📘 12.1 Overview of Portfolio Managers in India
📉 Risk
Risk refers to the possibility of losing the invested capital. Portfolio management aims to minimize risk through diversification and strategic asset allocation.
📈 Return
Return is the profit gained from investments. Portfolio managers focus on maximizing returns while controlling risks for investors.
💼 Portfolio Manager’s Role
A portfolio manager is a **body corporate** that manages or advises on securities or funds on behalf of the client. They are registered under the **SEBI (Portfolio Managers) Regulations, 2020** and can provide discretionary or non-discretionary services.
📜 SEBI Guidelines
Portfolio managers must be registered with **SEBI** to offer services. They are required to comply with all regulatory requirements, ensuring transparency and fairness in managing client funds.
📜 SEBI Regulations (1993)
The journey of **Portfolio Management Services** in India began in **January 1993** with the issuance of the **Securities and Exchange Board of India (Portfolio Managers) Regulations, 1993**. These were some of the first regulations issued by SEBI, underscoring the importance of PMS in India’s financial markets.
🏢 Asset Management Companies
AMCs provide a range of investment solutions, including equity, fixed income, and multi-asset strategies for investors.
📈 Brokerage Houses
Brokerage firms offer equity and commodity-based portfolio management services to clients, primarily targeting active traders and investors.
🏠 Boutique PMS Houses
Independent firms providing customized and high-end investment management services for high-net-worth individuals (HNIs).
📘 12.2 Types of Portfolio Management Services
🔧 PMS by Providers
🏢 Asset Management Companies
Asset management companies offer a wide variety of portfolio management services, including equity, fixed income, and multi-asset strategies.
📈 Brokerage Houses
Brokerage houses provide PMS services, mainly focusing on equity, commodities, and other investment instruments that are more suited to active traders.
🏠 Boutique PMS Houses
Independent boutique PMS houses offer personalized portfolio management services, focusing on high-net-worth individuals (HNIs) with bespoke strategies tailored to their financial goals.
🔧 PMS by Product Class
📈 Equity PMS
Focuses on equity investments with the aim of achieving capital appreciation through stock market investments.
📉 Fixed Income PMS
Invests in bonds and other fixed income instruments to provide stable, predictable returns while managing risk.
💎 Commodity PMS
Involves investing in commodities such as gold, silver, oil, etc., providing diversification and hedging against market volatility.
📊 Mutual Fund PMS
Combines a range of mutual funds to diversify the portfolio while managing risk effectively.
⚖️ Multi-Asset PMS
Utilizes a diversified approach, including equities, fixed income, commodities, and mutual funds to balance risk and return.
🔧 PMS by Service Type
📑 Discretionary Services
The portfolio manager makes all investment decisions on behalf of the client, following a predefined strategy or custom plan.
📅 Non-Discretionary Services
The client retains full control over investment decisions, and the portfolio manager executes trades as directed by the client.
🧠 Advisory Services
The portfolio manager provides investment advice, and the client is responsible for making the final decision and executing trades.
📘 12.3 Structure of PMS in India
📑 Portfolio Manager’s Structure
A portfolio manager is a **corporate entity** that manages or advises on the portfolio of securities or funds on behalf of the client. The portfolio manager’s structure involves various key roles, such as compliance officers and principal officers, ensuring proper functioning and compliance with SEBI regulations.
🔧 Key Roles and Functions
📊 Portfolio Management
The portfolio manager is responsible for making investment decisions, including selecting and managing securities, in line with the client’s financial goals and risk tolerance.
🔍 Client Interaction
Portfolio managers maintain transparent communication with clients, updating them on portfolio performance, market trends, and investment strategies.
📈 Risk Management
They ensure effective risk management by diversifying the portfolio, using hedging strategies, and adjusting investments based on market conditions.
📑 Reporting and Compliance
Portfolio managers are required to provide regular performance reports and ensure compliance with SEBI regulations, ensuring transparency in all dealings.
📜 Legal and Regulatory Framework
📑 SEBI Regulations
SEBI’s **Portfolio Managers Regulations, 2020** ensure that portfolio managers comply with the required legal and operational standards. This includes compliance with reporting, disclosure requirements, and operational transparency to safeguard the interests of investors.
📘 12.4 Registration Requirements of a Portfolio Manager
📑 Application for Registration
To act as a portfolio manager, obtaining a certificate of registration from **SEBI** is mandatory. The application must be made in **Form A of Schedule I**, along with a non-refundable fee. This form requires detailed information about the applicant’s organization and business plan.
🔧 Information Required for Registration
📝 Applicant Information
Details such as Name, PAN, and Address of the applicant.
🏢 Organization Structure
Information on the organizational structure of the applicant’s business.
📋 Business Plan
Three-year business plan, outlining the company’s growth strategy and objectives.
📊 Financial Information
Details of the capital structure, net-worth, major sources of income, etc.
🔧 Additional Information Required
📑 Disputes and Membership
Details of settled and pending disputes, and membership with stock exchanges.
💼 Business Activities
Information on the type of activities carried out, decision-making process, risk profiling procedure, and grievance redressal mechanisms.
📜 Experience
Experience in financial services, details of activities, and relevant certifications.
