Investing in PMS as well as Mutual Funds: A Strategic Approach

Investing in the stock market has always been an attractive avenue for wealth creation. In India, investors have multiple options to gain exposure to equities, with Mutual Funds (MFs) and Portfolio Management Services (PMS) being two of the most popular choices.

While both investment vehicles focus on stock market investments, they differ significantly in terms of management, structure, and strategies. Mutual funds are widely accessible to retail investors, while PMS is a more exclusive service designed for high-net-worth individuals (HNIs).

Does it make sense to invest in both PMS and mutual funds simultaneously? Let’s explore this in detail and understand whether a combination of these two investment options can help optimize returns.

What Are Mutual Funds?

A mutual fund is a professionally managed investment vehicle that pools money from multiple investors and invests across various asset classes, including equities, debt, or hybrid instruments. These funds are managed by experienced fund managers who make investment decisions based on market conditions and the scheme’s objectives.

Key Features of Mutual Funds

• Diversification – A mutual fund invests in a broad range of stocks or securities, reducing the risk associated with the poor performance of a single stock.
• Liquidity – Mutual funds allow easy entry and exit, making them a flexible investment option.
• Professional Management – Fund managers ensure better asset allocation and risk management.
• Regulation and Transparency – Mutual funds are regulated by SEBI (Securities and Exchange Board of India) and provide regular disclosures about holdings and performance.

Types of Mutual Funds

Investors can choose from various types of mutual funds depending on their risk appetite and financial goals:

1. Equity Mutual Funds

These funds invest primarily in stocks and aim for capital appreciation. They are ideal for long-term investors seeking high returns but come with market-related risks.

2. Debt Mutual Funds

These funds invest in fixed-income securities like bonds, treasury bills, and corporate debt. They are suitable for conservative investors looking for stable returns.

3. Hybrid Mutual Funds

Hybrid funds combine equity and debt investments to provide a balanced risk-return ratio, making them suitable for moderate-risk investors.

4. Index Funds

These funds track a specific stock market index (such as NIFTY 50 or Sensex) and replicate its performance. They are passively managed and have lower expense ratios.

5. Thematic and Sectoral Funds

These funds focus on specific sectors (like banking, IT, or pharmaceuticals) or investment themes. They carry higher risks due to sector-specific exposure.

What is Portfolio Management Service (PMS)?

A Portfolio Management Service (PMS) is a specialized investment service designed for high-net-worth individuals. Unlike mutual funds, PMS provides customized portfolio solutions based on an investor’s risk profile, financial goals, and preferences.

Key Features of PMS

• Personalized Investment Strategy – PMS allows investors to have a say in their investment choices.
• Higher Investment Threshold – SEBI mandates a minimum investment of ₹50 lakh for PMS, making it exclusive to affluent investors.
• More Control & Transparency – Investors have direct ownership of stocks, providing greater flexibility.
• Active Management – PMS portfolios are actively managed, offering the potential for higher returns compared to mutual funds.

Types of PMS

PMS services can be categorized into two types:

1. Discretionary PMS

The portfolio manager has complete authority to make investment decisions on behalf of the investor without prior approval.

2. Non-Discretionary PMS

The portfolio manager provides investment recommendations, but the final decision lies with the investor.

Should You Invest in PMS, Mutual Funds, or Both?

Both PMS and mutual funds have their advantages and limitations. Choosing between them depends on factors such as investment corpus, risk appetite, financial goals, and tax implications.

Key Differences Between PMS and Mutual Funds

Benefits of Investing in Both PMS and Mutual Funds

If you have a high investment corpus, diversifying between PMS and mutual funds can be a strategic decision. Here’s why:

1. Diversification of Risk

• Investing in both reduces dependency on one investment vehicle.
• Mutual funds provide stability, while PMS offers high-return potential.

2. Different Investment Strategies

• Mutual funds offer broad market exposure.
• PMS provides a more focused and curated portfolio.

3. Optimized Tax Efficiency

• PMS attracts higher tax liabilities.
• Mutual funds have tax-efficient options like ELSS (Equity-Linked Savings Scheme).

4. Liquidity Management

• Mutual funds can be redeemed quickly.
• PMS investments require a long-term horizon and are less liquid.

Example Investment Strategy

Let’s assume you have ₹1 crore to invest. Instead of putting all your money into either PMS or mutual funds, you could:

• Allocate ₹50 lakh to PMS for higher risk-adjusted returns.
• Invest ₹30 lakh in diversified mutual funds (equity, debt, hybrid) for balanced growth.
• Keep ₹20 lakh in liquid/debt funds for emergency needs.

This way, you get the best of both worlds—higher returns from PMS and stability from mutual funds.

Both PMS and mutual funds serve different investment needs. While mutual funds are ideal for retail investors looking for a regulated and diversified option, PMS caters to HNIs seeking customized investment strategies with higher return potential.

Before choosing between the two, consider:

• Investment Corpus – If you have less than ₹50 lakh, mutual funds are your best bet.
• Risk Appetite – PMS is riskier but offers higher potential returns.
• Liquidity Needs – Mutual funds are easier to redeem, while PMS is suited for long-term investing.
• Tax Implications – Mutual funds are more tax-efficient compared to PMS.

If you have the financial capacity, investing in both PMS and mutual funds can help create a well-diversified and optimized portfolio. Consulting a financial advisor before making any major investment decisions is always recommended.

By choosing wisely, you can build long-term wealth and achieve your financial goals efficiently.