Risk and return are two essential aspects of any financial investment. Portfolio management refers to the process of selecting and managing a mix of investment assets to reduce risk while maximizing returns. A portfolio manager plays a key role in tailoring investment solutions to meet the specific objectives of individual clients. A portfolio manager is a body corporate that, under a contract or agreement with a client, either advises or manages the client’s portfolio or funds. This management can be discretionary, non-discretionary, or advisory. Portfolio managers are governed by the SEBI (Portfolio Managers) Regulations, 2020. According to these guidelines, only entities registered with SEBI can offer portfolio management services. The concept of Portfolio Management Services (PMS) was formally introduced in India in January 1993, when SEBI issued the Securities and Exchange Board of India (Portfolio Managers) Regulations, 1993. These regulations were among the earliest issued by the regulator, preceding even the mutual fund regulations. This highlights the critical role that portfolio management plays in the Indian financial ecosystem. In India, portfolio management services are primarily offered by large brokerage firms, asset management companies, and independent financial experts. These service providers offer tailored investment strategies based on the risk profile and return expectations of each client.
Growth of Portfolio Management in India
India has emerged as a significant market for portfolio management, owing to the rise in the number of high-net-worth individuals and increased investor awareness. According to a regional wealth report from 2017, the Asia-Pacific region had the highest number of high-net-worth individuals (HNIs), with India ranking fourth in the region in terms of HNI population. India’s HNI population and their wealth saw a growth of 9.6 percent and 10 percent, respectively, in 2016. This growth is evident in the increasing number of clients opting for portfolio management services. Between March 2015 and March 2019, the total number of clients receiving portfolio management services increased from approximately 46,707 to 1,49,720. Alongside this growth in clientele, the Assets Under Management (AUM) also experienced consistent expansion. The rise in AUM is a clear indicator of the increasing trust that investors place in professionally managed portfolios.
Types of Portfolio Management Services Based on Provider
Portfolio management services can be categorized based on the type of service provider. These categories help to understand the structure and origin of the services offered.
Portfolio Management by Asset Management Companies
These services are provided by established asset management firms. They usually offer PMS as part of a broader set of financial services. Their experience in managing mutual funds and institutional assets often translates into expertise in managing private portfolios.
Portfolio Management by Brokerage Houses
Brokerage houses also offer PMS to their premium clients. These firms leverage their research capabilities, in-house analysts, and market knowledge to provide customized investment portfolios. Their trading infrastructure enables real-time execution of client orders, which is essential in volatile markets.
Boutique Portfolio Management Firms
These are smaller, independent portfolio management firms often founded by experienced professionals. Boutique firms typically focus on niche markets or investment strategies and offer highly customized services to a limited set of clients. Their lean operational structure allows for a greater focus on individual clients and specific investment philosophies.
Types of Portfolio Management Services Based on Asset Class
Portfolio management services can also be classified based on the asset classes they focus on. This classification helps clients choose the service best aligned with their financial goals and risk appetite.
Equity-Based Portfolio Management Services
These services focus exclusively on equity investments. Equity-based PMS is generally aimed at clients seeking high returns and who are willing to assume higher market risk. The portfolio includes stocks listed on recognized stock exchanges and is actively managed by the portfolio manager.
Fixed Income-Based Portfolio Management Services
These services focus on debt securities, such as bonds and debentures. Fixed income PMS is suitable for investors looking for steady returns with lower risk. It appeals to conservative investors who prioritize capital preservation and income generation.
Commodity Portfolio Management Services
Some portfolio managers offer services focused on commodities such as gold, silver, oil, or agricultural products. These services are more common in countries or regions where commodity trading is prevalent and regulated.
Mutual Fund Portfolio Management Services
This category involves managing a client’s investments across various mutual fund schemes. The portfolio manager selects and monitors mutual funds that align with the client’s investment goals and risk profile. This service is often useful for investors who want exposure to mutual funds but prefer professional oversight.
Multi-Asset Portfolio Management Services
These services manage portfolios diversified across multiple asset classes, including equities, fixed income, commodities, and real estate. Multi-asset PMS is ideal for clients seeking balanced exposure to different markets and asset types to reduce volatility and enhance returns.
Types of Portfolio Management Services Based on Investment Approach
Portfolio managers may also classify their services based on the nature of the client relationship and the degree of decision-making authority delegated to them. These types are explicitly mentioned in SEBI regulations.
