Should We Invest in PMS & Mutual Funds or Both?

Mutual funds (MF) and portfolio management services (PMS) are two excellent guided investment tools that you can use to make money from the market. However, both have different approaches, management, implementation and portfolio construction.  

To make an informed decision, you need to have a clear idea of PMS vs mutual funds. Here’s more. 

PMS and mutual funds: How do they differ?

Here are the parameters by which you can differentiate between portfolio management services and mutual funds:

Fee structure

When it comes to fee structure, portfolio management services will provide you with numerous options but with the same fee structure. Generally, irrespective of gains or losses, the portfolio manager will charge you 2 to 2.5% of the transaction value. 

On the other hand, mutual fund schemes generally have a fixed fee structure. The fund manager sets an expense ratio ranging from 0.50 to 2.50% and charges you accordingly. 

Stock variety

PMS providers are very client-oriented. They generally do not have more than 20-30 stocks in their portfolio, and these options are tailor-made, keeping in mind your risk appetite and investment goals. Thus, you have additional control over your portfolio. However, it comes at the cost of being more expensive. 

In the case of mutual funds, their portfolios generally have more than 40 to 50 stocks. They offer a lot of variety in this regard. Thus, you can always select a mutual fund scheme that invests in your preferred stock options.   

Investment flexibility

Portfolio management services do not have the restriction of a fixed investment objective. Portfolio managers have the freedom to invest and pull back your money from the market as and when they deem necessary. This may seem like a risky ordeal, but it enables portfolio management services to outperform the market and generate excellent returns. 

For example, if portfolio managers sense risks in the current market scenario, they can take aggressive calls to safeguard your investment. Moreover, they can also sell off all your equity holdings in order to maintain a 100% cash position. 

In the case of mutual funds, they have an investment objective that is declared when the fund starts. Then, the fund manager stringently follows this objective throughout the life cycle of the scheme. 

Taxation

Taxation is a major factor that you must take into consideration when it comes to PMS vs mutual funds analysis. If you choose portfolio management services, all the stocks are held in your name. Therefore, when the portfolio manager buys or sells shares, you have to deal with the capital gain or loss incurred. 

Mutual funds have a pass through status. It means that the fund manager has the authority to buy and sell stocks any number of times without any tax implications. Also, when you invest in certain mutual funds (like ELSS), there are tax deduction benefits. 

Fees involved  and customised solutions

Portfolio management services are usually meant for high net worth individuals who would invest a substantial amount of money in the market. The minimum cost of investment has to be Rs.25 lakh. However, if you are investing in mutual funds, you can start with an average minimum SIP (Systematic Investment Plan) of Rs.500 or a minimum lump sum investment of Rs.5,000. 

Moreover, you can get various customisation options when using PMS. Notably, these customisation options aren’t available with mutual funds. 

Investment transparency

When you invest via a portfolio management service, the portfolio manager is answerable to you, and there is a high level of transparency in how your money is being invested. For example, you get to track things like portfolio manager’s fees, transaction dates, brokerage, buying and selling of shares, etc. Furthermore, you can also see where the portfolio manager made a profit or a loss.  

On the other hand, when it comes to mutual funds, you simply get a quarterly total expense ratio and a report of your final holdings every month. 

However, there is one factor to consider. A portfolio management service only delivers data to its client. Therefore, it is not accessible to the common public. Moreover, as they are catered to the special financial needs and risk factors of individuals, there is nothing as a scheme performance. 

Alternatively, in the case of mutual funds, all the data is publicly available. Thus, you can get a clear understanding of how it is performing. This will enable you to choose a fund accordingly. 

Individuality

Opting for portfolio management services helps you maintain your individuality when it comes to taking decisions. Here, the service provider treats your portfolio as a separate entity, and there is no way in which other investors can affect your investment. 

However, this is not the case with mutual funds. If most of the people keep redeeming their units in a mutual fund, the fund manager shall have to sell off most of the liquid stocks in the mutual fund’s portfolio. This may affect the portfolios of other people who have invested in the scheme.  

Apart from all these major differences, there is another important point. You must have a Demat account in order to purchase stocks via a portfolio management service. Whereas, when you opt for mutual funds, there is no need for one. This is because you are simply investing in a plan set by the fund manager. 

Now that you have a clear idea of PMS vs mutual funds, you can decide which one suits your investment strategy best. In case you have a small corpus and do not wish to engage in tax complications, then mutual funds are your best choice. However, if you have a huge amount of capital and desire customisation in your portfolio, then PMS is the option you can go for. 

Furthermore, if you have huge capital, you can also invest using both of these options. You can allocate a part of it to a portfolio management scheme and another to mutual funds. This way, you can get the best of both worlds. However, the final decision rests with you.