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Investors have several options for managing their money, but Portfolio Management Services (PMS) and mutual funds are two distinct approaches.
While both let investors participate in a professionally managed portfolio, they differ in minimum investment requirements, portfolio customization, ownership structure, fees, risk, and the level of control available to investors.
This article explains PMS and mutual funds in detail along with their differences.
Key Takeaways
- Mutual funds pool money from thousands of retail investors to buy securities like shares.
- Portfolio management services build custom stock portfolios for wealthy individual investors.
- You can start a mutual fund investment with as little as ₹100 via SIP, but a PMS requires a minimum of ₹50 lakh.
- Mutual fund investors own units of a collective pool, whereas portfolio service clients own individual shares in their Demat accounts.
- PMS can have higher charges because they include management fees and performance-based fees.
What are Mutual Funds?
A mutual fund pools money from multiple investors and invests it in a portfolio of securities based on the scheme’s stated objective.
A professional fund manager makes the investment decisions, while investors hold units representing their share of the overall portfolio.
What is Portfolio Management Services?
PMS offers a more personalized approach. Instead of pooling your money with other investors, a portfolio manager manages a portfolio specifically for you, with the securities held directly in your name.
How are Mutual Funds Different From PMS?
| Feature | Mutual Funds | Portfolio Management Services (PMS) |
| Structure | Money from multiple investors is pooled | Portfolio is managed separately for each investor |
| Ownership | Investors own units of the mutual fund | Investor directly owns the securities |
| Management | Fund manager manages the pooled portfolio | Portfolio manager manages the individual portfolio |
| Customisation | Limited. Follows the scheme mandate | High. Portfolio can be tailored to the investor |
| Minimum investment | ₹100 via SIP | ₹50 lakh |
| Demat account | Not necessarily required | Required for holding securities directly |
| Best suited for | Retail and mass-market investors | High-net-worth investors |
Types of Mutual Funds
Based on asset types, there are mainly 4 types of mutual funds:
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Equity Funds: These invest primarily in company shares and carry higher market risk. Common categories include large-cap, mid-cap, small-cap, multi-cap, and tax-saving ELSS funds.
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Debt Funds: These invest in fixed-income securities such as government bonds, corporate bonds, treasury bills, and other money-market instruments. They are considered less volatile than equity funds, although they still carry interest-rate and credit risks.
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Hybrid Funds: These invest across a combination of equity and debt instruments. The mix allows investors to balance growth potential with relative stability. Examples include balanced advantage, aggressive hybrid, and conservative hybrid funds.
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Solution-Oriented Funds: These are designed around specific long-term financial goals. Common examples include retirement funds and children’s funds.
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Other Funds: This category includes funds that do not fall neatly into the above classifications, such as index funds, fund of funds, etc.
Types of PMS
PMS in India is classified into three primary categories. This distinction is based on the degree of control and investor involvement:
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Discretionary PMS: In this PMS type, the portfolio manager has complete autonomy to make investment decisions on behalf of the investor. This type is ideal for investors who prefer professional management with minimal involvement.
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Non-Discretionary PMS: In non-discretionary PMS, the portfolio manager provides recommendations, but investors make the final decision to buy or sell. This type of PMS suits investors who want expert advice while retaining decision-making authority.
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Advisory PMS: In Advisory PMS, the portfolio manager offers investment advice, and the investor executes transactions independently. This type of PMS suits experienced investors who want guidance but full control over their investments.
