One offering that has emerged in recent years is the mutual fund-based PMS (MF-based PMS), which combines the portfolio management framework of a PMS with investments made through mutual funds and exchange-traded funds (ETFs) rather than individual stocks.
Unlike a traditional equity PMS, where managers buy and sell stocks directly, an MF-based PMS constructs and actively manages a portfolio of mutual funds.
Industry experts say the focus is on asset allocation, diversification and fund selection to build portfolios aligned with an investor’s objectives and risk profile.
“An MF-based PMS is an actively managed PMS strategy like every other except the underlying securities here are mutual funds and ETFs and not direct equity shares,” said Nirav Karkera, Head of Research and Fund Manager, W by Groww, a wealth management platform specifically designed for High Networth Individuals (HNIs) and affluent investors.
According to Aditya Agrawal, CFA, Chief Investment Officer at Avisa Wealth Creators, a wealth management division and subsidiary of the publicly listed Indian financial services group, Swastika Investmart, the structure combines professional portfolio management with greater flexibility and personalisation than a traditional mutual fund while avoiding the concentration risk associated with equity PMS strategies that invest directly in stocks.
How is it different from a mutual fund?
While a mutual fund pools money from investors into a single scheme managed according to a predefined investment objective, an MF-based PMS creates a customised portfolio comprising multiple mutual funds.
According to Shobhit Mathur, Co-Founder, Ionic Wealth, an Indian omnichannel wealth-tech platform and portfolio management service backed by brokerage firm Angel One, the strategy follows a portfolio approach, where the various investments are designed to work together instead of being selected independently over time.
He said the portfolio is built with controls around asset allocation, diversification and investment policy, allowing it to potentially serve as an investor’s core portfolio if constructed appropriately.
Industry experts also point out that because the underlying investments are mutual funds, portfolio turnover can remain relatively low compared with strategies that frequently trade individual securities.
How is an MF-based PMS different from a Fund of Funds (FoF)?
Although both invest in mutual funds, their structures are different. A Fund of Funds (FoF) is itself a mutual fund scheme that invests in other mutual fund schemes according to a predefined mandate and offers the same portfolio to all investors.
An MF-based PMS, by contrast, is a portfolio management service where the portfolio manager can customise the mix of mutual funds, asset allocation and rebalancing strategy based on an investor’s mandate, subject to the agreed investment objective.
How does it differ from an equity PMS?
The primary distinction lies in the underlying investments.
A traditional equity PMS typically invests directly in shares, allowing portfolio managers to build concentrated portfolios based on individual stock selection.
In contrast, an MF-based PMS invests through mutual funds and ETFs.
According to Karkera, portfolio management involves deciding the allocation across asset classes, investment styles and mutual funds rather than selecting individual companies.
Agrawal said this approach enables investors to access customised portfolios while maintaining diversification across multiple funds.
How is the portfolio managed?
According to Karkera, portfolio construction begins with research covering macroeconomic trends, asset classes, sub-asset classes, investment factors and market styles. Based on this assessment, managers determine the preferred allocation mix for the prevailing market environment.
He said portfolios are also stress-tested against different market scenarios, while rebalancing decisions take into account factors such as taxes and exit loads before changes are made.
Mathur said portfolio outcomes are influenced by three broad factors—asset allocation across different asset classes, diversification within each asset class, and the selection of suitable mutual funds. He added that fund selection is only one part of portfolio management, with allocation and diversification also playing an important role.
Similarly, Agrawal attributed performance to disciplined asset allocation, quality fund selection and timely portfolio rebalancing.
What benchmark is used?
Benchmark selection depends on the investment strategy.
Karkera said W by Groww’s WealthEdge PMS uses the S&P BSE 500 Total Return Index (TRI) as its benchmark because it represents the broader equity market across large-, mid- and small-cap stocks, making it more suitable for a flexible allocation strategy than a large-cap-only index.
What should investors keep in mind?
Like mutual funds and equity PMS products, MF-based PMS investments are market-linked and do not guarantee returns.
Investors should also note that SEBI regulations prescribe a minimum investment of ₹50 lakh for Portfolio Management Services, including MF-based PMS.
The threshold is significantly higher than that for mutual funds, making PMS products primarily suitable for high-net-worth investors.
Before investing, experts recommend evaluating the investment mandate, portfolio strategy, fee structure, taxation, minimum investment requirement and overall suitability for one’s financial goals and risk appetite.
