Why One Fund Manager Moved All His PMS Clients Into AIF Category III
An informative 1:1 chat
A fund manager recently told us something interesting. He had moved most of his PMS clients into an AIF Category III structure. On paper, that sounds counterintuitive. Moving clients away from PMS can create tax events. It can disrupt existing portfolios. It requires explaining a more complex structure to investors who may already be comfortable with PMS.
So why take that step?
His answer was simple:
In his own words:
The next set of opportunities I wanted to capture were not fully available inside PMS.
PMS is a strong structure for personalised portfolio management. It gives investors transparency, direct ownership and client-level customisation. But it has a ceiling. Category III AIFs open access to a different playing field. For a like-to-like comparison, Category III AIFs are the right counterpart to PMS because they are actively managed and often focused on listed market strategies. Category I and II AIFs typically serve different purposes, including unlisted, venture, private equity and early-stage investments.
The real difference between PMS and Category III AIF is not only regulation, it is access.
The five doors Category III AIFs can open
1. Anchor allotment in IPOs
When a company comes out with an IPO, a portion of the issue can be allotted to anchor investors before the IPO opens to the wider market. A registered AIF can participate in this anchor allotment. A PMS generally cannot do this in the same way because PMS is not one pooled institutional vehicle. It is a collection of individually managed client accounts. For managers who want early institutional access to IPOs, the AIF structure is far more suitable.
2. QIB status
SEBI recognises registered AIFs as Qualified Institutional Buyers. PMS does not get the same status. This difference is powerful. QIB status can give access to institutional tranches in public issues, QIPs and other capital market opportunities reserved for institutional investors. Even if a PMS manager handles a large pool of capital across clients, the structure itself does not become a QIB. In practice, that can shut PMS out of certain opportunities.
3. Preferential allotments
Listed companies often raise capital through preferential allotments to select investors. These opportunities can come with attractive entry points, but they also come with lock-in requirements. For PMS, this becomes messy. The securities sit across many individual demat accounts. Each client account has to be managed separately. Lock-ins, exits and portfolio-level decisions become operationally heavy. A Category III AIF holds assets at the fund level. That makes preferential allotments far easier to manage.
4. Warrants
Similarly, warrants are increasingly used in structured market transactions. They can offer upside participation, but they also require careful management across their lifecycle. Again, PMS faces the same issue. When every client account is separate, instruments with lock-ins, conversion timelines and structured terms become difficult to manage at scale. An AIF is better designed for this. The fund can hold the instrument, track the lifecycle and execute decisions at the vehicle level.
5. Pre-IPO investments
Pre-IPO investing is one of the biggest reasons I thought of an AIF structure. The opportunity can be attractive, but the execution is difficult through PMS. When a company is preparing for an IPO, it does not want a messy cap table. If a PMS participates, dozens or hundreds of individual clients may appear as separate shareholders. For the company, its lawyers and its bankers, that can become a nightmare. An AIF appears as one institutional investor. That makes the transaction cleaner for everyone. For pre-IPO opportunities, this difference can decide whether the manager gets access at all.
The tax angle is also important
Category III AIFs are taxed at the fund level. The fund handles the tax on gains, and investors receive returns net of tax or through the fund’s structure. For the investor, this reduces a lot of administrative friction. They do not have to track every trade, compute capital gains on every transaction or manage advance tax obligations based on frequent portfolio activity.
PMS works differently. Since the securities sit in the client’s own demat account, every trade flows into the investor’s tax records. Every capital gain has to be reported. Advance tax has to be estimated and paid. In high-churn PMS strategies, this can become a recurring cash flow and compliance burden for the investor. Some PMS providers do help clients with tax-related processes, but that is a service layer they have added on top for convenience, however Category III AIFs solve this more cleanly by design.
PMS still has two major strengths
The shift to AIF Category III does not mean PMS is inferior. PMS continues to win on two important fronts.
One is Transparency. In PMS, the investor can see the full portfolio. Every stock is held in their own demat account. For investors who value real-time visibility, PMS is hard to beat. Category III AIFs may offer transparency, but full portfolio disclosure is not always mandatory in the same way. I may voluntarily share detailed reporting, but the structure itself does not compel the same client-level visibility as PMS.
And second is customization, This is the biggest PMS advantage. A PMS portfolio can be adjusted for individual client needs. A client can exclude certain stock or risk can be adjusted, tax-loss harvesting can be planned at the client level and personal preferences can be built into the portfolio. An AIF cannot do this since it’s a pooled vehicle.
That is the trade-off.
As Indian wealth management matures, PMS and Category III AIFs will continue to coexist. They are not substitutes for the same use case; they are different vehicles for different strategies. This is also partly the reason why more PMS managers are now launching AIFs for their own clients, especially when the strategy requires access to anchor allotments, pre-IPO deals and other fund-level opportunities.
For us, managing both PMS and AIF structures would have been cumbersome. That was one of the reasons we chose to move our clients into a single AIF structure. For managers with larger platforms and deeper operating teams, running an AIF alongside PMS is increasingly becoming the norm.