PMS Vs Mutual Funds – Differences, Types And Factors To Consider
Independent portfolio managers, brokerage firms and AMCs offer Portfolio Management Service (PMS) as well. Many people are familiar with the mutual fund schemes of Asset Management Companies (AMCs). Like mutual funds, PMS are customised investments keeping the risk capacities of the investors in mind. Keep reading to understand pms vs mutual funds!
What is PMS and What are the Types of PMS?
A portfolio manager offers Portfolio Management Service or PMS as an investment service, where an investor gets the opportunity to tailor their portfolios according to their financial goals and personal preferences. Investing in PMS means investors can own bonds or shares in their names. However, in mutual funds, investors can own only the fund units of the scheme.
Portfolio management services can be of two types − non-discretionary and discretionary. In the case of non-discretionary PMS, the manager gives investment suggestions to the investors. After getting approval from the investors, the manager initiates the trade on their behalf.
Under discretionary PMS, the manager selects bonds and stocks as well as the time of purchasing the units based on his preference. Most of India’s Portfolio Management Services are of this type and are inclined towards overseeing equity-related portfolios.
Fees and Charges of PMS
All entities providing portfolio management services charge different types of commissions and fees for their services. The charges are decided at the time of investment and may vary from one PMS provider to another. The types of charges associated with PMS are as follows:
- Entry Load Charges: Most of the PMS providers charge a one-time entry load when the investor enters a scheme. It can vary between 1% and 3%.
- Operating Expenses: This is a recurring charge levied to cover the cost of managing the portfolio. The charges have been capped by SEBI at 0.5% of the client’s average daily assets under management during a year.
- Brokerage Charges: PMS providers levy brokerage charges for each market transaction.
- Exit Load charges: Investors are charged an exit load fee when they redeem their investments. As per new guidelines by SEBI, the exit load cannot be more than 3% if investors redeem their investment during the first year. The charges are 2% and 1% for exits in the second and third year, respectively. There are no exit load charges after the third year.
What are Mutual Funds?
Mutual funds are investments made in different types of bonds, stocks and other securities. An AMC or mutual fund company accumulates money from different investors and invests in various securities. There are various companies to invest in hence the risk is low due to a diverse portfolio. Each mutual fund scheme has a dedicated fund manager responsible for analysing and investing in securities using the pooled wealth. These securities can be stocks, gold, and fixed-income securities such as bonds, commercial papers, and treasury bills.
Mutual Funds and Their Types
Mutual funds can be categorised into various types based on asset class and structure.
1. Types of Mutual Funds Based on the Underlying Asset Class:
- Equity funds
- Debt funds
- Hybrid funds
2. Types of Mutual Funds Based on Structure:
- Open-ended funds
- Close-ended funds
- Interval funds
Other types of mutual funds include solution-oriented schemes, index funds, fund of funds, etc.
PMS vs Mutual Funds
The following parameters will help you understand the difference between PMS vs mutual funds:
- Portfolio size
As per SEBI guidelines, PMS needs to have a portfolio size of Rs.50 lakh (minimum). Often some portfolio managers set a higher limit. On the other hand, an individual can start investing in mutual funds at Rs.500 only. - Flexibility
Mutual funds work under a rigid framework and firmly utilise benchmark allocations. They remain invested throughout the investment horizon. In contrast, PMS provides more flexibility to its investors.
This tool allows portfolio managers to be more proactive in fund management and showcase their ideas more prominently in the portfolios they create. As a result, PMS can potentially generate higher yields than mutual fund schemes. - Accounts
Mutual funds use pooled accounts for maintaining the securities and funds, whereas a Portfolio Management Service uses a separate Demat account and bank account for each client. - Value
A mutual fund scheme’s market value depends on the Net Asset Value or NAV of the fund units held. On the other hand, PMS considers the market value of securities in a Demat account and money in the bank account of the investor. - Transparency
Under PMS, an investor can view every trade, brokerage and price of execution. He can get information about the expenses incurred for managing the portfolio.
However, a mutual fund is less transparent and does not disclose all the expense-related details. Everything in mutual funds depends on Net Asset Value and its reporting.
Also read: Lump Sum Investment in Mutual Funds
What to Choose: PMS or Mutual Funds? PMS vs Mutual Funds: Which One to Choose?
