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Business News/ Money / Personal Finance/  Your Questions Answered: What is better: PMS or AIF for tax efficient returns?
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Your Questions Answered: What is better: PMS or AIF for tax efficient returns?

PMS and AIF both offer higher returns and tax efficiency. Taxation depends on the category of AIF.

As with any investment, you must carefully evaluate the risk factors before you choose between PMS and AIF.Premium
As with any investment, you must carefully evaluate the risk factors before you choose between PMS and AIF.

Q. I am Rajesh, the CEO of a software company. I have been an active investor for a decade now. I am looking for a few financial products that provide higher returns and are also tax efficient. Should I choose a PMS or an AIF?

When you seek both higher returns and tax efficiency, Portfolio Management Services (PMS) and Alternative Investment Funds (AIFs) are both viable options. Both offer tailored strategy investments and involve management fees.

There are three categories of AIF, based on where the funds are invested.

AIF category 

Invests in 

CAT I 

Economically and socially viable start-ups and small and medium enterprises. Routed through venture capital funds, angel funds, social venture funds, and infrastructure funds. 

CAT II 

Viable equity and debt securities. Includes private equity funds, funds for distressed assets, real estate funds, debt funds, and fund of funds.  

CAT III 

Hedge funds and private investments in public equity funds. Focus is on earning short-term returns through diverse trading strategies. 

It is important to consider the different features of PMS and AIF before you decide. This quick comparison should help you.

PMS 

AIF 

Personalised portfolio management. Transparent, direct ownership. Diverse elements like private equity, venture capital and real estate. Complex, entails lock-in periods. 
Tax liability direct; same as in investors dealing directly in the assets.  

Taxation depends on the category of AIF. 

In CAT I and CAT II, the income generated by the fund will be taxed at the hand of the investor and not by the fund business. 

In CAT III, it is taxable at the fund level. Currently, profit under this category is charged the highest level of tax. 

PMS offers customization and visibility, but higher fees can impact overall returns. Balancing potential returns with risk is essential, especially considering the complexity and potential illiquidity of AIFs. 

As with any investment, you must carefully evaluate the risk factors before you choose between PMS and AIF. Your financial circumstances, investment goals and your appetite for risk tolerance are all important considerations. A financial advisor will be able to help you assess these and other factors objectively, so that you are able to make the right decision.
 

International Money Matters Pvt Ltd is a 20-year-old SEBI registered financial planning-cum-investment advisory boutique. Please click here to find out more.
 

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Published: 29 Aug 2023, 12:33 PM IST
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