Discretionary Portfolio Management Services
According to SEBI’s Portfolio Managers Regulations, 2020, a discretionary portfolio manager exercises, under a contractual arrangement, any level of discretion over the investment of client funds or securities. In practical terms, this means that the portfolio manager has complete authority to make investment decisions on behalf of the client, without seeking prior approval for each transaction. The manager may either follow a pre-defined investment strategy or customize the strategy based on the client’s needs. Discretionary services are suitable for clients who prefer to entrust their investments to professionals and do not wish to be involved in daily investment decisions.
Non-Discretionary Portfolio Management Services
In a non-discretionary arrangement, the portfolio manager provides investment recommendations, but the client retains full control over all final decisions. Every buy or sell action must be authorized by the client. The manager is responsible for executing transactions and maintaining records, but does not make independent decisions. This model suits investors who want expert guidance but prefer to remain actively involved in managing their investments.
Advisory Portfolio Management Services
In advisory services, the portfolio manager provides non-binding investment advice or ideas. The final investment decisions and execution of trades rest solely with the client. Typically, these services are used by institutional clients or sophisticated investors who already have experience in managing portfolios but consult country-specific or sectoral experts for informed decision-making.
Legal Identity of Portfolio Managers
Portfolio managers must be legally recognized as a body corporate. This ensures legal accountability and operational transparency. The Companies Act, 2013, defines a body corporate as a company incorporated either in India or abroad, but excludes co-operative societies and other entities as specified by the Central Government. Therefore, portfolio managers must operate as private companies, public companies, one-person companies, small companies, limited liability partnerships, or foreign-incorporated companies that have independent legal existence.
Regulatory Requirement to Act as a Portfolio Manager
Any entity wishing to operate as a portfolio manager must be registered with SEBI under the Portfolio Managers Regulations. The application for registration must be submitted through the SEBI Intermediary Portal. The application involves the payment of a non-refundable fee and must be made using Form A as prescribed in Schedule I. This form is comprehensive and requires detailed disclosures across multiple sections, including organizational structure, key personnel, infrastructure, financials, and proposed business plan.
Essential Information for Registration
Applicants are required to disclose a wide range of information. These include particulars of the applicant such as legal name, PAN, registered office, and branch office addresses. The organizational structure must include incorporation documents, board resolutions, organizational charts, and details of directors, partners, key management personnel, and compliance officers. The infrastructure section requires details about office premises, technology, equipment, disaster recovery systems, and data security measures. A three-year business plan must also be submitted, outlining growth targets and operational strategy. Financial disclosures must include capital structure, net worth, profitability data for three years, income sources, and resource deployment. Applicants must also detail all legal disputes, compliance history, and prior interactions with other regulatory bodies.
Evaluation Criteria for SEBI Registration
SEBI evaluates several factors before granting registration. These include the legal status of the applicant, availability of infrastructure, and presence of qualified key personnel. The principal officer must possess a relevant professional qualification and a minimum of five years of experience in related activities within the securities market. Additionally, the applicant must employ at least one other qualified professional with relevant experience. Any employee with decision-making authority over fund management must meet the same criteria as the principal officer. SEBI also checks for the absence of disciplinary action or litigation involving moral turpitude or economic offenses. The applicant must meet the prescribed net worth requirement of five crore rupees and satisfy SEBI that granting registration is in the interest of investors. If all requirements are met, SEBI issues a certificate of registration, which remains valid unless suspended or canceled.
Infrastructure Requirements for Portfolio Managers
Portfolio managers are required to maintain a minimum standard of infrastructure to ensure smooth operations and effective service delivery to their clients. The infrastructure must be appropriate for the scale and complexity of the portfolio management services offered. SEBI mandates that the portfolio manager must have a principal place of business with suitable office space, communication facilities, and essential office equipment. The firm should also have proper data processing capabilities, including both in-house and outsourced systems, supported by necessary computer hardware and software. A disaster recovery setup and a well-defined business continuity plan are also essential components of the required infrastructure. These measures ensure operational resilience and the ability to serve clients uninterrupted even during emergencies or unforeseen events.
Human Resource and Staffing Criteria
Portfolio managers must ensure they have a competent and experienced team to handle the responsibilities that come with managing client portfolios. SEBI requires that every portfolio manager appoint a compliance officer who is responsible for ensuring that the firm adheres to all applicable laws and regulations. Additionally, the principal officer must hold a relevant professional qualification and possess at least five years of experience in securities markets or related fields. The team must include at least one other person with two years of relevant experience and a recognized graduation degree. Further, any employee involved in fund management must also meet the same qualifications and certification criteria as the principal officer. This requirement helps to maintain the integrity of investment decisions and ensures that all portfolio management activities are carried out by skilled and qualified professionals.
