Managing own portfolio is not easy for a retail investor with little expertise or time to take the right call. Although investors would prefer to have a larger say in their investment decision-making, the chances are that it would ensue losses unless investor has a substantive knowledge and expertise of finance.
“Sound investment decision requires deep understanding of overall market, sector and particularly, of the company as well as the asset class you are investing into. More than merely seeking a financial advice, long term investment discipline calls for investors to stay engaged with a portfolio manager or a fund house on a regular basis,” says Deepak Aggarwal, a Delhi-based chartered accountant and financial advisor.
This leads to the need to map investments to a portfolio manager in a bid to maximise the returns and minimise the risk by diversifying the portfolio across multiple asset classes.
There are multiple options to manage your funds.
Let us understand in what situation an investor is likely to choose one over the other.
There is no doubt that mutual funds are far more popular and sought-after schemes to invest via professional fund managers who take diversified risk and ensure your money – pooled in with others’ – is safe and secure. Overall, the mutual fund industry saw a net inflow of ₹72,846 crore last month alone. The number of SIP accounts stood at an all-time high in April at 5.39 crore.
On the other hand, portfolio management service is meant for those investors who are more serious and importantly, who have deeper pockets.
In this case, you get a portfolio manager – a qualified professional, of course, who takes decisions on your behalf. Portfolio management service (PMS) is given by professional managers to informed investors and can be tailored to meet specific investment objectives.
They invest in the securities via focused portfolios. So, an investor’s account will be kept separate and operated according to their investment discretion, while the investment manager takes investment calls in alignment with the investor’s goals.
Greater flexibility
One of the key differences is that in case of PMS, you have greater flexibility and decision-making authority, unlike in case of mutual fund where investors don't have any say in the investment decisions.
Mutual funds are subject to tighter regulatory control that makes PMS a far more flexible investment tool for those investors who want to have a larger say.
But there is a deterrent in the PMS i.e., the minimum investment of ₹50 lakh that makes the option worthwhile only for the super wealthy.
On the other hand, minimum threshold for a mutual fund investment can be as low as ₹500 a month via SIP route. Because of their popularity, there are a barrage of fund schemes and investors can choose any or several of them to align with their investment goals.
Tax treatment
Another key factor of distinction is the tax treatment in each of the two scenarios. Whatever transaction a mutual fund carries out is not liable to income tax under investor's head. An investor becomes liable to income tax only when they redeem some of the mutual fund units.
On the other hand, every transaction a PMS carries out is seen as an investor's transaction and they are liable to tax.
So, it is clear from the above discussion that a relatively wealthier investor with investible corpus of ₹50 lakh who want to have a larger say in their investment decisions can choose a portfolio management service, whereas someone with a smaller pocket and lower risk appetite can choose a mutual fund over PMS.