Overview of portfolio managers in India
In India, portfolio managers are professionals or firms that provide personalized investment management services to high net worth individuals (HNIs), institutional clients, and other investors who are willing to pay a fee for professional management of their investment portfolios.
Portfolio managers in India are registered and regulated by the Securities and Exchange Board of India (SEBI), which is the country’s primary regulator for the securities markets. SEBI sets the rules and regulations governing the operations of portfolio managers and also specifies the qualifications and experience required for individuals and firms to obtain a portfolio management license.
Portfolio managers offer a range of services including portfolio construction, asset allocation, investment selection, risk management, and performance reporting. They work closely with clients to understand their investment objectives, risk tolerance, and liquidity requirements, and create customized investment strategies to meet these needs.
Some of the key players in the portfolio management industry in India include large banks and financial institutions such as ICICI Bank, HDFC Bank, and Kotak Mahindra Bank, as well as independent firms like Motilal Oswal, IIFL Wealth Management, and Sanctum Wealth Management. These firms typically have a team of experienced investment professionals who manage client portfolios across a range of asset classes including equities, fixed income, and alternative investments.
Portfolio management services in India are typically offered on a discretionary basis, which means that clients delegate investment decisions to the portfolio manager. The portfolio manager has the authority to make investment decisions on behalf of the client, subject to the investment objectives and guidelines agreed upon with the client. In return for their services, portfolio managers charge a fee based on the value of assets under management, which is typically a percentage of the portfolio’s total value.
Types of portfolio management services
| Types of Portfolio Management Services | Description |
|---|---|
| Discretionary services | In discretionary services, the portfolio manager has complete authority to make investment decisions on behalf of the client without requiring prior approval from the client for each transaction. The client’s investment objectives, risk profile, and constraints are taken into account while making investment decisions. |
| Non-discretionary services | In non-discretionary services, the portfolio manager provides investment advice to the client, but the client retains the final decision-making authority for each transaction. The portfolio manager provides investment recommendations based on the client’s investment objectives, risk profile, and constraints. |
| Advisory services | In advisory services, the portfolio manager provides investment advice to the client but does not have the authority to make investment decisions on behalf of the client. The client retains the final decision-making authority for each transaction. The portfolio manager provides investment recommendations based on the client’s investment objectives, risk profile, and constraints. |
Registration requirements of a Portfolio Manager
| Registration Requirements of a Portfolio Manager | Description |
|---|---|
| Particulars of the applicants | This includes details about the applicant’s identity, such as name, address, and contact information, as well as details about the applicant’s experience, qualifications, and background. |
| Organization Structure | This includes information about the type of entity being formed, such as a company, partnership, or sole proprietorship, as well as details about the management structure and ownership. |
| Infrastructural Facilities | This includes details about the physical infrastructure and facilities required to operate as a portfolio manager, such as office space, equipment, and technology. |
| Business Plan (for three years) | This includes a detailed plan outlining the proposed business activities, marketing strategies, financial projections, and goals for the next three years. |
| Financial Information | This includes details about the applicant’s financial history, including financial statements, tax returns, and any outstanding debts or liabilities. |
| Other Information | This includes any other relevant information about the applicant, such as regulatory or legal issues, affiliations with other entities, or any other relevant details. |
| Business Information | This includes details about the applicant’s past and current business activities, including any relevant experience in the securities or financial industry. |
| Experience | This includes details about the applicant’s past experience as a portfolio manager or in a related field, such as investment management or financial analysis. |
| Additional Information | This includes any additional information that may be required by SEBI or that the applicant wishes to provide in support of their application. |
| Declaration | This includes a declaration by the applicant stating that all information provided in the application is true and accurate, and that they will comply with all SEBI regulations and guidelines. |
Before issuing a certificate of registration, the regulator will ensure that the:
| Registration Requirements | Description |
|---|---|
| Applicant | The applicant must be a body corporate. |
| Infrastructure | The applicant must have adequate office space, equipment, and manpower to effectively discharge the activities of a portfolio manager. |
| Compliance Officer | The applicant must have appointed a compliance officer. |
| Principal Officer Qualifications | The principal officer of the applicant must have a professional qualification in finance, law, accountancy or business management, and experience of at least five years in related activities in the securities market. They must also have the relevant NISM certification specified by the regulator from time to time. |
| Employee Qualifications | The applicant must employ at least one person who has a graduation from a recognized university or institution and experience of at least two years in related activities in the securities market. |
| Regulatory Actions | The regulator will verify if any disciplinary action has been taken against a person directly or indirectly connected with the applicant. |
| Net Worth | The applicant must fulfill the net worth requirement of Rs. 5 crore. |
| Litigation | The applicant, its directors, partners, principal officer, compliance officer, or employees must not be involved in any litigation connected with the securities market that has an adverse bearing on the business of the applicant. |
| Criminal Record | The applicant, its directors, partners, principal officer, compliance officer, or employees must not have been convicted for any offense involving moral turpitude or found guilty of any economic offense. |
| Fit and Proper | The applicant must be a fit and proper person. |
