Bharath Shiksha

Guide · Managed money

Portfolio Management Services (PMS) in India, explained

The short answer

A Portfolio Management Service is a SEBI-regulated arrangement in which a licensed portfolio manager builds and runs a portfolio for a single investor, with the securities and cash held in that investor's own name and own account, not pooled into a shared scheme as in a mutual fund. It is governed by the SEBI (Portfolio Managers) Regulations, 2020 and is open only above a minimum investment of 50 lakh rupees. Because you own the underlying holdings directly, the portfolio can be concentrated and customised to you, and each sale is a taxable event in your own hands. It carries full market risk and guarantees nothing.

PMS occupies an unusual place in Indian investing. It is marketed almost entirely on past returns, yet the thing that actually defines it is not performance at all: it is a question of ownership and account structure. A mutual fund pools your money with thousands of others and hands you units. A PMS does the opposite, holding real shares in a demat account with your name on it. That single structural fact drives everything downstream: the minimum ticket, the tax treatment, the customisation, and the way SEBI chose to regulate it. This guide works through the mechanism from that foundation, then sets out the current rule-book with its dates, and finally places PMS against the two structures it is most often confused with, the mutual fund and the alternative investment fund.

What a PMS actually is, structurally

Strip away the marketing and a PMS is a management contract wrapped around a separately managed account. You open a demat account and a linked bank account in your own name, you fund it, and you sign a power of attorney or an agreement that lets a SEBI-registered portfolio manager transact within it on your behalf. The manager buys and sells securities that settle directly into your account. At no point does your money merge with another client's. There is no scheme, no net asset value struck for a shared pool, no units. If you hold a hundred shares of a company through your PMS, those hundred shares sit in your demat, registered to you.

This is the whole game. In a mutual fund the fund is the legal owner of the securities and you own a claim on the fund, expressed as units whose price is the pooled net asset value divided by the number of units outstanding. In a PMS there is no intervening vehicle. The line between the investor and the securities is direct. Everything that makes PMS different from a fund, and everything SEBI worries about, follows from that directness: concentration is possible because there are no thousands of co-owners to protect, tax flows straight to you because you are the owner of record, and the regulator sets a high entry bar precisely because the diversification and daily-priced liquidity that protect a small mutual-fund investor are absent here.

Mutual fund versus PMS versus AIF: who owns what A mutual fund pools many investors into one scheme that owns a diversified basket, and investors hold units. A PMS gives each investor a separate account in their own name that directly holds securities, all managed by one portfolio manager. An alternative investment fund pools many investors into one fund vehicle that holds the assets, and each investor holds a share of the pool. Three ways to have money managed: who owns the securities MUTUAL FUND many investors, hold units One pooled scheme the legal owner Diversified basket PMS One portfolio manager Account in A's name owns shares B Account in C's name owns shares separate accounts, each owns the securities directly AIF fewer, larger investors One fund vehicle the legal owner Pooled strategy assets Pooled on the left and right; individually owned in the middle. Structure, not returns, is what separates these three.
The middle column is the whole point. A mutual fund and an AIF both pool capital into a single vehicle that owns the assets, so you hold units or a share of a fund. A PMS keeps a separate account in each investor's own name, holding the securities directly. That is why a PMS can concentrate, why its tax flows straight to you, and why SEBI gates it behind a high minimum.

The current rule-book: the 2020 regulations

The framework in force is the SEBI (Portfolio Managers) Regulations, 2020, which took effect on 16 January 2020 and repealed the 1993 regulations that had governed the space for a generation. The overhaul was deliberately tightening. It doubled the minimum investment from 25 lakh to 50 lakh rupees, and it raised the net worth a portfolio manager must maintain from 2 crore to 5 crore rupees, giving existing managers a window to comply. SEBI's stated intent was to keep the product with investors able to bear its risks and to weed out under-capitalised, non-serious managers.

The minimum is not a one-time gate. It has to be maintained for the life of the account. If your portfolio grows and you withdraw part of it, the balance that remains cannot be allowed to drop below 50 lakh rupees. This matters more than it first appears, because it means a PMS is not a place to park a marginal sum: it is a commitment to keep a substantial amount under management, in a single concentrated account, with the illiquidity that implies.

On the manager's side, the regulations also draw lines around what a discretionary manager may buy. A discretionary portfolio manager is restricted to listed securities, money-market instruments and units of mutual funds. A non-discretionary or advisory manager has more room and may invest or advise up to twenty-five percent of that client's assets under management in unlisted securities, in addition to the instruments a discretionary manager may use. The regulator is comfortable with more exotic exposure only where the client is closer to the decision.

