When it comes to investing large sums of money, especially for high-net-worth individuals (HNIs) and ultra-high-net-worth individuals (UHNIs), traditional options like mutual funds or fixed deposits may no longer feel adequate.
These investors often seek something more tailored, more dynamic, and with greater potential for returns. That’s where Portfolio Management Services (PMS) and Alternative Investment Funds (AIF) come in. Offering a more customised and strategic approach to wealth creation, these options have become go-to choices for those looking to make their money work smarter and harder.
In this guide, we will explain the AIF vs PMS debate in detail. We will also explore their structures, regulations, benefits, taxation, and help you decide which one aligns with your financial goals.
What is Portfolio Management Service (PMS)?
Portfolio Management Services (PMS) is a tailored investment solution offered to investors with a significant corpus, typically ₹50 lakhs or more. It involves professional management of an individual’s portfolio of equities, fixed income, or other securities.
There are three main types of PMS:
- Discretionary PMS: The portfolio manager takes all investment decisions.
- Non-discretionary PMS: The manager gives advice, but the final call is yours.
- Advisory PMS: Here, the investor makes decisions with advisory support, and the service provider doesn’t directly manage the portfolio.
PMS is suitable for investors who:
- Seek customized portfolios
- Want direct ownership of stocks
- Are looking for active stock market advisory
- Are ready to invest large sums and can handle some level of risk
If you’re just starting, read this beginner’s guide to PMS to understand how PMS works and what to expect.
What is an Alternative Investment Fund (AIF)?
Alternative Investment Funds (AIFs) are privately pooled investment vehicles that collect money from sophisticated investors to invest in assets beyond traditional stocks and bonds. These include private equity, hedge funds, venture capital, real estate, etc.
SEBI has classified AIFs into three categories:
- Category I AIF: Invests in startups, small businesses, social ventures.
- Category II AIF: Includes private equity funds and debt funds with no leverage.
- Category III AIF: Includes hedge funds and complex trading strategies, often using leverage.
SEBI regulates AIFs, ensuring transparency and governance, and they are targeted at HNIs and institutional investors with a minimum investment requirement of ₹1 crore.
The AIF vs PMS distinction lies mainly in structure, regulation, and risk-return profile. Both serve different investor needs.
Key Differences Between AIFs and PMS
Understanding AIF vs PMS becomes easier with a side-by-side comparison. Here’s a breakdown of the PMS vs AIF differences across several parameters:
| Feature | PMS | AIF |
| Structure | Separately managed account | Pooled investment vehicle |
| Minimum Investment | ₹50 lakhs | ₹1 crore |
| SEBI Regulation | SEBI (PMS Regulations, 2020) | SEBI (AIF Regulations, 2012) |
| Ownership | Direct holding of securities | Indirect (units of the fund) |
| Liquidity | High (stocks can be sold anytime) | Low (locked-in for years) |
| Transparency | High (client sees each stock) | Moderate (pooled reporting) |
| Risk Level | Moderate to High | Depends on AIF category |
| Return Potential | Market-linked, can be volatile | Higher, but riskier (esp. Cat III) |
| Tax Treatment | Taxed as per investor’s slab | Pass-through in Cat I & II; Taxed at fund level in Cat III |
Who Should Invest in PMS?
PMS is ideal for investors who:
- Have at least ₹50 lakhs to invest
- Want a customized and actively managed equity portfolio
- Prefer ownership of listed securities
- Seek stock market advisory to build long-term wealth
- Are comfortable with moderate market risk
- Need detailed performance reports and transparency
This solution works well for entrepreneurs, salaried HNIs, or family offices looking for tailored equity exposure. It’s also great for those who trust a professional manager but still want to see each stock in their account.
Who Should Invest in AIFs?
AIFs cater to sophisticated and niche investors who are:
- Ready to commit at least ₹1 crore
- Seeking non-traditional investment opportunities
- Open to longer lock-in periods
- Aiming for alpha generation over the long term
- Comfortable with complex or illiquid asset classes
- Looking to diversify beyond stocks and mutual funds
For instance:
- Category I AIF suits those wanting to support early-stage startups or green initiatives.
- Category II AIF appeals to long-term private equity seekers.
- Category III AIF is for aggressive investors chasing market-beating returns with hedge strategies.
If you’re interested in diversifying with unique instruments, AIF and PMS solutions can offer you something traditional investments can’t.
Taxation of AIFs vs PMS
Let’s explore how taxation plays out in the AIF vs PMS context.
PMS Taxation
- Investors are taxed as if they own the securities directly.
