Introduction:

In Nepal's evolving financial landscape, investors are presented with various avenues to grow their wealth. Among the most prominent options are Portfolio Management Services (PMS) and Mutual Funds. These financial instruments cater to investors with differing preferences, risk appetites, and investment goals. In this comprehensive analysis, we will delve into the world of PMS and Mutual Funds in the context of Nepal, exploring their features, benefits, and drawbacks, ultimately helping you make an informed investment decision.

Portfolio Management Services (PMS) in Nepal:

PMS is a specialized service provided by Asset Management Companies (AMCs) such as Garima Capital, Muktinath Capital, and Nabil Investment. It is designed to cater to investors who seek a personalized and expert-driven approach to managing their investments. Here are some key aspects of PMS:

Benefits of PMS:

• Expert Opinion on Your Investment: One of the primary advantages of PMS is that it places your investments in the hands of seasoned professionals. These portfolio managers are experts in their field, well-equipped to navigate the complexities of the market and aim to maximize your returns over time.
• Customized Investment Plans: PMS offers tailored investment strategies based on your specific financial objectives. These strategies are then adapted to factors like your income, budget, risk tolerance, and age, ensuring that your investment aligns with your unique circumstances.
• Efficient Risk Management: Portfolio managers prioritize risk management, aiming to reduce the risk associated with your investments while optimizing returns. They do this through diversification, ensuring that your portfolio is not overly exposed to any single asset or asset class.
• Regular Monitoring: PMS involves continuous monitoring of your portfolio's performance, with adjustments made as necessary to align with your financial goals. This proactive approach keeps your investments on track.

In essence, Portfolio Management Services allow you to take a more hands-off approach to your investments, relying on experts to make decisions on your behalf. This can be particularly appealing to investors who lack the time or expertise to actively manage their portfolios.

Why Should You Consider PMS in Nepal?

PMS is not suitable for everyone, but it can be an attractive option if you meet certain criteria:

1. Substantial Funds: Typically, PMS is designed for investors with a minimum investment threshold, often in the range of Rs 300,000 or more.
2. Limited Investment Knowledge: If you lack a deep understanding of investment principles and the complexities of the financial markets, PMS offers a solution by placing your investments in the hands of professionals.
3. Time Constraints: Managing investments can be time-consuming, requiring constant monitoring and decision-making. PMS allows you to delegate these responsibilities to experts, freeing up your time.
4. Risk Mitigation: If you are concerned about market volatility and uncertain about how to safeguard your investments during turbulent times, PMS provides a layer of risk management.
5. Diversification: PMS often involves diversification across various asset classes, including stocks, bonds, and other investment vehicles. If you seek diversification, PMS can be a viable choice.

In summary, PMS can be an excellent option for individuals with substantial funds who prefer to delegate investment decisions to professionals, value customized investment plans, and seek efficient risk management.

Mutual Funds in Nepal:

Mutual Funds are another popular investment avenue in Nepal, managed by the same Asset Management Companies mentioned earlier. These funds pool money from investors and invest in various financial instruments, including stocks and bonds. In Nepal, Mutual Funds come in two primary forms: Open Ended and Close Ended.

1. Open Ended Mutual Funds:

Open Ended Mutual Funds have no fixed maturity period. They are not openly traded on the stock market, and if an individual wishes to invest, they must do so through the respective company's website using its online portal. Open Ended Mutual Funds are influenced by market trends, but their Net Asset Value (NAV) is not affected by the supply and demand of their own units. These funds do not incur brokerage or trading commissions, and DP Fee is Rs 5

1. Close Ended Mutual Funds:

Close Ended Mutual Funds, in contrast, have a finite maturity period, which can range from 5 to 10 years or more. These funds are openly traded on the stock market, making it easy for investors to buy and sell units. However, they tend to be relatively more expensive due to higher transaction costs, including a DP charge of Rs 25 per fund, brokerage commissions, and other associated fees. The price of Close Ended Mutual Funds is directly influenced by the demand and supply of their own units.

Benefits of Mutual Funds:

Mutual Funds have gained popularity among retail investors for several reasons:

1. Diversification: One of the primary advantages of investing in Mutual Funds is diversification. These funds pool money from numerous investors and spread it across a diversified portfolio of securities. This diversification helps reduce risk by not relying heavily on a single asset or asset class.
2. Easy Access and Liquidity: Mutual Funds are highly liquid investments, as they are traded on major stock exchanges. Investors can easily buy or sell units, providing flexibility and accessibility.
3. Economies of Scale: Mutual Funds benefit from economies of scale. Buying a single security at a time can lead to significant transaction fees for individual investors. However, by pooling funds and investing in bulk, Mutual Funds can achieve cost efficiency.
4. Professional Management: Mutual Funds are managed by professional investment managers who conduct careful research and skilled trading. This allows even small investors to benefit from professional money management.
5. Variety and Freedom of Choice: Investors have the freedom to choose from a wide range of Mutual Funds with different styles and objectives. These may include value investing, growth investing, and investments in developed or emerging markets, income-focused funds, and macroeconomic-focused funds, among others.
6. Transparency: Mutual Funds are subject to industry regulations that ensure accountability and fairness to investors. This transparency provides investors with confidence in the management of their funds.
7. Systematic Investment Plans (SIP): Investors can participate in SIPs, which allow for regular investments with an average cost facility. SIPs often have low minimum investment requirements, with some starting at just Rs 1,000.

