Naturally, in most part, the answer to the question will be very case and client specific. For starters, not many will be able to invest in a PMS due to the rather large investment amount required to start.
Just like Mutual Funds (MFs), PMS provides professional management of client’s funds by investing in one or more class of assets. In this article, I will try to explain the advantages of investing in one over the other.
The key to understanding the pros and cons of Mutual Funds and PMS is to first recognize:
(I) Types of Mutual Funds and PMS;
(II) Portfolio Structure: Course of action that can be adopted in each case; and
(iii) Fee/ Commission Structures;
TYPES OF MUTUAL FUNDS AND PORTFOLIO MANAGEMENT SCHEMES (PMS)
Types of Mutual Funds
Each mutual fund will have a predetermined investment objective and investment strategy (growth or dividend). Mutual funds invest money across various asset classes like equity, debt and gold and / or a combination of more than one asset class.
To understand different types of mutual funds and their key features visit our mutual fund articles archive below:
Types of PMS – Discretionary and Non-Discretionary PMS
Assets under management (AUM) of discretionary PMS – increased 16% over the past one year, from Rs 67,299.07 Cr. in April 2015 to Rs 78355.84 Cr. in April 2016, according to data released by SEBI.
In discretionary PMS, portfolio manager takes investment decisions and has full discretionary power to manage investor’s portfolio, i.e. he can buy/sell stocks without consulting with the investor.
In non discretionary PMS, portfolio manager can suggest investment ideas; the rest is investor’s choice. In both the scenarios, portfolio managers can deduct fees/commission charges monthly, quarterly or yearly.
Also See: Example below in the point on ‘Fee Structure’.
|Mutual Funds||PMS Schemes|
|There is a limit on exposure to individual stocks (limited to 10% in a single stock) in a mutual fund.||There is no limit in terms of stock or any other instrument specific exposure. Portfolio manager can make more aggressive allocations.|
|Typically cannot take positions in derivates (F&O) markets other than for the purpose of hedging positions.||Can buy/sell in derivates (F&O) markets to make trading gains.|
|Mutual funds typically have wide diversification. For example, a typical equity mutual fund will invest in 40-50 stocks from many sectors. The focus usually is capital preservation with reasonable return.||Will have 10-30 stocks/ strategies or other financial instruments at a given time. The underlying idea is to generate high returns usually with some or more capital risk.|
|Minimum investment amount can be as low as Rs. 500.||Minimum investment has to be Rs. 25,00,000/- and above.|
|Investor only fills an application form to invest in a mutual fund scheme. The scheme in turn acts same for all investors.||Each PMS investor and the portfolio manager enter into a separate agreement which could have different terms in each case.|
In addition, each PMS account is managed individually, i.e. the portfolio manager can buy/sell different stocks in different client accounts. While legally this is allowed, for ease of management and execution, a portfolio manager would execute same orders in all accounts or at best have 3 different fund groups such as – Value, aggressive and low risk.
FEE/ COMMISSION STRUCTURES
A PMS investor has a choice to decide how he would like to pay his portfolio manager. Unlike mutual funds where expense ratio for each fund is pre-decided for every investor, in a PMS scheme the investor can choose from different commission slabs which portfolio managers offer. In addition, it is possible to have a completely different fee arrangement. In short, it’s a matter between the investor and the portfolio manager.
Investor A invests in a discretionary PMS an amount of Rs. 25,00,000 and agrees to pay a fund management fees as below:
Fixed management fee of 2% per annum (charged quarterly @ 0.5% on average NAV) plus a 10% share of profit per annum.
After 3 months, the amount grows to Rs. 30, 00,000. The portfolio of the client will automatically deduct Rs. 14,000 as management fees on the last day of the quarter (calculated assuming that the average NAV for the quarter was Rs. 28,00,000).
At the end of the year, the amount grew to Rs. 34,00,000. In addition to the quarterly management fee, the portfolio of the client will also deduct Rs. 90,000 (i.e. 10% of the yearly profit of Rs. 9, 00,000 on the starting value of Rs. 25,00,000).
While the fees may seem like a lot, it is only because the portfolio generated over 36% return in the year. If the portfolio did not generate any profit then the portfolio manager would only make his management fees.
Further, the fee structures could vary and as a client you will have the right to choose a structure you are more comfortable with.
Examples of some fee structures being offered by the same PMS:
If an investor in non discretionary PMS invests Rs. 25 lacs and after 3 months, the amount grew to Rs. 28 lacs, then also the portfolio manager will charge on the profit generated based on the terms on which such a client availed the service.
This is how the scheme information document will disclose the nature of scheme:
The Portfolio Manager offers only Discretionary Portfolio Management currently. The Portfolio manager will exercise any degree of discretion as to the investment or management of portfolio of securities or funds of the client.
If you are a High Net Worth Individual with some appetite for risk and can spend long time in the market, you should opt for a good PMS; particularly if you are looking to take equity exposure. For Long Term Savers and professionals, who wish to invest smaller amounts in a systematic manner, mutual funds offer a viable solution.
Finally, if you are a Seasoned Investor who understands the markets and more importantly, can keep an investing discipline, the best option will be to open an account and invest yourself. If you belong to the last category, I encourage you to use my services as much as you can :-).
For any questions, write in to me at firstname.lastname@example.org or call me on 9833905054
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