Operational Aspects of Portfolio Managers: formula sheet

Key formulas

On-boarding sequence

Prospect → KYC and CDD → risk profiling → disclosure document → agreement → account opening → funds or securities accepted

Remember the order. Funds or securities are taken only after the agreement is in place.

Minimum investment per client

₹50 lakh (value of funds and/or securities)

Under the SEBI (Portfolio Managers) Regulations, 2020. Accredited investors have separate relaxations; check the workbook.

Disclosure document timing

Disclosure document given to the prospective client before the agreement is signed (at least two days before)

The client's acknowledgement of receipt is kept on record.

Core KYC documents

PAN + proof of identity and address + photograph + bank details (+ demat details)

Non-individuals also give constitution documents, authorised signatory details and beneficial owner details.

Beneficial owner

Beneficial owner = natural person who ultimately owns or controls the client

Must be identified for companies, partnerships and trusts.

Record keeping

KYC and transaction records kept for the period set by PML rules (five years)

Records must be retrievable on request by regulators.

Order of documents

Disclosure document → client reads it → agreement signed → funds or securities accepted and managed

The disclosure document always comes before the agreement. The manager cannot act for the client without an agreement.

Purpose test

Disclosure document = information about the portfolio manager; Agreement = contract between manager and client

Use this to sort any option that says which document contains what.

Agreement core terms

Service type + investment approach + funds/securities handed over + fees + risks + period + settlement + termination

These are the themes the agreement must cover. Service types are discretionary, non-discretionary and advisory.

Disclosure document core content

Manager background + services + approaches + fees and expenses + risk factors + performance + litigation + associates + taxation and accounting policies

This is information about the manager and the offer, not the client's personal terms.

Minimum investment

₹50 lakh per client (₹50,00,000), in funds or securities

This is the general minimum under the 2020 Regulations. Accredited investors are treated differently. Confirm the exact exemption in your workbook.

Fixed fee

Fixed fee = AUM × fee rate % × (period ÷ 12 months)

Charged irrespective of performance. Use average or stated AUM basis as per the agreement.

Profit sharing fee (no hurdle)

Performance fee = Profit × profit-share %

Charged only on profit, normally above the high water mark.

Profit sharing with hurdle

Performance fee = (Profit above hurdle or high water mark) × share %

No fee if the portfolio stays below the hurdle or high water mark, as defined in the agreement.

Hybrid fee

Total fee = Fixed fee + Performance fee

Fixed part is usually lower than in a pure fixed structure.

High water mark

Chargeable profit = Current value − High water mark (if positive)

If the value is at or below the mark, no performance fee.

Net return to client

Net value = Closing value − fees − chargeable expenses

Compare returns after costs, not before.

Sub-period return

Sub-period return = (Ending value ÷ Beginning value) − 1

Beginning value includes any cash flow made at the start of that sub-period. Ending value is taken just before the next cash flow.

TWRR (linked returns)

TWRR = [(1 + r₁) × (1 + r₂) × … × (1 + rₙ)] − 1

Link the sub-period returns by multiplying. Do not add them. Deposits and withdrawals do not distort the result.

Reporting frequency

Client report: at intervals not exceeding 3 months

More frequent reports can be given if the client requests them.

Record retention

Books and records: minimum 5 years

Maintained client-wise.

Segregation rule

Client assets ≠ portfolio manager's assets ≠ other clients' assets

Separate bank and demat accounts per client. The custodian is independent and SEBI-registered.

Pro rata allocation

Client's allocation = Total quantity executed × (Client's order quantity ÷ Total order quantity)

Same average price for every client in the bunched order. Round off fairly as per the written policy.

Average execution price

Average price = Σ(quantity × price of each fill) ÷ total quantity

Every participating client gets this single price, not a price chosen per client.

Allocation rule

Allocate fairly, on a pre-defined policy, no cherry picking

Allocation should not be altered after seeing price movement to benefit favoured clients.

Segregation rule

One client = one separate set of books and holdings

Client funds and securities are kept separate from the manager's own and from other clients'.

Grievance escalation order

Portfolio manager → SCORES → ODR

Know the sequence. Exam traps reverse it or let the client skip the firm's own process.

