Mutual Funds vs PMS – Key differences and which is better

Investing in the financial markets offers various avenues to potentially grow one’s wealth. Apart from direct stock market investments, Portfolio Management Services (PMS) and mutual funds are two ways in which investors can participate in the financial market while also benefitting from the involvement of experts in portfolio planning and managing. However, both investment avenues differ in their structures, management styles, and investment approaches. Understanding these differences can help investors to decide which option is more suitable for their unique objectives and preferences.

This article will assist you in understanding PMS vs mutual funds and the type of investors each suit.

• Table of contents

1. What is PMS?
2. What are mutual funds?
3. PMS vs mutual funds: Differences
4. PMS vs mutual funds: Return potential

What is PMS?

These are investment services offered by professional portfolio managers or investment firms. In PMS, an individual's or entity's portfolio is managed on their behalf, with the objective of achieving specific investment goals. PMS typically caters to high-net-worth individuals (HNIs) and institutional investors who seek personalised investment strategies tailored to their unique financial objectives and risk profiles. The minimum investment amount for PMS is Rs 50 lakh. Creating a diversified PMS portfolio can be expensive because the capital is coming from a single source.

What are mutual funds?

Mutual funds are investment vehicles that pool money from multiple investors to invest in a diversified portfolio of securities such as stocks, bonds, or a combination of both. Mutual funds are managed by professional fund managers who make investment decisions on behalf of the investors. Mutual funds offer investors the opportunity to participate in the financial market with a diversified portfolio through relatively lower investment amounts compared to direct investments in individual securities. Investments start at just Rs 100 in some schemes. An SIP calculator can help you plan your contributions and estimate the potential growth of your investments over time. For those investing in lumpsum, a compounding calculator can enhance your financial planning by illustrating how reinvested earnings can potentially result in exponential growth in your portfolio.

PMS vs mutual funds: Differences

• Investment minimums: PMS generally require higher minimum investment amount compared to mutual funds. PMS typically cater to high-net-worth individuals with substantial investable assets, whereas mutual funds are accessible to a broader range of investors with varying investment sizes.
• Customisation: PMS offers personalised portfolio management tailored to the specific needs and preferences of individual clients. In contrast, mutual funds follow pre-defined investment mandates and are structured to cater to a broader investor base. Investors have no say in the design or management of the portfolios, though they can choose the type of scheme they wish to invest in based on their financial goals, risk appetite and other factors.
• Direct ownership: In PMS, investors have direct ownership of the underlying securities held in their portfolios, providing greater control over their investments depending on the category of PMS. On the other hand, mutual fund investors own shares or units of the fund rather than the underlying securities, resulting in indirect ownership.
• Fees and charges: PMS typically charge higher fees than mutual funds due to their personalised services and customised investment strategies.

PMS vs mutual funds: Return potential

The potential for returns in both PMS and mutual funds depends on various factors such as investment strategy, market conditions and the skill of the fund manager. While PMS offer personalised investment strategies and direct ownership of securities, they also entail relatively higher fees, which can impact overall returns. On the other hand, mutual funds provide access to diversified portfolios managed by professional fund managers at a relatively lower cost, making them suitable for retail investors seeking broad market exposure.

Conclusion

PMS and mutual funds offer investors different avenues to potentially achieve their financial goals. PMS design and manage portfolios based on individual preferences and objectives, while mutual funds offer diversification and professional management at a relatively lower cost, but without customisation. While both PMS and mutual funds can be helpful for growing your wealth, a lumpsum calculator can help you determine how much you would need to invest upfront to potentially achieve your financial goals. This can be a useful tool for investors who are considering either PMS or mutual funds.

FAQs:

Between PMS and mutual funds, which offers the benefit of diversification?

Mutual funds offer the benefit of diversification by pooling investors' money and investing in a diversified portfolio of securities. This diversification helps spread risk and reduce the impact of individual security performance on the overall portfolio. PMS may also offer diversification benefits, but to a lesser extent, as they are typically tailored to individual investor preferences and may hold a concentrated portfolio of securities. Moreover, the investor in a PMS has to individually purchase every asset in the portfolio, which can make diversification more expensive.

Between PMS and mutual fund, which one has higher expenses and fees?

PMS generally has higher expenses and fees compared to mutual funds because it offers personalised services created for individual clients, resulting in higher costs. In contrast, mutual funds pool investors' money to create diversified portfolios, allowing for economies of scale and lower expense ratios.

How to apply for PMS?

Individuals typically need to approach a registered portfolio manager or investment firm offering portfolio management services. They will need to complete the necessary application forms, provide relevant documents such as KYC details, proof of identity, and address, and meet the minimum investment requirements specified by the PMS provider.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.