The Securities and Exchange Board of India has proposed a new portfolio management category focused exclusively on mutual funds. This structure allows direct fee deduction from investment assets, potentially streamlining revenue for advisers. However, a ₹25 lakh entry threshold and strict compliance standards may create barriers for smaller wealth managers.
The Securities and Exchange Board of India (SEBI) has released a consultation paper introducing a mutual fund-only Portfolio Management Services (PMS) category. This framework seeks to fill the gap between standard mutual fund investing and traditional PMS offerings. Under this proposal, portfolio managers would build strategies using only mutual fund schemes, specifically utilizing direct plans to remove distribution commission costs for clients.
Impact on Fee Collection and Revenue Models
A primary change offered by this structure is the method of fee collection for Registered Investment Advisers (RIAs). Currently, RIAs must bill clients separately, which often results in irregular cash flow or payment delays. By adopting a PMS structure, managers can deduct advisory fees directly from the client’s investment corpus. This model is expected to provide more predictable revenue and reduce administrative burdens related to chasing payments from individual clients.
Compliance and Net Worth Requirements
While the fee mechanism appears advantageous, the proposal introduces significant regulatory obligations. Because PMS providers exercise direct control over client funds, they are subject to more frequent reporting and stricter oversight compared to standard advisory services. To encourage participation, the regulator has proposed reducing the minimum net worth requirement for entities offering these services to ₹2 crore, down from the previous ₹5 crore threshold. Despite this reduction, many smaller distributors and advisers may find the cumulative cost of compliance, audit, and technology infrastructure prohibitive.
Market Perspectives and Potential Risks
Industry participants have highlighted several challenges beyond compliance. One major concern is whether the structure offers enough unique value, given that the difference in expense ratios between direct and regular mutual fund plans is already narrowing. Additionally, there is a risk that the introduction of performance-based fees could incentivize excessive buying and selling of funds within a portfolio. Such frequent trading can trigger exit loads and tax implications, which might harm the long-term returns for investors.
Some industry experts suggest that rather than building independent platforms, smaller wealth managers might choose to partner with established PMS houses to leverage their existing infrastructure. Furthermore, while the current proposal mandates a ₹25 lakh investment, some market participants have indicated that lowering this barrier to ₹10 lakh could help in broader adoption by retail investors. Investors should track the final regulatory guidelines, as the ultimate impact on portfolio performance will depend on the cost structures, fee caps, and the ability of managers to select funds that consistently outperform the broader market after accounting for all management fees.