Thread by @tapak7

#thread

I can't tell you how important it is to calculate your PMS/ RIA / AIF annual performance on post tax basis. Use this no to compare against benchmark

Benchmarked performance shown by PMS/AIFs/RIAs (including on SmallCase) is usually post fees & costs but NOT post taxes

The reason most don't talk about post tax performance is that for each client the tax implications will be different. hence it's messy. Fair enough

Therefore as a client it's for you to go back & c what the performance was post tax

Usually an index is used as benchmark to compare performance. Remember, when any PMS/AIF/RIA uses an index as benchmark, they are in some ways comparing how their active investing worked against just buy & hold index strategy

In India one can buy index ETFs through mutual funds. Their post costs performance is usually close to index but on lower side. (About 0.5% to 1% lower)

Such an index ETF investor will incur NO taxes TILL the investor sells the fund. If investor keeps holding - no taxes

However, the PMS/RIA/AIF investors incur taxes every time any securities are sold at a profit and the aggregate profits booked in a year (net of losses) lead to a tax liability.

As an illustration:
Assume
'A' puts 100,000 under a PMS
'B' puts 100,000 in index ETF

Both won't redeem their investment and will compare value after 3 years.

'B' gets statement of NAV each yr. No taxes to pay

'A' gets statement from PMS each yr showing value net of fees & cost. They also advise on tax obligations. Note: Many in real world one doesn't redeem from PMS to pay tax, but pays from other sources. 'A' does the same

At end of year 3:

'A's pf with PMS is worth 150,000
'B's pf in index ETF is worth 140,000

PMS shows OUTperformance of 10% over 3 years - an alpha of ~3% per year

However 'A' goes back & recalculates his portfolio value based on: 'what if i withdrew from PMS to pay taxes, since these taxes arose out of PMS advisory?'

After some work: he finds that post tax value of pf with PMS would b only 141,000/-.

Barely any outperformance!

I have used above example only to convey a message here: Publicly reported performance data by PMS/AIF/RIAs (including Small Case RIAs) DOES not capture the effect of taxes. It's the clients responsibility to do so and only then can they truly gauge the benefit of association

Have seen clients who paid reasonable taxes for a yr like 2017-2018 when their small and mid cap focussed PMS booked good profits (PMS basically only churned and reinvested proceeds in other stocks). As always, the PMS showed pf value on March 31st 2018 on pre-tax basis.

A yr later, on march 31st 2019 the PMS pf was down big time: about 35%. But in reality the client was down a lot more than just 35%, because of the taxes he paid.

Taxes paid on gains and then gains gone :)

Lastly please remember: Futures, Options and intra day trading in equity does not get benefit of short term capital gain rate of 15% but instead one pays full tax rate

Bottomline: higher the churn of a PMS/AIF/RIA (including on SmallCase) the higher the likelihood of taxes. Publicly reported performance data does not adjust for this tax drawdown. So pic is incomplete

If adjusted, alpha shown by some vs benchmark, may turn to zero or negative

*AIF taxation is a bit more complex depending on category of AIF and pass through status. So for purpose of this thread focus more on PMS/RIA