What is PMS: Understanding Its Types And Advantages
PMS stands for “Portfolio Management Services,” which refers to a specialised investment service offered by financial institutions to manage and grow the investment portfolios of high net worth individuals (HNIs) and institutional investors. PMS offers personalised and customised investment solutions based on the individual investor’s risk tolerance, financial goals, and investment preferences.
Key Features of PMS:
- Structure and Regulation: PMS is regulated by the Securities and Exchange Board of India (SEBI), the country’s securities market regulator. SEBI has laid down guidelines and regulations to ensure transparency, accountability, and investor protection within the PMS industry.
- Investment Strategy: PMS providers offer a range of investment strategies, such as equity-focused, debt-focused, balanced, and specialised thematic strategies. These strategies can cater to different risk profiles and investment objectives.
- Minimum Investment: The minimum investment required to avail PMS services is Rs.50 lacs. Typically, PMS requires a higher minimum investment compared to mutual funds, making it more suitable for HNIs and institutional investors.
- Personalization: PMS offers a higher degree of customization compared to traditional investment options like mutual funds. Investors can have a say in their investment preferences, risk appetite, sector preferences, and other considerations.
- Diversification: PMS portfolios are diversified across multiple asset classes and investment instruments, aiming to spread risk and generate returns for investors.
- Fees and Charges: PMS services usually involve management fees, performance-based charges (profit-sharing), and other administrative fees. These fees can vary based on the PMS provider and the size of the investment.
- Reporting and Transparency: SEBI mandates PMS providers to provide regular reports to clients detailing their portfolio holdings, performance, and other relevant information. This ensures transparency and helps clients monitor the progress of their investments.
- Risks: While PMS services can offer personalized and potentially higher returns, they also carry inherent risks associated with investment markets. The performance of PMS portfolios depends on market conditions, the investment strategy employed, and the skill of the fund manager.
- Tax Implications: PMS investments are subject to taxation rules similar to those of direct equity investments. Capital gains tax and other tax regulations apply.
- Selection of PMS Provider: Investors should carefully research and select a PMS provider based on their track record, investment philosophy, team expertise, and alignment with the investor’s financial goals.
It’s important for investors to conduct thorough due diligence and consider consulting with financial advisors before choosing PMS services. The PMS landscape in India has evolved significantly, and investors should stay informed about regulatory changes and industry trends.
What are Alternative Investment Funds?
AIFs are pooled investments for investing in hedge funds, venture capital, futures, and private equity. Based on their investment strategies, AIFs, are classified into three categories.
Category I
These funds are invested in small businesses, start-ups, social ventures, early-stage ventures, angel funds, etc., with superior growth potential.
Category II
This category includes investments in Private Equity (PE) funds, fund of funds, and debt instruments.
Category III
This AIF aims at generating short-term returns by employing diverse and complex trading strategies. Category-III funds can include hedge funds and Private Investment in Public Equity (PIPE) Funds.
PMS vs AIF: Which one is better?
| AIF | PMS | |
| 1. Pooling of funds | Pooling of funds is the essence of this kind of investment model. | Funds are not pooled, and investors have separate Demat accounts. |
| 5. Number of Investors | The maximum number of investors to any AIF scheme cannot exceed 1,000 | There is no cap specified on the number of investors |
| 3.SEBI-mandated minimum investment amount | Rs. 1 crore | Rs. 50 lakhs |
| 4. Minimum corpus | A minimum corpus of Rs. 20 crore is required. For Category-I angel funds, Rs. 10 crore is necessary. | No corpus amount requirements |
| 6. Lock-in period | In close-ended AIF, investors must adhere to the lock-in period. | PMS investors can withdraw their funds at any time. |
| 2. Types | AIFs are grouped into three – Category I, II, and III, depending on where the funds are invested. | PMS are of two types; discretionary and non-discretionary based on the authority of the fund manager. |
| 7. Tenure | Category-I and II AIFs have a minimum tenure of 3 years and a maximum of 5 years. The minimum term is extended when two-thirds of investors by value approve it. Category-III funds have no minimum tenure. | No fixed tenure for securities. |
| 8. Taxation | Two factors impact the taxation of an AIF: Classification of the fund into one of the 3 categories and Legal form of the fund. SEBI regulations permit an AIF to be set up in the form of a trust, or a company, or a limited liability partnership or a body corporate. | Equity PMS – Short term capital gains (before 1 yr) will be taxed at 15% and any long-term capital gains will be taxed at 10% (after 1 lakh limit per financial year) without indexation benefits. Debt PMS – For listed securities, you have the benefit of long-term capital gains taxation, after 1 year, 1 day as compared to three years in debt mutual funds |
To Conclude
While AIF gives the investor an avenue to pool in funds with the flexibility to invest in derivatives, listed & unlisted equity shares, real estate, hedge Fund, etc.; PMS permits the investor to actively monitor its personalised portfolio to track developments and maximise returns. Since both AIFs and PMS are high-risk, high-reward instruments, it is crucial to have an excellent management team.
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