By Sandeep Kulkarni, CEO, Moneyworks4u Mutual Fund Distributors
Over the past 7-8 years, the growth in Portfolio Management Services (PMS) have outpaced the growth in mutual funds. From a few thousand crores, a couple of years back, the assets under management in equity PMS has ballooned to a high of Rs. 6 lakh crs. Given the increasing interest in this space, let us understand what makes PMS different from mutual funds and which of this option is suitable for whom. For this purpose, let us compare the two instruments basis various parameters.
Nature of Investment
a) Mutual funds pool money from multiple investors and invest in a diversified portfolio of stocks, bonds, or other securities. Investors purchase units in a mutual fund, and the fund manager makes investment decisions on behalf of all investors.
b) Portfolio Management Services are personalized investment services offered to individual investors. In PMS, a professional portfolio manager manages a separate portfolio for each client based on their investment goals and risk tolerance. The approach is customized in nature as compared to a mutual fund.
Minimum Investment
a) Mutual funds have lower minimum investment requirements, making them accessible to a wide range of investors. You can start investing in mutual funds with as little as Rs. 500 or even less.
b) PMS typically requires a higher minimum investment, often in lakhs or crores of rupees. This makes it suitable for high-net-worth individuals.
Diversification
a) Mutual funds offer diversification across various asset classes, sectors, and securities. This diversification helps spread risk and offer relatively predictable returns over long term.
b) While PMS can also offer diversification, it can be more concentrated compared to mutual funds since the portfolio manager tailors the portfolio basis individual client’s preferences. The range of expected returns in PMS is much wider than that of Mutual funds.
Customisation
a) Mutual fund portfolios are standardized in nature. They are not tailored to individual investor preferences.
b) PMS offers a higher degree of customization. The portfolio manager takes into account your risk tolerance, investment objectives, and preferences as well as current market situation when constructing the portfolio.
Transparency & Control
a) Mutual funds are highly regulated, and their portfolios are disclosed regularly. Investors have limited control over security selection within a fund.
b) PMS provides more transparency and control as investors can see the individual securities in their portfolio and can have direct communication with the portfolio manager. Access to fund management team is one of the reasons why HNIs like to invest in PMS.
Costs
a) Mutual funds have expense ratios that cover fund management fees and operational costs. These costs are shared among all investors in the fund.
b) PMS fees can be customised in nature. One can choose between fixed fees or performance linked fees or a combination of both. Fixed fees are a bit higher than those in mutual funds.
Regulation
a) Mutual funds are regulated by the Securities and Exchange Board of India (SEBI), and there are strict guidelines governing their operation.
b) PMS providers are also regulated by SEBI, but they enjoy more flexibility in investment strategies compared to mutual funds.
Nimbleness
a) With the rise in inflows, popular mutual fund portfolio sizes tend to be large. These can be a hindrance in portfolio manoeuvrability as most stocks outside Nifty 100 do not have enough liquidity to absorb the bulk buying or selling by mutual funds.
b) PMS portfolios are much smaller in size than mutual funds. As a result, they can enter or exist a stock position much faster and with much lesser collateral damage.
Basis these points, it is clearly visible that mutual funds are suitable for a wide range of investors given their accessible investment amount and diversified investment options available. PMS, on the other hand, offers a higher degree of customization and direct control of the portfolio which is beneficial for a well versed high-net-worth individuals (HNI). Also, the higher minimum investment requirements and costs associated makes it an instrument for HNIs and ultra-HNIs.
For an investor trying to make a choice between the two, remember to make the decision based on your financial goals, risk tolerance, and the level of customization and control you desire in your investment portfolio.