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 exactly a Cellphone was discovered. But the basic 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 differentiates 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.
To understand the key variance in their features we need a clear understanding of the basic operations of Mutual funds and Portfolio Management Service.
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
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.
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 categorized into two basic structures as, Discretionary and Non-discretionary PMS
Discretionary:
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 acknowledgment 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.
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.
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.
What you need to see: Obviously mutual fund 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.
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 favorable 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.
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.
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 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.
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.
1. 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,
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”.
Generally, to coin something as ‘the best’ we need some standards to measure its quality. Unlike Mutual funds, a Portfolio Management Service is highly customized across various requirements of the investor and thus the only reliable standard appears to be the ‘returns’. Investors can check the return performance of a PMS provider by the SEBI’s Portfolio Manager Monthly Report to find the Best PMS in India.
But the Report of the SEBI Working Group on Portfolio Managers published on 11th July 2019 says that the monthly return reports showcased by most of the PMS providers appear to be untrustworthy.
The SEBI working group on PMS observed the practices & monthly reports of PMS providers and identifies a list of issues and provides recommendations to SEBI to impose more regulations on PMS providers.
The bottom line of the report is that the performance reported by the PMS providers to the existing clients, prospective clients, and SEBI are not upto the mark and often exaggerated or only partially accurate. Thus prospective clients cannot make a rational decision on choosing the right PMS provider due to non-standard performance reports.
Also, there are only a few regulations that govern the contents used in the propaganda to call in new clients for PMS. Along with this, there are other issues that are listed below in the report of the SEBI working group of PMS.
ii. Some of the PMS managers produce only model return reports instead of the actual return of a portfolio.
iii. Only selective well-performing portfolio returns are reported by PMS. Not the gross returns for all the portfolios.
iv. A standard method of calculating returns is not available for PMS. They use variable methods IRR, TWRR, simple average, etc.
v. Comparison of PMS returns to benchmark are not specified & changed randomly.
vi. Performance figures of portfolios existing more than 1 year are not given by PMS providers annually but given periodically (whenever performance is better).
vii. The PMS performance report is provided across different products with different strategies which do not allow SEBI/investor to evaluate the performance to any metrics.
viii. PMS Returns are inflated by annualizing partial and periodical returns.
ix. PMS Performance reports are generated by omitting unrealized losses and only considering realized gains.
x. Portfolio managers are ignoring withdrawn portfolios and thus making the report a survivor based performance report.
xi. PMS providers are not reporting the change of fund managers or change of strategy.
These are the major issues pointed out by the report of working people to SEBI. The group has also recommended some regulations to be enforced on PMS providers like raising the minimum investment criteria for Portfolio Management Service from ₹ 25 Lakh to ₹ 50 Lakh. A major recommendation from the working group is regarding the implementation of more regulations to the monthly report submitted by the PMS providers to SEBI.
The SEBI working group strongly intends to standardize the reporting requirements from upfront to trail model, like Mutual funds. This clearly denotes that Mutual funds stand as a well standardized and regulated platform of investment.
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.
Even after the interpretation of the report by SEBI working group, if you 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
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 to conquer more for you.
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