Portfolio Management Services (PMS) and mutual funds are two of the most popular stock market investment methods

New Delhi (India), July 15: The most significant difference is the minimum investment required to invest in each. While SEBI has regulated pms service companies not to accept investments lower than Rs. 50 lakh, mutual funds allow investments as low as Rs. 100.

Despite being ‘investments for the wealthy’, PMSes are at a disadvantage compared to mutual funds. And we are not referring to specific aspects like performance (returns) they deliver, but rather structural differences.

It is important to note that PMSes invest in equity or stocks almost exclusively (with exceptions like the mutual fund based PMS operated by Dezerv).

The following paragraphs essentially compare the structural differences between direct equity PMSes and equity mutual funds.

Tax advantage
The biggest advantage mutual funds have over PMSes is in terms of taxation.

Mutual funds are pass-through entities, meaning that when the mutual fund manager buys and sells any stocks, the profits generated are tax-free. Neither the mutual fund company nor you (the investor) has to pay taxes on such transactions.

As a mutual fund investor, you pay tax only when you withdraw money from a mutual fund and are profitable at the time of withdrawal.

PMSes, or stock portfolios, are at a disadvantage because the stocks are held under your name. You must pay applicable tax when a stock held in your name is sold for a profit or the stocks pay dividends.

Frequent buying and selling in a PMS will result in taxation, and the frequent outflows slow down the compounding process. However, compounding will not be affected in the case of frequent buying and selling by your mutual fund manager.

This advantage can be enjoyed even by PMS strategies that construct client portfolios using mutual funds.

Dezerv is one of the few PMS providers in India that offers mutual fund based PMS instead of stock based PMS. So investors of Dezerv PMS enjoy all the mutual fund benefits discussed in this article.

Institutional robustness
Mutual funds are institutions with processes, protocols and values. This makes them robust and immune to key personnel (like fund manager and CIO - Chief Investment Officer) departures.

Moreover, the robustness imparts the rigour required for consistently picking stocks that perform at the scale of thousands of crores of AUM (assets under management).

When it comes to PMSes, this institutional robustness is absent in most cases because of how small and new PMSes are. Only a few PMSes that are either old or as large as smaller mutual fund houses can claim institutional robustness.

This exposes PMSes to risks like lack of consistency and key personnel risk. If these risks materialize, it is investors like you who lose.

Ease of diversification
PMS managers are biased toward an investment style or strategy like value investing.

This means if you invest Rs. 50 lakh in a PMS (the minimum amount), it will be investing in 20-30 stocks using a single investment approach. If you have just Rs. 50 lakh worth of investments invested in a single PMS strategy, you are exposed to concentration risk.

In contrast, you can invest an amount as low as Rs. 500 in a mutual fund scheme. As many as 10 equity funds categories are available across investment styles and strategies like mid cap funds, value funds, index funds etc.

So, creating a mutual fund portfolio that is well diversified is possible with a few thousand rupees, significantly lower than Rs. 50 lakh.

Equity mutual funds have structural advantages in taxation, institutional robustness and diversification over stock-based PMSes.

However, portfolio management services are more personal and can help you plan financial goals and create wealth.

Portfolio management services like Dezerv construct client portfolios using mutual funds to offer the best of equity mutual funds (advantages we discussed) and PMS (personalization).