Breaking Down PMS and AIF
Do you find Mutual funds too mainstream? Want to invest in securities beyond mutual funds? Well, you need to look no further than Portfolio Management Services (PMS) and Alternative Investment Funds (AIF). We’ll try to explain what each product is and you’ll also get a better idea of the difference between PMS and AIF.
What is PMS?
Portfolio Management Services offer a customised investment portfolio in equity or debt asset classes. The objective is to generate superior returns. Professional fund managers provide these services.
The services are often tailor-made to suit the financial goals of investors. PMS offers professional management of your portfolio to create wealth. A power of attorney is executed by the investor in favour of the Fund Manager to operate the person’s Demat account. PMS is like Mutual Funds; both are professionally managed. However, in PMS, the investor owns the underlying asset, unlike in Mutual Funds, where they own units representing the stock.
There are two types of PMS
- Discretionary PMS: It is Discretionary when the fund manager is empowered to take decisions on behalf of the investor.
- Non-Discretionary PMS: It is Non- Discretionary when the fund manager only offers suggestions to the investor, and the investor takes the final decision.
Benefits of PMS
- Portfolio Monitoring: Active monitoring of portfolio to track developments impacting it, with a view to maximising returns on investment.
- Customised Portfolio: Personalised to achieve key investment goals.
- Professional Management: Experienced Portfolio managers who build an investment portfolio to meet your desired objectives.
- Convenience: No administrative hassle in managing your portfolio. You can review the transaction summary periodically and get periodic updates on performance.
Things to keep in mind
While the benefits of PMS are numerous, an investor must keep in mind the following aspects before choosing PMS:
- Minimum Investment Amount: Is currently Rs. 25 lakh.
- Fees: PMS, in most cases, involves, entry charges, management fee and performance fee - either fixed or variable.
What is AIF?
Alternative Investment Funds are an investment avenue to pool in funds for investing in private equity, real estate or to hedge funds. AIFs may be established or incorporated as a company, trust or other bodies corporate (including limited liability partnerships).
Categories of AIF
- Category I – AIF that invest in start-ups or social venture funds, infrastructure funds, SME funds, and so on. They are often considered socially viable or economically desirable for the government or regulators.
- Category II – Funds that do not leverage or undertake to borrow other than to meet the operational requirement which does not fall under Categories I and III. Typically Private Equity Funds fall in this category.
- Category III – Funds that undertake diverse or complex trading strategies including investment in listed or unlisted derivatives. Typically Hedge Funds fall in this category. Only close-ended funds are in Category I and II AIFs while open-ended funds are in Category III.
Benefits of AIF
- Customisable – Structure of AIF can be designed for a particular investment strategy either in terms of exposure in a specific sector or investment in diverse asset classes.
- Flexibility to raise resources – AIF may raise money from any investor whether Indian, foreign, or of Non-Resident Indian (NRI)
- Have a Large Corpus – Since AIF work like mutual funds, by pooling capital, a larger corpus is pooled together. The accumulated corpus is useful in achieving set investment objectives.
PMS vs AIF
- Pooling of funds
In PMS, there is no pooling of investor funds. A separate Demat account needs to be created for every independent PMS investor. Whereas in the case of AIF, pooling of funds is a necessity.
- Minimum Investment Amount
A minimum investment of Rs. 25 lakh is required for PMS. In the case of AIFs, an investor must invest at least Rs. 1 crore.
- Minimum Corpus
PMS requires no corpus amount. For AIFs, corpus needs to be a minimum of Rs. 20 crore. For angel funds, the requirement is lower, at Rs. 10 crore.
- Lock-in Period
PMS investors have the choice to withdraw funds at any point in time. Close-ended units in AIFs have a lock-in period to which they must adhere.
PMS are of two types; discretionary and non-discretionary based on the authority of the fund manager. On the other hand, AIFs are grouped into three – Category I, II, and III, depending on where the funds are invested.
For PMS, apart from the non-refundable application fee of Rs 1 lakh, the applicant needs to pay a registration fee of Rs. 10 lakh upon issuance of the registration certificate. If you want to invest in AIFs, apart from the application (non-refundable) payment of Rs. 1 lakh, you’ll also need to pay a registration fee. The costs vary depending on the category of AIF upon issuance of the registration certificate.
This is an important point to consider when trying to understand the difference between PMS and AIF. In PMS, there is no defined tenure for the securities. Instead, the agreement term between a fund manager and an investor is binding. In AIF, the tenure of the securities for Category I and II is a minimum of three years. This tenure can be further extended by another two years. The extension is subject to the approval of two-thirds of the investors by value of investment in the AIF. In case of no majority to extend, the AIF gets liquidated within one year following expiration. The expiration date is considered one year from the start date or a year from the extended time. There is no minimum tenure for Category III funds.
- Segregation of Funds
Every client's funds have to be segregated into separate Demat accounts in PMS. No segregation is required in AIFs.
- Number of investors
There is no cap specified on the number of investors for PMS. A fund manager can have any number of clients. The maximum number of investors to any AIF scheme cannot exceed 1,000.
- Types of Funds
PMS is categorised as Discretionary and Non-Discretionary Funds based on the rights of the fund manager. AIFs are classified into Categories I, II, and III based on the end-use of funds pooled.
- Manager Contribution
While PMS has no specific requirements on Manager contribution, AIFs require managers to have continued interest. In the case of Category I and II of AIFs, managers should hold at least 2.5% of the corpus, or, Rs. 5 crores, whichever is lower. For Category III AIFs, a manager should hold at least 5% of the corpus, or, Rs. 10 crores, whichever is lower.
With in-depth information on PMS vs AIF, you are now better poised to plan your next investment.
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