| Investor Interest | The grant of certificate to the applicant must be in the interest of investors. |
| Validity | The certificate of registration granted under SEBI Portfolio Managers regulations shall be valid unless it is suspended or cancelled by the regulator. |
Responsibilities of a Portfolio Manager
| Responsibilities of a Portfolio Manager |
|---|
| – The discretionary portfolio manager shall manage the funds of each client individually and independently. |
| – The non-discretionary portfolio manager shall manage the funds in accordance with the directions of the client. |
| – The portfolio manager shall not accept funds or securities worth less than fifty lakh rupees from a client. |
| – The portfolio manager shall act in a fiduciary capacity with regard to the client’s funds. |
| – The portfolio manager shall segregate each client’s holding in securities in separate accounts. |
| – The portfolio manager shall keep the funds of all clients in a separate account maintained by a Scheduled Commercial Bank. |
| – The portfolio manager shall transact in securities within the limitations placed by the client under the RBI Act. |
| – The portfolio manager shall not derive any direct or indirect benefit out of the client’s funds or securities. |
| – The portfolio manager shall not borrow funds or securities on behalf of the client. |
| – The portfolio manager shall not lend securities held on behalf of the clients to a third person. |
| – The portfolio manager shall handle complaints from clients properly and in a timely manner. |
| – The portfolio manager shall ensure that anyone involved in distributing their services is compliant with regulations. |
Cost, expenses and fees of investing in PMS
Cost, expenses, and fees associated with investing in PMS according to SEBI:
| Type of Cost/Expense/Fee | Description |
|---|---|
| Fixed Cost | These are fixed expenses that the investor has to pay regardless of the performance of the portfolio. They include management fees, custody fees, brokerage fees, and administrative expenses. These fees are usually charged as a percentage of the assets under management (AUM) and may range from 1% to 3% per annum. |
| Performance-Linked Cost | These are expenses that are charged based on the performance of the portfolio. They are usually charged as a percentage of the profits generated by the portfolio over a benchmark or hurdle rate. This fee is also known as the performance fee or incentive fee and may range from 10% to 30% of the profits generated. |
| High Watermark Principle | The high watermark principle is a method used to calculate the performance-linked cost. According to this principle, the performance fee is only charged if the portfolio generates profits that exceed the previous highest level of profits achieved. This ensures that the investor does not pay performance fees for losses incurred in previous periods. |
| Hurdle Rate | The hurdle rate is a predetermined minimum rate of return that the portfolio has to achieve before the performance-linked cost is charged. This rate is set by the portfolio manager and is usually higher than the benchmark return. |
| Catch Up/No Catch Up Concept | The catch-up concept is used to calculate the performance-linked cost. It allows the portfolio manager to receive a higher percentage of the profits once the portfolio generates returns that exceed the hurdle rate. The no catch-up concept, on the other hand, does not allow the portfolio manager to receive a higher percentage of profits once the hurdle rate is exceeded. This is usually specified in the agreement between the investor and the portfolio manager. |
Direct access facility offered by PMS
Direct access facility is an add-on service offered by portfolio management services (PMS) providers to their clients. In this facility, the clients are provided with direct access to their investment portfolio, enabling them to view real-time updates and transactions in their portfolio.
Here are some key differences between regular PMS plans and PMS plans with direct access facility:
- Transparency: Direct access facility provides complete transparency to the clients by allowing them to view the transactions and investments made on their behalf in real-time. In regular plans, clients only receive periodic updates on their portfolio performance.
- Flexibility: Clients with direct access facility can make their investment decisions and execute trades on their own. In regular plans, the portfolio manager makes investment decisions on behalf of the clients.
- Cost: Direct access facility usually comes with a higher fee as compared to regular PMS plans due to the additional services provided.
The role of Investment Advisers in PMS plans with direct access facility is to guide the clients in making informed investment decisions. Investment Advisers work closely with the clients, helping them understand the risks and opportunities associated with different investment options. They also assist in setting investment objectives, designing the investment strategy, and monitoring the portfolio’s performance.
In summary, direct access facility is a value-added service provided by PMS providers to offer more flexibility and transparency to clients. Investment Advisers play a crucial role in guiding clients in making informed investment decisions while using this facility.
SEBI requirements on performance disclosure
SEBI has mandated the following requirements on performance disclosure for Portfolio Managers:
- Portfolio Managers must disclose their performance track record in their disclosure document and on their website. The disclosure must include the returns of the portfolio for each year since inception or for at least the last five years, whichever is shorter.
- The performance of the portfolio must be disclosed net of all fees and charges.
- The disclosure must be made in a standardized format that includes the following information:
- Absolute returns of the portfolio for each year since inception or for at least the last five years, whichever is shorter.
- Benchmark returns for the same period.
- Risk metrics, including standard deviation, beta, and Sharpe ratio.
- Asset allocation of the portfolio.
- Portfolio Managers must disclose the performance of each client account on a quarterly basis. The disclosure must include the returns of the client’s portfolio for the previous quarter, the current year-to-date returns, and the returns since the client account was opened.
- Portfolio Managers must also disclose the performance of their model portfolios, if any. The disclosure must include the returns of the model portfolio for each year since inception or for at least the last five years, whichever is shorter, and the benchmark returns for the same period.
- Any advertisements or marketing materials that contain performance information must comply with the disclosure requirements set by SEBI.
These requirements are aimed at ensuring transparency and consistency in the performance reporting of Portfolio Managers, thereby helping investors make informed investment decisions.
