Category: Investment Management

Portfolio Management Services

Portfolio Management Services

As per the latest report from Credit Suisse, the total Indian household wealth stood at $5 trillion while the country is home to 2,45,000 millionaires. This report also mentions that the number of millionaires is expected to reach 372,000 while the total household income is likely to grow by 7.5% annually to touch $7.1 trillion by 2022. This shows that the wealth in India has grown on an average of 9.2% per annum since Y2K which is faster than the global average of 6%.

As people become richer, it’s natural for them to wish for above-average returns from their savings. This gave rise to a new stream of wealth management which was entirely different from the traditional way of wealth management which targeted only certain individuals. The first market boom that started after the e-commerce bubble fueled this growth and the Portfolio Management Services (PMS) started flourishing in the Indian investment market.

What is Portfolio Management Services?

The PMS is a tailor-made professional service offered by the Portfolio Manager to cater the investments objective of a niche segment of clients, who can be individuals or institutional entities with high net worth. The investment solution provided can be an investment portfolio in stocks, fixed income, debt, cash, structured products and other individual securities, managed by a professional money manager, which can be tailored to meet specific investment objectives.

When an investor invests in PMS, he owns his individual securities, unlike a mutual fund where he owns a unit of that specific fund. The investor has the freedom and flexibility to tailor his portfolio to address personal preference and financial goals.  Even if the portfolio manager oversees hundreds of portfolios, he gives specific attention to give customised service to each account.

Who is a portfolio manager?

As per SEBI guidelines, “A portfolio manager is a body corporate who, pursuant to a contract or arrangement with a client, advises or directs or undertakes on behalf of the client (whether as a discretionary portfolio manager or otherwise), the management or administration of a portfolio of securities or the funds of the client”.

Different type of PMS services

There are three types of PMS services as explained below-


Under this type of PMS services, the fund manager takes investment decisions on behalf of the investor. The choice, as well as the timings of the investment decisions, rests solely with the Portfolio Manager.

Non Discretionary

In this type of PMS services, the fund manager suggests investment ideas, while the decision is made by the client. The choice, as well as the timings of the investment decisions, rests solely with the investor. However, the execution of trade is done by the portfolio manager.


In this type of PMS services, the portfolio manager only suggests the investment ideas. The choice, as well as the execution of the investment decisions, rests solely with the investor.

The process

When an investor opts for a PMS Service, a bank account and demat account are separately opened in the name of the investor and all investments are made in his name only. The investor and the portfolio manager enter into an agreement detailing the investment strategy, goals and other details. The investor can offer either a sum of up to Rs.25 lakh or stocks worth this much. PMS are offered on different types. In the discretionary model, the manager takes investment decisions and has the power of attorney to manage the investor’s demat account. In nondiscretionary, he merely suggests investment ideas, the rest is the investor’s prerogative. Accordingly, any income or dividend coming out of the investment made will also be credited to the investor’s bank account and the shares will be held in the demat account of the investor.

The regulatory guidelines

After the subprime, the Market watchdog SEBI has tightened regulations for the Portfolio management services. Every fund manager should avail proper license from SEBI. Further, before giving a PMS license, the market regulator insists on previous experience of the applicant in related activities and managing funds. Once this is met, the portfolio manager should put an application with SEBI along with a Non-refundable fee of Rs.100000 and while grading the certificate the fund manager has to pay registration fees of Rs.1000000. The certificate is valued for a period of three years, which have to be renewed before it’s expire with a renewal fee of Rs. 500000. The guidelines put forward that the portfolio manager should have required capital adequacy, with a minimum net worth of 2 Crs. SEBI instinct that the new investor should bring a minimum value of Rs.2500000 to avail the PMS services of a portfolio manager.

The fee structure

Most of the PMS services charges were fixed before 2008. The PMS products with performance-driven fees were popular in 2008 and early 2009 while the interest for these waned after the stock market plunged. In 2010, the regulator mandated ‘High watermark principle’ to be used as the basis of sharing profits from the portfolio returns as a management fee. This implies that the investor is charged a fee only in case there is a real addition to the capital introduced by him. This is a unique characteristic which offers a low cost opportunity for optimisation of returns generated by competent portfolio managers with robust track records.

The SEBI’s Portfolio Management Regulations have not prescribed any scale of the fee to be charged by the portfolio manager to its clients. However, the regulations provide that the portfolio manager shall charge a fee as per the agreement with the client for rendering portfolio management services. The fee so charged may be a fixed amount or a return based fee or a combination of both. The portfolio manager shall take specific prior permission from the client for charging such fees for each activity for which service is rendered by the portfolio manager directly or indirectly.

The history of PMS in India

The PMS got regulated in India on 7th Jan 1993, when SEBI issued the Securities and Exchange Board of India (Portfolio Managers) Regulations, 1993 which marked the beginning of PMS as a formal investment vehicle in India. The SEBI issued the guidelines within one year of its existence, this shows the importance of this service in Indian capital market. The Parag Parikh Financial Advisory Services Ltd. was the first advisory firm to launch the PMS service in India in Oct 1996.

In the year 2000, ICICI Prudential launched its PMS services and thus become the first institutional participant in this services. Even though it was started in the first half of late 90’s and 2000, this service was not popular among the investors. This became popular on the bull run of 2005-2008, during which the PMS providers increased from 60 to 130 between in Mar 2004 to Mar 2006.

Then came the real blow “the subprime of 2008”. As per SEBI data, the AUM of discretionary PMS products declined by 40%, but the AUM for the Non discretionary PMS products increased by 26% from Dec 2010 to Dec 2011.

The way ahead

The investor’s interest towards PMS services as an investment option is apparent from the 50% increase in the number of clients over the last one year. The AUM for these accounts has also seen an incremental growth, with the total AUM stands at Rs.2.14 trillion, a growth of 35% in 1 year. This compares to 24% growth in the last 12 months.



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