Ankur Warikoo, an investor with ₹18 crore put into portfolio management services (PMS) and alternative investment funds (AIFs), is constantly flooded with pitches from wealth managers to invest in PMS, AIFs and specialized investment funds (SIFs). But PMS and AIFs are under threat: the recent launch of SIFs has disrupted India's high-net-worth investor (HNI) market, forcing PMS and AIF providers into a high-stakes battle for survival.
SIFs—equipped with tax advantages and lower entry barriers—are actively cannibalizing existing market shares. For investors, the abundance of choice is welcome, but for traditional fund houses, every rupee that flows into a new SIF comes at the expense of an established PMS or Category III AIF.
“It was difficult to make investment decisions early on because I did not understand the difference between products,” said Warikoo. “But once I settled on what is the right approach for me, then I just stuck with it. I have two PMS schemes and three AIFs (Category I) and that is all that I do. I don't feel the need to have any other.”
Yet, the broader market appears to be migrating toward SIFs at a blistering pace.
A Mint analysis of assets under management (AUM) reveals just how dramatically SIFs have upended these competitive dynamics. SIF assets have surged almost ninefold to ₹17,857.77 crore across 30 schemes since the first one was launched in October 2025, according to data from the Association of Mutual Funds in India (Amfi).
PMS and AIF providers are struggling to keep up. PMS assets (excluding Employees’ Provident Fund Organisation and provident fund mandates) rose to ₹8.9 trillion by June, according to data from the Securities and Exchange Board of India (Sebi). In the nine months from October 2025 to June 2026, their assets grew only 4%, a slowdown from the 6.5% surge in the same period a year before.
Clients, commitments
Client additions have also cooled. The number of PMS investors increased 4.1% to 220,444 during the period, compared with 10.4% growth a year earlier.
Commitments in Category III AIFs, which are high-risk funds that deploy complex trading strategies and may invest in shares and derivatives to generate short-term returns, stood at ₹3.15 trillion as of March. During the final quarter of FY26, commitments raised grew only about 1% compared with 6% growth in the same period last year. Funds raised rose merely 2%, much slower than the 14% increase in the fourth quarter of FY25.
The analysis was limited to Category III AIFs, which is the most comparable to PMS and SIF schemes due to its investments in the public markets.
“SIFs have given very tough competition to Category III AIFs, so much so that we are struggling to get AUM now,” said an AIF executive, requesting anonymity. “SIFs have better taxation with a similar long-short strategy. In such a case, investors will obviously choose the former.”
Sebi introduced SIFs to bridge the gap between mutual funds and PMS. They were designed for investors willing to take greater risks than conventional mutual fund investors. SIFs have a lower entry threshold of ₹10 lakh, better tax efficiency and flexible strategies.
Category III AIFs also use hedge fund-style strategies, including long-short investing, derivatives and leverage. Long-short investing involves taking long positions and short positions to profit from rising and falling markets. However, the two products differ in taxation and that difference is increasingly driving investment decisions.
Category III AIFs are generally taxed at the fund level while SIFs are taxed under the capital gains regime. The impact on returns can be significant.
Comparative returns
Consider a Category III AIF generating a 15% pre-tax return. If the fund pays tax at an effective rate of about 39%, almost six percentage points are lost to tax, leaving investors with a roughly 9% post-tax return.
An SIF generating a lower 11% return is taxed at an effective long-term capital gains rate of about 15%, including surcharge and cess, leaving investors with about 9.35% after tax. Despite earning four percentage points less before tax, the SIF delivers a superior post-tax outcome.
“SIFs have cut the entry ticket to ₹10 lakh, so the eligible pool has suddenly widened. PMS and AIF firms are not competing with a better product. They are competing with an easier one,” said Dhirendra Kumar, chief executive officer at Value Research. “The early money into SIFs is buying a tax structure, not a strategy.”
Fund manager churn inside a SIF creates no tax event for the investor, Kumar said. In a PMS, every trade shows in your capital gains statement. Whether the manager can actually short is a question that investors ask later, usually after the first drawdown, he added.
Fund managers are now rethinking their offerings.
“Category III AIFs are now doing long-only funds as doing long-short would put them in direct competition with SIFs,” a second AIF executive said. “The slowdown in growth of AUM for AIF and PMS has a direct correlation to the launch of SIFs, which has heightened competition for HNI clients.”
“Sebi and the ministry of finance should allow pass-through taxation for Category III AIFs since that is the only way the segment can survive in the current landscape,” the first AIF executive said.
Staying relevant
PMS firms, meanwhile, are trying to differentiate themselves rather than compete head-on with SIFs.
“If PMS firms launch niche, differentiated schemes, then they might be able to grow AUM,” said a PMS executive, requesting anonymity. “We have seen a rise in firms launching schemes such as a micro-cap fund. Such schemes offer a unique proposition that neither mutual funds nor any other product offers. This is the only way to grow AUM in the segment since competition from other products is very high.”
Regulation could also revamp the competitive landscape. Sebi has proposed an overhaul of the PMS framework that would allow discretionary PMS managers to invest in unlisted securities and allow overseas investments across PMS categories. If implemented, the changes could make PMS a stronger competitor to both AIFs and SIFs.
For investors such as Warikoo, each product still occupies a distinct place in the portfolio.
“For public markets, I would consider PMS and even SIF if I don't mind holding stocks in units. Unlisted markets—AIFs is the only way,” he said. “SIF is a true competitor to at least Category III AIFs. For tax purposes, people are moving towards SIF, for sure. Long-term taxation of 12.5% is ridiculously attractive.”