Business Plan Submission
A business plan for the next three years must be included with the application for registration. This plan should provide a detailed explanation of the applicant’s business history, major past events, and the present structure of operations. The proposed business plan must describe how the portfolio manager intends to conduct its business and achieve financial and operational goals. It should also include projected profitability over the three years, outlining revenue targets, cost structure, and strategies for growth. The plan should demonstrate the applicant’s understanding of the market landscape and the competitive environment in which it operates. A well-articulated business plan provides SEBI with insights into the long-term viability of the applicant’s business model and its ability to serve clients effectively.
Financial Requirements and Net Worth Criteria
Financial stability is a critical consideration in the approval process for portfolio managers. Applicants must provide audited financial statements for the previous three years, detailing their capital structure, sources of income, net profit, and deployment of financial resources. The net worth requirement for registration as a portfolio manager is currently fixed at five crore rupees. A net worth certificate, not older than three months from the date of application, must be submitted as proof. This ensures that only financially sound entities are allowed to offer portfolio management services, reducing the risk to clients and enhancing trust in the industry. Information about the applicant’s principal banks and auditors must also be disclosed to SEBI as part of the application process.
Experience in Financial Services
Applicants must detail their experience in financial services. This includes a comprehensive record of the services rendered, market segments served, products offered, and overall client base. Experience in investment advisory, research, or fund management is considered particularly relevant. The regulator may give special consideration to entities with a proven track record in related financial services sectors. Providing this information helps SEBI evaluate whether the applicant has the necessary industry knowledge, operational expertise, and understanding of compliance to perform portfolio management activities effectively.
Additional Disclosures and Declarations
SEBI requires applicants to furnish several declarations and supporting documents with the registration application. These include a draft agreement with clients, a draft disclosure document, and details about custodians appointed for safekeeping client assets. The applicant must declare compliance with several key regulatory provisions, including adherence to SEBI circulars, disclosure norms, fee structures, reporting timelines, and record maintenance requirements. The firm must also declare the availability of the disclosure document on its website. Other important declarations involve the firm’s grievance redressal mechanism, dispute resolution policies, risk profiling procedures, and internal accounting systems. These disclosures provide SEBI with a clear picture of how the applicant plans to operate within the regulatory framework and safeguard client interests.
Fit and Proper Criteria for Portfolio Managers
Before granting registration, SEBI must be satisfied that the applicant, its directors, partners, principal officer, compliance officer, and employees meet the fit and proper criteria. This includes ensuring that the individuals involved have not been convicted of moral turpitude or economic offences and have no history of disciplinary actions by regulatory authorities. The applicant must also not be involved in any litigation related to securities markets that could affect its business. The fit and proper requirement is crucial to ensuring that only trustworthy, ethical, and competent entities operate as portfolio managers. The objective is to protect investor interests and maintain the integrity of the financial system.
Grant of Registration Certificate
Once SEBI is satisfied that all eligibility criteria have been met and the applicant is fit and proper, it will issue a certificate of registration. This certificate allows the portfolio manager to legally operate and offer services in India. The certificate remains valid unless suspended or cancelled by SEBI due to regulatory non-compliance or other issues. Portfolio managers must ensure continued compliance with SEBI regulations and circulars to maintain their registration status. Failure to do so may result in penalties, suspension, or revocation of the registration.
Operational Guidelines for Portfolio Managers
Once registered, portfolio managers must follow several operational guidelines to maintain transparency, accountability, and investor protection. These include segregating each client’s holdings in separate accounts and ensuring that client funds are kept in a separate bank account with a scheduled commercial bank. This ensures clear separation between the funds and assets of different clients and the company’s accounts. Portfolio managers are required to act in a fiduciary capacity and must not derive any direct or indirect benefits from client funds or securities. They are also prohibited from borrowing or lending on behalf of clients, except under conditions explicitly allowed by SEBI regulations. All transactions carried out by portfolio managers must be compliant with limitations imposed by the client, particularly concerning RBI regulations on securities.
Client Onboarding and Minimum Investment Requirement
SEBI has prescribed a minimum investment amount of fifty lakh rupees per client for onboarding new clients or accepting fresh investments from existing ones. This minimum threshold helps ensure that portfolio management services remain targeted at high-net-worth individuals or institutional investors who can bear market risks. Exceptions to the minimum investment requirement exist for accredited investors and co-investment portfolio managers, provided appropriate disclosures are made in the disclosure document. Before accepting a client, the portfolio manager must conduct a thorough Know Your Client (KYC) process and risk profiling. This helps align the investment strategy with the client’s risk tolerance, financial goals, and investment horizon.
