Three Types of PMS — Discretionary, Non-Discretionary, Advisory
Definition
SEBI classifies Portfolio Management Services into three types based on the degree of decision-making authority delegated to the Portfolio Manager: Discretionary PMS (Manager makes all buy-sell decisions independently), Non-Discretionary PMS (Manager recommends, investor approves each transaction), and Advisory PMS (Manager only advises; investor executes through their own broker).
In Simple Words
In a Discretionary PMS, the investor signs a Power of Attorney that grants the Portfolio Manager full discretion to buy and sell securities in the demat account without seeking approval for each transaction. This is the most common form in India today (over 90% of PMS AUM) because it removes execution friction and allows the Manager to act on conviction quickly. The investor sees holdings and transactions through quarterly reports but is not consulted on individual trades. In a Non-Discretionary PMS, the Manager recommends each transaction but the investor must approve before execution. This suits investors who want to retain final decision-making — typically founders, business owners, or sophisticated investors who view the Manager as a research partner rather than a delegate. The operational friction (every trade requires a call or email) means few firms offer this structure today, and it is often slower in execution. In an Advisory PMS, the Manager only provides research and recommendations; the investor executes through their own broker. The Manager does not have access to the investor's demat. This is the lightest-touch structure — the investor pays for advisory expertise but bears all execution responsibility. It is also the least common in retail PMS distribution; most Advisory PMS arrangements are bespoke for ultra-HNI clients or family offices. The choice depends on three factors: the investor's desire for involvement, the Manager's value proposition (some Managers are pure stock-pickers; others add execution discipline), and operational practicality at the investor's wealth scale.
Real-Life Scenario
Three investors at the same liquid wealth level (₹3 crore each) make different PMS choices. Aniket, a 50-year-old senior banker in Mumbai, prefers Discretionary — he travels frequently for work and wants the Portfolio Manager to act without waiting for his approval. He signs the POA, allocates ₹50 lakh, and reviews the quarterly statements with his Relationship Manager. Sandeep, a 55-year-old tech entrepreneur in Bangalore, runs Non-Discretionary — he was a public-equity investor for 15 years before his startup years and wants to remain involved in stock-level decisions. He receives daily emails of recommended trades and approves or declines each. The Manager's strategy is more constrained because of his approval cycle, but Sandeep values the involvement. Krishnan, a 60-year-old former CFO with ₹15 crore liquid wealth and a personal broker network of 20 years, chooses Advisory — he pays the Manager a flat ₹5 lakh annual research fee for ideas, executes through his own broker, and integrates the Manager's ideas with his own research. Each structure suits a different investor — the choice is not about which is "best" but which fits the investor's personal involvement level and total ticket size.
Key Points to Remember
Frequently Asked Questions
Test Your Knowledge
3 questions to check your understanding
In a Discretionary PMS, who executes individual trades?
Summary Notes
Three PMS types vary by execution authority: Discretionary, Non-Discretionary, Advisory.
Discretionary is most common; choice depends on investor's involvement preference.
POA in Discretionary is limited to the agreed investment mandate — not unrestricted authority.
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What you’ll learn in PMS Foundation
Portfolio Management Services (PMS) is the SEBI-regulated route through which High Net Worth Individuals access concentrated, professionally managed equity portfolios held in their own demat account. This foundation track covers the structure, the three PMS types, fee economics, and how to choose between PMS, mutual funds, and SIFs.
Frequently asked questions
Why is the PMS minimum ₹50 lakh?
SEBI set ₹50 lakh as the threshold to ensure PMS is accessed only by investors who can afford the operational complexity (separate demat, transaction-by-transaction tax, individual reporting) and absorb the higher concentration risk. The threshold also supports the Portfolio Manager's economic viability — managing customised portfolios for ₹10 lakh tickets would not be cost-effective.
Do I receive dividends and corporate actions directly?
Yes. Because the securities sit in your own demat account, all dividends, bonus issues, rights, buybacks, and other corporate actions accrue directly to you, on the same terms as if you held the stocks yourself. This is one of the structural differences from mutual funds, where these benefits accrue to the fund and are reflected in the NAV.
Can I see what the PMS is buying and selling in real time?
You receive transaction confirmations through your broker (since the trades happen in your demat account), and the Portfolio Manager provides quarterly portfolio statements with detailed positioning. You will not see real-time alerts on every trade, but you have full transparency on holdings and transactions through your demat account at any time.
How does PMS differ from a mutual fund operationally?
The most important operational difference: in a mutual fund, you hold units and the fund holds the securities. The fund's buy-sell activity is invisible to you (you only see the NAV). In a PMS, you hold the securities directly, so every Portfolio Manager transaction reflects in your demat — and creates a tax event on your books. This means PMS portfolios typically generate more granular tax reporting than mutual funds.
Is Discretionary PMS riskier because the Manager makes decisions independently?
Not necessarily. The Manager operates within a SEBI-mandated investment framework and the strategy disclosed in the Disclosure Document. The POA grants execution authority but not unlimited risk-taking. The investor reviews holdings quarterly and can withdraw at any time. The greater "risk" of Discretionary is psychological — investors must accept that they will not approve every trade.
Can I switch from Discretionary to Non-Discretionary in the same PMS?
Generally no — these are distinct service types under SEBI rules and require different agreements. Switching usually means redeeming from one and re-subscribing to the other, with the corresponding tax events.
In Advisory PMS, who is responsible if the recommended trade goes wrong?
The investor — because the investor executes the trade. The Advisory Portfolio Manager provides recommendations but does not bear execution risk. This is one reason Advisory is suitable only for sophisticated investors who can independently evaluate recommendations.
How is the POA structured in a Discretionary PMS?
The Power of Attorney is limited — it authorises the Portfolio Manager to buy and sell securities specifically within the agreed strategy and demat account, and does NOT permit fund transfers, account closures, or other transactions outside the investment mandate. Always read the POA carefully and consult your legal advisor before signing.
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