SEBI has proposed a new 'MF-only' Portfolio Management Services (PMS) category, lowering the investment threshold to ₹25 lakh. This move aims to expand professional investment services to more affluent individuals but creates a potential conflict for mutual fund distributors, who risk losing commission income if clients shift to these fee-based models.
The Securities and Exchange Board of India (SEBI) has released a consultation paper in July 2026, proposing a new category of Portfolio Management Services (PMS) specifically for mutual fund investments. This 'MF-only' PMS framework is designed to help mass-affluent investors access professional portfolio management at a lower entry cost.
Under the current proposal, the minimum investment threshold for this new category is set at ₹25 lakh, which is significantly lower than the ₹50 lakh requirement for traditional PMS products. Additionally, the proposal suggests a minimum net worth requirement of ₹2 crore for entities applying to manage these portfolios. This move is intended to bridge the gap between retail mutual fund investing and high-end discretionary portfolio management.
For mutual fund distributors, however, this proposal introduces a significant challenge to their existing business model. Currently, many distributors earn commissions from 'regular' mutual fund plans, which are built into the expense ratio of the funds. In contrast, an MF-only PMS would exclusively invest in 'direct' mutual fund plans, which do not pay any commissions to distributors. Instead, the portfolio manager would charge a direct management fee to the client, which SEBI has proposed to cap at 2.5% of assets under management.
This shift effectively creates a 'double squeeze' for distributors. First, they are already facing competition from investors choosing direct plans to save on costs. Second, if clients move from regular mutual fund schemes to an MF-only PMS structure, the distributor loses their ongoing commission income entirely. This acceleration toward a fee-based model means that distributors may need to rethink how they add value to clients, moving away from commission-based earnings toward advisory fees.
To prevent conflicts of interest, the regulator has included a strict 'firewall' provision in the proposal. Companies that act as both mutual fund distributors and MF-PMS providers cannot service the same client through both businesses. They must choose one model or maintain a strict separation of operations. This rule is designed to prevent companies from automatically migrating commission-paying clients into higher-fee PMS mandates as their wealth increases.
Investors should also consider the economic trade-offs. While an MF-only PMS provides professional oversight and active management, it may result in a higher overall cost for the client. The investor would pay the expense ratio of the underlying mutual funds, plus the additional management fee charged by the portfolio manager. The final implementation of these rules will be a key event for the distribution industry, and investors may monitor how firms adjust their business models to comply with these new regulatory boundaries.