‘HNIs ditch mutual funds for high-conviction AIFs and PMS bets’

As India’s affluent investors grow more discerning, there’s a clear pivot away from off-the-shelf mutual funds to more customised, high-conviction strategies offered by Portfolio Management Services (PMS) and Alternative Investment Funds (AIFs). In this exclusive interview with Fortune India, Prashasta Seth, CEO of Prudent Investment Managers LLP, explains how HNIs are now seeking deeper engagement with concentrated themes, private market access, and structured strategies. He decodes the behavioural shift towards embracing illiquidity in return for differentiated alpha.

Edited excerpts:

What are the key behavioural or market factors prompting affluent investors to move away from traditional liquid instruments towards less liquid options like PMS and AIFs?

High-net-worth investors in India are gradually shifting away from conventional mutual funds, spurred by disappointment with mass-market returns and off-the-rack strategies. With market cycles becoming increasingly shorter and more sophisticated, there's an increasing understanding that standardised products might no longer provide stable alpha. HNIs are thus increasingly turning to Portfolio Management Services (PMS) and Alternative Investment Funds (AIFs), which are customised, exclusive, and high-conviction strategies typically uncorrelated to larger markets.

This represents a change from focusing on liquidity to a more specialised, strategic plan, at least for a part of their portfolio. Some of the reasons are the demand for customised portfolios, reduced interest in benchmark-cozy funds, discipline via lock-ins, and increased willingness to deploy long-term capital. Individually and collectively, these represent a mature, goal-driven attitude among India's high-net-worth investors.

Additionally, exposure to unlisted markets isn’t available through the traditional markets. Investors have seen companies like Nykaa, Eternal, PB Fintech, etc, starting small and becoming multi-billion-dollar companies before listing and using AIF/PMS options to participate in these high-growth companies from an early stage and generate multifold returns, which might not be possible in traditional liquid instruments

How are sophisticated investors evaluating the risk-reward trade-offs of illiquidity, especially in a market where alpha is harder to generate through conventional mutual funds?

Illiquidity is no longer considered a limitation; it's becoming more of a thought-out commitment. Experienced investors are considering it in terms of:

• Volatility control: Illiquidity forestalls knee-jerk reactions and maintains investment thesis integrity.

• Access to alternative assets: Most AIFs feature private credit, pre-IPO investments, or structured approaches beyond the reach of mutual funds.

• A conventional high-net-worth portfolio may now allocate 20-30% to these vehicles, trading illiquid for greater return potential over 3-5 years.

Having said that the general expectation would be to generate 20%+ CAGR returns in the illiquid instruments (ideally 25% returns) to compensate for additional risks and lack of liquidity that the investor is signing for.

Having said that the general expectation would be to generate 20%+ CAGR returns in the illiquid instruments (ideally 25% returns) to compensate for additional risks and lack of liquidity that the investor is signing for.

In what ways are PMS and AIF managers using concentrated, thematic, or differentiated strategies to justify the illiquidity premium in client portfolios?

PMS and AIF managers today are going beyond traditional portfolio construction—they are building narratives rooted in conviction and deep insight. Their approach reflects a strategic blend of foresight, flexibility, and thematic focus.

One key technique is taking concentrated bets, typically managing compact portfolios of 15-25 high-conviction stocks, which allows for sharper alpha generation. They are also early movers in identifying high-growth themes such as China+1 opportunities, digitisation-led transformation, and India’s manufacturing resurgence.

Unlike conventional mutual funds that operate within rigid category boundaries, PMS and AIF managers enjoy flexible mandates that let them move freely across market capitalisations and sectors, enabling more dynamic positioning. Additionally, AIF structures—especially Category II and III—offer access to alternative strategies like structured debt, pre-IPO investments, and other niche plays, giving investors a differentiated edge in their portfolios.

These differentiated strategies justify the illiquidity by providing a value proposition that's difficult to match elsewhere.

What regulatory or structural evolutions in India’s PMS and AIF space are giving high-net-worth investors more confidence in deploying long-term, lock-in capital?

The Sebi (Securities and Exchange Board of India) has played a key role in this transformation by introducing greater transparency, stricter entry norms, and a stronger focus on investor suitability. These changes have helped reposition PMS and AIFs from being niche or opaque offerings to credible and sophisticated wealth-creation vehicles for discerning investors. Key developments driving this shift include higher minimum investment thresholds—₹50 lakh for PMS and ₹1 crore for AIFs—which ensure that only informed, risk-appropriate investors participate.

The Sebi has also mandated periodic disclosures and audited reporting, making these products more transparent. The increasing adoption of digital tools, such as real-time dashboards and performance-tracking interfaces, has further enhanced investor comfort and control. Additionally, the adoption of institutional-grade practices in governance, research, and risk management has brought greater professionalism to the ecosystem, helping to attract long-term capital with confidence.