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PMS vs Mutual Funds

Whether PMS and mutual funds are the same or are they different? Visit www.investmentz.com to know more!<br><br>

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PMS vs Mutual Funds

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  1. PMS vs. Mutual Funds

  2. Introduction You might have definitely heard about Portfolio Management Services (PMS) in India. PMS services in India are gaining some good impetus. More investors with big fund corpus such as Rs.15-20 lakhs or more are looking at PMS investment as a good way to grow their fund corpus. That said, investors also rely a lot on mutual fund investment to build their portfolio. Thus, a question that would come in your mind now is whether PMS and mutual funds are the same or are they different?

  3. There are no surprises when it comes to the fact that PMS has a much bigger market, at least theoretically, compared with mutual funds. This stems largely from the fact that a large portion of the Indian investors’ Demat holding lies dormant in their Demat account. This also suggests that this portion is not being managed well in the investors’ favour, offering great potential for PMS investment in India. This clearly suggests the bigger market for PMS compared with MFs.

  4. On the other hand, Mutual funds refer to a pool of funds. A crucial part about MF is that they tend to perform well, and in the investors’ favour during booming markets. However, they tend to do the exact opposite when the markets aren’t performing as expected. The portfolio margins of MFs either get diluted or concentrated depending on whether there are more inflows or outflows largely because the portfolios are being managed as a pool.

  5. That said, in case of PMS, it is the client’s segregated Demat account in which that client’s portfolio is held. Therefore, the increasing effect of the actions of all the other PMS subscribers does not really impact the portfolio of a particular individual. • For example, if you subscribe to PMS today, then your Demat account will be credited with the shares at the current buying prices as of today. Therefore, going forward, regardless of how many customers either come in or go out, your portfolio does not get affected under PMS, since the shares have been credited to your account at the exchange price you got for that day. This is one of the crucial behavioural differences between PMS and MFs. While your MF portfolio gets diluted daily, your PMS portfolio doesn’t since it is managed on a segregated basis for each client.

  6. As far as your MF portfolio is concerned, no stock can exceed 10% of your portfolio for a diversified fund. Therefore, portfolio managers are forced to sell your winners on the margin. Each time your stock crosses 10% or is hovering in the range of 9.5%, your fund managers will start trimming your MF portfolio. In the case of MF, SEBI mandatorily requires that no stock can exceed 10% of the overall weight of your portfolio. However, when it comes to PMS, your service provider could place hard caps around the 15-20% mark, in order to exercise higher control over the portfolio. Therefore, the trimming process will be commenced by most PMS providers once your stocks cross the 15-20% mark of your overall portfolio. The crucial thing to remember here is that this is not mandatory as in the case of a mutual funds portfolio.

  7. Mutual funds generally have two classes that include direct and regular, unlike PMS where there is much more flexibility with regards to asset classes, fee structures, and expense ratios.MFs are held under a trust, which means that provisions of section 10(23D) of the Income Tax Act apply, making MFsa tax-advantaged vehicle for Indian investors. Another thing that you must note is that MFs don’t pay any taxes on buying and selling securities since it is a trust. • This is where PMS differs since the treatment of sale or purchase of shares is treated just like that made by an individual directly in the stock market. Therefore, every time you sell a stock in PMS in a time span of less than 1 year, you will come under the purview of short-term capital gains tax in case there has been a gain on the sale. Therefore, a trading strategy can be disadvantageous in case of PMS compared with an MF portfolio. Moreover, since PMS is not a tax-advantaged investment vehicle, this gives one-upmanship to MFs.

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