Benefits of Mutual Funds and PMS
| Benefit | Mutual Funds | PMS |
| Expert Management | Managed by professional fund managers based on the fund’s objective and strategy. | Professional portfolio managers take more focused investment calls. |
| Personalisation | Expert oversight and risk reduction through spread-out assets. | More personalised, with the portfolio built around the investor’s goals, risk appetite and preferences. |
| Diversification | Offers diversification by spreading investments across different companies, sectors or asset classes. | Portfolio diversification is designed around the investor’s risk appetite to maximise returns. |
| Taxation | Short-term capital gains (<12 months) are taxed at 20%. Long-term capital gains (>12 months) are taxed at 12.5% on profits exceeding ₹1.25 lakh per year. Dividendsare taxed at income slab rates. | Short-term equity gains (<12 months) are taxed at 20%. Long-term equity gains (>12 months) are taxed at 12.5% for profits above ₹1.25 lakh. Dividends are taxed at regular income slab rates. |
| Transparency & Control | Investors can track the fund’s NAV, portfolio and performance, but do not control individual investments. Redemption of mutual fund units is relatively easier compared to PMS |
Investors have direct ownership of the securities and get greater visibility into individual holdings and transactions. You continue to enjoy voting rights on corporate resolutions and dividends get credited in your bank accounts |
| Flexibility | Investors can choose from different schemes based on their goals and risk appetite. | Offers greater flexibility to customise the portfolio and investment approach. |
Fee and Other Cost Considerations
PMS
PMS involves higher management and performance fees compared to mutual funds. Some PMS providers may charge a performance-based fee when the portfolio earns returns above a certain level or benchmark.
Fixed charges can range between 1% and 2.5% annually. Performance fees can be 10-20% of profits after a certain hurdle rate. Rules ensure you pay performance fees on new profits, not recovered losses.
For example: If the hurdle rate is 12% and profit-sharing is 80:20, returns beyond 12% in a year would be shared 80% to the investor and 20% to the provider.
Mutual Funds
Mutual fund fees and charges primarily include the Total Expense Ratio (TER). This annual fee is deducted from your assets to cover management and operating costs. Other charges can include exit loads charged one-time on early redemptions.
TER is expressed as a percentage of your total investment and depends on the fund type. For instance, smaller open-ended equity funds (up to ₹500 crore AUM) have a maximum TER limit of up to 2.25%.
SEBI Regulatory Framework for PMS and Mutual Funds
PMS
SEBI regulates PMS in India to maintain transparency and protect investors.
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Registration: All PMS providers must register with SEBI before they can offer portfolio management services.
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Entry: The minimum investment required for PMS is ₹50 lakh.
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Transparency: PMS providers must keep investors updated on portfolio performance, fees, risks, and other important information.
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Safety: Investor assets must be held with an independent custodian.
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Compliance: PMS providers must have a compliance officer who ensures the firm follows SEBI rules and other applicable regulations.
Mutual Funds
SEBI regulates mutual funds in India through a comprehensive framework.
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Registration: Mutual fund houses have to be registered with SEBI.
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Fund structure: A mutual fund is set up through different entities such as the sponsor, AMC, trustees and custodian as per SEBI’s framework.
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Scheme classification: SEBI has standardised mutual fund categories so that schemes with similar objectives follow broadly defined investment mandates.
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Disclosures: AMCs must disclose important information about their schemes.
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SEBI also regulates aspects like expense ratio and valuation and other compliance norms.
Risks Associated With Mutual Funds and PMS
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Market risk: Both mutual funds and PMS can be affected by market movements.
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Tax: In PMS, frequent buying and selling of shares by the manager can create capital gains, which may increase the investor’s overall tax liability every fiscal.
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Chasing past returns: A fund or PMS manager that performed very well last year may not necessarily repeat the same performance.
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Concentration risk: Mutual funds are usually diversified, but some schemes can still have higher exposure to certain sectors or companies. PMS portfolios may be even more concentrated depending on the manager’s strategy.
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Manager risk: The performance of both mutual funds and PMS depends, to an extent, on the investment decisions of the fund or portfolio manager.
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No guaranteed returns: Neither mutual funds nor PMS guarantee returns.
Conclusion
Choosing between mutual funds and portfolio management services depends on your investment choices and expectations. Both have their own pros and cons. Weigh your expectations against the benefits of each investment path to make the right decision.
