Mutual funds vs portfolio management services: What's right for you?

PMS has higher costs due to 2-3% management fees plus performance fees, reducing returns; mutual funds have only management fees

Investors may choose between mutual funds and portfolio management services (PMS) for their needs. Both options have advantages and drawbacks, making it essential to understand which might be the apt fit for individual investors. 

“Mutual Funds follow a pooled investment approach, offering diversification, professional management, and lower entry barriers. While PMS provides a personalised investment strategy with direct stock ownership and greater flexibility, suited for those who seek active portfolio management. PMS is best for HNIs who prefer tailored strategies and can commit a minimum of Rs 50 lakh. Choosing between Mutual Funds (MFs) and Portfolio Management Services (PMS) depends on your financial goals, risk appetite, and investment preferences,” Spokesperson of a portfolio management services said.

 

  Features of a MF & PMS.

 

Feature	Mutual Funds	Portfolio Management Services (PMS)
Structure	Pooled investment fund	Personalized, individual portfolio
Management	Professional, fund manager-driven	Active, personalized portfolio management
Investment Minimum	Low ( Rs 500 to Rs 5,000)	High (minimum INR 50 lakhs)
Fees	Generally mutual funds are less costlier compared to PMSs
Liquidity	High (generally, can redeem anytime)	Moderate (depends on portfolio's composition)
Risk	Diversified risk	Higher risk, more concentrated investments
Return Potential	Moderate, consistent returns	Higher potential returns with more risk
Taxation	Capital gains tax on mutual fund units	Capital gains tax on direct investments

 

Difference between MF and PMS

 

Both are managed by professionals and offer a diversified portfolio, but the difference lies in how they’re structured and their costs.

 

Mutual funds are more accessible and flexible as an investment option. They typically hold a broader mix of stocks, often around 60, making them inherently more diversified. They’re also heavily regulated, which adds a layer of security for investors. A PMS investment operates with a smaller basket, usually of 30-50 stocks, and requires a minimum investment of Rs 50 lakh, making it suitable mostly for the ultra-high net worth individuals.

 

There are around 43 asset management companies, each offering multiple fund categories, and hence, you have over 700 mutual fund schemes to choose from. PMS, on the other hand, limits you to just one portfolio per investment, making diversification much harder.

 

Shweta Rajani, head - mutual funds at Anand Rathi Wealth, explained factors investors should consider before choosing between MFs and PMS.

 

Diversification: Mutual funds offer a much larger basket of stocks and securities and thus provide investors with much more diversification benefits. PMS has much more concentration risk, with the basket of securities being smaller.

 

Investors should keep in mind that costs are much higher in PMS due to management fees of 2-3 per cent and performance fees separately. This eats into the return generated. Mutual funds usually only have management fees, and a lower expense ratio.

 

Another thing to keep in mind for investors is the tax implications. In PMS, every transaction made by the portfolio manager has tax implications for the investor since trades happen through their demat account. But in mutual funds, taxation happens at the trust level, which makes it far more efficient.

 

When considering the risk-adjusted returns, an investor should choose mutual funds over a PMS, as a well-diversified portfolio will have higher returns than that of a concentrated one. Investors should diversify across different funds to optimize returns while managing risk.

 

“There is no ideal investment amount — it depends on an individual’s overall portfolio, liquidity needs, and long-term financial vision. The key to wealth creation lies in making informed, strategic decisions that align with your financial aspirations,” the spokesperson said.