The 33 per cent hike in short-term capital gains (STCG) tax has queered the pitch for portfolio management services (PMS) firms, making it more challenging for them to compete with mutual funds (MFs) and alternative investment funds (AIFs).
While most PMS strategies invest for the long term, fund managers are used to short-term churn and agile sector rotations.
Such moves will now attract a 20 per cent tax instead of 15 per cent. Unlike the MF and the AIF industries, PMS players don’t enjoy a pass-through status. This makes it more difficult for the PMS fund managers to beat the returns generated by MFs and AIFs.
PMS players said their short-term positions will come down, and there will be more thought processes in building a little long-term portfolios.
“Churn does not get taxed in case of MFs, but it gets taxed in PMS. We think it is inherently unfair, but we also understand why it happens. If you, as an MF industry, can churn tax-free, and for us, if the capital gains tax goes up, it creates an issue. But post-tax returns from PMS and MFs don’t fundamentally differ,” said Saurabh Mukherjea, Founder and Chief Investment Officer, Marcellus Investment Managers.
While taxes are important considerations, the returns and taking the right investment calls supersede them, say industry players.
PMS players said given the frenzy in the current markets when stocks are giving 50-60 per cent returns within a year, the client will be okay with profit booking, irrespective of the tax outgo.
They say PMS funds—which are aimed at the wealthy investor—aim to generate 10-15 per cent alpha.
“The differential in taxation is challenging, but we are still in a nascent stage of evolving as a financial product. In this process, weaker hands will probably move out of the industry. The better and stronger ones will continue, and the industry will go through a certain amount of consolidation. If one is good at generating risk-adjusted returns, you will continue to attract investors,” said Aniruddha Naha, CIO-Alternates, PGIM India MF.
Bhavik Thakkar, CEO of Abans Investment Managers, said that many times, a fund manager’s decision to sell a security does not depend on what kind of tax it will attract.
“It is more to do with whether the fund manager thinks he should be or should not be in a particular stock. At the same time, what might happen is that fund managers will be more cautious in terms of checking what taxation implications there are for a particular stock, whether you’ve been holding it for more than or less than one year,” said Thakkar.
The PMS industry is already facing heat with the new investment vehicle proposed by market regulator Securities and Exchange Board of India (Sebi) with a minimum ticket size of Rs 10 lakh, much below the threshold of Rs 50 lakh for PMS. Though there is a lack of clarity on the treatment of the new asset class, it offers more flexibility than the PMS structure. For example, PMS funds can only take positions in derivatives for hedging purposes. But the new asset class shall be able to take exposure in derivatives for purposes other than hedging, which provides more flexibility and risk-taking in investments and potentially generate higher returns.
“A lot of people who would ideally have graduated from an MF to a PMS will now have a smaller step where they can gain experience before moving to a PMS,” said Naha.
First Published: Jul 25 2024 | 8:05 PM IST
