Structure of PMS in India
This sub‑topic covers the structure of Portfolio Management Services (PMS) in India, including legal entities, types of services, regulatory framework, fee calculations and client segmentation. Understanding the structure helps you answer exam questions on PMS registration, fee models and compliance. It also links the PMS concept to broader investment advisory knowledge in the module.
Learning Objectives
- 1Identify the three legal structures used for PMS in India.
- 2Distinguish between discretionary, non‑discretionary and advisory PMS models.
- 3Explain SEBI registration requirements and fee calculation methods.
- 4Recognise client segmentation criteria and typical reporting obligations.
Legal Structures of PMS in India
Trust – A PMS can be set up as a trust under the Indian Trusts Act, 1882. The trustee holds the assets on behalf of the investors and is fiduciarily bound to act in the investors’ best interests. Trusts are popular for high‑net‑worth (HNW) clients because they provide a clear separation between ownership and management.
Company – Most PMS providers operate as a private limited company registered under the Companies Act, 2013. The company structure offers limited liability to shareholders and easier access to capital for scaling operations. SEBI requires a minimum net‑worth of INR 5 crore for a PMS company.
Partnership – A limited liability partnership (LLP) can also register as a PMS. LLPs combine the flexibility of a partnership with limited liability. They are less common because SEBI’s net‑worth requirement (INR 5 crore) is the same as for companies, making the company route more attractive.
- All three structures must obtain a PMS registration certificate from SEBI.
- Regardless of the legal form, the PMS must appoint a qualified compliance officer.
Students often confuse the asset‑holding role of a trust with the operational role of a company. Remember: the trust holds client assets, while the company (or LLP) runs the investment management function.
Types of PMS Services
Discretionary PMS – The portfolio manager has full authority to buy, sell or hold securities without prior client approval for each transaction. The manager follows the client’s risk profile and investment objectives, making day‑to‑day decisions autonomously.
Non‑Discretionary PMS – The manager proposes trades based on research and client objectives, but each trade must be approved by the client before execution. This model suits investors who want professional advice but retain control over every transaction.
Advisory PMS – The manager provides investment recommendations and periodic portfolio reviews, but the client executes all trades independently, often through a broker. This is the least intensive model for the PMS provider.
- Fee structures differ: discretionary PMS usually charges a higher management fee than advisory PMS.
- Regulatory reporting frequency is the same across all types, but execution responsibility varies.
Exam takers often add performance fee to the base management fee without checking the fee‑cap clause. Always verify whether the performance fee is applied only after a hurdle rate is achieved.
Registration & Regulatory Framework
SEBI (Securities and Exchange Board of India) is the sole regulator for PMS. A PMS must obtain a registration certificate under SEBI (PMS) Regulations, 1996, and comply with ongoing obligations such as net‑worth, capital adequacy and audit requirements.
The minimum net‑worth requirement is INR 5 crore for a PMS entity, irrespective of whether it is a company, LLP or trust. The entity must also maintain a separate PMS bank account for client funds and keep detailed transaction records for at least five years.
Key compliance points include quarterly reporting to SEBI, annual audit by a chartered accountant, and disclosure of conflicts of interest. Failure to comply can lead to penalties, suspension or cancellation of the registration certificate.
- Registration is valid for five years, after which renewal is mandatory.
- Every PMS must appoint a compliance officer with at least five years of relevant experience.
Fee Structure & Calculation
Where:
AUM= Assets Under Management in rupeesr= Annual management fee rate expressed in percentWorked Example
Given AUM = 5,00,000 and r = 2%: Step 1: Fee = (5,00,000 × 2) / 100 Step 2: Fee = 10,000 Verification: (5,00,000 × 2) / 100 = 10,000.
The management fee is usually charged on a quarterly or annual basis as a percentage of the average AUM. In addition to the base fee, many PMS providers levy a performance fee, often calculated as a percentage of returns above a predefined hurdle rate.
Performance fees are typically 20% of excess returns, but the exact percentage can vary. The fee‑cap clause limits the total fee (management + performance) to a maximum of 3% per annum in most SEBI‑approved PMS agreements.
For exam purposes, remember to calculate the base fee first, then add the performance fee only if the portfolio’s return exceeds the hurdle. The total fee cannot exceed the fee‑cap, otherwise the agreement is non‑compliant.
- Base fee = AUM × fee%.
- Performance fee = (Portfolio Return – Hurdle Rate) × Performance %.
Client Segmentation & Risk Profiling
Clients are segmented primarily by investment amount and risk tolerance. SEBI defines three broad categories: Retail investors (investment < INR 1 crore), High Net‑Worth Individuals (HNI) (INR 1–5 crore), and Ultra‑High Net‑Worth Individuals (UHNI) (investment > INR 5 crore).
Risk profiling involves a questionnaire covering investment horizon, liquidity needs, income stability and attitude towards market volatility. The resulting profile (conservative, moderate, aggressive) guides the asset‑allocation strategy recommended by the PMS.
Exam tip: The same risk profile can apply to different investment‑size categories, but fee structures and minimum investment thresholds differ across categories.
- Conservative – focus on debt and blue‑chip equities.
- Moderate – balanced mix of equities, debt and alternative assets.
- Aggressive – higher equity exposure, including small‑cap and sectoral funds.
