PMS for the haves, mutual funds for the have nots?

We find out which investment scheme suits you best

PMS for the haves, mutual funds for the have nots?

Oh, the 1,000-watt charm offensive, warm lunch plates, big champagne on ice... most of us are suckers for five-star treatment, right?

And if this extends to your hard-earned savings being given the right push by a wealth manager in a plush office, that's the icing on the cake.

No wonder, many crave to invest in a PMS (portfolio management service).

An oasis for those who can invest at least Rs 50 lakh (basically the rich and the almost-rich), a PMS claims to offer silver spoon service, and returns.

Its pure white exterior is a far cry from the rough and tumble image of mutual funds , an investment option that has democratised investing in India. For all you know, your driver and domestic help may have dipped their feet in mutual funds too. So how can this investment vehicle help you ? After all, to misquote George Orwell, some of us are born more equal than others.

Or at least that's what I thought, until I compared the two options - PMS and mutual funds - and what I eventually found:

	PMS	Mutual funds
High entry barrier	Yes. Min. investment: Rs 50 lakh	No. Min. investment: Ranges from Rs 100 to Rs 5,000
Exit cost	Very high withdrawal expenses	Relatively much lower. Also, many funds don't have any exit cost.
Premature withdrawal	Not easy. There are lock-in periods.	Easy. No lock-in period, barring tax-saving funds do.
Portfolio construction	You can be highly involved in how your portfolio is built in non-discretionary schemes.	No such flexibility.
Tax	High. PMS trades stocks from your demat account. So, you bear transaction costs and short- and long-term capital gains.	Low. You pay tax just once at the time of withdrawing your investment.
Management fees	Yes, but it can be very high as there is no SEBI oversight.	Yes, but it is capped by SEBI and is part of the expense ratio.
Profit-sharing	They can charge additional fees for generating returns beyond a certain point.	They don't charge additional fees.
Operating strategy	They can change strategies on the go. No SEBI looking over their shoulders.	Largely pre-defined. Also, SEBI regulates them, hence safer.
Transparency	No. Investment decisions are made in-house. No clarity.	Yes. They are mandated to disclose where they invest.
Performance indicator	Not clear. PMS don't need to disclose their holdings. Plus, finding a benchmark to evaluate performance is tough.	Clear. Funds update their holdings and NAV regularly. Finding a benchmark is easy.

Our take
The one upside of PMSs giving you the option to influence your own portfolio is noteworthy. Known as non-discretionary PMS, the fund manager needs to take your approval before any trade is made. But the argument to this is whether you are financially empowered to know which transaction suits your risk profile and goals. Because if you aren't, a non-discretionary PMS is as good as a chocolate teapot.

Also, the notion of PMSs delivering outsized returns, because they invest in the creme-de-la-creme investments, is misplaced. For one, you can't even identify a proper benchmark to compare its performance. Two, PMSs can take undue risks - engaging in hedging and derivative trading, among others - to deliver returns. As you know, behind the beauty of high returns lurks a monster called high risk.

So, why not just keep it simple? It's your hard-earned money after all... unless you are a sucker for privilege treatment.

This article was originally published on August 17, 2023.

Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.

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