PMS vs MF: Which is the better option?
A portfolio management service or PMS is a service offered by professional portfolio managers to take investment decisions and monitor portfolios on behalf of clients. As against the mutual fund schemes which comprise a portfolio designed as per its investment objective, a PMS provider designs a portfolio as per the client’s personal preferences and financial goals. Here, the shares and bonds purchased are held in the client’s name, which means that he directly owns them.
Types of PMS
PMS can be of two types, discretionary and non-discretionary. In discretionary PMS, the portfolio manager takes all the decisions pertaining to the choice of instruments and the timing of investment. The investor is unaware of these decisions. Whereas, in non-discretionary PMS, the portfolio manager gives advice and information to the investor. The former executes the decisions only after the latter gives approval to the ideas.
What is the minimum threshold?
As per SEBI guidelines, to avail PMS service, an investor has to invest at least Rs 50 lakh. This limit proves a major deterrent for retail investors who have lower funds to invest. On the contrary, the minimum investment amount for MFs can be as low as Rs 500 which makes it a viable option for many investors.
The PMS provider has the liberty to allocate any percentage of funds to any stock in the portfolio. Call it a boon or a curse, he does not face any regulatory restriction in this regard. This enhances the chance of beating the market and comes with an increased risk. On the other hand, the mutual funds are regulated by SEBI and are mandated to not allocate more than 10 per cent of the funds in a single stock. This brings down the risk of the portfolio and makes it a safer option for investors.
An investor availing PMS services will have the same tax structure as that of an investor who invests directly. In essence, the taxation costs are borne directly by the investor. This is not the case with mutual funds as they are registered as a tax-exempt trust structure.
PMS is not everyone’s cup of tea. It is more suitable for investors who are high net worth individuals with a big risk appetite. For retail investors, mutual funds are a better option.