Wealth beyond the conventional realm: Decoding the allure of alternative investments and PMS

The investment landscape today is peppered with a host of investment solutions that are crafted to cater to the myriad needs of investors. While some solutions are generic in nature and can be leveraged to achieve financial goals, others are designed to meet the nuanced needs of the investor and enhance the risk-adjusted returns of the portfolio. In that context, interest in, and exposure to, alternative investments has been growing at a strong clip, both globally as well as in the domestic markets. 

As of December 2023, the global alternative Assets Under Management (AUM) stood at USD 22 trillion or 15% of the global AUM. Consider the fact that twenty years ago, global alternative AUM was a mere USD 4.8 trillion or 6% of global AUM. Similarly, in India, the alternative industry, as represented by Alternative Investment Funds (AIFs) and Portfolio Management Services (PMS), has been gaining significant traction. The alternative investment industry in India has demonstrated remarkable growth in the past five years, registering a CAGR of 26%. The AUM for the alternative investment industry reached ₹13.74 lakh crore as of June 2023.  Further, the total AUM of the PMS industry in India has nearly tripled in the last seven years, ascending from ₹10.45 lakh crore in March 2016 to nearly ₹30 lakh crore in March 2023. This growth rate is more than double that of the mutual fund industry.

The alternative appeal

PMS and AIFs often offer customised investment solutions where experienced portfolio managers handle investments on behalf of clients and can potentially provide unique exposure. PMS platforms owe their success to creating special investment plans that fit each person’s needs and risk appetite. This personalised approach ensures that investments are curated for each individual. Furthermore, PMS platforms extensively leverage technology to enable transparency, ease of communication, and seamless access to portfolio views and transactions. Overall, investing via the PMS routes allows investors to gain unique exposure to stocks that are aligned with their investment outlook and nuanced themes. 

On the other hand, AIFs are pooled investment vehicles, somewhat like mutual funds, that are managed by experienced fund managers and offer unique investment exposure. What makes AIFs particularly unique is their ability to provide exposure across asset classes to both listed as well as unlisted investment options. 

AIFs are primarily divided into 3 categories based on the investment strategy employed. While categories 1 and 2 can provide exposure to the unlisted space, category 3 deals with only the listed space. Different opportunities including private equity, private debt, venture debt, long-short strategies, etc., all fall under the purview of AIFs. Thus, AIFs become a very good vehicle for investors looking to create long-term wealth, enhance the risk-adjusted returns of the portfolio, and gain unique exposure. Another point to note here is the growing private market in India. 

With the Indian economy making a slow ascent to global dominance, companies, both start-ups as well as established, are playing a catalytic role in contributing to the growth of the country. Inevitably they are well-positioned to benefit from the country’s economic growth. Many of these companies are not listed, i.e., they are privately held. A great way to invest in these companies and partake in their growth story is via AIFs.

While AIFs and PMS offer a good opportunity to gain nuanced exposure and potentially create wealth, they also offer diversification benefits. This is especially true for AIFs. 

Despite the myriad benefits of alternative investments, it is best to approach them with some caution. As an investor, you must ensure that you have the networth and portfolio strength to absorb the risk attached to alternative investments. Especially in the case of PMS, investors must be circumspect about portfolio exposure and establish prudent risk management practices. 

Having said that, high-net-worth individuals (HNI) and Ultra-high-net-worth individuals (UHNI) investors must consider adding alternative investments to their portfolios while ensuring that incremental exposures are aligned with their overall asset allocation strategy. 

The article has been compiled by Pravin Murarka & Rajeev Murarka, Director, Poonam Securities