Portfolio Management Services (PMS) offer a regulated and professional framework for managing individual investment portfolios. These services are provided by SEBI-registered Portfolio Managers under the SEBI (Portfolio Managers) Regulations, 2020. PMS mandates are structured to cater to varying levels of investor involvement and discretion, enabling investment decisions to be aligned with pre-agreed objectives and risk profiles.
Broadly, PMS offerings fall into two categories: Discretionary and Non-Discretionary. While both operate under the same regulatory framework, they differ fundamentally in execution authority, client engagement, and permissible investment instruments.
This document outlines the key characteristics of each structure to provide clarity on their operational distinctions.
What Is Discretionary PMS?
In a Discretionary PMS, the Portfolio Manager executes investment decisions independently, based on the mandate agreed upon during client onboarding. This includes decisions related to asset allocation, security selection, rebalancing, and timing of trades.
Once the investment mandate is defined, no further transaction-level approvals are required from the client. This structure facilitates operational efficiency and adherence to the stated investment strategy.
Key Characteristics:
- Mandate Execution: The Portfolio Manager acts within pre-specified parameters defined by the client.
- Autonomous Decision-Making: Investment decisions are executed without requiring client intervention for each trade.
- Operational Continuity: Enables swift execution in dynamic market environments, reducing lag due to approval cycles.
Data Snapshot: According to SEBI’s Portfolio Managers data (November 2024), assets under management (AUM) for Discretionary PMS (excluding EPFO/PF mandates) stood at ₹4.59 lakh crore, reflecting a year-on-year increase of 29.4%. (Source: SEBI, Portfolio Managers Data, November 2024)
What Is Non-Discretionary PMS?
Under a Non-Discretionary PMS structure, the Portfolio Manager recommends investment opportunities, but execution is carried out only after receiving explicit approval from the client for each transaction.
This format allows for higher investor involvement, making it suitable for clients who prefer to retain decision-making control over their portfolios.
Key Characteristics:
- Client Approval Required: Each buy/sell decision is subject to investor confirmation.
- Advisory Role: The Portfolio Manager provides rationale and recommendations, but final execution remains client-driven.
- Higher Engagement: Investors evaluate each proposal and make informed choices on a case-by-case basis.
Data Snapshot: As per SEBI’s Portfolio Managers data (November 2024), Non-Discretionary PMS AUM (excluding EPFO/PF) stood at ₹2.81 lakh crore, marking a 16.6% year-on-year growth. (Source: SEBI, Portfolio Managers Data, November 2024)
Structural Comparison
| Feature | Discretionary PMS | Non-Discretionary PMS |
| Decision Authority | Portfolio Manager executes trades within mandate | Client approval required for each transaction |
| Client Involvement | Limited post-mandate | Continuous, transaction-specific |
| Control | Delegated | Retained |
| Execution Speed | High | Dependent on client response time |
| Risk Oversight | Managed by Portfolio Manager per defined profile | Evaluated per transaction by client |
| Flexibility | High | Subject to client availability and inputs |
| Permitted Instruments | Listed/traded securities, money-market instruments, direct-plan mutual funds | Same as Discretionary + up to 25% in unlisted securities (e.g., AIFs, REITs, InvITs) as per SEBI guidelines |
Regulatory Highlights
- Investment Universe:
- Discretionary PMS: Investment restricted to listed or traded instruments.
- Non-Discretionary PMS: May include up to 25% of client AUM in unlisted securities such as Alternative Investment Funds (AIFs), Real Estate Investment Trusts (REITs), Infrastructure Investment Trusts (InvITs), and unlisted debt/equity, as permitted by SEBI.
- Lock-in Period:
- No lock-in period is allowed under SEBI regulations. However, Portfolio Managers may levy exit loads subject to regulatory caps: 3% in Year 1, 2% in Year 2, 1% in Year 3.
- Performance Reporting:
- Discretionary PMS performance must be disclosed using the Time-Weighted Rate of Return (TWRR) method to ensure consistency and comparability.
- Minimum Investment:
- The minimum threshold to invest in PMS is ₹50 lakh, either as funds or in the form of securities.
Operational Considerations
Portfolio structure selection may depend on several objective criteria, including:
- Time Commitment: Discretionary PMS is more suitable for clients with limited bandwidth to evaluate ongoing market opportunities.
- Analytical Involvement: Non-Discretionary PMS enables investors to apply their own judgment to investment proposals.
- Delegation vs. Oversight: Clients prioritising execution efficiency may find discretionary formats better aligned to their needs, whereas those valuing control may consider the non-discretionary option.
- Risk Governance: In Discretionary PMS, the Portfolio Manager manages risk within the client profile. In Non-Discretionary PMS, risk is evaluated by the investor per transaction.
Summary
Both Discretionary and Non-Discretionary PMS models are governed by the same regulatory framework, but differ in the extent of execution control and client involvement. Investors are encouraged to evaluate the structural characteristics of each format in light of their operational preferences and investment experience.
Disclaimer
This content is for informational purposes only and does not constitute investment advice or an offer to invest in any Portfolio Management Service (PMS). PMS is regulated by SEBI under the Portfolio Managers Regulations, 2020. Past performance does not guarantee future results. Returns are subject to market and manager-specific risks. Investors should review the PMS Disclosure Document, understand the fee structure and associated risks before investing.
References
SEBI (Portfolio Managers) Regulations, 2020 SEBI Investor Education Portal – Portfolio Management Services SEBI Master Circular for Portfolio Managers, Jun 2024 SEBI Circular – Performance Reporting (TWRR) SEBI Circular – Portfolio Managers Amendment, Jan 2020 SEBI Circular – Disclosure Document Format, Jul 2023 SEBI Portfolio Managers Monthly Reports (AUM Data) SEBI Circular – Accredited Investors Framework, May 2021