- Short-Term Capital Gains (STCG) on listed shares: 15%
- Long-Term Capital Gains (LTCG) above ₹1 lakh: 10%
- Dividends: Taxed as per investor’s tax slab
AIF Taxation
- Category I & II AIFs: Treated as pass-through entities. Income is taxed in the hands of the investor based on type.
- Category III AIFs: Taxed at fund level up to 42.744% on short-term gains and 30.9% on long-term gains.
In terms of taxes, PMS and AIF differ significantly. PMS may allow more personalized tax planning, while AIFs offer simplicity in reporting (except for Category III).
Performance Potential: AIF vs PMS
PMS Performance Potential
- Top PMS funds have outperformed mutual funds in the long run.
- Being actively managed and concentrated, PMS can deliver high returns.
- However, volatility is a given, especially with equity-heavy portfolios.
AIF Performance Potential
- AIFs, especially Category III, may deliver superior risk-adjusted returns.
- They can use hedging, leverage, or arbitrage, something PMS cannot do.
- Private equity and venture capital AIFs offer potential for massive long-term gains.
Real-life examples:
Over the past few years, several AIFs in India have delivered strong returns. Among the top performers, Abakkus Emerging Opportunities Fund 1 has stood out with returns of 43.4% over three years. Ampersand Growth Opportunities Fund Scheme – I, launched in 2017, recorded a strong 35.3% return. Abakkus Growth Fund 1 also performed well, delivering 34% since inception. Meanwhile, Carnelian Capital Compounder Fund – I posted a solid 29.4%, and I Wealth Fund, launched in June 2018, achieved 26.7%. These funds highlight the strong performance potential of alternative investment vehicles in India’s capital markets.
In May 2025, at least 15 PMS strategies delivered returns exceeding 13%, with Money Grow Asset’s Small Midcap strategy leading the pack. Smallcap and thematic portfolios staged a strong rebound, outperforming most other categories. In contrast, quant-based and sector-focused strategies lagged, contributing to a widening disparity in performance across portfolios.
Source: economic times
SEBI Regulations: AIFs vs PMS
PMS Regulations
- Governed by SEBI (PMS) Regulations, 2020
- Portfolio manager must register with SEBI
- Stringent norms around reporting, audits, and disclosures
- Periodic statements, risk profiling, and performance records shared with investors
AIF Regulations
- Governed by SEBI (AIF) Regulations, 2012
- Sponsors and fund managers must be registered
- SEBI has strict rules on leverage, related party transactions, and investor disclosures
- Regular updates to ensure investor protection and market integrity
In the PMS vs AIF comparison, both follow SEBI guidelines, but AIFs are slightly more flexible in strategy due to their pooled nature.
Final Words
Both PMS and AIF offer distinct advantages tailored to the needs of wealthy investors, and the choice between AIF vs PMS ultimately depends on individual preferences and investment goals.
If you seek personalized stock ownership, high liquidity, tax flexibility, and transparent reporting, PMS may be the ideal choice, especially for those who value direct stock market advisory and want more control over their investments.
On the other hand, if you’re comfortable with pooled structures, long-term lock-ins, and complex strategies aimed at generating alpha, then AIFs might suit you better, particularly in niche or private-market opportunities.
Still uncertain about what fits your portfolio best? It’s wise to connect with a stock market advisory expert who can assess your financial goals, risk appetite, and available capital to help you make an informed decision.
FAQs
What is the minimum investment in PMS and AIF?
Portfolio Management Services (PMS) require a minimum investment of ₹50 lakhs, while Alternative Investment Funds (AIFs) mandate a higher minimum threshold of ₹1 crore from investors.
Which is riskier: AIF or PMS?
Risk depends on the category. Category III AIFs are usually riskier due to leverage and derivatives. PMS risk is market-driven, generally ranging from moderate to high, depending on strategy and exposure.
Can NRIs invest in AIFs and PMS?
Yes, NRIs can invest in both AIFs and PMS, provided they comply with FEMA regulations and complete the necessary KYC documentation through SEBI-registered intermediaries or custodians.
Are returns from PMS guaranteed?
No, PMS returns are entirely market-linked and can fluctuate. They depend on the portfolio manager’s decisions and market conditions—there are no fixed or guaranteed returns in PMS.
Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as a recommendation or investment advice by Equentis – Research & Ranking. We will not be liable for any losses that may occur. Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL & certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.
Yash Vora is a financial writer with the Informed InvestoRR team at Equentis. He has followed the stock markets right from his early college days. So, Yash has a keen eye for the big market movers. His clear and crisp writeups offer sharp insights on market moving stocks, fund flows, economic data and IPOs. When not looking at stocks, Yash loves a game of table tennis or chess.