The three mandate types: who decides, who executes

Every PMS falls into one of three mandate types, and the difference between them is a question of control, specifically who decides a trade and who executes it. This is the axis a prospective client should think hardest about, because it determines how much of their time and judgement the arrangement will actually consume.

Discretionary, non-discretionary and advisory: a control ladder Discretionary PMS, the manager decides and executes, client hands over most control. Non-discretionary PMS, the manager recommends but the client approves each trade before execution. Advisory PMS, the manager only advises while the client decides and executes, keeping the most control. Who holds the decision, and who presses the button Client hands over most control Client keeps most control Discretionary Manager DECIDES Manager EXECUTES No approval sought per trade the most common form Non-discretionary Manager RECOMMENDS Client APPROVES each Every trade is signed off before execution the client is in the loop Advisory Manager ADVISES only Client DECIDES + EXECUTES Advice in, action entirely on the client most work stays with you
Control is a dial, not a switch. As you move from discretionary to advisory, the manager does less of the deciding and executing and you do more. Discretionary is the common form because most PMS clients are buying delegation; advisory suits an investor who wants a professional view but keeps their own hand on the trigger.
The three PMS mandate types, by who decides and who executes
TypeWho decides the tradeWho executes itClient involvement
DiscretionaryThe managerThe managerLowest: the manager acts without seeking approval per trade
Non-discretionaryThe manager recommendsThe manager, only after approvalMedium: the client signs off on each trade before it is placed
AdvisoryThe clientThe clientHighest: the manager advises, the client acts

The fee framework, and the high-water-mark rule most people miss

Fees are where SEBI did the most careful work, because a PMS fee can be structured to look small and cost a great deal. The governing document here is the SEBI circular SEBI/HO/IMD/DF1/CIR/P/2020/26 dated 13 February 2020, which sits under the 2020 regulations. It permits three shapes of fee: a fixed fee as a percentage of assets, a performance fee as a share of gains, or a combination of the two. The client agreement must carry an annexure listing every fee, which the client signs separately, and the manager must lay the options out clearly enough that the client can choose knowingly rather than be defaulted into the most expensive one.

The rule that changes the economics is the high-water mark. A high-water mark is the highest portfolio value on which a performance fee has already been charged. SEBI mandates that any profit-sharing or performance fee is charged only on gains above that previous peak, measured over the life of the investment. In plain terms: if your portfolio rises, you pay a performance fee on the new gain and the high-water mark resets up to the new peak; if it then falls and later recovers, the manager earns nothing on the recovery until the value has climbed back past that old peak. You are never charged twice for the same rupees of gain. In 2024 SEBI went further and, by circular SEBI/HO/IMD/IMD-PoD-1/P/CIR/2024/35 dated 2 May 2024, required managers to give every client a fee calculation tool that models the multi-year fee across options and bakes in the high-water-mark principle, so the effect is visible before signing.

How the high-water mark gates the performance fee A portfolio value rises to a first peak where a performance fee is charged and the high-water mark is set. The value falls into a drawdown and recovers, but no performance fee is charged while it is merely climbing back toward the old peak. Only once the value exceeds the previous high is a performance fee charged again, and only on the new gain above the mark. All figures are illustrative. The fee applies only above the previous peak Illustrative portfolio value over time high-water mark (previous peak) fee charged, mark set drawdown and recovery: no performance fee back at the mark fee only on the new gain above Illustrative only. Shapes show the mechanism, not any actual portfolio or any return you should expect.
The manager is not paid to recover its own drawdown. Once a performance fee is taken at a peak, that peak becomes the high-water mark. Any later fall and recovery earns no fee until the value pushes past the old high, and even then the fee applies only to the fresh gain above the mark. It is the single most important number to understand before signing a performance-fee agreement.

Two further protections in the 2020 fee circular are worth naming because they quietly lower cost. First, direct on-boarding: a portfolio manager must let a client come in directly, without a distributor, and must disclose that option in the disclosure document, in marketing material and on its website. When you onboard directly, no charge except statutory charges may be levied, so you avoid a distribution cost entirely. Second, the circular barred any upfront fee, direct or indirect, and required that distributor commissions be paid only on a trail basis out of the manager's own fees, not billed on top to the client. The intent is to stop the front-loaded, sell-and-forget incentives that plagued mis-sold products.

PMS fee shapes permitted under the 2020 framework (structure only, no rates)
Fee modelHow it is chargedWhat to watch
Fixed onlyA percentage of assets under management, charged periodicallyPaid whether the portfolio rises or falls; predictable but not aligned to gains
Performance onlyA share of gains, charged subject to the high-water markNo fee on gains already charged for, or on merely recovering a drawdown
CombinationA smaller fixed fee plus a performance share above the markModel the total across several years before signing; SEBI mandates a tool for this
Direct on-boardingCome in without a distributorNo charge except statutory charges; no distribution cost

Alongside fees, the manager owes the client transparency on an ongoing basis. Every PMS provider must issue a disclosure document with the prescribed static and dynamic information before onboarding, and must send the client periodic reports, typically every quarter, covering the portfolio, its transactions, its costs and the risks. Because you own the securities, you can also see the holdings directly in your own demat, a line of sight a mutual-fund unit-holder does not have.

