Investing in equities can be done in multiple ways. You can invest directly in shares through your Demat account or indirectly through Mutual Funds, NPS, ULIPs or Portfolio Management Services (PMS). If you are not an expert in selecting direct shares, the indirect route can be beneficial.
For a fee, a professional fund manager will make investment decisions for indirect options. They will allocate and manage resources to give you maximum returns.
Portfolio Management Services (PMS) are not very popular among investors. While Mutual Funds and New Pension Scheme are well-known products, PMS is not. The minimum investment amount is the main reason for this.
PMS managers are getting noticed by being very active on social media platforms, sharing their successes and portfolio updates during good times.
What is PMS Investment?
Portfolio Management Services (PMS) involves professional investment management by asset management companies, wealth management companies and brokerage firms on behalf of their clients. PMS can include other asset classes like fixed income, structured products and debt.
The PMS structure allows for a portfolio to be created for each client and tailored to their risk profile and goals.
Types of PMS
- Discretionary PMS: In this type of PMS, the portfolio manager can make any investment decision on behalf of the client without seeking approval every time. The portfolio is under the manager’s control, and the client has no say in the investment process.
- Non-Discretionary PMS: In this arrangement, the portfolio manager will propose investment ideas but only implement them after the client has given consent. The portfolio manager does not have complete discretion.
- PMS Advisory: In this case, the portfolio manager will only advise and suggest investment ideas. The investor will execute the trades as per their choice.
How to Invest in PMS
To invest in Portfolio Management Services, you need to agree with the PMS provider. This agreement will outline the PMS, investment strategy and fee structure. By signing this document, you are giving the portfolio manager power of attorney over your trading and bank accounts.
You will also need to open a new Demat account, trading account and bank account, even if you already have them. This new bank account will receive any income from the investment like interest or dividends.
Taxation of PMS Investments
The securities are in your name. Any gains made by the PMS manager on sale are treated as capital gains, and you will have to pay tax on those gains even if you don’t withdraw the money.
The tax rate for PMS investments is the same as any equity gains. If the manager sells the security within a year of purchase, the short-term capital gains tax is 15%.
PMS vs Mutual Funds: Key Differences
- Pooling of Funds: Mutual funds pool and invest the money of individual investors together. In PMS, separate accounts are created in the name of investors, and each account is managed separately.
- Minimum Investment Requirement: For PMS, the minimum investment amount is Rs. 50 lakhs. You will have to open a new Demat, trading, and bank account. However, you can invest in mutual funds with as low as Rs. 500 and use your existing accounts to invest, including setting up SIPs.
- Tax Incidence: Tax is only applicable when you redeem money from mutual funds, not when the fund manager sells the securities. In PMS, you will have to pay tax each time the manager records a gain.
Conclusion
When choosing between Portfolio Management Services (PMS) and mutual funds, consider investment style, minimum investment requirement and tax. PMS offers customised portfolio management for individual risk profiles; it’s suitable for high-net-worth individuals who can invest big and want more control over their portfolios. Mutual funds are for the average investor, with lower entry points and the convenience of pooled investments managed by professionals.
Tax is another big differentiator—mutual funds tax gains only upon redemption, and PMS requires tax on profits as they happen. Investors who want discretion in investment decisions may go for discretionary PMS, those who wish to lower fees and simpler management may go for mutual funds.
In the end, it all depends on an investor’s financial goals, risk appetite and willingness to manage the portfolio actively. Whether you want the customisation and higher investment threshold of PMS or the ease and affordability of mutual funds, both have different ways to grow wealth.
