PMS V/S Mutual Funds: Meaning, Benefits and Comparison

There are so many tools and ways to enter the market that choosing one is difficult. Experts advise choosing the best method based on your financial goals and resources. Both portfolio management services (PMS) and mutual funds are professionally managed investments where a qualified fund manager manages the portfolio. They allow investors to get exposure to the market and help them reach their financial goals. So, what’s the difference between the two? The latter is accessible to everyone, while the former is only for investors with big money. Read to know more about the difference between PMS funds and mutual funds.

What is PMS?

Portfolio management service (PMS) is a wealth management service where a professional fund manager manages your portfolio. The fund manager invests your money in stocks and securities after thorough market research. They either make investing decisions independently, take your consent for every transaction, or provide advisory services and you will have to execute the transactions on your own. They provide their services for a fee, which is usually a percentage of the investment amount or a cut in profits. The fund manager also customizes the portfolio based on your financial goals, risk appetite, and investment tenure.

What are Mutual Funds?

Mutual funds are investments that pool money from several investors and invest in stocks and securities based on the fund’s objective. A fund manager takes all the decisions regarding the portfolio independently, and the investors have no say in it. They perform extensive market research before choosing the securities for the portfolio and charge a small fee from the investors. Mutual funds are governed by the securities and exchange board of India (SEBI) and must make daily and monthly disclosures. Several kinds of mutual funds are available in the market, and investors can choose based on their financial goals, investment tenure and risk appetite.

Benefits of PMS

• Professional management: In PMS, an experienced fund manager handles your portfolio. They understand how to handle a portfolio in different market conditions and manage your investments efficiently to increase returns over time.
• Customized portfolio: Fund managers customize the portfolio according to your goals, risk tolerance levels, investment horizon, and age. They will factor in all these before choosing securities for your portfolio.
• Transparency: As an investor in a PMS fund, you can get complete information about all transactions. You can also know the status of the portfolio and its holdings anytime you want and not wait for monthly, quarterly, or half-yearly updates from the fund house.
• Regular monitoring: The fund manager will monitor your portfolio closely and monitor its performance. If they find any deviation, then they will alter the portfolio immediately.

Benefits of Mutual Funds

• Low minimum investment: You can start investing in mutual funds with just Rs 500. You don’t need a huge amount to invest in them.
• Multiple modes of investment: You can invest in mutual funds either in lumpsum or regularly through a systematic investment plan (SIP). Based on your requirements, you can choose one of the two options.
• Transparency: The fund house is required to release the net asset value (NAV), expense ratio, portfolio holdings, and any other disclosures regularly. This ensures transparency in your investments.
• Diversification: You can access an entire basket of stocks and securities by investing in one mutual fund. This ensures your portfolio is well diversified across multiple securities.
• Professional management: Mutual funds are managed by professionals. They are well experienced and experts in their fields who know how to handle a portfolio in different market situations.

Differences between PMS Funds & Mutual Fund

Following are the major differences between PMS funds and mutual funds.

Investment amount

The minimum investment amount in a mutual fund is Rs 500 through SIP, whereas for PMS, the minimum ticket size is Rs 50 lakhs. Hence mutual funds are easily accessible to all investors, unlike PMS funds.

Fees

Mutual funds charge a fixed expense from their investors, which is directly cut from the fund’s NAV. Investors are not liable to pay any taxes on individual transactions.

In contrast, PMS charges a fixed fee or a performance-based fee by taking a cut in profits or follows a hybrid structure where it charges a fixed fee and also takes a cut in profits.

Professional management

Mutual funds are professionally managed funds, and an expert fund manager selects stocks and securities for the portfolio after thorough market research. However, they select stocks as per their judgment, and investors do not have a say in the portfolio.

For PMS funds, the fund manager consults the investor before taking any investing decisions. In some cases, they act independently and make all investing decisions after getting approval from investors. However, most of the time, investors have to give their approval for every transaction.

Flexibility in portfolio

In mutual funds, there is a statutory requirement to maintain the fund’s equity and debt asset allocation despite unfavorable market conditions. For example, a fund qualifies as an equity fund only if 65% of the assets are invested in equities. If the markets are volatile, the fund manager cannot decrease the equity asset allocation to maintain returns.

The fund manager can change the asset allocation in PMS funds based on market conditions.

Customized portfolio

A mutual fund portfolio cannot be customized to an investor’s needs. This is because a mutual fund pools money from several investors and customization is impossible when there are multiple investors.

The fund manager customizes the portfolio in PMS funds based on the investor’s goals, risk appetite, age, investment horizon, and available resources.

Transparency

Mutual funds are required to publish all fund-related information regularly. Hence investors can compare the returns, expenses and portfolio of a fund before investing in it.

In PMS, the information about the fund is not publicly available. Only the investor can see all the data about the fund and its transactions. Hence it can get difficult for investors to compare two PMS funds before choosing one for investment.

Taxation

In mutual funds, investors pay tax only when they redeem their investments. The tax is levied on the type of gain, namely short-term capital gain or long-term capital gain.

In contrast, for PMS funds, investors pay tax on every purchase and sale of securities.

Documentation

Mutual funds are popular investment avenues and can be purchased from the fund house or any platform that sells them with zero paperwork. However, investing in PMS funds is way more complicated as a lot of documentation is involved. Moreover, it is also a time-consuming process to set up a PMS account.

PMS vs Mutual Funds

Conclusion

Both PMS funds and mutual funds allow you to invest in equities. However, it is important to check when one suits you the best. Mutual funds may best suit you if you have limited resources and can invest regularly. A PMS fund is a better option if you have a huge amount, at least Rs 50 lakhs. Based on the benefits and differences mentioned above, choose the one that will suit your goals, needs, budget, and requirements.

Frequently Asked Questions

What is a PMS fund?

Portfolio management services (PMS) is a wealth management service. The fund manager manages your investments and customizes your portfolio based on your goals, investment horizon, and risk appetite.

Is PMS a good investment?

PMS fund is considered a good investment as they have the flexibility to change the investment portfolio based on market conditions and investor requirements. This ensures the portfolio has the potential to give market-beating returns.

How are PMS funds taxed?

All transactions for a PMS fund are done through the investor’s demat account. Hence all profits will be treated as capital gains. These capital gains are taxed as per the holding period and asset class, just like how it is done in the case of mutual funds. Short-term capital gains for equities are taxed at 15%, and for debt instruments, it is taxed at the investor’s income tax slab rate. Long-term capital gains for equities up to Rs 1 lakh are exempt from tax, and gains beyond that are taxed at 10%. For debt instruments, the long-term capital gains are taxed at 20% with indexation benefits.

Written and Reviewed by:

Priyanka Rao

Author

Priyanka Rao is a content strategist for Jupiter.Money, and specializes in writing on topics related to finance, banking, budgeting, salary & wages, and other financial matters. She has a passion for creating engaging content that resonates with audiences across various digital platforms. In her free time, Priyanka enjoys traveling and reading, which allows her to gain new perspectives and inspiration for her work. With a keen eye for detail and a creative mindset, Priyanka is committed to creating content that connects well with her readers, enhancing their digital experiences.