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PMS Vs Mutual Fund

PMS Vs Mutual Fund

Investors have many options to grow their wealth, and two of the most widely used are PMS and mutual funds. Understanding the difference between PMS and mutual funds can help you choose the right investment option. 

Portfolio Management Services (PMS) is a customised investment service where a professional portfolio manager helps you build and manage your portfolio. This is a great option if you’re looking to maximise your returns through a targeted approach that takes your risk tolerance and preferences into account. 

Mutual funds (MF), in contrast, pool money from multiple investors and invest it in a diversified mix of stocks, bonds, or other assets. The fund is managed by an asset management company and follows a fixed strategy suitable for a broader audience of investors.  

In this article, we explore PMS vs MFs, including how they work, who they suit, and the main MF vs PMS differences related to their cost and returns.

Difference between PMS vs Mutual Funds 

Below are the differences between PMS vs. Mutual Funds

AspectPMS (Portfolio Management Services)Mutual Funds
ManagementActively managed with personalised strategies for individual investors.Managed by professional fund managers with a standard strategy for all investors.
Investor ProfileAll types of investorsHigh-net-worth Individuals (HNIs)
InvestmentThe minimum investment amount is Rs. 50 Lakhs.Investment amount through SIP can be as low as Rs. 100
DiversificationLimitedHigher
Risk appetiteHighModerate
CustomisationHigh degree of customisationFollow a pre-defined investment strategy
FeesIt’s between 2% to 2.5%Usually between 0.5% to 2.5%
Investment horizonPMSs generally have longer investment horizonsMFs investment horizons can range from short to long-term
Ideal for PMSs are suitable for investors interested in transparency and customisationMFs are suitable for investors interested in a simple investment solution and diversification
Investor profile High Net Worth Individuals (HNIs) typically invest in PMSsAll investors can invest in MFs.
CostsAssociated costs are generally higher than MFsAssociated costs are typically lower than PMSs

Types of PMS

In India, there are two main types of PMS. These include:

  1. Discretionary: In this type, the portfolio manager has total authority over investment decisions on behalf of their client. The client has no decision-making authority over the investment securities or timing. 
  1. Non-Discretionary: Here, the portfolio manager advises the client regarding which securities to invest in. However, the final decision depends on the client. 

Advantages and disadvantages of PMS (as compared to mutual funds)

In comparison to mutual funds, here are some advantages and disadvantages of PMSs:

Advantages of PMS Disadvantages of PMS 
Customisation: PMS is meant to cater to a niche audience. Unlike mutual funds, it does not involve pre-created portfolios for mass customisation, like mutual funds.Higher fee: The associated fees with PMS are generally higher, and add-ons include login, an on-demand portfolio view, and analytics. Portfolio managers also have a more intense job, commanding a higher fee.
Easy monitoring and access: Most PMS providers offer user-friendly, personalised portfolio monitoring facilities, high-end analytics and relevant content to enhance customer delight.Niche clientele: These investment offerings are meant to cater to a specific audience. They are not open to a vast audience, and garnering the required number of investors or the necessary quantum of investments is challenging.
Transparency and accountability: PMS is regulated by SEBI, meaning investors are required to be informed about all transactions undertaken. While public disclosure is not necessary, it is essential to communicate privately with the investor to keep them in the loop regarding any transactions. High entry point: The minimum investment needed to invest in PMS is high, as it is primarily aimed at HNIs, UHNIs, and NRIs.
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Probability of higher returns: Portfolios are customised to suit individual investors, with a more thorough and selective approach to stock picking. They also tend to offer increased flexibility.
Multiple asset classes: PMS may invest in various asset classes, including derivatives, gold, commodities, etc. PMS operates with slightly higher liberty.

Factors to consider before investing in PMS.

Before investing in PMS, some factors to consider include:

  • Risk appetite: PMS investments are higher risk, suitable for investors with a high-risk appetite.
  • Costs: The costs associated with PMSs are higher, making them ideal for investors with a higher budget 
  • Investment horizons: Since it takes time to generate returns. PMS require longer investment horizons.
  • PMS track record: It is crucial to research the fund manager’s credentials, investment methods, philosophy, track record, and success rates.  


