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What is AIF and PMS Funds and How Does It Work – Benefits of Investing in AIF and PMS

RC: Hello everyone. Today we have a special guest with us, Vikas Agarwal. He has an MBA in finance and he has many years of experience in alternative investment space, which we’re going to discuss more in detail today. He has around 18 years in digital finance and he actually has worked with a lot of high net worth individual clients in his earlier capacities. Before his current venture, Vikas was associated with Motilal Oswal AMC as well as their private wealth management as Senior Group Vice President. He’s very passionate about his clients’ wealth goals and he has a unique take on what is the upcoming AIF/PMS industry today. He’s an ardent learner of business cycles and he keeps up with all the upshots, be it macro or micro economics. Hi Vikas.

Vikas Agarwal: Hi.

RC: Probably we can start with a brief introduction of what is and an idea about what is it that you do?

Vikas Agarwal: So firstly, thank you so much RC for inviting me on your show. It’s a great show so you’re doing a great job in terms of educating and empowering investor community as a whole. So, many congratulations for the same. So yes, I’ll with that. So before I talk about my platform, let me quickly tell you in a minute why did I pick this platform. So, basically I spent about almost 20 years in the industry. As you rightly mentioned, I used to work for Motilal Oswal as a Senior Group Vice President wherein my profile was more involved towards managing client. So what i realized after 20 years in the industry is there is a huge gap between manufacturers, which is the portfolio managers, and the investors. So what happens for example when market fell down last year by almost 30% due to COVID, some of the investors got panicked and they started redeeming their money because they were hearing from TV and they were getting lot of feedback from their neighbours, friends that market will fall down, they will be a lot of problem. So, what happens is that that is the time that your client needs a lot of hand holding. These investors need lot of support and what I see is that there is a huge gap between portfolio manager and the investor. So, what I thought is why not I would build a platform or a kind of an interface wherein it will be like an eco-friendly sort of client centric platform where client can come, speak to Portfolio Manager through us, analyze the data points whatever is required, and then take the right and informed decision. So I thought that when there is a huge gap, why not I would build this kind of platform wherein any client — any HNI client, high net worth clients, even they need lot of data points. They can come to our platform, the platform name is, and compare various portfolio management schemes. For example if you want to invest in mutual fund, what you do as an investor. You go to, you go to, and you are able to compare the performance of various mutual funds. But unfortunately, if you look at AIF and PMS industry is highly scattered so therefore you don’t have a platform where you can go and compare Fund A with Fund B basis the various parameters. So what we did is our attempt is to build a platform, which is investor friendly, where client can come and compare the performance based on various parameters, and then choose basis the requirement the client has or basis the risk appetite the client has.

RC: Excellent, excellent. That’s a nice anecdote you mentioned about value research and other sites. So, it’s easy for an investor today to compare mutual funds, right? There are enough and more platforms. But this is a niche segment where I myself have struggled. I come across a new PMS, but I always figured out how can I compare this PMS versus this. So, you have actually addressed a very niche. Now to some of our audience who are probably wondering what are we talking about, what is an AIF? What is a PMS? Can you briefly explain to us what these terms are and what they mean?

