What are the Advantages & disadvantages of investing in AIF & PMS?

Author: Nitin Vishwakarma

Advantages of investing in PMS:

  • Maximize your return on investments: PMS assigns a specialized portfolio manager to your investments, who is supported by a research framework. The SEBI accredited analysts make up the research team. These experts are always tuned in to the markets and keeping an eye on the current developments. The team keeps a close eye on your portfolio and keeps meticulous records of it. Your portfolio is well positioned to enjoy increased profits as a result of your attention. The main reason is continuous monitoring, which aids in making educated decisions at the appropriate moment.
  • Provides a financial risk management plan:
Portfolio management services play a larger part in your investing life than just detailed research and recommendations. It also comes up with a financial risk management strategy. The risk management strategy includes keeping track of sufficient diversification. Furthermore, the risk linked with the market and interest rates, as well as inflation, are taken into account. A risk management strategy is a comprehensive approach to reducing risk and maximizing market returns.
  • Build customized investment portfolio: One of the main advantages of using a portfolio management service is the level of customization available. As an investor, you can also talk about and determine which asset classes or equities you wish to invest in or avoid. This allows you to create a personalized investment portfolio that meets your needs while also generating profits.

Dis-advantages of investing in PMS:

  • Requires high capital investment: Investing with PMS is advantageous because it is regulated by SEBI. It adds to the credibility of good governance and reduces fraud. To begin investing with PMS, however, SEBI has mandated that you have a minimum corpus of 5 lac. This makes things a little more challenging for investors with lower income profiles. The situation is likely to deteriorate more in the future, as the bulk of companies providing these services have a Rs.25 lac entry barrier. To summaries, you must be an HNI to use this service.
  • Brokerage and PMS charges can drain investing returns: PMS charges asset management fees based on investment percentages, as well as profit sharing fees. The asset management costs range from 2-2.5 percent, with 15 percent profit sharing. Furthermore, the earnings are deducted from the total. These are the service's two main costs. In addition, the brokerage fees you pay with each transaction are an additional cost to you. With all of these charges, the package gets expensive, which has a direct impact on your returns.
  • No performance guarantee: PMS are known to share earnings, but in the event of a loss, they will not pay you any compensation. This is a major matter that you should be aware of. PMS does not guarantee a return, but if your earnings exceed the benchmark returns, they will share 15 percent of the gains with you. Is it reasonable? The person who shares our earnings should also share responsibility for our losses. But unfortunately, the phenomena don’t exist.

Advantages of investing in AIF:

  • Trust:
  1. They're simple to set up and takedown.
  2. They provide a lot of flexibility in terms of their commercial goals.
  3. In comparison to a corporation or a limited liability partnership, there are little statutory disclosure requirements.
  • LLP:
  1. They have their own legal personality and are heirs in perpetuity.
  2. All partners' liability is restricted to the amount of capital they provide..
  3. There is no maximum number of partners, subject to the AIF Regulations' maximum number of investors (1,000), and there is no requirement to hire a trustee for the AIF.
  • Company:
  1. It has a distinct legal identity and continues in perpetuity.
  2. The shareholders' responsibility is restricted to the amount of their investment.
  3. Because the company's management is vested in the board of directors, there is a separation of ownership and management.

Disadvantages of investing in AIF:

  • Trust:

The drawback is that if the trust is a discretionary trust or if the beneficial interest of the investors is uncertain, as in the case of hedge funds, they may be subject to tax at the maximum marginal rate.

  • LLP:
  1. The AIF's sponsor or management must be named as a designated partner, and designated partners bear unlimited liability for the partnership's compliance with all applicable laws.
  2. In the event that the LLP's creditors are cheated, the partners' personal assets may be taken to settle the fraudulent creditors' claims.
  3. Certain onshore financial institutions are unable to invest in an LLP, limiting the LLP's ability to raise cash.
  • Company:
  1. Compliance and reporting standards are increasingly strict.
  2. Costs rise when more compliance requirements are added.
  3. The corporation must adhere to more stringent accounting and auditing standards.