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PMS Jargon For Dummies

Updated: Apr 6, 2023


PMS

PMS refers to a professionally managed portfolio of investments in assets, including debt and equity. They aim at homogeneous investors willing to undertake a certain amount of extra risk on their portfolio with enhanced exposure to familiar asset classes including equity and debt.


AIF

AIFs invest in alternative investments. They are asset classes different from conventional equity and debt. Alternative investments include structured products, commodities, hedge funds, real estate, private equity, etc.

 

Categories


PMS

There are 3 types:


Discretionary: In this type of PMS, the fund manager undertakes the investment decisions independently.


1. Non-discretionary: In this, the investor (client) has to approve all buy-sell transactions. Only upon approval, the fund manager is allowed to execute the transactions.


Advisory: here, the portfolio manager provides expert advice to the investor. It is upto to the client to follow the advice and execute the plan.


AIF

There are 3 categories of AIF:

1. Cat 1 allows investment in early-stage ventures, social ventures, SMEs, infrastructure or other sectors that the regulators consider economically important.

2. Cat 2 allows investment in funds such as PE or Private equity funds, real estate funds, distressed asset funds, etc.

Cat 3 allows investment in hedge funds and other assets which focus on short-term gains.


 

Lock In


PMS

In PMS there is no lock-in period and no limit to the number of investors.


AIF

These funds typically have a lock-in period of 3-10 years, and the number of investors is typically restricted to 1000, except in the case of angel funds where no scheme shall have more than 49 angel investors.


 

Ticket Size


PMS

The minimum investment amount as per SEBI mandate for PMS set-up is Rs. 50 Lakhs.

AIF

As mandated by SEBI, the minimum investment in AIFs is Rs 1 Crore.


 

Pooling of Funds


PMS

In PMS, there is no pooling of investor of funds. A separate Demat account needs to be created for every independent PMS investor.


AIF

In case of AIF pooling of funds is a necessity. As AIFs are privately pooled investment vehicles, they raise funds through private placement by issue of information memorandum or placement memorandum.


 

Minimum Corpus


PMS

PMS requires no corpus amount.


AIF

For AIFs, corpus needs to be a minimum of Rs 20. Crore. For angel funds, the requirement is lower, at Rs 10 Crore.


 

Segregation of Funds


PMS

In PMS every client’s funds have to be segregated into separate Demat accounts.


AIF

No segregation is required in AIFs.

 

Taxation


PMS

The investor pays tax at slab rate applicable to his level of income.


AIF

In case of Cat 1 and Cat 2:

Other than business income (e.g.: capital gains)

Passed through – AIF does not pay any tax. Unit holder pays tax. Tax rate applicable to unit holders.


Business income – taxed at AIF. Such income is not taxable for unit holders.

AIF formed as company or LLP: taxed at the rates applicable to a company or LLP.

AIF formed as trust: taxed at maximum marginal rate.


In case of Cat 3:

Cat 3 funds have not been accorded pass through status. So all income made by cat 3 funds will be taxed at the fund level. The rate of tax depends on the legal form of the fund.


 

Regulation


PMS got regulated in 1993


AIF got regulated in 2011


 

Certificate Validity


PMS

The certificate of registration remains valid for 3 years. The portfolio manager has to apply for the renewal of its registration certificate to SEBI, 3 months before the expiry of the validity of the certificate, if it wishes to continue as a registered portfolio manager.



AIF

The certificate of registration of an AIF shall be valid till the AIF is wound up.


 

Manager Contribution


PMS

PMS has no specific requirements on manager contributions.


AIF

AIFs require managers to have continued interest. In the case of Cat 1 and 2 of AIFs, managers should hold at least 2.5% of the corpus, or Rs. 5 crores, whichever is lower. For Cat 3, a manager should hold at least 5% of the corpus, or Rs. 10 crores, whichever is lower.


 

Tenure


PMS

In PMS, there is no defined tenure for the securities. Instead, the agreement term between the fund manager and client is binding.


AIF

In AIF, the tenure of the securities for Cat 1 and Cat 2 is a minimum of 3 years. The extension is subject to the approval of two-thirds of the investors by value of investment in the AIF. In case of no majority to extend, the AIF gets liquidated within one year following expiration.


 

Liquidity


PMS

Liquidity is high as an investor can withdraw at his discretion in a manner specified under the agreement. However, exit load may be applicable on early withdrawal.


AIF

AIFs being closed ended except for Cat 3, which can be closed or open in nature. Closed ended AIFs are least liquid compared to PMS.


 

Customization


PMS

Option available to each investor


AIF

Not available.

 

Risk Profile


PMS

Moderate


AIF

AIFs are the riskiest. Which is why it is only for sophisticated investors and even the ticket size is higher.

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