Portfolio Management Services (PMS) in India: Discretionary vs Non-Discretionary

What is PMS?

Portfolio Management Services (PMS) is a SEBI-regulated investment service in which a registered Portfolio Manager manages a client's investment portfolio on a one-to-one basis. Unlike a mutual fund, where investor money is pooled into a single scheme and unitholders own units of the pool, in a PMS each client has a separate portfolio held in the client's own name in their own demat account. The manager makes investment decisions according to a defined strategy disclosed to the client at onboarding.

The defining features of a PMS arrangement are:

• Direct ownership:the underlying stocks are held in the client's demat in the client's name. No pooling.
• High minimum investment: SEBI mandates Rs 50 lakh minimum per client.
• Higher fees: typically 1-2.5% fixed management fee plus 10-20% performance fee, far higher than mutual fund expense ratios.
• Concentrated portfolios: typically 15-30 stocks, much more concentrated than a diversified mutual fund.
• Customisation: the strategy can be partially tailored to the client, especially in non-discretionary and advisory PMS structures.
• Different tax treatment: every rebalance triggers a taxable event for the client, since the client owns the shares directly.

Regulatory framework

PMS in India is governed by the SEBI (Portfolio Managers) Regulations, originally issued in 1993 and amended several times since. The most consequential amendment in recent memory was announced in November 2019, when SEBI raised the minimum investment per client from Rs 25 lakh to Rs 50 lakh. The rationale was that PMS is a sophisticated, less-regulated product compared to mutual funds, and the higher minimum acts as a filter to ensure that participants have the financial capacity and sophistication to bear the associated risks.

Key regulatory requirements that every Indian PMS must meet:

• SEBI registration: the entity must hold a valid Portfolio Manager licence from SEBI. Operating as an unregistered PMS is illegal.
• Net worth requirements: minimum net worth for the Portfolio Manager entity, designed to ensure financial stability of the operator.
• Custody arrangements:client securities must be held with a SEBI-registered custodian, separate from the Portfolio Manager's own assets.
• Disclosure document: every PMS must publish a detailed Disclosure Document covering investment strategy, risks, fee structure, performance history, key personnel, and related-party transactions.
• Performance reporting: SEBI mandates monthly performance reporting to clients in a standardised format, comparing portfolio returns against an appropriate benchmark.
• Code of conduct:Portfolio Managers must adhere to SEBI's code of conduct including segregation of client assets, fair allocation of trades, conflict-of-interest disclosures, and prohibition on certain practices.

The three PMS types

1. Discretionary PMS

In a discretionary PMS, the Portfolio Manager has full authority to make all investment decisions on behalf of the client without seeking approval for individual trades. The client signs a Power of Attorney that authorises the manager to operate the demat account within the boundaries of the agreed investment strategy. The manager buys and sells stocks, rebalances the portfolio, and executes corporate actions as appropriate.

Discretionary PMS is the most common type in India. It is suited to clients who want the manager's expertise to be applied rapidly when market opportunities or risks emerge, without the delays inherent in seeking client approval for each trade. The manager bears the responsibility for staying within the agreed mandate and achieving outcomes consistent with the disclosed strategy.

2. Non-Discretionary PMS

In a non-discretionary PMS, the manager researches and recommends transactions but the client must explicitly approve each transaction before it can be executed. The manager prepares a recommendation, communicates it to the client (often via email, phone, or a dedicated client portal), and waits for client approval before placing the order with the broker.

Non-discretionary PMS suits clients who want professional research and strategy support but wish to retain final decision authority on every trade. The trade-off is execution speed — opportunities that require rapid action can be missed if client approval is not obtained in time. Some non-discretionary clients give standing approvals for certain categories of trades (for example, rebalancing trades within an index basket) while requiring approval for discretionary picks.

3. Advisory PMS

In an advisory PMS, the manager only suggests investment ideas without any execution authority or trade approval workflow. The client receives research notes, model portfolios, or investment ideas and chooses what to do with them — the client may execute on their own through their broker, ignore the suggestions, or combine the manager's ideas with other sources of advice. This is the most hands-off form of PMS from the manager's side and the most hands-on from the client's side.

Advisory PMS is less common than discretionary, partly because the value chain is closer to that of a Registered Investment Adviser (RIA) than a traditional portfolio manager.

Fee structures

PMS fee structures are far more varied and complex than mutual fund expense ratios. The three main archetypes:

Fixed-only fee

A flat percentage charged on Assets Under Management (AUM), typically in the range of 2-2.5% per year. There is no performance component. This structure is straightforward and gives clients certainty on fees, but does not align manager incentives with portfolio performance — the manager earns the same fee whether the portfolio outperforms or underperforms.