Comparison: Portfolio Management Services (PMS) vs. Mutual Funds in Nepal:

Now that we have explored the features and benefits of both PMS and Mutual Funds, let's compare them based on various factors:

1) Costs:

   - PMS: PMS involves costs, including Annual Maintenance Fees (AMF) and Performance Fees. These fees can impact your returns, typically ranging from 0.5% to 2% for AMF and around 10-20% for Performance Fees.

   - Mutual Funds: Mutual Funds have their own set of expenses, such as Fund Management Fees, Depository Fees, and Fund Supervisor Fees. These expenses are typically compulsory and are not tied to fund performance. In Nepal, the total expense ratio (TER) for Mutual Funds often hovers around 1.57% of assets under management (AUM).

Example: Let's illustrate the cost difference between PMS and Mutual Funds with an example. Suppose you invest Rs 300,000 in a PMS with a 1.25% AMF and a 15% Performance Fee. In the first year, the total cost would be Rs 8,400, which is approximately 2.8% of the AUM or 28% of the profit if the portfolio manager earns a 10% profit. However, if there is a loss, the Performance Fee is 0, and the AMF remains at Rs 3,750.

On the other hand, for a Mutual Fund investment of Rs 300,000 with a NAV of 9.82, the initial number of units would be approximately 30,550. The total cost, including the TER of 1.57% and Demat renewal, would be Rs 5,330 per year. In the event of a 10% gain, your portfolio would increase to Rs 329,940, with an expense of Rs 5,330. In the case of a 10% loss, your portfolio would decrease to Rs 270,000, with an annual expense of Rs 4,389.

2) Customization:

   - PMS: Portfolio Management Services offer a high degree of customization. Investors have visibility into the specific stocks and assets held in their portfolios and can have their investments aligned with their preferences.

  - Mutual Funds: Mutual Funds are typically not personalized. Investments are made as per the fund manager's strategy, and investors rely on the expertise of the fund management company. The approach here is often based on the belief that "in the long run, the market will provide profits."

3) Minimum Investment:

  - PMS: PMS generally requires a higher minimum investment, often starting at Rs 300,000 or more.

  - Mutual Funds: Mutual Funds can offer lower minimum investment requirements, making them accessible to a broader range of investors. Some SIPs even allow investments starting from as little as Rs 1,000.

4) Transparency:

  - PMS: PMS provides transparency regarding the specific stocks and assets held in the portfolio, allowing investors to see exactly what is happening with their investments.

   - Mutual Funds: Mutual Funds also offer transparency, with regulatory oversight ensuring accountability and fairness to investors.

5) Management Style:

   - PMS: PMS allows for a more active and personalized management style, with decisions made based on the investor's risk tolerance and objectives.

  - Mutual Funds: Mutual Funds often adopt a more passive approach, following the fund manager's chosen strategy.

6) Risk Management:

   - PMS: Portfolio managers in PMS prioritize risk management, aiming to diversify risk and protect investments from market fluctuations.

   - Mutual Funds: Mutual Funds mitigate risk through diversification across a broad range of assets and securities.

7) Investment Horizon:

   - PMS: The investment horizon in PMS can vary based on the investor's objectives and can be tailored to short-, medium-, or long-term goals.

  - Mutual Funds: Mutual Funds often have defined maturity periods, but they can be chosen based on the investor's preferred time frame.

Conclusion:

In the landscape of Nepal's investment options, Portfolio Management Services (PMS) and Mutual Funds stand out as two distinct avenues, each offering its own set of advantages and considerations. Deciding between the two depends on your individual financial goals, risk tolerance, and preferences.

When to Consider Portfolio Management Services (PMS):

- You have a substantial amount of funds to invest (typically Rs 300,000 or more).

- You lack the knowledge or expertise to actively manage your investments.

- You have limited time to monitor and rebalance your investment portfolio.

- You are concerned about market volatility and seek professional risk management.

- You want a high degree of customization and visibility into your portfolio holdings.

When to Consider Mutual Funds:

- You have a smaller investment amount to start with.

- You prefer a more passive investment approach.

- You are comfortable relying on professional fund managers to make investment decisions.

- You value diversification and want to spread your risk across various assets and securities.

- You are looking for flexibility, accessibility, and the option to start with a low minimum investment, often available through SIPs.

Ultimately, both Portfolio Management Services and Mutual Funds can play a significant role in helping you achieve your financial objectives. Your choice should align with your specific financial situation and investment philosophy. If you have the resources and prefer a customized, hands-on approach, PMS may be the way to go. On the other hand, if you are looking for diversification, professional management, and lower minimum investment requirements, Mutual Funds offer a compelling option. Regardless of your choice, it's essential to conduct thorough research, consider your risk tolerance, and consult with a financial advisor if needed, to make an informed investment decision that aligns with your long-term financial goals.

Article By: Aashish Bhattarai
Semi-Qualified CA, Personal Finance Consultant