Not entirely right.
See, there are few things that you should understand here (as a potential PMS/Advisor/Cat 3 AIF Funds investor) . No 1 is expected returns from equity investment is always inversely propotional to anount of money under management with a fund management house (the sum total of money under management by the house and not the scheme as all houses has a one man who finally takes most of the calls and he can’t at the end of the day have high conviction beyond a certain number of ideas). As the amounts under management increases, the expected returns should decrease as because of liquidity reasons your position sizing and concentration decreases which leads to lowering of weights for individual stocks resulting in returns more along the benchmarks reducing market deviation but also alpha potential (outperformance over market is called alpha).
So there has been a lot of flow towards PMS, but MFs have also raised much more money - infact MFs have so much money that it would be difficult for them to outperform the market - already I think more than 50% of the MFs are underpeforming the benchmark. Infact a recent report highlighted that the average alpha generated by non-small/midcap mutual funds has come down from 3-4% in 1990s to 1-2% in 2000s and that is when MFs were comparing total returns generated against benchmark which didnt had dividend in it. Now with SEBI coming up with a requirement to compared MF performance against total return benchmark - I think soon we will get to know that most of the MFs are a bit lower or similar to benchmarks in terms of performance. And this is not out of alignment with other geographies - globally 75% of active managers are unable to beat the benchmark and in India that figure will soon move from 50% to 75%. One more important point is that benchmarks over time are becoming stronger as better perfoming strong companies are gaining weightages - classic example is NIFTY BANK in which HDFC Bank now has upwards of 30% weightage and is a damn difficult index to beat for managers of BFSI focused funds (I have run one in the past, so I know :-)) So, even NIFTY which was earlier dominated by oil major PSUs etc. is becoming over years a more and more dififult to index as better companies are gaining weightages and more and more MF managers would find it very hard to beat in the coming years.
So, what does it all lead to and how do we take decisions.
For most of the small and retail investors who have small ticket size for equity investments - Ideally they should invest 60-70% of money in large cap ETFs in direct plan with minimal fees and rest of the money with some small/mid cap MF fund with direct plan.
For others with ticket size of 50 lakhs or more, they should park 50% of money in large cap ETFs and for rest of their money, try to find out some excellent managers in PMS/Advisory/AIF Cat 3 where there is alignment of interest and investments are primarily in small & mid cap and the amount of money under management is not very large (else expected performance would drop). The former will give them market returns with minimal fees (say at ~12% over the long term) and the latter will generated wealth over long term (say at ~20-22% gross returns and 16-18% net returns).
LTCG is not so high as of now that it materially tilts the equation in favour of anyone. PMS/Advisory firms which charge a hefty commission upfront and high fixed fees should have been avoided earlier also (unless one has a very strong conviction on the high fee manager )