Investing in financial markets is an essential part of the wealth creation process. With multiple investment avenues in the Indian marketplace, Portfolio Management Services (PMS) and mutual funds (MFs) are considered among the most sought-after options.
Both offer the advantages of diversification and professional management, yet they cater to distinct investor profiles with varying risk appetites, financial goals, and investment strategies. In this article, we will provide an all-inclusive comparison of mutual funds vs PMS, their features, types, differences, and which option may suit the investor more.
What Do Portfolio Management Services Mean?
Portfolio Management Services, or PMS, is an investment service wherein fund managers design unique strategies for clients’ variable investments into stocks, bonds, etc. Targeted towards HNIs and UHNIs, With a minimum investment requirement of ₹50 lakhs, PMS focuses on maximising returns through informed decision-making and risk management.
Regulated by SEBI, PMS offers customised portfolios aligned with an investor’s financial goals and risk tolerance. It provides expert management, diversification, and protection against market volatility, making it a preferred choice for affluent investors seeking personalised asset management.
What are the Different Types of Portfolio Management Services?
Before understanding the difference between PMS and MF, you must have a look at the following types of portfolio management services:
Discretionary PMS
Discretionary Portfolio Management Services gives the investment manager full authority to make investment decisions on behalf of the client. In this relationship, the client is not part of the decision-making for the manager. It allows the managers to act quickly based on market conditions and opportunities.
Non-Discretionary PMS
Under Non-Discretionary Portfolio Management Services, the investment manager would advise the clients and make recommendations based on their analysis. While the manager is allowed to suggest securities and strategies, the client will have the last word and the final say over how to manage their investments, providing a way for active involvement.
What are the Different Types of PMS Investment Strategies?
On a more granular level, PMS strategies can be classified as follows:
Aggressive Growth
The aggressive growth strategies look to obtain high returns by investing in high-risk, high-growth opportunities. Here, the focus is on certain sectors or companies that show great growth potential, offering an increase in capital appreciation. Clients who adopt this strategy should be ready to experience volatility and considerable losses.
Income Generation
Income generation strategies extract a regular income through investments in dividend-paying stocks and fixed-income instruments. It is the ideal approach for someone needing a steady cash flow. Generally, it is a more interesting proposition to retirees or those desiring a fixed, steady return. The focus is on consistent income generation with less risk.
Capital Preservation
Capital preservation strategies are intended to preserve the investor’s principal asset by investing in low-risk environments such as bonds and money markets. This is a conservative strategy designed to keep losses at a minimum during a financial downturn and provide the investor with a slow but steady income stream. It is specifically for conservative investors looking for a more cautious approach than an aggressive growth consumer.
What Do Mutual Funds Mean?
Mutual funds are professionally managed investment vehicles that pool money from multiple investors to invest in a diversified portfolio of equities, debt, or a mix of both, depending on the fund’s objective. These entities are regulated by SEBI, which allows retail investors to invest conveniently.
Key features of mutual funds include professional management, diversified portfolios, low minimum investments, easy liquidity, and regulatory oversight. They provide a simple and cost-effective way for investors to gain market exposure while benefiting from expert fund management and risk diversification. With flexible investment options and easy redemption, mutual funds are an ideal choice for beginners and seasoned investors alike.
What are the Different Types of Mutual Funds?
When understanding the distinction between MF vs PMS, you must have an understanding of a few types of mutual funds:
Equity Funds
These funds primarily invest in equity markets to achieve capital appreciation. As dictated by the SEBI Regulations, they must invest at least 65% of assets in equities and related instruments. Equity funds provide diversification across various sectors and market capitalisations, making them suitable for investors with varying risk appetites.
Debt Funds
Debt funds invest in fixed-income securities such as government bonds, corporate bonds, and treasury bills. These funds can be considered less volatile than equity funds- making them suitable for risk-averse investors looking for a fixed-income flow. Low risk may mean that the growth potential of these funds may be limited.
Hybrid Funds
Hybrid funds implement investments in both equity and debt. The allocation between equity and debt will depend upon the objective of the fund. These funds range from aggressive growth to capital preservation and are best suited for the moderate investor seeking diversification among various asset classes.
Index Funds
Index funds are passively managed funds tracking a particular market index, such as the Nifty 50 Index. They invest in the same companies that form the index and in the same proportion to achieve similar returns. As such, index funds are characterised by relatively lower expense ratios coupled with low levels of risk and diversification, typically appealing to an investor seeking returns linked to that index.
Thematic Funds
Thematic funds invest in companies based on a particular theme or trend, including sectors like technology, infrastructure, or consumption. Such funds exploit potential growth in a particular sector. Thematic funds can prove to be very high-growth potential investments but involve greater risks as they are generally highly concentrated.
Sector Funds
Sector funds focus on specific industries within the economy, such as banking, pharmaceuticals, or energy. They tend to benefit from the growth potential of that specific sector. Less diversified than equity funds, sector funds are always at an elevated level of risk relative to other diversified equity funds.
What is the Difference Between Portfolio Management Services and Mutual Funds?
The following table portrays the difference between PMS and mutual funds:
| Parameters | Portfolio Management Services | Mutual Funds |
| Target Audience | Primarily aimed at high-net-worth individuals (HNIs) seeking personalised investment solutions. | Caters to a broader investor base, including retail investors, HNIs, and institutional investors. |
| Minimum Investment | Requires a substantial initial investment, typically starting at ₹50 lakhs. | Offers accessibility with significantly lower minimum investment amounts, even starting as low as ₹100 through Systematic Investment Plans (SIPs). |
| Management Style | Portfolios are actively managed, with a focus on dynamic adjustments based on market conditions and individual client needs. | It can be actively managed (e.g., Equity Linked Savings Schemes – ELSS) or passively managed (e.g., index funds), depending on the fund’s objective. |
| Customisation | Provides highly customised portfolios designed to align with each investor’s specific financial goals, risk tolerance, and investment preferences. | Offers more generalised portfolios that follow a predefined investment strategy, making them suitable for a larger group of investors but with less personalisation |
| Fees | Fees are based on both portfolio management and performance, potentially including profit-sharing arrangements. | Incurs comparatively lower fees in the form of expense ratios and sometimes exit loads upon redemption. |
| Investor Control | In non-discretionary PMS, investors retain full control by making the final investment decisions based on the portfolio manager’s advice. | Fund managers make investment decisions on behalf of investors, providing no direct control over specific securities within the portfolio. |
Which is Better: Mutual Funds vs Portfolio Management Services?
The choice between mutual funds vs PMS hinges on investment capital, risk appetite, and financial objectives.
PMS is meant for ultra-high-net-worth buyers in search of individual strategies, direct security ownership, and higher risk tolerance that investment portfolios are expected to generate. The PMS market holds concentrated positions in active management, potentially leading to higher investment returns. This kind of service usually requires a minimum investment of ₹50 lakhs.
On the other hand, mutual funds ideally serve retail investors with a focus on diversification, simplicity, and lower costs in exchange for a moderate amount of risk. These are a much cheaper alternative, with standard expense ratios for equity funds running between 1% and 2.25%.
Conservative investors tend to find mutual funds less risky and cost-efficient, whereas more aggressive investors with larger capital could benefit from personalisation through PMS.
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