Moneycontrol Pro Panorama | A new era for portfolio managers

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The Securities and Exchange Board of India has overhauled the portfolio management services framework by introducing a new route, the Portfolio Managers' Route for Investing in Mutual Funds (PRIM). PRIM allows portfolio managers to build client portfolios from mutual fund plans, ETFs, index funds, and Specialised Investment Funds. The minimum ticket size is Rs 25 lakh, half of the current requirement of Rs 50 lakh. Existing providers can offer PRIM as a separate investment approach while new applicants can register for this route alone.

PRIM comes with its own checks and balances. SEBI has allowed fees of up to 1 percent of client assets, plus performance fees. Exposure to affiliated or group asset management firms may not exceed 25 percent, and PRIM-only managers must have a net worth of Rs 2 crore. Firms that additionally distribute mutual funds must keep their distribution and PRIM client operations separate, with an exception for accredited market participants.

This scheme differs from the early operations of a PMS in that a PRIM manager does not pick stocks. He decides which schemes an investor holds, how much goes into each and when the mix shifts. This was previously open only to registered investment advisers. Now PMS firms and advisers will compete for the same affluent client. In short, SEBI has now allowed an adviser to use a PMS licence to become an asset allocator.

That stated, the industry does not seem particularly happy. The first problem is cost. The one percent cap is the biggest offering, as they claim expenses can exceed it, at least in the initial years. That stated, they fail to mention that they can receive additional incentives, such as commissions, from the fund houses.

For the market participants, this is a double cost as the underlying schemes still charge their own expense ratios. Furthermore, the burden of performance rests with the fund manager of the underlying fund, not with the allocator. Most funds have underperformed the key market indices.

Although this step is generally positive for the industry, it will introduce an extra layer of costs for clients. The proposal brings direct competitive pressure to advisors and could give climb to a new category of fund managers focused on monitoring mutual fund managers.

Between April 2019 and May 2026, PMS assets have increased from Rs 18.07 lakh crore to Rs 42.61 lakh crore, while the number of registered managers has more than doubled to 515. This new route could significantly expand the PMS industry.

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