Portfolio manager
Also written Portfolio Management Service · Portfolio Management Services
A body corporate registered with SEBI that, under a contract with a client, advises on or manages that client's securities or funds — discretionary, non-discretionary or advisory.
In plain language
A portfolio manager is a body corporate — a company, not a single person. It works under a contract or arrangement with a client. Under it, the manager advises on, directs or takes over the management or administration of the client's portfolio. That portfolio may be securities or the client's funds.
Portfolio managers are registered and regulated under the SEBI (Portfolio Managers) Regulations, 2020. Only SEBI-registered entities may offer portfolio management services.
The service comes in three grades. The difference is who decides and who carries out the trades:
- Discretionary — the manager decides how the funds are invested. Each client's money is managed individually and separately. It must not take on the character of a mutual fund.
- Non-discretionary — the manager follows the client's directions. The investor decides what to buy or sell, and when. The manager carries it out.
- Advisory — the manager offers investment ideas the client need not follow. The investor decides and carries out the trades. Institutional clients typically use this.
India's PMS regulations date from January 1993. They came before the mutual fund regulations.
How it works
The registration and conduct rules carry the numbers the paper asks for.
To register: a body corporate; certificate of registration from SEBI; application in Form A of Schedule I with a non-refundable fee; adequate office space, equipment and manpower; a compliance officer; a principal officer with a professional qualification in finance, law, accountancy or business management, at least five years' experience in related securities-market activities and the relevant NISM certification; at least one further employee who is a graduate with two years' experience; net worth of Rs 5 crore; and a fit and proper person throughout.
Once registered: the portfolio manager shall not accept from a client funds or securities worth less than Rs 50 lakh. It must act in a fiduciary capacity with regard to the client's funds, segregate each client's holdings in separate accounts, and keep all clients' funds in a separate account with a scheduled commercial bank. It may invest a maximum of 30% of a client's portfolio in securities of its own associates or related parties, and only with a one-time written consent. It may not invest in below-investment-grade securities, may not borrow funds or securities on the client's behalf, may not lend client securities except as provided, and may not derive any direct or indirect benefit out of client funds.
Fees come in two layers — a fixed fee, and a performance-linked profit share governed by a hurdle rate (the return below which no profit share arises), a high water mark (the previous highest value on which fees were charged) and a catch-up / no catch-up term deciding whether the share is computed on all the gains or only those above the hurdle. Returns are computed per financial year.
A worked example
Mr Rao places Rs 80,00,000 with a discretionary PMS — comfortably above the Rs 50 lakh regulatory minimum. The terms: 1% fixed fee, plus a 20% profit share above a hurdle rate of 8%, no catch-up, subject to a high water mark.
| Year | Opening | Closing | Return | Above hurdle? | Above high water mark? | Profit-share base | Share at 20% |
|---|---|---|---|---|---|---|---|
| 1 | 80,00,000 | 96,00,000 | 20.0% | Yes | Yes (first year) | Rs 9,60,000 | Rs 1,92,000 |
| 2 | 96,00,000 | 88,00,000 | −8.3% | No | No | Nil | Nil |
| 3 | 88,00,000 | 1,02,00,000 | 15.9% | Yes | Yes (HWM Rs 96,00,000) | Rs 6,00,000 | Rs 1,20,000 |
Year 1: the hurdle of 8% on Rs 80,00,000 is Rs 6,40,000, putting the hurdle value at Rs 86,40,000. Under a no catch-up term only the excess counts — 96,00,000 − 86,40,000 = Rs 9,60,000 — so the share is Rs 1,92,000. The high water mark is now Rs 96,00,000.
Year 2: the portfolio falls. No profit share, because the value is below the high water mark. The 1% fixed fee is still charged, in this year as in every other.
Year 3: the return of 15.9% clears the hurdle, and Rs 1,02,00,000 clears the high water mark of Rs 96,00,000 — so a share arises, but only on the Rs 6,00,000 above the previous high.
The last line is the whole reason the principle exists. Without a high water mark the year 3 base would have been the full Rs 14,00,000 of the year's gain and the fee Rs 2,80,000 — meaning Rs 1,60,000 of it was a second charge for recovering ground the client had already paid for in year 1.
Why NISM asks about it
Chapter 12 (Portfolio Manager) end to end — 12.2 on the three types of service, 12.4 on registration, 12.5 on responsibilities, 12.6 on costs and fees, 12.7 on the direct access facility and 12.8 on performance disclosure. The numbers are asked directly: the Rs 50 lakh client minimum, the Rs 5 crore net worth, the 30% associate cap, the five-year principal officer experience. Expect at least one arithmetic question on hurdle rate and high water mark, and a definition question separating discretionary from non-discretionary from advisory.
Common exam traps
- Rs 50 lakh is the minimum the manager may accept from a client; Rs 5 crore is the manager's own net worth. Both figures appear in the options of the same question.
- Non-discretionary is not advisory. In non-discretionary the client decides and the manager executes; in advisory the client decides and executes, and the advice is non-binding.
- A discretionary manager must manage each client individually and independently, in a manner that does not partake of the character of a mutual fund. That sentence is the regulatory line between PMS and a pooled scheme.
- The high water mark is a level; the hurdle rate is a rate. A year can clear the hurdle and still pay nothing because the value sits below the previous high — as year 2 to 3 above shows.
- No catch-up means the share is computed only on the excess over the hurdle. Catch-up computes it from the first rupee of gain once the hurdle is crossed. The difference is real money.
- The 30% associate limit is a cap with consent, not a prohibition — a one-time written consent from the client is required.
- A portfolio manager cannot borrow on the client's behalf and cannot buy below-investment-grade securities. Neither restriction applies to every fund structure, so do not generalise them.
