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NISM Series XXI A PMS Short Notes – Chapter 8: Operational Aspects of Portfolio Managers

12 Apr 2026 • NISM-Series-21A: Portfolio Management Services (PMS) Distributors Mock Tests

 

NISM Series XXI A PMS Short Notes – Chapter 8: Operational Aspects of Portfolio Managers

Welcome to Part 5 of 7 in our NISM Series XXI A – PMS Distributors Exam study series. This post covers Chapter 8: Operational Aspects of Portfolio Managers — a highly practical and compliance-heavy chapter that is tested regularly in the NISM XXI A certification exam.

This chapter covers: who can invest in PMS, how clients are onboarded, what disclosures are required, the fee structure, and the obligations of portfolio managers under SEBI regulations.

📖 Previous Parts: Part 1 | Part 2 | Part 3 | Part 4

Table of Contents

  1. Who Can Invest in PMS?
  2. Disclosures to Prospective Clients
  3. Global Investment Performance Standards (GIPS)
  4. Client Onboarding Process
  5. KYC Requirements
  6. Agreement Between Portfolio Manager and Investor
  7. Direct Onboarding in PMS
  8. Costs, Expenses, and Fees of PMS
  9. High Water Mark and Hurdle Rate
  10. Practice Questions

1. Who Can Invest in PMS? — Eligible Entities

As per SEBI (Portfolio Managers) Regulations 2020, the following entities can invest in PMS with a minimum investment of ₹50 lakhs (in cash or securities with a minimum value of ₹50 lakhs):

# Eligible Investor Type
1 Individual investors (resident Indians)
2 Non-Resident Indians (NRIs) — as per RBI guidelines
3 Hindu Undivided Family (HUF)
4 Proprietorship Firms
5 Association of Persons (AOP)
6 Partnership Firms
7 Limited Liability Partnerships (LLPs)
8 Trusts
9 Body Corporates (companies)

Key Exam Fact: Minimum PMS investment = ₹50 lakhs (cash or securities). Below this threshold, portfolio managers are not permitted to accept funds from clients.

2. Disclosures to Prospective Clients

Accurate and standardised disclosure is essential to help investors make informed decisions before investing in a PMS product.

Regulatory Requirement (SEBI PM Regulations 2020)

Portfolio Managers are required to provide a Disclosure Document to every prospective client along with the account opening form — before signing the agreement.

What the Disclosure Document Must Contain

  • Details about the portfolio manager and key personnel
  • Investment philosophy and approach
  • Type of services offered (discretionary / non-discretionary / advisory)
  • Fee structure and all associated charges
  • Risk factors
  • Performance history (if any)
  • Grievance redressal mechanism
  • Information about direct onboarding option

The disclosure document must be updated within 7 days if there is any material change in information.

3. Global Investment Performance Standards (GIPS)

GIPS are ethical standards for calculating and presenting investment performance developed for investment firms. They are based on two core principles:

  1. Fair Representation
  2. Full Disclosure

Originally developed for investment firms managing composite strategies, GIPS ensures that the performance information presented to prospective clients is accurate, complete, and consistent across firms.

Key features of GIPS:

  • Standardises how past performance is reported
  • Prevents cherry-picking of best-performing periods
  • Requires inclusion of all fee-paying discretionary portfolios in composites
  • Promotes global comparability of investment performance

4. Client Onboarding Process in PMS

The two most important elements of the PMS customer lifecycle are:

  1. Client Onboarding
  2. Reporting

Steps in the Onboarding Process

Step Requirement
Step 1 Reading the Disclosure Document — client must receive and read the disclosure document before signing
Step 2 Fulfilling KYC Requirements — know your customer verification as per SEBI and AML guidelines
Step 3 Submitting Duly Filled Application Form — complete all required forms with accurate information

5. KYC Requirements for PMS Clients

KYC (Know Your Customer) is mandatory for all PMS investors. Requirements differ by investor type:

KYC for Resident Indian Individuals

  • PAN card
  • Aadhaar / address proof
  • Photograph
  • Bank account details
  • Demat account details

KYC for Non-Resident Indians (NRIs)

  • Passport copy (identity proof)
  • Overseas address proof
  • Indian PAN card
  • NRI Demat Account: Held under PINS (Portfolio Investment Scheme) or Regular NRI account
  • NRI Trading Account: For executing equity transactions in India
  • Bank account — NRE (repatriable) or NRO (non-repatriable) account

6. Agreement Between Portfolio Manager and Investor

Before starting portfolio management services, the portfolio manager must enter into a written agreement with the client.

What the Agreement Must Clearly Define

  • The nature of the relationship (discretionary / non-discretionary / advisory)
  • Mutual rights, liabilities, and obligations
  • Investment objectives and mandate
  • Fee structure and payment terms
  • Reporting frequency and format
  • Duration and termination conditions
  • Grievance redressal mechanism

The agreement serves as the legal foundation of the entire PMS relationship and must be signed before any funds are accepted from the client.

