Difference Between AIF and PMS: Key Insights for Indian Investors

Introduction

India today ranks 6th globally in terms of ultra-wealthy and high-net-worth individuals (HNIs), with their population projected to grow by nearly 50% by 2028. With rising wealth comes the responsibility of preserving and multiplying it – pushing HNIs to explore diverse investment avenues. Among the most preferred choices are Portfolio Management Services (PMS) and Alternative Investment Funds (AIFs).

However, despite both being popular SEBI-regulated investment products, many investors find themselves asking: "Which is better for me – PMS or AIF?"

This blog simplifies the differences between PMS and AIF, unpacking them from an investor's perspective so you can choose wisely.

Two doors but only one may suit your journey. Let's find out which one is for you.

What are AIFs?

Alternative Investment Funds (AIFs) are privately pooled investment vehicles that collect money from investors and channel it into non-traditional asset classes. Unlike mutual funds or direct equity, AIFs typically invest in areas such as private equity, venture capital, hedge funds, debt instruments, structured products, or other alternative strategies.

Regulated by SEBI, AIFs are designed for sophisticated investors who seek diversification beyond traditional markets. The minimum investment is ₹1 crore, except in the case of Angel Funds, where it is ₹25 lakhs.

Major categories of AIFs include;

Category I – Invests in early-stage ventures, start-ups, infrastructure, social ventures, and SMEs (with government incentives for these investments).

Category II – Includes private equity funds, debt funds, and other funds not covered under Category I or III (no specific incentives, but flexible).

Category III – Employs diverse or complex strategies, including hedge funds, to generate short-term returns through listed or unlisted derivatives, arbitrage, and trading.

What Is PMS or Portfolio Management Services?

PMS is a professional service provided by SEBI-licensed portfolio managers to handle and manage a client's portfolio. In simple terms, it's like hiring an expert to actively manage your investments – buying, selling, and strategizing based on your financial goals, risk tolerance, and preferences on your behalf.

Based on your preferences, there are three types of Portfolio Management Services made available.

Discretionary PMS –

The portfolio manager takes full control of investment decisions. Buying, selling, and portfolio strategy are executed without requiring the investor's prior approval. (Most common type of PMS.)

Non-Discretionary PMS –

The portfolio manager suggests investment ideas, but execution happens only after the investor's approval.

Advisory PMS –

The portfolio manager only provides research-backed advice. The final decision and execution remain with the investor.

Difference Between AIF and PMS: Key Pointers Explained

The table below explains the difference between AIF and PMS in a detailed format.

Pros and Cons of AIF vs. PMS

On a larger scale, both AIF and PMS have their pros and cons for investors. And this will give clarity on where to invest.

Portfolio Management Services

Pros

• Direct ownership of securities in your demat account.
• High transparency (real-time tracking) with monthly reports.
• Customized portfolio as per goals & risk appetite.

Cons

• Higher minimum investment (₹50 lakh).
• Portfolio performance depends heavily on manager’s skills and expertise.
• PMS involves entry charges, performance fee, management fee - either fixed or variable.
• Tax liability directly falls on investor.

Alternative Investment Funds

Pros

• Access to niche opportunities (start-ups, PE, hedge funds).
• Professional management with pooled expertise.
• Diversification across unique asset classes.

Cons

• Very high minimum investment (₹1 crore).
• Lower transparency (only periodic reports).
• Limited flexibility as the same strategy applies to all investors.

AIF vs PMS: Which Is Better?

Deciding between them has no single answer. Both PMS and AIF have their own set of pros and cons. The sole decision on where to invest depends on your financial goals, risk profile, and the kind of exposure you're seeking.

In PMS, you are allowing a portfolio manager to manage and decide where to invest your money. Whereas AIF is a fund of funds, allowing you to invest in funds beyond stocks and bonds. But to see, one common bridge is that HNI investors get to invest in both these SEBI-regulated investments – only the minimum corpus differs.

All things considered, your investment decision must come with clarity, research, and consideration of how it suits your portfolio.

Disclaimer: The information provided in this article is for educational and informational purposes only. Any financial figures, calculations, or projections shared are solely intended to illustrate concepts and should not be construed as investment advice. All scenarios mentioned are hypothetical and are used only for explanatory purposes. The content is based on information obtained from credible and publicly available sources. We do not guarantee the completeness, accuracy, or reliability of the data presented. Any references to the performance of indices, stocks, or financial products are purely illustrative and do not represent actual or future results. Actual investor experience may vary. Investors are advised to carefully read the scheme/product offering information document before making any decisions. Readers are advised to consult with a certified financial advisor before making any investment decisions. Neither the author nor the publishing entity shall be held responsible for any loss or liability arising from the use of this information.