By Rajnish Girdhar
Both PMS and Mutual Funds may look similar because on the face of it, they both do similar jobs – managing your fund and providing the best possible returns on them. However, there exist significant differences between the two. If one were to give an analogy when comparing mutual funds (MF) and portfolio management services (PMS), one could take the case of wanting to buy a bespoke, customised suit vs buying a ready-made suit at a retail shop. Sure, both are suits, but there are marked differences.
Ownership: In Mutual Funds, investors own units or shares of the fund, which represents their proportionate ownership of the fund’s assets. The fund’s management team is responsible for selecting and managing the underlying securities within the fund. Investors do not directly own the individual securities held by the fund but benefit from the collective performance of the fund’s portfolio. Shared ownership means that risks and rewards are both divided among the investors in the MF. In that aspect, investing in MFs is a low-risk, low-reward proposition when compared to investing in PMS.
On the other hand, Portfolio Management Services (PMS) provide a direct ownership structure. Investors in PMS have their own separate portfolios with ownership of the individual securities held within their portfolio. The PMS provider acts as an advisor or manager, assisting investors in making
investment decisions and executing trades. This direct ownership model allows PMS investors to have more control and visibility over the specific securities they own. Thus, bringing transparency to the level of price and quantities bought for them.
Customisation: A PMS creates portfolios tailored to individual investors or a select group, unlike MFs, which are designed for a broader audience. PMSs, being less regulated, offer several advantages. Investors can customise their portfolios by selecting specific sectors, capitalisation, and allocation according to their preferences in consultation with PMS or in accordance with the style bias of the Portfolio Manager. In addition, portfolio managers possess expertise in domestic and global markets, enabling them to make optimal decisions for each investor’s portfolio. This personalised approach and market knowledge differentiates PMSs from MFs, offering a more tailored investment experience. On the other hand, since MFs are regulated by SEBI on concentration at stock, sector and even capitalisation level, the fund manager does not have a lot of elbow room to exhibit their own style and is bound to play by the book.
Fees: PMSs charge management fees. Alongside this, there is either a fixed fee or a variable performance fee. There are also those PMS providers who charge only based on the performance made at the end of tenure, as agreed. This mostly works out to be a better fee structure, considering the fund manager has developed a skin in the game. Thus, the fees for each customer will be different when investors avail portfolio management services. However, this is not the case with Mutual Funds, where investors are charged at the same rate, which again are regulated so that there is substantial fairness across unitholders.
The exit loads again are an area where PMS offers flexibility and customisation at a client level. On the other hand, MFs being a pooled strategy need exit load to protect the interests of investors who decide to stay put even if a large investor exits from the fund.
Performance reporting and client experience: Since MFs are being a pooled strategy, the client experience of two different unit holders/investors, between two specific dates will be the same irrespective of their entry date and so will be their performance when reported. In PMS, this won’t be the case as the underlying will be different for two PMS Investors. In fact, two PMS Investors having invested on different dates will showcase different performances when calculated from January 2023 onwards. The reason, again, will be their underlying portfolios being different. PMS houses that don’t follow a model portfolio strategy while deploying money will have a variance in performance that eventually reduces when investors have stayed for long. Comparing this with the performance demonstrated in a factsheet will again be divergent as this is reported at the strategy level and not at the individual portfolio level, more popularly known as Composites.
From risk appetite to how much one is willing to spend to fees, taxation, and returns customisation options; there are differences between mutual funds and PMS at every step. Both platforms serve different purposes and have markedly different characteristics. To decide which route to take, investors should consider their investment goals and risk tolerance among other factors before making the right choice.
(Rajnish Girdhar, CEO, Karma Capital. Views expressed are the author’s own. Please consult your financial advisor before investing.)