Mutual funds (MF) and Portfolio Management Services (PMS) both are Professionally Managed investment products available for the investors. In India, investors have the option to invest in equities through Mutual Funds (MFs) or Portfolio Management Services (PMS). 

While both MFs and PMS may involve similar stocks, the implementation and management approaches differ significantly, as do the portfolio construction strategies. Mutual Funds, though managed by professionals, are not customized to individual preferences. 

In contrast, PMS offers a more personalized approach, where fund managers work collaboratively with clients to create bespoke portfolios tailored to their specific needs. 

Additionally, the minimum investment requirement for a Mutual Fund scheme is as low as Rs 100, making it accessible to a wider range of investors, whereas the minimum investment for PMS is Rs 50 lakh, which restricts its availability primarily to high-net-worth individuals.

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

How PMS and mutual funds differ?

Mutual funds : A mutual fund is an investment Product  that pool capital from multiple investors to create a diversified investment portfolio with combination of stocks, bonds, or other securities, in accordance with the fund's stated strategy and guidelines. This structure enables individual investors to access their funds in a professionally managed portfolio via AMC which benefiting from economies of scale and potentially spreading risk across a wide range of investments.

PMS :  Portfolio Management Service (PMS) is a professionally managed financial product where experienced portfolio managers, supported by a dedicated research team, manage your equity portfolio. While many investors hold equity shares in their Demat accounts, managing them effectively can be challenging. 

PMS offers a systematic approach aimed at maximizing returns while minimizing risks. It empowers investors to make informed decisions based on comprehensive research and factual data, without requiring active involvement. Moreover, PMS helps investors navigate market volatility with greater confidence and preparedness.

Fee structure

When it comes to fee structure, portfolio management services will provide you with numerous options but with the same fee structure. Portfolio managers typically charge fees for their services, which are structured in three main ways: fixed fees, performance-based fees, and hybrid fees that combine both approaches.

1. Fixed Fees: Under this structure, a fixed percentage of the portfolio's average value is charged periodically, usually on a Half-yearly or yearly basis. This fee is independent of the portfolio’s performance and serves as a regular retainer for the manager's ongoing services.
2. Performance-Based Fees: With this structure, fees are contingent upon the portfolio's performance. A fee is only incurred if the portfolio exceeds a predefined hurdle rate, which represents the minimum acceptable return. For example, if the hurdle rate is 15% and the portfolio generates a return of 20%, the performance fee would only apply to the 5 % profit that exceeds the hurdle rate.
3. Hybrid Fees: This model combines elements of both fixed and performance-based fees. The investor pays a fixed fee regardless of performance, along with an additional performance fee if the portfolio generates returns above the hurdle rate.

On the other hand, mutual fund schemes generally have a fixed fee structure. The fund manager sets an expense ratio ranging from 0.75 to 2.25 % under different charges 

1. Exit Load : An exit load is charged to investors who redeem their units in a mutual fund scheme within a specified period from the date of purchase. Asset Management Companies (AMCs) impose this fee to discourage premature withdrawals and to help manage liquidity within the fund. Typically, the exit load is around 1% of the redemption value if the investor exits the scheme within one year. No exit load is applied if the investment is redeemed after one year.
2. Transaction Charges : Transaction charges are levied once per investor, typically for investments of Rs. 10,000 or more. A fee of Rs. 100 to Rs. 150 may apply for such investments, including Systematic Investment Plan (SIP) investments that exceed Rs. 10,000. Investments below Rs. 10,000 are generally exempt from transaction charges.
3. Expense Ratio : The expense ratio is an annual fee charged by an Asset Management Company (AMC) for managing a mutual fund scheme, expressed as a percentage of the fund's average daily net assets. It covers various operational costs, such as sales and marketing, administrative expenses, distribution fees, and fund manager compensation.

The expense ratio is calculated by dividing the total expenses of a fund by its total assets under management (AUM). Notably, the expense ratio tends to be higher for regular plans of mutual fund schemes compared to their direct plans, primarily due to the additional distribution and marketing costs associated with regular plans.

Selection of Stocks

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 investors risk appetite and investment goals. Thus, investor have additional control over their 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 of diversification in this regard. Thus, investor can always select a mutual fund scheme that invests in their 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 DEMAT. Therefore, when the portfolio manager buys or sells shares, investor have to deal with the STT, stamp duty, brokerage, DP charges, Sebi charges, transaction charges, STCG & LTCG as well.

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 and also every charge’s will be adjusted at NAV level. Investor needs to deal with STCG & LTCG. 

Fees involved and customized solutions

Portfolio management services are usually meant for high-net-worth individuals who would invest a substantial amount in the market. The minimum cost of investment must be Rs.50 lakh. However, if you are investing in mutual funds, you can start with an average minimum SIP (Systematic Investment Plan) of Rs.100 or a minimum lump sum investment of Rs.500. 

Moreover, you can get various customization options when using PMS. Notably, these customization 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, the expense ratio will be calculated on daily basis which is being calculated on annually basis . 

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 while maintaining liquidity.  

Apart from all these major differences, there is another important point. You must have a separate 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.

Conclusion 

Now that you have a clear idea of PMS vs mutual funds, you can decide which one suits your investment strategy. 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 customization in your portfolio, then PMS is the option you can go for. 

Furthermore, if you have huge capital, you can also invest using both options. One can allocate a part of it to a Portfolio Management Services scheme and mutual funds by managing the diversification equilibrium of portfolio. This way, one can get the best of both worlds. However, the final decision rests by considering the risk appetite, goals, financial conditions.