Where this is taught
- Series XXI-B · Chapter 1: Investment Landscapeintroduced here
- Series XIX-D · Chapter 2: Types of Investmentsintroduced here
- Series X-A · Chapter 5: Introduction to Indian Financial Marketsintroduced here
- Series III-A · Chapter 12: SEBI (Stock Brokers) Regulations, 2025introduced here
- Series SEBI-ICE · Chapter 14: About SEBIintroduced here
- Series XXI-A · Chapter 7: Role of Portfolio Managersintroduced here
- Series XXI-B · Chapter 7: Role of Portfolio Managers
- Series X-A · Chapter 12: Portfolio Manager
Related terms
- Principal officerThe named individual at a non-individual intermediary who carries personal regulatory responsibility for the advisory business, and who must personally hold the prescribed qualification and NISM certification.
- Investment adviserAny person who, for consideration, is in the business of giving investment advice, including anyone holding out as one — but not an AMFI-registered distributor whose advice is incidental to distribution.
- Asset allocationThe decision on how to distribute a client's wealth across asset classes — the first decision in building a portfolio, and the one that explains most of what the portfolio then does.
- Net worthEverything you own minus everything you owe — the one number that says where a household actually stands, and the starting point of any financial plan.
- Fiduciary capacityThe legal standing in which an investment adviser or portfolio manager must act — putting the client's interest ahead of its own and disclosing every conflict of interest as it arises.
- Hurdle rateThe minimum return that must accrue to investors before the manager earns any incentive fee — the threshold that turns a fund's profit into the manager's profit.
- Portfolio Management ServicesA tailored investment service where the client owns the securities directly in their own name, regulated under the SEBI (Portfolio Managers) Regulations, with a minimum investment of Rs 50 lakh.
- Eligible fund managerAn India-based, SEBI-registered fund manager meeting Section 9A conditions, who manages money for overseas "eligible investment funds" without making those funds taxable as Indian residents.
- Body corporateAn entity with a legal existence separate from the persons forming it, as defined in Section 2(11) of the Companies Act, 2013. Only a body corporate can register with SEBI as a portfolio manager.
- Breach listThe list of listed Indian companies where combined foreign holding by FPIs, NRIs or the overall sectoral cap has hit its permitted ceiling, so an NRI cannot place a fresh buy order in that stock.
- Modern Portfolio TheoryMarkowitz's framework for building portfolios on expected return and risk together, in which the co-movement between holdings — not their individual riskiness — decides the risk of the whole.
- Private EquityEquity capital raised by companies from external investors without going to the public markets — direct investment in businesses that are not listed on a stock exchange.
- Retail Individual InvestorUnder the SEBI ICDR Regulations, 2018, an individual investor who applies or bids for specified securities for a value of not more than Rs 2 lakh.
- Managed portfolioAn investment made through a professionally managed vehicle that pools investors money — a mutual fund, AIF, portfolio manager or collective investment scheme — rather than bought directly.
- Non-discretionary serviceA portfolio management service in which the client decides every buy and sell and the portfolio manager only executes — the manager must consult the client for every transaction.
- Tippee liabilityLiability of a person who trades on a tip about confidential information, such as an impending large order — requiring proof that the tipper owed confidentiality, the tippee knew of the breach, and traded anyway.
- Segregation of holdingsThe portfolio manager's duty to hold each client's securities in a separate account, and all clients' funds in a separate bank account with a Scheduled Commercial Bank.
- Co-investmentInvestment by a manager, sponsor or investor of a Category I or II AIF directly into an investee company that the AIF is itself investing in, alongside the fund rather than through it.
- Investment approachA broad outlay of the securities and permissible instruments a portfolio manager will invest in for a client, set out in the PMS agreement and tagged to exactly one strategy.
- Dealing teamThe team a portfolio manager must constitute to place and execute all orders under its written policies, working from a restricted dealing room with recorded lines and full audit trails.
- APMIThe Association of Portfolio Managers in India — the PMS industry body that prescribes benchmarks and valuation norms, standardises client documents and registers PMS distributors.
- PortfolioUnder the SEBI PM Regulations, the total holdings of securities and goods belonging to any person — the basket whose return is a weighted average but whose risk also depends on correlation.
- Co-investment Portfolio ManagerA category of portfolio manager that the SEBI PM Regulations exempt from several rules — the ₹50 lakh minimum per client, net worth at all times, and appointing a custodian.
- Advisory servicesThe PMS service type in which the portfolio manager only suggests ideas or gives non-binding advice; the investor both takes the decisions and executes the transactions.
- Weighted average priceTotal cost of a day's aggregated purchases (or sales) divided by total quantity — the price at which a portfolio manager must allocate aggregated trades to clients, pro rata.
- Proprietary tradeA trade a stockbroker executes for its own account with its own funds, not on behalf of a client — distinct from the client orders it routes through its exchange terminal.
- Alternative Investment FundA privately pooled investment vehicle registered with SEBI that raises money from select Indian or foreign investors under a defined investment policy — never from the public at large.
- Direct access facilityA facility requiring portfolio managers to let investors come to them directly, without a distributor, so that the investor avoids distribution costs — the PMS counterpart of a mutual fund direct plan.
- Catch-up and no catch-upTwo ways a PMS profit-sharing fee is calculated once returns cross the hurdle rate: 'no catch-up' charges only the gains above the hurdle; 'catch-up' charges the entire gain from the first rupee.
- Benchmark portfolioA reference portfolio, typically an index, matched in composition to a client's own portfolio so the client's actual returns can be fairly compared against it, comparing 'apple with apple'.