Accounting And Finance

Which Is the Best for Investors: AIF, PMS, or Mutual Funds?

The investment industry offers a variety of strategies and securities to create mutual funds (MF), alternative investment funds (AIF), and portfolio management services (PMS). Investors should carefully choose the best investment instruments. The risk of loss in AIFs, PMSs, and MFs is comparatively lower than in other types of investment instruments. Although AIFs, PMSs, and MFs differ in structure, strategy, and accessibility, they all provide a wider option for the growth of wealth to investors.

Overview of Investment Vehicles in India

Investment vehicles comprise methods designed and managed by professionals to gain positive returns. Generally, businesses and individual investors are allowed to make investments in different types of investment vehicles. An investment vehicle is also known as an investment instrument.

Certificates of deposit (CDs), bonds, annuities, collectibles, mutual funds, and exchange-traded funds (ETFs) are some of the investment vehicles in India.

Common Types of Investment Instruments

There exists a variety of common types of investment instruments that diversified investors retain in their investment portfolios. The following are some of the common types of investment vehicles issued to minimize the risks through diversification:

1. Portfolio Management Services

Portfolio Management Services (PMS) the portfolio manager offers to make investments (including stocks, fixed income, debts, cash, and other individual securities) are personalized investment portfolios. The Portfolio Manager Registered with SEBI assists in making the right decision for investment by:

• Maximizing the return with limited funds;
• Managing the liquidity of funds;
• Minimizing the risk of investment in securities;
• Strategic allocation of assets;
• Improving the financial understanding of the investors.

2. Alternative Investment Funds

Alternative investment funds (AIFs) are pooled investment instruments used to buy assets (such as hedge funds, real estate, derivatives, private equity, and venture capital) not physically available to retail investors.

Also, the Securities Exchange Board of India facilitates the Alternative Investment Fund (AIF) Registration to secure investment in different categories of AIF. The following are the benefits of investing in different types of AIF:

• Higher rate of return;
• Exposure to distinctive & high-growth assets;
• Low volatility rate in comparison to traditional equity investments;
• Ensures diversification of funds of an investment portfolio.

3. Mutual Funds

Mutual funds (MF) are collective investments managed by fund managers to offer diversified portfolios containing stocks and bonds. The shares of Mutual Funds Registered with SEBI are traded at the end of every trading day. Some of the categories of high-return mutual funds for smart investing are provided below:

• Equity mutual funds;
• Hybrid mutual funds;
• Debt mutual funds;
• Solution-oriented mutual funds;
• Tax-saving mutual funds;
• NFO mutual funds;
• Multi-cap mutual funds;
• Fund of funds.

Comparative Analysis of AIF, PMS, or Mutual Funds

A brief comparative analysis of the alternative investment fund (AIF), the portfolio management system (PMS), and the mutual funds (MF) is provided below:

Basis of Comparison	Portfolio Management System	Alternative Investment Fund	Mutual Funds
Regulation	SEBI (Portfolio Managers) Regulations, 1993	SEBI (Alternative Investment Funds) Regulations, 2012	SEBI (Mutual Funds) Regulations, 1996
Objective	Assists institutional investors & high-net-worth individuals in generating higher returns	Used for diversification and preservation of capital	Assists in reaching long-term growth
Types	4 categories: Discretionary PMS;Non-discretionary PMS;Active PMS;Passive PMS	3 categories: Category I AIF (venture capital funds);Category II (private equity funds); Category III AIF (hedge funds).	5 broad categories: Equity schemesDebt schemesHybrid schemesSolution-oriented schemesOther schemes
Investment Limit	Minimum Rs. 50 lakhs	Minimum Rs. 1 crore (except angel funds)	Minimum Rs. 100 (through SIP), or Rs. 1000 to 5000
Structure	Individualized portfolio management	Pooled investment vehicle	Collective investment scheme
Investment Horizon	Medium to long-term	Medium to long-term	Short to long-term
Risk Management	Tailored risk management strategies	Varied depending upon the category of AIF	Diversified approach
Fund Manager	Dedicated portfolio manager	Professional or fund manager team	Professional fund manager
Income Tax Exemption (for unit-holders)	No exemption	Exempt under Section 10 (23FBB), (23FBC) of the Income Tax Act 1961.	Fully exempt from tax on capital gains, dividends, and interest income earned by mutual funds.
Liquidity	Lower liquidity	Lower liquidity (strict lock-in period)	Higher liquidity (short lock-in period)
Ownership of Stocks	Direct ownership of stocks	Indirect ownership by way of issuing units or shares	Indirect ownership through units

Which Investment Instrument is Best for Investors?

The best investment option for investors is decided based on certain factors. The investors must mandatorily consider these factors before making any investment in different instruments:

1. Risk Tolerance Strategies

When confused between mutual funds, PMS, and AIF, investors must look after the risk tolerance strategies used to mitigate any arising losses. Consider the following risk tolerance strategies for different investment instruments:

• PMS: uses differentiated and high-risk-high-return tolerance strategies
• AIF: uses diverse and niche risk tolerance strategies
• MF: uses conventional and low-risk-low-return tolerance strategies.

2. Degree of Flexibility

The degree of flexibility or customization must be reviewed before investing in the diversified investment instruments. The following are the degrees of flexibility required to be looked for to decide the best investment option in India:

• PMS: high degree of flexibility or customization
• AIF: low to moderate degree of flexibility or customization
• MF: no flexibility or customization

3. Transparency Level

Checking the transparency level of the different investment instruments is crucial to deciding on the best investment choice. Further, the transparency of the instruments must be

• PMS: high transparency level (provides detailed and regular updates on shares)
• AIF: low transparency level (least stringent disclosure)
• MF: moderate transparency level (makes periodical disclosure of portfolio details)

4. Expense Ratios

The expense ratio of all three investment instruments must be reviewed before making any investment. The expense ratios of different investment instruments are provided below:

• PMS: management fees, fixed performance fees, or both (i.e., 2.5% of total portfolio value)
• AIF: management fees, fixed performance fees, or both along with watermark rate (i.e., 1% index-based expense ratio);
• MF: only expense ratio which is adjusted in the fund’s net asset value (NAV).

5. Liquidity Ratio

The best-ever investment instruments must possess shorter commitments and liquidity ratios. The investors must consider the following liquidity ratio to decide the best investment options from AIF, PMS, and mutual funds:

• PMS: low to moderate liquidity ratio
• AIF: very low liquidity ratio
• MF: high liquidity ratio

6. Investible Amount

The minimum amount required for investment in different instruments is another crucial factor that must be considered. The investible amount of Rs. 50 lakhs (PMS), Rs. 1 crore (for AIF), and Rs. 500/- (for MF) are required to make investments in different categories of instruments.

PMS and AIF are impractical for investors holding a limited amount of funds, whereas mutual funds are presently accessible for small-scale investors.

7. Taxation Efficiency

The tax efficiency plan for investment instruments must be reviewed before deciding to invest. The impact of taxation on PMS and mutual funds is similar, whereas additional taxes are imposed on AIFs. Meanwhile, PMS is considered more tax-efficient than AIFs and MFs.

Conclusion

All three investment instruments, portfolio management services, alternative investment funds, and mutual funds, are advantageous for investors according to their investor profiles. The differences among the structure, objective, investment strategy, liquidity, regulation, types, investment limit, risk management strategy, etc., are crucial for choosing the best investment options. Further, retail investors who are looking forward to high net worth and personalized management systems are mandatorily required to review the pros and cons of diversified investment avenues.

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