NISM-Series-X-A: Investment Adviser (Level 1) · Portfolio Manager

PMS Investment Approaches and Operational Requirements for Portfolio Managers

Updated 11 October 2026 · Fact-checked

A portfolio manager under SEBI rules runs client money through a stated investment approach, keeps client funds and securities separate from its own, appoints an independent SEBI-registered custodian to hold client securities (it cannot be its own clients' custodian), and follows a code of conduct. To solve, identify the service type, then apply the segregation, custodian and conduct rules.

Understand Investment Approaches and Operational Requirements

A portfolio manager is a SEBI-registered body corporate that manages a client's portfolio of securities or funds under a contract. The rules sit in the SEBI (Portfolio Managers) Regulations, 2020. The service comes in three types: discretionary (the manager decides and acts on its own), non-discretionary (the manager acts only with the client's prior consent for each decision) and advisory (the manager only advises, and the client acts).

An investment approach is a broad outline of the kind of securities and instruments the manager will invest in, and the objective it follows. Think of it as a named strategy, such as a large-cap approach or a debt approach. The manager can offer several approaches. It must describe each one to clients in the disclosure document, so that the client knows what the money will be used for.

The core idea of operations is separation. In PMS, the client owns the securities directly, in a portfolio specific to that client. This is the main difference from a mutual fund, where many investors pool money into a scheme and hold units. Because of this, the manager must keep client money apart from its own money, and each client's money apart from other clients'. It must not pool funds in a way that mixes accounts.

The custodian is an independent entity that holds and safekeeps client securities and handles settlement-related functions. It exists to add a check: the manager decides what to trade, but a separate party holds the assets. This lowers the risk of misuse. The manager must appoint an independent custodian registered with SEBI to hold client securities. It cannot act as custodian for its own clients. Advisory services do not involve the manager holding client assets, so the manager has no client securities to place with a custodian there.

Conduct and risk rules complete the picture. The manager must act with integrity, fairness, due skill, care and diligence, disclose conflicts of interest, and put client interest first. It must not promise or guarantee returns. It must keep records and have its books audited. The minimum investment per client is ₹50 lakh (₹50,00,000), counted across all of that client's portfolios with the manager and met with funds or securities. It relates to the discretionary and non-discretionary services, and accredited investors are relaxed from it. The manager must also maintain a minimum net worth of ₹5 crore at all times, as a continuing requirement and not only at registration.

Key formulas to remember

Types of PMS: Discretionary = manager decides | Non-discretionary = client consent needed | Advisory = advice only; Exam questions often ask who takes the investment decision or who executes it.
Minimum client investment: ₹50,00,000 per client (funds or securities); relaxed for accredited investors; Applies under the 2020 Regulations to discretionary and non-discretionary services, across all of the client's portfolios with the manager. It is not a requirement for the advisory service. Do not confuse it with the manager's net worth requirement.
Minimum net worth of portfolio manager: ₹5 crore, maintained at all times; This is a continuing requirement for the manager, needed at registration and afterwards. It is not a client limit.
Investment approach: Investment approach = broad outline of securities and instruments + objective; It is disclosed to clients. A manager may offer more than one.
Segregation rule: Manager's own funds ≠ client funds; client A ≠ client B; Separate bank accounts and separate client-wise records apply.
Returns rule: No guarantee or assurance of returns; Past performance may be shown with disclosures, but future returns cannot be promised.

How to solve Investment Approaches and Operational Requirements questions

Use this method for any MCQ on portfolio manager approaches, custody or conduct.

1Read the question and mark the keywords: discretionary, non-discretionary, advisory, custodian, segregation, conduct.
2Identify who is acting: the manager, the client or the custodian.
3Recall the matching rule: who decides, who holds the assets, whose money is kept separate.
4Check for numbers. Match ₹50,00,000 to client minimum and ₹5 crore to manager net worth.
5Eliminate options that allow pooling, guaranteed returns, mixing own and client funds, or hiding conflicts.
6Prefer the option that protects the client: disclosure, independence, separation and consent.
7Confirm that exactly one option fits all conditions in the question before marking it.

Quickest way: Protect the client filter

When to use it: Use when time is short and two options look similar.

