Mutual Funds vs PMS vs AIF

PMS (Portfolio Management Services) and AIFs (Alternative Investment Funds) are primarily designed for High Net Worth Individuals (HNIs), whereas mutual funds cater to retail investors.
EXPLORE FUNDS
Difference between PMS vs AIF vs Mutual Funds
EXPLORE FUNDS
3 min
11-December-2024

PMS (Portfolio Management Services) are personalized investment portfolios managed for individual clients, while AIFs (Alternative Investment Funds) pool funds from multiple investors for unique strategies. Mutual Funds (MFs) are collective investment schemes managed by fund managers, offering diversified portfolios to retail investors.

Each of these investment options gives investors an avenue to grow their wealth. However, all three differ in their structures, strategies, and accessibility. Let’s understand how they differ by comparing PMS vs AIF and AIF vs PMS in this article.

What are mutual funds?

Mutual funds help you buy equity, debt, or a mix of both for a diversified portfolio containing stocks and bonds. The shares of mutual funds are traded i.e. bought and sold at the end of each trading day.

The fund manager defines strategies based on investment objectives and market research. Mutual funds invest in a combination of assets like shares, bonds, stocks, short-term debt, etc., to ensure diversification that forms the basis of a well-balanced portfolio. The investors, in return, are given shares in the fund, which reflect a percentage of how much money they have invested.

With mutual funds, you can start a sip for as low as Rs. 100 and also opt for lumpsum investments.

What are portfolio management services (PMS)?

The investment avenue is designed for high-net-worth individuals who require a customised investment plan for their capital.

They can invest across varied asset classes like fixed income, equities, cash, debt and other assets that a professional money manager manages. PMS offers many differentiated strategies with varying levels of risk and return to meet the unique requirements of individual investors.

Typically PMS services require a high amount of investment starting Rs. 50,00,000, which acts as a barrier to entry for retail investors.

What are alternative investment funds (AIFs)?

Alternative Investment Funds (AIFs) can be defined as pooled instruments of investment that buy assets like hedge funds, realty, commodities, derivatives, private equity and venture capital that are not typically available to retail investors.

AIFs provide investors with niche and varied strategies to generate more returns in comparison to traditional assets.

They also come with a high barrier to entry as most AIFs require at least Rs. 1 crore as a minimum investment.

Now that you are familiar with the characteristics, let us take a look at mutual fund vs pms vs aif

Difference between PMS, AIF, and MF: Mutual fund vs PMS vs AIF

Here are some of the main differences between mutual funds vs PMS vs AIF.

Aspect Mutual Funds Portfolio Management Services (PMS) Alternative Investment Funds (AIF)
Structure Collective investment scheme Individualised portfolio management Pooled investment vehicle
Investor profile Retail investors High-net-worth individuals Sophisticated investors
Regulation SEBI SEBI SEBI
Transparency High High Varies
Customisation Limited High Varies
Investment horizon Short to long-term Medium to long-term Medium to long-term
Risk management Diversified approach Tailored risk management strategies Risk varies based on the AIF category
Fund manager Professional fund manager Dedicated portfolio manager Professional or fund manager team


PMS vs AIF vs MF with examples

Let us understand the differences between PMS (Portfolio Management Services), AIFs (Alternative Investment Funds), and Mutual Funds (MFs) with examples:

1. Investment objective

All three investment vehicles have different objectives. Mutual funds aim at long-term growth, while PMS is generally reserved for institutional investors and high-net-worth individuals to aid them in generating higher returns. AIF can be used for diversification and preservation of capital.

2. Investment strategies

While discussing PMS vs AIF or AIF vs PMS comparison, we must remember that these investment avenues have different strategies. Mutual funds go big on investing in stocks, bonds, or other securities managed by professional fund managers for retail investors. PMS offers customised portfolio management tailored to individual client financial goals and risk profiles, while AIF facilitates investment in non-traditional assets like real estate, startups, and private equity for potentially higher returns.