Performance-only fee

No fixed management fee; the manager earns only a share of profits, typically 10-25% of returns above a hurdle rate. This structure aligns manager incentives strongly with client outcomes. The trade-off is that managers running this model may take on higher portfolio risk to chase performance fees, and there is no fee buffer to fund the manager's operations during a flat or down year.

Hybrid fee

The most common structure in Indian PMS today. A fixed management fee (typically 1-1.5% of AUM) combined with a performance fee (typically 10-20% of returns above a hurdle rate). The fixed fee covers operational costs; the performance fee aligns incentives with outperformance. Hybrid structures dominate the Indian PMS market because they balance certainty for the manager with alignment for the client.

High water mark and hurdle rate

Two technical concepts shape how performance fees are calculated in practice:

High water mark (HWM): the highest portfolio value previously achieved on which performance fees have been paid. The manager can charge performance fees only on gains that exceed this previous peak. This prevents the manager from collecting performance fees twice on the same gains — for example, if a portfolio rises from 100 to 130, drops back to 110, and then climbs back to 140, the performance fee is charged only on the gain from 130 (the previous high water mark) to 140, not on the entire 110-to-140 recovery. Without an HWM, clients could be charged fees twice during recovery from drawdowns.

Hurdle rate: a minimum return threshold that the portfolio must exceed before any performance fee applies. Common hurdle rates in Indian PMS are 8%, 10%, or sometimes the benchmark return (Nifty 50 return). With a 10% hurdle rate and 20% performance fee, if the portfolio returns 15% in a year, the performance fee is 20% of the 5 percentage point excess above the hurdle (so 1% of AUM), not 20% of the full 15%. The hurdle rate ensures that managers earn performance fees only when they deliver returns above a defined acceptable level.

Performance reporting

SEBI mandates that PMS providers issue monthly factsheets and performance reports to clients. The minimum disclosure includes:

• Portfolio composition at the end of the period — every stock, weight, and sector allocation.
• Period returns — typically 1-month, 3-month, 6-month, 1-year, 2-year, 3-year, 5-year, and since-inception returns.
• Benchmark comparison — returns versus the disclosed benchmark (Nifty 50, Nifty 500, sector-specific indices, or a defined custom benchmark).
• Risk metrics — typically standard deviation, beta, and other measures depending on the strategy.
• Top holdings and any changes — for transparency on how the portfolio has evolved.

PMS performance reports tend to be more detailed than mutual fund factsheets because each client has a unique portfolio history. The trade-off is that some PMS providers report composite performance (an average across all clients in a strategy) rather than individual client performance, which can mask the dispersion of outcomes across clients.

Notable Indian PMS providers (illustrative)

The Indian PMS industry includes both arms of large financial conglomerates and specialist boutiques. Names that have featured prominently in industry discussions historically include Motilal Oswal Asset Management, Marcellus Investment Managers, ASK Investment Managers, Sundaram Asset Management, ICICI Prudential PMS, Carnelian Asset Management, and Buoyant Capital, among many others. These names are referenced for educational context only — historical inclusion in industry conversations does not constitute any endorsement, and the universe of SEBI-registered PMS providers is much larger and constantly evolving.

Pros of PMS

• Direct ownership:stocks are held in the client's demat in the client's name, providing full transparency at all times.
• Customisation: the strategy can be tailored to client preferences — for example, exclusion of certain sectors, tax-loss harvesting at the client level, or weighting adjustments.
• Concentrated portfolios: 15-30 stocks rather than 60-100 in many diversified mutual funds, which can translate into more meaningful exposure to high-conviction ideas.
• Skin in the game alignment: performance fees link manager compensation to client outcomes more directly than fixed mutual fund expense ratios.
• Direct dialogue with the manager: HNI clients often have direct access to the portfolio manager or the client servicing team for periodic reviews.
• Bespoke reporting: SEBI-mandated detailed monthly reports plus often additional custom reporting on request.

Cons of PMS

• High minimum: the Rs 50 lakh minimum excludes most retail investors.
• Higher fees: total fees (fixed plus performance) frequently exceed mutual fund expense ratios by 1-2 percentage points or more annually.
• Tax inefficiency relative to mutual funds:every rebalance is a taxable event for the client. Mutual funds, by contrast, do not pass through capital gains taxes on internal rebalancing.
• No SIP option: PMS does not support the small monthly contribution model that mutual fund SIPs enable. Top-ups are made in larger lumps.
• Lock-in or exit-load periods: some PMS providers impose minimum holding periods or exit loads if withdrawals occur within the first 12-24 months.
• Fee complexity: hurdle rates, high water marks, performance-fee periods (annual versus since-inception) and other technicalities make fee comparisons across providers difficult.
• Reporting lag: while monthly reporting is mandated, real-time portfolio visibility is lower than in smallcase or direct stock ownership.
• Manager risk: performance is heavily dependent on a few key individuals. Changes in the management team can materially affect portfolio outcomes.

