PMS vs Mutual Funds: Fees, Tax and Who Should Choose

A mutual fund pools money from many investors into one scheme, while a portfolio management service (PMS) runs a separate portfolio of shares in your own name, with a minimum investment of ₹50 lakh. For most investors a low-cost mutual fund is the better fit; a PMS only makes sense if you have a large portfolio, can live with concentrated bets and accept that every trade the manager makes is taxed in your hands.

This guide first explains how a PMS works and the three types SEBI allows. It then compares PMS and mutual funds on cost, tax, transparency and performance reporting, walks through a rupee example of PMS fees, covers SEBI’s newer in-between options (Specialised Investment Funds and the PRIM route), and ends with the questions to ask before you sign a PMS agreement.

What is a PMS?

A portfolio management service is a SEBI-registered firm that manages a portfolio of securities for an individual client under a written agreement. Unlike a mutual fund, there is no pooling. The shares sit in a demat account opened in your name, and you can see each stock, each buy and each sell.

SEBI raised the minimum PMS investment from ₹25 lakh to ₹50 lakh at its board meeting of 20 November 2019, and the rule was carried into the SEBI (Portfolio Managers) Regulations, 2020. You can meet the minimum with cash, with shares you already own, or with a mix. Most PMS strategies are equity portfolios of roughly 15 to 30 stocks, though debt and multi-asset strategies also exist.

Discretionary, non-discretionary and advisory

SEBI’s rules recognise three ways a portfolio manager can work with you:

• Discretionary PMS: the manager decides what to buy, sell and when, without asking you trade by trade. This is by far the most common type.
• Non-discretionary PMS: the manager recommends trades, but each one is executed only after you approve it. You keep control, but you also need to be available and responsive.
• Advisory PMS: the manager only advises. You decide whether to act and you place the trades yourself through your own broker.

PMS vs mutual funds at a glance

Feature	Mutual fund	PMS
Minimum investment	Often ₹100 to ₹1,000 for SIPs	₹50 lakh per client
Structure	Pooled scheme; you own units	Separate portfolio; you own the shares directly
Number of stocks	Usually 30 to 80 in active equity funds	Usually 15 to 30, more concentrated
Costs	One expense ratio, capped by SEBI and built into the NAV	Fixed fee, performance fee or both, plus GST, brokerage and other charges
Tax	No tax until you redeem units; trades inside the fund are not taxed in your hands	Each sale by the manager is a taxable event for you
Exit	Redeem any business day; exit load usually up to 1% for a short period	Exit load capped at 3% in year 1, 2% in year 2, 1% in year 3, nil after
Disclosure	Daily NAV; portfolio published monthly	Full view of your own holdings and trades; strategy returns reported to APMI
Customisation	None	Limited (for example, excluding certain sectors or stocks you already hold)

How PMS fees work

A PMS must disclose its fee structure in the agreement, and SEBI’s February 2020 fee circular sets the ground rules. Upfront fees are not allowed. Operating expenses other than brokerage are capped at 0.50% a year of your average daily assets. GST at 18% is added to management and performance fees.

Most PMS providers offer one or more of these models:

• Fixed fee: a flat percentage of assets each year, commonly in the range of 1.5% to 2.5%, charged whether the portfolio rises or falls.
• Performance fee with a hurdle: a lower fixed fee (or none) plus a share of returns above a hurdle rate. A typical structure is 1% fixed plus 15% to 20% of returns above a 10% hurdle.
• High-water mark: SEBI requires performance fees to be charged on a high-water mark basis. The high-water mark is the highest value your portfolio has reached on which a performance fee was charged, so you are never charged twice for the same gains after a fall and a recovery.

Mutual fund costs are simpler. All costs are in the total expense ratio, which is deducted from the NAV daily. Under SEBI’s mutual fund regulations in force from April 2026, the base expense ratio for an equity scheme is capped at 2.10% for the smallest schemes and falls as assets grow; direct plans of large active equity funds commonly charge under 1%.

Worked example: what fees do to one good year

Suppose Meera invests ₹50 lakh, and the portfolio earns 18% before fees in year one, ending at ₹59 lakh. To keep the maths simple, assume all fees are calculated once, at year end, on the opening value. Here is how three hypothetical cost structures compare.

Option A, PMS with a 2% fixed fee: fee = 2% × ₹50,00,000 = ₹1,00,000. GST = 18% × ₹1,00,000 = ₹18,000. Total cost ₹1,18,000. Ending value ₹59,00,000 − ₹1,18,000 = ₹57,82,000, a net return of 15.64%.

