NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors

Role of Portfolio Managers: formula sheet

Full chapter guide

Key formulas

Portfolio manager (idea): Portfolio manager = contract with client + advises, directs or manages portfolio of securities or funds; Regulated by SEBI under the SEBI (Portfolio Managers) Regulations, 2020.
Discretionary PMS: Manager decides and executes; client consent not needed per trade; Manager uses sole and absolute discretion as per the agreement.
Non-discretionary PMS: Manager executes only on client's express prior instructions; Client gives consent for each transaction.
Advisory PMS: Manager advises; client decides and executes; Manager does not execute the trades.
Minimum investment: Minimum ₹50 lakh per client; Compare with mutual funds, which accept small amounts.
Ownership of assets: PMS: securities in client's name | Mutual fund: units in the scheme; PMS portfolios are individual, not pooled.
Minimum net worth of portfolio manager: Net worth ≥ ₹5 crore (₹5,00,00,000); Net worth is broadly paid-up capital plus free reserves. It must be maintained, not just shown at registration. The older 1993 limit was lower, so do not pick ₹2 crore.
Minimum client investment: Funds + market value of securities ≥ ₹50 lakh (₹50,00,000); The amount can be cash, securities or both. Count the total value. The limit is per client with the portfolio manager.
Who can be a portfolio manager: SEBI-registered body corporate only; An individual cannot hold the registration. Registration is granted by SEBI after checking eligibility.
Types of portfolio management service: Discretionary | Non-discretionary | Advisory; Discretionary means the manager decides. In non-discretionary, the client's consent is needed for each decision. In advisory, the client carries out the advice.
Core conduct rules: No guaranteed returns; client assets kept separate; custodian for securities; written agreement and disclosure document; Use these to eliminate wrong options on conduct questions.
Discretionary service: Manager decides independently within the agreed mandate; No consent is needed for each trade. The manager is still bound by the agreement and the regulations.
Non-discretionary service: Manager manages the portfolio, but only with client's prior consent for each decision; Look for the words 'prior consent' in the question.
Advisory service: Manager advises only; the client takes the decision; Advice is given, not discretionary management.
Fiduciary standard: Client's interest first + honesty and fairness + conflicts avoided or disclosed; Any act that benefits the manager at the client's cost breaches this duty.
Client asset segregation: Client funds and securities ≠ manager's own funds and securities; Client assets are accounted for client-wise, separately from the manager's own.
Reporting: Periodic reports to each client, at least once every three months; Reports cover portfolio holdings, transactions, fees and expenses. Check the agreement for any more frequent schedule.
Approach by asset class: Equity approach → mainly shares; Debt approach → mainly fixed income; Multi-asset → mix of asset classes; Classify by the main asset class named in the approach objective.
Growth vs value style: Growth → above-average earnings growth; Value → price below estimated worth; Growth stocks often have high valuation ratios. Value stocks often have low ones.
Approach vs style: Approach = the product offered; Style/strategy = how securities are selected within it; Exams test this difference directly.
Where it is disclosed: Each approach → described in the Disclosure Document, with objective, selection basis, benchmark and risks; The client is bound to the chosen approach through the agreement.
Fixed fee: Fixed fee = AUM × fee rate (% p.a.); Charged regardless of performance. Usually applied on average or opening AUM as the agreement states.
Performance fee with hurdle (fee only on excess): Performance fee = profit share % × (portfolio gain − hurdle amount); Hurdle amount = invested capital × hurdle rate. No fee if the gain is at or below the hurdle. This applies when the agreement says fee is on the excess only.
Performance fee with high water mark: Performance fee = profit share % × (current value − high water mark); Charged only if current value is above the high water mark. The mark is the highest value on which a fee was last charged.
Hybrid fee: Total fee = fixed fee + performance fee; Fixed part is lower than in a pure fixed-fee structure.
Entry load: Entry load = not permitted; A portfolio manager cannot charge an entry load to clients.
Equity capital gains rates (listed equity shares, STT paid): Short term (held up to 12 months): 20%. Long term (held over 12 months): 12.5% on gains above ₹1,25,000 in a year; Plus applicable surcharge and cess. These are the rates for transfers on or after 23 July 2024, as per the Finance Act in force. Rates may change in later Finance Acts, and exam questions follow the current workbook. They apply only to listed equity shares on which STT is paid. Other assets that a PMS may hold, such as debt, unlisted shares and units, have different holding periods and rates. Gains may be treated as business income instead, depending on the facts.
Dividend and interest: Taxed at the client's slab rate; Taxed under Income from Other Sources in the client's hands.

