Before investing in Morningstar's PMS, take a close look at cost structure

Outsource your asset allocation and fund selection worries

Morningstar, the US-based firm, well known in India as a provider of fund ratings, has now launched its portfolio management service (PMS). It already offers such solutions in the US, the UK, Australia and South Africa.
 
Most investors have a need for proper asset allocation and fund selection to achieve their goals and usually approach a financial advisor for this purpose. “Instead of advisors reinventing the wheel, they could leverage Morningstar’s capabilities in these areas to provide ready solutions to their clients,” says Dhaval Kapadia, director and portfolio specialist, Morningstar Investment Adviser India.
 
Morningstar’s PMS will consist of multi-asset portfolios that include domestic and international equities, fixed income, cash and gold. It will launch four portfolios: Balanced, Growth, Aggressive, and Aggressive Plus. The fourth portfolio, unlike the rest, will have not have international equities. The four portfolios will cater to investors with different risk appetites and investment horizons. “The Balanced portfolio will suit someone with an investment horizon of five-seven years; Growth is for a seven-10-year horizon; while Aggressive and Aggressive Plus are for a 10-year plus horizon,” says Kapadia. These portfolios will invest in direct plans of mutual funds, and not in direct equities.   

 

Research globally has shown that asset allocation (and not choice of funds) is the key driver of portfolio returns. “Most people decide on asset allocation based on thumb rules, whereas it is an elaborate science. In our portfolios, we will decide how much you should invest in each asset and sub-asset class, based on research and analysis, taking multiple factors like valuations, interest rates, and several others into account,” adds Dhaval. Investors will also enjoy comfort vis-à-vis fund selection, since these portfolios will invest in funds where Morningstar’s analysts have a positive forward view. The minimum investment amount will be Rs 25 lakh.

In a PMS like this, investors will be able to avoid asset allocation related errors. “Investors tend to invest based on past performance and become overweight in an asset class close to its peak, such as in mid- and small-caps towards end-2017. That mistake won’t happen in a portfolio like this,” says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors. Most Indian investors have a domestic bias. These portfolios will help them diversify internationally. Investors will also be able to avoid the other typical mistakes of portfolio construction—too many funds, overweight in a particular fund, overlap in stocks held by various funds, and so on.

 
The PMS structure also offers an advantage over robo advisory. “In the former, the fund manager takes the buy and sell decisions himself. In the latter, the platform may advise the investor, but the latter may not execute it on time, causing problems later on,” says Nikhil Banerjee, co-founder, Mintwalk.   
 
Before investing, however, investors should take a close look at the cost structure of this PMS, details of which Morningstar has not finalised yet. Check the annual fund management fee. Also, check if there will be an upfront payout to distributors, which could reduce the corpus invested on your behalf. There is no lock-in period, and exit load is 1 per cent for one year and nil thereafter. Fund structure is open-end.

 
If an investor has the bulk of his money in this PMS (which essentially has a fund-of funds structure), he would pay fee at two levels — expense ratio of constituent funds and the fee charged by the PMS. But if only a small portion of his wealth is in this PMS, and he also uses an advisor, he would end up paying costs at three levels (including the advisor’s fee).
 
Currently, this PMS does not have a track record. Prudent investors should wait to see how well these strategies work in the real world. Investors should also watch closely the level of churn in the PMS, as exits from funds will create tax incidence. On taxation of this product, Kapadia says: "Since the mutual funds units will be held in the investor’s account as part of the PMS, normal mutual fund taxation applicable to equity and debt funds will apply for equity and debt funds purchased in the PMS, regardless of the asset allocation of the overall portfolio."

What competitors offer

Fundsindia.com: Offers its own fund ratings and recommendations, and goal-based solutions, delivered through a hybrid model of robo-advisory and human advisors. Its methodology ensures recommendations don't change too much within a short period, allowing investors to stick to their funds for a longer time. Customer invests in regular plans.

MobiKwik (earlier Clearfunds): Uses artificial intelligence for fund selection. Claims to select funds that can outperform for at least the next three years. Customer invests in direct plans. No transaction fee.

RankMF (Samco Securities’ arm): Does not rank funds based on historical data. Instead, assesses the quality of instruments included in the portfolio (based on a mix of fundamental and technical parameters), and valuations, and then ranks funds on the basis of their holdings.  Customer invests in regular plans.