Portfolio Management Services and Mutual funds are often looked at with the same lens. However, there is a world of difference between the two. For starters, mutual funds are for a larger audience and offer much less customisation. PMS offers better customisation and is for a targeted group of investors. Here, we look at the difference between PMS and MFs before we try to understand the advantages and disadvantages of these two products.
Difference between PMS and MF
PMS is a wealth management service wherein professionals call portfolio managers to manage the investors’ funds. They invest in a range of assets, usually equity, to optimise returns at risk-adjusted levels. In return, there is a fund management fee and/or performance fee and an admin fee.
There are 3 types of PMSs:
In this type of PMS, the fund manager or portfolio manager undertakes the investment decisions independently. They are given power of attorney by the investor (client) to buy and sell shares on their behalf. The investor does not have much say in the portfolio design and realignment.
In this, the investor (client) has to approve all buy-sell transactions. Only upon approval the portfolio manager is allowed to execute the transactions. The client has control over the portfolio design and realignment.
Here, the portfolio manager provides expert advice to the investor. It is up to the client (investor) to follow the advice and execute the plan. Here, the entire onus and control remain with the investor.
As per the latest SEBI regulatory guidelines, the minimum investment amount for a PMS set-up is Rs. 50 Lakh.
Mutual funds are a pool of money gathered from a vast audience (investors) and are invested in various assets based on the investment mandate filed with the SEBI. The fund is managed by a professional called a fund manager. The two modes of investing in mutual funds are:
- Lumpsum – Entire amount is invested at a single point into the mutual funds
- SIP – Systematic Investment plans are methods of investing in mutual funds; a fixed amount is invested in equal instalments for a pre-determined period of time.
There are various types of mutual funds, such as Debt mutual funds, equity mutual funds, and hybrid mutual funds, which have various risk profiles. You can choose to invest in suitable funds depending on your risk appetite.
SEBI governs both PMS and mutual funds. While the big picture may seem the same, PMS is a more customised effort for a homogenous set of investors. At the same time, MFs are highly standardised and mandated investment efforts catering to a heterogenous audience. PMS services have a high entry threshold. Mutual funds are aimed to encourage small investors with a threshold of as low as Rs. 500 per month.
Advantages and disadvantages of PMS (as compared to mutual funds):
Here’s what works under the PMS platform:
PMS is designed for a niche audience. They are not pre-created portfolios with the intent of mass customisation, like in the case of mutual funds.
- Easy monitoring and access:
Most PMS companies provide user-friendly, stylised portfolio monitoring facilities. There is high-end analytics and relevant content to enhance customer delight.
- Transparency and accountability:
Since SEBI regulates PMS, there is a requirement to communicate all the transactions undertaken on the PMS regularly to the investor. There is no requirement for public disclosure as in the case of mutual funds. However, privately communicating and letting the investor know about the transactions undertaken is of prime importance.
- Probability of higher returns:
These portfolios are curated to align with the specific requirements of the investors. The stock selection process is quite intense as compared to that of Mutual funds. The realignment is strategic without any redemption pressure, which may not be in the case in some mutual funds. The relative flexibility, when compared to mutual funds, would be higher. PMS is allowed to invest in a range of asset classes, including derivatives, gold, commodities etc.. There are multi-asset mutual funds which also have the liberty to invest in gold and commodities apart from Equity and debt. There are some similarities between the two products. However, they are intended for a different audience, and the liberty with which PMS operates is slightly higher.
There are drawbacks to this service as well:
- Higher fee:
The fees charged by PMS are relatively higher than that of Mutual funds. At the same time, the add-ons are provided in terms of login and on-demand view of the portfolio. Analytics etc., are all these high-end services that come at an additional cost. Further, portfolio managers have a more intense job than mutual fund managers, thereby commanding a higher fee.
- Niche clientele:
These products are for a niche clientele. They are not open to a vast audience, thereby making it tough to garner the required number of investors/quantum of investments.
- High entry point:
The minimum investment required for PMS is higher as it is aimed at HNIs, UHNIs and NRIs.
Advantages and disadvantages of Mutual funds (as compared to PMS):
Here’s what works for mutual funds as an investment class:
- Diversification even for a small amount:
You would technically own multiple underlying securities, even for a small amount of money. Diversification is one means of risk reduction and is also a method for optimising returns.
- Ease of investing:
The SIP route is highly convenient for investing and lets the investor start with a minimal amount and stay committed to her investment. This is also a very effective risk reduction technique. This mode of investment is also introduced in some PMS. However, it is still in the nascent stages in PMS, whereas in mutual funds, the SIP and STP modes of investing are highly popular.
- Professional management of funds:
Not everyone can afford professional management of their money. Mutual funds are an easy means to access professional management of your funds. It is indeed an excellent place to start for any beginner.
- Low threshold:
The low amount with which you can start your investment journey in mutual funds remains the highlight of this avenue. It is accessible to a large mass and provides a variety of options as per your risk appetite.
Drawbacks of mutual funds (as compared to PMS):
- Taxability of the fund:
The payouts are subject to the tax incidence for the fund. The turnover, redemptions, gains, and losses are all accounted for before the distributions reach the hands of the investor. There is a dividend distribution tax incurred by the fund house which will eventually be passed onto the hands of the investor, although not directly. Although the %age of taxation is largely the same for both PMS and MFs, there is a difference only due to the structure of the products. Since MFs are pooled, the taxability is based on any collective strategy executed on the fund. In the case of PMS, the taxability is more on an individual basis as you will have a separate individual demat account.
- Trade execution turnaround time:
The redemption or buy request that you place before the cut-off time will be executed the same day, whereas anything placed after such time will be executed the following day. For someone looking at immediate liquidity or purchase would not benefit from this avenue.
Strict regulations are issued by SEBI, and mutual fund managers have to adhere to the regulations for investments in their portfolio, whereas PMS offer more flexibility.
Both these avenues have their advantages and disadvantages. However, it is apparent that both are for different segments of investors. Mutual funds are open for everyone, while PMS is for a niche set of investors. Depending on your profile and risk appetite, you should choose what suits you best. Experts at TATA Capital Wealth can help you with either of these avenues and help you align your investments with your financial goals.