Table of Contents
Chapter 6: Collective Investment Vehicles
The Spectrum of Collective Investment Vehicles
Collective investment vehicles pool capital from multiple investors to achieve portfolio diversification and professional management:
Collective Pooling Spectrum:
┌───────────────────────────────────────┐
│ Mutual Funds & ETFs │ • Pooled trust vehicles; daily NAV liquidity
│ (SEBI Mutual Fund Regulations, 1996) │ • Retail accessibility; strict limits on concentration
└───────────────────┬───────────────────┘
│
┌───────────┴───────────┐
▼ ▼
┌───────────────────────┐ ┌───────────────────────┐
│ Real Estate Inv. Trusts│ │ Infrastructure Trusts │
│ (REITs - SEBI 2014) │ │ (InvITs - SEBI 2014) │
│ Commercial real estate│ │ Roads, power grids, │
│ 90% NDCF distribution │ │ 90% NDCF distribution │
└───────────────────────┘ └───────────────────────┘
1. Mutual Funds and ETFs
- Mutual Funds: Open-ended or close-ended trust structures where investors hold fractional units. Provide daily liquidity at Net Asset Value (NAV), full regulatory transparency, and retail accessibility (minimum ₹500 SIPs).
- Exchange Traded Funds (ETFs): Mutual fund schemes whose units are listed and traded continuously on stock exchanges at real-time market prices, tracking underlying indices with low expense ratios.
2. Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs)
- REITs: Investment vehicles that own, operate, or finance income-generating commercial real estate assets (office parks, commercial complexes). Mandated by SEBI to distribute at least 90% of Net Distributable Cash Flows (NDCF) as dividends/interest to unit-holders semi-annually.
- InvITs: Similar trust structures holding operational infrastructure concessions (highways, transmission lines, renewable energy grids), offering long-duration cash yields.
Multi-Dimensional Comparison of Investment Vehicles
| Feature | Mutual Funds | PMS (Discretionary) | Alternative Investment Funds (AIF) | REITs / InvITs |
|---|---|---|---|---|
| Legal Constitution | Contributory Trust. | Bilateral Client Contract (PMS Agreement). | Trust, LLP, or Company. | Business Trust. |
| Minimum Ticket Size | None (₹500 for SIPs). | ₹50 Lakhs (Statutory SEBI threshold). | ₹1 Crore (₹25L for Angel Funds). | 1 trading lot (~₹10,000 to ₹15,000). |
| Custody & Ownership | Unitized pool; investor owns units, not shares. | Direct Demat Ownership; shares held in client's own individual demat. | Unitized pool; investor owns fund units. | Unitized pool; units traded on stock exchange. |
| Portfolio Customization | Zero customization; all investors hold identical portfolio. | High customization; tailored mandates, model portfolios, exclusions. | Defined by PPM mandate; zero individual customization. | Fixed asset portfolio; zero customization. |
| Tax Treatment | Tax exempt at fund level under Section 10(23D); tax paid on redemption. | Direct pass-through; every buy/sell in demat triggers personal capital gains tax. | Pass-through for Cat I/II (Sec 115UB); fund-level MMR tax for Cat III. | Concessional hybrid tax pass-through on dividends and interest. |
| Performance Fees | Prohibited; flat Total Expense Ratio (TER). | Permitted; management fee + profit share above hurdle. | Permitted; standard "2 and 20" structure. | Management fees to REIT manager; no carry. |
Why High-Net-Worth Individuals Choose PMS
Portfolio Management Services occupy a specialized institutional niche between retail mutual funds and private alternative funds:
┌────────────────────────────────────────┐
│ Unique Value Drivers of the PMS │
└───────────────────┬────────────────────┘
│
┌───────────────────────────────────────┼───────────────────────────────────────┐
▼ ▼ ▼
┌──────────────────────────────┐ ┌──────────────────────────────┐ ┌──────────────────────────────┐
│ Direct Demat Ownership │ │ Unconstrained Alpha │ │ Client Transparency │
│ Every share resides directly │ │ Concentrated portfolios │ │ Real-time trade visibility, │
│ in client's own demat account│ │ (15 to 25 high-conviction) │ │ complete corporate action │
│ with individual voting rights│ │ unrestricted by retail caps │ │ tracking, direct tax bills │
└──────────────────────────────┘ └──────────────────────────────┘ └──────────────────────────────┘
Core Advantages of the PMS Architecture
- Direct Beneficial Ownership: Unlike mutual funds where investors own units of a collective trust, PMS clients retain direct ownership of every underlying share in their personal demat account. Dividends flow directly into the client's bank account, and bonus/rights shares accrue directly to the client.
- Concentrated Alpha Generation: Retail mutual funds face statutory single-stock concentration limits (max 10% in a single company) and hold 50 to 100+ stocks, leading to benchmark hugging. PMS managers construct focused portfolios of 15 to 25 high-conviction companies, maximizing active share and outperformance potential.
- Direct Tax Ownership and Tax Harvesting: In a mutual fund, an incoming investor indirectly inherits the unrealized capital gains of existing holdings. In PMS, the client’s tax cost basis is established on the exact day their capital buys each individual share, allowing personalized tax-loss harvesting to offset other personal capital gains.