Portfolio Management Services vs. Direct Stock Investing
The main difference between PMS and direct stock investing is that PMS helps you leverage investment expertise of professional portfolio managers whereas direct stock investing requires stock picking skills and time commitment from you.
Let’s look at some more differences (and similarities) between PMS and direct stock investing in the following paragraphs.
Portfolio Management Services (PMS) vs Direct Stock Investing
| Portfolio Management Services | Direct Stock Investing | |
| Definition | Portfolio Management Services or PMS offer investment portfolios and strategies to qualified clients. PMSes employ Portfolio Managers to create the right investment portfolios for their clients. | Direct Stock Investing refers to stock market investing where the investor is responsible for taking investment decisions by researching or speculating investment opportunities. |
| Investment is done in | Portfolio Management Services offer various strategies. Investors can invest in one or more of PMS strategies. | Stocks. However, investors can choose to diversify their stock investments with bonds, gold, mutual funds etc. |
| Minimum investment | Rs. 50 Lakh. Prior to Jan 2021, the minimum investment required for PMS was Rs. 25 Lakh. | Depends on the stock being considered. In most cases, a diversified portfolio of direct stocks would require at least a few thousand rupees. |
| Asset classes you can get exposure to | Stocks, bonds, commodities, unlisted equity. Portfolio Management Services can even invest in mutual funds (direct plans only) | Stocks. Investors may diversify stock portfolios with self-researched bonds, gold and mutual fund portfolios. |
| Types | Based on investment control, PMS could be discretionary, non-discretionary or advisory. Based on market cap focus, PMS could be large cap, mid cap, small cap etc. | Stock marketing investing can be short-term, long-term or speculative. Sophisticated investors may invest in popular themes (like IT or FMCG) or strategies like value investing, growth investing etc. |
| Personalization | Portfolio Management Services offer a lot of personalisation. However, different PMS providers may offer different levels of personalisation. | Any stock portfolio independently constructed by investors would be 100% personalised. Investors may also invest basis tips, speculations or copy other investors. |
| Relationship manager | Every PMS offers a dedicated relationship manager or account manager who can help you with general queries and doubts. | The investor is the portfolio manager, research analyst as well as the relationship manager for the portfolio. |
| Investment control | Discretionary PMS investors have no control over the investment decisions. Non-discretionary PMS investors, however, can approve or reject trades recommended by the portfolio manager. | Direct stock market investors have full control on their portfolios unless they are investing under the guidance of someone else or copying investment portfolios of other investors. |
| Ownership of securities | In PMS, the investor is the owner of the securities. The securities are held in a dedicated demat account owned by the investor. | Direct stock investors are owners of the stocks and other securities they may invest in for diversification beyond stocks. |
| Flexibility | PMS potentially offer a lot of flexibility because of how they are structured. But it all depends on the PMS provider. | Direct stock investing offers a lot of flexibility since the investor is in full control of decision making and research process. |
| Liquidity | PMS are very liquid. However, early withdrawal may have costs in the form of exit load and higher taxation. | Most stocks (large caps and mid caps) are very liquid. The investments could be illiquid if the stocks are not traded often on the stock exchange. |
| Returns | Historically, returns from comparable PMS have been higher than direct stock investing. Expected returns depend on the market conditions and PMS performance, and cannot be predicted. | Historically, stock investors have underperformed professionally managed instruments like PMS and mutual funds and even the stock market (represented by NIFTY 50). Returns vary based on market conditions, investor research process and decision making. |
| Is SIP* possible? | Yes. SIP is possible in Portfolio Management Services. | Yes. SIP is possible in direct investing. Most brokers offer SIP in stocks. Alternatively, investors can invest manually every month. |
| How many of each exist in India? | There are 300+ Portfolio Management Services investment strategies in India. | It is difficult to estimate the number of DIY (Do-It-Yourself) stock investors in India |
