Types of Portfolio Management Services – Discretionary | Non-Discretionary | Advisory

Portfolio management services in India are classified three different ways. By who provides the service, by the class of assets the portfolio holds, and by how much decision-making control the client retains. The third classification is the one that finds mention in the regulations. It determines who decides what to buy, what the portfolio may hold, and whether a custodian has to be appointed at all.

Table of Contents

1. Classification by Provider
2. Classification by Product Class
3. Discretionary Portfolio Management Services
4. Non-Discretionary Portfolio Management Services
5. Advisory Services
6. What Each Type May Invest In
7. Frequently Asked Questions

Check out NISM X Taxmann's Portfolio Management Services (PMS) Distributors, the official NISM workbook for the NISM-Series-XXI-A certification. It covers the registration requirements and general responsibilities of portfolio managers, the administration of the investor's portfolio, and the operational, taxation and regulatory framework within which each type of service operates.

1. Classification by Provider

On the basis of who provides the service, PMS in India falls into three groups.

1. PMS offered by asset management companies
2. PMS offered by brokerage houses
3. Boutique, or independent, PMS houses

The workbook records that the major providers of portfolio management services in India are big brokerage firms, asset management companies and independent experts.

2. Classification by Product Class

By the class of product the portfolio is built from, PMS is further classified as:

1. Equity based PMS
2. Fixed income based PMS
3. Commodity PMS
4. Mutual fund PMS
5. Multi asset based PMS

Portfolio managers may also classify their clients on the basis of net worth.

3. Discretionary Portfolio Management Services

Under the SEBI (Portfolio Managers) Regulations, 2020, a discretionary portfolio manager means a portfolio manager who, under a contract relating to portfolio management, exercises or may exercise any degree of discretion as to the investment of funds or management of the portfolio of securities of the client.

In practice the discretionary portfolio manager individually and independently manages the funds of each investor, as the contract provides. The mandate may follow an existing investment approach or strategy that the portfolio manager already offers, or it may be customised to the client’s requirement.

The client hands over the decision. That is the defining feature.

4. Non-Discretionary Portfolio Management Services

A non-discretionary portfolio manager manages the funds in accordance with the directions of the client. The portfolio manager does not exercise discretion over buy or sell decisions and has to consult the client on every transaction.

Two questions stay with the investor: what to buy or sell, and when to buy or sell. Execution of the trade is done by the portfolio manager.

The distinction is worth stating precisely, because it is frequently blurred in marketing material. In a non-discretionary mandate the portfolio manager provides investment execution services. It does not provide investment management services.

5. Advisory Services

In an advisory role the portfolio manager suggests investment ideas or provides non-binding investment advice. The investor takes the decisions and the investor also executes the transactions.

These arrangements are typically used by institutional clients who manage their portfolios themselves but hire country experts in each market they invest in.

	Discretionary	Non-Discretionary	Advisory
Who decides what to buy	Portfolio manager	Client	Client
Who executes	Portfolio manager	Portfolio manager	Client
Nature of the advice	Not applicable	Client’s own direction	Non-binding
Service provided	Investment management	Investment execution	Investment advice
Custodian required	Yes	Yes	No

The custodian position is a genuine regulatory difference rather than a matter of practice. Every portfolio manager must appoint a custodian in respect of securities managed or administered by it. The requirement does not apply to a portfolio manager providing only advisory services, or to a co-investment portfolio manager.

6. What Each Type May Invest In

The investment universe is not the same across the three.

A discretionary portfolio manager shall invest the funds of clients in securities listed or traded on a recognised stock exchange, money market instruments, units of mutual funds, and other securities as specified by SEBI from time to time.

A portfolio manager offering non-discretionary or advisory services may invest, or advise on investment of, up to 25 per cent of the assets under management of such clients in unlisted securities. That is in addition to the securities permitted for discretionary portfolio management.

For large value accredited investors, the portfolio manager may offer discretionary, non-discretionary or advisory services for investment of up to 100 per cent of assets under management in unlisted securities. This is subject to appropriate disclosures in the disclosure document and to the terms agreed between the client and the portfolio manager.

One further point of consequence for any PMS client. Early withdrawal is otherwise governed by the agreement, but in three circumstances funds or securities can be withdrawn before the maturity of the contract notwithstanding anything in that agreement: on voluntary or compulsory termination of portfolio management services by either party, which does not apply to a co-investment portfolio manager; on suspension or cancellation of the portfolio manager’s certificate of registration by SEBI; and on the bankruptcy or liquidation of the portfolio manager.

The current text of the Portfolio Managers Regulations, with its amendment history and the circulars issued under it, is on Taxmann.com | Research.

7. Frequently Asked Questions

What are the three types of portfolio management services?

Discretionary, non-discretionary and advisory. The classification is drawn from the SEBI (Portfolio Managers) Regulations, 2020 and turns on who makes the investment decision.

What does non-discretionary portfolio management mean?

The portfolio manager manages the funds in accordance with the client’s directions and does not exercise discretion over buy or sell decisions. The client decides what to buy and when. The portfolio manager executes.

Who is advisory PMS meant for?

Institutional clients who manage portfolios on their own but hire country experts in each country. The portfolio manager suggests investment ideas or gives non-binding advice; the investor takes the decisions and executes the transactions.

Does an advisory-only portfolio manager need a custodian?

No. The requirement to appoint a custodian does not apply to a portfolio manager providing only advisory services, or to a co-investment portfolio manager.

Can a PMS invest in unlisted securities?

A discretionary mandate is restricted to listed or traded securities, money market instruments, mutual fund units and other SEBI-specified securities. Non-discretionary and advisory services may deploy up to 25 per cent of assets under management in unlisted securities, in addition to the securities permitted for discretionary portfolio management. For large value accredited investors, a portfolio manager may offer discretionary, non-discretionary or advisory services for investment of up to 100 per cent of assets under management in unlisted securities, subject to appropriate disclosure in the disclosure document and the terms agreed with the client.

Which type gives the client the most control?

Advisory. The client receives ideas, decides, and executes. Discretionary gives the least, since the investment decision passes to the portfolio manager entirely.

Working towards the NISM-Series-XXI-A certification? Every type of service, and the conduct standards attaching to each, is covered in NISM X Taxmann's Portfolio Management Services (PMS) Distributors. Structured courses on securities market and financial regulation are available on Taxmann.com | Learning.