Portfolio Management Services vs. Mutual Funds
The main difference between PMS and mutual funds is that PMS cater to high net-worth individuals who can invest upwards of Rs. 50 lakh whereas you can invest in mutual funds with an amount as low as Rs. 100.
Portfolio Management Services and Mutual Funds help you invest in the stock market through professional portfolio managers and fund managers, respectively.
While they both lead you to a destination and achieve goals that are identical, the routes they take are different. Each route has its own pros and cons and we will explore them by comparing portfolio management services and mutual funds in a tabular format.
What are Portfolio Management Services (PMS)?
Portfolio Management Services are professional investment services that offer investment strategies to HNI investors.
But why only HNI investors? Because SEBI has mandated a minimum investment of Rs. 50 lakh in PMS strategies which makes it out of reach of the average retail investor.<
What are mutual funds?
Mutual funds are trusts that pool money from many investors and hire investment experts or fund managers to invest the money in stocks, bonds, arbitrage opportunities, gold etc.
Unlike Portfolio Management Services, Mutual Funds are highly accessible because of a very nominal minimum investment requirement of Rs. 500.
Now that we know what PMS and mutual funds are, let’s compare them and help you identify the best investment option for your situation.
Portfolio Management Services (PMS) vs Mutual Funds
| Portfolio Management Services | Mutual Funds | |
| Definition | Portfolio Management Services or PMS offer investment portfolios and strategies to qualified clients. PMSes employ Portfolio Managers to create the right investment portfolios for their clients. | Mutual Funds are professionally managed investment portfolios offered by AMCs or Asset Management Companies. AMCs hire Fund Managers to manage investment portfolios for the investors of their funds. |
| Investment is done in | Portfolio Management Services offer various strategies. Investors can invest in one or more of PMS strategies. | Mutual Funds offer several mutual fund schemes. Investors can invest in one or more of mutual fund schemes. |
| Minimum investment | Rs. 50 Lakh. Prior to Jan 2021, the minimum investment required for PMS was Rs. 25 Lakh. | Varies but it is mostly as low as Rs. 500. |
| Asset classes you can get exposure to | Stocks, bonds, commodities, unlisted equity. Portfolio Management Services can even invest in mutual funds (direct plans only) | Stocks, bonds, commodities (like gold) |
| Types | Based on investment control, PMS could be discretionary, non-discretionary or advisory. Based on market cap focus, PMS could be large cap, mid cap, small cap etc. Read more here → | Based on entry and exit restrictions, mutual funds could be close-ended or open-ended. Based on asset class focus, mutual funds could belong to one of equity, debt or hybrid categories. |
| Personalization | Portfolio Management Services offer greater personalisation than mutual funds. | Mutual fund schemes manage money of thousands of lakhs of investors. Hence, personalisation is not possible. |
| Relationship manager | Every PMS offers a dedicated relationship manager or account manager who can help you with general queries and doubts. | AMCs that offer mutual fund schemes don’t have relationship managers. However, if you have invested through an advisor or distributor, the person can act as your relationship manager. |
| Investment control | Discretionary PMS investors have no control over the investment decisions. Non-discretionary PMS investors, however, can approve or reject trades recommended by the portfolio manager. | Mutual fund investors have no control over the investment decisions. All investment related decisions are made and executed by the fund manager and his team. |
| Ownership of securities | In PMS, the investor is the owner of the securities. The securities are held in a dedicated demat account owned by the investor. | Mutual funds are set up as trusts. Investors don’t directly own the securities but own units of mutual fund schemes thereby owning the portfolio securities indirectly. |
| Flexibility | PMS potentially offer a lot of flexibility because of how they are structured. But it all depends on the PMS provider. | Mutual funds offer no flexibility at all. Investors have no influencing power on how a mutual fund scheme is operated. |
| Liquidity | PMS are very liquid. However, early withdrawal may have costs in the form of exit load and higher taxation. | Mutual funds are very liquid. However, early withdrawal may have costs in the form of exit load and higher taxation. |
| Returns | Historically, returns from comparable PMS have been lower than mutual fund schemes. Expected returns depend on the market conditions and PMS performance, and cannot be predicted. | Historically, mutual funds have outperformed comparable Portfolio Management Services strategies. Expected returns depend on the market conditions and mutual fund, and performance cannot be predicted. |
