PMS vs Mutual Funds: Which Investment Avenue is Right for You?

When it comes to investing in the equity markets, two prominent avenues often come up: Portfolio Management Services (PMS) and Mutual Funds. Both offer exposure to a diversified portfolio of stocks, but they differ significantly in terms of structure, customization, risk profile, minimum investment, and costs.

In this blog, we’ll break down the key differences between PMS and mutual funds to help you make a more informed investment decision.

What is PMS?

Portfolio Management Services (PMS) is a customized investment solution offered by licensed portfolio managers or firms. Here, your money is invested in individual stocks and other securities directly in your name. A professional portfolio manager actively manages your investments based on your risk profile, financial goals, and preferences.

• Minimum Investment: ₹50 lakhs (as per SEBI guidelines). However, a lot of popular PMS have imposed a minimum investment of INR 1 crore

• Ownership: Securities are held in the investor’s name

• Customization: High level of customization

• Ideal for: HNIs (High Net-Worth Individuals) looking for a bespoke investment strategy

• Fees: Most equity funds will have 1% of AUM plus profit sharing after a hurdle rate of 10% or 12%. Some PMS also function on a fixed fee basis or profit sharing basis. Overall the fee turns out to be more than Mutual Funds

What is a Mutual Fund?

A Mutual Fund is a pooled investment vehicle that collects money from multiple investors and invests in stocks, bonds, or other assets. The fund is managed by a professional fund manager, but all investors hold units of the fund, not the underlying securities.

• Minimum Investment: Can start as low as ₹100

• Ownership: Units of a fund are held, not direct ownership of securities

• Customization: Limited to choosing among available schemes

• Ideal for: Retail investors looking for cost-effective diversification and professional management

• Fees: Fees are typically from 0.2% (index funds) to around 1% for actively managed funds

Key Considerations Before Choosing

1. Investment Size: If you’re investing less than ₹50 lakhs, PMS is not even an option.

2. Control and Customization: PMS offers tailored strategies, suitable for those who want control and have specific goals.

3. Cost Sensitivity: Mutual funds are more cost-effective due to their lower fees and no performance charges.

4. Risk Appetite: PMS may use concentrated strategies and can be more volatile; mutual funds, especially index or balanced funds, may offer more stability.

5. Taxation: In PMS, capital gains are taxed as they occur; mutual funds offer more tax efficiency, especially if held long-term.

6. Returns: Lure of higher returns even after all fees is the primary reason to invest in PMS as compared to mutual funds. Unfortunately data for PMS is not as readily or extensively available as for MFs. We mostly get point to point annualized returns data for PMS and hence comparing over different time periods for consistency is tough. While amongst all PMS the top 5 to 10 ones would provide more returns than the top 5 MFs, the catch is on how to choose these since as mentioned data analysis over different time periods is not available. Another problem in looking at returns for PMS is the returns data available is for the fund and not for the individual investor. Each investor within the fund may have a different portfolio and hence the fund level returns may not be relevant. So do not just get lured by the overall return of the PMS since the individual investors at different entry and exit points may have very different returns.

Conclusion

There’s no one-size-fits-all answer to PMS vs Mutual Funds. If you are a high-net-worth investor seeking customization, willing to take higher risks, and can stomach higher costs, PMS could be suitable, but choosing the right fund based on limited data is challenging. On the other hand, if you’re looking for affordability, diversification, and simplicity, mutual funds are the better choice.