What is PMS?
Portfolio Management Service is a professional investment service in which a SEBI-registered portfolio manager builds and manages a portfolio of stocks, bonds and other securities for a single investor, with a minimum investment of ₹50 lakh. To understand how it works, read our detailed guide on Portfolio Management Services.
What is a Mutual Fund?
Mutual funds pool money from a large number of investors and invest it across a diversified portfolio of stocks or bonds. You own units of the fund, priced daily at Net Asset Value, not the underlying securities. To understand how they work, read our detailed guide on mutual funds.
PMS vs Mutual: Difference Between the Both
The table below summarises the key differences between a PMS and a mutual fund:
| Factors |
PMS |
Mutual Funds |
| Minimum investment |
₹50 lakh |
As low as ₹100 (SIP) |
| Ownership |
You own underlying securities (debt, bond, shares) directly in your demat account |
Indirect ownership through units in a pooled fund |
| Customization |
Portfolios can be customised based on investor’s financial goals and risk appetite |
AMC decides a standardized portfolio for all investors |
| Portfolio size |
Generally concentrated, 15-25 stocks |
Diversified, often holding 50+ securities |
| Regulator |
SEBI |
SEBI |
| Typical charges |
2-3% annual management fee and occasional performance fee |
0.5-2.25% expense ratio |
| Transparency |
Flexible visibility of every holding |
Portfolio disclosed monthly as mandated by SEBI |
| Best for |
High net income investors seeking a personalised and concentrated investment |
First-time investors looking for diversified and professionally managed investments |
How Charges Affect Your Choice Between PMS and Mutual Funds
The charges for a Portfolio Management Service and a mutual fund may appear small on paper but over longer holding periods, they impact your final returns on the investments.
PMS Fee Structure
- A PMS may charge an annual management fee ranging 2-3%, plus an occasional performance fee as decided by your PMS provider.
- This means your total cost can vary in a year based on your portfolio’s performance.
Mutual Fund Fee Structure
- A mutual fund generally has an expense ratio of 0.5-2.25% and does not include any performance charges.
- The expense ratio depends on whether the fund is actively or passively managed.
- The expense ratio is capped by SEBI based on the size of your fund’s AUM.
PMS vs Mutual Funds Taxation for NRIs
Understanding taxation for PMS and Mutual funds helps plan more effectively and choose the better option. The taxation structure for PMS and Mutual funds for NRIs is similar in India.
Equity Holdings
- Both PMS and Mutual Fund are subject to a short-term capital gain of 20% on equity holdings if an investment’s holding period is less than 12 months.
- If you withdraw your equity-based investments after a year and your income crosses the annual ₹1.25 lakh mark, you are subject to a long-term capital gain of 12.5%.
Debt Holdings
For units purchased in a debt-based mutual fund on or after April 1, 2023, all gains are taxed at the NRI's applicable income tax slab rate.
- In case of PMS, gains are taxed at the NRI’s applicable income tax slab, if the holding period is less than 12 months. For listed debt securities held for more than 12 months, gains are taxed at 12.5% rate.
- If your country of residence has a DTAA with India, you may be able to benefit from reduced TDS on your investment.
Note: Because tax rates and limits are revised in each Union Budget, it's better to check the current year's rules or confirm with a tax advisor before making decisions.
How Tax Residency Affects PMS vs Mutual Fund Decisions
Your country of residence, the governing tax laws and DTAA with India can answer your PMS or Mutual fund question.
NRIs in USA/Canada
Countries such as the USA and Canada generally treat pooled investments like Indian mutual funds as Passive Foreign Investment Companies (PFIC).
- This complicates the paperwork and may also result in unfavourable tax treatment.
- Since an investment like PMS is directly owned by you, it doesn’t get classified under PFIC and receives better tax treatment in the USA.
In such a case, PMS becomes more favourable for an NRI to invest in the USA or Canada.
NRIs in UAE/Saudi Arabia
For NRIs in the UAE or Saudi Arabia, there is no tax to offset in the country of residency.
- This totally shifts the choice between PMS and mutual funds on the tax treatment in India.
- In such a case, you can make your decision based on your investment amount and customisation and goals.
NRIs in Singapore
Singapore-based NRIs can enjoy the DTAA benefits, which lower the tax deducted at source.
- Capital gains in some mutual funds are only taxable in Singapore, which saves tax significantly.
- This scenario tilts the decision in favour of mutual funds for NRIs.
Final Thoughts
Choosing between a PMS and a mutual fund as an NRI depends on your investable corpus, tax residency, and how involved you want to be. Mutual funds are better if you are an NRI based in the Gulf countries, whereas PMS is favourable if you are an NRI in the USA or Canada with a larger corpus and seeking a more tailored investment approach.
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