7. Direct Onboarding in PMS

As per a specific SEBI circular, portfolio managers are required to offer clients the option to be onboarded directly — without going through any distributor or intermediary.

Key Requirements

  • Portfolio managers must clearly disclose the direct onboarding option in:
  • Their disclosure documents
  • Marketing materials
  • Their official website
  • The option must be prominently featured — not buried in fine print

Direct plans typically come with lower costs as there is no distributor commission involved.

8. Costs, Expenses, and Fees of Investing in PMS

Investors in PMS are charged for various services. A clear understanding of the fee structure is essential for the NISM XXI A exam.

Types of Charges in PMS

Charge Type Description
Investment Management & Advisory Fee Primary charge for portfolio management. Can be flat fee, fixed %, or performance-linked.
Custodian / Depository Fee Charged for holding and safekeeping securities in the client's demat account
Registrar & Transfer Agent Fee Charged for maintaining investor records and processing transactions
Brokerage & Transaction Costs Charged for executing buy/sell trades on behalf of the client
Certification & Fund Accounting Charges Charges for professional certifications and accounting of fund activities
Out-of-Pocket & Incidental Expenses Any additional costs incurred in managing the portfolio

Important: In PMS, the investor (not the fund) is charged brokerage fees for each transaction. This is different from mutual funds where brokerage is absorbed within the TER.

9. High Water Mark and Hurdle Rate High Water Mark (HWM)

The High Water Mark is the highest value ever reached by a client's portfolio or account.

  • Portfolio managers charge performance-based fees ONLY on returns above the previously achieved High Water Mark
  • This protects investors from paying performance fees on recovered losses

Example: Initial Portfolio Value: ₹1,00,00,000 Year 1 — Portfolio rises to: ₹1,20,00,000 ← New High Water Mark Year 2 — Portfolio falls to: ₹1,05,00,000 (below HWM) → No performance fee charged in Year 2

Year 3 — Portfolio rises to: ₹1,30,00,000 (above previous HWM of ₹1.2 Cr) → Performance fee charged only on gains above ₹1,20,00,000 = ₹10,00,000 Hurdle Rate

The hurdle rate is a minimum benchmark return that the portfolio must exceed before the portfolio manager can charge performance fees.

  • Defined in the agreement between the PM and the investor
  • Can be an absolute percentage (e.g., 8% p.a.) or a benchmark return (e.g., Nifty 50)
  • Portfolio managers earn performance fees only on returns above the hurdle rate

HWM vs Hurdle Rate — Quick Comparison

Feature High Water Mark Hurdle Rate
What it is Highest past portfolio value achieved Minimum required return threshold
Purpose Prevents double-charging after losses Ensures PM earns performance fee only if minimum return is delivered
When fee is charged Only on gains above previous HWM Only on gains above hurdle rate
Investor Protection High High

Practice Questions — Chapter 8

  1. What is the minimum investment amount to open a PMS account?

    a) ₹10 lakhs   b) ₹25 lakhs   c) ₹50 lakhs   d) ₹1 crore

    ✅ Answer: c) ₹50 lakhs

  2. High Water Mark protects investors by:

    a) Guaranteeing minimum returns   b) Charging performance fees only on gains above previous peak value   c) Reducing brokerage costs   d) Setting fixed annual fees

    ✅ Answer: b)

  3. GIPS standards are based on which two principles?

    a) Risk and Return   b) Transparency and Liquidity   c) Fair Representation and Full Disclosure   d) Efficiency and Profitability

    ✅ Answer: c) Fair Representation and Full Disclosure

  4. The disclosure document in PMS must be given to the client:

    a) After signing the agreement   b) At the time of onboarding only   c) Along with account opening form, before signing the agreement   d) After the first investment

    ✅ Answer: c)

  5. Which of the following is NOT an eligible entity for PMS investment?

    a) Hindu Undivided Family   b) Partnership Firm   c) Retail Cooperative Society   d) LLP

    ✅ Answer: c) Retail Cooperative Society is not listed as eligible

Key Takeaways — Chapter 8 at a Glance

  • Minimum PMS investment: ₹50 lakhs (cash or securities)
  • Eligible investors: Individuals, NRIs, HUF, Partnership Firms, LLPs, Trusts, Body Corporates
  • Disclosure document must be shared BEFORE the agreement is signed
  • GIPS = ethical performance reporting standards — Fair Representation + Full Disclosure
  • Onboarding: Disclosure Document → KYC → Application Form
  • High Water Mark = PM charges performance fee only when portfolio value exceeds previous peak
  • Hurdle Rate = Minimum return the PM must deliver before charging performance fees
  • In PMS, the investor directly bears brokerage and transaction costs
  • Direct onboarding must be offered — SEBI mandate

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Tags: NISM Series XXI A, PMS operational aspects, high water mark, hurdle rate, GIPS standards, SEBI portfolio managers regulations 2020, KYC PMS, nism study material, PMS fees charges, direct onboarding PMS, portfolio management services India