PMS vs Mutual Funds : Key Differences

Category: Finance2025-11-04 11:37:33

For investors seeking professional management of their hard-earned money, diversification, and an easy way to grow wealth without spending too much time and effort, two popular options often jump to mind: Mutual Funds and Portfolio Management Services. Both are investment vehicles, so technically, you don’t invest in them, but rather through them. They act as channels that help you invest in different types of securities and strategies with the same ultimate goal, making your money work for you. While there are some similarities between mutual funds and portfolio management services, the two vehicles are distinct. Every investor should understand what sets them apart before deciding which one suits their financial goals, risk appetite, and investment style.

Here we’ll look at what PMS vs mutual funds really are, how they work, their pros and cons, and most importantly, break down the differences between PMS vs Mutual Funds so you can decide which one fits you better.

What Are Mutual Funds?

Mutual fund schemes are SEBI-regulated investment vehicles offered by Asset Management Companies. These AMCs launch a number of schemes, each managed by a professional fund manager and designed with a specific objective in mind. Investors pool their money into these schemes, and the fund manager invests that pooled amount across various securities such as stocks, bonds, REITs, gold, and other instruments, depending on the scheme’s goals and strategy. For example, in a large-cap scheme, the majority of the fund is invested in India’s top companies by market capitalisation. Similarly, a debt fund will invest in fixed-income instruments such as G-secs and corporate bonds to provide modest returns at lower risk. In return, the scheme charges a small fee, known as the expense ratio.

So in simple terms, mutual funds give you an avenue to invest in a diversified portfolio that’s professionally managed. As vehicles, they are incredibly versatile and cater to a vast variety of investors. Have a look at some common types of mutual funds available:

Equity Funds: These invest primarily in stocks to generate long-term wealth. Examples include small-cap funds and mid-cap funds.
Debt Funds: Here, the focus is on fixed-income securities like government bonds, CPs, and CDs. The objective is to deliver modest returns while preserving capital. Some examples are short-term debt funds and corporate bond funds.
Hybrid Funds: These combine equity and debt to balance risk and returns. Balanced advantage funds and arbitrage funds are included in this category.
Open-Ended Funds: This classification is based on the scheme’s structure. Here, investors are allowed to enter and exit the scheme at any time at the prevailing NAV. Most mutual funds fall under this category.
Close-Ended Funds: In some schemes, one can only invest during the initial offer period. There are windows when the investment can be redeemed, but generally, they have a fixed maturity period. They do offer liquidity, as the units of a closed-ended fund can be sold on exchanges.
ELSS: Equity-linked savings schemes are special types of equity funds that offer tax benefits under Section 80C of the Income Tax Act. They come with a 3-year lock-in period.
Growth Option Funds: This refers to a specific option you can choose while investing in a mutual fund. Here, any profits made by the fund are reinvested back into the scheme rather than being paid out to investors, so your money gets compounded.
IDCW Funds: The Income Distribution cum Capital Withdrawal option allows the AMC to distribute a portion of the profits to investors from time to time, like dividends.

How Do Mutual Funds Work?

There are two main ways to invest through a mutual fund: lump sum and SIP.

Lump Sum Investment: In this method, you invest a large sum of money in one go. For instance, investing a bonus or proceeds from the sale of a property.
Systematic Investment Plan: SIPs allow you to invest smaller, fixed amounts regularly (such as monthly, quarterly, or weekly) in a mutual fund scheme. This affordable approach has its own benefits, such as rupee cost averaging, and ultimately lets you build wealth gradually without putting too much pressure on your pockets.

Once the fund house receives your money, the fund manager pools it with other investors’ contributions and allocates it across various securities as per the fund’s objective. For example, in an equity fund, a greater share of your money will go into stocks, while in a debt fund, most of it will be invested in fixed-income instruments. You won’t hold these individual securities directly, but rather units of the mutual fund that represent your share in the fund’s portfolio. These units have a value, known as the NAV (Net Asset Value), which is basically the market value of the fund’s total assets minus its liabilities. When the value of the underlying securities changes, the NAV fluctuates accordingly.

You also don’t need a demat to hold mutual fund units, which makes the process even simpler. You can invest directly through the AMC’s website, or through mutual fund distributors, and you can track, redeem, or switch your investments anytime.

What Are PMS?

PMS stands for portfolio management services, another SEBI-regulated investment vehicle offering professional management. Right off the bat, what sets PMS apart from mutual funds is the level of customisation it offers. Managers recommend portfolio composition suited to your financial goals, risk tolerance, and investment horizon. You directly own all securities, meaning the stocks, bonds, or other assets purchased are held in your demat account.

