PMS vs. Mutual Funds: What is better for an investor?

The financial market provides investors with several avenues to manage their investments and build wealth. Portfolio management services (PMS) and mutual funds are two popular options for long-term wealth accumulation.

In fact, last year, the Indian mutual fund industry increased its Assets Under Management (AUM) from ₹47.80 trillion to ₹68.50 trillion (Oct 2023 to Oct 2024), marking a growth of 43.30%. Equity mutual funds also have attained up to 74% return from Nov 2023 to Oct 2024.

Additionally, data as of Aug 2024 indicates that the returns for equity-focused PMS categories have exceeded 35% in the last year.

As investment vehicles, both PMS and mutual funds seek to optimize returns. However, they follow distinct approaches to wealth management and investment growth. An analysis of PMS vs. mutual funds will help investors evaluate both options and make informed decisions.

This blog provides insights into PMS vs. mutual funds, including differences, types, and which one to choose for investing.

What are Portfolio Management Services?

Portfolio management services (PMS) are customised investment services that cater to high-net-worth individuals (HNIs) and institutional investors. These services are extended by wealth management firms or highly experienced stock market professionals. The asset classes in PMS include equities, bonds, commodities, etc.   

Investors need dedicated portfolio managers to manage PMS. The manager curates an investment portfolio based on the investor’s financial goals, risk profile, and preferences. 

PMS ensures customised investment plans and efficient risk management, which enable HNIs to relax and reap the benefits of their investments.

What are Mutual Funds?

Mutual funds are collective investment vehicles managed by professional fund managers. These funds cater to a wide range of investors. While retail investors are the primary participants, HNIs and institutional investors also invest in them.

In mutual funds, Asset Management Companies (AMCs) play a vital role. They collect funds from multiple investors, which fund managers use to invest in different assets and create a diversified portfolio. Depending on the mutual fund’s objectives, these assets may include equities, gold, bonds, etc., or their combination.

Mutual funds offer ease of investment and diversification which are among the top reasons for it’s popularity among investors.

Types of PMS

Portfolio management services are divided into two categories. This division is based on the level of control an investor has over the portfolio.

Here are the two types of PMS.

Discretionary PMS

In this PMS type, the fund manager has full control over an investor’s portfolio and can make investment decisions on behalf of the client. However, the manager first discusses the investment strategy with the investor so that they remain on the same page.

This type of PMS is well-suited to investors who lack the time or inclination to manage their portfolios on a daily basis.

Non-Discretionary PMS

In a non-discretionary PMS, the role of the fund manager is limited to offering advice and suggestions to the client about the investments. The fund manager can strategize and guide the client, but the ultimate power to make investment calls remains with the investor .

Once the client makes an investment decision, the manager may execute the transaction. This type of PMS requires the manager to get approval from the client for any investment-related activity in the portfolio.

Types of Mutual Funds

Mutual funds are a vast asset class that caters to different investment goals. One can categorise them in several ways, based on various criteria.

Here are a few popular types of mutual funds.

1. Structure-Based Mutual Funds

These mutual funds are classified by structure. They indicate how fund units are bought and sold.   

• Open-Ended Funds: In open-ended funds, investors can buy and sell fund units at all times.
• Closed-Ended Funds: These funds allow investors to buy fund units only during a New Fund Offer (NFO) and sell at the expiry of fund tenure.
• Interval Funds: A combination of open and closed-ended funds, these funds allow investors to redeem fund units periodically at predetermined intervals.

2. Asset Class-Based Mutual Funds

As the name indicates, these mutual funds are categorised based on the asset class they invest in. Some of them are:

• Equity Funds: These funds allow investors to invest in equities or stocks.
• Debt Funds: These funds invest in fixed-income securities, such as bonds, treasury bills, government securities, etc.
• Hybrid Funds: These funds enable investing in multiple equities and debt instruments.
• Sector Funds: The investments in these funds are directed towards a specific sector, such as banking, energy, IT, etc.

