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

Introduction to Portfolio Management for NISM XXI-A

Updated 11 October 2026 · Fact-checked

Portfolio management is the professional management of a client's money across securities and assets to meet stated goals, within the client's risk tolerance and constraints. Services are discretionary (manager decides and executes), non-discretionary (client approves each decision) or advisory (manager only advises; client acts). Identify who takes the decision.

Understand Introduction to Portfolio Management

A portfolio is a collection of investments held together to meet a goal. Portfolio management is the process of choosing, monitoring and changing those investments so that the goal is met with a level of risk the investor can accept.

The main objectives are to earn returns that suit the investor's goals, to control risk, to keep the portfolio liquid enough for the investor's needs, and to respect constraints such as time horizon, tax position and any restrictions the client sets. Return and risk always travel together. A good manager does not chase the highest return. The manager seeks the best return for the risk the client can take.

Portfolio management is a process, not a single act. It starts with understanding the client's objectives and risk profile, then setting an investment policy, deciding asset allocation, selecting securities, and then monitoring, rebalancing and measuring performance. Later topics in this chapter cover each stage.

Portfolio management services (PMS) can be offered in three ways. The difference lies in who takes the investment decision. In discretionary services, the manager takes decisions and executes them on the client's behalf, as per the agreement. In non-discretionary services, the manager suggests, but the client must give approval for each transaction before it is executed. In advisory services, the manager only gives advice and the client takes the decision and executes it.

For the exam, remember the question to ask: who decides, and who executes? That one question separates the three types in almost every MCQ.

Key formulas to remember

Discretionary service
Manager decides + manager executes
Done independently on the client's behalf, as per the agreement and the client's objectives.
Non-discretionary service
Manager suggests + client approves + manager executes
Each transaction needs client consent. Execution is still by the manager.
Advisory service
Manager advises + client decides + client executes
No authority to transact on the client's account.
Core objective
Best return for the risk the client can accept
Objectives are set by the client's goals, risk tolerance, horizon, liquidity needs and constraints.

How to solve Introduction to Portfolio Management questions

Use this method for any question on the basics of portfolio management.

  1. 1Read the stem and spot the key word: objective, discretion, approval, advice, execution or constraint.
  2. 2If the question is about service type, ask who takes the decision and who executes it.
  3. 3Match the answer: manager decides and executes means discretionary; client approves means non-discretionary; client acts means advisory.
  4. 4If the question is about objectives, link every answer to client needs: return, risk, liquidity, horizon and constraints.
  5. 5Reject options that promise guaranteed or maximum returns, since no manager can guarantee returns.
  6. 6Watch for absolute words like always or only, and check them against the definition.
  7. 7Choose the option that best fits the definition, not the one that merely sounds familiar.

Quickest way: Decide-and-execute test

When to use it: Use it for any question that asks you to identify or compare the three types of PMS.

  1. Ask: who makes the decision?
  2. Ask: who places the trade?
  3. Manager and manager: discretionary.
  4. Client approves, manager trades: non-discretionary.
  5. Client decides and trades: advisory.

Common mistakes in Introduction to Portfolio Management

  • Treating non-discretionary as the same as advisory

    Both involve client involvement in decisions, so they look alike.

    Fix: In non-discretionary, the manager still executes after approval. In advisory, the client executes.

  • Thinking discretionary means the manager can ignore the client's wishes

    The word discretion suggests total freedom.

    Fix: Discretion works within the agreement, the client's objectives and any restrictions set by the client.

  • Choosing maximum return as the objective

    Return feels like the obvious goal.

    Fix: The objective is return suited to the client's risk tolerance, horizon and constraints.

  • Believing a portfolio manager can guarantee returns

    Marketing language blurs the line between a target and a promise.

    Fix: Returns are never assured. Treat any option that guarantees returns as wrong.

  • Seeing portfolio management as just stock picking

    Selection is the most visible step.

    Fix: Remember the full process: profiling, policy, allocation, selection, monitoring, rebalancing and evaluation.

Worked examples

Example 1

A portfolio manager suggests buying a stock for a client. The client agrees, and the manager then places the order. Which type of service is this?

A. Discretionary
B. Non-discretionary
C. Advisory
D. Execution-only

Show the solution
  1. Who decided? The manager suggested, but the client approved.
  2. Who executed? The manager placed the order.
  3. Client approval with manager execution is the definition of non-discretionary.
  4. Discretionary needs no approval, and advisory has client execution. Execution-only is not a PMS type here.

Answer: B. Non-discretionary

Example 2

Which of the following best describes the objective of portfolio management?

A. Earning the highest possible return in every period
B. Guaranteeing capital to the client
C. Seeking returns suited to the client's goals within the client's risk tolerance and constraints
D. Investing only in equity shares

Show the solution
  1. Option A ignores risk, so it is wrong.
  2. Option B promises a guarantee, which a manager cannot give.
  3. Option D restricts asset classes without reason.
  4. Option C links return to the client's goals, risk tolerance and constraints, which matches the objective.

Answer: C

Exam tips

  • Always apply the decide-and-execute test before reading the options.
  • Reject options that use words like guaranteed, assured or risk-free.
  • Expect scenario questions where a client approves or does not approve each trade. Look for the approval step.
  • Remember that objectives are personal to the client. Two clients can have very different portfolios.
  • If an option names risk and return together, it is often the stronger choice.

Practice questions from Portfolio Management Process

Introduction to Portfolio Management in other exams

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

Introduction to Portfolio Management: frequently asked questions

What is portfolio management in NISM XXI-A?

It is the professional management of a client's investments to meet stated goals within the client's risk tolerance and constraints. It covers profiling, policy, asset allocation, selection, monitoring and evaluation.

What is the difference between discretionary and non-discretionary PMS?

In discretionary PMS, the manager takes and executes decisions on the client's behalf. In non-discretionary PMS, the manager suggests but needs the client's approval for each transaction before executing it.

How is advisory service different from the other two?

In advisory service, the manager only gives advice. The client takes the final decision and executes the trade, so the manager does not transact on the client's account.

What are the main objectives of portfolio management?

They are to earn suitable returns, control risk, maintain adequate liquidity and respect the client's horizon and constraints. The balance between return and risk is set by the client's profile.