PMS vs mutual funds
A mutual fund gives you units of a pool; a PMS gives you the shares themselves.
A mutual fund pools money from thousands of investors into one scheme and gives each of them units. A PMS manages one client's own portfolio in that client's own demat account. Every other difference between the two follows from that.
If you already sell mutual funds, the useful question is not which is better but which differences matter to this client: minimum ticket, cost structure, tax mechanics, transparency and how much the portfolio can be tailored.
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PMS vs mutual funds at a glance
Structure
Mutual fund
Pooled scheme; investors hold units
PMS
Individual account; the client holds the securities directly
Regulations
Mutual fund
SEBI (Mutual Funds) Regulations, 1996
PMS
SEBI (Portfolio Managers) Regulations, 2020
Minimum
Mutual fund
Low, set by each scheme
PMS
₹50 lakh in funds or securities (exceptions for accredited investors)
Pricing
Mutual fund
One NAV per scheme, published daily
PMS
Each client's portfolio has its own value and returns
Costs
Mutual fund
Expense ratio charged within the NAV, within SEBI's limits
PMS
Management fee, performance fee (only above a high water mark) or both; operating expenses capped at 0.50% a year of average daily AUM, brokerage extra at actuals; no upfront fee
Exit load
Mutual fund
Set by each scheme
PMS
Capped: up to 3% in year 1, 2% in year 2, 1% in year 3, nil after
Customisation
Mutual fund
None; every investor owns the same scheme
PMS
Possible within the investment approach, such as excluding a sector the client objects to
Reporting
Mutual fund
Account statement of units held
PMS
Report at least every three months showing every holding, trade, dividend, expense and the distributor's commission
| Mutual fund | PMS | |
|---|---|---|
| Structure | Pooled scheme; investors hold units | Individual account; the client holds the securities directly |
| Regulations | SEBI (Mutual Funds) Regulations, 1996 | SEBI (Portfolio Managers) Regulations, 2020 |
| Minimum | Low, set by each scheme | ₹50 lakh in funds or securities (exceptions for accredited investors) |
| Pricing | One NAV per scheme, published daily | Each client's portfolio has its own value and returns |
| Costs | Expense ratio charged within the NAV, within SEBI's limits | Management fee, performance fee (only above a high water mark) or both; operating expenses capped at 0.50% a year of average daily AUM, brokerage extra at actuals; no upfront fee |
| Exit load | Set by each scheme | Capped: up to 3% in year 1, 2% in year 2, 1% in year 3, nil after |
| Customisation | None; every investor owns the same scheme | Possible within the investment approach, such as excluding a sector the client objects to |
| Reporting | Account statement of units held | Report at least every three months showing every holding, trade, dividend, expense and the distributor's commission |
Tax mechanics, the difference clients feel
When a mutual fund sells a stock inside the scheme, the investor pays no tax on that sale; tax arises when the investor redeems units. In a PMS, every sale the manager makes is the client's own capital gains transaction, because the client owns the shares. A high-churn PMS can therefore generate short-term gains each year even if the client never withdraws a rupee.
Dividends, too, are received directly in the PMS client's account. The detail of rates and how fees are treated is on the PMS taxation page.
Distributor commission works differently
In PMS, SEBI allows distributor commission on a trail basis only, paid out of the portfolio manager's own fees, and the prospective client must be told what the distributor will earn before onboarding. The quarterly report then shows the commission actually paid for that client. There is no upfront commission to recover.
One crossover worth knowing: a portfolio manager may buy mutual fund units for a PMS client only through direct plans, and may not charge any distribution fee on them.
Free account, this exam preselected.
A worked comparison
A client in Bengaluru has ₹75 lakh to put into Indian equities for at least five years.
Does the client want to see and own each stock?
Points toward a mutual fund
No, units are fine
Points toward PMS
Yes
Does the client want specific exclusions?
Points toward a mutual fund
No
Points toward PMS
Yes, for example no tobacco or no group companies of their employer
Is the client comfortable with a performance fee?
Points toward a mutual fund
Prefers a single expense ratio
Points toward PMS
Accepts it, with the high water mark
Does the client want to withdraw within three years?
Points toward a mutual fund
Scheme exit load only
Points toward PMS
PMS exit load of up to 3%, 2% or 1% may apply
Would yearly capital gains from churn bother them?
Points toward a mutual fund
Yes
Points toward PMS
Not a concern
| Question to ask | Points toward a mutual fund | Points toward PMS |
|---|---|---|
| Does the client want to see and own each stock? | No, units are fine | Yes |
| Does the client want specific exclusions? | No | Yes, for example no tobacco or no group companies of their employer |
| Is the client comfortable with a performance fee? | Prefers a single expense ratio | Accepts it, with the high water mark |
| Does the client want to withdraw within three years? | Scheme exit load only | PMS exit load of up to 3%, 2% or 1% may apply |
| Would yearly capital gains from churn bother them? | Yes | Not a concern |
How XXI-A tests this
Expect true/false statements such as 'a PMS client holds units of the portfolio manager's scheme' (false), 'a discretionary manager must not manage funds in a manner that takes on the character of a mutual fund' (true) and 'a PMS may invest in regular plans of mutual funds' (false: direct plans only). Fee questions contrast the NAV-embedded expense ratio with PMS fees charged to the client's account.
FAQs
What is the main difference between PMS and mutual funds?expand_more
A mutual fund is a pooled scheme where you hold units. A PMS is your own portfolio, held in your own demat account and managed for you.
Is PMS better than a mutual fund?expand_more
Neither is better in general. PMS suits investors with at least ₹50 lakh who want direct ownership and some customisation; mutual funds suit smaller tickets and investors who prefer pooled diversification and a single expense ratio.
Can a PMS invest in mutual funds?expand_more
Yes, but only through direct plans, and the portfolio manager cannot charge any distribution-related fee on those units.
Why does PMS create more tax events than a mutual fund?expand_more
Because the client owns the shares, each sale inside the portfolio is the client's own capital gains transaction. In a mutual fund, tax arises when you redeem units.