A/ Introduction
Many Indian investors, after achieving a decent corpus, are often lured by Portfolio Management Services (PMS) with promises of “exclusive strategies”, “superior returns”, and “personalized wealth management”.
But before switching from mutual funds to PMS, it is crucial to pause and ask - is PMS really better, or is it just better marketed?
In this post, we’ll compare PMS and Mutual Funds, highlight their pros and cons, and see why, despite the glamour around PMS, mutual funds often turn out to be the wiser choice for most investors.
B/ Detailed Explanation
What is a PMS (Portfolio Management Service)?
A Portfolio Management Service (PMS) is a professional investment service offered by SEBI-registered portfolio managers to high-net-worth individuals (HNIs). The manager creates and manages a customized portfolio of stocks in your name. The minimum investment in PMS in India is ₹50 lakh as per SEBI rules.
What are Mutual Funds?
Mutual Funds pool money from several investors and invest in a diversified portfolio of stocks, bonds, or other assets. They are managed by professional fund managers, regulated by SEBI, and allow retail investors to participate with as little as ₹500.
C/ The Positives of PMS
1/ Personalized Portfolio:
PMS offers a tailor-made portfolio aligned with your goals, preferences, and risk appetite.
2/ Direct Stock Ownership:
Stocks are held in your name, giving you full control and visibility.
3/ Flexibility:
The portfolio manager can buy or sell securities without restrictions typical in mutual funds.
4/ Potential for Higher Returns:
In theory, active strategies and concentrated bets could outperform mutual funds.
D/ The Negatives of PMS
1/ High Costs Eat Returns:
- PMS fees typically include 2 to 3% annual management charges and a 10 to 20% performance fee.
- This severely erodes long-term returns.
- In contrast, mutual funds cost barely 1% or less.
2/ Tax Inefficiency:
- In PMS, each buy/sell transaction triggers a capital gains tax, even if you don’t withdraw money.
- Mutual funds defer taxation until redemption, compounding benefits over time. That is what we also refer to as Tax Compounding
3/ Lack of Standardization:
- Reporting formats, valuation methods, and transparency vary across PMS providers.
- Unlike mutual funds, PMS data is not easily comparable or uniformly published.
4/ Concentration Risk:
- PMS portfolios are usually concentrated in 20 to 30 stocks.
- This can amplify returns but also magnifies losses - especially dangerous in volatile markets.
5/ No Guarantee of Outperformance:
- Despite claims, most PMS schemes in India do not consistently outperform mutual funds after costs and taxes.
- The allure of exclusivity often hides underwhelming real-world performance.
6/ Liquidity and Control:
- Exiting PMS investments can be cumbersome, often requiring written requests and notice periods.
- Mutual funds, by contrast, can be redeemed anytime online.
7/ Limited SEBI Oversight:
- Though regulated, PMSs are less tightly monitored compared to mutual funds.
- Investor grievances and transparency remain weaker in the PMS ecosystem.
E/ Real-Life Indian Example
Consider Mr. Rajesh, a 45-year-old businessman from Mumbai, who shifted ₹1 crore from mutual funds to a PMS scheme in 2018.
The PMS manager promised superior returns through active equity management.
Over five years, the PMS delivered an annualized return of 9% after fees, while his earlier diversified mutual fund portfolio, managed passively, delivered 11.5% with far less volatility and no profit-sharing charges.
Moreover, Rajesh faced tax outgo every year due to frequent trading by the PMS manager - money that could have otherwise compounded.
He eventually switched back to mutual funds, realizing that simplicity and cost-efficiency often beat sophistication.
F/ Tax Implications
For Indian investors, taxation is a major differentiator:
PMS Taxation:
- Every transaction (sale) triggers capital gains tax.
- Short-term (within 1 year) equity gains are taxed at 20%.
- Long-term gains above ₹1.25 lakh are taxed at 12.5%.
- Frequent churn leads to multiple taxable events every year.
Mutual Fund Taxation:
- Tax is applicable only when you sell units.
- The fund manager’s internal trades do not trigger tax for investors.
- This gives mutual funds a compounding advantage.
G/ Transparency Issues with PMS viz viz Mutual Funds
- They are not required to publish full portfolios publicly. Only clients get access to their own portfolio. Non-clients and potential investors can’t independently verify the actual holdings or concentration.
- Public reporting is limited - often voluntary and not standardized.
- No daily NAV disclosure.
- Return computation methods differ - some use TWRR (Time-Weighted Return Rate), others IRR, and many exclude or include certain charges differently.
- Performance fee calculation (hurdle rate, high-water mark, etc.) is complex and not standardized
- Many PMSs discontinue or merge poor-performing schemes, which disappear from published data.
- Aggregators like PMS Bazaar mainly show active strategies, making the industry look better than it actually is. By contrast, mutual fund data archives include all schemes - even those that were merged or underperformed.
- There’s no AMFI-like central database where you can easily compare all PMS strategies, portfolios, and returns.
H/ Summary
PMS promises personalization but comes with higher costs, lower transparency, and frequent taxation.
Mutual funds, though less glamorous, offer low cost, high transparency, better diversification, and long-term tax efficiency.
For most Indian investors, mutual funds remain the smarter, simpler, and more effective route to wealth creation.
I/ References
- Related Blogpost: What is Tax Compounding
- Related Blogpost: Capital Gains Harvesting - Equity
- Related Blogpost: Top 7 mistakes when investing in Mutual Funds
- Related Book: From the Rat Race to Financial Freedom
- Related Book: FOOPS: 30 Common Financial Mistakes
- Related Video: Tax Harvesting
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