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Difference Between Portfolio Management and Mutual Fund

Narendra Kumar

| Updated: May 05, 2018 | Category: SEBI Registration

Portfolio Management and Mutual Fund

How is Portfolio Management Different from Mutual Fund?

Portfolio Management and Mutual Fund Before we start analyzing the differences between these two investment models, let us first try and understand what are mutual funds and portfolio management services.

Portfolio Management Services are provided by registered professionals. They enter into an agreement with their client to manage their investment portfolios. These portfolios consist of a different set of securities. Portfolio Managers are responsible to make tailor-made investment decisions on behalf of their clients with an objective to meet their specified objectives.

On the other hand, Mutual Funds are investment vehicles. These investment vehicles consist of a pool of investments made by their clients with a view to investing in different securities like bonds, stocks, money market instruments etc. One can choose a mutual fund based on their requirements and financial needs.

How is a Portfolio Management and Mutual Fund different from PMS?

In general, both Portfolio Management and Mutual Fund and PMS have managed funds, where investors put in their money and they are invested by expert professionals with their in-depth understanding of the market forces.

Despite this fact, they are very different investment models. Any investor can make an informed investment decision only after analyzing the differences between these two investment models.

Portfolio Management and Mutual fund and PMS can be differentiated on many points including fees, size, taxation, customization, etc. Here, we will discuss these points of difference in detail.

 Point of Difference

  • Size of Investment

One of the major differences between these two is the minimum investment size. In the case of the Portfolio Management and mutual fund, the investor can start a SIP of an amount as low as Rs. 500. However, in order to avail Portfolio Management Services minimum investment size is set at Rs. 25, 00,000. Investment models like PMS and AIF are for big investors. With time SEBI[1] is planning to increase this limit in case of PMS from 25 lakhs to 1 Crore and align them with alternative investment funds.

  • Fee Structure

Another major difference is the fees charged by these fund managers. In case of mutual funds fees charged from the clients are fixed and the amount is dependent on the amount of investment made.

On the other hand, in the case of PMS the fee charged by them can consist of the following components:

  • Upfront fee: This fee can be charged at the time of purchase of the PMS. And the amount of entry charge can be around 2% to 3%.
  • Management fee: This is a mandatory fee charged by every PMS. These portfolio management charges can be anywhere between 1% to 3 % depending on the terms of the provider and are charged on a quarterly
  • Performance fee: This will include any profit-sharing option forwarded by any PMS. Here, the services provider charges a certain amount of the returns on the portfolio which is termed as a performance fee.
  • Customization

In the case of mutual funds, no customization facilities are available. On the other hand, PMS can either be Discretionary or Nondiscretionary in nature. There is a certain level of customization in the case of PMS. However, it is only in the case of High Networth Individual (HNI) that the portfolio manager offers high-level customization of their investment portfolios.

  • Transparency

The level of transparency in the case of PMS is much higher as compared to Mutual Funds. In the case of Mutual Funds, the investor is provided with a report on final holdings on a monthly basis and total expense ratio on a quarterly basis. However, before making an investment decision on can check the scheme performance of any mutual fund.

On the other hand, PMS offers full disclosure of money management. Every sale, purchase, fees along with the date of every transaction is reported to the investor. But, unlike a mutual fund, one cannot check scheme performance beforehand, as every portfolio is created as per individual investor needs.

  • Taxation

Mutual funds can purchase or sell securities and the transactions are exempt from any capital gain tax. However, in the case of PMS on every sale or purchase of stocks the investor incurs capital gain or loss as the stocks are held in the investor’s name. And the capital gain tax is applicable on the same.

  • Flexibility

Mutual Funds are not very flexible in nature as compared to PMS. If a portfolio manager senses risk, then it can take aggressive actions on his part including cash calls. However, in the case of mutual funds, such actions are very rare.

  • Investment Status

In the case of PMS, every investor’s portfolio is treated as a separate unit. As a result, the actions of other clients of any PMS will not affect the status of your portfolio.

However, in a mutual fund, the investment made by any single investor will not have a separate identity. As a result, if there is a major activity like withdrawal done by a large no of investors, it will affect the remaining investors too.

  • Accountability

As portfolio managers are responsible for every portfolio investment made by different investors, they are answerable to their clients especially in case of discretionary portfolio… However, in the case of Portfolio Management and mutual funds, there is no accountability on the part of the fund manager.

Narendra Kumar

Experienced Finance and Legal Professional with 12+ Years of Experience in Legal, Finance, Fintech, Blockchain, and Revenue Management.

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