In India, you have the option to invest in a basket of stocks, bonds, and other securities through Portfolio Management Services (PMS) or mutual funds. While both involve asset management, they differ in implementation.
MFs are professionally designed but not personalized, whereas PMS offers customized funds. Does that mean one is better than the other? Let’s discuss PMS vs Mutual Funds in this article to get a better understanding.
What are PMS and Mutual Funds?
A Portfolio Management Service (PMS) involves hiring a professional to manage your investments. It’s a service where a portfolio manager/expert creates a personalized investment plan just for you.
The portfolio manager selects stocks and other assets based on your investment goals, affordability, and risk tolerance level.
On the flip side, mutual funds are pooled assets where you and multiple other investors just like you invest in a basket of securities managed by professionals known as Fund Managers.
PMS offers more tailored options compared to mutual funds because you get your own dedicated portfolio manager.
However, PMS often requires a higher starting amount, around Rs. 50 lakh in India, making it suitable for those with a larger corpus and specific investment needs.
The barrier for entry in different types of mutual funds schemes is much lower, with funds allowing you to invest with as little as Rs. 500.
The primary reason behind the minimum investment amount and higher cost of investment of a PMS is the customization it offers, followed by rules and guidelines set forth by the market regulator.
Advantages of PMS and Mutual Funds
PMS and mutual funds, both have their good sides, and it’s like picking your favorite dessert. They’re different, but both can be suitable for you in their own ways.
1. Choices and Affordability
Think of PMS as a tailored suit. It’s customized just for you. But remember, it often requires a substantial entry point, typically around Rs. 50,00,000.
Mutual funds, on the other hand, are more like ready-to-wear. They’re not as personalized but have the advantage of affordability. You can start with as little as Rs. 500, making it accessible for many.
2. Preferred Investment Choices
With PMS, you often get the first-row seat to exclusive investment opportunities. It’s similar to a VIP pass.
Mutual funds rely on the collective. They pool money from many to invest, which means you get a piece of a broader pie.
3. Spreading the Risk
Both PMS and mutual funds aim to keep your investments diversified.
While PMS crafts a basket of investments only for you, mutual funds spread the risk across a wide range of stocks, bonds, or other assets, pooling their AUM from various investors.
Disadvantages of PMS and Mutual Funds
Desserts have consequences. Both PMS and mutual fund investment options come with a set of challenges.
1. Associated Charges
PMS tends to be more expensive, with various fees eating away at your returns. While you may not encounter the same magnitude of charges in mutual funds, the AMC will charge you for convenience.
Read: Mutual Fund Load
2. Potential Risks
With PMS and mutual funds, a lot hinges on the expertise of the manager. It’s like relying on a captain to steer your ship. If they falter, the ship falters.
If they sail like a pro, your money will grow. But there’s always the risk of the sea being powerful regardless of the captain’s expertise.
Similarly, investments are also influenced by market dynamics and volatility which impact the overall return.
Mutual Funds are easy to get into, but they might not always give you the coverage you desire in your investment spread. PMS offers more personalization but demands a heftier entry fee and exit fee.
Taxation of PMS Vs Mutual Funds
In India, long-term capital gains from equity mutual funds are taxed at 10% per annum plus cess and surcharge, applicable on gains exceeding Rs 1,00,000 annually.
Short-term gains are also taxed with cess and surcharge. Importantly, mutual fund investors are liable for tax only upon redemption.
Here’s the kicker – even though you have a dedicated manager handling your investments in a PMS, the investments are treated as though they were made by you directly.
This means there’s the PMS fee that you pay won’t be considered during PMS taxation. PMS aims to offset this tax disadvantage by potentially delivering higher returns.
PMS Vs. Mutual Funds in Depth
Now, let’s put PMS and Mutual Funds side by side to delineate the differences:
|Entry Point||High, around Rs. 50 lakh||Low, starts from Rs. 500|
|Customization||High, with personalized strategies||Standardized, based on fund specifications|
|Management||Dedicated portfolio manager||Fund manager for a pool of investors|
|Cost Implication||Higher due to personalized service||Relatively lower, with varied fees|
|Tax Efficiency||Less, as taxes apply per transaction||More, as taxes apply on exit|
|Risk Exposure||Based on portfolio manager’s decisions||Spread across various investments|
|Liquidity||Varies, often lower due to bespoke agreements||Higher, with easy entry and exit|
Is PMS Better Than Mutual Funds?
In a discussion of PMS vs mutual funds, whether PMS is better than mutual funds depends on your individual financial goals, risk tolerance, and investment preferences.
For example, if you want to invest Rs. 50 lakh in a highly personalized and actively managed portfolio, PMS could be a potential choice. The flexibility and customization it offers can align with your specific needs.
On the other hand, if you’re starting with a smaller amount like Rs. 50,000, and prefer diversification with lower management fees, mutual funds might be more suitable.
They provide access to professionally managed portfolios without the high minimum investment requirement.
Young professionals who are just starting out may find it easier to invest in mutual funds, given the low minimum investment amount and professional management.
As their careers progress, they can increase their SIP amount and gradually build their investment portfolio over time.
In contrast, seasoned professionals at the tail end of their careers may have room to invest in a PMS, and the higher barrier to entry may not be a barrier to them at all.
Ultimately, the decision between PMS and mutual funds should be based on your unique financial circumstances and objectives.
When comparing PMS and Mutual Funds, consider your investment goals, risk tolerance, and financial expertise.
PMS offers personalized management but demands higher capital and costs, while Mutual Funds provide diversification and affordability.
To grow your portfolio, have a long-term vision. MFs have a low starting limit of Rs. 500, while PMS requires a minimum of Rs. 50 lakh, limiting access for most investors.
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