PMS or Mutual Funds – Which One Is Suitable for You?

As financial literacy is penetrating the Indian landscape deeper, people are understanding the value of professional investment services. When it comes to investing in the stock markets, two of the most preferred professional management services that investors seek are mutual funds (MF) and portfolio management services (PMS). 

While they may seem the same as both are professional investment management services, they are designed differently from each other. The approach, investment objectives, suitability, risk quotient, expenses, and everything else are quite different for both. 

In this article about PMS vs Mutual Fund, we will try to explore both PMS and mutual funds, how PMS are different from mutual funds, which one is suitable for which type of investor, and more. 

What are Mutual Funds?

Mutual funds are financial or investment instruments that pool money from different investors together, and then invest the total amount in a portfolio of securities, which can include equity shares, bonds, and any other assets. Fund managers are the professionals who work on these mutual funds and have the duty and authority to make all investment decisions regarding the mutual fund/s they are assigned to. 

How do mutual funds work?

Usually, every mutual fund has a theme or investment objective, according to which the fund managers build the fund, and track it, rebalance whenever necessary to generate returns and value for the investors. 

When you invest in a mutual fund, you do not directly invest in the securities, but units of the mutual fund that have invested in certain securities. 

So, for instance, if you have invested in 100 units of a large-cap equity mutual fund, this means the mutual fund invests predominantly in large-cap equities listed in the Indian stock market, and 100 units represent your share in the fund’s value. 

A mutual fund’s price is determined by net asset value NAV, which is derived by dividing the fund’s value by the total outstanding mutual fund units. 

Key Features of Mutual Funds 

• Simple and hassle-free: Mutual Funds offer investors a simple way of investing in capital markets without any hassle.
• Affordable: Mutual Fund investments can be started with even ₹500 per month via the Systematic Investment Plan (SIP) route. 
• Portfolio Diversification: You can diversify your investment portfolio by investing in mutual funds, as they invest across various securities
• Professional Management: Mutual Funds are professionally managed by fund managers; thus, investors do not require a deep understanding of the markets. 
• Highly Regulated: Mutual Funds in India are highly regulated by both SEBI and AMFI, and they work towards protecting investors’ interests above everything else. 

Types of Mutual Funds

Mutual Funds are categorized mainly as per two aspects, which are market capitalization and underlying assets. 

As per market capitalization, the types of mutual funds available in the Indian market are – 

• Largecap mutual funds
• Midcap mutual funds
• Small-cap mutual funds

While these three are the broad categories, there are other subcategories or hybrid categories in this segment as well. 

As per underlying assets, mutual funds are broadly categorized as – 

• Equity mutual funds
• Debt mutual funds
• Hybrid mutual funds

What is PMS Investment?

Coming to PMS in PMS vs MF, let’s first see what PMS’s full form is. PMS stands for Portfolio Management Services, which is a professional service for managing investors’ portfolios. Here, highly experienced and skilled portfolio managers, along with their research team, manage high-net-worth individuals’ (HNIs) investment portfolios. 

How PMS Works?

Portfolio managers open a demat account on behalf of their clients, so here the demat account is in the name of the investor. Then the portfolio manager buys, sells, and holds securities as per the investment objective of the investor. Here, the portfolio manager customizes the investment plan for the individual investor to suit their particular investment goals, and not a general investment goal. They also look into the investor’s risk tolerance level and investment horizon to prepare a tailor-made investment plan, and accordingly, they select securities for the portfolio. 

Here, at the PMS services in India, the portfolio manager has the authority to operate the demat and trading account of the investors as per the agreement between the PMS and the investor. 

Key Features of PMS 

• Tailor-made plan: PMS investments offer tailor-made investment services where portfolio managers take care of individual investors’ portfolios and prepare an investment plan according to his or her investment goals, tenure, and risk tolerance level. 
• Risk-Return Payoff: In the case of PMS, the risk-return payoff is high; that is, while PMS comes with a higher risk quotient, there is often potential for higher returns as well. 
• Direct Investment: Here, your money is invested directly into the securities your portfolio manager picks for the portfolio. 

Types of PMS

• Discretionary PMS: Here, the portfolio manager does not need any approval from the client/ investor to make investment decisions. 
• Non-Discretionary PMS: Here, the portfolio manager advises the clients about investment choices, and the final decision is made by the clients themselves. 

Difference between PMS and Mutual Funds

Basis	Mutual Funds	PMS
Suitability	For retail investors	For HNIs
Structure	Pooled funds from different investors	Professional investment services for individual investors
Transparency	Portfolio details are usually shared monthly	Real-time or daily portfolio updates are accessible
Customization	Mutual Funds are developed with an investment objective; investors whose investment goal aligns can invest.	Here, the investment plans are developed as per the individual investor, keeping in mind their individual goals, risk appetite, and other factors.
Minimum investment	₹500 if you are going via the SIP route, or ₹5000 if you are investing a lump sum; however, these are the minimum investment of maximum of the maximum funds, but there are outlier funds as well where you can even start with ₹100 a month.	The minimum investment for PMS as per SEBI guidelines is ₹50 lakhs.
Fees	In mutual funds, there are no direct fees, but there are expense ratios, exit loads, and transaction charges, which usually range between 0.5% to 2.5%	PMS usually has a fixed fee, along with a performance-linked incentive or fee, and other charges as well
Ownership	Investors do not have direct ownership of the securities as they are held by the fund.	Investor have direct ownership of the securities in their demat account.
Liquidity	Apart from ELSS, you can redeem any funds whenever you want; however, returns can be hurt.	Liquidity is high as you can directly sell your investments, but if there is any strategy that the PMS has opted for long-term, then it might significantly affect the returns.

Which one should you choose?

PMS and Mutual funds both offer professional investment services, but they are designed for completely different sets of people.  

Who should choose PMS?

• If you have a high net-worth, as the PMS minimum investment is ₹50 lakhs
• You need a fully tailor-made portfolio designed as per your particular investment and life goals, risk-taking abilities, and other factors
• You are looking for high-risk, high-return investments
• You want personalized advice and support for your investments 

Who should choose Mutual funds?

• Retail investors who want to start the investment journey
• Who needs well-diversified portfolios 
• Lower fees and expenses for investments

Final Thoughts 

As not everyone is a finance professional and it is not possible to track all investments every day, professional investment services are important for most investors, whether they are retail investors or HNIs. While for retail investors, mutual funds are most suitable, for the HNIs, it is portfolio management services. So, choosing wisely between the two is crucial for your investment journey, and for that, you need to understand the PMS vs mutual fund differences.

PMS vs Mutual Funds | FAQs

Source: https://www.amfiindia.com/

Disclaimer: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.