The minimum ticket size for investing via PMS is Rs. 50 lakh, so it’s a service geared towards affluent investors and HNIs. PMS providers design custom strategies, make timely buy-and-sell decisions, and rebalance the holdings according to market conditions or changes in the client’s objectives. That’s why the associated costs of availing the service are comparatively higher. Fees can include fixed management costs (as a percentage of the assets under management), performance fees (a percentage cut should the returns exceed a specific benchmark), or a combination of the two. The investor must also pay charges associated with trading, such as brokerage fees and custodian charges.

Types of PMS

PMS can also be categorised on the basis of underlying securities and investment strategies. However, the main classification is based on the level of control the clients give to managers over their portfolios. Broadly, PMS can be divided into three types:

Discretionary PMS: In this type, the portfolio manager is given full authority to make all investment-related decisions, such as what to buy, sell, or hold on your behalf. This freedom allows them to act whenever they feel the time is right without needing approval for every single transaction. If you trust the manager’s expertise and do not have the time or experience to manage investments on your own, you can consider discretionary PMS.
Non-Discretionary PMS: Here, the portfolio manager’s role is reduced to only offering recommendations and executing transactions. The client retains the final call on every investment decision, giving much higher control over their portfolio. However, a limitation of this PMS is that decision-making can become slower. Since the portfolio manager must get approval before executing any trade, opportunities can be missed if the client does not respond quickly. You can choose this PMS if you want to stay more involved with your investments, but know that a good understanding of markets is necessary to evaluate each recommendation.
Advisory PMS: The manager only provides investment advice. The admin tasks, such as trade executions, are carried out entirely by the client.

PMS vs Mutual Funds – What Are The Key Differences?

Time to jump into PMS vs Mutual Funds! Here’s how these two vehicles differ from one another:

Factor	Mutual Funds	Portfolio Management Services
Primary Investors	Mostly retail investors, though others, such as high-net-worth individuals and institutional investors, also invest.	Geared towards HNIs and affluent investors with higher investible surplus.
Minimum investment Amount	The entry point is very low, with some schemes offering SIPs starting from just Rs. 100 per month.	A pms investment starts from a minimum of Rs. 50 lakh as mandated by SEBI.
Personalisation	Mutual funds are pooled vehicles, so in a single scheme, all investors have the same portfolio.	Offers higher customisation as investments depend on the investor’s goals and risk tolerance.
Asset Ownership	Investors only hold units of a mutual fund, and the securities are owned collectively by all unit holders. Investors do not directly own the underlying securities.	Investors directly own all underlying securities, which are held in their own demat account.
Liquidity	Most mutual funds are open-ended and without lock-in periods, so they offer very high liquidity. Units can be redeemed with the AMC whenever needed.Even closed-ended funds offer some liquidity as they can be traded on the market.	PMS providers tend to impose a minimum tenure, so early exit may lead to an exit load. These lock-ins are clearly mentioned in the agreement, so investors know exactly when they can access their funds.
Fees	Every mutual fund charges a small expense ratio, which is capped by SEBI depending on the fund’s category. Some charge an exit load for early redemptions.	PMS fees are higher in comparison and can include management fees, profit-sharing fees, and other transaction costs.
Control Over Investment Decisions	The fund manager is responsible for all investment decisions, so unit holders have no say in buying or selling calls.	Investing via non-discretionary PMS allows investors to have a say in all transactions.

Which is better – PMS or Mutual Funds?

As we’ve seen, both PMS and mutual funds come with their own set of pros and cons, so the answer to the question ‘which is better?’ really depends on your profile as an investor. Mutual funds are one of the most convenient, liquid, and diverse ways to invest. Thanks to SIPs, they’ve become incredibly affordable and are often the choice for both beginners and seasoned investors. On the other hand, the main obstacle that prevents most retail investors from choosing PMS is the hefty entry ticket size of Rs. 50 lakh. However, if you do have that kind of investible surplus, don’t need immediate liquidity, and want a more personalised investment strategy managed by experienced professionals, then pms services can be a good option.

That said, it’s important to understand the risk/return profile of both these investment options. While each comes with its own categories, generally speaking, PMS aims to deliver higher returns by building a less concentrated portfolio. Since PMS portfolios aren’t as diversified as mutual funds, the focus on fewer stocks can lead to bigger gains. This naturally increases the risk you’re taking on. The personalised attention you get with PMS comes at a cost, too, as the fees are higher compared to mutual funds.

Conclusion

While both investment vehicles share some similarities, such as professional management and diversification, there are some key differences between PMS vs Mutual Funds when it comes to customisation, costs, minimum investment amounts, and asset ownership. Mutual funds are great for most investors looking for long-term wealth creation through options like SIPs. A pms investment is designed for those with larger surpluses who want a more personalised touch. If you want to grow wealth slowly with minimal effort, mutual funds may suit you. But if you have the means and appetite for a more customised strategy, PMS could be the answer.