Both PMS and mutual funds are attractive investment options that offer lucrative returns. Here are the primary differences between the two, which will help you understand which one you should choose:
| Portfolio Management Service (PMS) | Mutual Funds |
| PMS is a professional service offered to an investor by experienced portfolio managers. | It is a professionally managed fund that pools money from different investors. |
| PMS requires a minimum investment of 50 lakh. | You can start a mutual fund investment with an amount as low as Rs. 100 per month. |
| The portfolio can be customised as per the investor’s risk profile and financial requirements. | Investments in a mutual fund cannot be customised as per the individual needs of an investor. |
| All transactions carried out by the portfolio managers are treated as your own and you will be liable to pay capital gains tax. | All transactions carried out by the fund manager are not treated as your own. |
| A PMS is not required to disclose portfolio details to the regulatory agencies. It is a private association between the portfolio manager and the investor. | Mutual funds are subject to rigorous regulations and scrutiny by SEBI. |
Factors to Consider Before Investing in PMS
If an individual wish to invest in PMS, he/she needs to consider the following parameters:
- Risk tolerance: Like mutual fund schemes, PMS also involves certain risks. Before investing, investors need to analyse market risks, inflation risks, and interest rate risks.
- Past performance: An investor needs to know how much returns have been generated by the PMS manager over the years. This knowledge will help him choose the right investment vehicle.
- Major expenses: PMS investment includes various costs such as accounting charges, custody charges, brokerage charges, exit load, performance/profit sharing fees and management fees. Investors need to consider such costs before making a decision.
- Investment objective: Before investing, a client must understand the PMS provider’s fund strategy and whether it aligns with his/her investment goals. He needs to clarify whether the fund manager follows an index to benchmark performance. Individuals must also know whether they are investing in small-cap, mid-cap or large-cap.
- Portfolio manager’s experience: Investors should assess the experience and qualifications of the fund manager before registering for a Portfolio Management Service.
Also read: What Are Direct Plans & How to Invest in Mutual Funds
Factors to Consider Before Investing in Mutual Funds
The following are the different aspects that one should take into account while investing in different mutual fund schemes:
- Risk appetite: There are primarily five risk levels in mutual fund investing – low, moderately low, moderate, moderately high and high. Investors must assess the amount of risk they are willing to take while choosing mutual funds.
- Expense ratio: The expense ratio of a mutual fund reflects the operational fees charged by the Asset Management Company (AMC). All expenses incurred for the administration, management and distribution of a mutual fund are included in this figure. The lower the expense ratio, the higher the net returns of a mutual fund scheme.
- Past returns: Investors must consider investing in mutual funds that have generated consistent returns for its investors. Assessing a fund’s past performance helps to shed light on the scheme’s potential in both bullish and bearish market scenarios.
- Value of Assets Under Management (AUM): The AUM of a particular mutual fund reflects the overall market value the fund holds. Funds with a high AUM are usually preferable because more assets mean higher liquidity.
Final Word
An individual must pick a well-informed fund manager and a suitable fund for PMS investment. Investors need to determine whether the PMS investment models can beat the mutual fund returns. A PMS can be an ideal option for high net worth investors, while retail investors can consider mutual funds.
Mutual fund schemes, such as Navi Large & Mid-cap Fund, enable investment in India’s best 200 companies via SIP and lump-sum mode. This scheme is a mix of aggressive mid-cap and stable large-cap companies. An individual can start investing in Navi through Paytm Money, Groww and Zerodha. Research before investing!
FAQs
Ans: A portfolio manager is an individual who makes an agreement with an investor and directs, advises and executes investments on the investor’s behalf. He primarily handles day-to-day asset management, manages a client’s portfolio and executes investment strategies.
Ans: Net Asset Value (NAV) denotes the per unit market value of a mutual fund scheme’s securities. It signifies the price of each share held in a particular fund.
NAV = (Total Assets – Total Expenses and Liabilities) ÷ Number of fund units outstanding
Ans: Once individuals decide to invest, they transfer their stocks/money to PMS accounts. Depending on the client’s investment objective, the fund manager generates a portfolio of stocks.
The fund house maintains this portfolio under a Demat account, registered either in the name of the client or the manager. If investors wish to suspend their accounts, they can transfer back their stocks.
Ans: Body corporates, sole proprietorship firms, partnership firms, Hindu Undivided Families (HUFs) and individuals can invest through PMS. However, the investment solutions are meant for high-net-worth clients. Individuals who prefer a personalised service for a long-term investment horizon can choose PMS.
Ans: An Asset Management Company charges a fee to an investor if he leaves a fund scheme before a pre-decided tenure. Fund houses levy exit loads to demotivate investors from redeeming fund units before a specific date.
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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
