Mutual Funds vs PMS: Which One is Better?
Wednesday, May 10, 2023
If you are looking for investment options that can generate higher returns than fixed deposits or savings accounts, you might have come across mutual funds and portfolio management services (PMS). Both of these are professionally managed investment products that aim to diversify your portfolio and optimize your risk-reward ratio. But how do they differ and which one is better for you? Let's find out.
Mutual funds are collective investment schemes that pool money from many investors and invest it in various securities such as stocks, bonds, commodities, etc. The fund manager selects the securities based on the fund's objective and strategy and charges a fee for his or her services. The investors get units of the fund that represent their share of the fund's assets and performance. Mutual funds are regulated by the Securities and Exchange Board of India (SEBI) and have to follow certain rules and guidelines regarding disclosure, diversification, valuation, etc.
PMS are customized investment solutions that cater to the specific needs and preferences of individual investors. The PMS provider assigns a dedicated portfolio manager to each investor who designs and manages the portfolio according to the investor's goals, risk appetite, time horizon, etc. The portfolio manager has more flexibility and discretion in choosing the securities and can also make changes without seeking the investor's consent. The investor gets a direct ownership of the securities in the portfolio and pays a fee to the PMS provider based on the assets under management or the performance of the portfolio. PMS are also regulated by SEBI but have less stringent rules and regulations than mutual funds.
Comparing them on Key Parameters
Here are some of the key parameters on which mutual funds and PMS differ:
1. Minimum investment amount: The minimum investment amount for mutual funds is very low, starting from as low as Rs 500 for some schemes. This makes mutual funds accessible to all kinds of investors, irrespective of their income level or risk appetite. On the other hand, the minimum investment amount for PMS is quite high, at Rs 50 lakh as per SEBI regulation. This means that PMS is suitable only for high net worth individuals (HNIs) who have a large corpus to invest and can afford higher risks.
2. Customization: In mutual funds, you have to choose from a predefined set of schemes that are designed for a large number of investors with similar objectives. You cannot customize your portfolio according to your specific needs or preferences. Moreover, you have no control over the portfolio composition or the fund manager's decisions. In PMS, you have a personalized portfolio that is tailored to your goals, risk profile, time horizon, etc. You can also decide on specific sectors, capitalization, allocation, etc. that you want to invest in. Moreover, you can interact with your fund manager and give feedback or suggestions on your portfolio.
3. Transparency: In mutual funds, you get regular updates on your portfolio performance through factsheets, annual reports, etc. However, you do not get detailed information on the individual stocks or securities in your portfolio or their weightage. You also do not know the rationale behind the fund manager's decisions or the costs involved in managing your portfolio. In PMS, you get complete transparency on your portfolio holdings, transactions, performance, etc. You can also access the fund manager's research reports and analysis on various stocks and sectors. You also get to know the exact fees and charges that you pay for availing the PMS service.
4. Taxation: In mutual funds, the taxation depends on the type of scheme and the holding period of your units. Equity mutual funds are taxed at 10% for long-term capital gains (LTCG) above Rs 1 lakh and 15% for short-term capital gains (STCG). Debt mutual funds are taxed at 20% with indexation benefit for LTCG and as per your income tax slab for STCG. Dividends from mutual funds are also taxable in the hands of investors as per their income tax slab. In PMS, the taxation depends on the type of securities in your portfolio and the holding period of each security. Stocks are taxed at 10% for LTCG above Rs 1 lakh and 15% for STCG. Debt securities are taxed at 20% with indexation benefit for LTCG and as per your income tax slab for STCG. Dividends from stocks are also taxable in the hands of investors as per their income tax slab.
5. Performance: The performance of mutual funds depends on various factors such as market conditions, fund manager's skill, scheme's objective, etc. Mutual funds have to adhere to certain exposure limits and diversification norms that may restrict their returns potential. Moreover, mutual funds may suffer from issues such as high expense ratio, exit load, tracking error, etc. that may erode their returns over time. The performance of PMS depends on various factors such as market conditions, fund manager's skill, portfolio composition, etc.
PMS has more flexibility and freedom to invest in high-growth stocks or sectors that may generate higher returns than mutual funds. Moreover, PMS has lower costs and charges than mutual funds that may enhance its returns over time.
Advantages of PMS
Based on the above comparison, we can conclude that PMS has some distinct advantages over mutual funds that make it a better investment option for HNIs who want to create wealth in the long run.
Whilst Mutual funds have some benefits over PMS, such as:
Low Barrier of Entry: Mutual funds require a minimum investment amount of Rs 5000 or less, whereas PMS requires a minimum investment amount of Rs 50 lakh or more.
Professional management: Mutual funds are managed by qualified fund managers who follow a predefined investment objective and strategy for each scheme.
Liquidity: Mutual funds are easy to buy and sell through online platforms or intermediaries. You can redeem your units at any time at the prevailing net asset value (NAV).
However, we favour PMS over mutual funds for the following reasons:
Higher returns potential: PMS has the potential to generate higher returns than mutual funds by taking advantage of market opportunities and inefficiencies that may not be captured by mutual funds due to their size, regulations or constraints.
Lower costs: PMS has lower costs than mutual funds in terms of expense ratio, transaction charges and taxes. PMS charges a fixed fee or a performance-based fee or a combination of both. Mutual funds charge an expense ratio that includes management fee, administrative fee, marketing fee, etc. Moreover, mutual funds incur transaction costs such as brokerage, stamp duty, etc. that are borne by the investors indirectly.
Control: PMS gives you more control over your portfolio than mutual funds. You can choose your portfolio manager, strategy, securities and assets. You can also monitor your portfolio performance and holdings regularly. You can also give feedback or suggestions to your portfolio manager.
Transparency: PMS gives you complete visibility into your portfolio holdings, transactions, performance, etc.
Customization and Flexibility: PMS allows you to have a tailor-made portfolio that suits your specific needs and preferences.
Conclusion
Mutual funds and PMS are both professionally managed investment options that can help you achieve your financial goals.However, they have some key differences that you should consider before investing.
Mutual funds are suitable for small investors who want to invest in a diversified portfolio with low risk and low cost. PMS is suitable for HNIs who want to invest in a customized portfolio with high risk and high return potential.
If you are looking for a wealth management service that can offer you personalized attention, expert advice, and superior performance, you should opt for PMS over mutual funds.
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