| Is SIP* possible? | Yes. SIP is possible in Portfolio Management Services. | Yes. SIP is possible in Mutual Funds. |
| How many of each exist in India? | There are 300+ Portfolio Management Services investment strategies in India. | There are 40+ AMCs (Asset Management Companies) or Mutual Funds in India that offer 2500+ mutual fund schemes. |
| Transparency | Transparency is very high. You get real time updates on all the investment transactions happening. Most PMS send monthly/quarterly newsletters. | Transparency is not very high. Mutual Fund publishes a fortnightly/monthly report to share the increase/decrease in allocation of securities it holds. Most AMCs also send regular newsletters. |
| Regulations | Portfolio Management Services are well regulated by SEBI. | Mutual Funds are even more tightly regulated by SEBI to protect the interests of retail investors. |
| Risk involved | Market risk is involved in PMS. However, since most PMS have concentrated portfolios, the risk is higher than mutual funds. | Market risk is involved in mutual funds. However, mutual funds are well-diversified in most cases and the total risk involved in mutual funds is lower than PMS. |
| Examples | Dezerv, Motilal Oswal, Marcellus are some popular Portfolio Management Services. | HDFC Mutual Fund, SBI Mutual Fund are some popular AMCs/Mutual Funds. |
| Is a demat account required? | Yes. A dedicated demat account is required for each PMS strategy. | Demat accounts can be used to invest in mutual fund schemes; not compulsory. |
| Who should invest | Portfolio Management Services has a high ticket size of Rs. 50 lakh. If you satisfy this, then PMS offers personalization and access to a relationship manager which are big advantages over mutual funds. But the downside is the PMS Services are expensive and most underperform mutual funds and benchmarks. | Mutual funds are better performance wise. But they are not as transparent or flexible as PMS. Additionally, mutual fund distributors are not qualified enough (and even allowed) to be portfolio managers. If you are comfortable investing in mutual funds yourself or under the guidance of an RIA or RA, then you should prefer mutual funds. |
| Management fees | Most PMS charge a management fee of around 1-2%. | Most mutual funds charge an expense ratio (covers management fee and other charges like operation fee) between 0.5% and 2%. |
| Performance fees | Most PMS charge a performance fee or profit sharing of 10-20% of profits. | Mutual funds have no performance fee as of 15 May, 2023. |
| Transaction costs | Transaction costs are STT and brokerage charged by the broker where the investor has the demat account. | Transaction cost is STT only. STT stands for Securities Transaction Tax and varies across securities. Brokerage may apply if you invest in mutual funds via a broker/demat account. |
| Others fees | Annual maintenance charge of the broker where the investor has the demat account. | None if mutual fund schemes are not done via a demat account. |
| Commission | PMS don’t have commissions since no middlemen are involved. | Mutual funds have commission if you are investing in regular plans through a mutual fund distributor. |
| Exit load | Exit loads may be applicable for withdrawals within 3 years from the time of investment and are generally in the range of 1-2%. | Exit loads may be applicable for withdrawals within 1 year from the time of investment and are generally 1% or lower. |
| Taxation on interest/capital gains | Taxation depends on the type of securities the investor has realised gains on. Taxation structure is different for different securities in India. | Taxation depends on the type of mutual funds investor has realised gains on. Taxation structure is different for different mutual funds in India. |
| Taxation on stock dividends | Dividends from stocks are taxed at 10%. | Dividends from mutual funds are taxed at 10%. But when the stocks held by schemes pay dividends they are not taxed in the hands of mutual fund investors. |
How are Investments in Mutual Funds & PMS Taxed?
Taxation is a key consideration for investors when evaluating different investment options.
Should you invest in Portfolio Management Services or Mutual Funds?
Most Portfolio Management Services underperform mutual funds.
Hence, we construct investment portfolios using mutual funds (and not stocks!) at Dezerv. It helps us create investment portfolios that are tax and cost efficient.
So, if performance is your only criteria, mutual funds score above portfolio management services.
Mutual Funds offer a great way to invest in the stock market and create wealth reliably. However, you should invest under professional guidance as much as possible.
However, portfolio management services have a couple of benefits like:
- A dedicated relationship manager
- A customized investment portfolio
But despite these benefits, investing in PMS could be very expensive because of the high fees.
Hence, at Dezerv we offer affordable PMS investing at 0% fixed management fee and a 10% performance fee that is substantially lower than the industry average.
