Portfolio Management Service (PMS) vs Mutual Funds

Here are a few points regarding Portfolio Management Services (PMS) vs Mutual Funds: Which is better?:

Portfolio Management Service vs Mutual Funds: Which is better?

Portfolio Management Services (PMS) is an arrangement wherein a portfolio manager handles clients’ portfolios on their behalf. The portfolio manager possesses rich experience and is backed by a research team of professionals.

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The investment portfolio will be composed of varied asset classes like stocks, cash, fixed income, debt, structured products and other individual securities. It is managed by a professional money manager who functions as per the specific investment objectives of the client.

There are two parties to a PMS contract, i.e. PMS Provider and PMS Investor.

PMS Provider is the SEBI registered investment advisor who offers portfolio management services. PMS Provider, in India, is usually the asset management companies (AMCs) and brokerage houses.

PMS Investor belongs to the niche segment of entities like institutions and high net-worth individuals. The investors are interested in taking intensive exposure to equity and structured products with the aim of wealth accumulation. For this, they prefer personalized investment solutions rendered by the PMS Provider.

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Types of Portfolio Management Services

PMS can be discretionary, non-discretionary or advisory.

In Discretionary PMS, your portfolio is entirely controlled by the portfolio manager. The decision regarding where to invest & at what time remains at his discretion.

Non-discretionary PMS is the somewhat decentralized arrangement. In this, you decide upon the choice and timing of investment. The portfolio manager only executes the trade after taking your consent.

Advisory PMS is the opposite of the above. In this, the portfolio manager works in an advisory capacity. He only suggests the lucrative investment ideas. The final execution of trade rests with you (the investor).

In India, you will find most of the PMS Providers offering Discretionary Services compared to the other two.

PMS vs Mutual Funds: the contrast

On the face, PMS and Mutual Funds may look similar. The presence of a portfolio manager taking care of a diversified portfolio is a standard feature in both of them.

However, his actions are interpreted differently in each one of them. It, in turn, will impact your tax incidence and the take-home returns.

You can start investing in mutual funds with a nominal amount of as less as Rs 500. However, the minimum investment in case of a PMS is Rs 25 lakh by way of either stocks or cash.

The units allotted by the fund manager represent your ownership in the underlying asset of the mutual fund scheme. In PMS, on the contrary, you authorise the portfolio manager to trade in stocks from your Demat account.

Thus, when the fund manager buys & sells stocks of mutual fund scheme, your books of accounts remain unaffected. But, in PMS, trades conducted by portfolio manager reflect in your Demat account.

It, in turn, affects your tax incidence by way capital gains on redemptions; and the related brokerage also goes out from your pocket.

How a PMS works?

Unlike a generic mutual fund scheme, each PMS account would be unique. It will differ based on the time of entry, amount of investment, redemptions/purchase and overall market situation.

The PMS Provider will have a model portfolio which can be tailored to suit your financial goals.

Suppose the PMS provider has a standard portfolio of large cap and small cap respectively. But you want similar exposure in both; so your portfolio will be adjusted accordingly. PMS isn’t bound by exposure limitations like mutual funds.

The concept of NAV doesn’t hold good for PMS. However, you will receive your portfolio valuation at frequent intervals from the portfolio manager.

Additionally, there will be regular interaction between you and your PMS Provider depending on the size of your portfolio.

Also read: Mutual funds: Direct plans vs. regular plans

Structure of Fees

The structure of charges in a PMS setup can be much more complicated than a mutual fund. It may differ from one PMS to another. Both the parties need to decide on the following charges at the beginning of investment:

1.Entry Load

An entry load may be charged when you are entering a PMS contract. Most of the PMS in India have removed the entry load except a few fund houses. Before availing the services of any fund house, make sure you touch upon these points.

2. Management Charges

Each PMS scheme would charge Fund Management charges of around 1% to 3% depending on the internal policy of the PMS provider. Usually, fund management charges are levied on a quarterly basis on the PMS account.

3.Profit Sharing

Apart from the fees, PMS schemes may have profit sharing arrangements. In this, the PMS provider may retain a percentage share of the profits if the stipulated return generated is above the threshold.

Consider the fee structure of a PMS to be 2%+20%. Here, the PMS will charge a fixed fee of 2% and 20% share in return if it touched a threshold say 15%.

Hence, if the portfolio earned a return of 30%, then the fees charged by the provider will be [2%+{(30%-15%)*20%}]

As the trades are conducted through your Demat account, you may be subject to additional charges like custodian fee, Demat account opening charges, audit charges and brokerage.

Due to differences in every PMS, the amount of fees charged may vary. Hence, it would be beneficial for you to examine the charges of the scheme beforehand.

Limitations of PMS

Portfolio Management Service vs Mutual Funds: Which is better?

Tax Burden

PMS isn’t as tax-efficient as mutual funds. Mutual Funds are registered as a tax-exempt trust structure. But PMS portfolios have the same tax implications as investing directly in stocks.

Capital gains on equities are tax exempt only when these are held for more than 1 year. However, if the portfolio manager indulges in frequent short-term trading, it might increase your tax liability.

Hence, whatever returns you earn would have to be paid away via taxes.

Get your financial plan done by a Registered Investment Advisor. Its FREE, but spots are limited… Register now.

Low performance

Most of the PMS hasn’t performed as per their claims. In fact, some of those failed to beat the benchmark during bull runs; and lost more than the benchmark during bear runs.

Considering their exorbitant expense ratios, these seemed more in favour of the AMC rather than the investor.

You would be better off investing in low-cost index funds which were found to give higher returns than PMS most of the time.

Liquidity Issues

You might have come across the concept of lock-in period in mutual fund tax saving schemes. But, apart from those, a mutual fund, in general, doesn’t have a lock-in period.

There’s ample liquidity available to meet your financial demand during an emergency.

However, PMS isn’t as liquid as mutual funds. Usually, there is a lock-in period ranging between 1 to 5 years in PMS.

So, you can’t think of liquidating your PMS investments whenever you want.

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Final Words

Before investing in a PMS, examine all the relevant factors to prevent any ambiguities. If you find it too expensive vis-a-vis returns, then you would be better off with mutual funds.

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