Reporting and Disclosure Obligations
Portfolio managers must provide clients with regular reports on portfolio performance, asset allocation, transaction details, and compliance with investment strategy. The frequency and format of these reports must be clearly defined in the client agreement. Portfolio managers must also submit periodic reports and disclosure documents to SEBI. These reports help ensure regulatory oversight and allow SEBI to monitor the conduct and financial health of registered entities. All material changes to the investment strategy, fee structure, or organizational structure must be disclosed to SEBI and, where applicable, to clients. These obligations promote transparency and accountability in portfolio management operations.
Risk Management and Compliance
Risk management is an integral part of portfolio management. Portfolio managers must have a documented risk management framework that covers investment, operational, regulatory, and reputational risks. This includes limits on asset allocation, diversification rules, and procedures for monitoring market conditions. Compliance with SEBI regulations, internal investment policies, and client agreements must be monitored regularly. The compliance officer plays a central role in ensuring adherence to rules and policies and must escalate any violations to senior management and SEBI as necessary. Effective risk management helps protect client assets and reduces the likelihood of legal or reputational issues for the portfolio manager.
Grievance Redressal and Investor Protection
A robust grievance redressal mechanism is essential for maintaining investor trust. Portfolio managers must have a dedicated system for receiving, recording, and resolving client complaints. The turnaround time for resolving grievances should be minimal, and clients should be informed of the status of their complaints regularly. In cases where disputes cannot be resolved internally, clients have the option to escalate the matter to SEBI or approach investor grievance redressal forums. Transparency in addressing client concerns ensures confidence in the system and promotes long-term relationships between clients and portfolio managers.
Responsibilities of Portfolio Managers (Continued)
Portfolio managers have a fiduciary duty to act in the best interests of their clients. Beyond compliance with SEBI regulations, they are expected to follow industry best practices and maintain transparency. Their key responsibilities are as follows:
Risk Management and Suitability
Portfolio managers are required to manage risks in the portfolio by evaluating investment options based on their risk-return profile. They must ensure that the investments are suitable for the client based on their investment objective, financial situation, and risk tolerance. This involves conducting a thorough risk profiling at the time of onboarding and periodically updating the same.
Performance Reporting and Disclosure
Portfolio managers must provide clients with reports at defined intervals. These include details of portfolio holdings, transactions undertaken, performance summary, fees debited, and any other material information. SEBI mandates quarterly performance reporting, and these reports should follow a standard format to ensure comparability and transparency. Accurate and timely disclosure helps investors make informed decisions and builds trust.
Compliance with SEBI Regulations
Portfolio managers must comply with all applicable regulations under the SEBI (Portfolio Managers) Regulations, 2020, and any circulars or guidelines issued. This includes ensuring adherence to investment restrictions, maintaining records, submitting periodic reports to SEBI, and undergoing audits. Any violation can result in penalties, suspension, or cancellation of registration.
Maintenance of Books and Records
Portfolio managers must maintain proper books of accounts, records, and documents, including client agreements, investment advice, transaction details, and performance records. These must be preserved for at least five years and be available for inspection by SEBI at any time. This requirement supports accountability and enables audit trails in case of disputes or regulatory inquiries.
Fees Transparency
SEBI mandates that all fees, charges, and expenses must be disclosed in the client agreement. These may include portfolio management fees (fixed or performance-based), brokerage charges, custodian fees, audit fees, and other administrative expenses. Portfolio managers must not charge any fee not mentioned in the agreement. They are also required to disclose the impact of fees on portfolio performance.
Investor Grievance Redressal
Portfolio managers must establish a grievance redressal mechanism to address client complaints efficiently. They are required to display their grievance redressal procedure and contact details on their website and share them with clients. If grievances are not resolved satisfactorily, clients can escalate the issue to SEBI’s SCORES (SEBI Complaints Redress System) platform.
Agreement with the Client
Portfolio managers must enter into a written agreement with the client that sets out the terms and conditions, investment objectives, services offered, fees, rights,, and obligations of both parties, and risk disclosures. SEBI provides a format and minimum content for this agreement to ensure uniformity across the industry.
