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PMS vs. AIFs in India: Key differences, tax rules, and which investment option is right for you

PMS vs. AIFs - Understand the key differences between Portfolio Management Services (PMS) and Alternative Investment Funds (AIFs) in India

By Forbes India

Published: Jul 11, 2025 03:53:30 PM IST

Updated: Jul 11, 2025 03:53:34 PM IST

The investment market in India has come a long way from traditional fixed deposits to high-growth equity funds and private equity plans. For investors with bigger goals and a higher risk appetite, there’s no shortage of options anymore. Among all the choices available today, Portfolio Management Services (PMS) and Alternative Investment Funds (AIFs) are the go-to choices for many. They both are structured to offer access to customised strategies and less conventional asset classes, especially if you’re looking beyond mutual funds and traditional avenues.

We’ve already discussed how AIFs in India function and what portfolio management services bring to the table in earlier posts. In this one, let’s put them side by side. By comparing PMS vs. AIF across lock-in, investor profiles, and minimum amount, we’ll help you understand both options for your investment journey.

What are portfolio management services?

Portfolio management services (PMS) are the professional way to manage your investments. Unlike mutual funds or alternative investment funds (AIFs) in India, PMS doesn’t pool money from multiple investors. Instead, your portfolio is managed individually by experts, and the assets are held directly in your name. This means more visibility, more control, and a portfolio built with your preferences and financial goals in mind.

Portfolio management services are often preferred by high-net-worth individuals, but are not limited to them. The portfolio manager takes care of portfolio diversification, rebalancing, and asset allocation, so that you don’t have to track every market move yourself.

From a tax perspective, a PMS is a pass-through structure. Since the investments are held in your name, you pay capital gains tax according to your income slab. For example, equity capital gains are taxed at 20 percent for short-term holdings (less than 1 year) and 12.5 percent for long-term holdings (more than 1 year), with an exemption of ₹1.25 lakh.

What are AIFs in India?

Alternative Investment Funds (AIFs) pool money from select investors to invest in non-traditional assets, such as private equity, real estate, or early-stage startups. AIFs in India are structured to cater to investors who plan for longer-term investments and are comfortable with higher risk. One of the key attractions of AIFs is access to off-market investment opportunities and more specialised strategies.

Tax efficiency is a crucial factor in comparing PMS vs. AIF. Category I and II AIFs enjoy pass-through benefits, as for Category AIFs, tax is paid at the fund level, at a rate of 9 percent for non-residents. From the next financial year, AIF returns will be considered capital gains, subject to a tax rate of 5 percent.

Key differences between PMS and AIFs

Here's a quick comparison that highlights how PMS vs. AIF plays out in the market:

Specifics	PMS	AIFs
Regulatory framework	Governed by SEBI	Regulated by SEBI under AIF regulations
Investor profile	Suited mainly for HNIs. Also extends to sole proprietors, NRIs and Hindu Undivided Families (HUFs)	Targeted at experienced or institutional investors
Fund structure	Each portfolio is managed separately in the investor’s name	Investors pool capital into non-traditional assets
Minimum investment	Starts at ₹50 lakh	Starts at ₹1 crore
Investor cap	No restriction on the number of clients	Limited to 1,000 per scheme (except angel funds)
Lock-in time	None. Can withdraw funds at any time	Minimum lock-in period of 3 years. Can also extend based on the AIFs category

Choosing between portfolio management services and alternative investment funds eventually comes down to your priorities as an investor.

If your goals are specific and you prefer a more hands-on approach, PMS offers that flexibility. You can customise your portfolio, stay involved in decision-making, and even manage the tax outflow based on how long you hold your assets. On the other hand, AIFs in India appeal to those who are comfortable pooling their money with others through exposure to private markets and specialised strategies.

Your risk appetite matters too. AIFs often deal with less liquid, higher-risk assets, while PMS tends to provide relatively more transparency and liquidity.

From a tax perspective, it’s essential to compare both options to determine which one best fits your needs and can work out favourably for your long-term financial goals. Consider how much control you want over your investment portfolio. Typically, it provides direct control over your investments, depending on the type of service. For example, in Discretionary PMS, the portfolio manager takes full charge, making decisions on your behalf, and ensures that your portfolio stays aligned with your goals.

PMS vs. AIFs: Which one is better for you?

When we compare PMS vs. AIFs, there’s no one-size-fits-all answer here. The real difference between PMS and AIFs lies in how much risk you’re willing to take, what kind of assets you want, and the degree of involvement you desire.

Before investing your money, take a step back and evaluate a few important things. Start with your own risk tolerance — can you handle short-term market swings, or do you prefer a more stable approach? Think about liquidity too — are you comfortable locking in your funds for a longer period, or would you prefer flexibility?

It’s also good to understand how the Securities and Exchange Board of India (SEBI) governs both portfolio management services and alternative investment funds in India. Each follows different rules, and knowing the basics can help you avoid surprises or challenges. Combine that with the current market conditions, and you’ll be in a stronger position to decide what fits your financial plans.