PMS/AIF FAQs

What is mean by PMS?

Portfolio Management Services account is an investment portfolio in Stocks, Debt and fixed income products managed by a professional money manager, that can potentially be tailored to meet specific investment objectives. When you invest in PMS, you own individual securities unlike a mutual fund investor, who owns units of the entire fund. You have the freedom and flexibility to tailor your portfolio to address personal preferences and financial goals. Although portfolio managers may oversee hundreds of portfolios, your account may be unique. As per SEBI guidelines, only those entities who are registered with SEBI for providing PMS services can offer PMS to clients.

How it works?

Each PMS account is unique and the valuation and portfolio of each account may differ from one another. There is no NAV for a PMS scheme; however the customer will get the valuation of his portfolio on a daily basis from the PMS provider. Each PMS account is unique from one another. Every PMS scheme has a model portfolio and all the investments for a particular investor are done in the PMS on the basis of model portfolio of the scheme.

However the portfolio may differ from investor to investor. This is because of:

1. Entry of investors at different time.
2. Difference in amount of investments by the investors
3. Redemptions/additional purchase done by investor
4. Market scenario – Eg If the model portfolio has investment in Infosys, and the current view of the Fund Manager on Infosys is “HOLD”(and not “BUY”), a new investor may not have Infosys in his portfolio.

Under PMS schemes the fund manager interaction also takes place. The frequency depends on the size of the client portfolio and the Portfolio Management Services provider. Bigger the portfolio, frequency of interaction is more. Generally, the PMS provider arranges for fund manager interaction on a quarterly/half yearly basis.

Is there any risk involved in it?

Market risk is always involved, but risk associated with any PMS is totally depending on a strategy which PMS fund manager is following in a portfolio, Many PMS fund manager carry an ability to take the high risk and proportionately deliver the high returns, few fund manager carry the defensive strategy to reduce the risk. So on the basis of historic track record of the fund manager and the strategy defined for the particular PMS, Investor can judge an intensity of risk associated with the model portfolio. Investors in PMS/MF historically observed the Risk reward ratio especially on the long term investments.

How PMS can be differentiated with Mutual funds?

In PMS, investors hold stocks, whereas in mutual funds they hold units. In PMS, the investor can know which stocks he is holding at any given point in time by logging in to his PMS report or demat account. This is difficult in case of mutual funds.Also, In PMS, Portfolio can be tailored to suit the needs of investor.

How would I come to know which stocks have bought in my portfolio, I get any notification from fund manager while buying any new stock?

Before buying or selling any stock, PMS fund manager send the notification for an investors consent and then the transaction gets executed, so investor always gets aware about the real time positioning of the portfolio on regular basis.

Can NRI Invest in PMS?

Yes, NRI can invest.The NRI needs to open a PIS account for investing in PMS. The documentation required for an NRI, however, is different from a resident Indian.

What are the types of PMS?

There are broadly two types of PMS
1. Discretionary PMS – Where the investment is at discretion of the fund manager & client has no intervention in the investment process.
2. Non-Discretionary PMS – Under this service, the portfolio manager only suggests the investment ideas. The choice as well as the timings of the investment decisions rest solely with the investor. However the execution of the trade is done by the portfolio manager.

The client may give a negative list of stocks in a discretionary PMS at the time of opening his account and the Fund Manager would ensure that those stocks are not bought in his portfolio. Majority of PMS providers in India offer Discretionary Services.

What is the taxation in PMS?

Any income from Portfolio Management Services account is a business income. Unlike MF, PMS is not required to remain 65%+ invested in equity to get equity taxation benefit. Each Portfolio Management Services account is in the name of additional investor and so the tax treatment is done on an individual investor level.

Profit on the same can be considered as business income.(i.eslabwise). Profit can be considered as Capital gains. [STCG(15%) or LTCG(10%)]. It depends on clients Chartered Accountant or the assessing officer how he treats this Income. The PMS provider sends an audited statement at the end of the FY giving details of STCG and LTCG, it is on the client and his CA to decide to treat it as capital gain or business income.

