A client's portfolio just crossed Rs 1.5Cr and their RM is pushing PMS and AIFs: is it time to move beyond mutual funds?

At a portfolio size of Rs 1.5Cr, complex vehicles like PMS or AIFs introduce unnecessary concentration risk and tax inefficiencies, making mutual funds the optimal choice.

A useful rule of thumb is that whatever can be done in a mutual fund should be done in a mutual fund. Other vehicles earn their place only for things a mutual fund genuinely cannot do. I think of investment vehicles as seven layers in increasing order of sophistication, from mutual funds up to structured derivative products.

REITs and InvITs are also growing now, and every one of these has a role. However, more sophistication does not automatically mean a better portfolio. Much of what people believe PMS and AIFs do for them, they don't actually do.

It is very difficult for a PMS to consistently beat a mutual fund over a long history. Mutual funds are tightly regulated and work as a permanent tax-deferral vehicle. Inside the fund, the manager can buy and sell stocks without you paying tax on each trade, whereas every trade in a PMS can create a tax event.

If a PMS cannot explain its clear difference from a mutual fund in two sentences, it is worth questioning why you need it. AIF Category II exists because mutual funds cannot invest in private debt or private equity, which is a genuine gap.

But consider the rule that no single holding should exceed about 10% of your portfolio. With a Rs 1Cr minimum ticket, you would ideally need around Rs 10Cr before an AIF fits comfortably. Putting Rs 1Cr of a Rs 1.5Cr portfolio into one AIF means taking a massive concentration risk.

A practical framework is to stay with mutual funds, SIFs and international exposure through GIFT City up to around Rs 5Cr. GIFT City matters because international exposure is an important part of portfolio construction and is currently hard to access through domestic mutual funds.

Personally I am comfortable that my own portfolio needs nothing beyond mutual funds and SIFs until it crosses Rs 10Cr. So at Rs 1.5Cr, a PMS is very hard to justify, as the size of your portfolio alone is not a reason to add complexity.

Based on Himanshu's podcast with Sachin: https://foliyo.ai/blog/investing-isnt-enough-managing-your-wealth/
Disclaimer: All information shared above are strictly for educational and informational purposes only. It should not be construed as financial or investment advice.