For High Net Worth Individuals (HNIs) and Family Offices, capital allocation decisions are no longer driven by headline returns alone. The real differentiator today is post-tax IRR, liquidity structure, and predictability of outcomes.

As portfolios grow larger, inefficiencies in taxation, exit timing, and asset management can materially impact long-term wealth creation. This is where AIF investments have increasingly entered serious capital allocation conversations, alongside Portfolio Management Services (PMS) and direct property ownership.

This blog takes a decision-making comparison approach, analysing tax-adjusted returns across AIF investments, PMS, and direct real estate using a ₹1 crore base allocation. The objective is to help HNIs evaluate where capital works harder after tax, not just on paper.

Understanding the Investment Structures Before Comparing Returns

Before analysing numbers, it is important to clarify how each structure functions from a tax, control, and execution standpoint.

Alternative Investment Funds (AIFs)

Alternative investment funds pool capital from sophisticated investors and deploy it across structured strategies such as private equity, credit, and real estate. For HNIs, AIF investments are attractive because they combine professional management with institutional-style access.

Key characteristics include:

• Defined fund tenure and strategy discipline
  Unlike ad-hoc investing, AIF investments follow a predefined mandate, which improves predictability of deployment and exits over the fund lifecycle.
  
• Tax pass-through (Category I & II)
  Most real estate and private credit funds fall under Category II, where income is taxed at the investor level, enhancing transparency in AIF returns.
  
• Professional risk management
  Fund managers use structured underwriting, diversification, and downside protection mechanisms, which materially influence long-term AIF performance.
  

Portfolio Management Services (PMS)

PMS offers discretionary equity-oriented portfolios managed on behalf of HNIs. While PMS provides customization, it operates within public market volatility.

Key characteristics include:

• Market-linked volatility
  PMS returns are highly dependent on equity cycles, making tax-adjusted predictability challenging.
  
• Shorter holding periods
  Frequent churn can reduce the proportion of gains qualifying for long-term capital gains.
  
• Higher effective tax leakage
  Tax inefficiencies directly impact net returns, especially for active strategies.
  

Direct Property Ownership

Direct real estate remains a traditional wealth asset, but scale introduces friction.

Key characteristics include:

• Operational involvement
  Leasing, maintenance, compliance, and exits require hands-on management.
  
• Illiquidity risk
  Exit timelines are uncertain, which affects realised IRR.
  
• Tax complexity
  LTCG benefits exist, but execution delays often dilute post-tax returns.
  

₹1 Crore Base Case – Assumptions for Fair Comparison

To maintain objectivity, the following assumptions are used across all three investment options.

Common Investment Assumptions

• Investment Amount: ₹1 crore
  
• Investment Horizon: 5 years
  
• Investor Profile: HNI in highest tax slab
  
• Return Metric: Post-tax IRR
  

Asset-Specific Return Assumptions

• AIF investments:
  
  • Target gross IRR: 16%
    
  • Holding period: 5 years
    
  • Structure: Category II real estate or credit fund
• PMS:
  
  • Gross CAGR: 14%
    
  • Annual churn impacting LTCG qualification
• Direct property:
  
  • Gross CAGR: 12%
    
  • Includes rental yield + capital appreciation
    

Tax Treatment Breakdown Across Investment Options

Taxation is the single biggest differentiator when comparing headline returns to realised wealth.

Taxation in AIF Investments

For Category II alternative investment funds, income is taxed at the investor level, while capital gains retain their nature.

• Long-Term Capital Gains (LTCG):
  20% with indexation benefits after 24 months.
  
• Indexation advantage:
  Inflation-adjusted cost base significantly improves post-tax outcomes.
  
• Impact on AIF returns:
  Proper structuring materially enhances net AIF performance versus headline IRR.
  

Taxation in PMS

PMS taxation depends on the underlying churn.

• Short-term capital gains:
  Taxed at slab rates (up to 30%).
  
• Long-term capital gains:
  10% beyond ₹1 lakh, but only if holding exceeds one year.
  
• Practical challenge:
  Active trading reduces the proportion of LTCG, impacting realised returns.
  

Taxation in Direct Property

Real estate taxation appears attractive on paper but is execution-sensitive.

• LTCG:
  20% with indexation after 24 months.
  
• Stamp duty and transaction costs:
  These costs reduce effective IRR but are often ignored in projections.
  
• Exit friction:
  Delays can distort holding period assumptions.
  

Post-Tax IRR Comparison – ₹1 Crore Investment Outcome

This is where comparative decision-making becomes tangible.

AIF Investments – Post-Tax Outcome

• Gross value after 5 years: ~₹2.1 crore
  
• Indexed cost adjustment: Improves tax efficiency
  
• Post-tax IRR: ~13–14%
  

Why it works:
Structured exits, disciplined deployment, and tax pass-through significantly protect net AIF returns.

PMS – Post-Tax Outcome

• Gross value after 5 years: ~₹1.93 crore
  
• Tax leakage due to churn: High
  
• Post-tax IRR: ~10–11%
  

Key limitation:
Tax inefficiency erodes compounding, even when gross performance appears competitive.

Direct Property – Post-Tax Outcome

• Gross value after 5 years: ~₹1.76 crore
  
• Indexation benefit: Helpful but offset by costs
  
• Post-tax IRR: ~9–10%
  

Hidden risk:
Liquidity and execution uncertainty often reduce realised returns.

Strategic Implications for HNIs and Family Offices

Beyond numbers, capital efficiency matters.

Where AIF Investments Fit Best

AIF investments are particularly suited for investors seeking:

• Predictable cash flow and exits
  Structured timelines improve capital planning.
  
• Professional execution at scale
  Institutional underwriting enhances downside protection.
  
• Optimised tax-adjusted wealth creation
  Indexation and pass-through taxation elevate AIF performance.
  

Role of PMS in a Portfolio

PMS works best as:

• A satellite allocation for tactical equity exposure
  
• Not the core vehicle for post-tax compounding
  

When Direct Property Still Makes Sense

Direct property may suit investors who:

• Have operational expertise
  
• Seek legacy or usage-driven ownership
  
• Can tolerate illiquidity and long exit cycles
  

Final Verdict – Choosing the Right Vehicle for Tax-Adjusted Returns

For HNIs evaluating capital deployment through a post-tax IRR lens, AIF investments increasingly outperform both PMS and direct property over medium-term horizons.

While PMS offers flexibility and liquidity, and direct property provides tangibility, alternative investment funds deliver superior balance across tax efficiency, professional management, and risk-adjusted outcomes.

For serious capital allocators, the conversation is no longer about what gives the highest gross return, but what compounds most efficiently after tax. On that metric, well-structured AIF strategies deserve a central role in modern HNI portfolios.