If you’re seeking to expand your investment portfolio beyond mutual funds with the goal of growing your wealth, Alternative Investment Funds (AIFs) and Portfolio Management Services (PMS) may be ideal options for you. These high-risk investment instruments have become increasingly popular among investors. But, between AIF and PMS, how do you decide which one is for you? In this blog, we will conduct an analysis of AIF vs PMS to help you figure out what would be the best for you.
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AIF vs PMS: Let us Understand the Difference
The given below table will help you understand the basic differences between AIF and PMS:
| Category | AIF | PMS |
|---|---|---|
| Pooling of Funds | The essence of the AIF model is pooling of funds. | There is no pooling of funds in the PMS model. There is a separate portfolio for every client along with their Demat accounts. |
| Number of Investors | The maximum number of investors should not exceed1,000. | There is no specific limit. A portfolio manager can have as many clients he/she can |
| Minimum Investment Amount | Rs. 1 crore | Rs. 50 lakhs |
| Minimum Corpus Amount | A minimum corpus of Rs. 20 crore is required. For Category-1 Angel Funds, Rs. 10 crore is required. | No corpus amount is required. |
| Lock-in Period | Close-ended units can have prescribed lock-in periods. | Investors investing in the PMS scheme can withdraw their funds at any time. |
| Types | AIFs are grouped into three – Category 1, Category 2, and Category 3. | There are three types of services in PMS namely Discretionary, Non-discretionary and Advisory. |
| Tenure | The minimum and maximum tenure for Category 1 and 2 AIFs is 3 years and 5 years respectively. On the other hand, Category 3 funds have no minimum tenure. | No minimum time is prescribed. |
| Taxation | Category 1 and 2 are exempt from tax obligations. Category III AIFs have not been given the Pass through status, which means that income from such funds will be taxed at the investment fund level. | (a) Equity PMS – Short term capital gains will be taxed at 15% and any long term capital gains will be taxed at 10% without indexation benefits. Debt PMS – For listed securities, you have the benefit of long-term capital gains taxation, after 1 year, 1 day as compared to three years in debt mutual funds. |
What is AIF?
The full form of AIF is Alternative Investment Funds. AIFs are pools of money which is used for investing in venture capital, hedge funds, futures, and private equity. These funds are aimed explicitly at HNIs (High Net worth Individuals) including residents, NRIs and Foreign Nationals. There are 3 categories of AIF namely Category 1, category 2, and category 3. Let us take a look at them:
a. Category 1
In Category 1 AIF, investors invest funds in small businesses, start-ups, social ventures, early-stage ventures, angel funds, etc.
b. Category 2
This category includes investments in Private Equity (PE) funds, real-estate funds, and debt instruments.
c. Category 3
This category allows investment in hedge funds and other assets which focus on short-term gains.
What is PMS?
The full form of PMS is Portfolio Management Scheme. It refers to the management of funds of HNIs including Indian residents, NRIs and Foreign Nationals by Portfolio Managers. These managers invest these funds into a varied range of stocks, fixed incomes, debt, and other individual securities. There are many PMS services available in India that can help investors achieve their investment goals.
Let us take a look at the three types of PMS categories:
a. Discretionary
In this type of PMS, the portfolio manager undertakes the investment decisions independently.
b. Non-Discretionary
In Non-discretionary PMS, the investor has to approve all buy-sell transactions. After the approval, the portfolio manager executes the transactions.
c. Advisory
In this type of PMS, the portfolio manager advises the client. After this, is up to the client (investor) to follow the advice.
AIF vs PMS: Pros and Cons
Pros of AIF
- AIF allows investors to diversify beyond the typical realms of debt and equity, providing access to more complex asset classes that require specialized knowledge for management.
- In certain cases, these funds have lower volatility due to less intense speculation on the asset classes, with the exception of hedge funds. The others are invested for the long-term, resulting in a lower portfolio turnover.
- The asset selection process for these funds is rigorous, but the lower portfolio turnover leads to lower transaction costs. However, the fund manager must have exceptional expertise across a complex set of products, which may drive up management costs.
- AIF offers the opportunity for direct ownership in asset classes such as early-stage investing, venture capital, and private equity. This provides greater control over business operations, allowing investors to steer the company in a specific direction.
- Most investments in this fund are held for at least three years, resulting in tax benefits such as indexation for debt or real estate-oriented assets. In the case of equity, long-term capital gains are lower for assets held for over 12 months.
Cons of AIF
- The minimum investment amount required for AIFs is relatively high, limiting its accessibility to a certain type of investors and excluding a significant portion of potential investors.
- This asset has a range of complex products that demand a comprehensive understanding of market dynamics to make informed investment decisions.
- Investments in these funds are subject to lock-in periods ranging from 3 to 10 years, raising concerns about the liquidity of the investments.
Pros of PMS
- PMS offers a high degree of customization that aligns with the goals and needs of the clients.
- Portfolio Management Services provide a high level of transparency and accountability, offering tools and login access to the portfolio anytime. PMS also conducts insightful analytics to enhance transparency.
- PMS is designed to complement an existing portfolio by providing deeper exposure to familiar investment areas.
- Unlike AIF, PMS does not have any lock-in period, making it an attractive asset class.
- Compared to AIF, PMS has lower fund management fees as it deals with conventional investment avenues.
Cons of PMS
- Compared to AIF, PMS has a higher turnover, resulting in relatively higher transaction costs.
- The frequent portfolio turnover in PMS can impact its performance due to tax implications.
To Sum Up
Both AIF and PMS are specialized services that aim towards the needs of HNIs in particular. Investing in either of these avenues requires enough knowledge and expertise. At SBNRI, there are investment experts for macros, equities, debt, reality structures products, etc., to advise clients how to diversify their portfolios effectively and reduce their risk in the process. For any queries related to PMS and AIF, contact us using the button below.
FAQs
A- The minimum amount required for investing in Alternative Investment Funds (AIFs) is Rs. 1 crore.
A- The AIF is exempt from any tax obligation on its investment income. However, such a pass-through taxation regime has not been extended to Category III AIFs under the Income-tax regime till now.
