The mutual fund (MF) space is growing, with certain portfolio management services (PMS) providers applying for MF licences and moving into the space. For a little over a decade, several portfolio management providers have launched or converted themselves into mutual funds.
In 2013, legendary investor, the late Parag Parikh, founder of Parag Parikh Financial Advisory Services or PPFAS, converted the PMS into a mutual fund, with the aim to invest long-term in Indian and foreign markets. And today, PPFAS’s flagship scheme, the Parag Parikh Flexi Cap Fund, is one of the most reputed and well-regarded funds among retail investors.
Since then, several other PMS providers have moved into the mutual fund space and applied for licenses, like White Oak, Unifi, and Capitalmind. White Oak Capital entered the mutual fund space with the acquisition of YES Asset Management Company, with SEBI giving its approval in 2021. Chennai-based Unifi Capital launched its mutual fund operations in November 2024, and Capitalmind received SEBI approval to launch its mutual fund in April 2025, just last month.
So there has been a pattern of PMS providers going the MF route. But why do PMS firms want to step into the MF space? Is it a logical “next step” to grow? What are the benefits? And what are the key differences between the two? Here’s a breakdown.
Understanding the difference: PMS vs MF
The main difference between portfolio management services (PMS) and mutual funds (MF) is the level of customisation that can be offered: while a PMS can be tailored to the needs of a single client or institutional investor, with mutual funds, money is pooled with other investors, creating a common portfolio.
But there are finer differences, like the minimum investment requirement, risk and return, costs, transparency and control, fee structure, and more.
- Minimum investment and structure:
Mutual funds are generally accessible to a wide range of investors, with minimum investments starting as low as ₹500. In contrast, portfolio management services cater to high-net-worth individuals, typically requiring a minimum investment of ₹50 lakh.
With MFs, investor contributions are pooled together to create a single, collective portfolio, and investors receive units representing their share. PMS, however, offers a more personalised approach. Each investor has a separate demat account, and the securities bought by the fund manager are held directly in the investor’s name. Unlike mutual funds where you own units, PMS allows you to directly own individual stocks or securities.
- Cost and fees:
Another major difference lies in the cost structure. Mutual funds typically charge an expense ratio between 1% and 2.25% for equity funds, making them relatively cost-effective. On the other hand, portfolio management services have the option of offering performance-based fee structures. Performance-based fees can offer a higher degree of alignment between the PMS and its clients.
- Customisation and control:
Another defining feature of PMS is the level of control investors have.
In discretionary PMS, the fund manager has full authority to make investment decisions without seeking the investor’s prior approval. In non-discretionary PMS, the manager provides recommendations, but trades are executed only after the investor’s consent.
Mutual funds, on the other hand, are managed entirely by fund managers who invest based on the fund’s predefined mandate and objectives. The investors who own units in that fund have no say in selecting specific securities within the portfolio.
- Transparency:
Both mutual funds and portfolio management services fall under SEBI’s regulatory framework. However, mutual funds offer greater transparency, with daily disclosures of net asset value (NAV), detailed portfolio holdings, and annual reports. (NAV or net asset value refers to the price of a single unit of the fund, which represents the market value of the fund’s holdings per unit. It is a value that investors use to buy or redeem units.)
PMS is also regulated by SEBI, but may provide less frequent disclosures and updates. PMS providers typically offer monthly portfolio updates to investors to keep clients up to date.
- Risk and return:
The risk-return profiles of mutual funds and portfolio management services differ significantly. Mutual funds are generally more diversified, which can help manage risk. MF returns vary based on the fund category and investment strategy, making them well-suited for investors with a moderate risk appetite and/or shorter investment horizons.
PMS, on the other hand, involves active management with fund managers making focused, research-driven investments. This approach can lead to higher returns but also comes with much more risk, making it more appropriate for investors who want tailored strategies and are comfortable with greater market volatility.
- Exit and liquidity:
Liquidity is another important factor. Mutual funds offer high liquidity and investors can buy or redeem units at any time based on the fund’s net asset value. In contrast, portfolio management services may have lower liquidity, especially if the PMS invests in small capitalisation companies, with exit terms governed by the specific PMS agreement. These may include early exit charges, making withdrawals less flexible.
Why PMS firms may choose to move to MFs
In both a PMS or a MF, managers need to demonstrate an acumen for managing money and making gains. However, both cater to very specific demographics: mutual funds are for everyday retail investors, while portfolio management services are for investors with deeper pockets, the high-net-worth individuals and ultra high-net-worth individuals (HNIs and UHNIs), which make up a smaller segment of the population. And this is the first of many reasons why some PMS providers move into MFs: the opportunity to scale.
- Investor base: Mutual funds allow fund managers to tap into the retail investor market and access a much larger investor base. Portfolio management services require a minimum investment of ₹50 lakh, which limits its appeal to HNIs. MFs, though, have a much lower entry barrier, as low as just ₹500, making them more accessible to retail investors. This reach is crucial in a country like India, where the mutual fund industry remains under-penetrated. According to the AMFI Crisis Factbook 2024, in fiscal 2024, the mutual fund AUM (assets under management) accounted for 18.2% of the gross domestic product, an all-time high. While the numbers are slowly increasing, it is still below developed economies like the United States.
- The risk factor: If PMS firms want to grow by attracting more retail investors, they need to cater to that demographic. Retail investors often seek high returns with a lower level of risk, which may not be possible in a PMS, whereas HNIs might be comfortable with the trade-off between risk and reward. So the mutual fund offering is a good way to appeal to a wider pool of investors and to capture a new demographic.
- Flexibility and scale: While PMS may give fund managers a bigger corpus to work with per investor, the mutual fund business offers greater flexibility in managing retail investments and building larger assets over time. A mutual fund license allows firms to raise and manage significantly larger pools of capital over time, creating brand visibility and deeper trust among the investing public.
- The trust factor: While mutual funds are more tightly regulated and more expensive to run, the credibility that comes with SEBI’s stamp of approval can help build investor trust. Setting up a PMS requires a relatively low net worth of ₹5 crore and there are fewer operational restrictions. Launching a mutual fund, on the other hand, involves more rigorous compliance, higher fixed costs, and tighter investment guidelines.
The path from PMS to MF certainly comes with its own set of challenges: higher costs, regulatory complexity, and a different investor psyche. But for firms willing to adapt and wanting to grow, the rewards of entering the mutual fund space could be substantial.
Sources
https://amc.ppfas.com/media/articles/parag-Parikh-big-mutual-fund-bet.php