Sebi proposes India PMS revamp to close mutual fund gap
India's market regulator has unveiled sweeping proposals to expand portfolio management services, aiming to accelerate asset growth and boost overseas diversification for wealthy investors.
The Securities and Exchange Board of India (Sebi) has issued a consultation paper proposing a broad overhaul of portfolio management services (PMS) regulations. The draft rules aim to expand investment avenues, simplify compliance, and introduce new operational frameworks for fund managers running customised portfolios for affluent clients.
The regulatory review targets a significant growth disparity. While PMS assets under management have doubled to ₹42.61 trillion as of May 2026, mutual fund assets have grown more than threefold to ₹81.6 trillion over the same period. Sebi intends to narrow this gap by granting PMS providers greater product flexibility.
Discretionary PMS managers would gain the ability to invest client capital in overseas listed equity, debt, and mutual funds. Domestically, the proposals allow allocations of up to 10% of a client's assets into investment-grade unlisted debt and access to to-be-listed securities.
A key structural change is the introduction of a mutual fund-only PMS (MF-PMS) framework. This would allow managers to operate portfolios consisting exclusively of direct mutual fund plans, exchange traded funds, and specialised investment funds. The minimum investment for this specific framework would be lowered to ₹250,000.
The overseas allocation provision addresses a major market gap. "A lot of investors do not have access to professionally managed overseas investments given the RBI cap on Mutual Funds. The proposal could open that door and allow domestic investors to truly diversify their portfolios through PMS," said Pramod Gubbi, founder at Marcellus Investment Managers.
Sebi also recommends allowing independent fund managers to operate under the licence and infrastructure of a single registered portfolio manager. Industry executives expect this to trigger consolidation among smaller firms and create a leasing model. "A lot of PMS firms may become leasing structures. The move could add new revenue streams for bigger PMS providers as they can rent their operating and compliance infrastructure to portfolio managers who want to just focus on portfolio management and lower entry barrier for new independent fund managers," Gubbi said.
The MF-PMS model could also disrupt the distribution landscape. "If the proposal is implemented, many mutual fund distributors may want to get a PMS license as execution will become easier under the new framework. MFDs, who had to get signatures on each investment in mutual funds from the client, will now be able to invest, redeem or switch between schemes with more ease," said Sushant Bhansali, chief executive officer at Ambit Asset Management.
Despite these expansions, the regulator ignored the industry's primary demand to reduce the standard ₹500,000 minimum investment threshold. Instead, existing investors who entered at the old ₹250,000 minimum will be forced to increase their holdings to ₹500,000 within 36 months of the rules taking effect.
"The industry demand to reduce investment threshold cannot be made up for. The biggest missing point was allowing investors to enter the segment if they have put in ₹50 lakhs across PMS firms," Bhansali said.
"Right now, PMS investors mostly have exposure to 1-2 schemes due to the high investment limit applicable for accounts with each PMS player. This is very low compared to a retail Mutual fund investor who generally has exposure to several schemes," he added.
