Portfolio Management Services (PMS) vs Mutual Funds

Many investors in India often debate between Portfolio Management Services (PMS) and Mutual Funds. Both have their advantages and serve different needs. 

This blog will explain PMS and Mutual Funds, compare their performance, and help you decide which suits your investment goals. By the end, you’ll clearly understand the differences and know which investment option is right for you.

What is PMS?

PMS stands for Portfolio Management Services. It is a type of investment service where a professional manages your investments. Think of it like having a personal financial advisor who handles your money and makes decisions based on your goals and risk tolerance.

In PMS, your money is invested in various assets like stocks, bonds, and other securities. The manager creates a customised portfolio to maximise returns while managing risk. This service is more personalised than other investment options because the portfolio is tailored to your needs and preferences.

There are different types of PMS, including discretionary, non-discretionary, and advisory services. In discretionary PMS, the manager makes all the investment decisions without your approval for each transaction. 

The manager provides recommendations in non-discretionary PMS, but you make the final decision. Advisory PMS offers guidance and advice, but you handle the actual investments.

PMS is typically suited for high-net-worth individuals because it requires a higher minimum investment than mutual funds. It is ideal for personalised attention and a tailored investment strategy. 

Using PMS, you can benefit from the expertise and experience of professional managers who aim to achieve the best possible returns on your investments.

What is a Mutual Fund?

A mutual fund pools money from multiple investors to invest in a range of assets like stocks, bonds, and other securities. These funds are overseen by seasoned professionals who base investment decisions on the fund’s objectives. The idea is to provide investors with diversified portfolios that help spread risk. 

Instead of buying individual stocks or bonds, you buy mutual fund shares. This way, you own a small part of an extensive and varied portfolio.

Equity funds focus on stocks, debt funds on bonds and other fixed-income securities, and balanced funds on both stocks and bonds.

Instead of buying individual stocks or bonds, you buy mutual fund shares. This way, you own a small part of an extensive and varied portfolio.

Mutual funds are of different types: equity, debt, and balanced funds. Equity funds focus on stocks, debt funds on bonds and other fixed-income securities, and balanced funds on both stocks and bonds.

Mutual funds are an easy and affordable investment. You don’t need a lot of money to start, and you benefit from the expertise of professional managers. They are also very flexible; you can invest a small amount regularly through Systematic Investment Plans (SIPs).

Differences Between PMS and Mutual Fund

Understand the overview of their fundamental differences in management style, investment amount, and customisation:

Management Style

In PMS, a professional manager creates and manages a unique investment portfolio just for you. They make decisions based on your specific financial goals and risk tolerance. It’s like having a personal financial advisor who focuses only on your money.

In mutual funds, your money is combined with money from many other investors. A professional manager then invests this pooled money in various assets. The investment decisions are made for the entire group of investors, not individually.

Investment Amount

PMS usually requires a larger initial investment, making it suitable for high-net-worth individuals who can afford to invest more.

Mutual funds are more accessible because you can start with less money. This makes them a good option for regular investors who want to begin investing with less money.

Customisation

The investment portfolio is customised with PMS to fit your specific needs and goals. The manager creates a unique mix of investments just for you.

Mutual funds offer standardised portfolios. This means the same mix of investments is applied to all investors in the fund. Everyone who invests in the same mutual fund gets the same portfolio.

PMS vs. Mutual Fund Performance Comparison

When comparing the past performance of PMS and mutual funds, PMS often shows higher returns. This is because PMS investments are managed individually and can exploit specific market opportunities. 

However, higher returns come with higher risks. Mutual funds, on the other hand, tend to have more stable and consistent returns over time because they spread investments across a wide range of assets.

With PMS, the potential for higher returns also means a higher risk. Since PMS portfolios are personalised and not pooled, they can be more volatile. If the manager makes good decisions, you can earn a lot. But if the decisions could be better, you might lose more.

Mutual funds are generally less risky. The pooled investment approach and diversification across many assets help reduce the impact of any one investment performing poorly.

This makes mutual funds safer for more cautious investors who prefer steady growth.

PMS Vs. Mutual Fund Returns

Looking at average returns over different periods, PMS usually shows higher returns than mutual funds. PMS managers can make specific investment choices tailored to individual needs and market opportunities. 

For example, a PMS might deliver higher returns over five years because of its personalised approach.

Mutual funds, on the other hand, offer more stable returns. They invest in a wide variety of assets, which helps manage risk and provide steady growth. Over the same five-year period, mutual funds might have lower returns compared to PMS, but they are generally more consistent.

Several factors influence the returns of both PMS and mutual funds:

Market Conditions

PMS and mutual funds are affected by ups and downs. Strong markets can boost returns, while weak markets can reduce them.

Management Skill

For PMS, the expertise and decisions of the portfolio manager play a crucial role. A skilled manager can significantly increase returns. In mutual funds, the performance also depends on the fund manager’s ability, but the impact is less pronounced due to the diversified nature of the investments.

Investment Choices

PMS can invest in various assets and quickly adjust based on market conditions. This flexibility can lead to higher returns. Mutual funds, however, follow a more structured approach, sticking to their specific investment objectives and strategies, which can limit rapid adjustments but provide stability.

Costs and Fees

PMS usually has higher fees due to personalised management, which can eat into returns. Mutual funds have lower costs, which helps retain more earnings.

Which One Should You Choose?

Choosing between PMS and mutual funds depends on your financial goals and risk tolerance. PMS might be better for you if you have a significant investment and want a personalised approach. PMS offers higher potential returns but comes with higher risks. 

On the other hand, if you prefer a more stable and accessible investment with lower minimum amounts, mutual funds are a good choice. They provide steady growth and are less risky due to diversification.

Consider your investment horizon as well. PMS might suit you if you want long-term growth and can withstand market fluctuations. Mutual funds offer flexibility and easy access to short-term and long-term goals. 

Conclusion 

Choosing between PMS and Mutual Funds depends on your financial goals and risk appetite. PMS offers personalised management but requires a higher investment, while Mutual Funds are more accessible and provide a diversified portfolio. Both have their own merits and potential for good returns. 

Assess your financial situation, understand the key differences, and choose the one that aligns with your objectives. With informed decision-making, you can achieve your investment goals effectively.