The world of investments is fast evolving and requires expert guidance to understand the nuances of the dynamic investment options and how they can help in meeting financial goals. No two individuals may have the same financial goals as these highly depend on one’s financial standing, goals, risk appetite, and preferences. Retail investors may want to explore investments that may not entice HNIs or institutional investors. Avenues like PMS or portfolio management services are increasingly being preferred by HNIs. But, do PMS offer the same outcome as mutual fund investments? How are the two different?
Let’s explore the key differences between PMS and mutual funds to better understand which is better for an investor and how.
Read More: Section 194k-What is TDS on mutual fund investments?
What is a Portfolio Management Service (PMS)?
PMS (Portfolio Management Services) is a professional service offered by financial institutions or portfolio managers and involves managing the investment portfolio of High Networth Individuals (HNIs) or institutions.
In PMS, the portfolio managers create a customised investment portfolio based on client-defined parameters like their investment objectives, risk tolerance, and investment horizon. The portfolio may consist of a combination of various asset classes such as equity, debt, and other financial instruments.
PMS offers a more personalised approach to investing as compared to mutual funds as the former provides tailor-made investments for every investor while the latter has a standardised portfolio. However, PMS is suitable for HNIs and ultra HNIs as these require a higher minimum investment and higher fees when compared to mutual funds.
What are Mutual Funds?
Mutual funds are a pool of investments from multiple investors combined into a single fund that further invest in certain assets as per the fund’s investment objective. These assets can be equity, equity-related instruments, debt and debt-related instruments, and instruments with a combination of both or currency, cash components, etc.
Mutual funds are a popular investment option because they offer individual investors access to a professionally managed and diversified portfolio that can help to reduce their overall risk and gain maximum returns. Investors can invest in these funds through the SIP (Systematic Investment Plan) or the lumpsum investment mode. Some mutual funds also offer tax benefits by investing like ELSS funds which have a lock-in period of 3 years.
What are the key differences between PMS and Mutual Funds?
The table below highlights the key differences between PMS and mutual funds:
| Category | PMS | Mutual Funds |
| Ownership | Under PMS, the investor owns the individual securities in the portfolio | In mutual funds, the investor is allotted units of the mutual fund that they invest in |
| Minimum investment | PMS generally requires the investors to provide higher minimum investment for effective services and customisation | The minimum investment in case of mutual funds is quite nominal and flexible ensuring maximum reach to a diverse class of investors. |
| Fees and charges | PMS charges a higher fee compared to mutual funds as it involves personalised management of the portfolio. | Mutual fund fees are comparatively nominal and are capped as per the regulations of SEBI and AMFI |
| Transparency | There is a higher degree of transparency in PMS as the investors are acutely aware of factors like every purchase and sale of securities, brokerage charged by the firm, date of transaction, portfolio manager’s exact fee, etc. | Mutual funds, on the other hand, provide a monthly report on the investor holdings and the quarterly expense ratio. However, it is easier to determine or track the performance of a mutual fund as compared to PMS as the entire data is available in public domain |
| Control | PMS offers more direct control to investors over the investment decisions as they can work with the portfolio manager to make specific investment choices | Mutual funds are managed by professional fund managers who make all investment decisions giving no control in the hands of the individual investors |
| Liquidity | PMS has a higher degree of restrictions and may not allow the investors as much of a prompt exit as compared to mutual funds. | Mutual funds offer higher liquidity compared to PMS as investors can exit the fund at any point. |
| Customisation | The USP of the PMS is that it offers a high degree of customization for the investors as the portfolio is managed on an individual basis for each client. | Mutual funds have a fixed portfolio that is the same for all investors and cannot be tailored based on individual risk-return perception. |
| Taxation | In the case of PMS, the securities are held in the name of the investor and hence, for every purchase or sale of assets, the investor is taxed on the capital gains made on the individual securities in the portfolio | In the case of mutual funds, the capital gains are calculated at the fund level and the investors are liable to pay tax only upon the sale of units held by them |
PMS or mutual funds, which is a better option?
There is no definite answer or correct choice between PMS and mutual funds as they cater to a different classes of investors. With PMS, investors can have more direct control over their portfolios and can have tailored investment options that meet their specific needs. The benefit of customisation is especially attractive for investors with a higher corpus and higher risk appetite.
On the other hand, mutual funds can be a better option for investors who may not have the necessary expertise or time for active portfolio management and require a diversified portfolio with minimum investment corpus and higher liquidity. Therefore, the choice between PMS and mutual funds is investor-specific and should be made after weighing the pros and cons of each option to determine the best fit for individual investor needs.
Conclusion
PMS and mutual funds are diverse options that meet or satisfy different investor needs. While it is generally perceived that PMS offer high-risk high-return investment options, they also attract higher fees. Therefore, these are suitable for affluent HNIs and ultra HNIs. Mutual funds, on the other hand, are more accessible to an average investor but lack the benefit of customisation. However, mutual funds are a good starting point to build an investment portfolio and meet financial goals of different investment horizons.
FAQs
PMS offers investor-specific portfolios and is responsible to provide transparency to only such investors. Therefore, it is difficult to track the performance of individual portfolios as compared to tracking the performance of mutual funds as all information about the latter is available in the public domain.
Mutual funds are managed by professional fund managers and they are responsible to buy and sell securities of the fund based on their investment strategies and fund objectives. Hence, customisation in mutual funds at the individual investor level is not possible.
Between mutual funds and PMS, the former offers a higher benefit of diversification as it includes approximately 40-50 stocks from different industries or sectors in its fund along with other assets like debt, currency, gold, and real estate as compared to PMS which usually offer 20-30 stocks along with other investor specific assets.
Taxation of mutual funds depends on the category of mutual funds and the dominant asset class. On the other hand, PMS attracts higher taxation as investors are taxed for capital gains made on the sale of every asset since the securities are held in their name.
