PMS vs Mutual fund – Which is Better Investment Option?

By Advisorymandi
31-October-2018 11:10:56 AM
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Portfolio management services (PMS) and mutual funds (MF) are two indirect investment options of investing in the market. Despite this, there are a lot of differences between portfolio management and mutual funds. For instance, unlike a mutual fund, the portfolio management service creates a unique portfolio for each participant of PMS. Plus, there are a lot of customization options PMS which are not available in mutual funds. You can simply monitor your portfolio and view online. Even the minimum corpus needed to qualify for a PMS Service is way higher compared to mutual funds.

Anyways, there is a lot more to discuss on. But, first, let’s discuss both avenues separately and see the dynamics of these investment options and factors to consider before investing in one.

 

Which is Better: Portfolio Management Services (PMS) or Mutual Funds (MF)?

To understand the key differences between Portfolio Management Services (PMS) and Mutual Funds (MF), we are going to compare both of them on different aspects which are important while considering any investment option to invest in. Now let’s see how the two competitors, portfolio management services (PMS) and mutual funds (MF) works against each other.

 

Key Differences between Portfolio Management Services (PMS) and Mutual Funds (MF)

 

Investing Criteria

First, we will talk about the nature of both indirect investment avenues in terms of investing criteria. Portfolio management services in short PMS are high-end products which needed a minimum capital of Rs 25Lakh to start investing. Basically, it is meant for high net-worth individuals (HNIs) and the brokerages who provide PMS offer you to choose from different model portfolios such as mid-cap and large-cap depending upon your needs. Besides, there is a lot of paperwork involved in PMS investment. Every scheme which offered to you has to be signed.

On the other hand, the investing criteria of mutual funds are so simple. For starters, you can start investing in mutual funds from just Rs 500 without any upper limit. With a simple KYC in place, you are good to go. In doing so, you have multiple options to make investments in mutual funds. Either you can go through a brokerage firm or registered investment advisory or maybe through a distributor.

Which is the better choice – PMS or Mutual Fund?

Well, after reviewing the above “investing criteria” we can say that mutual fund clearly an easy winner to invest in. Since you have the option to start investing with much-much lower capital compared to portfolio management services.

 

Transparency Level

Speaking of a transparency level, the portfolio management services offer complete transparency in its money management. Means, you can have complete knowledge of buy and sell, the exact date of the transaction, and an exact fee of the portfolio manager’s amongst others. This level of transparency allows you to get the complete idea of where your fund manager made money and where he/she lost it. However, in mutual funds, you can’t have such facility of monitoring every single thing just like in PMS. Instead, you will only get a monthly report of final holdings and quarterly total expense ratio.

But, one thing which certainly lacks in portfolio management services is transparency in publically available disclosures. PMS is not very transparent in their disclosures. Having said this, it is very difficult to check the performance of a PMS scheme amongst others; however, in mutual funds, you have complete transparency in their disclosures thanks to the market regulator – SEBI (Securities & Exchange Board of India). So, it becomes easy to check the performance of a mutual fund scheme with other schemes.

Which is the better choice – PMS or Mutual Fund?

It’s kind of complicated. Portfolio management services and mutual funds both are not entirely transparent. In mutual funds, you have the benefit to check the performance of one to another before investing but failed to provide the services of gauging buy and sell as PMS do. But, in portfolio management services, you have the facility to be aware of every move your portfolio manager make.

Despite, we would suggest you go for mutual funds if you are looking for transparency level. Besides, the publically available disclosures of PMS are not that transparent as mutual funds do.

 

Fee Structure & Cost to Invest in

Which is more cost effective: portfolio management services or mutual funds? It is one important question you need to ask yourself. As you know that PMS is usually for people who fall in the HNI category. Thus, the fee & charges for management of the portfolio is quite high. It is because the portfolio manager of a PMS is free to decide the costs. There is no upper limit here. It charges various kinds of charges such as:

 

  • Entry load charges – At the time of buying
  • Fund Management Charges – Every PMS scheme charge for fund management whose upper limit is variable and depends upon the PMS Providers.
  • Profit Sharing – Not all but some portfolio management services schemes have the fee of profit sharing which the provider charge over a stipulated return generated in the fund.
  • Fixed Fee – Sometimes depending upon the size of the portfolio, some schemes have a fixed component and charge a fixed monthly fee from investors. However, it is not a percentage fee and intimated by the providers before investing in the PMS.

 

On the other hand, the MFs have a minimum expense ratio is very simple. In mutual funds, the fees are charged on daily basis as a percentage of AUM. For example, the annual cost charged by an equity mutual fund and debt mutual fund can be near around 3% and 2.75% maximum respectively. However, if you have a distributor then he/she may apply a transaction charge but you can reduce these charges if invest directly with the fund house through direct plans.

Which is a better choice: PMS or Mutual Fund?

In comparison, we can say that in terms of cost and fee, a mutual fund is a better option to invest in. PMS has multiple charges which can’t be judged through publicly available data. It may have customized services, but the charges to offer that is too high. So, if you have a large capital even then we would suggest you understand all the charges before investing in PMS. Otherwise, the mutual fund is ‘All the way’.