Vikas Agarwal: Sure. So yes, that’s a very good question and I get lot of feedback from clients and all of them are curious to participate. In fact, let me tell you this industry AIF and PMS is one of the fastest growing segment in India today. If I have to quantify in terms of numbers, then total AIF participation in India has reached to 1,25,000 crores. And I remember when I entered in the industry of mutual fund in 2000, 2001, the total size of equity mutual fund used to be 1,25,000 crores. So, in no time you know AIF industry has picked up very well. When you look at the portfolio management services, that is also growing very fast. So, again I have to quantify in terms of numbers and numbers are very attractive. So, that has also reached to now almost 95,000 crores of assets. So put together, it is more than 2 lakh crores. So, that clearly indicates that how fast it’s growing. Because 2011, 2012 was the time when SEBI started taking some reforms and started shaping up this platform called AIF. So, let me tell you — so, one is that I talked about the overall size of the industry. Now coming back to your question that what is AIF, what is PMS, and how different it is. So, basically what happens is that these are nothing but vehicles in which you choose. So AIF is a vehicle, your PMS is another, and the mutual fund is another vehicle. So, these are the vehicle which is defined by regulator and they have defined the minimum threshold also for these investments. So anybody wants to participate in AIF, the minimum threshold is INR1 crore. If you want to participate in Portfolio Management Services schemes, then the minimum threshold is INR50 lakhs whereas in mutual fund, you can start with INR5,000 or even INR500 rupees of SIIP. So, the second question which comes to me is how different it is from one to another? Why should I look at PMS and why should I look at AIF? So, I’ll give you one classic example. Nowadays everybody is using Ola app. When you use Ola app, you have all the options. You have an option a pool car, then you have an option of taking a separate car for yourself, and then you have an option of going for SUV where you can sit comfortably, have an access to Internet, listen to your music what you feel like listening to. So, these are the options. So, these are basically options. Let’s say you want to go to say airport. From your residence going to airport let’s say takes 30 minutes time is one kind of analogy that I’m giving you. If you take a pool car probably it might take 35 minutes, if you take a separate car it might take 28 minutes, or some time when there is traffic, all of them will reach 30 minutes time of the destination. So let me tell you that there is there is no major difference as such, but there are few limitations each of the vehicle has, which I would like to highlight here. So in case of AIF if you look at, AIF is a perfect blend of mutual fund and PMS. So, what happens in AIF you get the units allotted to you and you have a monthly NAV. In mutual fund, you have a daily NAV. In AIF, you have a monthly NAV. So there also you get units, here also you get in units. But it behaves like PMS, it works like PMS. What is PMS? So, PMS is a portfolio management services where you give the power of attorney to the Portfolio Manager to invest on your behalf. However, all the stocks — as per the new mandate of SEBI, all the stocks are held on your Demat account, all the appreciation or depreciation of stocks belongs to you, all the dividend comes to you. So in NSDL or CDSL, the stocks are — it reflects on your name. But you are giving a power of attorney to the Portfolio Manager and get down to an agreement that you manage my portfolio, whatever profit and loss would remain belong to the investor, and what you’re doing is basically giving the mandate. So these are the two, three differences that technically you have. In case of AIF, you get a monthly NAV and you get an allotment of units. And in case of AIF, you can also participate in unlisted securities even if it is a category one. I’ll come to that what are the different types. In PMS, you start with INR50 lakhs and all the stocks are held in your name. And in mutual fund, it’s a pool account where you have all the investors come together and share the common goal. So these are the two, three things that I wanted to highlight to you.

RC: Excellent, excellent. So, coming back to your platform. Now if one of our listeners are interested in PMS, let’s say he’s decided I’m going to invest 50 lakhs. Now your platform is very unique in that you said you can compare, right? In a mutual fund setup, I can look at expense ratio, I can look at — if it’s an index fund, I can look at the tracking error or I can look at past performance, fund history, who’s the fund manager? These are the general parameters in a mutual fund. So an investor who’s interested in analyzing a PMS and AIF, what are sort of the metrics that he or she should be aware of to compare a performance?

