Portfolio management services vs mutual funds
I recently came across a unique investment proposition offered by major players in our country – Portfolio Management Services (PMS). I decided to do some research on the topic. I even talked with some of the major players in the country who offer these services, including Motilal Oswal, Anand Rathi, Purnartha, ASK, etc.
I wanted to share this information with everyone out there, as most of us are unaware that something like this even exists. In simple terms, PMS helps you to invest in stocks directly as opposed to just having a small part divided into chunks as happens with mutual funds. Don’t worry… we’ll be having a deep dive into it in this article.
Most people think PMS is on similar lines to investing in mutual funds… but that is not the case. I did some research and found some major differentiating points between the two. People who don’t have the time, knowledge or resources to invest their money in the right place generally tend to go for investing in mutual funds. If you are also one of them, please make sure that you go through this article as you can widen your investment horizon and options through this.
I have differentiated b/w the two on some major pointers we consider while decision making.
1. Minimum Investment Amount
PMS – As per SEBI Guidelines, the minimum investment amount in a PMS scheme is Rs.50 Lakhs.
Mutual Funds – In mutual funds, you can get started with as low as Rs.100 as a lumpsum amount or Rs.500 as a SIP.
2. Understanding the Working
PMS – In a PMS Service, the company assigns a fund manager who handles the entire corpus of that particular PMS scheme and makes the investment on your behalf. The company then creates a Demat account under your name, and individual stocks are purchased. You can only track the performance through a dashboard, but you cannot buy and sell the stocks by yourself, without the company’s approval. (This is discretionary PMS, which is the most common).
Mutual Funds – While purchasing a mutual fund, your money gets distributed amongst a basket of different stocks where the returns are distributed amongst a number of investors. This is why you can enter with as low as Rs.100 and that amount will get distributed into various stocks proportionately as per the MF. You will get returns proportionate to the amount invested by you. Even in MF, you cannot select individual stocks as per your preferences, as they are pre-decided by the company.
3. Fees Structure
PMS – PMS companies generally charge b/w 2-2.5% p.a. of the investment amount as fixed charges and may also include profit sharing of ~20% on a hurdle rate of 15-25% profits.
Mutual Funds – MF companies generally charge around 1-1.5% p.a. on the investment amount. The charges are generally significantly lower than the PMS Schemes.
4. CAGR
PMS – One can expect a CAGR of 18-22% while opting for PMS schemes. The long-term returns are generally higher in PMS schemes as compared to MFs. The main reason behind this is mentioned in the next point.
Mutual Funds – Even the best-performing MFs are able to give a CAGR of a maximum of 12-15%.
*While considering the returns of both these instruments, we should look at the horizon of 5 years+ and the historical returns. The past 3 years were a special case, as some companies grew exponentially and these parabolic returns cannot be expected every year.
5. Capping Per Stock
PMS – There is no specific percentage capping per stock. This is the main reason why PMS schemes hold on to the multi-baggers for a long time and ride the wave to the top. Although you might think there would be a downside to this as the stock might crash as well; which is absolutely true. But the fund managers ensure that the winners make up for the losers from their strategy.
Mutual Funds – According to SEBI guidelines, any mutual fund cannot have more than 10% allocation in 1 stock. This means that even if you have a multi-bagger stock in your MF, the company would need to cut short its allocation to another stock to avoid the allocation being >10%. This is why MFs cannot provide a higher CAGR over a certain limit.
6. Risk Element
PMS – PMS is generally considered to be more risky as compared to MFs, mainly because of the difference in restrictions imposed by SEBI. Apart from this, another risk is that the fund manager doesn’t need your approval or permission to sell your holding or restructure it. You can just track your positions through the dashboard which will be provided by the company.
Mutual Funds – MFs are considered less risky comparatively, as they are tightly governed by SEBI. Even to make changes to the allocations, the company needs to go through a lengthy process to make it happen. Hence, the allocations tend to be more or less similar over the long run.
7. Taxation
The taxation in PMS and MFs is more or less the same, i.e. 15% Tax on returns redeemed within 1 year (short-term capital gains) and 10% Tax on returns redeemed after a year if the amount exceeds Rs.1 Lakh (long-term capital gains).
Being a person who likes to take more risks in the market but still be cautious with money, I personally prefer to go with PMS as the winner. Someone who likes to go for a safer approach may be more inclined towards Mutual Funds. At the end of the day, it is a personal choice. I would love to know what you think about these two options. Let me know in the comments which is the one that you would personally like to invest in and do mention any additional relevant information that you know about these two investment vehicles.
Happy Investing!