We share some data hereunder on how the tax plays out across different strategies. This analysis assumes an average annual return of 25%, net of fees and expenses, over the 10-year period, in line with historical averages (PMS Bazaar):
ETMarkets.comShort-term momentum-based PMS strategies were already disadvantaged due to their frequent churn, and the recent tax changes have only exacerbated this issue.
For example, over a 10-year period, a short-term PMS with 100% churn grows an initial ₹1 crore investment to ₹6.19 crore under the new tax regime, compared to ₹6.87 crore under the old regime—a reduction of ₹67.6 lakh (10%).In contrast, the impact of increased taxes on long-term PMS strategies is almost negligible. By deferring tax to the final year, the compounding effect can be fully realized. Under the new tax regime, a long-term PMS approach grows the same ₹1 crore investment to ₹8.27 crore, compared to ₹8.48 crore under the old regime—a decrease of just ₹20.8 lakh (2.5%).This illustrates that long-term PMS strategies with negligible churn not only cushion the impact of higher taxes but also offer a 33% superior return compared to short-term approaches.
Assuming a 25% rate of return, short-term strategies see their post-tax IRR drop to 20% over 10 years, while long-term strategies maintain a higher IRR of about 23.5%.
There has also been ongoing debate about the perceived inefficiency of PMS compared to mutual funds under the new tax regime, mainly because mutual fund investors are not taxed on portfolio churn, while PMS investors are.
However, when evaluating long-term investing, PMS platforms can yield returns comparable to, or even exceeding, those of mutual funds.
As shown in the table above, an apple-to-apple comparison indicates that both long term approach PMSs and mutual funds face 12.5% tax incidence at exit. Furthermore, a study by PMS Bazaar found that PMS approaches outperformed their benchmarks by 70% on average over 5 and 10 years, compared to 48% for mutual funds. This suggests that with a disciplined, long-term approach, PMS fund managers can match or surpass the performance of mutual funds, effectively neutralizing their tax efficiency advantage.
The proof of the pudding is in the eating. At Equitree Capital, we practice extremely long term investing with a typical holding period of 5–7 year outlook. This has enabled us to effectively minimize the tax impact on returns for our investors.
For example, an investor who started three years ago experienced only a 0.5% difference between pre-tax and post-tax returns.
As of the end of July, this investor’s portfolio shows a pre-tax IRR of 44.14% and a post-tax IRR of 43.57%, demonstrating the consistency and strength of a long-term approach despite tax changes.
In conclusion, adopting a long-term investment approach is key to maximizing returns, harnessing the full potential of compounding, and deferring the impact of higher tax rates. PMS strategies excel by offering a customized portfolio, enhanced investor communication, and greater transparency.
We anticipate that investors will increasingly favor long-term PMS solutions for their potential to generate significant alpha compared to mutual funds.
(The author is Co-Founder at Equitree Capital)
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