Vikas Agarwal: Yeah, that’s another interesting question. So RC, one of the things that you need to look at is when you are looking at AIF and you are looking at PMS, ultimately you’re giving money to whom? You’re giving money to the Portfolio Manager. And therefore, what I feel is it is very, very important that you analyze the Portfolio Manager. You do your own due diligence before choosing the Portfolio Manager. So look as an organization, we are a data driven organization. So what you rightly mentioned that when you’re analyzing a mutual fund, these are three, four things that you look at. Who is the fund manager, ultimately who is managing your money? Then you look at what has been the track record. Then you look at what sort of expense ratio he has. Similarly, the platform — our platform allows you to access this information within the AIF and PMS industry where you can actually go and look at the Portfolio Manager. And what happens is what we have done as an organization is we have developed our own framework, the framework is called Three Is Framework. Let me take a minute to quickly tell you what is this Three I Framework. So, the first I is basically investment manager because as I mentioned to you, what is more important is ultimately that you’re giving money to whom. What sort of track record the fund manager brings on the table? Whether he has seen all the cycles which are important for any fund manager to be able to see that or not. The second thing that you look at in the portfolio manager, how long he’s been continuing in a particular organization. Is he frequently changing the job or he is sticking to one organization and creating a long-term goal? Then you also look at that is there anything wrong about the Portfolio Manager. Is there any — SEBI has sort of sent any kind of notification to him in terms of doing anything unethical. So, this is called due diligence. So what we do is as a platform, we filter out these parameters. We’ve got about almost 58 parameters to look at before we look at the Portfolio Managers. So, the first I is basically more about investment manager. The second I is basically investment portfolio. Because we are a research driven organization and we understand the quality of the stocks so what we do is we filter out the portfolios basis the quality. Now quality as a word is very different. For you the quality may be something else, for me quality could be something else. So, what we essentially look at is how has been the stock selection process of a portfolio manager and we go to an extent of looking at the track record of how many stocks portfolio managers have bought, how many calls have gone right and how many calls have gone wrong. And that gives you a sort of picture that whether Portfolio Manager is running high conviction ideas, which they are supposed to be, or is working on a probability and buying any stocks thinking that it will double up. So, what is important is the research needs to be done. At an investor level, it is very difficult for him to extract these data points. So what essentially our platform does is we filter out the Portfolio Manager first, then we filter out basis the quality of the portfolio because sometimes some portfolio managers when they come on CNBC, they speak something else and when you look at their portfolio, they have Yes Banks of the world. Nothing right and wrong about it, but that’s not the quality stock that we need to talk about. So, that’s where we play an important role in terms of helping the client to choose the right Portfolio Managers and protect the rest of the investor. The third I is basically the investment performance. Now investment performance, what happens, RC, is that there are various portfolio managers and when market does well, you see them outperforming  the performances like anything. But when you see the market turns down, then you see that they start bleeding more than the markets. So how would you feel, how would you select the Portfolio Manager? So, what we do is we take out the consistency in terms of performance. So, the formula which we have developed internally is that what we look at is how the portfolio has done over a long period of time during the good times and the bad times. So, what is your expectation as an investor is if market is down by 20%, my portfolio will also go down, but should not go down beyond 20%. Rather we would be happy if it goes down by 18% or 17% so you have so you have an alpha on the down. Then you look at that the market has done say 20%, your portfolio should deliver 24%, 25% because then you are kind of outperforming and that’s why you’re giving the fees to the Portfolio Manager. Your expectation as an investor is to see to it that it should be protected on both the side. So, what is our job is basically we look at how consistently the portfolio has done because what investors do not like or hate is the roller coaster ride. So if market is doing well, you’re getting good return. If the market is — you have 2019 and 2020 you saw the market fell down and suddenly there is a huge underperformance. That’s the time investor gets panicked and start taking their money out from the scheme. So our job is to see to it that whatever decision taken by the investor, we help them with all sorts of data points. Our platform, our expert team so we have a product team, we have research team, we have expert team, sales team. All of them work in a collaboration and work in a manner where we help our investors to choose the right Portfolio Manager, right portfolio scheme basis the risk appetite of the client.

RC: Excellent, excellent. You mentioned earlier that in AIFs or alternative investment funds, there is an option for the fund manager to also invest in unlisted stocks. That was very interesting. So, can you tell us a bit more about is that a good way to get an alpha because we are hearing a lot of exits these days? Lot of companies are doing their IPOs that basically means from unlisted space, they’re getting into the listed space. Any specific examples in India or can you talk little bit more about investing in unlisted space?

