Mutual Funds vs PMS: Expert on why PMS isn’t the superior product many assume; what investors should know

India’s investment landscape is undergoing a significant transformation as investors move beyond traditional products and explore more sophisticated wealth-management structures. Among the newest entrants is the Specialised Investment Fund (SIF) — a customised investment vehicle designed to bridge the gap between Mutual Funds (MFs), Portfolio Management Services (PMS), and Alternative Investment Funds (AIFs). 

While SIFs are still in early stages, the debate between Mutual Funds and PMS—the two dominant portfolio vehicles—continues to intensify. Both invest in equities and debt, both are professionally managed, yet the underlying structure, cost, risk, and suitability differ sharply.

Aditya Shah, founder of Hercules Advisors, recently broke down the distinctions, emphasising that the “Mutual Fund vs PMS” debate has become increasingly heated on social media. According to him, both products serve different investor segments:

Mutual Funds allow investments as low as Rs 500, making them accessible to retail investors.

PMS requires a minimum of Rs 50 lakh, restricting participation to HNIs and family offices.

MFs offer tax efficiency, with gains taxed only at redemption.

PMS portfolios face taxation on every buy/sell, given that all trades settle directly in the investor’s demat account.

MFs have lower fees (0.5%–2.5%), while PMS charges fixed fees, performance fees, or hybrid structures, making them costlier.

Despite PMS being marketed as a higher alpha–generating product, experts note that PMS does not necessarily outperform mutual funds consistently. Many PMS managers take concentrated or aggressive positions to generate alpha, sometimes increasing risk levels beyond what retail investors can stomach. “Only investors with large surpluses and appetite for higher volatility should consider PMS,” Shah noted, adding that most retail investors would be better served through diversified active mutual funds and low-cost passive products.

Portfolio structure: PMS vs MF

Portfolio structure is another major differentiator. Mutual funds generally hold 40–50 stocks or more, offering broad diversification but little room for customisation. PMS portfolios are concentrated—often under 30 stocks—and personalised according to the client’s risk profile, goals, liquidity preferences, and investment horizon.

Flexibility further sets PMS apart. PMS managers can take decisive calls, including raising cash positions up to 100% during uncertain markets. Mutual funds, however, must adhere to SEBI-mandated investment mandates, limiting tactical freedom.

The tax impact also differs sharply.

In PMS: Every transaction triggers capital gains, STT, brokerage, and stamp duty.

In MFs: Investors pay capital gains only when selling units, with all operational expenses embedded in the NAV.

Transparency levels also vary. PMS offers transaction-level reporting to clients but no public disclosure. Mutual funds publish regular factsheets and holdings publicly, enabling easy comparison but limiting real-time visibility.

As India’s wealth grows, more investors are exploring solutions beyond mutual funds. PMS remains an aspirational product for many HNIs seeking customisation and active engagement. Meanwhile, the newly emerging Specialised Investment Fund (SIF) framework is expected to offer the next level of tailored strategies with regulatory oversight.

For most investors, however, the conclusion remains unchanged: Mutual funds offer simplicity, diversification, lower cost, and tax efficiency — making them the right long-term choice for the majority.