Navigating Investments: PMS And AIF For Modern Investors

As the new financial year approaches, are you ready for the opportunities that FY2025 will offer? Building generational wealth is a top ambition for many, and each financial year presents a chance to rebalance and restructure your investment portfolio for maximum returns with minimal risk. If you're an experienced investor well-versed in traditional assets like equities, debt, mutual funds, gold, and real estate, FY25 might be the ideal time to explore the burgeoning alternatives landscape, including Portfolio Management Services (PMS) and Alternative Investment Funds (AIFs). Here's everything you need to know to determine if these alternatives are right for you. 

PMS stands for Portfolio Management Services, which are platforms that offer customized portfolios primarily composed of publicly traded securities. These portfolios are managed by experienced portfolio managers with the aim of outperforming the market while managing risks.

AIF stands for Alternative Investment Funds, which serve as investment vehicles enabling participation in unconventional assets and strategies such as private equity, venture debt, and structured credit. Unlike mutual funds, which focus on traditional assets, AIFs invest in hedge funds, private equity, venture capital, and other non-traditional investments.

The key differences between PMS and AIF lie in the minimum investment requirement, fund structure, and lock-in period. PMS typically requires a minimum investment of INR 50 lakhs, while AIFs demand a higher entry point of INR 1 crore. Additionally, PMS investors directly own the securities in their portfolios and can redeem them at their discretion, whereas AIFs usually have predetermined lock-in periods.

Despite being relatively young compared to mature markets, both the PMS and AIF industries in India have experienced robust growth in recent years. PMS assets under management have more than doubled over the last half-decade, reaching INR 29 trillion as of December 2023. Similarly, AIF assets have grown five-fold over the last five years, reaching INR 10 trillion by the end of 2023. This growth is attributed to factors such as rising income levels, increased accessibility to alternative investments, and the appeal of diversification and higher returns.

With regard to participating in PMS, no specific certification is required in India. Equity broking firms and wealth management services offer PMS solutions. Investors are required to create separate bank and demat accounts. All investments are made under the investor's legal name, with gains and dividends credited to their designated bank account. Investors grant power of attorney to portfolio managers for managing both accounts but retain full access for monitoring investment status.

Additionally, SEBI regulations mandate receiving customisation and detailed performance reports every six months.

Eligible investors can access AIFs via private placement after paying registration fees, obtaining SEBI certification, and completing basic KYC requirements. Once certified, AIFs seek stock exchange listing through submission of management agreements or placement memoranda.

With the domestic alternatives landscape poised for further growth, now could be the optimal time to embark on your PMS and AIF journey.

PMS and AIF provide advantages over mutual funds:

• Targeted Themes: They focus on specific investment themes, offering better returns by capitalising on niche opportunities.

• Flexibility: Managers can concentrate on individual stocks or sectors, potentially yielding higher returns taking higher exposure compared to Mutual Funds. 

• Reduced Liquidity Pressure: With fewer retail investors, managers face less pressure to sell during market downturns, allowing them to stick to their strategies.

• Tax Efficiency: Certain AIF categories offer tax benefits, enhancing overall returns.

These features make PMS and AIF attractive options for investors seeking tailored strategies and potentially higher returns.