PMS debt products promise better deal than debt funds

 
Source : FC: Dipak Mondal May 11 2010 , New Delhi

If you have a investible surplus of over Rs 5 lakh and you want to invest in a low-risk, long-term investment tool, debt products offered by portfolio management service (PMS) providers could be ideal, compared with debt mutual funds, wealth managers say.

Wealth managers and investment advisers suggest that as part of diversification, high net worth individuals (HNIs) can invest in debt products of PMS providers, who not only offer customised products but also the freedom to invest in a wide array of debt papers otherwise not possible through mutual funds.

They point out that regulatory changes made by the Securities and Exchange Board of India (Sebi) in the debt mutual funds have made them less attractive by limiting their returns and increasing volatility.

Liquid and ultra-short-term funds, which have been among the favourite investment avenues for HNIs, are not allowed to invest the corpus in debt papers of maturity longer than the tenure of the fund. This limits the returns from these funds. Besides, from July 1, 2010, all debt funds investing in papers of more than 91-day maturity would be marked-to-market, making them more volatile.

PMS is professional service offered by portfolio managers, who offer tailor-made financial products to their clients based on their need and financial goals. In India, the minimum amount that can be invested in PMS is Rs 5 lakh. Sebi has also asked PMS firms to maintain separate accounts of each of their clients.

R K Gupta, managing director, Taurus Mutual Fund, who heads the company’s PMS business, said as liquid and ultra short-term funds cannot invest in long-term debt papers, returns from such funds are not attractive, while long-term debt funds are more volatile because of they are open-ended and they have to keep a part of the portfolio in cash for redemption payouts. “All these make debt mutual funds a little less lucrative. Therefore, as a part of diversification, HNIs can put some money in PMS debt products, which can invest in papers where debt funds can’t invest,” he added.

Rajesh Saluja, chief executive officer, ASK Wealth, said customised products offered by PMS are not available in debt mutual funds with all the restrictions in place. “Debt products of PMS is a good investment option for investors with large investible surplus,” he said.

K Ramanathan, chief investment officer, ING Investment Manager, said in addition to falling returns from liquid and ultra-short-term funds, another reason for investment in PMS debt products is the growing feeling that specialist fund managers can add value in managing large investments of both HNIs and institutional players.

Uttam Agarwal, head, wealth management, Bajaj Capital, said if one has a large corpus, PMS providers could offer customised products, which otherwise is not possible with mutual funds. “The ideal products would be longer-term debt instruments, where one can remain invested till maturity and earn returns of 9-9.5 per cent a year. This eliminates volatility of return, which is not possible in gilt funds (long-term debt funds), which are open-ended funds and hence always carry an interest rate risk,” he added.

However, Himanshu Kohli, founder partner, Client Associates, said, one major advantage of investing in mutual funds is tax benefits. “If one invests in mutual funds, the long-term capital gains tax without indexation is 10 per cent, and 20 per cent with indexation, but the tax outgo in PMS products would be 30 per cent,” he added.