PMS and AIF — Structural Differences

Account or fund

In a PMS each client has an individual account and owns the securities in it. The portfolio manager manages or advises on a portfolio for each client separately.

An AIF is a privately placed pooled fund. Investors' money is combined, the fund makes the investments, and each investor holds units of the fund, not the underlying assets. Both structures can invest across more than one asset class.

Minimums and categories

The PMS minimum is ₹50 lakh per client. The standard AIF minimum is ₹1 crore per investor, with ₹25 lakh for employees and directors of the AIF or its manager. Accredited investors are exempt from both minimums.

AIFs fall into three categories. Category I includes venture capital funds, along with angel, SME, social impact, infrastructure and special situation funds. Category II covers funds that are neither Category I nor Category III, such as private equity and private credit funds. Category III funds use diverse or complex trading strategies.

Tenure, exit and leverage

A PMS client may withdraw money or close the account as the client agreement provides, and SEBI sets caps on exit loads. An AIF's exit rules depend on its category. Category I and II funds must be close-ended with a minimum tenure of three years, so their units cannot be redeemed at will. A longer life or lock-in, where one applies, is a term of the particular fund and not a SEBI rule.

Category III funds may be open-ended or close-ended, and may use leverage up to two times net asset value. Units of close-ended AIFs may be listed on a stock exchange, but liquidity is limited in practice, so AIF units can be hard to sell.

Where the terms are written

A PMS client's terms are in the client agreement, within limits SEBI sets, such as the bar on upfront fees and the high-water-mark principle for performance fees.

An AIF's terms are set in its placement memorandum. The distribution waterfall (the order in which proceeds are shared) and the hurdle rate are contractual terms of each fund, not SEBI figures.

Tax

A PMS client is taxed on each transaction in the account, because the client owns the securities. Category I and II AIFs have pass-through status for income other than business income: it is taxed in the investor's hands as if the investor had made the investment directly, while business income is taxed at the fund level. Category III AIFs have no pass-through; their income is taxed at the fund level. This is the position as of October 2026.

Rules at a glance

Key points

• PMS is an individual account in which the client owns the securities; the minimum is ₹50 lakh.
• An AIF is a privately placed pooled fund in which investors hold units; the standard minimum is ₹1 crore.
• Category I and II AIFs are close-ended with a minimum tenure of three years; Category III may be open-ended or close-ended.
• Category I includes venture capital funds; Category III may use leverage, capped at two times net asset value.
• Neither assures returns; both carry market risk, and AIF units can be hard to sell.

Common misunderstandings

• An AIF investor does not own the fund's underlying assets: the investor holds units of a pooled fund, whereas a PMS client owns the securities in the account.
• Long lock-ins quoted for AIFs are not SEBI rules: SEBI requires Category I and II funds to be close-ended with a minimum tenure of three years, and the actual term is a term of each fund.
• An AIF is not the only regulated route to unlisted securities: non-discretionary and advisory PMS may hold them up to 25% of assets under management.

Questions people ask