Ask: which option gives the client more protection or more disclosure?
Reject any option that mixes money, guarantees returns or removes independence.
For service type, link discretionary to manager's own decision and non-discretionary to client consent.
For numbers, tie ₹50,00,000 to the client and ₹5 crore to the manager.

Common mistakes in Investment Approaches and Operational Requirements

Treating PMS like a mutual fund with pooled units.
Both are professionally managed and both invest in securities.
Fix: Remember that PMS holds securities in the client's own portfolio, while a mutual fund pools money and issues units.
Mixing up ₹50,00,000 and ₹5 crore.
Both appear in PMS chapters and both are minimums.
Fix: ₹50,00,000 is the client's minimum investment. ₹5 crore is the manager's minimum net worth.
Saying a non-discretionary manager decides alone.
Students focus on the word manager and ignore the type.
Fix: Non-discretionary needs the client's prior consent for each decision. Only discretionary allows independent decisions.
Thinking the custodian chooses the investments.
Custodian and manager both handle the portfolio.
Fix: The custodian holds and safekeeps securities and supports settlement. The manager makes investment decisions.
Accepting an option that promises assured returns if the strategy is conservative.
A safe-sounding strategy feels like it could carry a promise.
Fix: A portfolio manager cannot guarantee or assure returns under any approach.
Ignoring conflict disclosure in conduct questions.
Students think only fraud counts as a conduct breach.
Fix: Failure to disclose a conflict of interest is itself a conduct failure. Pick the option with disclosure.

Worked examples

Example 1

A portfolio manager offers a service where it takes each investment decision for the client without asking the client before every trade. Which type of portfolio management service is this?

A. Advisory
B. Non-discretionary
C. Discretionary
D. Custodial

Show the solution

Find the key fact: the manager decides and acts without per-trade consent.
Recall that advisory means advice only, and the client acts. This does not fit.
Recall that non-discretionary needs client consent for each decision. This does not fit.
Custodial is not a type of portfolio management service. It relates to safekeeping.
The match is discretionary.

Answer: C. Discretionary

Example 2

Which statement about handling client funds and securities by a portfolio manager is correct?

A. Client funds may be mixed with the manager's own funds if records are kept
B. Client funds must be kept separate from the manager's own funds, and securities are safekept with an independent custodian
C. The manager may promise a minimum return if it uses a debt-oriented approach
D. The custodian decides which securities to buy for the client

Show the solution

Test A: mixing own and client funds breaks the segregation rule. Reject.
Test B: separation of funds and use of an independent custodian match the rules. Keep.
Test C: guaranteeing or assuring returns is not allowed under any approach. Reject.
Test D: the custodian holds assets, while the manager decides investments. Reject.
Only B fits all the rules.

Answer: B. Client funds must be kept separate from the manager's own funds, and securities are safekept with an independent custodian

Exam tips

Link each PMS type to its decision-maker. Many questions test only this link.
Memorise both numbers: ₹50,00,000 for the client and ₹5 crore for the manager's net worth. Options often swap them.
Wrong answers often allow pooling, mixing of funds or assured returns. Reject these quickly.
For conduct questions, choose the option with disclosure, fairness and client interest first.
X-A has negative marking of 25% of the marks assigned to a question: a wrong answer costs 0.25 on a 1-mark question and 0.5 on a 2-mark question. Guessing is a strategy choice, not a rule. It tends to pay off when you can eliminate at least one or two options, and it is riskier on 2-mark caselet questions.

Practice questions from Portfolio Manager

Investment Approaches and Operational Requirements in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Investment Approaches and Operational Requirements: frequently asked questions

What is an investment approach in PMS?

It is a broad outline of the kind of securities and instruments a portfolio manager will invest in, along with the objective. A manager can offer several approaches. Each is described in the disclosure document given to the client.

What is the role of a custodian in PMS?

The custodian is an independent entity that safekeeps client securities and supports settlement. It does not take investment decisions. Its separation from the manager adds a safety check for the client.

What is the difference between PMS and a mutual fund?

In PMS, the manager runs a portfolio for each client, and the securities are held for that client. In a mutual fund, many investors pool money in a scheme and get units. PMS also has a high minimum investment of ₹50,00,000 per client.

Can a portfolio manager promise returns to a client?

No. A portfolio manager cannot guarantee or assure returns. It must disclose risks and conduct itself with integrity, fairness and due care.