[Curated for NRIs] Mutual Funds Vs. PMS (Portfolio Management Services)
Fixed deposits (FD) and debt mutual funds are two popular investment options that are suitable for risk-averse investors. Both of them offer attractive returns and liquidity. But which one is better for NRIs? In this article, we will compare Non-Resident External (NRE) FD and Debt Mutual Funds on various parameters and help you decide which one suits your needs and goals better.
March 31, 2024
7 mins

Is investing a nightmare for you? Are you confused about how to invest, which asset to invest in, and which advisor/ platform to pick? The list can be never-ending.

Among the myriad options, picking the right one often becomes challenging. But when broken down, it actually isn’t all that difficult. Let’s say you’ve decided to invest in Indian equities, and now you have three options - 

1️⃣Invest directly in the stock market - the famous DIY approach.

2️⃣Invest through mutual funds - invest and relax!

3️⃣Invest through Portfolio Management Services (PMS) - have a manager maintain your portfolio while having a say on where to invest (bonus - you’ll have a diversified portfolio across asset classes).

Only if you are a PRO (have the required knowledge and time) go for the first option. Everybody else, the remaining 2 are your way forward.

Both involve investing in a portfolio of securities, such as stocks, bonds, commodities, etc., managed by professional fund managers. However, there are significant differences between them in terms of portfolio size, customisation, charges, performance, and taxation.

Let’s understand the differences in detail and see which option is best for you. 

What are Mutual Funds (MFs)?

Mutual Funds pool money from many investors and invest it in a diversified portfolio of securities, such as stocks, bonds, money market instruments, etc. 

The fund manager is responsible for selecting the securities, monitoring the performance, and adjusting according to the market conditions and the scheme’s objective.

Mutual funds offer various types of schemes, such as equity, debt, hybrid, sectoral, thematic, index, etc., to cater to different investors' risk-return profiles and investment horizons.

What is Portfolio Management Services (PMS)?

PMS is a customised investment service offering tailored solutions to individual investors based on their risk appetite, return expectations and investment objectives. 

PMS involves giving a discretionary or non-discretionary mandate to a portfolio manager, who manages the investor’s portfolio on their behalf. 

PMS requires a minimum investment of INR 50 lakhs, which makes it suitable for high-net-worth individuals (HNIs).

Mutual Funds Vs. PMS (Portfolio Management Services)

PMS is designed for high net-worth individuals with an investment capacity of INR 50 lakh, while mutual funds allow investments with as little as INR 500. Let’s understand the differences between the two

Debt Mutual Fund Information
Aspect Mutual Funds Portfolio Management Service (PMS)
Definition Mutual funds are professionally managed investment portfolios provided by Asset Management Companies (AMCs). PMS offers personalised investment portfolios and strategies for qualified clients.
Minimum Investment INR 500 (may vary) INR 50 lakhs
Can Invest in More than one fund More than one PMS strategy
Asset Class Exposure Stocks, Bonds and Commodities Stocks, Bonds, Commodities, Unlisted Equity and Mutual Funds
Types Based on Asset Class: Equity, Debt or Hybrid Based on Structure (entry and exit restrictions): Open-ended or Closed-ended Based on Market Cap: Large Cap, Mid Cap, Small Cap, etc. Based on Investment Control: Discretionary, Non-Discretionary Or Advisory.
Personalisation Not available. However, third party apps like iNRI can help you pick funds that suit your investment goals. Available, the portfolio manager will personalise your holdings to match your investment goals.
Relationship Manager Not available if you are investing directly. For investment through a distributor or advisor, they can act as your relationship manager. You will have a dedicated relationship or account manager.
Control Over Investments Zero control Discretionary PMS - No control over investment decisions Non-Discretionary PMS - You can approve or reject trades suggested by the portfolio manager
Ownership of Securities You will own the units of a mutual fund and not the shares of the companies it invests in. For stock investments, you will be the shareholder of the companies you invest in.
Performance Benchmarked against an index No benchmark
Flexibility No flexibility at all. High, but it depends on the PMS provider.
Liquidity Highly liquid; however, early withdrawals may attract exit load and higher taxation. Highly liquid; however, early withdrawals may attract exit load and higher taxation.
Returns Historically, mutual funds have given higher returns than PMS. Since these invest in market-linked instruments, returns are not guaranteed. Historically, PMS has given lower returns than MF. Since these invest in market-linked instruments, returns are not guaranteed.
Is Systematic Investment Plans (SIPs) possible? Yes Yes
Number of Providers 40+ AMCs with more than 2,500+ funds 300+ PMS providers
Transparency Not very high, the AMC will publish the portfolio holdings fortnightly or monthly. Very high, you will get real-time updates on your investments.
Demat Account Not compulsory. You can invest in MFs without a demat account as well. Compulsory
Management Fees 0.5% to 2% ~1-2%
Performance Fees MFs don't charge any performance fee 10-20% as performance fee or profit sharing
Other costs and fees Securities Transaction Tax (STT) only if you invest through a demat account. STT and Annual Maintenance Charge (for demat account)
Commissions Only if you invest through a distributor. No commissions.
Exit Load Up to 1% if withdrawn within 1 year from investing. However, it does not apply to all types of mutual funds. 1-2% if withdrawn within 3 months from investing.

