When navigating the complex landscape of wealth creation, High-Net-Worth Individuals (HNIs) often explore premium investment options that go beyond mutual funds or fixed income. Portfolio Management Services (PMS) and Alternative Investment Funds (AIF) are two such investment vehicles. Though they may appear similar at first glance, these avenues differ significantly in structure, strategy, regulation, and suitability.
This guide will help you understand the key distinctions between PMS and AIF, empowering you to choose the right vehicle aligned with your financial goals.
What is PMS (Portfolio Management Services)?
PMS offers customized and actively managed portfolios tailored to individual investors. These portfolios typically consist of equities, debt instruments, or a mix, and are designed based on an investor’s financial objectives, risk appetite, and preferences.
Portfolio Management Services (PMS) offer bespoke investment solutions, where seasoned professionals manage a unique portfolio aligned specifically to the investor’s financial goals and preferences.
As per SEBI guidelines, the minimum investment threshold for PMS is ₹50 lakh, making it accessible primarily to affluent investors.
Key Highlights of PMS
- Ownership: Investors own the individual securities directly.
- Customization: Strategies are tailored to your risk profile and financial objectives.
- Transparency: Full visibility into your holdings and transactions.
- Taxation: Taxes are applicable at the individual investor level based on gains from underlying assets.
What is AIF (Alternative Investment Fund)?
AIFs are pooled investment vehicles that collect capital from sophisticated investors for investing in unconventional asset classes like private equity, venture capital, real estate, or structured debt.
AIFs span a diverse array of asset classes, including but not limited to real estate, private equity, structured credit, and hedge-style strategies, extending well beyond traditional equity and debt markets.
Alternative Investment Funds are often structured for experienced investors, including institutions, with a minimum commitment starting at ₹1 crore.
SEBI mandates a cap of 1,000 investors per AIF scheme, except in the case of angel funds, which have their own set of norms.
Categories of AIFs:
- Category I: Focus on sectors such as early-stage ventures, SMEs, and socially impactful enterprises. These may offer certain tax advantages while maintaining relatively conservative risk profiles.
- Category II: Invest in private equity, real estate, or debt instruments. These funds do not enjoy tax benefits but offer diverse strategies.
- Category III: Employ complex trading strategies, including derivatives and leverage. These are typically high-return, high-risk opportunities.
PMS vs AIF: Head-to-Head Comparison
| Feature | PMS | AIF |
| Minimum Investment | ₹50 lakh | ₹1 crore |
| Ownership | Direct (investor owns underlying securities) | Indirect (investor holds units of the fund) |
| Customization | High (personalized portfolios) over assets | Limited (standardized fund structure) reporting |
| Transparency & Control | High – full visibility and control | Moderate – based on fund |
| Asset Classes | Primarily equities and fixed income | Risk Profile Can be tailored for moderate risk
Broader: includes private equity, real estate, structured debt, and hedge strategies |
| Fee Structure | Fixed fee (1–3% AUM) + performance fee (over benchmark) | 0.5–2% AUM + performance fees (often 15–30% of profits) |
| Taxation | Taxed individually as per asset class | Category I & II: Pass-through; Category III: Taxed at fund level |
| Investor Type | Affluent investors seeking tailored management (₹50L+) | Typically higher, especially in Category III |
Understanding the Fee Structure
PMS generally charges a fixed management fee—often between 1% and 3% of assets under management—along with a variable fee based on returns exceeding a predetermined benchmark.
AIFs usually have a lower base fee (0.5–2% of AUM) but may include significant performance-based fees, which can range from 15% to 30% of the profits earned.
Taxation Differences
- PMS:
Tax liability lies with the investor and depends on the asset class (LTCG, STCG, etc.).
- AIF:
○ Category I & II: Follow a pass-through taxation model where tax is paid directly by investors based on the nature of income.
○ Category III: Taxed at the fund level, which can reduce transparency and control.
Which One Should You Choose?
Choose PMS if:
- You prefer direct ownership of stocks or bonds.
- Transparency and customization are a priority.
- You seek tailored strategies to match your investment goals.
With PMS, investors benefit from enhanced transparency and direct control over individual investments and portfolio composition.
PMS can be structured to match an investor’s specific risk appetite, often targeting moderate exposure.
Choose AIF if:
- You’re comfortable with relatively lower transparency but wider diversification.
- You’re looking for exposure to private markets, hedge funds, or structured products.
- You can commit a higher capital base for longer lock-in periods.
Certain AIF categories—particularly Category III—can involve significantly higher levels of risk.
Final Thoughts
For HNIs, both PMS and AIF offer distinct value propositions. While PMS delivers control, transparency, and personalization, AIFs provide access to niche opportunities and advanced strategies that can unlock greater returns.
At EquiZen, we help high-net-worth investors make informed decisions by aligning investment avenues with their wealth goals and risk tolerance. Whether it’s PMS or AIF, our wealth experts ensure that your capital works strategically to build, preserve, and grow your legacy.
