Blog Details
Table of Contents
- What is portfolio management service?
- Why should you invest in PMS?
- What is AIF?
- How does PMS work?
- How does AIF work?
- What are PMS charges?
- What are AIF charges?
- Redemption of PMS
- Redemption of AIF
- Taxation on PMS
- Taxation on AIF
- Tax Efficiency of AIF and PMS
- Who should invest in PMS?
- Who should invest in AIFs?
- Are AIFs regulated by SEBI?
- Are PMS regulated by SEBI?
- How to invest in AIF or PMS?
PMS vs AIF Funds: Decoding the Key Differences
Tue, 5 Nov 2024
9 mins

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What is portfolio management service?
Portfolio Management Services (PMS) are specialized investment services offered by qualified professionals or institutions to manage and invest funds on behalf of individual or institutional investors. PMS funds are tailored investment portfolios designed to meet the specific investment objectives, risk profiles, and financial goals of each client.
PMS funds operate under a discretionary or non-discretionary model. In a discretionary PMS, the portfolio manager has the authority to make investment decisions without seeking prior approval from the client, within the agreed-upon investment mandate. In a non-discretionary PMS, the portfolio manager must obtain client approval before executing any investment decisions.
PMS funds are regulated by the Securities and Exchange Board of India (SEBI) and must comply with stringent regulations to ensure investor protection and transparency. SEBI mandates that only qualified portfolio managers with relevant experience and certifications can offer PMS services. -
Why should you invest in PMS?
1. Customized Portfolios: PMS funds are tailored to individual client needs, allowing for personalized investment strategies and asset allocations.
2. Professional Management: PMS funds are managed by experienced and qualified portfolio managers who actively manage the investments based on research and market analysis.
3. Diversification: PMS funds typically invest in a diverse range of asset classes, such as equities, bonds, derivatives, and alternative investments, to mitigate risk and enhance returns.
4. Transparency: PMS regulations require portfolio managers to provide regular updates and performance reports to clients, ensuring transparency and accountability.
5. Minimum Investment: PMS funds typically have a higher minimum investment requirement Rs 50 lakh compared to other investment avenues, making them suitable for high-net-worth individuals and institutional investors. -
What is AIF?
Alternative Investment Funds (AIFs) are a class of pooled investment vehicles in India that collect funds from investors, whether Indian or foreign, for investing as per a defined investment policy. AIFs are considered an alternative to traditional investment avenues like mutual funds, stocks, and bonds. AIFs are classified into three categories by the Securities and Exchange Board of India (SEBI):
Category I AIF: These funds invest in start-ups, early-stage ventures, social ventures, small and medium-sized enterprises (SMEs), infrastructure, or other areas that the government or regulators consider socially or economically desirable. They are generally considered to have low risk and can include venture capital funds, SME funds, social venture funds, and infrastructure funds.
Category II AIF: These funds invest in assets like private equity, debt, infrastructure, and real estate without using significant borrowing. They cater to accredited and institutional investors and are regulated by SEBI in India.
Category III AIF: This type of fund employs diverse trading strategies and may use leverage or borrowing to amplify returns. These funds often engage in high-risk activities such as derivatives trading, short selling. -
How does PMS work?
PMS funds typically follow an active investment approach, where fund managers actively research, analyze, and handpick stocks or securities for the portfolio. The objective is to generate alpha (excess returns over the benchmark) through superior stock selection and tactical asset allocation. PMS funds can be diversified across various sectors, market capitalizations, and investment styles (value, growth, etc.). They often have a higher risk profile, aiming for superior returns by taking calculated risks.
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How does AIF work?
AIFs can adopt both active and passive investment strategies, depending on the fund's mandate. Some AIFs may follow an active approach similar to PMS funds, while others may employ passive strategies like index tracking or factor investing. AIFs have a broader investment universe, allowing them to invest in various asset classes, including unlisted securities, real estate, commodities, and alternative assets. The risk profile and return targets of AIFs can vary significantly, ranging from conservative income-generating strategies to high-risk, aggressive growth strategies.
