Mutual Funds vs Model Portfolios: As retail investors gain access to increasingly diverse investment products, the debate between mutual funds and model portfolios is gaining traction. Both aim to generate long-term wealth through equity exposure, but experts say the right choice depends on investor experience, risk appetite, and involvement level.
Speaking on Zee Business on model portfolios and modern investing tools, Kshitiz Mahajan, Managing Partner & CEO of Complete Circle Wealth, and Poonam Rungta, Certified Financial Planner, explained how both products work and where each fits in an investor’s journey.
What are mutual funds?
Explaining mutual funds, Mahajan said mutual funds are pooled investment vehicles where money from multiple investors is managed by professional fund managers.
According to him, investors receive units based on Net Asset Value (NAV), while fund managers take decisions on asset allocation across large-cap, mid-cap, or sectoral stocks depending on the fund strategy.
Experts noted that mutual funds are typically more suitable for beginners or passive investors who prefer professional management and minimal involvement in day-to-day investment decisions.
What are Model Portfolios?
Describing model portfolios, Mahajan explained that these are curated stock baskets created by research analysts or advisory platforms, often based on specific themes such as mid-cap, small-cap, defence, energy, or manufacturing.
He said these portfolios are directly executed in an investor’s demat account, meaning investors own the underlying stocks rather than fund units. Rebalancing decisions are communicated by the portfolio manager or platform, but investors can choose whether to act on them.
“Model portfolios are curated, distributed, and executed through platforms, and the stocks are directly held in your demat account,” Mahajan said during the discussion.
He added that, unlike mutual funds, model portfolios often come with lower entry barriers compared to PMS and AIF products, allowing investors to start with relatively smaller amounts.
Mutual Funds vs Model Portfolios: Key differences, benefits and risks
Mahajan highlighted that the key distinction lies in control. While mutual funds are fully managed by fund managers, model portfolio investors retain direct control over execution decisions in their demat accounts.
He also cautioned that this control comes with responsibility: “In advisory or model portfolio structures, control is with the investor. If you cannot handle that responsibility, mutual funds may be a better route,” he said.
He further added that investors should avoid putting all their money into a single type of product and instead maintain a balanced allocation across mutual funds, index funds, and selective exposure to model portfolios.
Who should invest in Model Portfolios?
Providing a behavioural and risk-based perspective, Rungta said model portfolios are not restricted to a specific investor category but require a certain level of market understanding.
According to her, these portfolios are designed based on individual goals and risk appetite, making them inherently customisable. However, she warned that first-time investors should be cautious.
“I personally would not recommend model portfolios to first-time investors,” Rungta said. “It is like being a co-pilot—you need to understand market movements, volatility, and risk. Otherwise, emotional decisions during volatility can hurt wealth creation.”
She added that beginners often struggle with panic-driven decisions, making mutual funds a more stable starting point.
Advantages and limitations of Model Portfolios
Rungta outlined several advantages of model portfolios, including:
- Higher transparency, as holdings are visible in the demat account
- Lower cost compared to some managed investment structures
- Personalisation based on risk profile and financial goals
- Option for SIP-based investing
However, she also highlighted drawbacks, particularly taxation and rebalancing.
Since stocks are directly held, frequent rebalancing can trigger capital gains tax. Additionally, investors must actively participate in tracking and responding to portfolio changes.
Hybrid strategy recommended
Both experts agreed that investors do not necessarily need to choose one over the other.
Mahajan recommended investing in a diverse manner, which means allocating most of their investment capital to mutual or index funds while reserving 10-15 per cent for model portfolios if they want to try their hands at direct stock investments.
Another point he mentioned was regarding reviewing the portfolio. Investors should do a review after six months to make sure they are in line with market trends.
Diversification and rebalancing are key
Rungta stressed that rebalancing is a core principle of investing, regardless of the product used. Without periodic adjustments, portfolios can drift away from intended risk levels and goals.
She suggested maintaining a balanced allocation—such as a 60:40 equity-to-debt ratio—based on investor risk profile and regularly rebalancing at least once a year.
Key takeaways for investors
However, both experts agreed that mutual funds as well as model portfolios cannot be regarded as superior.
Whereas mutual funds have an edge over model portfolios due to their simplicity and expert management, model portfolios provide more transparency and flexibility. However, both investment options call for more work from the investors.
According to the experts, choosing between mutual funds and model portfolios ultimately depends on financial understanding, risk profile, and ability to withstand market volatility.
