Difference between Alternative Investment Fund and Portfolio Management Service

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Difference between Alternative Investment Fund and Portfolio Management Service

September 26, 2022
Difference between Alternative Investment Fund and Portfolio Management Service

Today's world is full of different investment plans, and an investor has a myriad of choices to choose from. 

Apart from mutual funds, FDs and stock exchanges, another set of investment options exists Alternative Investment Fund (AIF) and Portfolio Management Service (PMS). Alternative Investment funds differ from traditional investment options as they include funds like hedge funds, venture capital, private equity, and many more.  On the other hand, Portfolio Management Services provides expert investment management designed to fit an investor's specific investment plan.

In this article, we will understand alternative investment funds and Portfolio management services and understand the difference between the two. 


Alternative Investment Funds (AIF)

As the name suggests, Alternative Investment Funds are alternative investment options to traditional financing. These funds provide a wide range of investments, from venture capital to private equity. High net worth individuals (HNI) often use these funds to further their wealth creation goals. It serves as an asset hedge as well.

AIF is regulated by the Securities Exchange Board of India (Alternate Investment Funds) Regulations, 2012. 

To regulate the pooled investment industry, these AIF Regulations were developed. They stipulated all such funds registered with SEBI with the aim of covering them under their legal purview.

The AIFs are divided into three categories, i.e., Category I, which includes venture capital funds (including Angel Funds), SME funds, social venture funds, and Infrastructure funds. Then comes Category II, which does not include leverage or borrowing for anything other than meeting the daily operational needs.

The third Category III utilizes a variety of trading tactics, including complex ones, and leverage, such as investing in listed or unlisted derivatives.


Some of the top AIFs in India are as follows:

  • Real Estate
  • Venture Capital
  • Angel Funds
  • Commodity
  • Private Equity
  • Hedge Funds
  • Peer-to-peer lending


Portfolio Management Service (PMS)

PMS provides customers with customized investment options. The investment portfolios are built by portfolio management services using various investment options. The fund managers are responsible for taking care of their customers' funds.

There are different types of PMS in India, namely:

  • Active Portfolio Management: Investors with a high-risk appetite go for active portfolio management. The research team chooses the necessary securities, and the portfolio manager actively oversees the investment portfolio.
  • Passive Portfolio Management: Unlike active portfolio management, passive does not include active portfolio churning. Index funds mirror market indices portfolios and are passive portfolio management's primary focus.
  • Discretionary Portfolio Management: The portfolio manager has all the say and takes all investment decisions under discretionary portfolio management.
  • Non-discretionary Portfolio Management: Unlike discretionary portfolio management, the portfolio manager considers the customer's investment choice. 

PMS looks forward to achieving the following for its customers:

  • PMS aims to diversify the portfolio, thereby reducing the risk factor.
  • PMS has a better chance of outperforming the underlying index, particularly if the portfolio is rebalanced to account for market volatility.
  • High Net-worth individuals find PMS hassle-free as there are no regular risk check-up’s that they must do. The portfolio expert does regular reviews and risk management and spares clients from all monitoring headaches.


Difference between Alternative Investment Fund and Portfolio Management Service



AIF

PMS

Types

AIF is segregated into three categories depending upon the customer’s need:

Category I

Category II

Category III

Different types of PMS are:

Active 

Passive

Discretionary

Non-discretionary

Regulatory Authority

Regulated by Securities Exchange Board of India (Alternate Investment Funds) Regulations, 2012. 

Regulated by Securities Exchange Board of India (Portfolio Managers) Regulations, 1993.

Segregation of Funds 

There is no need of segregation of funds

The funds are segregated in separate Demat accounts.

Validity of Registration

Registration of AIF is valid till it is wound up.

PMS validity is for three years and must be renewed three months before the expiry.

Minimum investment limit     

Minimum investment of Rs.1 crore.

Minimum investment of Rs. 25,00,000.

Fees

Applicant must pay Rs.1,00,000 - a non-refundable fees and has to pay registration fees when the certificate of registration is issued.

Different categories have different cost:

Category I - Rs. 5,00,000

Category II- Rs. 10,00,000

Category III - 15,00,000

An applicant is required to pay a non-refundable fee of Rs. 1,00,000. Additionally, registration fees of Rs.10,00,000 needs to be paid when certificate of registration is issued.


Disclaimer: Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Please refer the Risk Disclosure Document issued by SEBI and go through the Rights and Obligations and Do’s and Dont’s issued by Stock Exchanges and Depositories before trading on the Stock Exchanges. Brokerage will not exceed the Exchange prescribed limit.

R. Kalyanaraman
by R. Kalyanaraman

Chief Executive Officer

I am a sales guy at heart with utmost willingness to listen to people – customers, employees, competitors et al. Nothing gets me a bigger adrenaline rush than an interesting conversation with my customer!