[SUPERSEDED BY 115101 – DO NOT PUBLISH] PMS vs AIF vs Mutual Fund – Regulation | Minimum Investment | Investor Profile

Managed portfolio solutions let an investor put money to work without picking securities directly. India has three that matter: mutual funds, Alternative Investment Funds and portfolio managers. All three pool or manage money on an investor's behalf. All three are registered with and regulated by SEBI. The differences lie in the minimum cheque each will accept, the investor each is built for, and how tightly SEBI regulates each one.

Table of Contents

1. What is a Managed Portfolio Solution?
2. Mutual Funds
3. Alternative Investment Funds
4. Portfolio Management Services
5. PMS vs AIF vs Mutual Fund – The Comparison
6. Which One Suits Which Investor?
7. Frequently Asked Questions

Check out NISM X Taxmann's Portfolio Management Services (PMS) Distributors, the official NISM workbook for the NISM-Series-XXI-A certification. It covers investments and the securities markets, the role and operational obligations of portfolio managers, the portfolio management process, performance measurement, and the taxation, regulatory and ethical framework governing portfolio management in India.

1. What is a Managed Portfolio Solution?

An investor has two routes into the securities market. The first is direct: buy the shares, the bonds or the gold yourself, using a broker or a depository participant to execute and hold. Fee-based intermediaries assist, but the decisions are yours.

The second route is indirect. Money goes to an investment vehicle that pools it, or to a manager who runs it, and professionals make the investment decisions. The workbook gives four examples of such vehicles: mutual funds, Alternative Investment Funds, portfolio managers and collective investment schemes.

The attraction is straightforward. Professional expertise becomes available at a cost far below what it would take to hire it directly.

2. Mutual Funds

A mutual fund is a trust that pools the savings of a number of investors who share a common financial goal. The money collected is invested in shares, debentures and other securities. Income earned and capital appreciation realised are shared by unit holders in proportion to the units they own. A mutual fund is a pass-through intermediary in the true sense.

Seven benefits follow from that structure:

• Professional investment management
• Risk reduction through diversification
• Convenience
• Unit holder account administration and services
• Reduction in transaction costs
• Regulatory protection
• Product variety

Two cautions belong alongside those benefits. Mutual funds are not get-rich-quick investments, and they are not risk-free. They are regulated by SEBI under the Mutual Fund Regulations, 1996, and the industry offers substantial variety across investment objectives and goals.

3. Alternative Investment Funds

An Alternative Investment Fund, or AIF, is a privately pooled investment vehicle. It collects funds from sophisticated investors and invests them in accordance with a defined investment policy for the benefit of those investors.

The words “privately pooled” carry weight. The fund is pooled from select investors, not from the general public. Those investors are institutions and high net worth individuals who understand the nuances of higher risk taking and complex investment arrangements. The minimum investment value in an AIF is one crore rupees.

SEBI categorises AIFs into three classes under the AIF Regulations, for the purposes of registration and other operational requirements.

3.1 Category I AIF

A Category I AIF invests in start-ups or early stage ventures, social ventures, SMEs, infrastructure, or other sectors the government or regulators consider socially or economically desirable. It includes venture capital funds, SME funds, social venture funds, infrastructure funds, special situation funds and such other AIFs as the regulations may specify from time to time. Funds considered economically beneficial and given special incentives by the government or a regulator also sit in this category.

3.2 Category II AIF

A Category II AIF is one that falls in neither Category I nor Category III, and which does not undertake leverage or borrowing other than to meet day-to-day operational requirements or as permitted in the regulations. Private equity funds and debt funds, for which no specific incentives or concessions are given, sit here.

3.3 Category III AIF

A Category III AIF employs diverse or complex trading strategies and may employ leverage, including through investment in listed or unlisted derivatives. Hedge funds fall in this category, as do open ended funds trading with a view to short term returns where no specific incentives or concessions are given.

Internationally, hedge funds are popular with large institutional investors: pension funds, investment funds, insurance companies, endowment funds, investment banks, family offices and HNIs. These investors hold large pools of funds and look for options beyond traditional investments.

4. Portfolio Management Services

A portfolio manager is a body corporate who advises, directs or undertakes on behalf of investors the management or administration of a portfolio of securities.

Chapter 1 of the workbook counts two types of service; the regulations-based classification in Chapter 7 adds a third, advisory. A discretionary portfolio manager individually and independently manages the funds of each investor. A non-discretionary portfolio manager manages funds in accordance with the directions of the investor.

The portfolio manager enters into a written agreement with the investor. That agreement clearly defines the relationship and sets out the mutual rights, liabilities and obligations relating to the management of funds or the portfolio of securities.

