PMS Vs Mutual Funds Which is the Right Choice for You

These are the main characteristics of each platform you should be aware of when investing in

  • TAXATION

Taxes on mutual fund returns and investments vary depending on the type and length of the fund. The fund manager’s transactions during the holding period are exempt from tax. If you hold equity funds for longer than 12 months, the 10% Long-Term Capital Gains Tax (LTCG) will apply. After indexation, the LTCG tax on debt funds that are held for longer than 36 months is 20%. Mutual funds are subject to a tax that is only computed when the plan is ended.

PMS – All shares in a Portfolio Management Service are directly in the name and ownership of the investor. The Portfolio Manager receives a power to act as an agent. Each time your portfolio manager sells stock, gains and losses are assessed and taxed. Tax is not applied at redemption like mutual funds. It is applied at the transaction. It can be hard to calculate tax on PMS because it must be calculated separately per portfolio.

Capital gains are subject to a 15% capital gain tax if the securities are sold within one year.

The equity LTCG is 10%. It applies to the sale of securities that have a greater than Rs 1 lakh gain. A total tax amount is calculated each year at the end of each year.

You must look at the post tax returns first if you are thinking of investing in a PMS. A Chartered Accountant (or Tax Consultant) may be required to determine tax for PMS.

  • FLEXIBILITY

This is the one area where PMS performs better than mutual funds. While managing mutual funds, the fund manager cannot invest in any other asset categories than those specified by the scheme’s purpose. For example, equity mutual fund schemes can only invest in stocks.

With PMS, there are no such restrictions. Portfolio managers can create portfolios that include stocks, bonds and commodities. This will make it easier to create a diverse portfolio.

  • REGULATIONS

Mutual funds must follow SEBI (Securities Exchange Board of India’s) rules. SEBI strictly supervises mutual fund schemes and AMCs to protect investors and prevent wrongdoings.

PMS is, however, not as closely monitored. Although SEBI has increased the transparency standards for PMS, mutual fund are more tightly controlled regulatory-wise.

  1. Easy to invest – An MF investment is the easiest option. Because PMS requires you to sign it, the process can be complicated. This means that you must be present. NRIs may find it more challenging as your portfolio manager might require your signature. If you have the patience and time to do all the paperwork, PMS may be a good choice. Otherwise, mutual funds might be a better choice.
  2. The overall service fees for a PMS are slightly higher than mutual funds’. In a favorable market, however, PMS returns may be substantially higher than those of mutual funds. You should see the real return, which is the return after expenses. You should always compare post-expense returns when investing.
  • Transparency

MF – SEBI (Securities and Exchange Board of India), is the regulator of the stock market. It also covers the AMC’s service fee and any other charges that investors may be subject to. SEBI categorizes stocks as small-, medium-, and large-cap to ensure consistency. These five types of schemes include equity, debt, hybrid and solution-oriented. SEBI also sets a maximum limit on a scheme’s exposure to a particular security. A mutual fund scheme’s portfolio cannot contain more that 10% of equity funds listed shares. Unlisted shares can only be 5% as they are subject to liquidity risks.

Portfolio Management Services – Portfolio Management Services are exempt from the SEBI laws regarding the percentage of service fees. All service fee ratios in the PMS are determined by the PMS supplier. It is, however, an advantage. The portfolio manager can limit the amount of fund exposure in a PMS by SEBI. This allows him to reduce the diversity and invest only in high-performance shares with higher returns.

SELECTING ABOUT PMS AND MUTUAL FUNDS

Both mutual funds and PMS have their advantages. The final decision about which mutual fund to choose depends on the investor’s needs. To make the best decision, you should focus on factors like your investment objective, risk appetite and market understanding.

An investment advisor can help guide you in choosing the right investment for your needs.