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Tata Capital > Blog > Wealth Services > Difference Between PMS and AIF: Comparison, Pros, Cons & Which is Better

Wealth Services

Difference Between PMS and AIF: Comparison, Pros, Cons & Which is Better

Difference Between PMS and AIF: Comparison, Pros, Cons & Which is Better

Are you looking to grow your money by investing in securities beyond mutual funds? Well, look no further than Alternative Investment Funds (AIFs) and Portfolio Management Services (PMS). These high-risk instruments have recently gained immense popularity among sophisticated investors for wealth creation.

Let’s understand PMS and AIF in detail and the differences between them.

What are Portfolio Management Services?

PMS is a tailored investment portfolio in fixed income instruments, individual securities, equity, and structured products. It caters to the investment objectives of high-net-worth individuals with a minimum ticket size of Rs. 50 lakhs.

PMS offers professional management of your investments and can be discretionary or non-discretionary. In discretionary, the fund or PMS managers manage your portfolio by tracking the market and keeping your investment requirements in mind. Contrarily, in non-discretionary, investors can make the final decisions.

In PMS, you actively monitor your personalised portfolio to track developments and maximise returns. Since experienced portfolio managers handle your investments, all you need to do is review the transactions periodically and get performance updates. Besides, fund managers receive flexibility in selecting stocks, sectoral allocation, and maintaining cash position.

Here, your portfolio is usually concentrated and your stocks are more likely to generate alpha returns in the long run.

What are Alternative Investment Funds?

AIFs are pooled investments for investing in hedge funds, venture capital, futures, and private equity. Based on their investment strategies, AIFs, are classified into three categories.

Category I

These funds are invested in small businesses, start-ups, social ventures, early-stage ventures, angel funds, etc., with superior growth potential.

Category II

This category includes investments in Private Equity (PE) funds, fund of funds, and debt instruments.

Category III

This AIF aims 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.

PMS vs AIF: Which One Is Better?

AIFPMS
Pooling of fundsPooling of funds is the essence of this kind of investment model.Funds are not pooled, and investors have separate Demat accounts.
Number of InvestorsThe maximum number of investors to any AIF scheme cannot exceed 1,000There is no cap specified on the number of investors
SEBI-mandated minimum investment amountRs. 1 croreRs. 50 lakhs
Minimum corpus A minimum corpus of Rs. 20 crore is required. For Category-I angel funds, Rs. 10 crore is necessary.  No corpus amount requirements
Lock-in period In close-ended AIF, investors must adhere to the lock-in period. PMS investors can withdraw their funds at any time.
TypesAIFs are grouped into three – Category I, II, and III, depending on where the funds are invested.PMS investors can withdraw their funds at any time.
Tenure  Category-I and II AIFs have a minimum tenure of 3 years and a maximum of 5 years. The minimum term is extended when two-thirds of investors by value approve it. Category-III funds have no minimum tenure. No fixed tenure for securities.
TaxationTwo factors impact the taxation of an AIF: Classification of the fund into one of the 3 categories andLegal form of the fund. SEBI regulations permit an AIF to be set up in the form of a trust, or a company, or a limited liability partnership or a body corporate.Equity PMS – Short term capital gains (before 1 yr) will be taxed at 15% and any long term capital gains will be taxed at 10% (after 1 lakh limit per financial year) 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

Types of PMS and AIF: Categories, Structures & Investment Strategies

Understanding the difference between PMS and AIF starts with knowing their types and structures. Portfolio Management Services (PMS) can be discretionary or non-discretionary. Discretionary PMS allows portfolio managers to actively manage investments in equities, fixed income instruments, and structured products. Non-discretionary PMS gives investors the final decision-making power. PMS portfolios are usually concentrated, aiming for long-term alpha returns.

On the other hand, Alternative Investment Funds (AIFs) are pooled investment vehicles classified into three categories. Category I targets start-ups and social ventures and Category II focuses on private equity and debt instruments. Category III employs complex strategies like hedge funds for short-term gains. Understanding these helps clarify the difference between PMS and AIF and guides investors in selecting the right structure.

Who Should Choose PMS or AIF? Investor Profile & Suitability

Understanding the difference between PMS and AIF helps investors select the solution that aligns with their financial goals and risk appetite. Individuals seeking a personalised investment approach with direct equity exposure may prefer PMS, while those looking for diversified portfolios across asset classes with professional management might opt for AIFs. 

Typically, PMS suits high-net-worth investors who want active involvement and customised strategies, whereas AIFs appeal to investors seeking alternative investment opportunities with potentially higher returns and professional oversight. Knowing what is PMS and AIF ensures that investment decisions match your risk tolerance, investment horizon, and financial objectives. Learning the difference between PMS and AIF is key to choosing wisely.

To Conclude

While AIF gives the investor an avenue to pool in funds with the flexibility to invest in derivatives, listed & unlisted equity shares, real estate, hedge Fund, etc.; PMS permits the investor to actively monitor its personalised portfolio to track developments and maximise returns. Since both AIFs and PMS are high-risk, high-reward instruments, it is crucial to have an excellent management team.

If you wish to invest in PMS or AIFs, get exceptional financial guidance and leverage wealth management solutions from – Tata Capital Wealth. Nurture your wealth and become a sophisticated investor with us. Get in touch today!

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FAQs

What is the main difference between PMS and AIF in India?

 

The main difference between PMS and AIF in India lies in structure and investment approach. PMS offers personalised equity portfolios, while AIFs pool funds to invest in diverse asset classes under professional management.

Can NRIs invest in PMS and AIF?

 

Yes, NRIs can invest in PMS and AIF, subject to regulatory approvals, eligibility criteria, and adherence to relevant guidelines. Investment options may vary based on residency status and fund requirements.

Which is riskier, PMS or AIF?

 

The risk depends on the strategy and asset class. Generally, PMS can be riskier due to concentrated equity exposure, while AIFs offer diversification across assets, potentially reducing risk.

Is there any tax advantage to choosing PMS over AIF or vice versa?

 

There’s no direct tax advantage between PMS and AIF. Tax treatment depends on the type of income apital gain(s or dividends) and holding period, so investors should consult a tax advisor for guidance.

Are there different types of AIF and PMS in India?

 

Yes, both PMS and AIF in India have different types. PMS can be discretionary or, non-discretionary, while AIFs are classified into Category I, II, and III based on investment strategy and risk.

How do fees and minimum investment requirements compare for PMS and AIF?

 

Fees and minimum investment requirements differ for PMS and AIF. PMS typically has higher entry thresholds with asset-based fees, while AIFs may have lower minimums but include performance-linked charges.

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