Portfolio Management Service vs Mutual fund Investment

PMS versus Equity Mutual Funds

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. Some of the key features of PMSs are:

●       PMSs offer different types of schemes, each with its own strategies and objectives.

●       There are three types of PMSs:

○       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. 

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

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

●        As per SEBI regulation January 2019, the minimum investment amount is ₹ 50,00,000.

●       PMS is Regulated and governed by SEBI.

In some ways, PMS is similar to a Mutual Fund. An MF is also an investment vehicle that collects money from a pool of investors and has qualified investment managers/managers to invest the money across a range of assets to achieve the objective of the investment scheme. An Equity MF will invest a major part of the corpus in equity and equity-related assets.

How does an investor decide where to invest? Here are the relative advantages and disadvantages of PMS versus MFs.

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.

·        Data as of September 2021

As you can see, some of the PMS funds fare better than Mutual Funds. They do have more independence when it comes to buying and selling as compared to Equity Mutual funds.

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 with 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% 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. A 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 do not hamper your portfolio in a PMS, unlike an MF in which the value, liquidity etc. are affected.

Transparency

PMS is 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

PMSs charge an entry load, management fees, and either a fixed fee or a performance fee. There are PMS providers that charge only basis 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 Annum+ ZERO Performance fee
OR

b)     Hybrid Fee-.1% per annum fixed fee +performance fees of 15% share above a hurdle of 12% no catch up

c)      OR

d)     Performance-based fee - Zero  Fixed Fee + 20% performance fee above 8% hurdle

Taxation

Long-term capital gains in equity mutual funds are taxable at 10% p.a plus cess and surcharge without indexation on gains above ₹ 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 PMSs is not as efficient. You pay short-term/long-term capital gains on every transaction. The PMS try 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.

Both MFs and PMS have their pros and cons depending upon the context.

 Investors who want to invest in customized portfolio construction, target absolute returns over the longer term, want a select portfolio of stocks only for themselves, or select a customized theme of investing can opt for PMS.

Vidya Kumar

Dilzer Consultants Pvt Ltd