Investing in stocks is one of the best ways to build wealth, but understanding the dynamics of the stock market is not always easy. It requires time, effort, and a lot of research to pick the right stocks and manage a diversified portfolio. For most people with busy schedules, digging into stock market analysis can be quite exhausting. Plus, dealing with the complexities and risks of the stock market isn’t everyone’s cup of tea.
The good news is, you don’t have to invest in individual stocks to grow your wealth. Equity-focused mutual funds and Portfolio Management Services offer a simpler, more convenient way to achieve your financial goals. Both give you the benefit of diversification, professional management, and convenience. Still, there are some key aspects that separate the two.
Here, we’re going to be looking at the difference between PMS and mutual fund investments, so you can figure out which between PMS vs MF would suit your investing needs better.
What is PMS (Portfolio Management Services)?
Portfolio Management Services are offered by highly experienced and qualified stock market professionals to HNIs (High Net Worth Individuals). Through PMS, these professionals create and manage custom portfolios on behalf of the investors. Here are some noteworthy points about PMS:
- These services are accessible only to HNIs, as the minimum ticket size to avail them is Rs. 50 lakh.
- Managers thoroughly assess their client’s financial needs and create a customised portfolio based on their financial goals and risk tolerance.
- The portfolio is more concentrated than mutual fund portfolios, so it doesn’t offer the same level of diversification as mutual funds. This means PMS carries higher risk but also offers the opportunity for higher returns if managed properly.
- The portfolio manager actively monitors the performance of the securities in the portfolio to make sure it stays aligned with the client’s risk tolerance and financial goals. They also maintain open communication with clients to keep them updated about portfolio changes and performance.
- Managers also adhere to SEBI regulations, which ensure transparency between clients and managers regarding aspects like fees, investment strategies, and performance reporting.
- The fee charged by managers can be fixed as well as performance-based.
What is a Mutual Fund?
Mutual funds, on the other hand, are offered by asset management companies to a much broader range of investors. These include mostly retail investors, but institutional investors and HNIs also invest in them. These are pooled investment vehicles where AMCs collect funds from a large number of investors and create a very diversified portfolio containing a variety of assets, such as stocks, bonds, gold, REITs, and more. A mutual fund’s portfolio is managed by a professional fund manager working with a team of analysts and researchers. Let’s have a look at some key features of mutual funds:
- A mutual fund portfolio can focus on particular kinds of underlying securities. For example, a type of mutual fund called ELSS focuses primarily on stocks. Similarly, liquid funds mainly invest in short-term money market instruments and other debt-related securities.
- Mutual funds give investors the option to invest through Systematic Investment Plans. These plans make mutual funds highly affordable and accessible. Some funds allow investors to start with just Rs. 500.
- An equity focused mutual fund generally offers much more diversification compared to PMS. This reduces the risk involved but also dilutes the returns.
- The Indian mutual fund industry is very well regulated by SEBI, whose regulations help make sure that the investors’ interests are always protected.
- Mutual funds charge a fee in the form of an expense ratio, which covers administrative, management, and other operational costs of the fund. Some funds also charge an exit load when investors prematurely redeem their investment.
Key Differences Between PMS and Mutual Funds
Let’s compare PMS vs MF:
| Factor | Portfolio Management Services | Mutual Funds |
| Aimed Towards | PMS are geared towards high-net-worth individuals. | Mutual funds are offered to a larger investor base that includes retail investors, HNIs, institutional investors, and so on. |
| Minimum Investment Required | A minimum investment of Rs. 50 lakh is required to get started with PMS. | When investing through SIPs, investors can start with just Rs. 500. |
| Style of Management | Portfolios are actively managed. | Mutual fund portfolios can be either actively managed, like ELSS, or passively managed, such as index funds. |
| Customisation | Portfolios are highly customised to reflect the financial goals and risk appetite of investors. | Mutual fund portfolios are more general as they follow a set investment strategy designed for a bigger group of investors. |
| Fees | Fee is charged based on management and portfolio performance. | A comparatively lower fee is charged in the form of expense ratios, and sometimes exit loads. |
| Control | Investors can retain full control over a non-discretionary PMS, where the portfolio manager offers advice and recommendations, but the final investment calls are made by the investor. | The fund manager makes all the investment decisions on behalf of the investors, so they have no direct control over the securities in the portfolio. |
As you can see from the table the main difference between PMS and mutual fund investment is that PMS is a vehicle for HNIs, while AMCs provide mutual funds to a wider investor base, mostly retail investors. This difference further leads to variations in the level of portfolio customisation, investment strategies, and minimum investment amounts. Now the question arises – is PMS better than mutual funds? Well, the answer largely depends on the size of your corpus and your risk tolerance.
Individuals who go for PMS have no immediate need for liquidity. They are often willing to take on higher risks to earn higher returns and prefer a more personalised approach to managing their investments. On the other hand, mutual funds are better suited for smaller investors looking for diversification, lower risk, and easy liquidity.
