Mutual Funds or PMS: Which is Better Option to Invest as You Approach Retirement?
As you approach your retirement, every decision regarding investments needs to be cautiously made. A certain recent fintech app has suggested redeeming your mutual funds and investing that amount in Portfolio Management Services. Both mutual funds and PMS deploy professional managers to take care of your money, but they work quite differently from each other, and knowing these differences is essential before you make a switch.
The minimum investment is a key difference; PMS usually requires a much higher minimum investment, say Rs.50 lakh. On the other hand, mutual funds are quite affordable, as one can begin investing with an amount as small as Rs.100 and thus are somewhat flexible in terms of small or regular contributions. And then there are the taxes. In mutual funds, all the buying and selling by the fund manager does not have any implications for you in terms of taxation until you decide to redeem your units. That is, you are taxed only at withdrawal. In the case of PMS, the portfolio manager buys and sells the stocks in your demat account directly. That is, every transaction cost and tax comes to you, which will considerably increase your overall cost and decrease the returns.
Again, there is an added concern of transparency. Mutual funds are highly regulated, with a daily update on their NAVs and a monthly disclosure of their portfolio. As a matter of fact, this indicates that at each and every moment in time, investors are able to identify where their money is being put into. In contrast, in PMS, such a level of transparency is not accorded since the portfolio details are shared only with you and the PMS provider, thus making it more complicated to track its performance on a regular basis.
Differences between Mutual Funds and PMS are:
1. Cost: Mutual funds range at much cheaper prices, while PMS, usually tends to be more expensive.
2. Portfolio Design: A mutual fund pools money from a large number of investors into one common fund; PMS, on the other hand, invests in tailored portfolios suiting the investor’s needs.
3. Regulation and Transparency: Mutual funds are well-regulated and mark daily updates, which are entirely transparent. In the case of PMS, the transparency is low, and the portfolio details are shared between the investor and the service provider on a private basis.
4. Investment Size: Whereas one may initiate mutual fund investments with minimum amounts ranging from Rs.100 to Rs.5,000, PMS investments would require a minimum investment of Rs.50 lakh or more.
5. Taxation: In mutual funds, you pay taxes only at the time of redemption. In the case of a PMS, every trade is related to a transaction cost and taxes, both of which are to be borne by the investor.
Conclusion
You might like to protect your wealth while seeking growth as you approach retirement. While PMS offers a more tailored approach to investment, higher costs, taxes, and the lack of transparency may dent your returns. Mutual funds with low entry costs, better tax efficiency, and high transparency might be the safer and more cost-effective option for your retirement plan.
