Why India's AIFs are outpacing portfolio management services

Mint

29-05-2025

Two of India's asset classes targeting the rich are growing at sharply different rates, with one growing thrice as fast as the other.
Alternative investment funds (AIFs) far outpaced portfolio management services (PMS) in FY25, data on fund commitments and assets showed, thanks to a more efficient tax structure, operational ease, and the flexibility to invest in unlisted stocks.
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Commitments raised by Category III AIFs grew 58% from a year earlier to ₹2.3 trillion at the end of March, as per data by the Securities and Exchange Board of India (Sebi). In the same period, assets under management (AUM) of the PMS industry grew 19% to ₹4.3 trillion, according to industry body Association of Portfolio Managers in India (APMI).
Here, category III AIFs are compared with PMS schemes as both invest in listed stocks, while category I and category II AIFs invest in unlisted companies. The minimum investment for AIFs is ₹1 crore, while it is ₹50 lakh for PMS.
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Pramod Gubbi, co-founder of Marcellus Investment Managers, said that AIFs are more cash-flow friendly for clients compared to PMS. Marcellus offers PMS for clients based in India, and has an AIF operating in GIFT IFSC for Indian clients wanting to invest in global equities.
"Although the tax on portfolio churn is similar for both AIFs and PMS, the key difference is that in a PMS, the client has to arrange and pay the tax themselves. In an AIF, the tax is paid at the fund level, directly from the returns," Gubbi said.
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This means clients receive post-tax returns in an AIF and don't need to worry about setting aside money for tax payments, unlike in a PMS, he added.
A tax on churn means capital gains tax is paid every time a PMS or an AIF sells a stock. The capital gains tax is 12.5% for long-term and 20% for short-term investments.
AIFs are also easier to operate, said experts.
'In PMS, investors are required to open a separate demat account and for NRI investors a separate custody and bank account too, and each transaction is done in separate account for each client," said Aniruddha Sarkar, chief investment officer at Quest Investment Advisors. In contrast, AIFs handle everything at the fund level, and investors simply receive fund units and net asset value (NAV) statements, much like mutual funds; there is no need for individual demat or custody accounts as units are allocated by registrar and transfer agents (RTAs), he added. Also, when most of the PMS and AIFs have similar strategies, investors would prefer an AIF because of the operational ease, said Sarkar.
Others pointed to how the ability of AIFs to invest in unlisted shares gives them an edge over portfolio management services.
Sushant Bhansali, chief executive of Ambit Asset Managers, said that AIFs allow investments in unlisted stocks, up to 25% of the portfolio. In comparison, PMS generally cannot invest in unlisted stocks. Only non-discretionary PMS can invest up to 25% in unlisted stocks, but this option is not popular, Bhansali added.
'That's because in a non-discretionary PMS, the client must approve every transaction before it is executed, making the process slower and less convenient. So, most investors prefer discretionary PMS, where the fund manager makes decisions without needing client approval," he added.
According to APMI data, non-discretionary PMS accounts for just 18% ( ₹79,436 crore) of the total PMS industry AUM as of March.
However, Bhansali added that the reason AIFs appear to be growing faster could also be because the data reflects commitments raised, not actual assets under management (AUM). 'So, comparing PMS AUM with commitments raised in Category III AIFs is not an apples-to-apples comparison," he explained.
AUM means mark-to-market value of the funds invested, while commitments raised means only the initial value of the funds raised from investors, which does not reflect in the MTM value.
That said, a true like-to-like comparison is not possible because Sebi does not publish AUM data for the AIF industry.
Another reason AIFs are gaining popularity is that they can offer close-ended funds, which PMS funds cannot.
'Some investors prefer to commit their money for a fixed period, especially when they have a specific financial goal in mind. In such cases, a close-ended fund structure works well," said a fund manager on the condition of anonymity. This flexibility makes close-ended AIFs more attractive to certain investors.