Exit load cap (first three years)

Year 1: up to 3% | Year 2: up to 2% | Year 3: up to 1% | After year 3: nil

These are maximums, applied to the amount withdrawn. Check the exact wording in your NISM workbook.

Exit load amount

Exit load (₹) = Amount withdrawn × applicable exit load %

Use the rate for the year of withdrawal, not the rate for the year of investment.

Audit rule

Annual audit by an independent chartered accountant

Do not confuse this with SEBI inspection, which is a separate power of the regulator.

Quick revision

• PMS minimum investment per client is ₹50,00,000 in cash, securities or both, subject to the relaxations in the regulations for accredited investors.
• Clients must be offered a direct onboarding option, with no distributor involved.
• KYC must be completed before the portfolio manager starts managing the client's funds.
• The disclosure document is given to the client before the agreement is signed, and it describes the manager, services, risks and fees.
• The portfolio management agreement is a binding contract that sets out the terms, services and charges of the relationship.
• Fee models are fixed, performance-based or a mix of both (hybrid).
• Entry load is not permitted. Exit load is capped at 3%, 2% and 1% of the amount withdrawn in years 1, 2 and 3 respectively, and is nil after 36 months. It must be disclosed and be part of the agreement, and the amount charged is credited to the client's portfolio.
• Client funds and securities are kept separate from the portfolio manager's own, and securities are held with a custodian.
• The portfolio manager must send periodic reports to clients at intervals not exceeding three months (quarterly), covering portfolio composition, transactions, fees and expenses, and performance, as per the regulations. Clients may also request information on demand.
• Trades are settled through the exchange and depository system, and the back office reconciles records with the custodian.
• Complaints go first to the portfolio manager, then to the regulator's channels such as SCORES and online dispute resolution if unresolved.
• A client can terminate the service by notice as per the agreement, and the settlement of the portfolio follows the agreed terms.

Common mistakes

• Thinking funds can be accepted first and paperwork completed later. Fix: Remember that KYC, the disclosure document and the signed agreement come before funds or securities are taken.
• Treating KYC as only a PAN card. Fix: KYC covers identity, address, PAN, photograph and bank details, plus beneficial owner details for non-individuals.
• Thinking the agreement is signed first and the disclosure document is handed over afterwards. Fix: Remember the client must be informed before committing. Disclosure document first, then agreement.
• Treating the two documents as the same thing. Fix: The disclosure document describes the manager and the offer. The agreement is the contract that binds both parties. Ask which one has the legal effect of a contract.
• Charging performance fee on the whole portfolio value instead of the profit. Fix: Performance fee is a percentage of profit only, never of total AUM.
• Charging performance fee when the portfolio is below the high water mark. Fix: Always compare the closing value with the high water mark before computing profit.
• Thinking the portfolio manager can hold client securities in its own name or pool them. Fix: Remember that PMS is client-wise. Each client has separate accounts and the securities belong to the client.
• Treating the custodian as the party that decides which securities to buy or sell. Fix: The custodian only safeguards securities and settles trades. Investment decisions stay with the portfolio manager or the client, depending on the service.
• Thinking allocation can be decided after the trade based on price performance. Fix: Remember allocation follows a pre-defined fair policy. Choosing after the outcome is cherry picking.
• Giving different clients different prices in one bunched order. Fix: Use the average price of the whole order for every participating client.

Exam tips

• Learn the on-boarding sequence as a chain. Many MCQs only ask which step comes first or last.
• Memorise the ₹50 lakh minimum and that it can be met in funds, securities or both.
• Link every AML term to its meaning: beneficial owner, PEP, enhanced due diligence, suspicious transaction.
• Watch for options that make a distributor mandatory. The direct on-boarding option is always available.
• With negative marking of 10% per wrong answer in this paper, answer when you can eliminate two options, and skip only when you have no basis at all.
• Expect sorting questions: given an item, say whether it belongs in the disclosure document or the agreement.
• Learn the order of documents cold. It is the easiest mark in this topic.
• Watch for options that let the manager skip the disclosure document or ignore the SEBI format. These are usually wrong.