Portfolio Management Services (PMS)

A portfolio management service (PMS) is an investment portfolio in equity, fixed income instruments, structured products, and other individual securities. PMS can either be discretionary or non-discretionary, with the former having the Portfolio Manager in charge of all decisions, and the latter leaving room for individual investors to voice their preferences. The execution right, however, lies with the Portfolio Manager in both cases.

PMS are geared more towards individuals or institutions that have a higher investable surplus as the SEBI-mandated minimum investment is 50 lakhs. PMS also offer advanced portfolio management along with the benefits of flexibility, risk diversification, and more customized service. In terms of tax liability, an individual investing with a PMS would be taxed in the same way had they invested in the capital markets directly. However, inefficiencies arise when management fees and performance charges are high.  

Alternative Investment Funds (AIFs)

An Alternative Investment Fund (AIF) is an investment vehicle that sets itself apart from conventional securities such as stocks, debt, or other money market instruments. AIFs are classified into three different categories:

Category I 

A Cat-I AIF invests in start-ups, small and mid-sized enterprises (SMEs) and projects that are defined to be economically and socially viable. 

Venture Capital (VC) Funds, Infrastructure Funds, Angel Funds, Social Venture Funds are all examples of this category of an AIF. The minimum investment for all these types of funds is 1 crore, except for an Angel Fund, that has a mandated minimum of 25 lakh. 

Category II 

A Cat-II AIF invests in several equity and debt securities. All the funds that aren’t included under the Cat-I and Cat-III definitions fall under Cat-II. 

Private Equity (PE) Funds, Debt Funds, and Fund of Funds are included in this category of AIFs. 

Category III 

A Cat-III AIF aims at generating short-term returns by executing several diverse, complex trading strategies. Cat-III AIFs are usually synonymous with hedge funds but can also include Private Investment in Public Equity (PIPE) Funds. Funds can either be long-only, focused entirely on equity, or long-short, where derivative strategies can be employed as well. 

AIFs are high-risk, high-reward investment vehicles, and are suited to more sophisticated, market-savvy investors, with a minimum SEBI-mandated investment minimum of 1 crore. Cat-III AIFs are the only pooled investment vehicles in India that are legally permitted to take short positions, giving this structure a one-up over a mutual fund or a PMS, where profitability is unidirectional.