Starting your investment journey can be challenging. It can be confusing as to where to start investing and what factors are to be considered while making this choice. There are many investment options available in the market. Each of them have their own set of advantages and disadvantages. To make the right choice, it can help you understand your investment objective, your risk capability, financial capacity, and other parameters. Mutual funds and portfolio management services are very common investment options across investors. Both of them have their own list of pros and cons. In this article, we will have a look into each of these investment options that will help you make a suitable decision according to your needs and choices.
What are Mutual Funds?
Mutual funds are considered to be one of the most popular investment options in the current times. It is an investment vehicle that is formed by an AMC (Asset Management Company) that pools in funds from different investors who have common investment goals. They are a smart option for investors who are looking to increase the diversity of their portfolio while also increasing their exposure. The investment made by a variety of investors is managed by the fund manager who is a financial professional. This fund manager would purchase different securities such as bonds and stocks that are aligned with the interest of investors.
With mutual funds, you can also diversify your portfolio as asset allocation can cover several instruments. The amount of units that you will be allocated will depend on the amount that you invest in the mutual fund. So, you would experience profits and losses that are proportional to the amount that you invest. There are several types of mutual funds such as debt mutual funds, equity mutual funds, and hybrid mutual funds.
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What is a Portfolio Management Service?
Portfolio Management Service is an investment management service that is offered by a portfolio manager. This service offers an investment portfolio that can be diversified into fixed income, stocks, and other structured products. You can either tailor-make or structure these services depending on your goals. You can reach out to your portfolio manager to help build an investment portfolio with the right mix of stocks according to your investment strategy and expectations. Your risk to reward expectations would be primarily considered to choose stocks according to the risk to reward profile. There are 4 main types of portfolio management.
Discretionary Portfolio Management
In this type of portfolio management, you will be given complete flexibility to make decisions as an investor. Your risk appetite, investment goals, and timeframe are taken into consideration by the portfolio manager who will then help you build a suitable investment policy statement.
Non-Discretionary Portfolio Management
With the non-discretionary portfolio management style, your portfolio manager advises you regarding which stock would be most suitable for your portfolio. This can be helpful if you are not well aware of the stock market. Both the risks and rewards will be mentioned to you. The discretion to take action is completely given to you as well.
Active Portfolio Management
With active management, investments are diversified to minimize risks. While higher risks provide potentially higher returns, they could also incur high losses.
Passive Portfolio Management
This is exactly the opposite of active portfolio management. Usually, index funds are widely used in this case. The turnover is relatively lesser, thereby providing potentially good long term returns.
Mutual Funds vs Portfolio Management Service
There are 5 main aspects that differentiate mutual funds and PMS. Let us have a look into each of them.
With PMS, your minimum investment is ₹50 Lakhs. Some portfolio managers have a higher threshold to encourage diversification. Whereas, with a mutual fund, you can start investing with an amount as low as ₹500. This proves to be a more affordable investment option.
According to SEBI, equity funds are allowed to only charge a maximum of 2.5% as annual expenses. In the case of debt funds, only 2% can be charged. However, with PMS, 2% to 3% is charged on an annual basis depending on the size of the portfolio. In addition to these annual charges, there are also incentive-based costs. For example, a portfolio manager may charge 10% of your profits if the profits earned are more than ₹50 Lakhs.
If you sell an equity fund after holding it for a year, you would have to pay long-term capital gains tax of 10%. However, a fund manager can sell and buy shares of stocks many times without having to face any tax implications. When it comes to PMS, the tax options are different. No matter the sale or purchase of stocks, investors will have to pay taxes as these stocks are directly owned by them.
For mutual funds, the track record of all the available schemes are available publicly on platforms. You can get your hands on this information and evaluate its authenticity. When it comes to PMS, the data available is from sources such as portfolio managers and fund managers. More often than not, they do not cover multiple cycles and do not provide the aggregate return values.
Mutual funds have several regulations that make sure that only a certain percentage of a particular type of fund is allocated in a portfolio. With a PMS portfolio, there is complete flexibility to create a tailor-made mix of funds according to your needs. For instance, with a mutual fund portfolio, you would not be able to hold more than 10% of a single stock. With a PMS portfolio, on the other hand, you can create a concentrated portfolio according to your needs and risk-to-reward capacity.
Choosing between mutual funds and portfolio management service is a choice that depends on your investment choices and expectations. Both of them have their list of pros and cons. Weigh out your expectations with the benefits of each of these investment pathways to make the right decision. Make sure that you lay down your expectations and financial capabilities in detail in order to go through with a good decision.