Explained: Sebi proposes MF-PMS framework model with entry fee at Rs 25 lakh. Who stands to benefit?

The Securities and Exchange Board of India (SEBI) has proposed a comprehensive overhaul of the Portfolio Management Services (PMS) framework, including the introduction of a new category of mutual fund-only PMS (MF-PMS). The proposal, outlined in a consultation paper released on Thursday, seeks to broaden the investment universe for portfolio managers while making professionally managed investment solutions more accessible to investors.

Sebi said the new framework could also create fresh business opportunities for portfolio managers and mutual fund distributors.

Under the proposed framework, MF-PMS portfolios will invest only in direct plans of mutual funds, exchange-traded funds (ETFs), and Specialized Investment Funds (SIFs).


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Sebi has also proposed revising the grandfathering provisions for existing PMS investors who entered the market when the minimum investment threshold was Rs 25 lakh. Under the proposal, all existing PMS clients—except those covered under the proposed MF-PMS framework—will have 36 months from the date the new regulations come into effect to meet the revised minimum investment requirement of Rs 50 lakh.

The introduction of PMS-MF is the centerpiece of the consultation paper, as it lowers the minimum investment threshold to Rs 25 lakh for portfolios investing exclusively in mutual funds. With the growing adoption of direct mutual fund plans among retail investors, many can reduce costs but continue to lack professional portfolio management, said Karan Aggarwal, Co-founder and CIO, Ametra PMS.

PMS-MF bridges this gap by allowing the emerging HNI segment (net worth of Rs 25 lakh or more) to combine the cost advantages of direct mutual funds with the expertise of professional portfolio managers, Aggarwal further said.

To avoid conflicts of interest, Sebi has proposed that entities offering MF-PMS maintain a clear separation between their distribution and portfolio management businesses. A distributor will not be allowed to sell regular mutual fund schemes and MF-PMS products to the same client.

The regulator has also proposed a lighter compliance framework for MF-PMS providers. The minimum net worth requirement would be reduced to Rs 2 crore from Rs 5 crore applicable to traditional PMS.

Sebi has also suggested simplifying qualification requirements for principal officers, making the appointment of an additional employee and a dedicated dealing room optional, and easing disclosure norms. Existing portfolio managers would be permitted to launch MF-PMS through a separate investment approach.

On fees, portfolio managers under the proposed MF-PMS framework may charge a fixed management fee of up to 2.5% of assets under management (AUM). Alternatively, they may levy a performance-linked fee or adopt a hybrid model combining fixed and performance-based charges, subject to client consent.

The market regulator also proposed a waiver of exit load provisions. This move is done to protect clients from double-charging of exit loads.

Sebi has also proposed improving operational flexibility for PMS investors by introducing demat account portability. Currently, investors switching from one portfolio manager to another are generally required to open a new demat account and complete fresh KYC formalities. The proposed change aims to make switching easier and reduce administrative hurdles.

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Expanding investment universe

As part of the proposed changes, Sebi has suggested expanding the investment universe for portfolio managers by allowing investments in to-be-listed securities, in addition to securities already listed on stock exchanges.

The regulator has also proposed permitting portfolio managers offering both discretionary portfolio management services (DPMS) and non-discretionary portfolio management services (NDPMS) to invest in foreign securities. The overseas investment universe would include listed international equities, listed debt securities, overseas mutual funds investing in listed equity and debt instruments, and overseas-listed real estate investment trusts (REITs).

By Sebi proposing to expand investment universe, Aggarwal said that the proposed relaxations in the consultation paper—covering short selling, hedging, foreign securities, IPO-bound securities, and unlisted investments—would restore PMS's original value proposition by enabling clients to consolidate their investments and market exposures under a single platform.

This would enhance portfolio flexibility while delivering meaningful operational and cost efficiencies for both clients and portfolio managers, he further said.

Demat Account Portability for clients of Portfolio Managers

Sebi has also proposed introducing demat account portability for PMS investors. Currently, investors switching from one portfolio manager to another are generally required to open a new demat account and complete the KYC process again.

The proposal seeks to enable one-time onboarding and seamless transfer of demat holdings and KYC records across portfolio managers, reducing paperwork, costs and administrative delays.

Independent fund managers

Sebi has proposed allowing independent fund managers to operate under a Sebi-registered portfolio manager instead of obtaining a separate PMS licence. Under the proposal, they can onboard their own clients and manage investment portfolios, while the registered portfolio manager will be responsible for regulatory compliance, KYC, infrastructure and trade execution.

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Who stands to benefit?

Aggarwal said that the performance-linked fee model better aligns the interests of investors and portfolio managers, ensuring that managers are rewarded only when they generate returns above normal investment expectations.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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