PMS and mutual funds are effective means of investing across a wide range of securities without subscribing to those individually. That being said, these are extremely different investment avenues.
If you’re also on the fence about whether to go for PMS investment or mutual funds, a comprehensive guide into the basics of both these products can help you make the right decision. Hence, read on!
Portfolio Management Services is a type of wealth management service that offers the utmost flexibility and customisation of investment strategies to generate optimal returns. Here, expert portfolio managers lead the investment process depending on the type of service an investor chooses. SEBI registered managers handle the investment operations. This manager works under a legal contract with the investor and devises and follows investment strategies to ensure superior risk-adjusted returns. Intending investors can choose to invest in PMS via platforms like KredX, which features various PMS, bonds, and even digital gold options.
PMS investment is segmented into three types:
- Discretionary PMS: Under these services, a manager controls the ultimate investment decisions, timings, and executes the trading. The investor has no significant role as he/she has given complete authority to the portfolio manager.
- Non-discretionary PMS: Here, a portfolio manager advises the investor, but the investor has the final say regarding the decisions. However, the manager does the trading, not the investor.
- Advisory PMS: Under these services, a portfolio manager can only advise an investor. However, the investor makes the choices, decides the timing, and also executes the trading.
PMS Investment – Benefits
- They can get a portfolio customised as per their risk appetite.
- Investors can frame a portfolio with the benefit of discretion (Discretionary PMS).
- PMS investment offers utmost transparency in portfolio management, performance, and reporting.
- It offers substantial diversification across securities like shares/stocks, fixed-income instruments, cash and cash equivalents, derivatives, etc.
Mutual funds are an investment vehicle that pools funds from varied investors and invests that compiled capital in securities like equity, debt, gold, etc. Like PMS, mutual funds are professionally managed by experts, known as Fund Managers appointed by respective Asset Management Companies.
As per SEBI (Securities and Exchange Board of India), mutual funds in India are bifurcated into three categories.
- Equity Funds: Invests a minimum of 65% of its assets in equity and equity-related instruments. The remaining 0% – 35% can be invested in debt or money market securities. As per SEBI, there are 11 types of equity funds. The most popular one is the ELSS or Equity-linked Savings Scheme, which comes with tax deductions of up to Rs 1.5 lakhs under section 3 of the Income Tax Act.
- Debt Funds: These mutual funds invest most of their assets (65%) in debt and marketable securities. As per SEBI, there are 16 debt funds and the liquid fund is considered the most popular type due to its shorter maturity period and lesser risk involved.
- Hybrid Funds: This type of MFs invests in two or more types of securities, including equity, debt, and money market instruments, gold and overseas securities. As per SEBI, there are 7 hybrid funds. The Dynamic Asset Allocation Fund is the popular type in this segment as it reduces its debt exposure in the bearish market and heightens its debt holding in a bullish market.
Mutual Fund Investment – Benefits
- Mutual Fund investment guarantees professional management of funds.
- ELSS comes with tax benefits.
- It helps achieve a diversified portfolio but is not customised per an investor’s objectives or aptitude.
- Systematic Investment Plan (SIP) enables investors to invest a fixed amount in an MF scheme at preset intervals (daily, weekly, monthly, bi-annually, and annually.)
After learning about PMS and mutual funds separately, a comparative analysis of both these products will further help investors locate their point of interest and invest accordingly.
PMS And Mutual Fund Investment – A Comparative Analysis
|Parameters||PMS||Mutual Funds Investment|
|Flexibility||Can be invested with no restriction||One can only gain exposure to asset categories according to the scheme’s objective|
|Regulatory Aspects||Regulated by SEBI||Regulated by SEBI and AMFI (Association of Mutual Funds in India)|
|Transparency||Periodic disclosures of data/information – transactions, costs – is available||Mutual funds information such as portfolio disclosures, performance data, commission offered to distributors can be tracked daily|
|Taxation||Income from the stocks through Discretionary PMS is taxable as Capital Gains
Investors have to pay short-term/long-term capital gains depending on the investment period
|Equity Mutual Funds –
STCG tax of 15%. (If withdrawn within 1 year)
LTCG tax of 10% for gains of above Rs. 1 lakh
Non- Equity Mutual Funds –
STCG tax – Combined with the investor’s income and taxed as per the tax slabs.
LTCG tax – 20% on gains for lock-in-period of more than 3 years.
|Ownership||Comes with direct ownership||Comes with shared ownership (AMC or Fund House)|
|Cost||Includes management fees, performance fees, entry/exit loads, and other charges
Investors can negotiate the fees with the PMS provider.
|Fees are fixed in terms of percentage.
Mutual funds have expenses daily.
|Minimum Investment amount||Rs. 50 lakhs||Rs. 500|
|Investor’s Asset Holding||Holds complete units of stocks, debt instruments, or other securities||Holds units of MFs. Hence, investors essentially own fractional units of all the involved securities|
|Model Portfolio||Offers customised portfolio management with large-amount investment options||Does not offer large sum-investment options (cannot hold more than 10% net asset value in a single stock)|
|Accountability||Portfolio managers are accountable to their clients, i.e. investors||Fund managers are not responsible to their clients|
Expert money managers guide both PMS investment and mutual funds. However, PMS investment is more customised with investment strategies informed by an investor’s risk appetite and financial objectives. Mutual funds are more regulated and can be invested with a minimum entry amount. Investors must consider factors like market conditions, purpose, risk appetite, tax benefits, etc., before investing in PMS or mutual funds.