Types of Mutual Funds

The main types of mutual funds include:

  1. Equity Funds: These MFs invest in shares of companies. 
  1. Debt Funds: Debt Funds are ideal for those looking for a steady income. They primarily invest in bonds, such as corporate and government bond funds. 
  1. Hybrid Funds: These funds invest in a mix of debt instruments and equities, offering balanced exposure to both asset types. 
  1. Sector Funds: These invest in companies in a particular sector, such as banking and finance, IT, defence, energy, or others. 
  1. Thematic Funds: These funds invest in companies related to a particular theme, such as the environment or infrastructure. 

Factors to consider before investing in Mutual Funds

Some factors to consider before investing in MFs include:

  • Risk profile: Different funds offer different risk profiles depending on their asset allocation. 
  • Investment goal: Different funds are suited to various goals, including wealth creation, stable income, tax benefits, and more. 
  • Performance: Before investing, it is crucial to research different mutual funds (MFs), their performance and track record, and other relevant details. 

Advantages and disadvantages of Mutual funds (as compared to PMS). 

Here are the pros and cons of mutual funds as an investment class:

Advantages of Mutual Fund Disadvantages of Mutual Fund
Diversification: With this form of investment, the investor would own small amounts of many underlying securities. Diversification is also suitable for optimising returns and reducing risks. 
Taxability of the Fund: Any payout is subject to the fund’s tax incidence. The turnover, losses, redemptions, and gains are accounted for before the distributions reach investor. Since MFs are pooled, taxation depends on the collective strategy of the fund.  
Ease of investing: The SIP route is convenient. It lets investors begin their journeys with a minimal amount and while staying committed. 
Trade execution turnaround time: The buy request placed before the cut-off time is executed the same day, while those placed after the cut-off time will be executed the following day.
Professional management of funds: Mutual funds give you access to experienced fund managers who handle investment decisions on your behalf.Regulations: SEBI issues strict rules, and mutual fund managers must adhere to them for investments in their portfolio, whereas PMS offer more flexibility
Low threshold: The minimal amount with which your investment journey can be started in mutual funds remains the highlight of this avenue. It is accessible to a broad demographic and provides various options depending on your risk appetite.

Conclusion 

Both of these avenues have their advantages and disadvantages, and it is essential to consider PMS vs. mutual funds carefully to determine the best fit for you. Both are for different segments of investors. Mutual funds are open to 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.

FAQs

How much return can I expect from PMS?

Over the 10 years ending in March 2024, PMS delivered average returns of about 18%. Actual returns can vary based on market conditions and the portfolio manager's strategy.

What is PMS in mutual funds?

Portfolio Management Services (PMS) provide tailored investment management for individuals. They create custom portfolios of stocks, bonds, and other securities to meet specific financial goals.

How does PMS work?

PMS creates a customised portfolio for clients, investing in stocks, bonds, or other securities. The portfolio manager makes decisions independently or with the client’s consent, focusing on achieving the client’s financial goals.

Who can invest in PMS?

Investors with a high risk appetite, significant funds to invest, and a desire for personalized, flexible investment strategies are suitable for PMS.

Between PMS and mutual funds, which offers the benefit of diversification?

Choosing between PMS vs. MFs can be a challenging decision. Mutual funds provide broader diversification by pooling funds and investing across various securities. PMS can also diversify but often holds a more concentrated portfolio tailored to individual preferences. 

Can I invest in both PMS and mutual funds through the same advisor?

Yes, you can invest in both PMS and mutual funds through the same financial advisor. Make sure your advisor explains any potential conflicts of interest and recommends options that match your financial goals. 

What is NAV in Mutual Funds?

NAV stands for Net Asset Value. It refers to the market value (per share) of a specific mutual fund. The NAV is typically determined by deducting liabilities from the TAV (total asset value) and then dividing by the number of shares.