I wish to know , is PMS better or equity MF for long term financial growth. Regards T.Sekhar
Ans: This is an important comparison. Choosing between PMS and equity mutual funds requires deep understanding.
Let us look at this from a 360-degree view.
We will explore key aspects like cost, risk, return, structure, transparency, and suitability.
Understanding the Basics
PMS stands for Portfolio Management Services.
PMS is a customised service for investing in equities. It is managed by a professional fund manager.
Equity mutual funds pool money from many investors and invest in diversified equities.
Equity mutual funds are regulated more strictly and have better investor protection norms.
PMS needs higher minimum investment. Usually Rs. 50 lakhs and above.
Equity mutual funds can be started with just Rs. 500 monthly SIP.
Both can be used for long-term wealth creation. But not equally suitable for everyone.
As a Certified Financial Planner, I will now analyse both options from all angles.
Cost and Charges Comparison
PMS charges are high. It includes management fee, profit-sharing fee, custodian charges.
PMS often charges 2% yearly management fee. Plus 20% profit-sharing above a hurdle rate.
These high charges can eat into your returns in the long run.
Equity mutual funds come with lower cost structures.
Regular equity mutual funds have a small trail fee for the distributor.
But the overall expense ratio is much less than PMS.
In equity mutual funds, charges are transparent and capped by SEBI.
In PMS, charges vary widely and may not be disclosed properly.
For long-term compounding, lower cost helps you grow faster.
Hence, mutual funds score higher in cost-efficiency.
Risk and Portfolio Diversification
PMS portfolios usually have 15-20 stocks.
That creates a concentrated exposure. Risk becomes higher.
Equity mutual funds hold 40-70 stocks. That gives better diversification.
PMS may invest only in one theme, sector, or strategy.
Mutual funds use a mix of strategies to reduce volatility.
PMS portfolios can underperform if the theme goes wrong.
Mutual funds offer stability due to diversification and internal risk control.
Risk-adjusted return is often better in mutual funds.
Mutual funds have clear categories and defined mandates.
PMS strategies are not always clearly defined.
Risk is better managed in mutual funds, especially for retail investors.
Transparency and Regulation
Mutual funds are highly regulated by SEBI.
NAV is declared daily. Portfolio is disclosed monthly.
Expense ratio and fund manager performance is transparent.
PMS is regulated, but with lesser disclosure requirements.
PMS reports are not published daily. NAV is not declared.
You may not always know your real-time returns in PMS.
With mutual funds, you have better visibility and tracking.
Regulation ensures discipline and investor protection in mutual funds.
Mutual funds are safer from governance point of view.
For long-term growth, transparency matters a lot.
Minimum Investment and Liquidity
PMS needs minimum Rs. 50 lakhs to start.
Not suitable for most Indian households.
Equity mutual funds allow investments from Rs. 500 per month.
That makes it suitable for salaried and small investors too.
PMS has lock-in period or exit load for 1-3 years.
Liquidity is lower. Redemption can take days.
Equity mutual funds can be sold anytime.
Redemption money usually credited in 2-3 working days.
If you may need money anytime, mutual funds are more flexible.
For financial goals like child education or retirement, flexibility matters.
Performance and Return Potential
PMS may sometimes beat mutual funds.
But it comes with higher risk and higher cost.
In mutual funds, performance is consistent over long-term.
Top mutual funds have beaten PMS even after fees.
Fund manager experience is crucial in both.
But mutual funds have stricter risk management teams.
Mutual fund performance can be tracked in public domain.
PMS does not disclose detailed performance publicly.
You will depend only on quarterly reports in PMS.
Past return is not a guarantee. But transparency helps you decide.
Taxation Angle
In PMS, capital gains tax is paid by investor directly.
You will get a detailed capital gains statement from PMS.
But tax calculation and filing is your responsibility.
In mutual funds, tax is simpler.
Mutual fund houses deduct and report your gains clearly.
Tax filing becomes easy with consolidated CAS report.
From April 2024, equity mutual funds attract 12.5% tax on LTCG above Rs. 1.25 lakhs.
STCG is taxed at 20%. Debt funds taxed as per your slab.
PMS taxation follows same capital gain rules.
But tax filing burden is higher in PMS.
Operational Ease and Monitoring
Mutual funds can be tracked on mobile app or website.
You can invest via SIPs, STP, SWP easily.
Portfolio review, rebalancing is easier with mutual funds.
PMS needs offline documentation and relationship manager follow-up.
Portfolio monitoring needs more involvement from you.
Mutual funds give automated alerts and monthly statements.
You can set up goal-based investing and automatic SIPs.
PMS is less friendly for working professionals.
Mutual funds support digital convenience and automation.
This helps you stay disciplined.
Behavioural Factors and Investor Discipline
Most investors struggle with market timing and emotional decisions.
Mutual funds use SIPs to build long-term habits.
SIPs reduce timing risk and promote discipline.
PMS does not allow SIP.
You need to invest lumpsum. That increases timing risk.
During market fall, PMS investors panic more.
Mutual fund investors who stay invested get better results.
Regular investing and asset allocation is easier in mutual funds.
Behavioural discipline is key for long-term growth.
Mutual funds support this better than PMS.
Index Funds vs Actively Managed Funds
Some people compare PMS with index funds too.
Index funds are passive. They copy the index.
They do not react to market changes.
In India, market is still inefficient.
Active funds can use research and beat the index.
Index funds are slow to adjust to new sectors or trends.
Actively managed funds aim for better alpha.
PMS and mutual funds both can be active.
Among these, equity mutual funds offer active strategies with lower cost.
Hence, actively managed mutual funds suit long-term growth better.
Direct Mutual Funds vs Regular Mutual Funds
Some investors choose direct funds to save cost.
But direct funds come with no advisor support.
You will miss guidance, monitoring, rebalancing and goal planning.
Many investors pick wrong funds in direct option.
Wrong asset allocation can harm your returns.
Regular plans through a Certified Financial Planner give better results.
The small trail fee in regular plan is worth the service.
A CFP helps you review and realign funds to goals.
Long-term growth depends more on right guidance.
Not just low cost.
Final Insights
PMS suits HNIs who understand equity markets well.
PMS needs higher risk appetite and lumpsum funds.
For most investors, equity mutual funds are better.
Mutual funds offer cost-efficiency, transparency, liquidity and goal alignment.
Mutual funds also help with automation, monitoring and behavioural discipline.
PMS may be tempting with past returns. But not suitable for all.
With the help of a Certified Financial Planner, mutual funds deliver long-term growth.
They also suit retirement, children’s education, wealth creation and tax-efficiency.
Keep your investments goal-based and diversified.
Review yearly and stay invested patiently.
That is the best way to create long-term financial freedom.
Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment
Question by Manish on Apr 07, 2022Hindi
