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With the demand for PMS going through the roof, a lot of new PMS are being launched in India catering to a multitude of investors. As a result of which, investors are now overwhelmed with the choices and unable to make fruitful decisions. In this blog, we would like to give a few pointers on how to choose a consistent PMS scheme.
If you are new to PMS and do not understand what a PMS is, then please read our first blog explaining the different features of PMS here. Now in almost all PMS, there will be different schemes that cater to the requirements of different types of investors. Some investors have higher risk tolerance than others. Some schemes are focused on small caps, some are focused on large caps while some are Flexi cap products. At present, there are more than 250 PMS schemes in the market and that alone makes it difficult for the uninitiated.
Studies conducted by universities tell us that contrary to the expectations a reduction in the choice increased the effectiveness of making a decision, as too many choices can make customers stressed, thereby paralyzing them from ever making a decision.
When faced with a wide variety of choices, an inexperienced investor usually takes the easier way out. He or she goes and searches for the scheme giving the highest returns and invests money in the same, a rather common mistake. The scheme might have been skewed by recent gains in the bull market driven by a specific sector. This is technically also referred to as recency bias. If the small caps have performed well in the last year, all the small-cap schemes would outperform the benchmark. The question one fails to ask is, will these schemes perform just as well in the future. One must remember small cap-based schemes outperform others in a bull market and fall the most in a bear market, so if an investor is not careful, he or she might end up buying during the peaks and as it turns bearish, these schemes will most likely fall the most and investors are left with anguish.
So how does one counter such a bias? Does it make sense to look for performance over only the past 5 or 10 years? Again, this might not give you the complete picture. If the scheme’s performance has increased/decreased drastically over the recent year, then this has a bearing on the overall performance of the scheme. A given scheme might have a tendency of fluctuating cyclically and you might be investing at the peak again. So, if past one year performance can affect near as well as long term performance, then how on earth does one select a scheme?
The simple answer is to look for a scheme with performance over at least 3 years. If the scheme has seen a bear market all the better. Try and understand how the scheme performs during the bear market. Remember, the world’s most famous investor Warren Buffet once said, “The first rule of investing is not to lose money. The second rule of investing is don’t forget the first rule.” If one loses 50% of one’s net worth, one needs a 100% return to come back to the original net worth.
If you are wondering how to understand the scheme performance during bear markets, then compare the drawdowns of the funds of the same category with respect to the benchmark. Returns alone never give an investor the complete picture so always incorporate risk, you can use ratios like Sharpe & Treynor ratios which basically speaks about the return of an investment compared to its risk and lastly one can use the Information ratio to measure a portfolio manager’s level of skill and ability to generate returns in excess relative to the benchmark and the best part is it also identifies the consistency of the performance by incorporating tracking error into the calculation.
It is paramount to go for a scheme that provides consistent returns. Suppose a scheme has made around 17%, 18%, and 19% over a 5 year, 3 year, and 1 year period, it is more likely to give similar returns in the future as well. It might not be the best returns of all the schemes, but its consistency is a very important factor that experienced investors alike. This is because investing is a long-term game. When one is investing with the next 15 – 20 years in mind, the consistency of the fund gives a higher probability of achieving long-term goals sooner with what one of the greatest physicists of all time, Albert Einstein calls the eighth wonder of the world, compounding.
It is important to pick a top-performing PMS scheme, but it is more important to select one that performs consistently, compounding returns over time. We at Right Horizons PMS, try to consistently beat market returns to create a fortune for our investors. With almost two decades of experience in the stock markets and almost a decade of providing Portfolio Management Services, Right Horizons can handhold new investors in understanding investing and its many quirks. We follow a risk-adjusted returns strategy to pick stocks during the boom as well as burst. Our experience and results speak for themselves; our schemes have been rated as top-performing schemes 4 times in the last 15 months. If you are interested, please take your phone and dial
+91 91480 96684.