When it comes to investing, there are multiple avenues an investor can consider. Most retail investors gravitate towards mutual funds as these vehicles offer exposure to multiple asset classes in a professional and systematic manner. However, when it comes to sophisticated investors who are looking for more nuanced and evolved offerings, mutual funds might not necessarily make the cut. In such a scenario, Portfolio Management Services (PMS) and Alternative Investment Funds (AIFs) can be ideal investment options.

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Understanding PMS

PMS is basically an investment management service offered by skilled portfolio managers and stock market professionals. They manage the investor’s investment portfolio (can be equity, debt, or any other asset class) and ensure that the portfolio is aligned with the investor’s specific return requirements and risk constraints. When one invests in PMS, one owns individual securities unlike a mutual fund investor, who owns units of the entire fund. Thus, any investments that are bought on the investor’s behalf reflect in his/her investment or demat account, as the case maybe. Certain types of PMS also allow investors the freedom and flexibility to tailor the portfolio to address their personal preferences and financial goals.

Although portfolio managers may oversee hundreds of portfolios, each individual investor’s account is unique. As per Securities Exchange Board of India (SEBI) guidelines, only those entities who are registered with SEBI for providing PMS services can offer PMS to clients. As per the SEBI guidelines, the minimum investment required to open a PMS account is Rs. 50 Lakhs. In India, PMS is provided by equity broking firms, wealth management firms, and mutual fund companies.

Types of Portfolio Management Services

1. Discretionary PMS

Here the investment is at the discretion of the fund manager managing the portfolio and the client does not have to take any investment decisions. The authority to execute trades likes with the portfolio manager and the PMS holder does not have the liberty to interfere on the inclusion or exclusion of any particular stock in the portfolio. This process is facilitated by a limited Power of Attorney given to the PMS provider to operate the PMS account. However, the client may give a negative list of stocks in a discretionary PMS at the time of opening his account. In such cases, the fund manager would ensure that those stocks are not bought in his portfolio.

2. Non-Discretionary PMS

In such a structure, the portfolio manager suggests the investment ideas and works as per the client’s direction. The choice, as well as the timing of the investment decision rest solely with the investor. However, the execution of the trade is done by the portfolio manager.

Understanding AIF

AIFs refers to the collection of pooled investments deployed in listed public shares, venture capital, private equity, hedge funds, managed futures, and other types of alternate investments. AIFs can be formed as a corporation, trust, or a Limited Liability Partnership (LLP). Generally, high-net-worth individuals and organisations engage invest in AIFs since the threshold investment, at Rs. 1 crore, is fairly high.

Categories of AIFs

Market regulator SEBI has put forth three distinct categories for AIFs.

Category 1

These funds primarily invest in startups, small and medium enterprises (SMEs), early-stage ventures, social ventures, infrastructure, etc. The government encourages investments in these ventures as they have a positive impact on the economy with regards to high output and job creation.

Category 1 AIFs usually comprise the following:

Infrastructure funds

Angel funds

Venture capital funds

Social venture funds

SME funds

Category 2

As per SEBI, funds that do not fit the definition of Category 1 or Category 3 funds, fall under the purview of Category 2 funds. These funds can invest in unlisted equities, debt instruments, credit structures, private equity, etc. Category 2 funds cannot undertake leverage or borrowing other than to meet their day-today operational requirements. Category 2 AIFs usually comprise the following:

Private credit funds

Fund of Funds

Debt funds

Private Equity funds

Category 3 AIFs

Category 3

]AIFs are widely popular among HNIs. They use complex and diverse trading strategies and invest in listed equities and derivatives. They are permitted to use leverage and borrowing to implement their trading strategies. Category 3 AIFs usually comprise the following

Long only funds

Hedge funds

Long-short funds

Private Investment in Public Equity (PIPE)

Both PMS and AIFs offer an opportunity to gain diversified investment exposure. However, each comes with certain risk elements and investors must ensure that the product is aligned with their overall asset allocation strategy.

Note: This is a partnered post, by Gautam Bhalla, Director, BM Fiscal Pvt Ltd.