In terms of risk profiles, PMS funds generally have a higher risk appetite due to their concentrated portfolios and active management approach. They aim to generate alpha by taking calculated risks and capitalizing on market inefficiencies. On the other hand, AIFs can have varying risk profiles, from moderate to high, depending on the underlying investment strategy and asset classes. -
What are PMS charges?
Fees and expenses are a crucial factor to consider when evaluating PMS (Portfolio Management Services) and AIF (Alternative Investment Funds) as investment options. Both fund types have distinct fee structures that can significantly impact the overall returns for investors.
PMS funds typically charge a combination of fixed management fees and performance-based fees. The management fee is a fixed percentage, usually ranging from 1% to 3% of the assets under management. This fee is charged annually and covers the fund manager's services, research, and operational expenses.
Additionally, PMS funds may levy a performance fee, which is a share of the profits generated by the fund. The performance fee is typically calculated as a percentage of the returns above a predetermined benchmark or hurdle rate. This fee structure aims to align the interests of the fund manager with those of the investors, as the manager is incentivized to generate higher returns. -
What are AIF charges?
AIF funds also have a fee structure that includes management fees and performance fees, but the specifics may vary depending on the fund's strategy and investment objectives. The management fee for AIFs is generally lower than that of PMS funds, ranging from 0.5% to 2% of the assets under management. However, AIFs often charge higher performance fees, which can range from 15% to 30% of the fund's profits.
It's important to note that AIFs may also have additional expenses, such as legal and compliance costs, operational expenses, and other fund-related fees, which can further impact the overall costs for investors. -
Redemption of PMS
Liquidity and lock-in periods are crucial considerations when evaluating PMS (Portfolio Management Services) and AIF (Alternative Investment Funds) investments. These factors significantly impact an investor's ability to access their funds and make redemptions.
PMS funds generally offer higher liquidity compared to AIFs. Investors in PMS funds can typically redeem their investments on a quarterly or monthly basis, depending on the terms specified by the portfolio manager. However, some PMS funds may have a lock-in period, typically ranging from 1 to 3 years, during which investors cannot redeem their investments. Exit loads, which are charges levied upon redemption, may also apply, particularly if the investment is redeemed within a certain period. -
Redemption of AIF
AIFs, on the other hand, are known for their relatively lower liquidity. These funds often have longer lock-in periods, ranging from 3 to 5 years or even more, depending on the fund's investment strategy and underlying assets. During the lock-in period, investors are typically not allowed to redeem their investments, ensuring that the fund manager can execute the intended investment strategy without facing premature redemption pressures.
After the lock-in period, AIFs may offer periodic redemption windows, such as quarterly or annually, during which investors can submit redemption requests. However, these redemption windows are usually subject to certain conditions, such as minimum redemption amounts or notice periods.
Exit loads for AIFs can be higher compared to PMS funds, particularly if an investor wishes to redeem their investment before the end of the fund's tenure or specified holding period. These exit loads are designed to discourage premature redemptions and align investor interests with the fund's long-term investment objectives. -
Taxation on PMS
Listed Equity:
Short-term Capital Gains (STCG): Taxed at 20% for units held for less than one year.(If assets sold on or after 23rd July 2024)
Long-term Capital Gains (LTCG): Taxed at 12.5% (without indexation), applicable on gains exceeding ₹1.25 lakh in a financial year. (If assets sold on or after 23rd July 2024)
Debentures and Bonds:
Interest Income: Subject to taxation as per your individual tax slabs.
STCG: Taxed according to your applicable income tax slab if held for less than 12 months.
LTCG: Taxed at 20% with indexation benefits provided the bonds are held for more than 12 months. -
Taxation on AIF
Category 1/2 AIF focuses on Unlisted securities, such as bonds or equity, come with specific tax implications. They offer pass-through taxation, meaning that investors directly incur taxes based on the nature of the income received.