| Transparency | Transparency is very high. You get real time updates on all the investment transactions happening. Most PMS send monthly/quarterly newsletters. | Absolute transparency since the investor himself/herself is managing the portfolio. |
| Regulations | Portfolio Management Services are well regulated by SEBI. | Regulations are not applicable to individual DIY investors. |
| Risk involved | Market risk is involved in PMS. However, since PMS strategies are professionally managed so that risk involved is lower than DIY stock investing. | Risk involved in self-researched stock market investing is higher than investing in professionally managed instruments like mutual funds and PMS. |
| Examples | Dezerv, IIFL, Marcellus are some popular Portfolio Management Services. | Not applicable. |
| Is a demat account required? | Yes. A dedicated demat account is required for each PMS strategy. | Demat account is compulsory to invest in stocks. |
| Who should invest | First, you need to have an investible surplus of at least Rs. 50 lakh to consider PMS investing. Next, you should invest in a PMS if you are looking for a dedicated relationship manager. Finally, you should consider a PMS service if you can handle the ups and downs of the stock market. | DIY Stock Investing is not for everyone. Sustained good performance through direct stock investing is difficult even for investors who have a finance or investment background. 99% investors are better off investing via PMS or mutual funds and let the experts do their job. |
| Management fees | Most PMS charge a management fee of around 1.5-2%. | Since the investor is relying on his/her own research and executes the transactions himself/herself, no management fee needs to be paid to anyone. |
| Performance fees | Most PMS charge a performance fee or profit sharing of 10-20% of profits. | No performance fee. |
| Transaction costs | Transaction costs are STT and brokerage charged by the broker where the investor has the demat account. | Transaction cost is STT only. STT stands for Securities Transaction Tax and varies across securities. Some brokers may charge brokerage as well. |
| Others fees | Annual maintenance charge of the broker where the investor has the demat account. | Time is the most important fee DIY stocks investors pau since sensible stock market investing requires a lot of time and effort to be put in. |
| Exit load | Exit loads may be applicable for withdrawals within 3 years from the time of investment and are generally in the range of 1-2%. | Stock investments have no exit loads. |
| Taxation on interest/capital gains | Taxation depends on the type of securities the investor has realised gains on. Taxation structure is different for different securities in India. | Stocks attract STCG for gains realized within 1 year of investment and LTCG otherwise. STCG is 15% of realised gains and LTCG is 10% of realised gains. The first Rs. 1 lakh of long-term gains are exempt from tax. |
| Taxation on stock dividends | Dividends from stocks are taxed at 10%. | Dividends from stocks are taxed at 10%. |
Should you invest in PMS or stocks?
The answer is not a straightforward one. We need to consider PMS eligibility and trade-offs involved.
Let’s look at eligibility first.
The minimum investment required to invest in PMS is Rs. 50 lakh. So, if your wallet size doesn’t allow you to invest in PMS then stocks may be a good option.
However, if you are looking to invest in the stock market under professional guidance with less than Rs. 50 lakh, then mutual funds are your best friends.
Let’s look at trade-offs now.
PMS is hands-off investing. You need to only transfer money to a dedicated demat account and the PMS investment team will take over and invest your money in the right stocks/mutual funds. The best PMS providers are also very vigilant and review your portfolio regularly and keep it in top shape by making necessary changes.
Direct stock investing, on the other hand, requires you to dedicate hours of research to identifying the right stocks and then investing in them. The entire process is very hands-on and requires you to do everything.
So, the most obvious trade-off is the dedication of time and effort that direct stock investing requires. PMS investing saves you all this time and effort.
However, Portfolio Management Services are for-profit businesses. They charge up to 2% of your portfolio value as well as a performance fee of up to 20% of your profits. So, PMS Services are definitely not cheap.
So, you can opt for Portfolio Management Services if:
- You have an investible surplus of Rs. 50 lakh or more
- You are okay with paying PMS fees, which are quite high
Dezerv is an affordable PMS with a 0% fixed management fee ->
You should invest in direct stocks if you have the expertise and time to pick and monitor them.
If you don’t have a big wallet and still want professional investment guidance, mutual funds are the way to go!
