NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Operational Aspects of Portfolio Managers

Fund Accounting, Custody and Reporting to Clients in PMS

Updated 11 October 2026 · Fact-checked

A portfolio manager must keep each client's funds and securities separate, use an independent custodian for safekeeping, maintain books of account for every client, and send periodic reports, at least every three months. Performance is reported using the time-weighted rate of return (TWRR), which removes the effect of client deposits and withdrawals.

Understand Fund Accounting, Custody and Reporting to Clients

A portfolio manager handles other people's money and securities. SEBI therefore wants three things: safety of assets, accurate records, and regular information to the client. This topic covers all three.

Safety. Client assets must never mix with the portfolio manager's own assets or with another client's assets. Each client has a separate bank account and a separate demat account. Securities are held in the client's name or as the agreement provides, never as the portfolio manager's own holding. A custodian keeps the securities safe and settles trades. It is a SEBI-registered entity, independent of the portfolio manager, so no single party controls both the investment decisions and the safekeeping.

Records. The portfolio manager keeps books of account for each client. They record every purchase, sale, receipt, payment, fee and expense. The portfolio is valued at market value, and units or a NAV can be computed for the strategy. Records must be kept for at least five years. Books are also subject to audit and SEBI inspection.

Reporting. The client must receive a periodic report at intervals not exceeding three months, and more often if the client asks. It shows the portfolio composition, the transactions in the period, opening and closing balances of cash and securities, and income received and fees charged. The report also states the portfolio's performance.

Performance. Clients add and withdraw money at different times, so a simple gain figure misleads. The standard method is the time-weighted rate of return (TWRR). It splits the period at each cash flow, computes the return for each sub-period, and links them. It measures the manager's skill and not the client's timing of deposits.

Key formulas to remember

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.

How to solve Fund Accounting, Custody and Reporting to Clients questions

Questions in this topic are either rule recall (who does what, how often, how long) or a TWRR calculation. Use this method for both.

1Identify the question type: custody and segregation, books and records, client reporting, or performance calculation.
2For rule questions, recall the party: the portfolio manager keeps the books and reports, the custodian safeguards the securities.
3Match the number to the rule: three months for reports, five years for records. Check whether the option is a maximum interval or a minimum period.
4For TWRR, list every date on which the client added or withdrew money and split the period there.
5Compute each sub-period return as ending value ÷ beginning value − 1, with the beginning value including the cash flow made at its start.
6Link the returns by multiplying (1 + r) for each sub-period, then subtract 1.
7Eliminate options that mix client and manager assets, add the returns instead of multiplying, or use the wrong interval.

Quickest way: Three-check shortcut

When to use it: Use it for multiple-choice questions on custody, reporting and performance when time is short.

Safety words (segregated, custodian, client's name) point to client assets being kept apart from the manager's.
Frequency words (periodic, at least) point to a report within three months.
Return words (deposits, withdrawals, manager's skill) point to TWRR, not simple gain.
For TWRR numbers, convert each sub-period to a factor such as 1.10 and 1.05, multiply, and subtract 1.
Reject any option that adds sub-period returns.

Common mistakes in Fund Accounting, Custody and Reporting to Clients

Thinking the portfolio manager can hold client securities in its own name or pool them.
Students confuse PMS with a pooled vehicle like a mutual fund.
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.
The words custody and management sound similar.
Fix: The custodian only safeguards securities and settles trades. Investment decisions stay with the portfolio manager or the client, depending on the service.
Adding sub-period returns to get TWRR.
Students are used to adding simple percentages.
Fix: Link returns by multiplication: (1 + r₁) × (1 + r₂) − 1.
Using the closing value without adjusting for a deposit made during the period.
Students overlook the cash flow and read the gain as performance.
Fix: Split the period at each cash flow and add the deposit to the beginning value of the next sub-period.
Confusing the three-month reporting interval with an annual report.
Annual statements and annual audits are common elsewhere, so students mix them up.
Fix: Client reports are periodic, at intervals not exceeding three months. Annual audit is a separate matter.
Stating the record-keeping period as one year or three years.
Students mix it up with the three-year validity of the NISM certificate.
Fix: Records are kept for a minimum of five years. The NISM certificate validity is a different fact.

Worked examples

Example 1

A client starts a PMS account with ₹10,00,000. After six months the portfolio value is ₹11,00,000 and the client adds ₹11,00,000. At the end of the year the portfolio is worth ₹23,10,000. What is the TWRR for the year?

Show the solution

Split the year at the deposit date: sub-period 1 is the first six months, sub-period 2 the next six.
Sub-period 1 return = 11,00,000 ÷ 10,00,000 − 1 = 0.10 = 10%.
After the deposit, the beginning value of sub-period 2 = 11,00,000 + 11,00,000 = ₹22,00,000.
Sub-period 2 return = 23,10,000 ÷ 22,00,000 − 1 = 0.05 = 5%.
TWRR = 1.10 × 1.05 − 1 = 1.155 − 1 = 0.155 = 15.5%.

Answer: TWRR = 15.5%

Example 2

What is the maximum interval at which a portfolio manager must send periodic reports to a client, unless the client asks for more frequent reports? Options: (a) 1 month (b) 3 months (c) 6 months (d) 12 months.

Show the solution

Recall the rule: periodic reports must be sent at intervals not exceeding three months.
One month is more frequent than required and applies only if the client asks.
Six and twelve months exceed the permitted interval.
Select the option that matches the maximum interval.

Answer: (b) 3 months

Exam tips

Learn the pairs: custodian with safekeeping, portfolio manager with books and reports, TWRR with the manager's skill.
NISM-Series-XXI-A has negative marking of 10% per question. If you can remove two options, answering is usually worth it. If you have no clue, you may skip.
TWRR questions are short. Write each sub-period as a factor, multiply, and subtract 1. Do not add returns.
Read the stem for words such as at least, not exceeding and minimum, because the numbers differ in direction.
Trap options often suggest pooling client assets or using the manager's own account. Reject them straight away.

Practice questions from Operational Aspects of Portfolio Managers

Fund Accounting, Custody and Reporting to Clients: frequently asked questions

What is the role of a custodian in PMS?

The custodian safeguards the securities of clients and handles their settlement. It is a SEBI-registered entity independent of the portfolio manager. This keeps safekeeping separate from investment decisions.

How often must a PMS provider send reports to clients?

Periodic reports must go to the client at intervals not exceeding three months. A client can ask for reports more often. The report covers portfolio composition, transactions, balances, income, fees and performance.

How is PMS performance calculated using TWRR?

Split the period at each deposit or withdrawal and compute the return for each sub-period. Then multiply (1 + return) for all sub-periods and subtract 1. This removes the effect of the client's cash flows.

Why does PMS use TWRR and not a simple return?

A simple return is affected by when the client adds or withdraws money, which the manager does not control. TWRR measures only the manager's investment performance, so portfolio managers can be compared fairly.