What is AIF

As per SEBI’s definition, an AIF is a “fund established or incorporated in India, which is a privately pooled investment vehicle, that collects funds from sophisticated investors, whether Indian or foreign, for investing it by a defined investment policy for the benefit of its investors.”AIFs invest in investments that are not traditional (for example, equities or fixed income). Securities and Exchange Board of India classifies AIFs under three broad categories. Namely, Category I AIF, Category I AIF and Category III AIF. Each of the categories has different investments as per the broad definition of the category. Some of them are private equity, venture capital, hedge fund, and angel fund etc.

Is it suitable option to invest vis-à-vis PMS?

It depends on strategy, business model, risk appetite& Investment objective of the investor

What are the types of AIF?

SEBIcategorises Alternative Investment Funds into three broad categories. Investors can choose to register in any of the following three categories and subcategories thereof.

Category I AIF Category II AIF Category III AIF
Venture Capital Funds Private Equity (PE) Funds Hedge Funds
Angel Funds Real estate Funds Private Investment in Public Equity Funds (PIPE)
SME Funds Funds for distressed assets
Social Venture Capital Funds Debt Funds
Infrastructure funds Funds of Funds

Can it be elaborate in detail?

Category I AIFs invest in startups or early-stage ventures or SMEs or social ventures or infrastructure or other sectors. The government or regulators consider these sectors as economically and socially desirable. Following are the subcategories under Category I AIF:

Venture Capital Funds- Venture capital funds primarily invest in startups and emerging businesses that have strong growth potential. Also, during the VCF launch, it specifies the sectors that the fund is targeting. Most importantly, venture capital is a kind of equity financing. In other words, VCFs provide funds to companies in exchange for an equity stake.
Additionally, venture capitalists also tend to participate in company operations. VCFs generate returns upon selling their stake in the companies. Also, angel funds are a subcategory of venture capital funds.

SME (Small and Medium Enterprises) Funds-
• As the name suggests, SME funds invest in micro, small and medium enterprises that are listed or unlisted. These companies raise debt through NBFC. While SME funds provide equity financing for these companies. Minimum investment of INR 1 Crore.

Infrastructure funds- Infrastructure funds primarily invest in firms that develop infrastructure projects. These funds raise capital from private investors. The infrastructure projects include railways, roads, water, municipal solid waste, and renewable energy. The Government of India offers incentives and concessions for investment in infrastructure funds.

Following are some of the key features of infrastructure funds:
• Closed-ended funds with a minimum lock-in of three years and an option to extend for two years.
• With a minimum tradable lot of INR 1 crore, these can be listed on stock exchanges.
SEBI defines Category II AIFs as the funds that do not fall under Category I and III and which do not undertake leverage or borrowing other than to meet day-to-day operational requirements.

Following are the investment restrictions for Category II AIFs:
• Close-ended schemes with a minimum lock-in period of three years.
• Minimum corpus under each scheme is INR 20 crores.
• Minimum investment from an investor is INR 1 crore. However, for the employee or director of AIF, it is INR 25 lakhs.
• Funds in Category II can invest only in units of other AIFs or in unlisted companies.

Sub categories of AIF II
Private equity (PE Funds), Debt funds, Fund of funds
Category III AIFs apply diverse trading strategies and leverage by investing in listed and unlisted derivatives. They use arbitrage, derivatives trading, futures and margin trading strategies. Category III funds can be both close-ended and open-ended funds. They are less regulated than conventional investments. Hence they do not need to publish their information regularly. Also, the Government of India doesn’t give any incentive or concession for investment in these funds.

Sub catagories- Hedge funds,Private investments in Public equity (PIPE)

What are the taxation rules for AIFs?

Category I and Category II are pass-through vehicles. The fund doesn’t have to pay any tax on its earnings. However, the investors have to pay the tax at their respective tax slabs. If the fund has any capital gains on stocks, then the investors have to pay 15% or 10% depending on the holding period. Category III AIFs are taxable at the highest income tax slab level (42.7%) at the fund level. The returns given to investors are after deducting the tax.