There was a time when most investors desired only two things from their savings, i.e., safety and liquidity. This would explain why many people from a few generations back preferred to keep their money in cash and why even today, a large number of people keep a significant amount of money in their savings bank accounts. However, with the passage of time, things started changing. Investor needs became more nuanced, investors themselves started becoming more aware about their portfolio requirements, and a lot more innovation started happening on the investment product side. Today, investors have nuanced requirements and are focused on optimising the risk adjusted returns of their portfolios. Perhaps, that would explain the sharp rise in the number of Alternative Investment Funds (AIFs) in India and the corresponding growth in commitments raised by these funds. As of 31st July 2022, India had 976 registered AIFs which have cumulatively raised commitments worth approximately INR 6,50,000 crore.
The edge yow
Over a period of time, markets have become increasingly volatile while at the same time, the investment environment is becoming more fecund. While the buy and hold strategy has traditionally been lauded by investment pundits, the current landscape also warrants for a more active management approach. Due to the shapeshifting nature of the current environment, it is becoming even more important to proactively identify and capitalise upon emerging investment opportunities. This is where Portfolio Management Services (PMS) and AIFs can give investor portfolios an additional edge.
AIFs are simply privately pooled funds, formed as trusts, companies or limited liability partnerships, with a mandate to invest the money pooled. They are primarily divided into three categories. The first is Category 1 funds that are have expected to have a social impact as they invest in startups, SMEs and new businesses. These funds are ‘close-ended’ (with a fixed number of units which are locked in till the term ends), not allowed to use leverage, and must adhere to their committed category. Category 3 funds are those invested in listed securities, have no restriction on the use of leverage or asset allocation, can be open or close ended, and can take both long and short positions. Category 2 funds are simply all others – they include private equity funds, debt funds, fund of funds, etc., and cannot use leverage. The value accretive nature of AIFs stems from their ability to invest across asset classes, in listed and unlisted equities, and as per nuanced strategies that are designed to generate alpha. While all of this indicates great potential for alpha, investors must also be cognisant of the higher degree of risk involved in certain strategies and asset classes.
PMS, on the other hand, is an interesting way to actively manage the investment portfolio in an attempt to generate alpha. This is an investment service that is generally offered by professional money managers and can be further customised to meet the specific investment objectives of the investor. PMS providers invest directly in securities on behalf of the investor through focused portfolios. This structure enables the PMS fund managers to take concentrated calls and create a focused portfolio of high conviction ideas. While the attempt here is to generate alpha, it is important to recognise that PMS often leads to a higher degree of risk which can be mitigated, to an extent, through a long-term investment approach. Another important point to note is that PMS gives the investor absolute transparency as the stocks bought by the fund manager reside in the investors demat account.
Both AIFs and PMS can be interesting investment options for investors looking to give their portfolio an edge. However, it is important to understand that these products are more nuanced and can often come with a higher degree of risk. Thus, investors considering investing through these investment vehicles must be better informed about the equity markets and portfolio risks. This is the reason why the minimum investment threshold for PMS and AIFs is high at INR 50 lakh and INR 1 crore, respectively.
Whether PMS, AIFs, mutual funds, or direct equity, irrespective of the vehicle chosen, investors must make all investment decisions taking into consideration their asset allocation strategy which should ideally reflect their risk profile, return requirements, and investment time horizon.
The views are personal and are not part of the Outlook Money editorial Feature