Whether to go for mutual funds or PMS?
Portfolio Management
Services (PMS) may sound like mutual funds. Are you confused between PMS and
Mutual Funds? While there are similarities, they are not the same.
Before understanding
the differences between the two, we need to understand mutual and
PMS.
Mutual
Funds
When an entity invests
money in stocks, bonds, money market instruments, or other securities after
collecting funds from several investors with similar investment goals, such a
financial instrument is known as a Mutual Fund. And by determining a scheme's
"Net Asset Value," or NAV, the returns earned from this collective
investment are distributed proportionately among the investors after
considering any applicable expenses and levies.
Portfolio
Management Services
PMS is a financial
service provided by the portfolio manager to achieve the required rate of
return while maintaining the desired level of risk. A portfolio manager is a qualified
investment professional with extensive knowledge of the market's various
instruments who focuses on analyzing the investor's investment goals. Stocks,
fixed income, commodities, real estate, other structured products, and cash can
all be included in an investment portfolio.
PMS is a customized
service offered as per the investor's return requirements and the ability and
willingness to assume the risk. A PMS drafts an Investment Policy Statement
(IPS) to understand the financial position and needs of the client. The
portfolio manager ensures that the return requirements coincide with the risk
profile.
Now that we know all
about mutual funds and portfolio management services, there are a few ways in
which you can decide on what type of investment avenue suits you the best.
1.
Mutual Funds work in a
rigid framework by their mandate and invest in instruments as per the scheme’s
investment objective. However, PMS offers a customizable regime to their
investors, where the portfolio is constructed at a macro level.
2.
The cost of a PMS is
higher than that of mutual funds. Mutual funds are more cost-effective and more
suitable for retail investors.
3.
As mutual funds are
pooled investments, other investors' actions can impact the mutual fund's
performance. For example, suppose an investor withdraws a considerable sum of
their invested amount from the fund. In that case, the fund manager might have
to sell good papers to cover the liquidity requirements. In such a case, the
NAV of the scheme might fall due to redemption pressures. But in PMS, the
actions of individuals do not affect the returns and investments of other
investors.
4.
Investors may choose
funds as per their financial goals and risk appetite. In mutual funds, you can
start investing at as low as Rs 500 monthly. In PMS, a minimum investment of Rs
50 lakh is required.
5.
You pay short-term or
long-term capital gains on every transaction. Long-term capital gains in equity
mutual funds are taxable at 10% per annum, including cess and surcharge without
indexation on incomes above Rs 1,00,000 in a financial year. Short-term capital
gains are taxable at 15%, including cess and surcharge. Moreover, mutual fund
scheme owners have to pay tax only on redemption. The tax on Portfolio
Management Services is not as efficient.
6.
The investing process
in mutual funds is easy. The investment process for Portfolio Management
Service is more tiresome considering the higher value of transactions.
7.
PMS must make timely
disclosures to the client for transparency, as these are not freely available
to the public. Moreover, it is not easy to assess and compare the performance
of different PMS products. But in the case of Mutual Funds, they are strictly
regulated, and all the information is public. You can easily compare
performances.
8.
A PMS can focus on
performance and make investment decisions to maximize absolute returns. They can focus more on returns than MFs that have to
take care of diversification rules, valuation guidelines, and
redemption-related regulations.
By comparing mutual
funds and PMS, you can make investment decisions according to your financial
objectives and ability to take risks.
This blog is purely
for educational purposes and not to be treated as personal advice. Mutual fund
investments are subject to market risks, read all scheme-related documents
carefully.
AMFI Registered Mutual Fund Distributor
6306522855
Burlington, Lucknow, 226001
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