3. Investment Goal-Based Mutual Funds

In these funds, the financial goals of the fund schemes are the categorising factor. Some of the major types are as follows:

• Growth Funds: These funds seek to increase the capital in the long run by investing in companies with high growth potential.
• Income Funds: In these funds, the focus is to generate regular income by investing in fixed-income securities, bonds, etc.
• Liquid Funds: In these funds, liquidity and safety are prioritised by investing in short-term debt instruments.
• Tax-Saving Funds: These funds offer tax benefits to the investor under Section 80C of the Income Tax Act.

PMS vs. Mutual Fund: Key Differences 

PMS and mutual funds differ in several aspects. By analyzing the differences, investors can align their investments to meet their financial objectives.

Here are the key differences between PMS and mutual funds.

Structure

PMS is a bespoke investment service offered by a dedicated portfolio manager. It is designed for individual clients.

A mutual fund is a collective investment service that caters to a broad investor base. A professional fund manager pools money from multiple investors to create a common portfolio.

Ownership

In PMS, investors own the underlying securities held in their portfolios, resulting in direct ownership of assets.  

In mutual funds, investors do not own the underlying assets in their portfolios. They own shares or units of the fund, leading to indirect ownership.

Customisation

PMS caters to the specific needs of an individual investor. It allows the portfolio to be customised to meet the financial goals of the investor.

Mutual funds offer a uniform portfolio to all investors in a specific scheme. Investors can choose the scheme they want to invest in but can’t customise the underlying assets in it.

Minimum Investment

PMS is designed for high-net-worth individuals. The minimum investment in a PMS is often ₹50 lakhs.

Mutual funds are designed for all kinds of investors who want to diversify their portfolios. An investor can start investing with a minimum amount of ₹500.

Risk and Return Potential

PMS allows concentrated investments tailored to an investor’s risk tolerance. This increases the potential for higher returns but also carries higher risk.

Mutual funds follow a diversified investment approach that helps to mitigate risks. The returns depend on the type of fund invested in and the strategy followed.

However, selecting an investment approach can be confusing for investors who lack adequate market experience. PowerUp Money offers a simple way of shaping portfolios for the best returns. It offers a balanced combination of high returns and minimum risks.  

Fee Structure

In comparison to mutual funds, PMS has a higher fee structure due to its personalized nature. The management fee of PMS usually ranges between 2% and 2.5% of the AUM per annum.

In contrast, the expense ratio of mutual funds is often between 0.5% to 2.5%.

Management Style

In PMS, each investor account is managed by a dedicated portfolio manager. Investment decisions are based on an investor’s risk tolerance and financial goals.

In mutual funds, a professional fund manager manages the portfolio based on predetermined investment strategies and objectives.

PMS vs. Mutual Fund: Which One to Choose

The decision to invest in either PMS or mutual funds or both will depend on an investor’s financial objectives and ability to handle risks. However, the pointers mentioned below can help an investor to analyse and make an informed decision.

When to Consider Investing in PMS?

PMS is a viable investing vehicle for an investor with a large corpus who wants a personalised portfolio and has higher risk tolerance. The investor must also have investment experience to understand the complexities and risks involved in this investment approach.

When to Consider Investing in Mutual Funds?

Mutual funds are a practical investing vehicle for an investor with a smaller corpus and a moderate risk appetite who prefers a simple investment approach.

When to Consider Investing in Both?

Investing in both PMS and mutual funds can be a feasible approach for an investor with a substantial corpus who seeks the advantages of a personalised portfolio and diversification through broad market exposure.

Conclusion

When it is PMS vs. mutual funds, an investor has to understand the nuances of both investment approaches before taking a call. Mutual funds are a simple investment approach that offers diversification and ease of investment. PMS is a customised investment approach that offers personalised portfolio management for individuals with high net worth.

The final choice between PMS and mutual funds will depend on an investor’s preferences, portfolio size, investment objectives, and risk tolerance.

Disclaimer: The information provided in this article is for informational purposes only. PowerUp Money is not responsible for any errors, omissions, or outcomes related to the use of this information.