Mutual Funds and portfolio management services: What are the differences?

Know the differences between Mutual Funds and portfolio management services.
Mutual Funds and PMS
4 mins
15 January 2024

While PMS and mutual funds may look similar on the surface, they are very different investment vehicles in practice. Read about the differences below.

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Investing is a crucial part of financial planning and wealth creation. However, choosing the right investment option can be challenging, especially when there are so many options available in the market. Two of the most popular investment options in India are mutual funds and portfolio management services (PMS).

What are mutual funds?

Mutual funds are a collective investment option that pool money from many investors and invest it in a diversified portfolio of securities, such as stocks, bonds, gold, etc. A mutual fund is managed by a professional fund manager who follows a predefined investment objective and strategy. A mutual fund charges an expense ratio for its management and operational costs. A mutual fund offers various schemes to suit different investor needs, such as equity, debt, hybrid, etc.

What is an index mutual fund?

An index fund is a type of mutual fund that invests in a basket of securities that track a specific market index, such as the Nifty 50 or the Sensex. An index fund aims to replicate the performance of the index by holding the same stocks in the same proportion as the index. An index fund is a passive investment option that offers low-cost, diversified, and transparent exposure to the market.

What are portfolio management services?

Portfolio management services are a customised investment option that offer tailor-made solutions to high net worth individuals (HNIs) or institutional investors. A portfolio manager manages the portfolio of the client according to their risk profile, investment objectives, and preferences. A portfolio manager has the discretion to buy and sell securities on behalf of the client, without seeking their approval for each transaction. A portfolio manager charges a fee for their services, which can be fixed, variable, or performance-based.

Types of PMS

There are two types of PMS in India:

  • Discretionary PMS: In this type, the portfolio manager has the full authority to make investment decisions on behalf of the client. The client has no say in the selection or timing of the securities in the portfolio.
  • Non-discretionary PMS: In this type, the portfolio manager only advises the client on the investment strategy and the securities to invest in. The client has the final say in the execution of the transactions.

Types of mutual funds

There are many types of mutual funds in India, but some of the common ones are:

  • Equity funds: These funds invest predominantly in stocks of companies across different sectors, sizes, and styles. Equity funds offer high returns potential but also carry high risk.
  • Debt funds: These funds invest mainly in fixed income securities, such as bonds, debentures, treasury bills, etc. Debt funds offer low to moderate returns with low to moderate risk.
  • Hybrid funds: These funds invest in a mix of equity and debt securities, in varying proportions. Hybrid funds offer a balance of risk and return, depending on the asset allocation.
  • Index funds: These funds invest in securities that mimic a specific market index, as explained earlier. Index funds offer low-cost, diversified, and transparent exposure to the market.
  • Sector funds: These funds invest in stocks of companies belonging to a particular sector, such as banking, IT, pharma, etc. Sector funds offer high returns potential but also carry high sector-specific risk.
  • Thematic funds: These funds invest in stocks of companies that are related to a particular theme, such as infrastructure, consumption, environment, etc. Thematic funds offer high returns potential but also carry high theme-specific risk.

Differences between mutual funds and portfolio management services

Mutual funds and portfolio management services differ on various aspects, such as:

  • Portfolio size: PMS requires a minimum investment of Rs. 50 lakh, whereas mutual funds can be started with as low as Rs. 500. PMS is suitable for HNIs who have large investible surplus, whereas mutual funds are suitable for all types of investors.
  • Flexibility: PMS offers more flexibility and customisation to the client, as the portfolio manager can design the portfolio according to the client’s needs and preferences. Mutual funds offer less flexibility and customisation, as the fund manager follows a predefined investment objective and strategy for all the investors in the scheme.
  • Accounts: PMS offers individual accounts to each client, where the client owns the securities in their name. Mutual funds offer pooled accounts to all the investors in the scheme, where the investors own units of the scheme and not the underlying securities.
  • Value: PMS offers the current market value of the portfolio to the client, which can vary depending on the market conditions. Mutual funds offer the net asset value (NAV) of the scheme to the investors, which is calculated at the end of each business day based on the closing prices of the securities.
  • Transparency: PMS offers more transparency to the client, as the portfolio manager provides regular reports and updates on the portfolio performance, holdings, transactions, etc. Mutual funds offer less transparency to the investors, as the fund manager only discloses the portfolio holdings and performance on periodic basis.

