Every presentation slide starts with a pledge of better returns due to active management. But in a world where AI algorithms analyse earnings calls in a split second, where satellite images track consumer activity outside retail stores, and where quantitative funds make sense of alternative data using massive computing power, the question that arises is, is there any alpha remaining for the discretionary investor?
This is not just a theoretical argument. The Indian PMS market has more than ₹30 lakh crore under management, where thousands of High Net Worth Individuals and Ultra-High Net Worth Individuals are placing their trust on the assumption that managers can provide better returns than what the market provides.
According to the Efficient Market Hypothesis (EMH), asset prices contain all available information at any given moment. According to the strong version of EMH, no individual or institution, regardless of ability or resource, will consistently outperform the market. The semi-strong version suggests that only private information (which is not publicly available) offers a competitive advantage.
The markets in 2026 will be much more efficient than those in either 2000 or 2010. The sell side has been commoditised, there is plenty of arbitrage capital, and algorithms neutralise discrepancies between bid and ask within microseconds. Easy alpha opportunities such as buying overlooked small caps ahead of time and profiting from earnings drift have mostly evaporated.
However, the fact that markets are becoming increasingly efficient does not mean that they are already perfectly efficient. Structural inefficiencies remain, and their presence is often directly related to areas characterised by institutional limitations, behavioural bias, and information imbalance.
Alpha Compression Forces
PMS Flexibility Levers
The opposition to active PMS is swift in pointing out the various studies that indicate that, despite the cost issue, the majority of active PMS investment strategies underperform the benchmark indexes over rolling periods of five years and ten years. This phenomenon is not exclusive to mutual funds, as PMS products have annual management fees of 1% to 2.5%, and upside sharing of profits of 10% to 20% in addition. The implication of management fees means that the gross alpha required to even pay for the fees would be 300 to 400 basis points.
In the large-cap and heavily researched stocks in India, the pricing of information efficiency, earnings surprises expectations, and the macro factors have been properly quantified. For a PMS manager who operates predominantly within this arena, the mathematics of alpha compression becomes difficult.
The flexibility advantage: the bulls' rebuttal
Supporters of PMS alpha have made a strong structural argument. Mutual funds, bound by SEBI diversification guidelines, cash allocation policies, and the unrelenting need to beat an index, enjoy far less freedom compared to PMS managers. With a focused, conviction-led portfolio of 15-20 stocks, a skilled manager can extract value from the insights not available to the 70-stock portfolios of mutual funds.
The freedom granted to PMS managers in terms of investment choices is evident in more ways than one. Firstly, PMS managers are free to hold stakes in small and micro-cap companies, where research coverage is sparse, institutional holdings are minimal, and price discovery is far from complete. This is the space where a hard-working analyst retains his/her value. Secondly, PMS managers have the freedom to act quickly when markets become dislocated owing to market crises, governance scandals, or sector-specific meltdowns.
Finally, the customisation opportunity should not be underestimated either. An investment management service can be built up based on an existing portfolio, taxation structure, and risk tolerance in a manner that no pooled fund can duplicate. In other words, alpha does not necessarily mean market performance but efficiency of the portfolio.
Market structure in India, notwithstanding its quick evolution, still retains some attributes that facilitate an edge for knowledgeable managers. The small and mid-cap space, which includes more than 4,000 companies with market caps under ₹5,000 crore, suffers from under-research by many. In fact, there are no reports from institutions on many of these stocks at all. An investment manager, who is prepared to speak with management, visit factory facilities, and create his own proprietary models, does some price discovery and does not compete with algos.
The inefficiencies arising from the governance-related opportunities provide yet another inefficiency. Promoters' actions, related parties' deals, and quality of capital allocation are always qualitative attributes and thus will take time to be priced. An investment manager who has done his due diligence and knows the company from top to bottom can easily pull out of trouble before it emerges and re-engage if the situation is corrected.
Demergers, buybacks, NCLT cases, re-rating due to regulation changes - there are still plenty of opportunities for event and special situations strategies to produce positive alpha.
Despite accepting that managers may create alpha in one go, the key lies in consistency. Is skill accumulative? Or is a good run just luck pretending to be genius?
The research on consistency is contradictory yet positive overall. Analysis conducted on the PMS track record in India shows a significant number of managers – about the top quartile – possess the ability to maintain a better-than-average level of consistency over a period of 7-10 years. The key to their success does not lie in having a single approach; rather, it lies in process discipline, risk management, and the courage to hold concentrated investments despite being down.
Consistency is made possible by the PMS structure in one specific way: minimum ticket size (₹50 lakh as per SEBI regulations) and high-calibre investors ensure the creation of a relatively stable capital base. As compared to a retail mutual fund, which has to sell at each dip in the market, a good PMS has the luxury to retain its convictions.
Any analysis of PMS alpha is incomplete without taking into consideration the costs involved in the process, with simple mathematical calculations. A fund manager who makes 18% gross return in a market where the market returns are around 13%, he is earning an alpha of 500 basis points. After considering a 2% management fee and after sharing 20% of the profits earned after a 10% hurdle rate, it becomes very tough for the investor.
However, this does not mean that PMS would become unviable because of the high fees, but it means that PMS investors need to be extra careful in their selection criteria of fund managers. The spread between the top quartile and median performance in PMS in India is more than 600–800 basis points.
The argument about whether there is a trade-off between alpha generation through compression versus flexibility advantage does not have a clear-cut answer. Markets have become more efficient compared to earlier times, and this is true, especially when it comes to large-cap indices, where the information is processed instantly. If a PMS operates in such a market environment with a 70-stock portfolio and a benchmark-constrained mandate, then in effect it becomes an expensive index fund.
However, this is more about bad product design rather than the overall concept of PMS itself. An effectively designed PMS that is focused on smaller companies, follows a proper investment process, and is reasonably priced can deliver substantial alpha returns in the Indian market environment for a long time to come. There are inefficiencies in the markets. Flexibility advantages are also present.
There is nothing that says PMS cannot consistently create positive alpha, but there needs to be the correct type of PMS for this to occur. Rather than assessing managers solely based on historical performance, it is time for investors to focus more on the process, uniqueness of the universe, and transparency of the fee structure. In an increasingly competitive world of alpha compression, the final advantage could very well be choosing your money manager.
April 2026 Market Wrap: What Changed After Q4 FY26 Results
5 min Read Apr 30, 2026
Summer Stocks in India Beyond AC and Power in 2026
5 min Read Apr 29, 2026
Core-satellite strategy: rethinking asset allocation for HNIs
5 min Read Apr 29, 2026
Top AC Stocks in Focus This Summer as Heatwave Demand: Blue Star, Voltas, Havells, Symphony
5 min Read Apr 28, 2026
Why AC, Cooler and Power Stock Rally During This Heatwave in India
5 min Read Apr 28, 2026
For android only
