fund

Explained: Key differences among mutual funds, PMS and AIFs. Who should invest?


When it comes to investments or wealth creation, investors have many choices. Among the most popular options available in India are mutual funds (MFs), portfolio management services (PMS), and alternative investment funds (AIFs). Each of these investment vehicles caters to different investor profiles, offering unique benefits and risk-reward dynamics. Each of these investment vehicles follows distinct tax rules, which can significantly impact your net returns.

Here’s a closer look at the differences among these three investment options and guidance on who should consider investing in them.

Mutual funds (MFs)

Mutual funds pool money from multiple investors to put into a diversified portfolio of stocks, bonds, or other securities. They are professionally managed and are among the most accessible investment options for retail investors. The minimum investment is as low as Rs 100 or Rs 500. It spreads risk across various asset classes. Mutual funds are easy to buy and sell and most funds have redemption within one-two business days. It is regulated by Sebi. There are equity, debt, hybrid and other types of mutual funds.
Mutual funds are ideal for those new to investing, given its simplicity and low entry barriers. Investors who have limited capital and want diversified exposure to various asset classes can opt for these.

Portfolio management services (PMS)

PMS offers personalised investment management for high-net-worth individuals (HNIs). A portfolio manager creates a tailored investment strategy based on an investor’s risk tolerance, financial goals, and preferences.

The minimum investment typically starts at Rs 50 lakh. The portfolios are individually crafted to meet specific needs. In PMS, the investors directly own the securities. There are management and performance-linked fees. Investors can track individual holdings in real time.

PMS is suitable for investors with substantial capital who seek personalised strategies. It offers transparency and allows investors to see and manage individual holdings. It is ideal for those with a long-term horizon and looking for customized wealth creation strategies.

Alternative Investment Funds (AIFs)

AIFs pool money from sophisticated investors and put them into unconventional assets such as private equity, venture capital, real estate, hedge funds, and more. SEBI categorizes AIFs into three types:

  • Category I: Includes venture capital funds, social venture funds, and infrastructure funds.
  • Category II: Comprises private equity funds and debt funds.

  • Category III: Focuses on hedge funds and funds employing complex trading strategies.

The minimum investment starts at Rs 1 crore. AIFs are Sebi-regulated but less stringent compared to mutual funds. This investment option comes with high risk and offers high rewards. It invests in startups, private equity, or hedge funds with higher risks but also the potential for higher returns. Typically AIFs have longer lock-in periods and it depends on the type of AIF.

AIF is suitable for those with a high-risk appetite and significant capital. It is for investors who understand complex investments and are willing to take on higher risk for potentially greater rewards. Investors looking to diversify beyond traditional equity and debt instruments can invest in AIFs.

Comparison at a glance

MF chartETMarkets.com

Each of these investment vehicles serves different investor needs and profiles. While mutual funds provide simplicity and accessibility, PMS and AIFs cater to those looking for personalized strategies and exposure to alternative assets. Identifying your financial goals, investment horizon, and risk tolerance is crucial in selecting the right investment avenue. Consulting with a financial advisor can help tailor a strategy that aligns with your objectives.



READ SOURCE

This website uses cookies. By continuing to use this site, you accept our use of cookies.