PMS vs AIF In India: Key Differences, Taxation And Which One To Choose
India’s wealth management and investment landscape has rapidly evolved with different investment services and products available to different sets of investors. On one hand, retail investors can now explore a wide range of investments at their fingertips, by themselves and on the other, those looking to benefit from professional management and expertise can explore structured products and expert services.
High-Net-Worth Individuals (HNIs) have a range of sophisticated investment options. Two of the most prominent choices for affluent investors are Portfolio Management Services (PMS) and Alternative Investment Funds (AIFs).
Both are regulated by the Securities and Exchange Board of India (SEBI) and cater to investors seeking professional management, diversification, and higher returns. However, they differ significantly in structure, investment approach, and suitability.
In this article, we will look at the difference between PMS and AIF, and try to understand how both work and explore the best investment options for HNIs in India.
What Is PMS?
PMS or Portfolio Management Services refer to a sophisticated set of investment management services that provide personalised investment solutions where a professional portfolio manager manages your investments directly in your name.
Unlike mutual funds or AIFs, where you own units in a pooled investment vehicle, as we’ll discuss later, in PMS, the investor typically holds the securities in their own Demat account, with the PMS manager having a power of attorney to manage the portfolio.
This approach allows for tailored strategies based on your financial goals, risk appetite, and liquidity needs, making PMS especially attractive for HNIs with complex requirements.
Portfolio Management Services (PMS) are regulated by SEBI under the SEBI (Portfolio Managers) Regulations, 2020, which ensure transparency and safeguard investor interests. The minimum investment threshold for PMS is INR 50 lakh, underscoring its suitability for high-net-worth individuals (HNIs) and more experienced investors.
What Are AIFs In India?
Alternative Investment Funds or AIFs, are privately pooled investment vehicles that collect capital from investors, both Indian and foreign, to invest according to a defined strategy. AIFs offer exposure to non-traditional asset classes such as private equity, real estate, venture capital, and hedge funds, providing diversification beyond stocks and bonds. SEBI regulates AIFs under the SEBI (Alternative Investment Funds) Regulations, 2012.
AIFs are classified into three categories for registration with SEBI, depending primarily on where they invest and their investment strategy:
- Category I: Invest in start-ups, SMEs, infrastructure, socially beneficial sectors, etc.
- Category II: Include private equity, debt, and real estate funds.
- Category III: Unlike Category I and II AIFs, Category III AIFs can employ leverage and can have complex strategies such as hedge funds and derivatives.
The minimum investment for most AIFs is INR 1 crore, except for angel funds, where it is INR 25 lakh, making AIFs suitable primarily for HNIs and institutional investors.
What Is The Difference Between PMS And AIF?
Comparing PMS and AIF is crucial for HNIs looking to avail professional investment management services.
The following table summarises the key differences between PMS and AIF:
Parameter | PMS | AIF |
Structure And Investment Strategy | Individually managed portfolios with direct ownership of securities. | Pooled investment vehicle. Investors own units in the fund. |
Regulatory Framework | Regulated by SEBI under SEBI (Portfolio Managers) Regulations, 2020 | Regulated by SEBI under SEBI (Alternative Investment Funds) Regulations, 2012 |
Types | Discretionary, Non-discretionary, and Advisory | Category I (Venture Capital, Infrastructure, etc.), Category II (Private Equity, Debt, Real Estate), and Category III (Hedge fund, etc.) |
Investor Eligibility | HNIs, NRIs, HUFs, firms, trusts, foreign investors, etc. | Primarily HNIs, institutional investors, and NRIs. |
Minimum Investment | INR 50 lakh | INR 1 crore (INR 25 lakh for Angel Funds) |
Minimum Corpus | No minimum corpus | INR 20 crore (INR 5 crore for angel funds) |
Number of Investors | No cap | Maximum 1000 per scheme (200 for angel funds) |
Liquidity | Higher, flexible redemptions are possible. | Lower, with lock-in/commitment period, and periodic redemption windows for open-ended Category III funds. |
Tenure | Open-ended or as per agreement. | Fixed tenure (Category I & II: minimum 3 years; Category III: open/close-ended). |
Top Investment Strategies For PMS and AIF
Let us try to understand the key differences between PMS and AIF in greater detail to help you better explore the two as per your financial goals.
