NISM Series XXI A PMS Short Notes – Chapter 6 & 7: Mutual Funds and Role of Portfolio Managers
Welcome to Part 4 of 7 in our complete NISM Series XXI A – Portfolio Management Services (PMS) Distributors Exam study series. This blog covers:
- Chapter 6: Mutual Funds
- Chapter 7: Role of Portfolio Managers
Both chapters are high-weightage and directly relevant to understanding how PMS differs from mutual funds — a core concept in this NISM PMS certification exam.
📖 Previous Parts: Part 1 | Part 2 | Part 3
Table of Contents
- What is a Mutual Fund?
- Benefits of Mutual Funds
- How Mutual Funds Work (AMC Structure)
- Types of Mutual Fund Schemes
- NAV, Total Expense Ratio, and Unit Pricing
- Mutual Fund vs PMS — Key Differences
- Role of Portfolio Managers
- Types of PMS Services
- Practice Questions
Chapter 6: Mutual Funds What is a Mutual Fund?
A mutual fund is a trust-based investment vehicle that pools money from multiple investors who share common financial goals. The pooled money is then invested in a diversified portfolio of securities — stocks, bonds, government securities, and other instruments.
The mutual fund is managed by an Asset Management Company (AMC) on behalf of unitholders.
Featured Snippet Answer: What is a mutual fund? A mutual fund is a professionally managed investment trust that collects money from multiple investors and invests it in a diversified portfolio of securities in line with its stated investment objective.
Benefits of Investing Through Mutual Funds
| Benefit | Explanation |
|---|---|
| Professional Management | Expert fund managers make investment decisions on behalf of investors |
| Affordable Diversification | Even small investors can access a diversified portfolio, reducing risk |
| Economies of Scale | Bulk transactions reduce transaction costs for all investors |
| Transparency | Regular disclosure of portfolio holdings, NAV, and performance |
| Tax Benefits | ELSS (tax-saving funds) offer deductions; equity funds have favourable LTCG treatment |
| Convenient Options | SIP, SWP, STP options for flexible investing |
| Regulatory Protection | SEBI-regulated, providing investor safety and grievance redressal |
| Product Variety | Equity, debt, hybrid, commodity, international — wide range of options |
How Mutual Funds Work — AMC Structure
Day-to-day operations of a mutual fund are handled by the AMC (Asset Management Company). The AMC is appointed by the sponsor (or trustees, if authorised) with SEBI approval.
Key Functions in an AMC
| Function | Responsibility |
|---|---|
| Compliance Function | Ensures SEBI regulations, scheme mandates, and legal requirements are met |
| Fund Management | Portfolio construction, security selection, and asset allocation decisions |
| Operations & Customer Service | Unit allotment, redemptions, investor queries, and back-office operations |
| Sales & Marketing | Distributor management, investor awareness, and product promotion |
Mutual Fund Ecosystem — Key Entities
- Sponsor: The entity that establishes the mutual fund (like SBI, HDFC, ICICI, Axis)
- Trustees: Oversight body that safeguards unitholder interests and ensures the AMC complies with SEBI regulations
- AMC: The fund management company — makes investment decisions
- Custodian: Holds securities on behalf of the fund
- Registrar and Transfer Agent (RTA): Manages investor records and transactions
Types of Mutual Fund Schemes Based on Structure
| Type | Feature |
|---|---|
| Open-Ended Funds | Buy and sell units at any time at the current NAV. No fixed maturity. |
| Close-Ended Funds | Fixed maturity period. Units traded on stock exchanges. NFO-based subscription. |
Based on Management Style
| Type | Feature |
|---|---|
| Active Funds | Fund manager actively selects stocks/bonds to outperform the benchmark. Higher expense ratio. |
| Passive Funds (Index Funds / ETFs) | Replicate a market index (Nifty 50, Sensex). Lower cost. No active decision-making. |
Based on Investment Universe
- Equity Funds: Primarily invest in stocks. Higher risk, higher return potential.
- Debt Funds: Invest in bonds, T-bills, corporate debt. Lower risk, regular income.
- Hybrid Funds: Combination of equity and debt.
- Commodity Funds: Gold funds, silver funds, or commodity ETFs
- International Funds: Invest in foreign markets and global securities
NAV, Total Expense Ratio, and Unit Pricing Net Asset Value (NAV)
NAV is the current value of one unit of a mutual fund scheme.
NAV = (Total Market Value of Portfolio + Accrued Income – Liabilities) ÷ Total Units Outstanding
NAV depends on:
- Mark-to-Market (MTM) value of all securities in the portfolio
- Accrued income (dividends, interest)
- Minus all expenses and liabilities
Unit Pricing (Open-Ended Funds)
Transactions (purchases and redemptions) in open-ended funds are executed at NAV. This ensures fair pricing — all investors (entering, exiting, or staying) are treated equally.
Total Expense Ratio (TER)
All expenses incurred by the AMC for running a scheme are collectively expressed as the Total Expense Ratio (TER) — expressed as a percentage of daily average AUM.
