Introduction
There are plenty of investing options in the Indian equity market, with mutual funds and Portfolio Management Services (PMS) being the most prominent. Many investors, especially beginners, try to understand which one of the two can help to generate more wealth. If you’re in the same boat, you must understand the meaning and differences between PMS and mutual funds.
What is PMS (Portfolio Management Services)?
Portfolio Management Services, or PMS, is an investment service portfolio managers provide. The manager tailors investment strategies based on the investor’s preferences and financial goals.
There are two types of portfolio management services - discretionary and non-discretionary. In discretionary PMS, the portfolio manager picks stocks and bonds and the time for purchasing the units. But, in non-discretionary PMS, the manager offers investment suggestions. The manager trades on your behalf after receiving your approval.
What are mutual funds?
Mutual funds are one of the most popular investment options. It pools money from multiple investors to create a diversified portfolio. This portfolio comprises stocks, bonds, and other securities.
Fund managers manage mutual fund schemes using the management team’s expertise and strategic insight. The focus is to generate lucrative returns. The risk of investing in mutual funds is low as the portfolio is diversified with investments in various companies.
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It is an attractive option for novice and seasoned investors due to its professional management, diversification, and accessibility.
PMS vs mutual funds - How are they different?
There are many differences between mutual funds and portfolio management services. Although both invest in similar stocks, there is a difference in the execution and management styles. The portfolio construction strategies also differ. Here’s a look at the different aspects in which PMS and mutual funds differ.
- Accounts: PMS provides a separate Demat and bank account to every client, where the account holder owns securities. However, mutual funds offer pooled accounts to investors. So, you are the owners of the scheme but not the underlying securities.
- Portfolio size: The smallest investment required for a PMS is Rs. 50 lakhs. Conversely, investors can start mutual fund investments with Rs. 500 only. As a result, mutual funds are ideal for all types of investors, whereas PMS is the right choice for high-net-worth individuals with a large investment corpus.
- Value: PMS considers the portfolio’s current market value, which can vary based on market conditions. But, the market value of a mutual fund scheme depends on its net asset value (NAV). The NAV is computed at the end of a trading day using the securities’ closing prices.
- Flexibility: The client can enjoy more flexibility and customisation with PMS since the portfolio manager curates the portfolio based on the investor’s needs and preferences. The degree of flexibility and customisation is less with mutual funds since the fund manager focuses on a pre-determined investment strategy and goal for all the investors in the scheme.
- Transparency: With PMS, clients enjoy more transparency. The portfolio manager provides updates and reports on the performance, transactions, holdings, etc., on a regular basis. On the other hand, investors don’t have much transparency with mutual funds. The fund manager discloses the portfolio performance and holdings periodically.
How do you choose which is better?
The decision between PMS vs mutual funds - which is better will depend on your investment corpus, risk tolerance, and financial objectives. Mutual funds are ideal if your corpus is small and you don’t want to go through comprehensive tax implications. You should bet on PMS if you have a six to seven-digit corpus and need tailor-made investments.
Suppose your budget is 75 lakhs. You can invest it in several MF schemes and one PMS scheme. Remember to avoid low-value MF schemes. The strategy to invest in both together can help maximise your opportunity of earning profits from your investments.
Wrapping up
You must choose a knowledgeable fund manager and a suitable fund for PMS investment. Investors must decipher if PMS investment models will offer better returns than mutual funds. High-net-worth investors with a higher minimum investment requirement can opt for a PMS, whereas retail investors with a starting investing budget as small as Rs. 500 should consider mutual funds.
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