Money Guru: How are PMS and AIF different from MF? See what experts say about the new SEBI rule

Last week, SEBI shared a circular in which it asked alternative investment funds (AIFs) to provide an option of a "direct plan" for investors. The market regulator also rolled out a trail model for the distribution commission. These rules will be implemented on May 1, 2023. Zee Business spoke to Anand Rathi Group's deputy CEO Feroze Azeez, and Kshitiz Mahajan, managing partner of Complete Circle Wealth Solutions LLP, on its show "Money Guru" to understand the difference among alternative investment funds (AIFs), portfolio management service (PMS), mutual funds (MFs), and the impact of SEBI's new rules on investors. They also talk about which of these plans is better for investors. The show was anchored by Swati Raina. 

Here are the edited excerpts

What are the new SEBI rules for AIF?

Azeez: The direct alternative plan for mutual funds was started in 2013. Now, the benefit should also be available to AIFs. There are three types of AIFs. Category I AIFs invest in startups or early-stage ventures; Category II AIFs are the funds that do not fall under Category I and III and which do not undertake leverage or borrowing other than to meet day-to-day operational requirements; and Category III AIFs apply diverse trading strategies and leverage by investing in listed and unlisted derivatives. 

So the new SEBI rule covers three important things: commission, direct alternative, and transparency. 

As per the new rule, in Category III, the upfront commission is banned, while in Category I and II, upfront commissions are reduced to one-third. There was so much complexity in this business earlier, so PPM (pre-placement memorandum) is provided in a simple format so that AIF investors will not have to comprehend different formats. 

This came after the regulator had already found inconsistencies and inadequate information in the PPM about specific business practices. 

Will there be more transparency after these changes in AIF? 

Mahajan: A mutual fund is for everyone, irrespective of its ticket size. While in PMS, the minimum investment is Rs 50 lakh, in AIF, it is Rs 1 crore. Regulators' vision is to give the same treatment to all the categories. Like MF and PMI already had direct alternative plans, now SEBI has implemented them in AIF also. 

To bring transparency to expenses and curb mis-selling, SEBI has asked AIFs to provide an option of a "direct plan" for investors and introduced a trail model for commission distribution. Trail has its own benefit, if a client's money increases, you will also get the benefit in payouts. Broadly across investment categories, trail is a new way of looking at debt. 

In categories I and II, they have still kept an upfront payment of one-third, but that is for a different set of categories where you want to do real estate, PE, or angel investments. The idea is to provide this category's benefits to clients who want to work with manufacturers directly. At the same time, manufacturers should also manage well and simplify the process rather than accumulate money. This is a very good move by SEBI for end investors and a win-win situation for the wealth creation of plans. 

Was there any discrepancy due to which SEBI announced a new rule? Will we see any challenges after implementing this? 

Azeez: It is a very important step that should have been taken earlier. Advisory regulations came in 2013 for that. Advisory business is based on a model in which the product manufacturer should give money to advisory and the client will pay directly. If every product does not have a direct alternative option, it will be difficult to run an advisory business. Portfolios have MFs, PMS, bonds, and insurance, and none of them has a direct alternative plan other than MFs. We also decided to be a distributor until all products get a direct alternative plan. Therefore, this is a very important step. 

The second thing is that many people put stocks in a long-only alternative fund, which is an oxymoron, as per Azeez. Common stocks are considered to be the oldest financial instruments, and earning commission through that by putting in an AIF is not correct. Due to these reasons, SEBI curtailed this rule. 

What are the benefits of PMS? 

Mahajan: There will be a very positive impact on PMS after this new SEBI rule. This is beneficial for the overall industry and investors as well. The PMS ticket size is smaller than AIF, and it is open ended and can be customised. 

There were around 4.5 crore demat accounts before COVID-19, and after COVID-19, the number of accounts increased to 11 crore, out of which, 6.45 crore are unique accounts. The love for direct stock holdings will increase in the future too. 

The stock holdings in PMS are individual, open ended, and there is no locking, while AIF comes with a different structure and locking period. There is no set-up fee for PMS. Therefore, PMS will grow and the industry may also grow by 25-30 per cent. The new regulations will also push PMS. 

Compare MF, PMS, and AIF? 

Azeez: If you calculate mathematically, MF comes out on top, even for ultra-HNIs (high net-worth individuals). For example, if anyone has 1,000 crore, his long-only position can be met through MFs. There are 380 schemes in MF that are actively managed. Out of 380, there is also one focused category, in which there are at least 25-30 stocks. If someone asks me to choose only one platform, it will be MF. 

In PMS, you have to pay tax on the fund manager's activity, while this doesn’t happen with MFs. The tax liability in MF comes after 10 years when you sell the stocks. If you calculate in rupees, the tax difference in top schemes in India is 0.84 percent. The fund managers make you pay taxes through a POA (power of attorney), which investors sign at the time of joining. 

Mahajan: When a client invests money, his 55-65 per cent portfolio falls under MF because it was very tax efficient till 31 March 2023. If we talk about new investors whose corpus is increasing, their portfolio up to Rs. 1.5 crore remains in MF because they get funds for diversification there. When the corpus is over Rs 2 crore, we suggest PMS, and there are 30-35 stocks in PMS. The structure is also dependent on a client's appetite for risk. 

AIFs, unlike PMS, are pools of money; as in the case of mutual funds, that money is invested in a variety of assets outside of the conventional asset class.