Comparison of Client Categories in PMS
| Category | Typical Minimum Investment | Management Fee Range | Regulatory Minimum Net‑Worth |
|---|---|---|---|
| Retail Investor | Up to INR 1 crore | 1.5% – 2.5% p.a. | N/A for client |
| HNI | INR 1 – 5 crore | 1.0% – 2.0% p.a. | INR 5 crore (PMS entity) |
| UHNI | Above INR 5 crore | 0.8% – 1.5% p.a. | INR 5 crore (PMS entity) |
Operational Workflow of a PMS
The workflow begins with client onboarding, which includes KYC verification, FATCA/CRS compliance and signing of the PMS agreement. The agreement outlines the investment mandate, fee structure, risk profile and reporting frequency.
After onboarding, the portfolio manager constructs the portfolio based on the client’s mandate, executes trades through a broker, and updates the PMS bank account. Portfolio performance is monitored daily, and periodic rebalancing is performed to stay aligned with the risk profile.
Reporting is done quarterly and includes a statement of holdings, transaction details, performance versus benchmark, and a compliance checklist. Annual statements are audited and submitted to SEBI.
- Key documents: PMS agreement, risk‑profiling questionnaire, KYC forms.
- Technology: Most PMS firms use portfolio management software for real‑time tracking and reporting.
Typical Management Fee Percentages by PMS Type
Scenario
Mr. Sharma invests INR 50 lakh in a discretionary PMS that charges a 2% annual management fee and a 20% performance fee on returns above a 8% hurdle. In the first year, the portfolio earns 12%.
Solution
Step 1: Calculate base management fee: (50,00,000 × 2) / 100 = INR 1,00,000. Step 2: Determine excess return: 12% – 8% = 4% excess. Step 3: Excess profit amount: 4% of 50,00,000 = INR 2,00,000. Step 4: Performance fee: 20% of 2,00,000 = INR 40,000. Step 5: Total fee = Management fee + Performance fee = 1,00,000 + 40,000 = INR 1,40,000. Verification: (50,00,000 × 2)/100 + 0.20 × (0.04 × 50,00,000) = 1,40,000.
Conclusion
The total fee of INR 1.4 lakh reflects both the base charge and the reward for out‑performing the hurdle. Remember to apply the performance fee only after the hurdle is met.
Do not calculate performance fee on the gross portfolio return; it must be applied only to the portion that exceeds the pre‑agreed hurdle rate.
Compliance & Reporting Requirements
SEBI mandates quarterly performance reports, which must include portfolio holdings, transaction details, benchmark comparison, and a statement of compliance with the investment mandate.
Annual compliance includes an independent audit of the PMS accounts, submission of the audit report to SEBI, and a declaration that the net‑worth requirement remains satisfied.
Any material change—such as a change in the investment strategy, fee structure or key personnel—must be reported to SEBI within 30 days. Failure to disclose can result in penalties up to 5% of the AUM.
- Quarterly report = performance + compliance checklist.
- Annual audit = certified by a Chartered Accountant.
Key Differences: PMS vs Mutual Funds
PMS vs Mutual Fund – Core Distinctions
| Aspect | Portfolio Management Service | Mutual Fund |
|---|---|---|
| Legal Structure | Trust/Company/LLP registered with SEBI | Company (AMC) registered under SEBI and SEBI (Mutual Fund) Regulations |
| Investor Minimum | Typically INR 25 lakh or higher | As low as INR 500 |
| Customization | Highly customized per client mandate | Standardized scheme objectives |
| Fee Model | Management fee ± performance fee | Expense ratio (annual) |
| Regulatory Reporting | Quarterly client statements, annual audit | Daily NAV disclosure, quarterly fact sheet |
⭐Exam Takeaways
- PMS can be structured as a trust, company or LLP; all require SEBI registration and a net‑worth of INR 5 crore.
- Three service models exist: discretionary (full authority), non‑discretionary (client approves each trade), and advisory (recommendations only).
- Management fee = (AUM × fee%) / 100; performance fee applies only on returns above the hurdle rate and is subject to a fee‑cap.
- Clients are segmented by investment size (retail, HNI, UHNI) and risk profile (conservative, moderate, aggressive).
- Quarterly performance reports, annual audit and timely disclosure of material changes are mandatory compliance requirements.
- PMS differs from mutual funds in legal structure, minimum investment, customization level, fee model and reporting frequency.
- Common exam traps: confusing trust vs company responsibilities, adding performance fee without checking the hurdle, and overlooking the fee‑cap limit.
Practice Questions
8 questions on Structure of PMS in India
What is the minimum net‑worth that any Portfolio Management Service (PMS) entity – whether a trust, company or LLP – must maintain as per SEBI regulations?
Which PMS model allows the portfolio manager to execute buy, sell or hold decisions without obtaining prior approval from the client for each transaction?
Among the client categories defined by SEBI, which typically enjoys the lowest range of management fee percentages?
Using the management‑fee formula, what is the fee for an AUM of INR 5,00,000 charged at an annual rate of 2%?
Mr. Sharma invests INR 50 lakh in a discretionary PMS that charges a 2% annual management fee and a 20% performance fee on returns above an 8% hurdle. The portfolio returns 12% in the first year. What is the total fee charged?
In a PMS structured as a trust, which statement correctly describes the distinct roles of the trust and a company (or LLP) involved in the service?
Which of the following is NOT a mandatory compliance requirement for a PMS under SEBI regulations?
An HNI client invests INR 3 crore in a PMS that charges a 1.5% base management fee and a 20% performance fee on returns above a 7% hurdle. The portfolio achieves a 10% return in the first year. Given the fee‑cap of 3% per annum, what is the maximum fee the client will be charged?