Option B, PMS with 1% fixed plus 20% above a 10% hurdle:

1. Fixed fee = 1% × ₹50,00,000 = ₹50,000. Value after fixed fee = ₹58,50,000.
2. Hurdle value = ₹50,00,000 × 1.10 = ₹55,00,000. Gain above hurdle = ₹58,50,000 − ₹55,00,000 = ₹3,50,000.
3. Performance fee = 20% × ₹3,50,000 = ₹70,000.
4. GST = 18% × (₹50,000 + ₹70,000) = ₹21,600. Total cost ₹1,41,600.
5. Ending value = ₹59,00,000 − ₹1,41,600 = ₹57,58,400, a net return of 15.17%.

Option C, direct mutual fund plan with a 0.8% total expense ratio: cost ≈ 0.8% × ₹50,00,000 = ₹40,000. Ending value ≈ ₹58,60,000, a net return of about 17.2%.

Before tax, the PMS has to beat the fund by roughly 1.5 to 2 percentage points a year just to break even on costs in this example. Option B is cheaper than Option A in weak years, because the performance fee disappears when returns are below the hurdle. If the portfolio fell 10% in year two, Meera would pay only the fixed fee, and no performance fee would be due until the value climbed back above its previous high-water mark. Over many years, that 1.5 to 2 point gap compounds, which is why fees matter as much as stock picking (see our guide to the power of compounding).

The tax difference most investors miss

A mutual fund is a pass-through vehicle for tax. When the fund manager sells a stock at a profit inside the scheme, you pay nothing. You are taxed only when you redeem your units. Equity fund gains are taxed at 20% if held up to 12 months and at 12.5% above ₹1.25 lakh a year if held longer. Budget 2026 left these rates unchanged.

In a PMS, you own the shares directly, so every sale the manager makes is your capital gain in that year. Dividends from the stocks are added to your income and taxed at your slab rate. A manager who churns the portfolio can leave you with a sizeable tax bill even if you never withdraw a rupee.

Suppose a PMS manager books ₹10 lakh of short-term gains in a year by selling stocks held under 12 months. Meera owes 20% × ₹10,00,000 = ₹2,00,000, plus 4% cess of ₹8,000, so ₹2,08,000 (before any surcharge). Had the same trades happened inside an equity mutual fund, her tax that year would be nil, and the ₹2.08 lakh would stay invested and compound. Fixed and performance fees are also generally not deductible from capital gains, though this has been argued before tax tribunals, so check with a chartered accountant.

There is one tax advantage to direct ownership: you can book losses in individual stocks to offset gains elsewhere, and you can move existing shares into a PMS without selling them. Our article on legal ways to reduce capital gains tax on shares explains loss harvesting and the ₹1.25 lakh exemption in more detail.

Transparency and performance reporting

Mutual funds publish a NAV every business day and their full portfolios at least monthly, and data on every scheme is freely available. Comparing two funds’ returns after costs takes minutes.

PMS reporting used to be patchy, with firms choosing flattering benchmarks and showing returns for a model portfolio. SEBI’s circular of 16 December 2022, effective 1 April 2023, tightened this:

• Each strategy (called an “investment approach”) must be mapped to one of the benchmarks prescribed by the Association of Portfolio Managers in India (APMI) for its category: equity, debt, hybrid or multi-asset.
• Performance must be shown as a time-weighted rate of return (TWRR), which removes the distortion caused by the timing of client inflows and outflows, and always alongside the benchmark’s return for the same period.
• Portfolio managers report performance data to APMI every month, and APMI publishes investment-approach-wise returns, so you can compare a strategy with its benchmark and with peers.

Two cautions remain. Reported PMS returns are usually net of fees but before tax, so the tax drag described above is not visible. And your own return can differ from the strategy’s TWRR, depending on when you joined. Your quarterly statement shows your actual figure.

The in-between options: SIF and PRIM

Specialised Investment Funds (₹10 lakh minimum)

SEBI created the Specialised Investment Fund (SIF) category, effective 1 April 2025, to fill the gap between mutual funds and PMS. SIFs are run by mutual fund houses under the mutual fund regulations, but they can use strategies normal funds cannot, such as long-short investing with unhedged short positions through derivatives of up to 25% of net assets.

• Minimum: ₹10 lakh per investor, counted across all SIF strategies of an AMC at PAN level. Accredited investors are exempt.
• Strategies: seven types across equity (long-short, ex-top 100 long-short, sector rotation), debt and hybrid categories.
• Launches: the first SIF, Quant Mutual Fund’s qSIF Equity Long-Short Fund, opened for subscription on 17 September 2025, followed by Edelweiss’s Altiva and SBI’s Magnum hybrid long-short funds in October 2025.
• Tax: because SIFs are mutual fund schemes, they keep the pass-through benefit; you pay tax only when you redeem, at rates that depend on the strategy’s equity exposure.

