Differences Between PMS and Hedge Funds
- 6 min read
Hedge funds and portfolio management services (PMS) are investment options, although they serve distinct investment goals. It becomes challenging for investors to invest their earned money between these two investment options.
Investors compare PMS vs hedge funds to understand which is better for financial goals. This blog analyses the differences between PMS and hedge funds while discussing their key features.
What are Portfolio Management Services?
Portfolio Management Services (PMS) offer tailored investment solutions to help investors achieve their financial goals. While investment portfolio managers handle the day-to-day management of assets, PMS focuses on constructing and managing diversified portfolios based on a variety of investment options. These services are designed to align with an investor’s risk tolerance and personal investment preferences, ensuring professional oversight of their portfolio.
PMS is primarily suited for high-net-worth individuals (HNIs) who may not have the time or expertise to manage their investments independently. These services are categorised into two types: discretionary, where the portfolio manager makes investment decisions on behalf of the investor, and non-discretionary, where decisions are made in consultation with the investor.
What are Hedge Funds?
Hedge funds are pooled investment vehicles that use a range of advanced strategies to generate returns for their investors. Due to their high-risk nature, they are typically accessible only to accredited or institutional investors. These funds may use techniques such as leverage, derivatives, short-selling, and other unconventional approaches to maximise gains.
Compared to mutual funds, hedge funds are managed more aggressively and have greater flexibility in both investment choices and investor terms. Since they are privately managed, hedge funds operate with fewer regulatory constraints, allowing for broader and more complex investment strategies.
What are the Features of Portfolio Management Services?
PMS helps investors to achieve their financial goals by providing customised investment solutions. Have a look at the key features of PMS:
- Based on the investors’ preferences, financial goals, and risk appetite, PMS services offer customised strategies to investors.
- Portfolio managers can use a wide variety of assets, including bonds, derivatives, and equities. They spread the assets across different asset classes to enhance the risk-adjusted returns of the portfolio.
- Investors can track each of the securities in their portfolio and track the portfolio performance regularly.
What are the Key Features of Hedge Funds?
Hedge funds employ different strategies to generate active returns for the investors. Below are some of the key features of hedge funds:
- Investing in hedge funds involves higher risks and higher returns than traditional investments.
- Hedge funds are managed by experts who use special plans based on the market conditions.
- These funds provide greater flexibility in making investment decisions as they operate under lower restrictions.
- Hedge funds invest money into various securities like stocks, real estate, currencies and bonds.
Understanding the Differences Between PMS and Hedge Fund
The comparison of PMS vs hedge funds helps you to find out the differences between them and choose an investment option. The table below highlights the major differences between hedge funds and PMS:
| Parameters | PMS | Hedge Fund |
| Risks | Risk levels are managed based on the investors’ profiles | Risks are high due to volatility and may result in substantial losses. |
| Returns | Moderate and steady returns | High returns with higher risks |
| Liquidity | Higher liquidity as investors can enter and exit their positions easily. | Investors have to wait for a specific period, as there are redemption restrictions and a lock-in period. |
| Costs | Investors have to pay management fees. Some providers charge a performance-based fee if the portfolio surpasses the predefined benchmark. | A fixed percentage of assets under management (AUM), which is higher than PMS. |
| Minimum investment | Investors have to pay INR 50 lakh or equivalent. | The minimum investment is INR 1 crore. |
| Regulations | The SEBI regulates PMS in India and ensures high transparency. | Hedge funds have fewer regulations than PMS. |
Final Thoughts
Based on the comparison of PMS vs hedge fund, choosing between these two depends on your risk tolerance, financial goals, and other aspects kike investment horizon. If you want to take low risk and get moderate returns, then you should opt for PMS. However, if you want to take higher risks and higher returns, then you can go with hedge funds.
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Frequently Asked Questions
1. What is the minimum amount of money needed to invest in hedge funds and PMS?
To invest in hedge funds, a person must have a minimum ticket size of INR 1 crore, and the fund as a whole must have a minimum corpus of INR 20 crore. Contrarily, a person must pay INR 50 lakh or have assets with a minimum value of INR 50 lakh to invest in PMS.
2. Are hedge funds and PMS subject to different regulations?
The SEBI regulates PMS in India, while hedge funds are subject to fewer regulations.
3. What type of investors are more suited for PMS vs. hedge funds?
Investors who are willing to take higher risks and higher returns must invest in hedge funds. However, investors who consider moderate risks and accept lower returns are suited to PMS.
4. What are the tax implications for investing in PMS and hedge funds?
In PMS, if you sell equity shares within 12 months, you have to pay a 20% short-term capital gain (STCG) tax. If you sell them after holding them for 12 months, you need to pay a 12.5% long-term capital gain (LTCG) tax.
On the other hand, hedge funds fall under the alternative investment fund (AIF) tax regulations. Under Category III of AIF, if your annual earnings exceed INR 5 crore, you have to pay 42.74% tax.
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Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.
