Why Most PMS Strategies Underperform Their Own Benchmark

The Indian PMS industry manages over ₹30 lakh crore in assets. The median PMS strategy, after fees, underperforms its own stated benchmark over any rolling 5-year period. This isn't a secret — SEBI's own disclosure requirements surface it for anyone willing to read the numbers. Yet assets keep flowing in. Understanding why requires understanding three separate forces: survivorship bias, portfolio churn, and the compounding effect of layered fees.

Survivorship Bias operates quietly. When you look at a PMS provider's track record, you're looking at the funds that survived. The ones that were merged, renamed, or quietly shut down after underperforming don't appear in the data. A universe that started with 50 strategies in 2015 might show you 30 today — but the 20 that disappeared dragged the average down significantly. The published average, stripped of the dead, looks better than reality.

Portfolio Churn is the tax problem nobody talks about. In a mutual fund, the fund manager can sell and rebuy a position without triggering a tax event for you. In a PMS, every transaction is in your name. If your PMS manager churns 60–80% of the portfolio annually — not unusual — you're realising short-term capital gains on most of those exits. At 20% STCG, a strategy earning 18% gross delivers perhaps 14–15% post-tax. Compare that against a well-chosen active mutual fund at 15% gross and 0% tax (held over 12 months) — suddenly the PMS looks far less attractive.

Fee Drag is straightforward but underestimated. A typical PMS charges 2–2.5% management fee plus 20% profit share above a low hurdle. On a year where the strategy returns 15%, you might pay 2.5% management fee plus 2.5% performance fee — leaving you with 10%. The compounding effect of a 5% annual fee drag over 15 years is not 75% — it's compounding, so the actual shortfall is far larger.

What should you look for in a PMS that does outperform? Three things: (1) Low portfolio churn — ideally below 30% annually. This protects your post-tax returns. (2) A high hurdle rate — strategies with hurdles above 10–12% have manager incentives better aligned with your outcomes. (3) Rolling return consistency — not a cherry-picked point-to-point. If the strategy shows strong rolling 3 and 5-year returns across multiple entry points, that's evidence of genuine alpha. A single good run from a lucky entry point is not.

The PMS category isn't broken — but the way most investors evaluate it is. Post-tax, post-fee, rolling-XIRR is the only number that matters. Everything else is marketing.