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When it comes to building your portfolio, there are several options, including mutual funds, stocks, bonds, and equities available. However, thinking beyond these investments also includes Alternative Investment Funds (AIFs) and Portfolio Management Services (PMS). While one acts as an investment management solution, the other is an investment vehicle. So, which one makes sense for your goals, risk appetite, and investment horizon?
In this blog, we slice down the key differences between AIFs and PMS, the features of both AIFs and PMS, and which one suits your requirements. Keep reading to explore more!
Portfolio management services (PMS) refer to the investment solutions provided by SEBI-registered portfolio managers to clients. These portfolio managers mostly cater to the HNIs and UHNIs category, with a minimum investment of ₹50 lakhs. They handle and manage their clients' assets to achieve specific financial goals.
Once a PMS manager knows your financial goals, risk profile, and investment horizon, they craft a suitable strategy for you. Over time, they balance your investments across different assets and adjust them as needed to keep your plan on track. However, it is important to note that these PMS services are not static but rather dynamic and continually evolving in nature.
Alternative Investment Funds (AIFs) are trusts that pool funds from investors and subsequently invest in complex instruments, such as private equity, venture capital, commodities, hedge funds, or real estate. They break the stereotype of traditional investing and divert attention towards alternative assets. They are available to those wealthy investors or High-net-worth individuals (HNIs) who have a minimum investment of ₹1 crore. Think of AIFs as niche investments that explore the world beyond stocks and bonds.
Under IFs, there are three types- Category I, II, and III. Category I & II funds cater to growth-potential investments, including private equity and debt funds. In contrast, Category III focuses more on complex products such as hedge funds, derivatives, and structured products.
The basic difference between AIFs and PMS lies in the type of service offered to clients. While the licensed portfolio managers provide these services to manage the client's investments, AIFs act as an investment trust (vehicle). For more points explaining the difference between PMS and AIFs, glance below:
| PMS | AIF | |
|---|---|---|
| Meaning | PMS are professional services offered to clients meant to handle their portfolios. | It is an investment vehicle that deals in private equity, debt funds, hedge funds, and real estate, among other assets. |
| Minimum investment | Here, the minimum investment limit is ₹50 lakhs. | A minimum investment of ₹1 crore is mandatory. |
| Types | Three major types include Discretionary, Non-discretionary, and Advisory PMS. |
There are three categories;
|
| Total amount invested or corpus | Since PMS is not a scheme, a corpus is not required. | For AIFs, the corpus limit is ₹20 crore. However, for angel funds, the amount is ₹10 crore. |
| Lock-in period | In a PMS, investors can withdraw funds at any time. | Closed-ended investments have a lock-in period during which withdrawals are not allowed. |
| Approach | Here, a separate demat account is maintained for each client. | It involves pooling funds from investors. |
| Regulations | Regulated by SEBI under PMS Regulations, 2020. | SEBI regulates it as per the Alternative Investment Funds Regulations, 2012. |
| Tenure | Here, there is no fixed tenure for securities. | While Categories I and II have tenure of three years (plus 2 2-year extension), Category III has no fixed tenure. |
| Liquidity | Since there is no fixed term, liquidity is relatively higher. Investors can redeem their investments anytime. | AIFs are the least liquid among PMS and mutual funds. |
| Number of Investors | A PMS provider can have multiple clients or investors under their management. | The maximum limit to the AIF scheme is 1000. |
| Taxation | Taxed in investors' hands (through capital gains). | Taxed at fund level: Category I & II, and Category III. |
| Manager's contribution | Here, no such contribution is mandatory for managers. | AIF managers must hold 2.5% of the corpus or ₹5 crore, whichever is lower (in Category I & II), and at least 5% in Category III. |
| Transparency | There is enough transparency and detailed reporting provided to PMS clients. | They provide periodic reports to investors, detailing the type of fund and the strategy deployed. |
The decision whether to choose between PMS and AIF depends on your financial goals and investment requirements. PMS is a professional investment service that caters to the portfolio requirements of HNIs and UHNIs. Think of it as a caretaker or guardian - someone always there to monitor your investments. Additionally, it has a strong regulatory framework for protecting investors' interests. All thanks to SEBI's rules and regulations.
Alternatively, for someone seeking a diverse, niche investment option beyond stocks and bonds, AIFs are a good category to explore. It can provide enough diversification to your portfolio and further improve your overall investment value.
The entire dilemma of PMS vs. AIF depends on their distinct features. Both of them serve differently to HNIs and UHNIs. While AIFs are investment trusts focusing on asset diversification (apart from stocks and bonds), PMS offers services where a portfolio manager handles your investments. The decision to choose depends on your investment goals, risk profile, tax benefits, and other factors.
If you want to enhance your portfolio situation, consider consulting a PMS provider or specialist for additional insights and guidance.