Custodian and Auditor Appointments
Every portfolio manager must appoint a SEBI-registered custodian for the safekeeping of securities for clients with assets under management (AUM) exceeding a certain threshold. Additionally, portfolio managers must appoint an independent auditor to audit their accounts and operations annually. Audit reports must be submitted to SEBI and shared with clients on request.
Investment Restrictions and Diversification Norms
SEBI has prescribed specific investment restrictions to ensure diversification and reduce concentration risks. For example, a portfolio manager cannot invest more than 25% of AUM in the securities of a single issuer. Restrictions also exist for investing in unlisted securities, derivatives, or related-party transactions. Adherence to these restrictions is critical to maintain a balanced and compliant portfolio.
Disclosures in Marketing and Advertising
Portfolio managers must ensure that all marketing material, advertisements, and promotional content are truthful, not misleading, and contain adequate disclaimers. Performance figures must be presented net of all fees and by SEBI-prescribed calculation methods. Misrepresentation or exaggerated claims in advertising can attract regulatory action.
Code of Conduct
Portfolio managers must follow the SEBI-prescribed Code of Conduct, which includes principles such as integrity, fairness, confidentiality, professional competence, and avoidance of conflict of interest. Any deviation from this code can be treated as misconduct and attract penalties.
Confidentiality of Client Information
Client information must be kept confidential and used only to provide portfolio management services. Portfolio managers are prohibited from sharing client data without explicit consent, except as required by law. Breach of confidentiality obligations is a serious offense under regulatory norms.
Inspection, Audit, and Disciplinary Proceedings
The Securities and Exchange Board of India (SEBI) holds the authority to inspect and audit the operations of a portfolio manager. This authority is exercised to ensure compliance with the SEBI (Portfolio Managers) Regulations, 2020. Inspections may be conducted either on a routine basis or when SEBI deems it necessary based on information received. The aim is to verify that the books of accounts, records, and documents are being maintained correctly and that the manager is acting in the best interest of the clients.
If discrepancies or violations are found, SEBI can initiate disciplinary proceedings, which may lead to actions such as suspension or cancellation of registration, monetary penalties, or issuance of directions to cease certain activities. SEBI can also impose restrictions or conditions on the operations of the portfolio manager to protect investor interests. All actions must follow the principles of natural justice, and the manager has the right to be heard before any penalty is imposed.
Code of Conduct for Portfolio Managers
Portfolio managers are expected to adhere to a prescribed code of conduct, which includes acting honestly, fairly, and in the best interests of their clients and the integrity of the market. They must maintain high standards of integrity and fairness in all dealings with clients, competitors, and others. Disclosures must be made transparently, and conflicts of interest must be properly managed or disclosed. The code also includes provisions related to confidentiality of client information, avoidance of misrepresentation, and prompt redressal of client grievances.
Portfolio managers must not make any statement that misrepresents the services they provide or that could mislead investors. Any advertisement or promotional material must be truthful and in compliance with the applicable regulations. The code of conduct helps in setting ethical standards and ensures that portfolio managers operate in a manner that strengthens investor confidence.
Reporting and Record-Keeping Requirements
Portfolio managers are mandated to maintain proper records of their transactions, client agreements, investment strategies, and other related documents. These records must be preserved for a minimum period as prescribed under the SEBI regulations. They must also submit periodic reports to SEBI and provide clients with reports on portfolio performance, transactions undertaken, and fees charged.
This ensures transparency and accountability and allows clients to review the performance of their investments. In the event of any dispute or inspection, these records form the basis for evaluating compliance and resolving issues. Proper documentation is also essential for calculating fees and assessing tax implications.
Renewal and Surrender of Registration
Portfolio managers must renew their registration before the expiry of the validity period by complying with the conditions and paying the required renewal fees. If a portfolio manager wishes to discontinue its operations, it must apply for surrender of registration. This process includes making arrangements for the transfer of client portfolios and assets and clearing all outstanding liabilities and complaints.
SEBI may accept the surrender application only after being satisfied that the portfolio manager has no pending obligations. This process ensures that investor interests are protected even when a manager exits the business.
Conclusion
The role of a portfolio manager is central to managing investment portfolios in a professional and regulated manner. SEBI’s comprehensive regulatory framework ensures that portfolio managers are qualified, act responsibly, and uphold the highest standards of transparency and integrity. From the registration process and types of services offered to the strict compliance requirements and code of conduct, the entire system is designed to foster trust and safeguard investor interests. As capital markets evolve, the regulatory framework continues to adapt to ensure that portfolio management remains a reliable and efficient option for both individual and institutional investors.