TER includes:
- Investment and Advisory Fee (most significant component)
- Administration charges
- Registrar & Transfer Agent fees
- Audit fees
- Distribution expenses (within SEBI limits)
SEBI has set TER limits — lower AUM funds can charge higher TER; larger funds have lower TER ceilings.
Mutual Fund vs PMS — Key Differences
| Parameter | Mutual Fund | Portfolio Management Services (PMS) |
|---|---|---|
| Minimum Investment | ₹500 (SIP) or ₹5,000 (lumpsum) | ₹50 lakhs |
| Investor Type | Retail investors | HNIs and sophisticated investors |
| Pooling | Pooled investment (units shared) | Separate account — no pooling |
| Customisation | Standard schemes — no customisation | Highly customisable to client needs |
| Transparency | Monthly disclosure of top holdings | Full portfolio visibility in client's own demat |
| Ownership | Investor owns units of the fund | Investor directly owns the securities |
| Regulation | SEBI (Mutual Fund) Regulations | SEBI (Portfolio Managers) Regulations 2020 |
| Fee Structure | TER (included in NAV) | Management fee + performance fee |
Chapter 7: Role of Portfolio Managers What Does a Portfolio Manager Do?
A portfolio manager plays a pivotal role in designing and managing customised investment solutions for clients. The core objective is to:
- Minimise risk
- Maximise risk-adjusted returns
- Align the portfolio with the client's goals, constraints, and risk appetite
A Portfolio Manager is a SEBI-registered body corporate that advises, directs, or manages a portfolio of securities on behalf of investors.
Types of PMS Services By Provider Type
- PMS by Asset Management Companies (AMCs) — offered by existing mutual fund houses
- PMS by Brokerage Houses — offered by large broking firms
- Boutique (Independent) PMS Houses — specialised, independent portfolio management firms
By Service Type 1. Discretionary PMS
The portfolio manager independently and individually manages the client's funds without seeking client approval for each investment decision.
- The PM has full discretion over buy/sell decisions
- Can follow a standard strategy or a customised mandate
- Client receives regular reports but does not approve individual trades
2. Non-Discretionary PMS
The portfolio manager manages the funds strictly as per the client's directions. The PM must consult the client before every transaction.
- PM does not exercise independent judgment on buy/sell decisions
- Client has full control over investment decisions
- PM role is purely advisory and executional
3. Advisory PMS
In this model, the portfolio manager only suggests investment ideas or provides non-binding recommendations. The investor makes the final decision and also executes the transactions.
- PM acts as a consultant, not a decision-maker
- No execution responsibility on the PM
Comparison of PMS Service Types
| Feature | Discretionary | Non-Discretionary | Advisory |
|---|---|---|---|
| Decision Authority | Portfolio Manager | Client | Client |
| Execution | PM executes | PM executes on client instruction | Client executes |
| Client Involvement | Low | High | Full |
| Customisation | Strategy-based or custom | Fully directed by client | Suggestion-based |
Practice Questions — Chapters 6 & 7
-
Which entity manages the day-to-day operations of a mutual fund?
a) Trustees b) Sponsor c) AMC d) Custodian
✅ Answer: c) AMC
-
In which type of PMS does the portfolio manager consult the client before every transaction?
a) Discretionary b) Advisory c) Non-Discretionary d) Active
✅ Answer: c) Non-Discretionary
-
NAV of a mutual fund depends on which of the following?
a) MTM value of portfolio securities b) Number of fund managers c) Sponsor's capital d) SEBI registration date
✅ Answer: a) MTM value of portfolio securities
-
What is the minimum investment required for PMS?
a) ₹5 lakhs b) ₹10 lakhs c) ₹50 lakhs d) ₹1 crore
✅ Answer: c) ₹50 lakhs
-
In a mutual fund, investors own:
a) Direct shares in companies b) Units of the fund scheme c) A separate demat account d) Government bonds directly
✅ Answer: b) Units of the fund scheme
Key Takeaways — Chapters 6 & 7 at a Glance
- Mutual fund = Pooled investment trust managed by AMC under SEBI supervision
- AMC functions: Fund Management, Compliance, Operations, Sales & Marketing
- Open-ended: Anytime buy/sell at NAV | Close-ended: Fixed term, listed on exchange
- Active funds: Beat benchmark | Passive/Index: Replicate benchmark
- NAV = (Portfolio Value + Income – Expenses) ÷ Total Units
- TER = Total Expense Ratio — most important expense is the investment advisory fee
- PMS minimum ₹50 lakhs | MF minimum much lower (₹500 SIP)
- PMS: Separate account, direct ownership, customised
- Discretionary PMS: PM decides | Non-Discretionary: Client decides | Advisory: PM suggests only
Internal Links
- 📘 ← Part 3: Fixed Income & Derivatives
- 📘 Part 5: Operational Aspects of Portfolio Managers →
- 🎯 Free NISM XXI A Mock Test →
- 📄 NISM Study Material PDF →
Tags: NISM Series XXI A, mutual fund exam, mutual fund distributor exam, portfolio management services, NISM PMS, discretionary non-discretionary PMS, NAV, total expense ratio, nism mutual fund, SEBI portfolio managers regulations 2020