Risk or Returns: What should be the focus while selecting a PMS?

Most investors approach equity investing, first thinking about risk, and then about return. And, since PMS is primarily an equity investing instrument, it is also approached generally with a risk focused approach than a returns focused strategy. And, this is why smarter PMS companies market their products highlighting the positioning of consistent compounding, wealth preservation, and show their focus on superior risk management.

However, ideally speaking, while selecting a PMS, the investor focus should to be on returns more than risk. Simply because, PMS is a product meant for wealth creation. And, wealth is not created unless risk is taken. So, risk should be accepted, but focus should be on returns. I am not saying that fear of loss should not be there. Fear is good, as it is because of the fear, one uses vivid judgement and takes every step with caution to make informed decisions in life.

The problem is that when investors focus too much on risk, they get into imagination and struggle with their fears based on negative emotions thinking about either past events when equity market had crashed and suffered losses or foresee the future with similar emotions and end up actually making an emotionally satisfying decision, but not a rationally well informed decision.

Positive approach to life says,  ‘One should not worry about past or future; one should learn from the past, but focus on the present, and hope for a greater future.’

Going by the definition of a risk of a diversified equity portfolio like a PMS itself – it’s nothing but volatility in returns. And, Equity PMS investment is not meant for short term, but long term, and so, volatility itself gets taken care to a greater extent. Those who have understood this simple fact, accept risk and then focus time and effort on selecting a good PMS for good returns which is actually not an easy process. It requires full understanding about the portfolio manager, investment philosophy, performance track record, portfolio holdings, price and fee structure. If mind is crowded with focus on risk, one will not be able to make a good and unbiased selection and in fact, one will have a tendency to fall trap to those PMSs which position themselves as relatively lower on risk.

And, focus on returns doesn’t mean that one ignores risk. Instead it means, one accepts risk and with the wisdom that there has to be risk in some form or the other only then returns will be reaped. More important is to focus on returns from the perspective of knowing convincingly that what type of risk is being taken by the PMS for generating returns. And, not losing the focus from returns, investors should build conviction and comfort with the type of risk being taken. This is because actually matter of risk only emanates from lack of understanding and knowledge. Some may argue that large caps portfolios are low on risk as these are well established businesses and part of Nifty 50 or Nifty next 50, but, others may find them in fact large caps are higher on risk, as average Price to Earning of large cap companies is upwards of 50 ( even currently ) which actually means very high valuation. Out of 3 most investment styles – Growth, Value, Momentum, those who do not understand value investing, feel growth has lower risk, but those who understand value investing, find growth companies to be relatively very expensive. And, those who do not understand momentum investing, find it to be most risky as one ignores business fundamentals, but, once who understand momentum investing hold diagonally opp perspective in this regards.

PMS is not a common man’s product; and thus it should not be evaluated with common man’s risk averse approach. PMS is an HNI product meant for serious wealth creation over long term, and so should be selected & evaluated with risk pro entrepreneurial approach where cognizance of risk is not missed, but focus is primarily on returns.

Rather than being awry, investors should ask an honest question to the self – Am I investing Rs 50 lacs & more in a PMS for long term, for good returns or for moderate to low risk? For those who still first think of risk and not returns, are actually not fully ready to make an Equity PMS investment, in my view. These investors need to first develop their comfort with risk of volatility by enhancing knowledge or should invest in mutual funds.