Vikas Agarwal: Sure. So basically as an investor, you have both the options available in India. One is that either you invest after the IPO has already been there in the place or you can participate when the company is small and they are growing. So, how do you participate as an investor? So earlier before 2011, 2012 times when AIF was not shaped up and was not structured by the regulator; some used to call it venture capital, some used to call that investment, some used to call that private equity fund etc., etc. Now after the AIF come into picture, this has become even more structured, it allows you to participate in the company in the initial stage when the company is growing. So what happens in AIF, you collect money. 100, 100, 100 say suppose you collect and you’ve got INR1,000 now. Out of this INR1,000 if you are the fund manager, you can take the mandate and speak to the companies at an early stage and buy out some stake from the company at the initial stage. Now these companies are in need of money because they want to expand and you are buying their value — you’re buying those stakes at a very lower valuation and then you help them, nurture them, mentor them to grow to the next level. And when they grow and when their IPO comes, that is the time the maximum valuation is encashed. So therefore, there are two ways of doing it. So in AIF, you have different categories. You have category one, you have category two, and category three. In case of category one, you have an option to invest in startup companies. In case of category two, you have an option to participate in real estate through AIFs. So in real estate say suppose — there was a time what used to happen is if you want to invest in real estate, you go and buy an apartment in Chennai or in Kerala or in Bangalore and then you have to wait. You have to wait for five, six years or 10 long years to see to it that the appreciation takes place. Nowadays you have an option of taking a back door entry. What is back door entry? Now what essentially these managers do is they collect money from investors and they fund the same money to the developers when they are building up the apartments and that is the time they get into an agreement that I am looking out for say 15% of interest from you and I will take 5% of equity alpha from you. So, I’m looking at 20% returns. So a lot of HNI investors instead of buying direct apartment now started participating in these AIF one or AIF two category. AIF one is more about unlisted space in the startup or AIF two is essentially about debt fund or about these real estate where they can invest their money and get about 15%, 20% at the regular interval depending upon each fund has a different yield to offer. There is then third category called category three. Category three is basically for unlisted space. In that you invest like a mutual fund, you select companies which are listed one, and you can invest. There you have some sort of flexibility given by the regulator that up to this much percentage, you can invest in pre-IPO also, but it cannot be a pure startup. So, some sort of flexibility is given in category three so that you can participate in some unlisted companies. And within category three, there is one more option which is called long-short fund. Now long-short fund as a fund is a category, which is very famous in the developed economy. Now in India it is building up. So what is long-short fund is basically in that fund, you are allowed to play on options which is call and put and generate consistent return. By reducing the risk, you can hedge the position so that therefore, essentially it is also called as hedge fund. So, these are the two categories within the category three, sub categories which are available where client can understand more and then participate. The minimum threshold is INR1 crore.

RC: That was very nicely explained, the three different categories for an AIF. Thanks again for that, Vikas. I see that — I see a lot of books in your background and this is a typical question that I ask all my guests. Can you recommend top three books to all our listeners that you read?