PMS versus mutual fund versus AIF

PMS is most often weighed against two neighbours: the mutual fund below it and the alternative investment fund above it. They are easy to blur, because all three are professionally managed pools of expertise. They come apart cleanly on one question asked first, do you own the securities or a claim on a pool, and then on the practical consequences of that answer: minimum, customisation, liquidity, transparency and tax.

How PMS compares with a mutual fund and an alternative investment fund
DimensionMutual fundPMSAIF
StructurePooled scheme; you hold unitsIndividual account in your name; you hold the securitiesPooled fund vehicle; you hold a share of the pool
Minimum ticketA few hundred rupees50 lakh rupeesGenerally 1 crore rupees per investor
SEBI regulationMutual Funds RegulationsPortfolio Managers Regulations, 2020Alternative Investment Funds Regulations
CustomisationNone; one basket for all holdersHigh; concentrated and tailored to youBy strategy, within a defined mandate
LiquidityHigh; redeem at daily net asset valueLower; sell holdings, subject to exit load in early yearsLowest; often locked with a tenure
TransparencyPeriodic disclosure of holdingsYou see your own demat directlyPeriodic fund reporting to investors
Tax flowDeferred; taxed when you redeem unitsDirect; each sale is a gain in your own handsAt the fund level in Category III before you receive

The exit-load line deserves a word, because it is one of the concrete numbers SEBI fixed. In a PMS the manager may charge an exit load capped at three percent of the amount redeemed in the first year, two percent in the second and one percent in the third, tapering to nothing thereafter. That schedule, together with the account-level illiquidity, is why a PMS suits capital an investor can genuinely leave in place for years rather than a sum they may need back at short notice.

Why the tax mechanism is the sharpest difference

The tax treatment is where the ownership structure stops being an abstraction and starts touching money. In a mutual fund you own units, and no tax event occurs while the fund trades inside its own portfolio; tax is triggered only when you redeem your units. The churn happens tax-free to you, and the reckoning is deferred to your exit.

A PMS works the opposite way. You own the securities, so every sale the manager makes in your account is a capital-gains event in your own hands, in the year it happens, classified as short-term or long-term by how long that particular holding was held. A manager who trades actively can therefore generate a run of taxable events for you across a year, each taxed at the rate that applies to you, whereas a mutual-fund holder pursuing a similar strategy would defer all of it to redemption. That does not make PMS worse: direct ownership brings the concentration, customisation and line of sight that are the reason to choose it. It does mean the tax profile is fundamentally different, and it is a mechanism, not a rate, so treat any specific percentage you read as something to verify against the current rules before you rely on it. An AIF differs again: a Category III AIF is generally taxed at the fund level before anything reaches you, so the drag is applied inside the fund rather than flowing to you sale by sale.

None of this is a substitute for deciding whether a managed portfolio is the right home for the money at all. Reading a fee schedule, understanding a high-water mark, weighing a tax mechanism against illiquidity, and judging whether concentration suits your situation are all acts of judgement, and building that judgement is exactly what the method we teach is designed around. The structure is knowable; whether it fits you is the harder question.

What a PMS is not. It is not a guaranteed-return product, and the high minimum does not shrink the risk. A PMS carries full market risk, its value can fall, and the past returns on which such products are marketed are not a promise of the future. SEBI regulates how a manager operates, discloses and charges; it does not underwrite what the portfolio does next.

Common Questions

Frequently Asked Questions

A PMS is a SEBI-regulated service in which a licensed portfolio manager builds and manages a portfolio for a single investor. Unlike a mutual fund, the securities and cash are held in that investor's own name, in the investor's individual demat and bank account, rather than pooled into a shared scheme. The service is governed by the SEBI (Portfolio Managers) Regulations, 2020, and is available only above a minimum investment of 50 lakh rupees, which places it out of reach of most retail investors by design.

The minimum is 50 lakh rupees per investor. This floor was set by the SEBI (Portfolio Managers) Regulations, 2020, which took effect on 16 January 2020 and doubled the earlier threshold of 25 lakh rupees. The minimum must be maintained through the life of the account: if you make a partial withdrawal, the remaining portfolio value cannot be allowed to fall below 50 lakh rupees. SEBI raised the bar deliberately, to keep the product with investors who can bear its concentration and illiquidity.

