Types of PMS, structure, registration requirements, responsibilities, costs/fees, direct access, performance disclosure
Portfolio management balances risk and return by selecting/managing a basket of assets to design customized investment solutions. A Portfolio Manager is a body corporate that, under a contract, advises, directs or undertakes the management/administration of a client's securities portfolio or funds (whether discretionary or otherwise).
| Service | How it Works |
|---|---|
| Discretionary | Manager exercises full/partial discretion to invest/manage funds per the contract — based on a standard strategy or customized to client |
| Non-Discretionary | Manager executes trades only per client's specific direction; client decides what/when to buy or sell, manager only executes with client consent |
| Advisory | Manager only suggests ideas/non-binding advice; client decides & executes — typically used by institutional clients with their own management capability who hire country/sector experts |
A Portfolio Manager must be a body corporate — an entity with independent legal existence — operating under a contract/arrangement with the client to manage securities or funds, whether in a discretionary capacity or otherwise.
A Certificate of Registration from SEBI is mandatory. Application is made in Form A of Schedule I with a non-refundable fee, covering:
Certificate remains valid unless suspended or cancelled by SEBI — no fixed renewal cycle mentioned, continuity is conditional on compliance.
| Cost Type | Description |
|---|---|
| Fixed Cost | Charged regardless of outcome — typically a fixed % of AUM (e.g., ~1%) plus brokerage/transaction costs |
| Performance-Linked Cost (Profit-Sharing Fee) | Additional fee tied to performance targets agreed at signing — incentivizes the manager but can be high; investors must track total cost carefully |
Fees are charged only when the portfolio value exceeds its previous highest recorded value (the "high watermark") — preventing fees on recovery from a prior loss.
Corpus ₹50 lakh rises to ₹60 lakh in Year 1 → profit-sharing fee calculated on the ₹10 lakh gain (new high watermark = ₹60 lakh).
Year 2: portfolio falls to ₹55 lakh → no fee until it crosses the prior high of ₹60 lakh again. Fee accrues only when (a) the fund value exceeds the previous high watermark and (b) returns exceed the hurdle rate.
The minimum return threshold (specified in the agreement, e.g., 8%) below which no profit-sharing fee is charged; fee calculation begins only once this rate is crossed.
| Concept | Meaning |
|---|---|
| No Catch-up | Only the incremental gains above the hurdle rate are used for the fee calculation |
| Catch-up | Once the hurdle is crossed, the fee is calculated on the entire gain from the first rupee of profit (manager "catches up") |
Mirroring the mutual fund "Direct Plan" concept, PMS providers must offer a Direct Access facility — investors can invest directly without an intermediary/distributor, cutting out commission and lowering costs/expenses, thereby raising net returns.
| Aspect | Direct Access | Regular Plan (via Distributor) |
|---|---|---|
| Intermediary | None | Broker/Distributor |
| Cost | Lower | Higher (includes distributor commission) |
| Fund Management | Identical — no difference in process/performance | Identical |
Advisers must (a) assess whether the client genuinely needs PMS over other instruments, (b) evaluate suitability of the direct access route based on the client's awareness/familiarity with PMS, and (c) guide on whether discretionary, non-discretionary, or advisory service best fits the client — potentially improving the investor's net returns.
| Aspect | PMS | Mutual Fund |
|---|---|---|
| Minimum Investment | ₹50 lakh | Low ticket size (often a few thousand rupees / SIP) |
| Ownership of Securities | Securities held in client's own demat/account, segregated per client | Pooled portfolio; investor holds units representing proportional interest |
| Customization | High — tailored to individual client | Standardized scheme for all investors |
| Regulation | SEBI (Portfolio Managers) Regulations, 2020 | SEBI (Mutual Funds) Regulations, 1996 |
| Fee Structure | Fixed + performance-linked (high watermark, hurdle rate) | Expense ratio (uniform for all investors in a plan) |
| Direct Route | Direct Access facility | Direct Plan |
1. As per SEBI regulations, a portfolio manager cannot accept funds or securities from a client worth less than:
2. In a non-discretionary PMS arrangement, who decides what and when to buy or sell?
3. The minimum net worth requirement for an entity to be registered as a Portfolio Manager with SEBI is:
4. Under the High Watermark principle, if a PMS corpus rises from ₹50 lakh to ₹60 lakh and then falls to ₹55 lakh the next year, when can the manager next charge a profit-sharing fee?
5. The "Direct Access" facility offered by PMS providers is most analogous to which mutual fund concept?