One of the prime reasons for the rise in the number of high networth individuals (HNIs) and ultra HNIs in India over recent years is strong stock market performance and consistent economic growth. The Indian economy is considered to be one of the bright spots despite the current global economic slowdown. With the rise in the number of HNIs and ultra HNIs, there is a growing need for non-traditional investment options. This is where PMS and AIF come into the picture as these offer personalised investment solutions.
So, what do these investment options encompass, are they the same or different. It is important for HNIs and Ultra HNIs to understand the unique features of PMS and AIFs before selecting the right fit.
Read More: What is private equity? How does it work?
What are PMS (Portfolio Management Services)?
PMS or Portfolio Management Services are a type of investment service that manage various investment formats like stocks, bonds, commodities, or other securities on behalf of investors.
Under PMS, investors get customised investment solutions based on their investment goals, risk tolerance, and investment horizon. The portfolio managers use their expertise and thorough research to build investment portfolios and manage assets that are expected to provide returns as per investors’ objectives. PMS usually charges higher fees for providing customised services that can be in the nature of a fixed percentage of AUM or fixed fees and can vary based on the size of the portfolio, customisation needed, or the investment strategy adopted to meet the financial needs.
The minimum investment for PMS is generally around Rs. 25,00,000 or higher, depending on the PMS provider’s policies. However, in some cases, PMS providers may also require a minimum investment of Rs. 50,00,000.
What are AIFs?
AIFs or Alternative Investment Funds are a category of privately pooled investment funds that invest in assets other than traditional investments like stocks, bonds, and cash. AIFs are regulated by the Securities and Exchange Board of India (SEBI) under the SEBI (Alternative Investment Funds) Regulations, 2012.
AIFs mainly invest in assets like private equity, venture capital funds, hedge funds, real estate, infrastructure, and other alternative investments. These funds are capable of providing potentially higher returns but have a higher risk of investment as compared to traditional investment options.
SEBI has classified AIFs into three categories and the minimum investment into an AIF is Rs 1,00,00,000 which ultimately limits the entry for retail investors. The categories of AIF as per SEBI are:
- Category I
These funds are invested in small businesses, start-ups, social ventures, early-stage ventures, angel funds, etc., with superior growth potential and certain tax incentives. These are usually of low-risk grades.
- Category II
This category includes investments in Private Equity (PE) funds, Fund of funds, and debt instruments. Any AIFs that do not fall under Category I and III as per SEBI classification are classified in this category. These funds do not undertake leverage or borrowing except for the purpose of meeting day-to-day operational requirements.
- Category III
AIFs under this category employ diverse or complex trading strategies that may
employ leverage, through investment in listed or unlisted derivatives. These are relatively less regulated open-ended or close-ended funds that aim at generating short-term returns by employing diverse and complex trading strategies. Category-III funds can include hedge funds and Private Investment in Public Equity (PIPE) Funds.
What are the key differences between PMS and AIFs?
PMS and AIFs both aim at providing customised investment solutions to HNIs and investors in India. The key differences between these options are provided in the table below:
| Category | PMS | AIF |
| Regulator | PMS is regulated under the regulations of SEBI (Portfolio Managers Regulations, 1993) | AIFs are regulated as per the provisions of SEBI (Alternative Investment funds Regulations, 2012) |
| Minimum investment | Investors are required to invest a minimum of Rs. 25,00,000 under PMS and Rs. 50,00,000 in some cases. | The minimum investment under AIF is Rs. 1,00,00,000 |
| Number of investors | There is no cap on the number of investors. | As per SEBI regulations, the maximum number of investors in any AIF scheme is restricted to 1000 |
| Minimum corpus | There is no minimum corpus mandate in the case of PMS | SEBI regulation mandate that the minimum corpus for every scheme under AIF should be Rs. 20,00,00,000 and Rs. 10,00,00,000 for Angel Funds. |
| Segregation of funds | PMS regulations require segregation of funds for every client which is maintained in a separate Demat account. There is no pooling of funds in PMS to create a fund that is similar to mutual funds or AIFs | The pooling of funds is the essence of AIFs and they are not required to segregate the client funds as in the case of PMS. |
| Lock-in period | There is no lock-in period in PMS | In case of close-ended AIFs, investors have to abide by the set lock-in period which can range from a few months to several years |
| Asset allocation | The assets under PMS include stocks, bonds, real estate, and more. | The investments under AIF depend on the category of AIF as per SEBI classification which can include investment in start-ups, early-stage ventures, hedge funds, private equity, real estate, and Private Investment in Public Equity (PIPE) Funds |
| Risk | PMS are considered to be higher risk as compared to mutual funds, however, are perceived to be less risky than AIF | AIFs invest in high-risk non-traditional investments that have a longer investment horizon and hence are considered to be of higher risk than PMS. |
| Registration | The registration of PMS is valid for a period of 3 years and can be further renewed within 3 months before the date of expiry. | AIF registrations are valid till the time of their existence, i.e., until the time they are closed or wound up. |
Conclusion
PMS and AIFs are dynamic investment solutions that are focused on meeting strategic investment needs of HNIs and institutional investors. The choice between the two depends on the investment preference and overall risk appetite of the investor. Therefore, investors should primarily understand the crux of these concepts and understand the main differences between the two options to make an effective choice that suits their investment needs.
FAQs
The minimum investment needed for AIFs is Rs. 1,00,00,000.
No, providing customised plans is a unique feature of PMS. This feature is not available in the case of AIFs.
Yes. AIFs are regulated as per the provision of SEBI (Alternative Investment funds Regulations, 2012).
PMS are considered to be more liquid than AIFs especially close-ended AIFS that have a set lock-in period.
