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Investors today have many options to invest their money that cater to their different financial goals, risk appetite, and investment strategies. Two of the popular long-term investment strategies at their disposal are portfolio management services (PMS) and mutual funds.
The essential question for most investors is to decide which is the better option for them. In this article, we deep dive into these two investment options – PMS vs mutual funds, and help you pick the right one for yourself.
While both options help you grow your wealth, they differ in several key aspects. Here is the detailed comparison of the two:
| Aspect | PMS | Mutual Funds |
| Investment Management | Actively managed and high flexibility to make changes in the portfolio. | The portfolio is standardized for all investors. |
| Minimum Investment | High minimum investment, typically starting at Rs 50 lakhs in India. | Low minimum investment requirement, often starting as low as Rs 500 or Rs 1,000. |
| Customization | Offers high customization with personalized investment strategies. Portfolios can be tailored for sector-specific, thematic, or goal-based investing. |
No customization; all investors in the same mutual fund scheme have the same portfolio. Investors must choose from pre-defined strategies based on the fund’s objective (e.g., equity, debt, balanced). |
| Fees and Charges | Higher fees due to active management, personalized services, and direct stock holding. Typically includes a fixed management fee (1-3%) and performance-based fee (10-20% of profits over a benchmark). Also includes transaction costs, brokerage, and custodian fees. |
Lower fees due to pooled structure and broader investor base. Charges include expense ratios (around 0.5% to 2.5%), which cover management, administrative, and operational expenses. Index funds and passive funds have even lower fees than actively managed mutual funds. |
It is tough to compare the PMS vs mutual funds returns since both have many sub-categories, and the performance of each varies considerably. However, overall, PMS has outperformed mutual funds. It is because of multiple reasons like customization, active management, and smaller fund sizes in PMS.
The returns in both investment options depends on below factors:
Below are some risks associated with
| Risk Factor | PMS (Portfolio Management Services) | Mutual Funds |
| Market Risk | PMS portfolios are highly exposed to market fluctuations since they typically consist of concentrated stock selections. | Mutual funds diversify investments across a broad range of securities (stocks, bonds, etc.), mitigating some market risk. |
| Concentration Risk | PMS portfolios often hold a smaller number of stocks, which can result in concentrated exposure to specific sectors or stocks. | Mutual funds typically hold a large basket of securities, spreading risk across multiple companies and sectors. Lower concentration risk due to broader diversification. |
| Managerial Risk | Since PMS is actively managed, the performance is highly dependent on the skills, experience, and decision-making of the portfolio manager. | Mutual funds are also managed by professional managers, but the diversification and regulation help reduce the impact of individual managerial decisions. |
| Regulatory Risk | PMS portfolios, though regulated, offer more flexibility and less stringent oversight compared to mutual funds. | Mutual funds are tightly regulated by SEBI (in India) and offer more transparency regarding holdings and management. |
Let us help you with parameters to consider while choosing the right option.
If you need liquidity, mutual funds are generally more liquid, especially open-ended schemes where you can buy or sell units on any business day. PMS tends to be less liquid due to concentrated holdings and the nature of customized portfolios.
Both PMS and mutual funds have their merits and are suitable for different types of investors. The choice between PMS and mutual funds ultimately depends on your investment goals, risk tolerance, and financial capacity. Before deciding, it is crucial to assess your financial situation, consult a financial advisor, and consider which option is best to meet your goals.