When PMS makes sense

Educational consensus suggests PMS suits a specific investor profile:

• Rs 50 lakh+ corpus dedicated specifically to equity, with appetite for additional contributions over time.
• Long horizon of at least 5-7 years, given that concentrated PMS strategies can endure multi-year drawdowns before recovering.
• Tax tolerance: the investor accepts the tax-inefficiency relative to mutual funds, often because customisation or specific exposure justifies the trade-off.
• Differentiated approach desired: the investor specifically wants exposure to a strategy not available through mutual funds — for example, deep-value, low P/E, very-concentrated, or sector-specific approaches.
• Comfort with manager dependency:the investor accepts that key-person risk is real and is willing to monitor the manager's continued involvement.

When PMS is the wrong fit

PMS is not a fit for investors with corpus below Rs 50 lakh, for investors who prioritise tax efficiency above all else, or for investors who want diversified low-cost exposure without active manager judgement. For these profiles, mutual funds (especially index funds and large-cap funds) typically offer better risk-adjusted after-tax outcomes. For investors in the Rs 1-25 lakh range who want curation but cannot meet the PMS minimum, smallcase fits the gap.

Common mistakes in evaluating PMS

• Comparing pre-tax PMS returns with pre-tax mutual fund returns. The relevant comparison is after-tax, after-fee. PMS typically loses 1-3 percentage points annually to the combination of higher fees and tax-inefficient rebalancing relative to a mutual fund running a similar strategy.
• Ignoring the hurdle rate construction. A 20% performance fee with no hurdle rate is much more expensive than a 20% performance fee with a 10% hurdle. The specifications matter.
• Anchoring on since-inception returns of a relatively new PMS. A PMS with a 3-year track record may show strong since-inception numbers because the inception period coincided with a favourable market regime. Longer-horizon performance through multiple cycles is more informative.
• Underestimating manager turnover. Star portfolio managers who deliver strong early performance sometimes leave to set up their own PMS or move to other firms. The strategy may continue under their successor with different results.
• Treating PMS as a substitute for diversification. A single PMS strategy with 20-25 stocks is far more concentrated than a diversified mutual fund. Holding only one PMS without complementary exposure can leave the overall portfolio under-diversified.

For complementary reading, see our guides on smallcase and mutual fund expense ratios.

The bottom line

PMS is a legitimate wealth-management product designed for HNI investors who can meet the Rs 50 lakh minimum and who want concentrated, customised, directly-held equity exposure managed by a named professional. The structural advantages — direct ownership, customisation, concentrated alpha potential — are real but come at material costs in the form of higher fees and tax-inefficient rebalancing relative to mutual funds. PMS works best when the investor specifically wants what PMS offers and uses it as part of a broader, diversified wealth allocation rather than as the sole equity vehicle. The decision should weigh manager track record, fee structure transparency, tax drag, and the marginal benefit of customisation against the simpler, cheaper, and more tax-efficient mutual fund route.

Frequently asked questions

What is the minimum investment for PMS in India?

SEBI mandates a minimum investment of Rs 50 lakh per client. This was raised from Rs 25 lakh in November 2019 to align PMS with sophisticated-investor frameworks.

What is the difference between discretionary and non-discretionary PMS?

In a discretionary PMS, the manager has full authority to execute trades without per-trade approval. In a non-discretionary PMS, every transaction requires explicit client approval before execution. Discretionary is more common because it allows rapid action on opportunities.

How is PMS taxed compared to mutual funds?

PMS is generally less tax-efficient. Every rebalance triggers capital gains tax at the client level since the client owns the shares directly. Mutual funds shield investors from rebalancing-driven tax — tax is realised only on redemption.

What is a high water mark and a hurdle rate?

A high water mark is the previous portfolio peak on which performance fees have been paid; the manager can charge performance fees only on gains above this peak. A hurdle rate is the minimum return threshold (often 8-10%) that the portfolio must exceed before performance fees apply.

When does PMS make sense versus mutual funds?

PMS suits HNI investors with Rs 50 lakh+ dedicated equity capital, a 5-7 year horizon, and a desire for customised, concentrated exposure. For smaller corpus or tax-conscious investors, mutual funds and smallcase typically offer better after-tax outcomes.