SIFs are new and their strategies are more complex than a regular fund’s, and some allow redemptions only at set intervals. Read the strategy document carefully before investing.

The PRIM route (₹25 lakh minimum)

On 24 September 2026, SEBI’s board approved new Portfolio Managers Regulations, 2026. They keep the ₹50 lakh minimum for regular PMS but add a “Portfolio Managers Route for Investing in Mutual Fund units” (PRIM), with a ₹25 lakh minimum. Under PRIM, a portfolio manager builds your portfolio from direct plans of mutual funds, ETFs, index funds and SIFs, with the management fee capped at 1% of assets and exposure to group AMC schemes capped at 25%. The detailed circulars and start date were awaited at the time of writing (as of October 2026). The same regulations will also let portfolio managers invest abroad within RBI’s remittance rules; our guide to investing in US stocks from India covers those rules.

Who should choose what

A mutual fund suits almost everyone, including people with large portfolios. It is cheap, liquid, tax-efficient and easy to compare. A mix of index funds or ETFs and a few active funds covers most needs; see our comparison of ETFs vs mutual funds.

A PMS can make sense if all of these are true: your investable portfolio is several times the ₹50 lakh minimum, so the PMS is only one part of it; you want direct ownership or customisation; you have found a manager whose strategy has beaten its APMI benchmark after fees over a full market cycle; and you accept the yearly tax on realised gains. Many investors use a PMS as a satellite holding next to a core of mutual funds, which fits the approach in our guide to asset allocation.

Questions to ask before signing a PMS agreement

1. Is the firm registered with SEBI as a portfolio manager? Check its registration number on SEBI’s website.
2. What is the strategy’s TWRR against its APMI benchmark over 1, 3 and 5 years, and through the last market fall?
3. Which fee options are offered, and what would my total cost have been, including GST, in a 0%, 10% and 25% return year?
4. What was the portfolio turnover last year, and what share of gains was short term?
5. What is the exit load, and how quickly are funds and shares returned when I exit?
6. Who is the fund manager, how long have they run this strategy, and what happens if they leave?
7. Is there a direct onboarding option without a distributor, and what commission does my distributor earn?
8. Will I receive a capital gains statement every year that my chartered accountant can use for my return?

Common mistakes

• Judging a PMS by its best year. Concentrated portfolios can top the charts one year and trail badly the next. Look at rolling returns against the benchmark.
• Comparing pre-tax PMS returns with post-tax fund returns. Adjust for the tax paid along the way in a PMS.
• Putting most of your wealth into one PMS. The ₹50 lakh minimum makes it easy to end up over-concentrated with one manager and 20 stocks.
• Ignoring the exit load. Leaving in year one can cost up to 3% of the amount withdrawn.

FAQs

What is the minimum investment for PMS in India?

₹50 lakh per client, set by SEBI in November 2019. You can invest cash, transfer shares you already hold, or combine both. SEBI’s new PRIM route, approved in September 2026, will allow a ₹25 lakh minimum for portfolios built only from mutual fund units.

Is PMS better than mutual funds?

Not by default. A PMS has higher costs and less tax efficiency, so it has to beat a comparable mutual fund by a clear margin just to match it after fees and tax. Some strategies have done this, many have not; check APMI-reported returns against the benchmark.

How is PMS taxed?

As if you held the shares yourself. Each sale is a capital gain or loss in your hands in that year, at 20% for listed shares held up to 12 months and 12.5% above ₹1.25 lakh for longer holdings. Dividends are taxed at your slab rate.

What is a high-water mark in PMS?

It is the highest portfolio value on which a performance fee has been charged. If the portfolio falls and then recovers, no performance fee is due until it goes above that previous peak, so you do not pay twice for the same gains.

How is a SIF different from a PMS?

A SIF is a pooled mutual fund product with a ₹10 lakh minimum, and it keeps mutual fund tax treatment, so you pay tax only on redemption. A PMS is a separate portfolio in your name with a ₹50 lakh minimum, and each trade is taxed in your hands.

Can I withdraw money from a PMS anytime?

Yes, but the manager has to sell shares (or transfer them to you), which takes a few days, and an exit load of up to 3% in year one, 2% in year two and 1% in year three may apply. Partial withdrawals can also be restricted if they take your balance below the minimum.