Power Of Attorney : Written legal authority given by one person to another person to act on the principal's behalf can remain in force only so long after principle is aside.
Portfolio : A collection of investments owned by the same individual or organization.
Will : legal declaration of how a person wish his/her possession to be disposed after their death
Fund : An amount of money saved or collected for a particular purpose
Return : Profit or loss derived from an investment
Investor : An investor is any party that makes an investment.
Capital Gain : Increase in the value of the asset, so you will get the gain only if you sell that asset..
A set of assets which an investor holds. This may contain equities, mutual funds, insurance and other cash equivalents.
Wealth is accumulation of resources or as on date value of assets a person own. Commonly Net worth is the measure of Wealth of an individual.
Liquidity or marketability is the ability to convert an asset in to cash quickly.
Can you carry a Telephone in your pocket while shopping?
NO. Even if you are not shopping, you cannot carry a telephone in your pocket.
That is why a Cellphone was discovered. But the objective of a telephone and a cellphone are basically the same.
Communicating to a person immediately over a distance is the purpose of both the devices.
Yet they have their own unique traits and features. Which makes them differ from each other while serving a common purpose.
A portfolio management service and a Mutual fund are both intended to produce satisfying returns to the investor.
The common action in both the avenues is that you can indirectly invest in equity and debt through a fund manager.
A mutual fund company creates a pool of investment through a diversified portfolio and a fund manager invests the collected money conservatively to produce a capital gain. Portfolio management service offers a personalized investment portfolio and some special facilities to an individual investor with more aggressive equity investment than conservative investments.
A mutual fund company announces an NFO to collect money from the investors and invests the money in stocks, bonds, and other investments by creating a portfolio. The Mutual Fund Company charges an annual fee or expense fee like a commission.
Your money will be handled by professional fund managers who make decisions in the best interest of the investors to generate returns. The services provided by your fund manager includes choosing the right stock, diversification, and professional fund management service. Capital gains or income generated through mutual funds are taxable at various standards.
Mutual funds are primarily structured into Open-ended and Closed-ended funds. They are further classified based on the kind of underlying securities they have mainly targeted for their portfolios as
- Equity funds
- Fixed income funds
- Money market funds
- Hybrid funds
A mutual fund is a mass investment vehicle which aims to produce reasonable returns by well-diversified asset allocation which naturally makes it a conservative investment choice.
Portfolio Management Service
PMS is a service of investing, monitoring and revamping a concentrated set of securities. It is actively managed by professional portfolio managers with freedom of customizing the portfolio to meet the investor’s needs.
Portfolio management service is generally targeted on High Net-Worth Individuals (HNI) or in simple terms wealthy investors. A high net worth individual is a person who holds more than Rs 2 Crore of investible cash. Portfolio Management Service is categorised into two basic structures as, Discretionary and Non-discretionary PMS
- Discretionary: The portfolio manager is provided with a Power of attorney for the investor with which he manages the client’s portfolio by taking decision discreetly.
Non-discretionary: The portfolio manager cannot make buy/sell decisions on his own discretion, he has to consult with the client before making a transaction. It is also a rare product in the Indian market due to the complexities in its operations. Getting an acknowledgement from the investor for every single transaction is a hectic job for the portfolio managers and the investors too. Thus many investment companies do not provide Non-discretionary Portfolio management service.
There are several Investment Management companies and Financial Planners who offer Portfolio Management Service at different prices. PMS aims to produce more returns and thus makes an aggressive investment with active fund management. Needless to say, more aggression means more profit or more loss.
Key Variance Factors
I hope you got an overview of what these services do, and now we’ll take a walk into their characteristics one by one, and compare them along the way to find the winner.
Here are the key characteristics of both the platforms you need to see while investing – minimum investment, ease of investment, charges, tax, transparency, and liquidity which we will look ahead.
- Mutual fund’s minimum investment is Rs 500 only. Thus exposes mutual funds to a huge number of affordable mass.
