PMS vs Mutual Funds, What’s Your Choice?
Nov 30, 2018 | 15:28 PM IST
Nov 30, 2018 | 15:28 PM IST
Investment is one of the most important aspects of your life. Unfortunately, many people realize this quite late in their lives. By the time they realize it, the best friend of the investor time, is no longer with them. On the other hand, those who make the right choices, lead a happy and a satisfying life. Going by the historical data there is only one instrument which has created enormous wealth for the investors equities.
There are two ways of investing in the direct equities with professional advice, one is through Portfolio management services (PMS) and other is through Mutual funds (MFs). Many people fail to understand the difference between these two. Both of these are the investment avenues which can earn decent profits. But differ each other in some aspects. Understanding these differences could lead to a crystal clear path for your long-term financial goal. Let's explore these differences to choose the best.
1. Customized Investment
Mutual funds and PMS both differ in the investment customization perspective. Mutual funds offer a portfolio as a whole. That is, it offers the basket with respective strategy. And a fund manager constantly handles the scheme.
On the other hand, PMS services offer you customized investment opportunities. Here, investors are offered with choices of selecting specific sectors, capitalizations. Further, skilled portfolio manager manage your portfolio which makes the process hassle-free. These professionals are well versed with in-depth research and study of global and domestic market situation.
On this front, PMS scores well than mutual funds. Because it offers you an opportunity to decide and discuss the sectors and stocks which you favour and want to invest.
2. Fees & Flexibility
Mutual funds don't charge any entry load but charge exit loads. That is if you exit the scheme within a specific period of time, you need to obtain exit loads as a percentage of your takeaway amount. Moreover, while investing in the mutual funds the expense ratio is charged separately. The expense ratio is nothing but the percentage of the amount charged from your investment for the administrative and other fund related expenses.
On the other hand, PMS charges you an asset management fees on your invested capital. It generally varies from 1.5 -2%. Some of the advisors prefer to offer a flat and fixed fee structure. And at the same time, usually, there is no exit load. That is one can enter and exit anytime without incurring any other fees.
On this front, PMS seems a bit beneficial than mutual funds with the flexibility. However, on fees front, some may find the latter beneficial as per their capital availability.
Mutual funds disclose all the expenses as well as modification in the portfolio monthly. This data is published through the fact sheets. These fact sheets are sent to the investors monthly, as well as are made available online. It is the only source where an investor can see the changes in the portfolio and other factors of the scheme.
On the other side, PMS offers utmost transparency in investment management. Being an investor you will be notified of all the transactions like a sale, purchase, brokerage, and everything. Owing to which you will be aware of the situations where your portfolio manager made you profits and where made losses for you and how did he handle the volatility situation.
On this front, PMS score over the mutual funds, as it offers you utmost transparency.
4. Taxation Aspects
In the case of MFs, you incur capital gains post exiting the investment. If you redeem investments within a year then you will incur short-term capital gain tax. And if you redeem post that you incur long-term capital gain tax. There are some schemes like ELSS which offer you tax benefits.
In the case of portfolio management services every time when a portfolio manager BUY or SELL the security it will incur you a capital gain which is ultimately taxed at the end of the year.
So on this front, both PMS and Mutual fund scores equally.
5. Separate Status
Portfolio management service considers every portfolio as a different from one another. That is every investor is treated separately here. It considers all the risk and investing needs of the investor and designs a portfolio exclusively. Due to this, every investor's portfolio is differentiated and not been hampered with the other investor's activities. For example, if there are huge redemptions in the mutual fund then the fund manager needs to create the liquidity by selling the most liquid stocks from the fund. portfolio. These changes may affect the investment of those investors who have invested in mutual funds.
On the other hand, mutual fund schemes are the portfolio baskets where an investor invests. So no separate status is offered in this type of investment. Mutual funds pool money from the investors and invest it in the specific portfolio which is managed by the fund managers.
On this front, PMS scores over the mutual funds, as your investments are treated as per your requirement with the separate status.
6. Investment Terms
Mutual funds and PMS both are governed by SEBI. These modes have specific terms and condition as per the SEBI guidelines. In the case of MFs, the investor only needs to be KYC compliant. Apart from this, there are no specific conditions for the investment. The investor can start investing in MFs from Rs.500.
On the other hand, As per SEBI guidelines for portfolio management services. For subscribing these services, minimum capital required is Rs.5,00,000. However many of the service providers put entry barrier of capital Rs.25,00,000. There is no upper cap.
On this front, Mutual fund scores well than PMS as the investor would need a minimum amount to start investing in mutual funds.
With the above discussion now you know how equity investment through MFs and PMS differs each other. Now all you need is to take the right decision for your finances. Both of these modes have its own benefits and cons, but if we observe the above key aspects. 4 out of 6 times PMS scores over Mutual funds, which indicates that the ease of investing and the possibility of higher profits can be more with portfolio management services. In India, there are many investment advisors and brokers who offer portfolio management services. These services have different features and terms. To know more about best PMS services and service providers in India, Read Best Portfolio Management Services In India.