📃 Additional Documentation
Draft agreement with clients, draft disclosure document, and details of custodian, SEBI registration, etc.
🔧 Compliance Requirements
📋 Compliance Checks
Before issuing the certificate, SEBI will ensure the following:
- The applicant is a **body corporate**.
- Has necessary **infrastructure** to discharge the activities of a portfolio manager.
- Has appointed a **compliance officer** and the **principal officer** has professional qualifications in finance, law, or business management.
- Has a **net-worth** of at least **five crore rupees**.
- The applicant, its director, or partner is not involved in any **litigation** that adversely impacts the business.
- The applicant is a **fit and proper person**.
📝 Grant of Certificate
The certificate of registration granted is valid unless it is suspended or cancelled by SEBI. The grant ensures the portfolio manager complies with all the legal and operational requirements to act as a manager of client portfolios.
📘 12.5 Responsibilities of a Portfolio Manager
📌 Portfolio Manager’s Core Responsibilities
Portfolio managers are responsible for managing and advising on client portfolios, ensuring their investments are aligned with clients’ financial goals and risk profiles. Below are the key responsibilities:
🔧 Key Responsibilities
🏢 Client Relationship Management
Maintaining a transparent relationship with clients, ensuring regular updates on portfolio performance and market changes.
📊 Risk Management
Managing portfolio risks through diversification, asset allocation, and hedging strategies to match the client’s risk tolerance.
💼 Investment Decision-Making
Making decisions on buying and selling assets based on market conditions, the client’s goals, and predefined strategies.
📑 Performance Monitoring
Tracking the performance of the portfolio, comparing it with benchmarks, and adjusting strategies to meet the client’s objectives.
🛡️ Regulatory Compliance
Adhering to SEBI regulations and ensuring that all portfolio management activities comply with legal and regulatory requirements.
📈 Ethical Standards & Fiduciary Duty
Acting in the best interests of clients, avoiding conflicts of interest, and maintaining high ethical standards in all dealings.
📘 12.6 Cost, Expenses, and Fees of Investing in PMS
🔧 Fixed Costs
Fixed costs are charges that the investor must pay regardless of the investment outcome. These typically include:
- Management Fee: A fixed percentage (e.g., 1%) of the assets managed by the portfolio manager.
- Transaction Costs: Costs associated with buying and selling assets, including brokerage fees, which are charged to the investor.
🔧 Performance-Linked Costs
Performance-linked costs, also known as profit-sharing fees, are additional fees based on the portfolio’s performance. These fees are designed to incentivize the portfolio manager to achieve better returns. The performance targets are set in the PMS agreement, and the fund manager receives a percentage of profits if these targets are met.
🔧 High Watermark Principle
The high watermark principle ensures that portfolio managers only charge fees on **gains above the previous highest value** of the portfolio. If the portfolio’s value drops, no performance fee is charged until the previous high is surpassed again.
🔧 Hurdle Rate
The hurdle rate is the minimum return required before the portfolio manager can charge performance fees. For example, if the hurdle rate is set at 8%, no fees will be charged unless the return exceeds this rate.
🔧 Catch-up Concept
If the hurdle rate is crossed, the portfolio manager may charge fees on the total gains, including those that were previously underperforming. This allows the manager to “catch up” on fees.
🔧 No Catch-up Concept
Only the gains above the hurdle rate are considered for performance fee calculation, without considering previous underperformance.
📘 12.7 Direct Access Facility Offered by PMS
📈 Difference with Regular Plan
The **direct plan** allows investors to invest directly with the PMS provider, eliminating intermediaries like brokers or distributors. This removes commission fees, reducing costs and increasing net returns for the investor.
💼 Role of Investment Advisers
Investment advisers help investors assess the suitability of the **direct access facility** based on their investment goals and knowledge of PMS. They guide clients in choosing whether a direct plan is beneficial, considering the investor’s awareness and financial goals. They also provide advice on whether the investor should opt for a **discretionary plan**, **non-discretionary plan**, or **advisory services**, ensuring they make the best decision for higher returns.
📘 12.8 SEBI Requirements on Performance Disclosure
📊 SEBI Disclosure Standards
SEBI mandates that portfolio managers disclose the **performance of the PMS** to investors. These disclosures must be transparent, covering performance data for **at least the last 3 years** or since the inception of the plan, whichever is shorter.
📈 Benchmark Comparison
Performance must be disclosed in comparison to a **relevant benchmark index** to provide context. This helps investors assess the portfolio’s performance relative to market conditions.
🧮 Calculation Methods
Portfolio managers must use **Standard Methods** for calculating performance, such as **Time-Weighted Return (TWR)** or **Money-Weighted Return (MWR)**, ensuring consistency in reporting.
📅 Quarterly Reporting
Performance disclosures must be updated and provided to clients on a **quarterly basis**, ensuring that investors have up-to-date information on their investments.
💼 Fees and Charges
In addition to performance data, **all fees and charges** (including management fees, transaction costs, and performance-linked fees) must be clearly disclosed to investors to ensure transparency.
📜 Compliance with SEBI Regulations
SEBI ensures that these disclosure requirements are met through its regulations. Portfolio managers must adhere to these standards to maintain investor trust and regulatory compliance.
