There are various ways to invest in equities – directly investing in stocks, through mutual funds, through Portfolio Management Services (PMS) and others. Direct stock investing needs experience and expertise of the investors while investment through mutual funds and PMS involve active fund management by professional fund managers.
Now you must be wondering what is PMS?
PMS is an investment service in which the investors get tailored portfolio according to their goals, risk appetite and time horizon. In PMS, the investor owns the shares and bonds in their name while a mutual fund investor own unit of a MF scheme.
There are two types of PMSs: one is called discretionary and other is non-discretionary. Discretionary PMS means that the portfolio manager decides which stocks and bonds to buy and sell. While, in non-discretionary PMS the portfolio manager recommends which stocks and bonds to buy and sell. The investor takes the final decision. Discretionary PMS are more popular and are named as managing equity-oriented portfolios.
Aspects of PMS and mutual funds one needs to know before choosing one between the two:
1. Minimum portfolio size
Investors are required to have a minimum portfolio size of Rs 50 lakhs if they want to invest in equities through PMS. There are also some PMS providers who might set a higher threshold. While in case of mutual funds, one can start investing with as low as Rs 500 through Systematic Investment Plan (SIP)
2. Diversification opportunity
In case of mutual funds, they offer debt funds and hybrid mutual funds which has a mix of both equity as well as debt, offering more diversification opportunities for the investors.
3. Cost structure
PMS provides usually charge upto 2%p.a., charges payable quarterly on the portfolio value or it is based on the incentive-based approach in which there are it is profit sharing.In the case of mutual funds, fund houses are governed by SEBI on how much they can charge on schemes. As the AUM of the fund rises, the expense ratio keeps reducing. You can see in the table below is the expense ratio structure. Maximum for equity funds is 2.25% while for debt funds it is 2%.
*Maximum TER as a percentage of daily net assets
|Assets Under Management (AUM)||TER for equity funds||TER for debt funds|
|On the first Rs 500 crores||2.25%||2.00%|
|On the next Rs 250 crores||2.00%||1.75%|
|On the next Rs 1250 crores||1.75%||1.50%|
|On the next Rs 3000 crores||1.60%||1.35%|
|On the next Rs 5000 crores||1.50%||1.25%|
|On the next Rs 40000 crores||TER reduction of 0.05% for every increase of Rs 5000 crores of daily net assets or part there of||TER reduction of 0.05% for every increase of Rs 5000 crores of daily net assets or part there of|
4. Tax methodology
Tax on mutual funds investments is related to the type of the fund held and duration for which the fund is held for. For example: equity funds have Long Term Capital Gains (LTCG) tax at 10% if you remain invested for more than 1 year. While, the LTCG tax is 20% in debt funds after indexation, if the fund is held for more than 36 months. However, the fund manager can sell and buy stocks many times over without any tax implication whatsoever for its investors
On the other hand, PMS has a different tax structure. Taxes will be applied on sale or purchase of stocks in the portfolio as the stocks are directly owned by the investors.
[Also read: Direct Equity or Mutual Funds]
Unlike mutual funds, a PMS is not compelled by any stated objective or stringent rules. It offers flexibility to the portfolio manager in terms of how much s/he wants to invest in a particular stock. If the situation arises where he has to maintain a 100% cash position he is free to do so. This is a good protection against market crashes like the one happened in 2008. In mutual funds, there are lot of regulations in place such as a single stock cannot be more than 10% of an equity fund portfolio.
6. Accountability of investment
PMS managers are directly answerable to the their investor clients while mutual fund managers have no such obligations.
Tarrakki offers PMS services as well as mutual fund services on the tarrakki app.
Check out tarrakki’s model portfolio now live on smallcase: https://www.smallcase.com/smallcase/tarrakki_high-growth-at-reasonable-valuations-TARMO_0001
So now as you have difference between PMS and mutual funds, you should take good amount of time to understand the market and your needs and then take a call accordingly.
Tarrakki – Towards prosperity