Quick revision

PMS is a professional service where a registered portfolio manager manages a client's securities or funds under a contract.
Portfolio managers are regulated by SEBI under its Portfolio Managers Regulations.
In discretionary PMS, the manager takes investment decisions on the client's behalf.
In non-discretionary PMS, the client's consent is needed for each decision.
In advisory PMS, the manager only advises and the client acts.
The client's money sits in an individual portfolio, unlike a pooled mutual fund scheme.
Know the workbook's exact minimum investment and eligibility conditions before the exam.
Managers owe disclosure, reporting and fair dealing to clients, and must keep client funds separate.
Fee types include fixed, return-based (performance) and hybrid fees, plus other charges.
Return-based fees often depend on a hurdle rate or high-water mark; learn how each works.
Check the workbook for how PMS gains are taxed and for the client's tax position.
Read each option fully; trap options often change one condition or number.

Common mistakes

Saying PMS pools client money into one fund with a common NAV. Fix: Remember: mutual funds pool and issue units. PMS keeps a separate portfolio for each client, held in the client's name.
Treating non-discretionary PMS as one where the manager decides freely. Fix: Only discretionary PMS gives the manager sole discretion. In non-discretionary PMS, each transaction needs the client's prior instruction.
Choosing ₹2 crore as the minimum net worth. Fix: Remember the 2020 Regulations: ₹5 crore. Cross out any note that still says ₹2 crore.
Mixing up ₹50 lakh and ₹5 crore. Fix: Link ₹5 crore to the firm's net worth and ₹50 lakh to the client's investment. Ask: who is the limit about?
Treating non-discretionary like discretionary service Fix: Link non-discretionary with prior client consent for each decision. Link discretionary with independent decisions within the mandate.
Believing a manager can guarantee returns Fix: Remember that no return can be assured. Past performance is not a promise of future results.
Treating approach and style as the same thing. Fix: Approach is the product. Style is the selection method inside it.
Calling a value stock one that is simply low priced in rupees. Fix: Value means price is low compared with estimated worth, not a small absolute price.
Charging the performance fee on the whole profit when a hurdle applies on the excess only. Fix: Always subtract the hurdle amount first when the agreement charges only on returns above the hurdle.
Treating the high water mark as the initial investment amount. Fix: The mark is the highest value on which a fee was charged. After a fee year it moves up and stays there if the value falls.

Exam tips

Learn the three PMS types by the question 'who decides and who executes'. Many MCQs are built on this.
Watch for scenario questions with no label. The words 'prior instruction' or 'consent for each trade' point to non-discretionary PMS.
For PMS vs mutual fund questions, anchor on pooling, ownership, customisation and minimum ticket size.
Do not guess when two options look alike. Negative marking is 10% of the marks for a question, so a wrong answer costs you.
Memorise ₹5 crore and ₹50 lakh with the subject attached: firm's net worth and client's minimum investment.
Watch for options that use old or invented numbers, such as ₹2 crore. They are deliberate distractors.
In this paper, a wrong answer costs 10% of the marks for the question, so a careful guess after removing two options is usually worth it.
Use conduct rules to eliminate options fast: no guaranteed returns, separate client assets, written agreement, disclosure document.