PRIM, But Is It Proper? Sebi lowers the velvet rope to ₹25 lakh, but the fees can still stack up

In the nursery rhyme, the Grand Old Duke of York had 10,000 men. He marched them up to the top of the hill, and he marched them down again. Sebi has done much the same with minimum ticket for portfolio management services (PMS). In 2012, Sebi raised it to ₹25 lakh. In 2020, it doubled to ₹50 lakh. Now, through PRIM (Portfolio Managers' Route for Investing in Mutual Funds), a new MF-only route, it's back at ₹25 lakh, although for a tamer product.

The new rulebook lets managers buy IPOs and new debt issues, and lets discretionary managers put up to 10% of a client's money into unlisted investment-grade bonds, with consent. It allows derivatives exposure of up to 1.25x the portfolio, the first explicit leverage the rules have permitted. PRIM lets managers build portfolios from direct MF plans, ETFs and SIFs, with the fixed fee capped at 1% (performance fees are allowed) and no more than 25% in funds run by an affiliated fund house.

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India's model is the nightclub bouncer who checks the size of your wallet. The rest of the world mostly lets you in, reserves wealth tests for riskiest features, then watches the bartender. India has that tool too. Its accredited-investor route, widened the same day, gates angel funds, but new PMS rules don't use it for leverage or unlisted debt.

US has no legal minimum. Fidelity will run a managed portfolio for $5,000, under a fiduciary duty at any size. Yet, in the early-2000s, separately managed accounts charged about 2.05% a year and largely disappointed. The hard line is on profit-sharing. Only clients with $1.4 mn under management (or $2.7 mn in net worth), roughly ₹13.4 cr, can be charged a performance fee, over 50x PRIM's ticket.

Since 2023, Britain's consumer duty lets FCA challenge a price for being poor value, not just misleading - faulting a restaurant for a ₹900 cup of coffee, not a misleading menu. The EU is adding similar value-for-money tests, and limits commissions that portfolio managers may keep.

Hong Kong gates products, not doors. Only individuals with HK$8 mn (₹9.8 cr) portfolio qualify as 'professional investors' who can be offered products barred from retail sale, and even they get suitability checks on complex products. Equity accumulators, nicknamed 'I kill you later,' caused losses after 2008, and protests outside Hong Kong's Securities and Futures Commission (SFC) offices.

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Since 2010, performance fees accrue only above the portfolio's previous peak. So, managers are never paid twice for the same gains. Operating costs, excluding brokerage, are capped at 0.5%, upfront fees are banned, and mutual-fund holdings must be direct plans. Sebi even cut PRIM's proposed fixed-fee cap from 2.5% to 1%.

Short of accredited-investor wealth, nothing offered a personally managed portfolio between the humble SIP and the ₹50 lakh PMS. India now has a regulated middle rung.

The 1.25x limit adds room for long-short strategies, which, used well, carry less market risk than a long-only book. The worry is, who decides. Hong Kong puts complex products behind suitability checks. India's main gate is a signature on a consent form.

Add up a fixed fee of up to 1%, a performance fee on top, up to 0.5% in operating costs, and the underlying funds' own charges. If the portfolio is mostly index funds, the client is paying a chauffeur to ride the bus. Once a performance fee kicks in, the stack can cost more than the regular plans many such investors hold today.

Over 10 yrs, over 70% of Indian active funds in every category trailed their benchmark. So, a manager of managers must beat the market after 2 sets of fees.

'Investment grade' did not save anyone at ILFS. Unlisted bonds are hard to sell and valued by models. A 2004 Journal of Financial Economics paper, 'An econometric model of serial correlation and illiquidity in hedge fund returns', found hard-to-sell assets making returns look smoother than they really are, hiding volatility. 10% in such paper, backed only by a consent form, is fine until the day you want your money back.

India's code of conduct bars managers from putting their own interests first. What it lacks is a test of whether the price is worth paying, and disclosure alone is not enough. In a 2010 Review of Financial Studies paper, 'Why Does the Law of One Price Fail?', 4 S&P 500 index funds, identical in what they held but not in fees, were given to subjects. Even with fees made plain, over 80% still didn't put everything in the cheapest.

That is why Britain now judges value for money, and Europe soon will. In India, a performance fee charged to a ₹25 lakh client, or 1% a year, to wrap an index fund, must be disclosed but is never judged.

Old Duke of York marched his men up the hill and down again. Sebi has made the descent safer. But it's yet to make it cheaper.

The writer is former ED, Nomura India