- Portfolio Management Service has set the minimum investment as 25 Lakh. According to the World Wealth Report of 2018, there are around 2,63,300 HNI’s in India. It is not affordable by the common population of our country and thus makes it a platform for the elite class.
What you need to see: If you can afford to invest any amount from Rs 500 to Rs 25 Lakh then mutual fund investment is your optimal choice as per the minimum investment criteria. Holding 25 Lakh of liquid cash will make you an eligible candidate for PMS but from a financial planners’ view, it is not the right choice. Because PMS is an aggressive equity investment which means your investment is subjected to high risk.
Thus, an investor who is ready to invest 5 crores in equity is advised to invest 4.5 crores in mutual funds and the remaining 50 Lakh (10% of the total equity investments) in a PMS. But do not judge PMS as a better investment vehicle because of the investment size. If size really mattered, the Elephant would be the king of the jungle.
Ease of investment
- Mutual funds offer two ways to invest, Offline and Online. Offline investment requires a regular KYC and some paper works. Online portals have no paper works and are more simple to enrol, exit and check the numbers in between.
- This high-end product has got heavy paper works to do when beginning to invest. Every scheme and feature has to be mentioned and signed individually. You must give a power of attorney to the portfolio manager to buy/sell shares on your behalf.
What you need to see: Obviously mutual funds is the easiest way of investment available. PMS has a complex working procedure since it demands your signature i.e, physical presence. It becomes more complicated if you are an NRI – as your portfolio manager might require your signature in case of an unfortunate situation and its definitely going to be a tricky puzzle for you.
If you have the time and patience to complete all the paper works then you can go ahead with PMS, if not then mutual funds are the choice.
- Most of the mutual funds follow a flat fee concept. SEBI has created norms on TER (Total Expense Ratio) for mutual fund companies for the welfare of investors. The fee charged is a maximum of 2.5% of the AUM for equity mutual fund and a maximum of 2.25% of the AUM for debt mutual fund.
- Portfolio Management Service is an aggressive investment which is supposed to have specialized charges mentioned below.
Entry load might be charged during the time of buying the Portfolio Management Service. It may vary from 2% to 3% depending on the PMS provider.
Management charge is charged to the investor by every Portfolio Management Service provider for managing your funds on your behalf. It varies from 1 % to 3% which is again dependent on the fund manager and PMS provider.
Profit sharing or ‘Performance fee’ is charged by some of the PMS providers. In this layout, a percentage of the amount is charged as performance fee over the specified return.
Exit load is charged if you redeem your PMS before the lock-in period (minimum investment period) mentioned in the agreement.
PMS seems to impose some additional charges which are not incurred in mutual funds.
But, is the amount of service charge worth it? – the answer might be dependent. Since PMS is an aggressive equity investment, it has the potential to produce more return than mutual funds, but only on a judgemental basis.
What you need to see: The overall service charges of a PMS is slightly higher than the Mutual funds. But in a favourable market situation, the returns in PMS could be way higher than Mutual funds. But what you need to see is the actual return, i.e., post-expense return. You should compare the post-expense returns while investing.
Mutual funds tax is calculated only at the time of exiting the scheme.
Short Term / Long Term Capital gains tax is applicable to mutual funds based on holding period of units. The transactions made by the fund manager during the holding period is not subjected to tax.
Equity funds have Short Term Capital Gain Tax of 15% for holdings less than 1 year and the Long Term Capital Gain Tax is 10% for holdings more than 1 year which exceeds the gain of 1 Lakh.
For non-equity funds, STCG is clubbed with your income and taxed as per slab and LTCG (> 3 years) tax is 20% with indexation option.
In a Portfolio Management Service, all the shares are directly in the name of the investor and only a power of attorney is given to the Portfolio Manager. Thus every time your fund manager makes changes to the portfolio by selling/buying shares, tax is incurred for the transaction.
With respect to the capital gain, Short Term Capital Gain tax of 15% is levied on the sale of listed securities within 1 year.
