PMS Vs Mutual Funds
In case you wish to invest with a substantial portfolio in mind, there are two popular methods you can consider. After weighing the pros and cons of each, you can make informed choices between a PMS vs. mutual funds.
Asset management companies and banks offer Portfolio Management Services (PMS) which are investment services, mainly meant for high net worth persons. A portfolio manager is assigned to the portfolio and individuals get a customised portfolio to suit their needs. With a PMS, investors own shares, bonds and other financial instruments that are included in a personal portfolio. A PMS is a high-end product in which the minimum investment you make is Rs. 50 lakh (based on regulations by SEBI).
A mutual fund, on the other hand, allocates your capital to a fund that invests in different securities, and you can choose equity, debt or blends of both. The fund is run by a fund manager, and the minimum amount you need to invest is Rs. 500.
Performance and Returns of Mutual Funds vs. PMS
Now that you know that PMS is a kind of wealth management service that is largely tailor-made to suit HNIs (high net worth individuals), and mutual funds are funds that invest your money in a common pool of various securities, you can get down to the returns that both potentially offer:
- Mutual Fund Returns - When you wish to sign up with any given mutual fund, you may expect moderate to good returns for the long run. It is important to note that returns on a mutual fund investment are largely dependent on the particular fund and the securities therein. No mutual fund can guarantee returns, but based on a fund’s past performance, you can gauge the extent of returns. Some good funds, like the ICICI Pru Focused Bluechip Equity Fund, have performed well over a five-year term. Debt mutual funds may be a safer bet as they invest in a range of fixed income securities, though returns may not be phenomenally high.
- PMS Returns - When you think about PMS vs. mutual funds, with regard to returns, the story may not be that different. The only difference in a PMS is that, since there is more capital to invest, your portfolio manager, based on your risk tolerance and financial goals, may invest more in asset classes that may bring high returns in the long run, such as equity. However, investments are not foolproof as they are subject to risks and volatility of the markets, and other factors like the state of the economy.
Minimum Portfolio Size of PMS & Mutual Funds
The portfolio sizes of PMS vs. Mutual Funds are related to the amounts of capital that may be invested in each. Your PMS portfolio size may be significantly larger than any mutual fund portfolio, simply because the minimum amount of investment that you have to make in a PMS is Rs. 50 lakh. The minimum amount you can invest in a mutual fund is just Rs. 500, so investing the minimum, the size of your portfolio could be small. Of course, you can invest as much as you wish in a Mutual Fund and then, your portfolio size in an Mutual Fund would increase.
Ease of Investing in PMS & Mutual Funds
When you are considering PMS vs. mutual funds, a factor you may think of is the ease of investing. With mutual funds, all you need to do is start with your KYC details and a minimum amount of Rs. 500 (there is no upper limit). You can make investments via a range of platforms online, either through an AMC, brokerage, or banks. A fund manager operates and manages the fund, rebalancing your portfolio to get you the maximum returns.
In the case of a PMS, you invest in a big-ticket product where you have to park a minimum amount of Rs. 50 lakh to invest. There is some degree of paperwork involved as schemes you opt for require investors to sign contracts. Based on whether you have chosen a non-discretionary or discretionary portfolio service, you have to authorize a POA (power of attorney) to permit the PMS to make transactions on your behalf.
Flexibility and Level of Personalization in Investing in a PMS & Mutual Funds
You should note that a mutual fund pools the capital of several investors and invests in a bunch of securities in any given fund. A fund manager manages and runs the functioning of any mutual fund, balancing it from time to time to get maximal investment returns. This is the extent to which a fund manager is involved in the fund. This marks one of the key points of difference between a PMS and mutual funds. Since a PMS involves a larger amount of investment, it comes with the perks of a personal portfolio manager who evaluates your portfolio at regular intervals and balances it with your considerations in mind. The level of personalization is high in a PMS.
With regard to flexibility of operations, mutual funds have regulations that may seem stringent. For example, any one stock cannot be above 10% of equity in a fund. Contrastingly, in a PMS, your portfolio manager, if you wish, can create a focused portfolio by investing any amounts in any investments, however disproportionate, in order to make the most of good opportunities.
Cost of Investment and Fees Involved in Investing in Mutual Funds vs. a PMS
As far as costs go, both mutual funds and a PMS have certain costs attached when you invest. The providers of a PMS normally charge you between 2% - 3% of the portfolio. This is paid annually. The amounts are computed based on the size and value of the overall portfolio. Apart from this, incentive-based fees are additional. For example, your portfolio manager may charge you 15% of any profits achieved worth more than Rs. 50 lakh. You may also have to consider extra costs linked to brokerage, audit charges, custodian fees, demat, stamp duty, etc.
With regard to mutual funds, according to rules of the Securities and Exchange Board of India (SEBI), mutual funds that invest in equity can charge you a maximum of 2.5% annually (inclusive of all costs). For debt mutual funds, the cost is at 2%.
Cost of Tax Implications of Investing in PMS & Mutual Funds
When you are evaluating PMS vs. MFs, you have to think of tax implications for both. If you redeem your mutual funds in equity after a year, you are liable to pay a long-term capital gains tax of 10% if gains cross Rs. 1 lakh. If holdings are redeemed within a year, a short-term capital gains tax of 15% is levied. For funds that are non-equity, you get taxed at 20% if your holdings are redeemed after three years. However, when your fund manager regularly rebalances your funds, no tax is levied. In a PMS, any purchase or sale of securities in a portfolio attracts taxes. This is due to the fact that securities are directly owned by investors.
Accountability & Transparency in Investing in a PMS & Mutual Funds
Mutual funds are regulated by SEBI, and hence, very transparent. All the information about any given funds is available on public domains. You can also track your mutual fund on a regular basis. However, any mutual fund manager may not consider your input while rebalancing your fund from time to time. In a PMS, your portfolio manager is like a personal assistant who has to keep you in the loop where any investment and reinvestment is concerned. Nonetheless, since this is a truly personalized service, there is no data available on any PMS on public domains.
What to Choose and When?
In making investment decisions between a PMS vs. mutual funds, your choice should be easy as you know about different aspects of investment modes and how these will impact you. The clear winner seems like mutual fund investments if you have limited funds. The primary difference lies in the disposable investment capital of any investor. However, as mutual funds are regulated more by SEBI, a PMS fund may not be appealing to those investors who want more transparency. Furthermore, since you can get a certain calculated degree of transparency and data about the previous performance of any given fund, your security with a mutual fund, while not guaranteed, is at least, safe to some extent.
- Is a PMS better than a mutual fund investment?
While you make your choice between a PMS and a mutual fund, it is necessary to consider various factors that may influence your investment, like costs, your disposable income, time horizon, etc. Which is better is largely dependent on the individual investor and their needs.
- What is the tax applicable to a PMS?
There is no clearly defined taxation for a PMS and gains thereof, except that any profits are taxed according to your own income slab, and rules governing the taxation of securities.
- Which is a more personalised service when you are opting for PMS vs. mutual funds?
A PMS gives you more personalised services than a mutual fund, as a dedicated portfolio manager is assigned to a PMS and therefore, exclusively to the investor of a PMS.
- Is there a minimum investment for a PMS?
Yes there is a minimum investment, and this is Rs. 50 lakh.
- Do mutual funds come with an expiry date?
Typically, mutual funds do not have any expiry date, unless investors opt for a close-ended ELSS scheme. If you invest through a SIP, there can be a fixed tenure attached.