Over the last year, the discretionary PMS in India has witnessed a 14% absolute growth year-on-year (YOY) in assets under management (AUM), reaching a huge Rs 22.4 lakh crores as of December 2022 as per SEBI data. Whereas AIF industry has shown ~105% CAGR in last 10 years and the total AUM was at 6.41 Lakh crore as of 2021-22. Just to put this in context, the total equity MF AUM is 22.92 Lakh crores. Clearly HNIs are finding avenues like PMS & AIF to be useful and have been making large allocations of their portfolios.
To begin with one needs to understand that PMS and AIFs are specialised products that work for investors who have an aggressive risk profile and also a fair understanding and experience of the vagaries of the investment markets. These investments are not as liquid as stocks and bonds or early liquidity will come at a cost and hence should be considered for a longer investment time frame. Mutual fund investing is built on the principle of diversification ( do not put all your eggs in one basket). On the other hand, PMS & AIF investing is based on the principle of concentration (put all your eggs in a few baskets and watch these baskets carefully)
HNIs already have core elements of their financial portfolios like mutual funds and low risk deposits in place, and could think of investing 15-20% of their financial portfolio in such avenues, with a goal of generating higher returns.
Now for some basics of these two product categories.
An Alternative Investment Fund (AIF) is a special type investment fund that invests in assets beyond traditional investment avenues listed stocks, bonds and cash. AIFs can invest in a wide range of other assets including private equity, hedge funds, derivatives, real estate, and commodities. AIFs are typically managed by professional fund managers and are regulated by the Securities and Exchange Board of India (SEBI). It’s worth noting that AIF managers or sponsors are required to have a “skin in the game” with a continuing investment of 2.5% of the corpus or Rs 5 crore, whichever is lower, to ensure better protection of investors’ investments. The minimum investment into an AIF is Rs 1 crore, limiting the entry for retail investors.
Portfolio Management Services (PMS) refers to professional management of a client’s investment portfolio by a third-party entity. The PMS provider invests the client’s funds in a variety of securities, including amongst others, stocks, debt instruments & structured products. PMS strategies can be customized to meet an investor’s individual objectives including liquidity & risk appetite. While an investor can choose either discretionary or non-discretionary PMS; both have their pros & cons which should be carefully considered before making an investment decision. PMS is also a SEBI regulated investment vehicle, which makes it suitable for HNIs only as the minimum investment amount is Rs 50 lakhs.As a rule of thumb, those interested in PMS should have an overall financial portfolio size of at least Rs 2-2.5 crore, while those considering AIFs should have a minimum portfolio size of Rs 5 crore. These investment options can be a valuable addition to the satellite portfolio of any HNI, providing the benefits of diversification and potentially higher returns.
In conclusion, HNIs should consider PMS and AIFs if they are looking for a more focused and professionally managed portfolio that can help them diversify and grow their existing wealth at a higher rate by taking a higher risk than commonly available traditional investments options.
(Abhijit Bhave is CEO of Fisdom Private Wealth)
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
