Understanding the Difference Between PMS and Mutual Funds: Key Features and Benefits
When it comes to investing in the stock market, two common investment avenues that many investors consider are Private Managed Securities (PMS) and Mutual Funds. Both have their advantages and disadvantages, and understanding the difference between them is crucial to making an informed investment decision.
What is a Mutual Fund?
A Mutual Fund is an investment instrument that pools money from multiple investors to invest in stocks, bonds, short-term money market instruments, and other securities. The objective of a mutual fund is not only to generate income or capital gains but also to diversify risks.
What is a PMS?
In contrast, a Private Managed Security (PMS) involves an investor hiring a fund manager to invest on their behalf, often with a Power of Attorney. The fund manager has the liberty to make investment decisions based on the specific requirements of the investor.
Key Differences Between PMS and Mutual Funds
Investment Structure
In a mutual fund, investors pool their money together in a pool that is managed by a fund manager. The fund manager then invests the pooled money into various assets such as stocks, bonds, and other securities. The fund manager is paid a management fee and an expense ratio as outlined in the fund's prospectus.
In a PMS, investors directly hire a fund manager through a broker. The fund manager then manages the investments using the funds provided by the investor, similar to a Power of Attorney. The fund manager charges a performance fee based on the success of the investment, in addition to a management fee.
Taxation Methodology
The taxation methodology for both mutual funds and PMSs differs. Mutual funds have a simpler tax regime where capital gains are realized on redemption only. However, in PMS, every transaction results in a capital gains or loss, which is taxed accordingly. This can be more complex for investors to manage.
Flexibility and Control
Mutual funds are often rigid when it comes to the types of assets in which the fund can invest, as stated in the fund’s objective. PMS, on the other hand, offers more flexibility. The fund manager can create a portfolio that includes a mix of equities, debt, and commodities, among other assets.
Additionally, investors in a PMS have more control over the composition of their portfolios, especially when the number of investors is fewer. This can be particularly beneficial for high-net-worth individuals or institutions looking for tailored investment solutions.
Examples and Personal Experience
I personally find PMS to be a better investment option, but with the caveat of choosing a well-established provider. One provider I have had a great experience with is First Global. They utilize a unique investment approach where AI crunches data for every company to identify the best stocks. Their expertise is then leveraged to make investment decisions.
I have invested in their equity scheme, IS50, which focuses on a single equity investment and a multi-asset scheme. As of the end of 2020, they have performed exceptionally well, outperforming in the multi-cap PMS category with a gain of over 55%. Furthermore, the drawdowns have been much lower compared to other mutual funds and PMS schemes I have been part of.
Additionally, I found their blogs very informative and unique, which has kept me well-informed about market trends and investment strategies. Their website is user-friendly and informative, making it easy to understand the investment process and success stories.
Conclusion
Both PMS and Mutual Funds have their strengths and weaknesses, and the choice between them depends on your investment goals, risk tolerance, and level of control you wish to have over your investments. For those seeking more flexibility and higher control, PMS might be the better choice. However, for those looking for a simpler, more diversified approach to investments, Mutual Funds could be the way to go.
Ultimately, the key to successful investing is understanding the options available and making an informed decision based on your individual needs and circumstances. Whether you choose PMS or Mutual Funds, it is always a good idea to conduct thorough research and consider professional advice if needed.