Once seen as competition to mutual funds, portfolio management services (PMS) providers are increasingly using them as building blocks. They are offering curated mutual fund (MF) portfolios to high-net-worth individuals (HNIs) who want the simplicity of MFs combined with professional, end-to-end portfolio management and execution. The typical investor profile: new-age entrepreneurs and senior corporate executives.
The shift has a clear tax rationale. Budget 2024's hike in short-term capital gains (STCG) tax on equities — from 15% to 20% — hit traditional stock-based PMS providers hard, particularly those running high-churn portfolios. Mutual fund-based PMS-es, with their structurally lower portfolio turnover and more tax-efficient structure, are positioning themselves as an alternative.
Since MFs have a pass-through tax status, investors in a mutual fund PMS are taxed only when they redeem units — not every time the fund trades the underlying stocks.
Here is how mutual fund-based PMS-es work. To be sure, some of the PMS providers also offer other asset classes to give investors a more diversified portfolio.
What is a mutual fund PMS?
Unlike traditional PMS, which involves direct stock ownership, mutual fund PMS builds and manages portfolios entirely — or predominantly — through mutual fund schemes. The PMS provider takes power of attorney over the investor's demat account and handles all buy and sell decisions on their behalf.
As per regulations, all cash and securities are required to be held with a custodian.
The minimum investment threshold, as mandated by the Securities and Exchange Board of India (Sebi), remains ₹50 lakh — keeping this in HNI territory.
"The investors we get fall into two broad categories — those just starting out in mutual funds, and those who already have a large portfolio but want it managed professionally," explained Sandeep Jethwani, co-founder of Dezerv, which is among the largest mutual fund-based PMS provider, managing ₹12,000 crore in mutual fund assets.
“We have even come across portfolios with more than 100 schemes, and some that include unit-linked insurance plans (ULIPs), likely pushed by intermediaries who did not have the investor's best interest in mind. We also work with investors to clean-up and consolidate such unwieldy portfolios, while ensuring the tax impact is limited.”
The investors are taken through a digital journey to assess their target asset allocation and suitable strategies. “It starts with relationship managers (RMs) who ask them questions to understand their risk appetite and financial goals. Then the RMs input these details into our system, which then generates a suitable asset allocation strategy for them. After this, our investment team reviews, approves or tweaks the strategy and product selection if required,” Jethwani added.
"Once the investor's asset allocation is finalized, investments are made in line with it. If the strategy calls for 20% in aggressive equity, for instance, a portion may be allocated to mid- and small-cap schemes identified by our investment model," he explained.
"Among our MF PMS strategies we offer three asset allocation baskets — balanced, growth and ultra — for moderate to high-risk profiles, in that order. The investor then chooses which basket to go with," said Vidya Bala, co-founder of PrimeInvestor.in and chief investment officer for their PMS offering.
PrimeInvestor launched its MF and stock PMS offering earlier this year, pivoting from its earlier avatar as a mutual fund research and stock analysis platform. It recently raised ₹19.5 crore from Rainmatter, the Zerodha-backed venture capital firm, to scale the business.
"Mutual funds have become increasingly complex, with a growing number of categories on both the active and passive side — new indices, smart-beta funds, and more. We felt it was not enough to just offer research; investors also needed execution support to re-balance their portfolios in a timely manner," Bala explained.
Managed portfolios
“While equity and a large part of debt exposure is offered through mutual funds, we also offer gold, silver exchange traded funds, bonds, REITs (real estate investment trusts), InvITs (infrastructure investment trusts) for investors who need further diversification,” Jethwani said.
Fisdom Wealth Edge PMS offers a 70:30 core-satellite approach that looks at mutual funds and ETFs for long-term growth, as well as medium-term opportunities.
PrimeInvestor offers three portfolio variants: mutual funds only, mutual funds plus stocks, and stocks only. “Within its mutual funds offering, we run three asset allocation baskets, with equity exposure set at 60%, 70%, or 80% depending on the investor's risk appetite and goals. The remainder is allocated to debt and gold,” Bala added.
What are the costs
Fee structures in mutual fund PMS-es broadly follow two models: fixed fees and profit-sharing. In the fixed fee model, most providers charge up to 1% of assets under management annually.
"We offer both fixed fee and hurdle rate-based profit sharing," said Nirav Karkera, fund manager at Fisdom Wealth Edge PMS. A hurdle rate is the minimum return threshold the portfolio must cross before the PMS is entitled to share in the profits. The PMS has pegged the hurdle rate at 10%.
Dezerv also offers both options. "In profit sharing, we don't have a hurdle rate," said Jethwani. Sebi guidelines require PMS providers following profit-sharing models to adhere to the high-watermark principle — ensuring the manager only earns a performance fee on gains that exceed the previous peak portfolio value.
Here is an example of how this works. If the investor has started with ₹1 crore in a PMS with a profit-sharing fee. In year one, the portfolio grows to ₹1.2 crore — a gain of ₹20 lakh. The PMS charges its performance fee on that ₹20 lakh gain. The new high-watermark is now set at ₹1.2 crore.
In year two, markets fall, and the portfolio drops to ₹1 crore. The PMS earns no performance fee — there are no gains to charge on.
In year three, the portfolio recovers to ₹1.15 crore. Here's the key: even though the portfolio grew from ₹1 crore to ₹1.15 crore that year, the high-watermark is still ₹1.2 crore from year one. So the PMS still earns no performance fee — because the portfolio hasn't crossed its previous peak yet.
Only when the portfolio crosses ₹1.2 crore again — say it reaches ₹1.3 crore — does the PMS earn a fee, and only on the gains above ₹1.2 crore (i.e., on ₹10 lakh), not on the full ₹30 lakh recovery.
PrimeInvestor, meanwhile, is sticking to a fixed-fee-only structure. For investors, the choice between a fixed fee and a profit-sharing arrangement depends on their preference for predictability versus performance alignment.
Portfolio re-balancing
The portfolio rebalancing, as and when investments move away from the investor’s chosen asset allocation framework or PMSes’ investment models suggest a change in mutual fund strategy.
“However, we ensure that the churn is low so as to keep the tax impact minimal. We do our calculations. We only execute a churn where the benefit of rebalancing exceeds the costs,” said Jethwani.
"Rebalancing decisions are taken only when the portfolio moves away from the target asset allocation and it becomes necessary to align the portfolio with the framework," added Bala of PrimeInvestor.
On the other hand, any buying and selling of stocks or securities happens at the fund level. As mutual funds have pass-through status, the investors only bear the tax impact when mutual fund units are redeemed and not the stocks.
Takeaways
“Fixed fee structures offer predictability — PMS providers typically charge between 0.6% and 1% annually, compared to 0.5%–0.8% for direct mutual funds, and lower for passive strategies and larger AUM,” said Shravan Sreenivasula, executive director and head of investment solutions at Avendus Wealth Management.
"The more important question is whether the PMS has a demonstrable edge in asset allocation and fund selection — because that is where the real value lies. Investors should ask questions to find out whether the PMS provider has a clear investment framework and the execution discipline to rebalance when it matters. Then the fee is worth paying,”
Since mutual fund-based PMSes are a relatively new category, most providers have limited track records. That said, disclosure norms have improved — Sebi now requires PMS providers to publish strategy returns in a standardized manner, along with fee structures, and mandates the high-watermark principle to prevent double-charging on profits. Performance data for individual providers is available on the Association of Portfolio Managers in India (APMI) website.