By Manish Kalra, Proprietor, Kalra Investments.
Portfolio Management Services (PMS) and Alternative Investment Funds (AIF) stand out as sophisticated avenues for individuals and institutions seeking tailored wealth management solutions beyond traditional Mutual Funds (MF). These avenues offer distinct advantages, catering to a diverse range of investors with varying risk appetites and investment goals.
What are PMS and AIF?
Portfolio Management Services (PMS) provide personalized investment strategies tailored to individual investors, HNIs, and institutions. Unlike pooled investments, PMS allocates funds directly to clients' demat accounts, offering real-time access to investment information. This customization ensures alignment with clients' financial goals and risk tolerance levels, enhancing transparency and control over their portfolios.
In contrast, Alternative Investment Funds (AIFs) collect capital from investors to invest in diverse assets beyond traditional markets. AIFs offer exposure to alternative asset classes like private equity, venture capital, and real estate, providing opportunities for portfolio diversification. Certain AIFs permitted to invest in equities can leverage their portfolios, enabling them to borrow against assets and increase their investment exposure beyond initial capital limits.
Subtypes of PMS and AIF:
PMS can be categorised into three main types: Discretionary PMS, Non-Discretionary PMS, and advisory PMS. Discretionary PMS grants the portfolio manager full authority to make investment decisions on behalf of the clients. At the same time, Non-Discretionary PMS involves advisory services where the manager provides recommendations, but the client retains the final decision-making authority. In both cases, the execution of the final decision is carried out by the PMS provider. Under PMS advisory, the fund manager only provides the opinion; the final say and execution are with the investors.
When it comes to AIF, AIFs are funds established in India for the purpose of pooling in capital from Indian and foreign investors for investing as per a defined investment policy. Therefore, AIFs are classified into three categories: Category I includes funds that invest in start-ups, SMEs, or other sectors considered socially or economically desirable by the government. Category II includes private equity funds, debt funds, and funds for distressed assets, typically not entailing leverage. Category III AIFs employ diverse or complex trading strategies and may use leverage, including through investment in listed or unlisted derivatives.
Differences from MF Investments:
Both PMS and AIF share some similarities with mutual funds to the extent that they are vehicles to generate wealth, which professional investors manage. All three are regulated by the Securities and Exchange Board of India (SEBI). And that is where perhaps the similarities end. Mutual Funds typically offer standardised investment strategies and cater to a broad investor base. In contrast, PMS does not pool investments but provide customised investment solutions tailored to individual preferences, risk profiles, and investment horizons. AIF pool investments but it gives investors an opportunity to invest in high-risk high return investment opportunities.
Minimum Investment Ticket Size
PMS and AIFs generally have higher minimum investment requirements compared to mutual funds, making them accessible primarily to high-net-worth individuals (HNIs) and institutional investors. The minimum investment ticket size for PMS starts with 50 lakhs, as per SEBI. Similarly, AIFs typically require that investors are accredited. To become an accredited investor, an investor should have an annual income of 2 crores or 1 crore with financial assets totalling 2.5 crore and a net worth exceeding 5 crore or net worth of 7.5 crore with at least 3.75 crore of financial assets.
Investor Profiles
PMS and AIFs are ideally suited for sophisticated investors with substantial investable assets, seeking personalized investment strategies, and willing to bear higher investment risks in pursuit of potentially higher returns. These products are particularly attractive to High-Net-Worth Individuals (HNIs), Ultra High Net Worth Individuals (UHNIs), Family Offices, Corporate Treasuries, and Institutional Investors such as Banks, Insurance Companies, Pension Funds, and Endowment Funds.
To conclude, PMS and AIF cater to high-net-worth individuals and institutions, offering personalized investment strategies and access to a wide range of asset classes. These investment vehicles stand apart from traditional mutual funds in terms of providing opportunities for wealth generation, risk management, and portfolio diversification. Before investing, it is crucial for investors to evaluate the portfolio or fund manager's track record, understand the investment approach, and consider the potential risks and returns before signing up for PMS or AIF.