NRI Taxation for MF and PMS

The taxation of MF and PMS for NRIs depends on the type of securities, the holding period, and the investor's country of residence. The following table shows the tax rates applicable for NRIs investing in MF and PMS:

Debt Mutual Fund Information
Aspect Mutual Funds Portfolio Management Service (PMS)
Definition Mutual funds are professionally managed investment portfolios provided by Asset Management Companies (AMCs). PMS offers personalised investment portfolios and strategies for qualified clients.
Minimum Investment INR 500 (may vary) INR 50 lakhs
Can Invest in More than one fund More than one PMS strategy
Asset Class Exposure Stocks, Bonds and Commodities Stocks, Bonds, Commodities, Unlisted Equity and Mutual Funds
Types Based on Asset Class: Equity, Debt or Hybrid Based on Structure (entry and exit restrictions): Open-ended or Closed-ended Based on Market Cap: Large Cap, Mid Cap, Small Cap, etc. Based on Investment Control: Discretionary, Non-Discretionary Or Advisory.
Personalisation Not available. However, third party apps like iNRI can help you pick funds that suit your investment goals. Available, the portfolio manager will personalise your holdings to match your investment goals.
Relationship Manager Not available if you are investing directly. For investment through a distributor or advisor, they can act as your relationship manager. You will have a dedicated relationship or account manager.
Control Over Investments Zero control Discretionary PMS - No control over investment decisions Non-Discretionary PMS - You can approve or reject trades suggested by the portfolio manager
Ownership of Securities You will own the units of a mutual fund and not the shares of the companies it invests in. For stock investments, you will be the shareholder of the companies you invest in.
Performance Benchmarked against an index No benchmark
Flexibility No flexibility at all. High, but it depends on the PMS provider.
Liquidity Highly liquid; however, early withdrawals may attract exit load and higher taxation. Highly liquid; however, early withdrawals may attract exit load and higher taxation.
Returns Historically, mutual funds have given higher returns than PMS. Since these invest in market-linked instruments, returns are not guaranteed. Historically, PMS has given lower returns than MF. Since these invest in market-linked instruments, returns are not guaranteed.
Is Systematic Investment Plans (SIPs) possible? Yes Yes
Number of Providers 40+ AMCs with more than 2,500+ funds 300+ PMS providers
Transparency Not very high, the AMC will publish the portfolio holdings fortnightly or monthly. Very high, you will get real-time updates on your investments.
Demat Account Not compulsory. You can invest in MFs without a demat account as well. Compulsory
Management Fees 0.5% to 2% ~1-2%
Performance Fees MFs don't charge any performance fee 10-20% as performance fee or profit sharing
Other costs and fees Securities Transaction Tax (STT) only if you invest through a demat account. STT and Annual Maintenance Charge (for demat account)
Commissions Only if you invest through a distributor. No commissions.
Exit Load Up to 1% if withdrawn within 1 year from investing. However, it does not apply to all types of mutual funds. 1-2% if withdrawn within 3 months from investing.

Note: You may also have to pay tax in your country of residence, depending on the tax laws of that country. However, you can claim credit for the taxes paid in India under the Double Taxation Avoidance Agreement (DTAA).

Conclusion

PMS and MF are both viable investment options for NRIs wanting to invest in the Indian market. However, they have different features, benefits, and drawbacks, making them suitable for different investors. PMS is more expensive in terms of investment amount and cost and has historically underperformed MFs. 

PMS also requires a demat account to invest, which is an offline process (a tedious one). Thus, MFs are a better choice for most NRIs, offering lower cost, higher returns, and more convenience.

You can invest in MFs through iNRI without a demat account. You can open a bank account and complete the KYC in no time. iNRI also helps with tax and other compliances and provides expert advice and guidance on the best MF schemes to invest in. Check out the top mutual funds curated specially for NRIs.

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