Whereas, Long Term Capital Gains on equity is 10%. It is levied on the sale of listed securities exceeding the gain of Rs 1 Lakh. A cumulative sum of tax is prepared at the end of every year.
What you need to see: If you have an idea to choose a PMS then you must know the post-tax returns before investing. Most of the times, calculating tax for PMS is a hectic job, and you will need the help of a Chartered Accountant or a Tax consultant. Don’t worry, even Einstien admits that, “The hardest thing in the world to understand is the income tax”.
SEBI (Securities & Exchange Board of India) is the regulator of all the securities and exchanges done in the stock market. It margins the service charge and other charges imposed on investors by the AMC’s. To ensure uniformity, SEBI has categorized small, mid, and large-cap clearly. Schemes are categorized into five groups – equity, debt, hybrid, solution-oriented, and others.
SEBI also provides a maximum limit for fund exposure of a scheme to a particular security. A mutual fund scheme’s portfolio cannot hold more than 10% of particular listed shares in equity funds. If the shares are unlisted, then the limit is 5% since the unlisted shares have liquidity risk.
SEBI’s regulations of the percentage of service charge are not applicable in a Portfolio Management Service. All the service charge ratios included in the PMS are decided by the PMS provider.
But it is also an advantage from one perspective. Since SEBI cannot regulate the fund exposure limit in a PMS, the portfolio manager can reduce diversification and invest in certain specific concentrated high-performance shares which could possibly produce more returns.
What you need to see: Of course, “Transparency is a measure of Authenticity”. Mutual funds are more transparent than PMS. But that doesn’t mean PMS is not an authentic investment. If you prefer transparency then mutual funds are your choice. If you can digest the opaque nature of PMS for the returns then PMS may be optimal for you.
Analyzing previous performance records is the easiest way of predicting future performance. So if you wish to forecast the performance of a mutual fund scheme, you can use the Alpha & Beta standards for evaluating the performance of a Mutual fund scheme. You can find a more detailed article about choosing the right mutual fund scheme here
How to Select the Best Mutual Funds to Buy
2. How to Choose the right mutual fund option?
3. Two ways to select a better rewarding mutual fund
Some of the important criteria to consider while analyzing a mutual fund scheme are,
- The time frame of the scheme
- Fund performance (risk-adjusted return, past performance, and consistency)
- Fund management team
- Expense ratio
It is very complicated to compare the performance of a PMS since the layout of a PMS provided to you will be different from the layout of PMS of another investor. You could have prescribed to avoid investing in the securities of your company (employer) since you hold an ESOP. But another investor would have recommended investing in that particular company. So you cannot compare specific PMS products. But you can take some criteria into consideration like,
- Duration of service of Portfolio Manager
- Consistency of the PMS provider
- Overall expense ratio
There are multiple factors that may vary between one PMS vehicle and the other. The bottom line is that they do not support comparison between each other.
What you need to see: Only the particular PMS scheme cannot be analyzed properly. You can collect data from the model portfolio of the PMS and evaluate its performance. But the evaluation of PMS will not be efficient as evaluation of Mutual fund. “The analysis of data will not by itself produce new ideas, but finds the idea that works best”.
Before arriving at the decision to choose between the two we need to have a look at your personal financial portfolio. A personal portfolio says all about the assets you own and your owes.
With all the interpreted data, to choose the portfolio management service, there are certain things you need to consider from your personal financial portfolio. PMS is optimal for investors those who
- Are considered as High Net-Worth Individuals.
- Holds an existing portfolio which is now grown bigger and thus became difficult to be managed by the individual investor.
- Have more than enough exposure to Mutual funds and willing to go for an aggressive equity investment.
My suggestion is that Mutual Fund is a mass investment vehicle and thus the best choice for anyone who is looking for a conservative investment. However, choosing the right mutual fund scheme is crucial. PMS is an elite investment platform which is suitable for a wealthy investor.
You can use Mutual funds as a ladder to climb the top of the wealth pyramid and make a safe seat for yourself and then pick a PMS that can conquer for you.