 

Risk Level

In the stock market, there are different types of investors based on their appetite of risk. Some investors prefer to invest in risky stocks or high-risk investment avenues such as direct equity and some investors prefer to invest in low-risk investment avenues like mutual funds and bonds. So, risk level plays a major role for investors with different financial goals. For instance, a risk-taking investor can opt to invest in equity funds whereas a risk-averse investor would go for debt or balanced funds. In comparison to mutual funds, the portfolio management services are riskier. It is because of the hold of a very concentrated portfolio of 20-30 stocks. However, the mutual funds are well diversified and any neutral risk-taking investor would go for mutual funds since MFs invest in more no. of stocks compared to PMS.

On top of that MFs have certain restrictions from SEBI especially on those which take positions in derivative instruments. However, the PMS does not have such restrictions. The PMS actively manage and often take considerably higher positions which could increase the possibilities of fluctuation.

Which is a better choice: PMS or Mutual Fund?

No doubt! Mutual funds are less risky than the portfolio management services.

 

Taxation

Portfolio management services aren’t as tax-efficient as mutual funds. For starters, MFs are registered as a tax-exempt trust structure however the PMS have the same tax implications as investing in direct equities. Since the mutual fund is considered a financial asset by the Income Tax Department, you need to pay tax on the capital gains subjected to the buying and selling of mutual fund schemes. In redeeming mutual fund gains within a holding period of one year, equity mutual funds attract an STCG tax of 15 percent and LTCG tax of 10 percent in gains of above Rs 1 lakh. The only condition is, the minimum holding period to qualify as LTCG is one year.

Compared to this the taxation of gains from PMS comes under the I-T Act. However, there’s a debate over the characterization of gains from PMS as business income or capital gains. So, it would be wise to consult with the fund manager or advisor before investing through PMS.

In a mutual fund, a fund manager can buy or sell stock any no. of times without incurring tax however in PMS, the stocks are under your name so whenever the portfolio manager sells a share, there is capital gain or loss.

Which is a better choice: PMS or Mutual Fund?

After discussing the taxation on both PMS and mutual funds, it is clear now that mutual funds are more tax-efficient than PMS in every aspect. So, if it is about taxation then the mutual funds score better than portfolio management services.

 

Liquidity

Portfolio management services have a lock-in period and high exit charges which made them illiquid. On the other hand, mutual funds do not have lock-in period and are highly liquid. That means in case of emergency you can sell your investment without any worries. On the contrary, the PMS is highly illiquid and out load on investor while exiting.

Which is a better choice: PMS or Mutual Fund?

Answer: Mutual fund.

 

Final Thoughts: –

After reviewing both investment options, we can say that portfolio management services are less transparent, closed-ended, tax inefficient, and charge a higher fee. It is nothing but a myth that PMS always generate high consistent returns because if you look at the historical performance of mutual funds then you will know that mutual funds have given consistent high returns, over the years.

Moreover, in PMS, most of the investment decisions taken by the portfolio manager, hence there is a lot of dependence upon the stock-picking ability of the portfolio’s manager. On the contrary, in mutual funds, fund managers take most of their decisions to mitigate risks. Besides, PMS is not that popularized in India and has a long way to go. Hence, we believe that mutual fund is still a better choice in comparison of portfolio management services.

Nevertheless, it is all up to you. Whichever you choose doesn’t forget to take the experts’ advice. If you have any query or would like to add something up then don’t forget to mention in the comment section below.

 

Note: All information & data provided in this article is for the educational purpose as well as to give general information on the finance & economy, not to provide any professional advice or service. Views & opinions are not biased against the company and do not affect any official policy or any other agency, an organization within the content.

 

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Author: Advisorymandi

AdvisoryMandi is India's most trusted Stock Market Advisory marketplace covers NSE, BSE, MCX & NCDEX. Invest with confidence and harness the power of AdvisoryMandi to make smarter investment decisions in Stocks, Indices, Commodities, Forex & IPO.

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4 Comments on "PMS vs Mutual fund – Which is Better Investment Option?"

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Jay
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11 months 13 days ago

If the benefits outweigh the costs, you may consider a PMS as an investment option. Not all of us have the time to analyze and choose an appropriate PMS. Thus, if the paperwork seems too cumbersome or the costs seem too high, it would be best to opt for mutual funds. Thanks for sharing a great article. Keep posting.

Ananthi Mathur
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Ananthi Mathur
8 months 7 days ago

Hi, thanks for this article. This is surely going to help people who are interested in and also for the knowledge of PMS. keep sharing such information.

Radhika Shah
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Radhika Shah
7 months 25 days ago

When choosing between the two;it is important that you know what makes them different. Portfolio Management Service (PMS) is offered by investment entities and deals with equity and debt options. PMS also used to deal in real estate, unlisted shares and structured products but these were later classified as Alternative Investment Fund (AIF). Mutual Fundis a service, which pools the money of different investors to buy stocks and securities. The funds are managed by a fund manager who chooses the companies which can be ideal for investments.

Sandra Adams
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Sandra Adams
3 months 16 days ago

In comparison to MF, PMS investments are riskier as these products usually hold a very concentrated portfolio of 20-30 stocks. Investing in a concentrated portfolio can be very risky as compared to well-diversified mutual funds. Generally, MF invests in more number of stocks (varies from fund to fund) compared to PMS.

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