Should You Invest in PMS as well as Mutual Funds?
In India, you can invest in equities through Mutual Funds (MFs) or Portfolio Management Services (PMS).
Through PMS and MF, even though you invest in similar stocks, the implementation and management (of these two schemes) are different, and so are their portfolio construction strategies.
MFs, though designed by professionals, are not customised. PMS, on the other hand, focuses on personalised funds. The managers here have a collaborative strategy for their clients and create portfolios independently, focusing on each client.
The minimum investment limit for an MF scheme is as low as Rs 500, while the lowest limit for PMS is Rs 50 lakh, restricting its access to the common man.
However, does it make sense to invest through both PMS and Mutual Funds? Let’s find out!
What are Mutual Funds?
Mutual funds are one of the most popular investment vehicles. Mutual funds pool money from several investors and invest them into various securities. Depending on the type of mutual fund scheme, the funds are invested in equities, debt, or other asset classes. These funds are professionally managed by a professional fund manager.
Types of Mutual Funds
Investors can invest in several types of mutual funds depending on their investment objectives and risk profile. Here are some of the different types of mutual funds:
- Equity Funds
- Debt Funds
- Hybrid Funds
- Index Funds
- Thematic Funds
- Sector Funds
What is a Portfolio Management Service?
A portfolio management service (PMS) is an investment option that offers custom and tailor-made investment solutions to fit a client’s investment objective and risk appetite. Typically, a PMS is suitable for high-net-worth individuals (HNIs) or institutional investors. In a PMS, the portfolio manager can manage the client’s portfolio at his/her discretion.
Types of PMS
There are mainly two types of PMS:
- Discretionary PMS: The portfolio manager can make investment decisions at his/her discretion without needing approval from the client.
- Non-discretionary PMS: The portfolio manager’s role is to advise the client on investment decisions. The client makes the final decision regarding the investments.
Should You Go for One or Both of Them?
MFs and PMS are both guided investment tools that can help you buy stocks in the same general market. But both have very different approaches. In an MF, you can see a wider variety of stocks, sometimes more than 40-50. And because there are so many options, one can always choose the scheme as per one’s risk appetite and long-term financial goals.
On the other hand, PMS is much more curated in terms of taste and goals but is much costlier to operate and manage. Generally, PMS portfolios do not have more than 20-30 stocks at one time. Moreover, PMS is usually tailored per the investor’s preferences to let the investors have more control over the composition of the portfolio than MFs. They also have fewer regulatory controls compared to MFs, making them riskier; however, their returns are much greater for the same reason.
The critical point here is that the lowest investment limit in PMS is Rs 50 lakh, so they remain out of reach for most investors.
PMS allows portfolio customisation based on your risk profile and financial needs. Also, they are more flexible when it comes to investment. And that’s why PMS portfolios are more likely to outperform the markets and bring in better returns.
Furthermore, PMS investment only needs to disclose information to the client; the same data is not available to the general public. But the same also makes it harder for one to compare other PMS products. On the contrary, all the data about MFs is public, making it much more transparent.
And even though PMS may offer high returns, they also attract higher fees and taxes.
So, now the question is, should you invest in PMS vs. mutual funds?
This will depend on your investment corpus, risk appetite, and financial goals. If you have a small corpus and do not wish for extensive tax compliance, MFs could be your option. On the other hand, if your corpus runs into 6/7 digits, demands customisation, and more, PMS could be your best bet.
Let us say you have Rs 1 crore to invest. Now, you could invest in one PMS scheme and multiple MF schemes together, barring low-value MF schemes. This can help you maximise your chances of making a profit from both these investment areas.
Difference between PMS and Mutual Funds
|
Point |
PMS |
Mutual Fund |
|
Function |
PMS offers custom and tailor-made investment solutions to fit the various needs of a client |
A mutual fund pools funds from several investors and invests in a diverse portfolio of assets depending on the type of the scheme. |
|
Suitability |
Suitable for HNIs |
Suitable for all types of investors |
|
Risk |
Considerably higher risk |
Risk varies from low to high depending on the mutual fund scheme. |
|
Cost |
Higher cost |
Relatively lower costs |
|
Investment Horizon |
Suitable for the long term |
Suitable for short as well as long-term investments. |
Conclusion
It is important to remember that you need to be careful when investing in equities.
While the market provides you with MF and PMS as investment vehicles (amongst others), remember that both have their own set of pros and cons. Understand your investment goals and analyse your risk appetite. Consult your investment advisor before investing in a PMS or an MF.