Portfolio management services are regulated by SEBI under the Portfolio Manager Regulations. The regulations do not prescribe any scale of fee. They provide instead that the portfolio manager shall charge a fee as per the agreement with the client for rendering the service. That fee may be a fixed amount, a return based fee, or a combination of both. It may also be an AUM based fixed fee, carry profit sharing, or a combination.

The portfolio manager is required to accept a minimum of ₹50 lakh in funds or securities from a client when opening the account. That floor applies to new clients and to fresh investments by existing clients, and does not apply to an accredited investor or to a co-investment portfolio manager. A portfolio manager cannot borrow on behalf of clients. What each investor receives is a solution built to that investor’s needs.

5. PMS vs AIF vs Mutual Fund – The Comparison

All three are managed portfolios. All three offer an indirect way of investing in securities. All three are regulated by SEBI. Beyond that, they diverge.

Parameter	Mutual Fund	Alternative Investment Fund	Portfolio Management Services
Structure	Trust that pools investor savings	Privately pooled investment vehicle	Managed or administered by a body corporate under contract
Minimum investment	Not stated in the workbook	₹1 crore	₹50 lakh
Investor base	Retail	Institutional and HNI	Institutional and HNI
Regulatory intensity	Most stringent, because retail investors are served	Lighter than mutual funds	Lighter than mutual funds
Investment restrictions	Most restrictive	Relatively less restrictive	Relatively less restrictive
Portfolio ownership	Units in a pooled scheme	Interest in a pooled vehicle	Segregated in separate accounts for each client
Customisation	Scheme objective is fixed	Fund’s investment policy is fixed	Solution built to the investor’s needs

The logic behind the regulatory gradient is worth stating plainly. Mutual funds are more stringently regulated than AIFs and PMS because mutual funds cater to retail investors. AIFs and PMS cater to institutional and high net worth investors, who are expected to understand complex investment strategies and the risks involved.

SEBI circulars, master circulars and amendments across all three vehicles are tracked on Taxmann.com | Research, where the current text of each regulation sits alongside its amendment history.

6. Which One Suits Which Investor?

The answer follows from three questions.

How much is being invested? Below ₹50 lakh the mutual fund route is ordinarily the only one of the three open, though the PMS minimum does not apply to an accredited investor or to a co-investment portfolio manager. Between ₹50 lakh and ₹1 crore, PMS becomes available. Above ₹1 crore, all three are.

Does the investor want a portfolio of their own? In PMS, each client’s holdings are segregated in separate accounts, the portfolio manager may not hold them in its own name, and the portfolio can be built to that investor’s stated objectives and constraints. In a mutual fund or an AIF, the investor holds a share of a pool whose objective was fixed before they arrived.

What level of complexity is acceptable? A Category III AIF may employ leverage and complex trading strategies. The investor’s own understanding of those strategies is the real constraint, and the regulator assumes it exists once the ticket size crosses the AIF and PMS thresholds.

Distributors introducing clients to any of these vehicles should note that PMS distribution now carries its own certification and registration requirements. Those are set out in the role and responsibilities of portfolio managers, and in the three types of portfolio management services.

7. Frequently Asked Questions

What is the minimum investment in PMS in India?

₹50 lakh. The portfolio manager is required to accept a minimum of ₹50 lakh in funds, or securities of that value, from a client at the time of opening the account. The requirement does not apply to an accredited investor or to a co-investment portfolio manager.

What is the minimum investment in an AIF?

One crore rupees.

Is PMS more regulated than a mutual fund?

No. Mutual funds are more stringently regulated than both PMS and AIFs, because mutual funds serve retail investors. PMS and AIFs serve institutional and high net worth investors and face relatively fewer investment restrictions.

Can a portfolio manager borrow on the client’s behalf?

No. A portfolio manager cannot borrow on behalf of clients.

What is the difference between discretionary and non-discretionary PMS?

A discretionary portfolio manager manages each investor’s funds individually and independently. A non-discretionary portfolio manager manages funds in accordance with the directions of the investor.

Are AIFs and PMS the same thing?

No. An AIF is a privately pooled vehicle in which the investor holds an interest in the pool. In PMS, the portfolio is managed or administered for the individual client, and each client’s holdings are segregated in separate accounts.

Preparing for the NISM-Series-XXI-A certification? The full syllabus, from investments and the securities markets through to the regulatory and ethical framework, is covered in NISM X Taxmann's Portfolio Management Services (PMS) Distributors. Every NISM certification workbook published by Taxmann is listed on Taxmann.com | Store.