Mutual Funds vs PMS: Comparison, returns, benefits; expert insights

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When it comes to investing, it is important that we use a tool that aligns well with our financial goals.  But it becomes difficult to understand which investment tool suits us best. 

Do not worry. Investment expert Dilshad Billimoria has some key insights 

Portfolio Management Service (PMS)

A Portfolio Management Service (PMS) is a wealth management service.  Qualified fund managers manage investors’ money by investing it in a portfolio of investment assets like stocks and fixed income securities for a fee.

There are three types of PMSes: 

a) Discretionary: The portfolio manager is independent to make the investment decisions. They have the power of attorney (PoA) to buy and sell shares on behalf of the investor.  

b) Non-discretionary: The client has to explicitly confirm all buy-sell decisions before the portfolio manager executes them. 

c) Advisory: The portfolio manager gives advice on the portfolio and it is the investor’s responsibility to execute them. 

As per SEBI regulation in January 2019, the minimum investment amount is Rs 50,00,000.  PMS is Regulated and governed by SEBI. 

Mutual Funds

Mutual funds are financial instruments in which investors chip in their money and it is managed by professionals. The money collected from all the investors is invested collectively by professionals. 

Payments can be made via two modes in Mutual Funds 

Lumpsum- The whole amount is invested in one go and is taken out after a set time period. 

SIP- Systematic Investment Plans or SIPs are a method of investing in mutual funds through which small, equal installments are paid to the fund in equal intervals of time. 

They seem pretty similar, don’t they? So, which one is better? How are they as compared to each other? Dilshad Billimoria, Board Member, Association of Registered Investment Advisors (ARIA) explains. 

Performance

Understandably, this is the main criteria that most investors look for before selecting an investment avenue. While past performance may not guarantee future returns, it gives a good perspective. Here is a comparison of the returns of a few PMSs and MFs across different fund types. 

Customization

In a PMS, the portfolio is designed for you or for a select group of investors, unlike MFs which are for everyone. PMSs are better as the investor can decide on specific sectors, capitalization, and allocation. Moreover, the portfolio managers are well-versed in domestic and global markets and are skilled to make the most optimum decisions for each investor portfolio. 

Flexibility

Equity Mutual funds have to invest up to 65 per cent in equity irrespective of the market conditions. PMSs are better here as they can be flexible with their investments and can increase or decrease their allocation to equity based on market scenarios and investor requirements. Therefore, they have the potential to outperform the markets. 

Focus

A PMS can focus on performance and can make investment decisions such that the absolute returns are maximized. They can focus more on returns as compared to MFs that have to take care of diversification rules, valuation guidelines and redemption related regulations. 

Investment status

As an investor, your portfolio is considered different from every other portfolio by the PMS. So, the decisions are made as per your investing needs, financial conditions and risk profile. Portfolio management service is more suitable as unlike an MF where the investments are pooled and invested irrespective of individual differences and needs. Also, redemptions by other investors does not hamper your portfolio in a PMS unlike an MF in which the value, liquidity etc. are affected. 

Transparency

PMS are required to make timely disclosures to the client. But these are not freely available to the public. Moreover, it is not easy to assess and compare the performance of different PMS products. In the case of MFs, they are strictly regulated and all the information is public. You can easily compare performances. 

Fees

PMSes charge an entry load, management fees, and either a fixed fee or a performance fee. There are PMS providers that charge only the basis of profit made, which is a good way to ensure the fund manager delivers the required returns. 

A typical example of fees in a PMS consists of 3 options 

a)   Fixed fee: 2 per cent per Annum + zero performance fee (or) 

b)   Hybrid Fee – 1 per cent per annum fixed fee + performance fees of 15 per cent share above a hurdle of 12 per cent no catch up (or) 

c)   Performance-based fee – Zero fixed fees + 20 per cent performance fee above 8 per cent hurdle. 

Taxation

Long-term capital gains in equity mutual funds are taxable at 10 per cent per annum plus cess and surcharge without indexation on gains above Rs 1,00,000 in a financial year. Short-term capital gains are taxable plus cess and surcharge. Moreover, mutual fund scheme owners have to pay tax only on redemption. The tax on PMSes is not as efficient. You pay short-term or long-term capital gains on every transaction. The PMS tries to compensate for this by giving higher returns. 

Process and Documentation

Investing in Mutual funds is easy and there are multiple channels to buy and sell schemes. The investment process for PMSs is more tedious considering the higher value of transactions. There is quite a lot of documentation and time required to set up the PMS account. 

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