3. Minimum investment amount

There is a variation in the minimum investment amount required for PMS, AIF, and MF. When it comes to MFs, you can start with Rs. 500. For PMS, the minimum investment amount is Rs. 50,00,000, and for AIFs, the minimum amount starts at Rs. 1 crore.

4. Fees

When it comes to mutual funds, an investor has to pay an expense ratio depending on the type of fund selected as mandated by SEBI. PMS and AIFs generally carry higher fees compared to mutual funds due to their personalised service and investments in less liquid assets. PMS charges management fees of 1-3% and profit-sharing fees, while AIFs charge 2% management fees and take 20% of the profits. Mutual funds charge an expense ratio, typically ranging from 1% to 2.25%, as regulated by SEBI.

5. Liquidity

When it comes to liquidity, PMs and AIF have comparatively lower liquidity. AIFs are bound by strict lock-in periods and come with very few options to liquidate. PMS, on the other hand, provides direct ownership of securities, but they are also relatively less liquid. MFs are the most liquid among the three, as they provide easy access and high liquidity through daily NAV based transactions.

Mutual Funds Pros and Cons

Mutual funds offer a popular investment avenue for individuals seeking diversification and professional management. However, they come with both advantages and limitations, as highlighted below.

Pros

Cons

Professional management

Management fees

Diversification

Market risks

Liquidity

Lack of control

Ease of investment

Taxation on gains


Mutual funds are managed by experienced fund managers, providing professional expertise and convenience for investors. They enable diversification by investing in multiple securities, spreading risk. The liquidity they offer ensures that investors can redeem their holdings easily.

However, mutual funds are not without drawbacks. Management fees can erode returns, and market volatility may impact fund performance. Additionally, investors have limited control over the fund’s specific investments, and capital gains may attract taxes, affecting overall profitability.

Portfolio management services Pros and Cons

Portfolio Management Services (PMS) cater to high-net-worth individuals by offering tailored investment solutions. Below are their benefits and limitations.

Pros

Cons

Customised investments

High fees

Professional management

Risk of over-concentration

Potential for higher returns

Limited liquidity

Transparency in reporting

High minimum investment


PMS offers tailored investment strategies, suiting specific financial goals and risk appetites. Backed by professional managers, it provides the potential for higher returns and detailed reporting for transparency.

However, PMS requires a significant initial investment and carries higher fees. Over-concentration on specific assets may increase risk, and liquidity is often restricted compared to mutual funds, making it less suitable for short-term goals.

Alternative investment funds Pros and Cons

Alternative Investment Funds (AIFs) are specialised investment vehicles offering unique opportunities. Below are their key advantages and drawbacks.

Pros

Cons

Diversified asset classes

High entry barrier

Potential for high returns

Limited liquidity

Access to niche markets

Regulatory complexities

Professional expertise

Risk of unconventional assets

 

List of  low risk mutual funds

Which is better — PMS vs Mutual Funds vs AIF?

Whether you opt for PMS vs Mutual Funds vs AIF depends on your financial goals and risk tolerance. It is common to find investors who invest in all three based on their requirements. But broadly speaking,

  • PMS typically suits high-net-worth individuals looking for tailored investment strategies.
  • AIFs are designed for sophisticated investors looking for exposure to alternative assets like real estate, private equity, or hedge funds.
  • Mutual funds offer diversified investment options across various asset classes with liquidity and accessibility. They are suitable for investors seeking professional management and liquidity through daily transactions.

Conclusion

Mutual Funds, Portfolio Management Services, and Alternative Investment Funds each offer distinct advantages and cater to different investor profiles. Understanding their differences in structure, objectives, strategies, fees, and liquidity is crucial for making informed investment decisions aligned with one's financial goals and risk appetite.

Whether you are a retail investor seeking diversification, a high-net-worth individual looking for personalised management, or a sophisticated investor exploring alternative assets, there's an investment avenue in mutual fund vs PMS vs AIF tailored to your needs.