The core difference is ownership. In a mutual fund your money buys units of a pooled scheme, and you own units, not the underlying shares. In a PMS the manager buys securities directly into your own account, so you own the actual shares. That has three consequences: the portfolio can be concentrated and customised to you rather than diversified across thousands of unit-holders, every sale the manager makes is a taxable event in your hands rather than deferred to redemption, and you can see and in principle control the individual holdings. The trade-offs are a far higher minimum and lower liquidity.

Discretionary, non-discretionary and advisory. In a discretionary PMS the manager has full authority to decide and execute trades without asking you first, which is the most common form. In a non-discretionary PMS the manager recommends trades but you must approve each one before it is executed. In an advisory PMS the manager only gives advice and you place the trades yourself. Control shifts from the manager to you as you move down that ladder, and so does the operational burden.

A high-water mark is the highest portfolio value on which a performance fee has already been charged. SEBI requires that any profit-sharing or performance fee is charged only on gains above that previous peak, over the life of the investment. If the portfolio falls and then recovers, the manager earns no performance fee until the value has climbed back past the old high and gone beyond it. The rule stops an investor being charged twice for the same rupees of gain, and is now built into the fee calculation tool SEBI mandated in 2024.

Yes. The SEBI circular of 13 February 2020 requires portfolio managers to offer a direct on-boarding option, and to disclose it in the disclosure document, in marketing material and on their website. When you come in directly, no charge except statutory charges may be levied, so you avoid any distribution cost. SEBI also barred any upfront fee, direct or indirect, and required that distributor commissions be paid only on a trail basis out of the manager's own fees. The direct route removes a layer of cost, but you give up the distributor's hand-holding.

Because you own the securities directly, PMS is taxed like a direct equity portfolio, not like a fund. Every time the manager sells a holding in your account it creates a capital-gains event in your own hands, classified as short-term or long-term by how long that holding was held, and taxed at the rate applying to you. This differs from a mutual fund, where tax is deferred until you redeem your units, and from a Category III AIF, which is generally taxed at the fund level before you receive anything. The mechanism is the point here, not the rate; verify the current rates and rules before you rely on them.

Both serve wealthy investors, but the structure differs. A PMS runs a separate account in each investor's own name, with a 50 lakh rupee minimum, and the investor owns the securities. An Alternative Investment Fund pools capital from many investors into a single fund vehicle, with a higher 1 crore rupee minimum per investor, and the investor holds a share of the pool rather than the underlying shares. AIFs can run wider strategies, including leverage and derivatives in Category III, and their taxation runs through the fund rather than flowing straight to the investor as it does in a PMS.

No. A PMS is a discretionary or advisory management service that carries full market risk, and its value can fall as well as rise. SEBI regulates how a portfolio manager may operate, disclose and charge, but it does not and cannot underwrite outcomes. Past performance shown in marketing is not a promise of future results, and a high minimum ticket does not make the risk smaller. A PMS is a way to have a portfolio managed professionally in your own name, not a guaranteed-return product.

Where the facts come from

Sources

  • SEBI (Portfolio Managers) Regulations, 2020. Effective 16 January 2020 in supersession of the 1993 regulations; raised the minimum investment from 25 lakh to 50 lakh rupees and the portfolio manager net worth from 2 crore to 5 crore rupees, and set the boundaries on discretionary versus non-discretionary and advisory mandates. business-standard.com
  • SEBI circular on fees, on-boarding and reporting. SEBI/HO/IMD/DF1/CIR/P/2020/26 dated 13 February 2020: fixed, performance or combination fees; the high-water-mark principle over the life of the investment; direct on-boarding without a distributor with no charge beyond statutory charges; a bar on any upfront fee; distributor commissions on a trail basis only; the exit-load cap of three, two and one percent over the first three years; and periodic reporting to clients. taxguru.in
  • SEBI fee-transparency update, 2024. SEBI/HO/IMD/IMD-PoD-1/P/CIR/2024/35 dated 2 May 2024 required portfolio managers to give clients a fee calculation tool with multi-year fee illustrations that incorporate the high-water-mark principle, and eased the digital on-boarding process. taxguru.in
  • Taxation mechanism, PMS versus fund versus AIF. In a PMS the investor owns the securities, so each sale is a capital-gains event in the investor's hands; a mutual fund defers tax to unit redemption; a Category III AIF is generally taxed at the fund level. Rates change and should be verified against the current rules. pmsaifworld.com
Educational note. This guide explains the structure and rules of Portfolio Management Services in India. It is not a recommendation to invest in a PMS or in any security, and it is not investment advice. Illustrative figures are labelled as such and do not represent any actual portfolio or any return you should expect. Bharath Shiksha is an educational publisher, not a SEBI-registered investment adviser or research analyst.

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