Role of PMS in investors' portfolios

This chapter is the heart of the certification. A distributor sells PMS to people who could just as easily buy a mutual fund, a SIF or an AIF, so you must be able to say exactly what a PMS is, who may offer it, what it costs to enter, and when it belongs in a client's plan. Expect several questions straight from these pages.

What a portfolio manager is

Under the SEBI (Portfolio Managers) Regulations, 2020, which replaced the 1993 regulations, a portfolio manager is a body corporate that, under a contract with a client, advises, directs or undertakes the management or administration of a portfolio of securities or funds of the client. The manager must hold a SEBI registration, maintain a net worth of at least ₹5 crore, and appoint a qualified principal officer and compliance officer. The service is called portfolio management services, and each strategy is published as an investment approach with its objective, the kinds of securities it buys, the basis of selection, allocation limits, benchmark, indicative tenure and risks.

Three kinds of service are permitted:

• Discretionary PMS. The manager decides what to buy and sell within the agreed investment approach and executes without consulting the client on each trade. The securities sit in the client's own demat account; the manager operates it through a limited power of attorney. This is the dominant model in India.
• Non-discretionary PMS. The manager recommends and executes, but only on the client's instructions. The client keeps the final say on every transaction.
• Advisory. The manager gives advice; the client executes on her own. No custody, no execution.

In every case the client owns the securities directly. There is no pooling, no units, no NAV. Each client's account is accounted for separately, and the manager cannot hold listed securities of the client in its own name.

The ₹50 lakh minimum and who may invest

A portfolio manager may not accept less than ₹50 lakh from a client, as funds, securities or a mix, with securities valued at market price on the date of transfer. The limit was raised from ₹25 lakh in 2020. Clients onboarded under the old limit could continue, but every new account must meet ₹50 lakh. Partial withdrawals are allowed only if the value left in the portfolio stays at or above the minimum; a fall below ₹50 lakh caused by market movement does not force a top-up or closure.

Two groups get relaxations. Accredited investors certified under SEBI's framework may invest below ₹50 lakh, and large value accredited investors (₹10 crore or more with the manager) may agree to terms that depart from some standard requirements. Separately, investors in an alternative investment fund may use co-investment portfolio management services to invest alongside the fund in unlisted securities through a PMS structure. For the ordinary HNI, ₹50 lakh is the number to remember.

Why a client chooses a PMS

The pitch is not higher returns; nobody can promise those. The genuine advantages are structural:

• Direct ownership and transparency. The client sees every holding in her demat account and every trade in her statement.
• Concentration and flexibility. No regulatory 10% cap per stock or sector limits as in mutual funds; a manager can run 15 to 25 positions with conviction.
• Customisation. Non-discretionary and advisory mandates can exclude sectors, stagger entry, or respect an existing holding the client does not want sold.
• Tax control. Losses in the account are the client's own and can be set off; gains are realised only when the manager sells.
• Access. Direct communication with the manager and strategy-level reporting.

The costs are equally structural: a high entry ticket, fees set by agreement rather than capped by a TER formula, tax on every sale the manager makes, less diversification, and wide dispersion between managers and even between clients of the same approach, because each account is built at a different time and price.

PMS against mutual funds, SIFs and AIFs

The exam loves this comparison. Keep the four columns straight:

• Ownership. Mutual fund and SIF: units of a pooled scheme. PMS: securities in the client's own demat. AIF: units of a privately pooled fund.
• Minimum. Mutual fund: none of note. SIF: ₹10 lakh per investor per AMC. PMS: ₹50 lakh. AIF: ₹1 crore (₹25 lakh for employees and directors of the manager).
• Regulation. Mutual funds and SIFs under the SEBI (Mutual Funds) Regulations, 1996 and the 2025 SIF framework; PMS under the 2020 Portfolio Managers Regulations; AIFs under the SEBI (Alternative Investment Funds) Regulations, 2012.
• Diversification rules. Mutual funds carry SEBI limits per issuer and sector; SIFs may take limited short exposure through derivatives; a PMS has only the limits in its investment approach, plus caps on unlisted and low-rated debt; AIFs follow category-specific limits.
• Fees. Mutual fund TER capped by slab; PMS fees agreed in the client agreement, with SEBI rules on high-water mark, no upfront fee and exit load caps; AIF fees per the placement memorandum.
• Tax. Mutual fund and SIF investors are taxed only on redemption; a PMS client is taxed on each sale and each dividend; Category I and II AIFs pass income through to investors, Category III is taxed at the fund level.
• Distributor certificate. NISM-Series-V-A for mutual funds, V-D for SIFs, XXI-A for PMS.

Where a PMS sits in the client's plan

Treat a PMS as a satellite or a concentrated core within the equity allocation, never as the emergency fund or the money for a goal three years away. Suppose a client has ₹5 crore of financial assets and a 60% equity target, so ₹3 crore in equity. If she wants a third of that actively managed in a concentrated style, ₹1 crore can be split between two portfolio managers at ₹50 lakh each; ₹90 lakh could support only one such relationship, since each manager must receive at least ₹50 lakh. The rest stays in diversified funds for liquidity and lower cost.

The distributor's job is suitability: match the approach's risk and horizon to the client's profile, explain the disclosure document and the fee illustration, set expectations about dispersion and tax, and never present the ₹50 lakh minimum as a sign of superior returns.

If you remember one line: a PMS is a contract, not a product. The client owns the securities, the manager owns the decisions, and the regulations set the floor on who may play.