PMS firms rethink strategy after increase in STCG tax

The 33 per cent increase in short-term capital gains (STCG) tax, as announced in the Union Budget 2024-25, is likely to make it more challenging for portfolio management services (PMS) providers to compete with mutual funds (MFS) and alternative investment funds (AIFS).

- SUNDAR SETHURAMAN

While most PMS strategies focus on longterm investments, fund managers are used to short-term churn and agile sector rotations. However, such moves will now incur a 20 per cent tax, up from 15 per cent. Unlike the MF and AIF players, PMS providers do not benefit from a pass-through status, complicating efforts to outperform MFS and AIFs in terms of returns.

According to PMS firms, there will be an impact of the tax hike on short-term positions. They suggested a shift towards more deliberate long-term portfolio strategies.

"Churn does not get taxed in case of MFs, but it gets taxed in PMS schemes. We think it is inherently unfair, but we also understand why it happens. If you, as an MF industry, can churn tax-free, and for us, if the capital gains tax goes up, it creates an issue. But post-tax returns from PMS schemes and MFs don't fundamentally differ," said Saurabh Mukherjea, founder and chief investment officer at Marcellus Investment Managers.