Difference Between AIF and PMS

When it comes to diversifying the portfolio in investment, then most of the investors often remain confused between two terms PMS and AIF. So, let’s begin understanding the difference between AIF and PMS. 

On one hand where PMS is the fund managing services while the other is the type of fund that provides you with the option to diversify your funds to gain better returns. 

Let’s dive into the details to learn the major differences between the two. 

Alternative Investment Funds

AIF stands for Alternative investment funds and as the name says, the investments are made into alternative assets like private equity, venture capital, hedge funds etc instead of traditional financial assets such as stocks and debt securities. 

Types of Alternative Investment Fund

Additionally, AIFs have been divided into three categories based on the nature of the investment. 

  • Category 1: Investments are made into Venture capital, SMEs, infrastructure, equity of companies that promote social welfare etc.
  • Category 2: Investments are made into the shares of unlisted private companies, debt securities of both listed & unlisted companies and portfolios of other AIFs. 
  • Category 3: Investments are made into Hedge funds and shares of traded companies at a discounted price. 

There are several pros and cons attached to investing in AIF products which we will look at as we move ahead in this article. 

Portfolio Management Services

PMS, short for Portfolio Management Services is an investment program that is made for managing your portfolio and investing your money into various assets like equity and debt securities listed on an exchange, fixed income, cash, structured products etc. 

Types of Portfolio Management Services

PMS are of two types based on the nature of the investment. 

  • Discretionary PMS: The first type is when the fund manager takes all the decisions and invests on the behalf of the investor.
  • Non-Discretionary PMS: In this second type, the investor takes the final decision while the fund manager only provides tips to assist the investor. 

10 Differences Between AIF and PMS

Now that we have an idea about both PMS and AIF, let’s dive into looking at the key factors that separate them. Here are some major differences between them both. 

 

1. Minimum Investment Required 

In AIF, the minimum amount of money required to invest in one scheme is ₹ 1 crore while the same limit in PMS is ₹ 50 Lakh. 

2. Minimum Corpus

While in PMS, there is no provision of a corpus, in AIF it is ₹ 20 crore. 

3. Tenure

Almost all the AIFs are close-ended which means they have a lock-in period of a minimum of 3 years which can be further extended too. In this period, the capital gain can not be withdrawn. However, in PMS there is no such thing as a Lock-in period and the investors can withdraw their money at any point. 

4. Pooling of Funds

In AIF, funds from different investors are pooled to make a corpus and then invested into different asses but in PMS, each investor has his/her own Demat account which is managed separately. 

5. Maximum Number of Investors

In AIF, a maximum of 1000 investors can invest in one scheme while there is no such limit in PMS. 

6. Taxation

Taxation is pretty much similar in both AIF and PMS but the major difference between both in this aspect is that the investors who invest in AIF category 1 and AIF category 2 have to pay no taxes on their earnings. It is because they invest in various trusts and government projects. 

Investors are only taxed on the capital gains on stocks. 

Both AIF and PMS investors are taxed at 15% for the short term capital gain and 10% for the long term capital gain. However, in PMS, there is an upper cap to the long term capital gain, which is ₹ 1 Lakh. 

7. Fees

Apart from having a minimum investment amount, the investors must also be ready to pay the application and registration fee. 

  • In AIF: Application fee – ₹ 1 Lakh (Non-refundable), Registration fee – ₹ 5 Lakh for category 1, ₹ 10 Lakh for category 2 and ₹ 15 lakh for category 3
  • In PMS: Application fee – ₹ 1 Lakh (Non-refundable), Registration fee – ₹ 10 Lakh

8. Types

As discussed, AIF Funds are broadly classified into 3 major categories while PMS are divided into 2 major types, discussed above. 

9. Registration Validity

Upon registration, the PMS has a registration validity of 3 years only and it needs to be renewed at least 3 months prior to the expiry of the previous registration. When it comes to AIF, there is no such provision and it is valid for as long as it exists. 

10. Sponsor

A sponsor is a person who sets up the AIF. There is no such provision for a sponsor in PMS. 

In the case of the AIF, the sponsor will have a continuing interest in the AIF of 

  1. 2.5% of the corpus or ₹ 5 crores, whichever is lower in category 1 and category 2 AIFs
  2. 5% of the corpus or ₹ 10 crores, whichever is lower in the category 3 AIF

It means the sponsor, also known as the fund manager will have to contribute that amount as a safety deposit till the funds of all the other investors get distributed. 

Benefits of AIF 

After understanding the difference between the two investment services, let’s now learn the benefits associated with the AIF funds:

  • Customizable: It is customizable which means the investors can skip and choose plans that suit their investment goals. 
  • Large corpus: Since AIF collects a large number of funds as the minimum corpus is ₹ 20 crore, the larger investment goals can be met making sure every investor gets to invest in their dream projects. 
  • Limitless: It is barrierless like a bird. AIF can raise funds from Indian citizens, NRIs and even foreigners. 
  • Flexible: In the AIF category 3, long-term and short-term investment goals are allowed. Investors can make both long-term and short-term profits. 

Benefits of Portfolio Management Services

  • Customized Portfolio: PMS allows you to maintain a personalized portfolio which in turn serves your investment goals to achieve the maximum profit. 
  • Personal Guidance: It caters to individual needs as PMS provides you with professional guidance on a one-on-one level. 
  • Hassle-free: In the Discretionary PMS, you don’t have to make any investment. The service itself will invest on your behalf, and in your best interests, saving you from the hard work. 

Conclusion 

Both the investment funds come up with their own investment models, time periods and advantages and cater to the requirement of people differently. 

If you intend to make quick profits then PMS serves your needs since most of the AIFs have a lock-in period. If you plan on saving taxes then investing in AIF helps you get exempted from paying taxes. If you want someone to manage your portfolio, then your choice will tilt towards PMS. 

Hence, an investor must assess their own needs, goals and compare the benefits of both and then choose to invest accordingly.

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