Types of PMS
Based on the level of control investors have over their portfolios, PMS can be classified into two types:
1. Discretionary PMS
Here portfolio managers retain full control over their clients’ portfolios. The investor and manager agree upon the investment strategy beforehand, so this type of PMS is suitable for individuals who cannot spend time managing their investments or prefer not to be involved in making day-to-day decisions.
2. Non-Discretionary PMS
These types of PMS are more suitable for investors who want to retain control over their portfolios. The portfolio manager provides recommendations, but the final investment decisions are made by the investor. Managers execute these decisions and provide ongoing advice, but ultimately every move requires the investor’s approval. Another similar type of service, called advisory PMS, works a bit differently. In such services, managers solely provide investment advice, while all the execution and other administrative duties lie with the investor.
Types of Mutual Fund
Mutual funds can be divided into a number of categories depending on different criteria:
1. Based on structure
Mutual funds can be classified into open-ended and closed-ended funds. Open-ended funds allow investors to enter and exit the scheme at any time, while in close-ended, they can buy and sell units only during an NFO, interval, or on the stock exchange.
2. Based on asset class
Mutual funds can be classified into equity funds, which invest in stocks, debt funds, which invest in fixed-income securities like bonds, and hybrid funds, which combine equities and debt instruments.
3. Based on investment goals
One can also classify mutual funds based on their objectives, such as growth funds, income funds, and tax-saving funds. Growth funds aim for capital appreciation in the long run by investing in companies that exhibit high growth potential. Income funds help investors generate a regular income. Tax-saving funds, like Equity Linked Savings Schemes, allow investors to claim tax deductions of up to Rs. 1.5 lakh under Section 80C.
4. Based on investment styles
Mutual funds can be either actively managed, where fund managers try to outperform the market indices, or passively managed, where the goal is to replicate the performance of a specific market index.
5. Based on market capitalisation
Equity funds can be classified based on the size of the companies they invest in. For example, large-cap funds invest in the top 100 companies by market cap, so they are more stable and less volatile. Similarly, mid-cap funds focus on companies that fall between large and small caps (101 to 250), and small-cap funds invest in companies beyond the top 250.
Key Factor Before Investing in PMS
The main hurdle for PMS is the large investible surplus required. If you are an HNI with sufficient funds to meet the minimum investment criteria, PMS can be a suitable option for you. There are, however, some things you should keep in mind:
- Make sure the PMS provider is qualified and trustworthy, especially if you are allowing them full discretion to act on your behalf. Take a good look at their track record and reputation before committing.
- The costs of PMS can be quite high. Managers charge not only a fixed management fee but also a performance-based fee. Make sure to fully understand the fee structure as it impacts your returns.
- PMS allows investors to enjoy a high level of personalisation. If you prefer to own the securities directly and have a portfolio customised entirely to your financial goals, needs, and risk tolerance, you should consider PMS.
- Since the investment is mostly in equity-related instruments, it might take time to see good returns. Make sure you’re investing with the long term in mind.
Key Factor Before Investing in Mutual Fund
There are several things you should consider before investing in mutual funds:
1. Financial goals
Clearly define your financial goals and make sure that the fund’s objectives align with yours.
2. Risk tolerance
How much risk you can take depends on your income, savings, debt, age, and financial responsibilities. Assess your risk tolerance based on these factors and choose a fund that matches your level of comfort.
3. AMC’s assets under management
AMC’s AUM should give you a good idea of its credibility and market trust.
4. Fund’s historical performance
Analyse the fund’s returns over the last 3, 5 and 7 years. Remember that consistency is more important than high returns in a single year.
5. Fund manager’s track record
The manager’s skill and experience play a huge role in the performance of a mutual fund. Take a good look into their tenure with the fund, the performance of funds they’ve managed previously, and their investment philosophy to make sure your money is in competent hands.
6. Fees
Mutual funds charge expense ratios which are lower than the charges of PMS. Some funds also charge an exit load if you withdraw your investment before a specific holding period.
When you are comparing different mutual funds, make sure they belong to the same category. For example, you cannot compare the risk-adjusted returns of a balanced advantage fund to those of a small-cap fund, as they have different goals, asset allocations, risk levels, and management styles. Always compare funds within the same category. If you ever find it overwhelming to sift through the many schemes in the market, consider getting help from a financial advisor.
Conclusion
Portfolio Management Services are vehicles designed for HNIs, whereas mutual funds are aimed at a broader range of investors. Thus, the choice between mutual funds vs PMS, first and foremost, depends on the financial capacity of the investor. PMS is more personalised and offers the potential for higher returns, however, it carries a higher level of risk and availing these services can be expensive.
Now that you understand the difference between PMS and mutual fund investments, you are ready to make more informed investing decisions. Consider consulting with a financial advisor before going forward, as they can assess your financial situation, goals, and risk tolerance and advise you accordingly.