Capital Gains: Short-term capital gains (STCG) are taxed according to the investor's applicable income tax slab. Long-term capital gains (LTCG) are taxed at a flat rate of 12.5%.
Interest Income: Any interest generated from unlisted securities is taxed at the investor’s personal income tax rate.
Dividend Income: Dividends are taxed based on the individual's total dividend income for the year.
Category 3 AIFs focuses on listed securities, such as equities and derivatives, are typically taxed at the fund level. Here's a breakdown of the key tax implications:
Capital Gains: Short-term capital gains (STCG) are taxed at 20%. Long-term capital gains (LTCG) are taxed at 12.5% on profits.
Derivative Income: Income generated from derivatives is treated as business income and is taxed according to the investor’s applicable income tax slab.
Dividend Income: Dividends are taxed based on the investor's applicable tax slab. -
Tax Efficiency of AIF and PMS
Both PMS and AIFs can offer tax efficiency depending on the investment strategy and the investor's overall tax situation. PMS investments may be more tax-efficient for investors with a lower income tax slab rate, as they can benefit from the lower long-term capital gains tax rate.
AIFs, on the other hand, may be more tax-efficient for investors with higher income tax rates, as they can potentially benefit from tax pass-through status and other tax exemptions. Ultimately, the tax implications of PMS and AIF investments should be carefully evaluated in the context of an investor's overall financial goals, risk tolerance, and tax situation. -
Who should invest in PMS?
PMS funds are typically suitable for high-net-worth individuals (HNIs) with substantial investible surplus. These investors generally have a higher risk appetite and seek diversification beyond traditional investment avenues. PMS funds cater to investors with a long-term investment horizon and the ability to withstand market volatility.
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Who should invest in AIFs?
AIFs, on the other hand, are suitable for a broader range of investors, including ultra HNIs, institutional investors, family offices, and corporates. These funds offer exposure to alternative asset classes, such as private equity, venture capital, real estate, and hedge funds. AIFs are categorized into three categories based on their investment strategies and risk profiles. Category I AIFs are considered relatively low-risk and are suitable for investors with a moderate risk appetite. Category II AIFs involve higher risk and are suitable for investors with a higher risk tolerance.
Category III AIFs are the riskiest and are suitable only for investors with a substantial risk appetite and the ability to withstand significant market volatility. Investors must meet the minimum investment requirements set by the respective AIF, which can vary depending on the fund's category and investment strategy. AIFs generally require a longer investment horizon and may have lock-in periods, making them suitable for investors with a long-term investment perspective. -
Are AIFs regulated by SEBI?
AIFs are regulated by SEBI under the SEBI (Alternative Investment Funds) Regulations, 2012. These regulations provide a comprehensive framework for the establishment, operation, and governance of AIFs. AIFs are categorized into three broad categories: Category I (venture capital funds, SME funds, etc.), Category II (private equity funds, debt funds, etc.), and Category III (hedge funds, etc.).
Each category has specific investment restrictions, reporting requirements, and investor eligibility criteria.
Compliance requirements for AIFs are rigorous, including mandatory registration with SEBI, appointment of a custodian, and adherence to stringent investment guidelines. Additionally, AIFs must comply with anti-money laundering regulations, conduct due diligence on investors, and maintain comprehensive records. -
Are PMS regulated by SEBI?
Yes, PMS funds are regulated by the Securities and Exchange Board of India (SEBI) under the SEBI (Portfolio Managers) Regulations, 1993. These regulations mandate stringent compliance measures, such as minimum net worth requirements for portfolio managers, periodic reporting obligations, and strict investment guidelines. SEBI also enforces a robust code of conduct and imposes strict penalties for non-compliance, ensuring investor protection and market integrity.
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How to invest in AIF or PMS?
Through InCred Premier: Reach out to us at 806-226-1663 or open your account, and we can help you start your investment journey.
Start your investment journey with InCred Premier today