Let’s explore the differences to help you make an informed decision.
Minimum investment requirements
Mutual funds typically offer a low entry barrier, with investments starting from as little as ₹500, making them accessible to almost everyone.
In contrast, portfolio management services are designed for high-net-worth individuals, with a minimum investment often starting from ₹50 lakh.
Rahul Jain, President & Head, Nuvama Wealth, emphasises that “PMS is geared towards more evolved investors, while MFs cater to retail investors looking for more affordable options.”
Structure of investment
The structure of the two investment options is also quite different. In mutual funds, your money is pooled with other investors, creating a common portfolio.
On the other hand, in PMS, investors have their own demat account, where the securities purchased by the fund manager are owned directly by them.
As Mohit Gang, Co-Founder & CEO, Moneyfront, explains, “While mutual funds have diversified risk, PMS often involves concentrated positions that allow for higher potential returns.”
Risk and return dynamics
Risk and return dynamics also vary between the two. Mutual funds typically carry moderate risk, as they are more diversified, and the returns depend on the type of fund and its strategy.
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PMS, however, is known for higher risk, with more concentrated investments and active management, which offers the potential for higher returns.
“PMS, due to its concentrated investments and active management, generally provides higher returns but comes with higher risk,” says Mohit.
Cost structure
The cost structure of mutual funds is another key difference. MFs generally charge an expense ratio ranging between 1% and 2.25% for equity funds, making them more cost-efficient. Passively managed funds like ETFs tend to have even lower costs.
In contrast, PMS comes with significantly higher fees, with a fixed management fee (up to 2.5%) and performance fees (up to 20% of profits above a benchmark).
As Rahul points out, “While MFs are cost-efficient, PMS comes with higher fees due to more personalised and active management.”
Liquidity and exit terms
Liquidity is another consideration. Mutual funds provide high liquidity, as investors can buy or sell units at any time.
PMS, on the other hand, often comes with lower liquidity, as the exit terms are defined by the PMS contract, which may include lock-in periods or exit fees.
Transparency and reporting
Both mutual funds and PMS are regulated by SEBI, but mutual funds are required to disclose daily NAV, portfolio holdings, and annual reports, offering a higher degree of transparency.
PMS, while also SEBI-regulated, provides less frequent disclosures but investors typically receive monthly reports with updates on their portfolio.
Active management and customisation
PMS stands out for its active management, where fund managers make concentrated bets based on research and analysis, making it suitable for investors looking for customized strategies and willing to take on higher risk.
Rahul Jain says, “PMS offers tailored solutions and the opportunity to generate higher alpha. However, it’s crucial to understand the associated risks before jumping in.”
In contrast, mutual funds offer a more stable and diversified approach, making them ideal for those with a moderate risk appetite or a shorter investment horizon.
Control and flexibility
Another defining feature of PMS is the level of control it offers investors. In discretionary PMS, the fund manager makes buy or sell decisions without needing prior consent from the investor.
Non-discretionary PMS, however, allows investors to approve suggested trades before they are executed.
“With Non-discretionary PMS, investors have more control over their portfolio. However, discretionary PMS allows the manager to act swiftly without waiting for approval,” explains Mohit Garg.
Choosing the right investment option
When choosing between mutual funds and PMS, it’s essential to consider factors such as investment horizon, risk appetite, capital availability, and the level of customisation required.
Mutual funds are suitable for both short- and long-term goals, while PMS is typically better suited for long-term, high-growth objectives.
Investors who have a higher risk tolerance and a substantial capital base may find PMS to be a more appropriate choice, while those looking for more affordable, diversified options might prefer mutual funds.
For many investors, a balanced portfolio that includes both mutual funds and PMS might be the best strategy.
As Mohit Garg suggests, “A balanced portfolio with a core of stable, lower-risk mutual funds, and a portion allocated to PMS for higher returns, can provide both stability and growth.”
Rahul Jain agrees, adding, “If you have a large surplus and seek higher returns with more customisation, then a mix of MFs and PMS could be the ideal strategy.”
