Both portfolio management and mutual funds are avenues to invest in stocks and bonds. They are managed funds where investors put in their money which is invested by expert professionals who have an in-depth understanding of the market forces. Although both portfolio management and mutual funds are indirect ways of investing in the markets, there are still significant differences between them. They are different investment models and an investor needs to understand the difference between these two to make informed investment decisions.
But before we start analysing the difference between portfolio management and mutual funds, let us first understand what both of these investment models mean individually.
What is Portfolio Management?
Portfolio management is a type of wealth management service provided by professional portfolio managers who enter into an agreement with the clients to manage their investment portfolios consisting of a different set of securities. There are two types of portfolio management services namely discretionary portfolio management and non-discretionary portfolio management. Under discretionary portfolio management, the portfolio manager is responsible for making investment decisions on behalf of the clients while under non-discretionary portfolio management, the portfolio manager makes investment decisions in accordance with the directions of the clients.
What is Mutual Fund?
Mutual funds are professionally-managed investment schemes which pools together the money from different investors and invests them in different instruments or assets like stocks, bonds, money market instruments, etc. The investment decisions in case of mutual funds are taken by the fund manager who decides which stocks, bonds or assets the mutual fund must buy.
Difference between Portfolio Management and Mutual Fund
The level of transparency in case of mutual funds is much higher as compared to portfolio management services as they are tightly regulated by SEBI. Moreover, portfolio management services are not very transparent in their disclosures.
· Size of Investment
You may choose portfolio management schemes if your risk appetite in more and investment amount is huge. The minimum investment size in case of portfolio management schemes is Rs. 25 lakhs. On the other hand, mutual funds are ideal for you if your investment amount is small and you are looking for stable returns. You can invest in mutual funds via systematic investment plans starting with just Rs 500. Portfolio management schemes typically cater to high net-worth individuals while mutual funds cater to a much wider investor universe.
· Fee Structure
Portfolio management services charge a very high fee for management of the portfolio in comparison to mutual funds. In the case of portfolio management services, the fee charged consists of entry load, fund management fee, performance fee and fixed fee. While in case of mutual funds, the fee charged is fixed which depends on the amount of investment made. Moreover, mutual funds have minimum expense ratio and exit load making them more cost-effective than portfolio management services.
Mutual funds offer various options for diversification of risk by investing in different funds and a huge number of stocks. On the other hand, portfolio management services usually invest in a concentrated portfolio of 20 to 30 stocks, making them a riskier product as compared to mutual funds.
In the case of mutual funds, the transactions of purchase and sale of securities are exempt from any capital gain tax. Whereas in the case of portfolio management services, the investor incurs a capital gain or loss on every transaction of sale or purchase as the stocks are held in the investor’s name. Thus he has to pay capital gain tax on the same.
Sound financial planning is a must in order to invest wisely. While making an investment decision, it is imperative to consider your financial goals, the amount you intend to invest and your risk appetite.