Factors to consider before investing in PMS

Before investing in PMS, one should consider the following factors:

  • Risk appetite: PMS involves higher risk than mutual funds, as the portfolio manager can take aggressive bets on the securities and sectors. One should invest in PMS only if they have a high risk appetite and can tolerate volatility in the portfolio value.
  • Investment horizon: PMS requires a longer investment horizon than mutual funds, as the portfolio manager may take time to generate returns from the portfolio. One should invest in PMS only if they have a long-term investment horizon of at least 3-5 years.
  • Cost: PMS involves higher cost than mutual funds, as the portfolio manager charges a fee for their services, which can be fixed, variable, or performance-based. One should invest in PMS only if they can afford the cost and are confident of the portfolio manager’s ability to deliver returns.
  • Track record: PMS requires a thorough research and analysis of the portfolio manager’s track record, credentials, investment philosophy, and performance. One should invest in PMS only if they are satisfied with the portfolio manager’s reputation and results.

Factors to consider before investing in mutual funds

Before investing in mutual funds, one should consider the following factors:

  • Investment goal: Mutual funds offer various schemes to suit different investment goals, such as wealth creation, income generation, tax saving, etc. One should invest in mutual funds that match their investment goal and time horizon.
  • Risk profile: Mutual funds offer different risk-return profiles, depending on the asset class, sector, style, etc. One should invest in mutual funds that match their risk profile and risk tolerance.
  • Performance: Mutual funds require a comparison and evaluation of the performance of different schemes, based on parameters such as returns, risk, consistency, benchmark, peer group, etc. One should invest in mutual funds that have a proven track record of delivering superior and stable returns over the long term.
  • Cost: Mutual funds involve a cost in the form of expense ratio, which is deducted from the NAV of the scheme. One should invest in mutual funds that have a low expense ratio and do not compromise on the quality and performance of the scheme.

What to choose: PMS or mutual funds?

The choice between PMS and mutual funds depends on various factors, such as the investor’s portfolio size, risk appetite, investment horizon, cost, and preference. PMS is suitable for HNIs (High Net-worth individuals) who have a large investible surplus, high risk appetite, long-term investment horizon, and desire for customisation and transparency. Mutual funds are suitable for all types of investors who have a small to medium investible surplus, low to moderate risk appetite, short to medium-term investment horizon, and preference for diversification and simplicity.

Frequently asked questions

What is the full form of PMS?

PMS stands for Portfolio Management Services, which are investment services offered by professionals to high-net-worth individuals.

What is the role of a portfolio manager?

A portfolio manager is a person or group of people who manage the investments of a client based on their objectives, risk profile, and preferences.

What is NAV in mutual funds?

NAV or Net Asset Value is the market value per unit of a mutual fund scheme. It is calculated by dividing the total value of the assets minus the liabilities by the number of units outstanding.

How does a PMS work?

A PMS works by creating and managing a customised portfolio of stocks, bonds, or other securities for a client. The portfolio manager has the discretion to make investment decisions on behalf of the client or with their consent.

Who can invest in PMS?

PMS is suitable for investors who have a high risk appetite, a large amount of investible surplus, and a desire for personalised and flexible investment solutions.

What are exit loads?

Exit loads are fees charged by mutual funds to investors who redeem or sell their units before a specified period. They are meant to discourage investors from making premature withdrawals, thus ensuring long-term commitment.

Do PMSes offer the same flexibility and liquidity as mutual funds?

PMSes offer more flexibility than mutual funds, as they are not restricted by set objectives and conditions. They can invest in a wider range of asset classes, sectors, and strategies. However, PMSes may have lower liquidity than mutual funds, as they may have lock-in periods, exit loads, or minimum holding requirements.

How are PMS and mutual funds taxed?

PMS and mutual funds are taxed differently depending on the type and duration of the investment. PMS investors have to pay capital gains tax on the profits from the sale of securities, while mutual fund investors have to pay capital gains tax only when they redeem their units. The tax rates vary for equity and debt investments, and for short-term and long-term holdings.

Is it possible to track the performance of PMS in the public domain like mutual funds?

It is possible to track the performance of PMS in the public domain, as PMS providers have to disclose their monthly returns, portfolio composition, and other details on their websites and to SEBI. However, the level of transparency and standardization may not be as high as mutual funds.

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