PMS Vs. Mutual Fund: Which One To Choose? (2024)

Long-haul investors in India can seek savings growth through several options, two of which are investments in mutual funds and portfolio management services. However, only some know the difference between the two, and even fewer understand the risks and benefits associated with them.

This story aims to provide a clear and concise low-down on each of the two options.

What is PMS and How Does It Work?

Portfolio management services (PMS) offer personalized investment solutions to investors based on their investment objectives, time frames, and risk tolerance to maximize returns.

Professional portfolio managers take care of the investment portfolio and invest in a mix of stocks, commodities, fixed income, structured products, real estate, and cash. Before executing the portfolio, PMS studies the market and the client’s needs.

Fees/charges of PMS

Different portfolio management services have varied fee structures. Charges are determined at the time of investment. Some of the charges associated with PMS are as detailed below:

1. Entry Load Charges: Most PMS providers charge 1% to 3% as a one-time entry load when the investor opts for a scheme.

2. Operating Expenses: This recurring charge is for managing the portfolio and is capped by SEBI at 0.5% of the client’s average daily assets under management per year.

3. Brokerage Charges: PMS providers levy brokerage charges for each market transaction.

4. Exit Load charges: For withdrawals in the first year, the maximum charge is 3%. The second and third-year charges are 2% and 1%, respectively. No charges apply after the third year.

Differences Between PMS and Mutual Fund

Before delving into the differences between PMS and mutual funds, it is important to know the similarities. Both can help savings grow, but both have risks associated with them, and both invest in market securities.

The differences lie in:

1) The extent of risk involved: PMS is a high-risk high-reward playing field. It’s important to point out here that the former is managed by a portfolio manager offering the service to an investor. Therefore it’s a custom solution. This is also the reason why the bias of the manager is bound to trickle into the portfolio. Additionally, PMS is an actively managed solution and can be highly rewarding.

2) The minimum investment required: The minimum investment requirement for PMS and mutual funds could not have been higher. You can start investing in mutual funds with as little as INR 500, but to invest in a PMS, you need INR 50 lakhs. This ensures that only those who can tolerate PMS-related high risk enter the fray.

3) Account types: PMS has different demat accounts for different investors while mutual funds have money accrued into one fund from different investors. Also, in a PMS, the solution is tailor-made to fit the customer’s requirements while mutual funds have a set roster for all investors.

4) Transparency: Investors dabbling in PMS can view every trade. He can also view the price of each execution and brokerage involved. This is not the case with mutual funds where expense-related details are not disclosed.

5) Regulations: Mutual funds are rigorously regulated and scrutinized by the Securities Exchange Board of India. However, portfolio details must not be disclosed to regulatory agencies regarding PMS since it’s a private cooperation between the investor and the portfolio manager.

6) Charges: Since PMS is a more personalized investment experience, its charges are usually higher than those of mutual funds. PMS charges usually include accounting charges, custody charges, brokerage charges, exit load, performance/profit sharing fees, and management fees.

Types of Mutual Funds and PMS

Mutual Funds

Mutual funds can broadly be categorized based on asset class and structure. Based on asset class, they are categorized into equity, debt, and hybrid funds. Based on structure, they are categorized into open-ended funds, close-ended funds, and interval funds.

There are also index funds, which mimic the fund units and return-risk profile of an existing market index, such as Nifty50. Additionally, the market has fund-of-funds (FoF) and solution-oriented schemes.

PMS

There are two types of portfolio management services. One is called discretionary and the other is non-discretionary. While the former has a manager pick and choose stocks and bonds as well as the right time to invest, the latter has a manager give those suggestions to the investor and the investor makes the call and the manager then initiates the trade on his behalf. It’s worth noting here that most portfolio management services in India are discretionary.

Factors to Consider Before Investing in PMS

The following parameters could be considered while considering PMS:

1) Risk tolerance: PMS usually has higher risks associated with it than mutual funds do. Investors must conduct a thorough analysis of the market risks, inflation risks, and interest rate risks before making any investment decisions.

2) Past performance: An investor needs to know the returns generated by the PMS manager over the years to choose the right option.

3) Major expenses: PMS investment involves costs such as accounting, custody and brokerage fees, exit loads, performance/profit sharing fees, and management fees.

4) Investment objective: To invest wisely, clients should understand the PMS provider’s fund strategy and ensure it aligns with their investment goals.

5) Portfolio manager’s experience: When considering a Portfolio Management Service, investors should evaluate the fund manager’s experience and qualifications.

Factors to Consider Before Investing in Mutual Funds

Investing in mutual fund schemes requires considering various aspects such as:

1. Risk appetite: Mutual funds are classified into 5 risk levels – low, moderately low, moderate, moderately high, and high. Before choosing a mutual fund, investors should evaluate their risk tolerance.
2. Expense ratio: The expense ratio of a mutual fund represents the operational fees charged by the asset management company (AMC). This figure represents all expenses associated with managing and distributing the mutual fund. It’s worth noting here that a low expense ratio means higher net returns.
3. Historical performance: Investors are usually advised to look into consistently performing mutual funds. Analyzing a fund’s historical performance can provide insights into its potential in both bull and bear markets.
4. Assets Under Management (AUM): The AUM reflects the overall market value of a particular mutual fund.

Should You Invest in PMS as well as Mutual Funds?

Mutual Funds (MFs) and Portfolio Management Services (PMS) are investment tools that allow you to buy stocks in the same market.

MFs offer a wider variety of stocks to choose from and are suitable for those with a smaller corpus and low tax compliance. In contrast, PMS portfolios are tailored to your taste and goals and are suitable for those with a larger corpus that demands customization.

PMS allows portfolio customization based on your risk profile and financial needs, is more flexible when it comes to investment, and is more likely to outperform the markets and get you better returns. However, PMS has higher fees and taxes, and the lowest investment limit is Rs. 25 lakh, making it out of reach for most.

Investing in PMS or MFs depends on your investment corpus, risk appetite, and financial goals. PMS could be your best bet if you have a larger corpus and demand customization. If you have a smaller corpus and don’t want extensive tax compliance, MFs may be your best option.

You could also combine one PMS scheme and multiple MF schemes to maximize your chances of making a profit from both investment areas.