Vikas Agarwal: Sure. So, I used to work for Motilal Oswal earlier and what I learned after working under the able guidance of Mr. Raamdeo Agrawal is that you have to develop your knowledge. If you don’t develop your knowledge, then you may not be able to compete in future and you would not be able to generate returns. So, investing is something which is not taken seriously in India. Therefore, you don’t have a subject called investment when you are growing up and you get to learn this subject only when you are say 35 or 40 or 45 and that is the time you start saving money and then you realise oh, I don’t know anything about investment and then you start reading. But it is always said that we should actually read books so that you get more frameworks about what is called Investing and then you go about building up your knowledge, speak to various portfolio managers, watch out CNBC, etc., where you get the basic details. So, my first book was Intelligent Investor — The Intelligent Investor. That is the first book everybody should read. When I started — and let me tell you I never used to like reading. Then I realised in one point of time in my career that if I don’t develop my knowledge, I may not be able to grow in my life. It’s very, very important because we are in the business where we are helping clients to create wealth. So, it is very important that we update ourselves. So, the first book that anybody wants to read about investment is The Intelligent Investor. That is the first thing that one should look at. Then you go on and build your likings and then read. So, I read various books on the investment. The second book that I like the most is, which was gifted by my boss Raamdeo Agrawalji, Concentrated Investing. So, there is another book which is Concentrated Investing. That is another book that you can read and grow your knowledge. And then there are many books on — you have other writers who are writing good book. One book that I like the most is, in fact this book is authored by my friend Gautam Baid. The book is — the name of the book is Joy of Compounding. So, this is written very beautifully. So, one should really read this book because power of compounding is something which we learn after 20, 30 years of our career and what I feel is this is something which is — which needs to be taught in the early stage of the career. So for example if your portfolio size is say today INR1 crore and if your portfolio is growing at 25% year-on-year, then INR1 crore becomes INR10 crores in 10 years’ time and this INR10 crores becomes INR20 crores — INR100 crores in 20 years’ time. So, you can imagine the kind of wealth that you can create. So, that is the third book that I would suggest you to read.

RC: Excellent choices. The Intelligent Investor, Joys of Compounding, and…

Vikas Agarwal: Concentrated Investment.

RC: Concentrated Investment. Excellent. Thank you. So, we are about to wrap up our chitchat with Vikas. But before I let you go, Vikas, how has your life changed? Pre-COVID and post-COVID, what have you learned? Any tips for any investor out there, general advice? Go ahead.

Vikas Agarwal: Well, I think this COVID as our Honourable Prime Minister talks about that how to make blessings in disguise. How to use this opportunity of COVID time and utilize it more meaningfully. And thanks to the entire wealth management industry, I would say that during this time like the way we are recording this session, there are many people like you who have worked significantly and contributed a lot in the industry by educating and empowering investor. And thankfully, investor also got lot of time because they were sitting at home, they were locked down, so they had no option than to really get into these and study more. So what happens pre-COVID and post-COVID, what I’m realizing is that the awareness level of financial product in India has gone up significantly and because we are a data driven organization, let me give you another data point. So if you look at we took about almost what 25 years to reach to — total number of Demat accounts in India was hardly 4 crores, 4.5 crores. Now you see every three months we are adding 1 crore of Demat account in India. So to my mind, this number clearly indicates that the financial literacy in India is going up and that is a very good sign. That is a very good sign as we embark the journey of $5 trillion economy, which is a dream of our Honourable Prime Minister. If we are moving towards that, then it is very important that what we are witnessing is there is a huge, huge value migration from unorganized to organized in India. There’s a huge value migration in terms of physical assets to financial assets. I remember my mummy used to go to my mama’s place and used to tie a rakhi and he used to give INR1,000 and she used to pocket it for 10, 20 long years. And when this demon came, she said I have some money of INR1 lakh, why don’t you deposit in the bank. So, what we see is that there is a huge value migration. Another data point is you might be surprised that during this Jan Dhan Yojana, which is run by Honourable Prime Minister, more than 40 crores of savings accounts have been opened and we are living in a country where your Prime Minister influencing you to open up account. Please understand that there are lot of maids and local wage workers, they don’t even have savings accounts. So, what we are witnessing is this value migration and you see the number of online transactions what it used to be and what it is now. So, number of online transactions is the highest in the world in India. So, that number also clearly indicates that there is a huge value migration from physical assets to financial assets. And I have no doubt in my mind that eventually India — this wicket belongs to India and we will he will become one of the superpowers in the days to come.

RC: Wow, what a way to end the chitchat. Wonderful data insights as usual. Thank you, Vikas, for taking the time out and speaking with us. Until next time, bye bye.

Vikas Agarwal: Thank you. Pleasure is mine.

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