1. Asset Focus: Traditional vs Alternative
PMS primarily invests in listed equities and debt instruments, focusing on stocks, bonds, and sometimes structured products. The portfolio is tailored to your preferences, risk appetite, and time horizon.
In contrast, AIFs provide exposure to alternative assets such as private equity, venture capital, real estate, infrastructure, and hedge funds. Category I AIFs focus on early-stage ventures and infrastructure, Category II on private equity and debt, and Category III on complex strategies including derivatives and long-short equity.
While a single PMS can explore different investment instruments, specific AIF schemes follow a predefined investment objective and strategy.
2. Strategy Models In PMS and AIF
PMS offers discretionary (manager decides), non-discretionary (investor decides), and advisory (recommendations only) models. This allows for a high degree of customisation and active management.
AIFs are structured as pooled funds, with each category following specific strategies: Category I and II are typically close-ended with a fixed tenure, while Category III can be open or closed-ended and may use leverage for aggressive strategies.
3. Liquidity And Lock-in Differences
PMS provides higher liquidity, allowing you to redeem investments with relative ease, subject to terms and possible exit loads. AIFs, however, often have longer lock-in or commitment periods, typically 3 to 5 years or more, reflecting the illiquid nature of their underlying assets.
Exit is generally allowed only at the end of the tenure (for close-ended funds) or during specified redemption windows (for open-ended Category III funds).
PMS vs AIF: Fees, Taxation, And Who Should Invest
PMS vs AIF: Fees
PMS typically charges a combination of fixed management fees and performance-based fees, along with transaction and custodian charges. The fee structure is negotiable and is catered to each investor, depending on portfolio size and other terms.
AIFs may charge a setup fee, annual management fee, performance fee (usually with a hurdle rate), and exit load for early withdrawal. The fee structure varies by fund and category.
PMS vs AIF: Taxes
Taxation for PMS is at the investor level. Gains from listed equities are taxed as per short-term (STCG) and long-term (LTCG) capital gains taxation, with recent changes setting LTCG at 12.5% for gains above INR 1.25 lakh, and STCG at 20% for assets sold within a year. Interest from bonds is taxed as per your income slab.
AIF taxation depends on the category. Category I and II AIFs are pass-through vehicles, taxed at the investor level at their applicable tax rate, while Category III is taxed at the fund level and is tax-free in the investor’s hands.
PMS vs AIF: Investor Suitability
PMS suits investors seeking direct control, customisation, and higher liquidity, while AIFs are ideal for those desiring diversification into alternative assets, willing to accept longer lock-ins and higher risk for potentially superior returns.
PMS vs AIF: How To Choose The Right Investment Option
The choice between PMS and AIF should align with your specific investment goals, risk appetite, and liquidity needs. You can go for PMS if you prefer direct ownership, customisation, and the flexibility to exit as per your needs. PMS is suitable if you seek active management of listed securities and want more transparency and control.
On the other hand, you can choose AIFs if you aim to diversify into alternative assets such as private equity, real estate, or venture capital, and are comfortable with longer lock-in periods. AIFs are better suited for investors with a higher risk appetite, longer investment horizons, and a desire for portfolio diversification beyond traditional assets.
Conclusion
Both Portfolio Management Services (PMS) and Alternative Investment Funds (AIFs) offer unique avenues for wealth creation, especially tailored for high-net-worth individuals (HNIs) seeking professional investment strategies. While PMS provides greater control, transparency, and customisation with direct ownership of securities, AIFs offer exposure to alternative investments like private equity, venture capital, and hedge fund strategies, helping investors diversify beyond traditional assets.
Choosing between PMS and AIFs depends on your risk appetite, investment horizon, and the level of involvement you desire. Understanding these differences can help you align your investments with long-term financial goals.
Explore alternative fixed-income opportunities, curated bonds, and other investment products designed for retail and HNI investors alike, on platforms like Grip Invest.
FAQs On PMS vs AIF
1. What is the minimum investment required for PMS and AIF?
PMS requires a minimum investment of INR 50 lakh, while AIFs generally require INR 1 crore.
2. Can retail investors invest in PMS or AIF?
No, both PMS and AIF are designed for HNIs and institutional investors due to high minimum investment thresholds.
3. Are PMS and AIF regulated by SEBI?
Yes, both PMS and AIF are regulated by SEBI under separate regulations to ensure transparency and investor protection.
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