Essential tools for mutual fund investors

Mutual Fund Calculator Lumpsum Calculator Mutual Funds SIP Calculator Step Up SIP Calculator
SBI SIP Calculator HDFC SIP Calculator Nippon India SIP Calculator ABSL SIP Calculator
Tata SIP Calculator BOI SIP Calculator Motilal Oswal Mutual Fund SIP Calculator Kotak Bank SIP Calculator

Frequently asked questions

Is AIF better than mutual fund?
Whether AIFs are better than mutual funds depends on individual investor preferences, risk tolerance, and financial goals. AIFs offer exposure to alternative assets and may potentially provide higher returns but often come with higher risks and may require larger investments compared to mutual funds.
What is the difference between PMS and AIF funds?
The primary difference lies in their target investors and investment strategies. PMS caters to high-net-worth individuals with personalised portfolio management, while AIFs target sophisticated investors with pooled investments in alternative assets beyond traditional stocks and bonds.
Which is better, PMS or mutual fund?
Selection between PMS and mutual funds depends on individual investor preferences, financial goals, and risk tolerance. PMS offers personalised portfolio management but requires larger investments and may have higher fees, while mutual funds provide diversification and accessibility to retail investors with lower minimum investment requirements.
What are the disadvantages of AIF?
One disadvantage of Alternative Investment Funds (AIFs) is that they often come with higher fees and expenses compared to traditional mutual funds. Additionally, AIFs typically involve higher risks due to their focus on alternative asset classes, which may lead to increased volatility and potential loss of capital for investors.
Is AIF tax-free?
Whether AIFs are tax-free or not depends on various factors, including the specific type of AIF and the investor's tax jurisdiction.
Who should invest in AIF?
AIFs are suitable for sophisticated investors with a higher risk appetite and a desire for exposure to alternative asset classes such as private equity, real estate, or hedge funds.
Why do people invest in PMS?
People invest in PMS for personalised portfolio management tailored to their individual financial goals, risk profiles, and investment preferences.
Who should invest in mutual funds?

Mutual funds are ideal for retail investors looking for simple, diversified, and tax-efficient investments. They suit those with limited market knowledge or time for active portfolio management. High-net-worth individuals (HNIs) seeking systematic investment options can also benefit. However, mutual funds may not be suitable for those preferring high-risk, high-return opportunities or direct stock ownership.

What are the advantages of PMS over mutual funds?

Portfolio Management Services (PMS) provide tailored investment strategies, direct stock ownership, and customised portfolios, making them suitable for investors with Rs. 50 lakh or more. PMS offers more control and transparency compared to mutual funds. However, it lacks tax benefits and involves higher fees, making it better suited for sophisticated investors seeking personalised solutions over pooled investments.

What makes AIFs unique among investment vehicles?

Alternative Investment Funds (AIFs) allow investments in niche areas like private equity, real estate, and unlisted shares. They offer sophisticated strategies, including leverage, and cater to investors willing to invest Rs. 1 crore or more. AIFs provide diverse risk-reward options but require a higher understanding and are less tax-efficient compared to mutual funds or PMS.

What are the tax implications of PMS and AIFs?

PMS treats investments as direct equity holdings, with taxes filed individually by investors based on gains. AIFs, particularly Category III, are taxed at the fund level, streamlining filings but leading to shared tax impacts. Mutual funds often offer more favourable tax structures, making them more efficient for tax-conscious investors.

How do AIFs handle market fluctuations differently from PMS?

AIFs, especially close-ended ones, can invest in illiquid or alternative assets, offering flexibility during market fluctuations. They are less impacted by inflows or redemptions compared to PMS. However, AIFs face risks of forced exits during adverse market conditions, making their performance more dependent on market liquidity and manager expertise.

How do I decide between mutual funds, PMS, and AIFs?

The choice depends on your investment amount, risk appetite, and goals. Mutual funds suit low-risk investors seeking simplicity and liquidity. PMS is ideal for those desiring customised portfolios with higher investment capacity. AIFs fit sophisticated investors aiming for niche strategies with higher risk and complexity. Expert advice is essential for informed decisions.

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The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

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