You have two options to participate in the Equity market
- Direct Equity - Shares
Under direct equity investment, you should have enough time, knowledge, research, analytical skills, etc. Stock picking is more of an art than science, and it is basically a full-time job. Patience, timing, conviction, flexibility, and above all control over human biases & emotions - everything is important when dealing with equity. That is the reason only 10% of investors able to generate wealth through direct equity investments.
- Indirect Equity - Mutual Funds (MF) & Portfolio Management Services (PMS)
However, you can deploy your investments through an indirect way of investing in equity i.e. Mutual fund route or PMS route. Let's understand the features of this two investment platform:
Mutual Funds (MF):- Purpose: wealth creation
- Min Amount: Rs. 500/-
- Payment: lumpsum and/or SIP
- Lock-in-period: nil (except ELSS - 3 years)
- Exit load: 1% before 1 year, nil thereafter
- Recommended investment tenure: > 7 years
- Expenses: expence ratio, AMC fee etc. - 1.5% p.a. appx
- Upfront charges: Nil
- Investment basket: large-cap, mid-cap, small-cap, multi-cap, value fund, contra fund, dividend yield fund, sectorial fund, thematic fund
- A portfolio can not be customized
- Choice of Funds: lot many
- Flexibility (investor): can switch from one scheme to another
- Flexibility (fund manager): limited, strictly follow SEBI guidelines
- Expected Return: 11% p.a. appx
- Capital Gains: Equity LTCG applicable - @10% after availing 1 lac exemption limit p.a.
- Portfolio churning by fund manager: not taxable
- Seller: mutual fund AMC
- The investment amount is managed by a Fund Manager
- Regulator: SEBI
Portfolio Management Services (PMS):
- Purpose: wealth creation
- Min Amount: Rs. 50 lacs
- Payment: lumpsum only (No SIP facility)
- Lock-in-period: nil
- Exit load: varies 1% - 3% (before 1 year - 3 year)
- Recommended investment tenure: > 3 years
- Expenses: higher than MF
- Upfront charges: Nil
- Investment basket: can be customized
- Choice of Funds: limited
- Flexibility (investor): limited
- Flexibility (portfolio manager): more than MF
- Expected Return: 12% - 18% p.a. appx
- Capital Gains: Equity LTCG applicable - @10% after availing 1 lac exemption limit p.a.
- Portfolio churning by portfolio manager: taxable
- Seller: SEBI registered PMS providers
- The investment amount is managed by a Portfolio Manager
- Regulator: SEBI
The main difference between the two is:
- The investment amount in PMS is way above MF, hence it is designed for HNI and not for retail investors.
- A portfolio management agreement is signed between investor & portfolio manager with contains details about the objective, risk, securities to invest in, cost & portfolio management charges.
- Unlike MF investments that can be one online/offline, PMS is started with offline mode, and later top-in / redemption can be done online.
- Demat & trading account is mandatory in PMS. In MF, it is optional.
- The beneficial ownership of securities invested by the portfolio manager remains with the investors in his Demat account.
- Customization of the portfolio is possible with PMS vis a vis MF which has a standard portfolio as per scheme objective.
- Capital gain tax on MF is applicable at the time of redemption or switch from the scheme by the investor and not when the Fund Manager buys/sells any securities.
- Capital gain tax on PMS portfolio applicable to the investor when the Portfolio Manager buys/sells or churns any securities.
- In that sense, MF is more tax-efficient than PMS
- PMS is more on tactical allocation strategy as per the direction/movement of the market. Portfolio Manager can overweight/underweight any stock.
Disclaimer: Investment in securities & mutual funds are subject to Market Risk
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