MFs vs PMS: Let corpus size and need for flexibility guide choice

In a pooled structure, your fate is tied to the collective behaviour of all investors. In a non-pooled one, your portfolio stands on its own

A few days ago I was at a friend’s wedding. As it happens sometimes in Indian weddings, the actual turnout far exceeded expectations. Some of the popular dishes ran out early. The chef, under pressure, had to quickly prepare a few alternatives using whatever ingredients were available, items that were easier and faster to prepare in large quantities. 

That moment reminded me of mutual funds (MFs) versus portfolio management services (PMS). In a pooled vehicle like a mutual fund, the fund manager — much like the chef — is sometimes forced to act based on the crowd’s behaviour. 

When investors consider building wealth, most of the discussion tends to revolve around which fund, stock, or manager to choose. But experienced investors know that what shapes long-term outcomes even more powerfully is asset allocation. 

But within an asset class, the type of vehicle you choose matters. For equities, two popular options, MFs and PMS, appear similar at first glance: Both involve a professional fund manager investing on your behalf, based on a defined style or strategy. But the structural difference between them is significant. MFs are pooled vehicles, while PMS accounts are non-pooled vehicles. Understanding this distinction is crucial. 

In an MF, investors’ contributions are pooled, forming a single scheme. The fund manager manages the pool in accordance with the scheme’s stated mandate. Investors don’t own stocks directly; they own units of the scheme, which reflect their proportionate share of the pool. 

The implication of this pooled structure is that your portfolio is tied to the behaviour of every other investor in the scheme. Heavy redemptions during downturns, or due to the scheme’s underperformance, can force the manager (like the chef who was forced to improvise) to sell holdings to meet withdrawals. 

The portfolio quality of even disciplined, long-term investors can be diluted because others choose to exit in panic. Each investor moves in lockstep with the crowd, whether they like it or not. 

PMS: The non-pooled approach 

In PMS, securities are bought directly in the investor’s name. Each investor has an individual portfolio, even if the strategy is similar across clients. 

The non-pooled structure offers two key advantages. First, your portfolio is insulated from the actions of other investors. If someone else exits suddenly, it doesn’t trigger forced selling in your account. 

Second, PMS offers greater flexibility at the point of entry or when making a top-up. In an MF, since it’s a pooled vehicle, any additional money you invest is allocated pro rata across the existing portfolio, regardless of whether certain stocks are over- or under-valued at that moment. In a PMS, the fund manager has the discretion to decide how your fresh inflows are deployed. They may avoid buying overvalued stocks and increase allocation to those that appear attractive. This ability to stagger or tailor entry can materially impact long-term outcomes. 

Both structures have their place. MFs offer scale, simplicity, liquidity, and tax efficiency, and are an excellent vehicle for disciplined SIP investing. 

PMS is better suited for larger portfolios with equity allocation of ₹3-5 crore. With the Securities and Exchange Board of India’s mandate of a ₹50 lakh minimum ticket size, one does not want to be over exposed to a single fund manager. 

PMS is better suited for investors who want exposure to high-risk, less liquid, small and microcap stocks, where insulation from herd flows is a must. 

Choosing between MFs and PMS is not about which is better. It’s about understanding the structural difference between the two. In a pooled structure, your fate is tied to the collective behaviour of all investors. In a non-pooled structure, your portfolio stands on its own. As with all investment decisions, the right choice depends on your corpus size, your need for flexibility, and your willingness to give a manager more discretion. What matters most is that you recognise the distinction and invest with eyes wide open. 

The writer is director of Circle Wealth Advisors, a Sebi-registered investment advisor;  X: @saurabhsmittal