SEBI proposes new MF-PMS framework: What does it mean for investors, portfolio managers?

Portfolio Management Services (PMS) are professional, regulated investment solutions that build and manage customised portfolios of stocks, bonds, and other securities for high-net-worth individuals. Unlike mutual funds, a PMS gives you direct ownership of individual assets rather than pooled units, and requires a higher minimum investment.

The Securities and Exchange Board of India (SEBI) has proposed a dedicated Mutual Fund-only Portfolio Management Services (MF-PMS) framework.

Also Read: Choosing PMS over MF? Do it only if you’re rich and well-informed

This proposed framework creates a bridge between retail mutual fund investing and high-ticket traditional PMS. It allows portfolio managers to discretionary-manage client funds exclusively through direct mutual fund schemes, ETFs, and Specialised Investment Funds (SIFs).

Key highlights of proposed MF-PMS framework

Lower capital entry barrier

• For Investors: The minimum portfolio size is halved to Rs 25 lakh (compared to Rs 50 lakh for conventional PMS). This targets mass-affluent investors who want active asset allocation without building a stock-specific portfolio.
• For Portfolio Managers: The minimum net worth requirement for launching an MF-PMS is reduced to Rs 2 crore (down from Rs 5 crore for traditional PMS).

Permitted investment universe

Managers are restricted from buying individual stocks, bonds, or unlisted instruments directly under this licence. All allocations must go into:

• Direct plans of mutual fund schemes
• Exchange-Traded Funds (ETFs)
• Specialised Investment Funds (SIFs)

Fee structure, no double exit load

• Management Fee Cap: Portfolio managers can charge a fixed fee of up to 2.5 per cent of Assets Under Management (AUM).
• Performance Fees: Variable or performance-linked fee structures are permitted with client consent.
• No Double Exit Load: To avoid penalising investors twice, SEBI has proposed exempting exit loads at the PMS level, meaning investors only pay underlying mutual fund exit loads if applicable.

Simplified setup, lighter compliance rules

To encourage Registered Investment Advisers (RIAs) and boutique wealth management firms to adopt this model, SEBI has proposed lighter compliance rules:

• Optional Infrastructure: A dedicated dealing room and additional employee headcount are not mandatory.
• Relaxed Qualification Norms: Certification requirements for Principal Officers have been simplified.
• Streamlined Reporting: Disclosure documents and reporting burdens are reduced.

Conflict of interest rules for distributors (MFDs)

Mutual Fund Distributors can apply to offer MF-PMS, but SEBI has instituted strict firewall requirements:

• Distributors must maintain an arm's-length separation between regular distribution and MF-PMS services.
• Strict Segregation: A provider cannot offer regular (commission-earning) mutual fund distribution and fee-based MF-PMS to the same client.

Comparison: MF-PMS vs Traditional PMS

Lower entry ticket

Currently, investors with Rs 25–50 lakh often manage direct mutual fund portfolios on their own due to high advisory thresholds.

MF-PMS gives them access to discretionary asset allocation, rebalancing, and professional management at a lower entry ticket.

Who will benefit?

• Mass-affluent investors (Rs 25 Lakh – Rs 50 Lakh Portfolio)
• Investors with Rs 25–50 lakh who were previously locked out of traditional PMS (which requires a minimum of Rs 50 lakh). It provides access to professionally-managed, discretionary portfolios at a lower entry ticket.
• Investors seeking asset allocation without direct stock risk
• Those who want professional tactical asset allocation across equities, debt, gold ETFs, and sector funds without the company-specific risks of individual stock picking.
• Overwhelmed DIY mutual fund investors:
• Investors holding 10 to 20 direct mutual fund schemes on their own without a clear strategy for rebalancing, risk management, or exit timing.

To whom it may not matter

• HNIs seeking ‘alpha’ from individual stocks
• High-net-worth investors looking for concentrated stock bets, small-cap stock strategies, or unlisted equity may not choose this. MF-PMS is restricted strictly to Direct Mutual Funds, ETFs, and Specialised Investment Funds (SIFs).

• Simple, low-cost DIY investors
• Investors who follow a straightforward "SIP and hold" approach with 2–4 index or flexi-cap funds. Paying an additional PMS management fee (up to 2.5 per cent AUM) on top of mutual fund expense ratios would unnecessarily eat into their returns.
• Cost-sensitive investors
• Those unwilling to pay a double fee layer (the PMS advisory/management fee plus the underlying mutual fund TER).
• Retail investors with portfolios under Rs 25 Lakh
• Since the minimum ticket size is Rs 25 lakh, retail investors below this threshold cannot access it.

How are you taxed?

Like traditional PMS, MF-PMS operates on a pass-through tax structure. This means the manager does not pay tax at the PMS entity level - every transaction executed in your portfolio is taxed directly in your personal tax return.

Key tax difference: Direct Equity PMS vs MF-PMS

Taxation example

Imagine you invest Rs 50 lakh. During the year, the manager needs to churn 30 per cent of the portfolio to lock in gains or cut losses.

Scenario A: Direct Equity PMS

1. Your PMS manager buys 15 individual stocks.

2. Six months later, the manager sells 5 of those stocks at a total profit of Rs 5,00,000 (Rs 5 lakh) to buy 5 new stocks.

3. Tax Outcome (Year 1):

• Realised STCG (held less than 12 months): Rs 5,00,000
• STCG Tax Payable (20 per cent): Rs 1,00,000 due in your tax return for that financial year!
• This Rs 1,00,000 leaves your portfolio immediately, reducing your total compounding power.

Scenario B: MF-PMS (MF-only PMS)

1. Your MF-PMS manager allocates Rs 50 lakh across 4 Direct Equity Mutual Funds.

2. Inside those 4 mutual funds, the underlying fund managers actively trade stocks, generating Rs 5,00,000 in gains. However, your MF-PMS manager does not sell or switch the mutual fund schemes.

3. Tax outcome (Year 1):

• Realised Capital Gains in your demat account: Rs 0
• Tax Payable: Rs 0
• The entire Rs 5,00,000 gain stays inside the mutual funds and continues to compound tax-free until your MF-PMS manager actually switches or redeems those mutual fund units.

Key takeaway

MF-PMS shields you from the "hidden" tax drag of stock-level trading churn while still giving you an expert manager to rebalance your overall mutual fund asset allocation.

While layering a PMS manager over existing mutual fund experts sounds like a recipe for double the gains, it usually results in performance dilution and a severe double fee drag. Investors end up paying both the underlying mutual fund's expense ratio (0.5 per cent –1.0 per cent) and the PMS management fee (up to 2.5 per cent), pushing total annual costs to 2.25 per cent – 3.0 per cent.

Also Read: Have ₹50 lakh to spare? It may be time to consider a PMS investment

This extra fee layer forces the PMS manager to consistently outperform the broader market index by at least 2 per cent – 3 per cent every year just to break even with a basic, low-cost direct index fund.