When individuals accumulate their savings and seek intelligent investment avenues, they typically look for two of the most popular alternatives: mutual funds and portfolio management service (PMS).
Both would appear identical on the surface—both are intended to grow your money by investing in a series of securities, such as stocks, bonds, and so on. But in reality, they are quite different from each other and are ideal for very distinct types of investors.
What is a Mutual Fund?
A mutual fund collects money from numerous investors to invest in a shared portfolio of stocks, bonds, or other securities.
As an investor, you don't directly own the individual bonds or shares in the portfolio — you own units of the fund.
A fund manager determines where to invest the combined money depending on the fund's purpose. The funds are overseen by the Securities and Exchange Board of India (Sebi).
One of the main reasons why mutual funds are so well-liked is that they are simple to invest in. With a minimum investment of as little as Rs 100, particularly in systematic investment plans (SIPs), mutual funds enable individuals with small savings to invest in professionally managed portfolios.
You also don't require much financial acumen to begin. Mutual funds come in different types, such as equity, debt, hybrid, and index funds to cater to various goals and risk profiles.
What is a PMS?
PMSs are usually meant for high-net-worth individuals (HNIs).
Under a PMS, your funds are handled individually by a professional portfolio manager who invests in a portfolio of your choice. As opposed to mutual funds, where you have units of a single fund, in PMSs, you personally own the shares or securities in your own name.
PMSs also involve a greater minimum investment—now Rs 50 lakh, under Sebi rules. Since the service is more customised and personalised, it usually includes one-on-one sessions with portfolio managers, who design a strategy keeping in mind your risk tolerance, financial objectives, and investment time frame.
Principal Differences in Practice
Though both are professionally managed, the form of ownership, charges, and risk are radically different.
In case of mutual funds, the investment strategy is uniform. All investors putting money in a given mutual fund receive identical portfolio and returns. In a PMS, the strategy is customised—two investors might have different portfolios based on their risk-taking capabilities and tastes. For instance, one investor's PMS portfolio can consist of more banking shares, while another's PMS portfolio might contain more mid-cap tech stocks.
Transparency also functions differently. Mutual funds reveal their net asset value (NAV) on a daily basis and the portfolio on a monthly or quarterly basis. In PMSs, you can generally monitor your personal holdings in real-time. You precisely know what stocks or bonds you hold, in what quantities, and how they are performing.
Charges are the other significant area of distinction. Mutual funds have an expense ratio—a rate of your overall investment—which tends to be lower, particularly if you opt for direct plans.
PMSs charge a performance fee in addition to a predetermined management fee. This makes PMSs costly, and therefore, are recommended for investors having a large portfolio who want exclusive attention.
Who Should Select What?
Mutual funds are suitable for the majority of retail investors, particularly beginners or those with small capital. They provide diversification, convenience, lower cost, and expert management. Investors can create long-term wealth even with a small monthly investment through SIPs.
A PMS is more appropriate for investors who already possess considerable capital and seek more control, personalisation, and perhaps higher returns. It might be attractive to those who are willing to assume greater risk, and also pay higher fees for a personalisation.
It should be noted that customised management is not a guarantee of improved performance. In fact, most well-run mutual funds have performed better than PMS portfolios for some time periods. Therefore, returns alone should not be the reason to move away from mutual funds to PMSs.
The choice between mutual funds and PMS is a function of your investment objectives, size of investment, appetite for risk, and the extent of involvement.
If you want to keep it simple and cheap to invest for long-term needs, such as retirement, mutual funds are probably the best. But if your portfolio size has increased and you are looking for more active and customised management, you may consider PMS—but only if you know the costs and the risks involved.
