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Whether to go for mutual funds or PMS

  November 19,2022

Whether to go for mutual funds or PMS?

Portfolio Management Services (PMS) may sound like mutual funds. Are you confused between PMS and Mutual Funds? While there are similarities, they are not the same.

Before understanding the differences between the two, we need to understand mutual and PMS.  

Mutual Funds

When an entity invests money in stocks, bonds, money market instruments, or other securities after collecting funds from several investors with similar investment goals, such a financial instrument is known as a Mutual Fund. And by determining a scheme's "Net Asset Value," or NAV, the returns earned from this collective investment are distributed proportionately among the investors after considering any applicable expenses and levies.

Portfolio Management Services

PMS is a financial service provided by the portfolio manager to achieve the required rate of return while maintaining the desired level of risk. A portfolio manager is a qualified investment professional with extensive knowledge of the market's various instruments who focuses on analyzing the investor's investment goals. Stocks, fixed income, commodities, real estate, other structured products, and cash can all be included in an investment portfolio.

PMS is a customized service offered as per the investor's return requirements and the ability and willingness to assume the risk. A PMS drafts an Investment Policy Statement (IPS) to understand the financial position and needs of the client. The portfolio manager ensures that the return requirements coincide with the risk profile.

Now that we know all about mutual funds and portfolio management services, there are a few ways in which you can decide on what type of investment avenue suits you the best.

  1. Mutual Funds work in a rigid framework by their mandate and invest in instruments as per the scheme’s investment objective. However, PMS offers a customizable regime to their investors, where the portfolio is constructed at a macro level.
  2. The cost of a PMS is higher than that of mutual funds. Mutual funds are more cost-effective and more suitable for retail investors.
  3. As mutual funds are pooled investments, other investors' actions can impact the mutual fund's performance. For example, suppose an investor withdraws a considerable sum of their invested amount from the fund. In that case, the fund manager might have to sell good papers to cover the liquidity requirements. In such a case, the NAV of the scheme might fall due to redemption pressures. But in PMS, the actions of individuals do not affect the returns and investments of other investors.
  4. Investors may choose funds as per their financial goals and risk appetite. In mutual funds, you can start investing at as low as Rs 500 monthly. In PMS, a minimum investment of Rs 50 lakh is required.
  5. You pay short-term or long-term capital gains on every transaction. Long-term capital gains in equity mutual funds are taxable at 10% per annum, including cess and surcharge without indexation on gains above Rs 1,00,000 in a financial year. Short-term capital gains are taxable at 15%, including cess and surcharge. Moreover, mutual fund scheme owners have to pay tax only on redemption. The tax on Portfolio Management Services is not as efficient.
  6. The investing process in mutual funds is easy. The investment process for Portfolio Management Service is more tiresome considering the higher value of transactions.
  7. PMS must make timely disclosures to the client for transparency, as these are not freely available to the public. Moreover, it is not easy to assess and compare the performance of different PMS products. But in the case of Mutual Funds, they are strictly regulated, and all the information is public. You can easily compare performances.
  8. A PMS can focus on performance and can make investment decisions such that the absolute returns are maximized. They can focus more on returns as compared to MFs that have to take care of diversification rules, valuation guidelines, and redemption-related regulations.

By comparing mutual funds and PMS, you can make investment decisions according to your financial objectives and ability to take risks.

This blog is purely for educational purposes and not to be treated as personal advice. Mutual fund investments are subject to market risks, read all scheme-related documents carefully.