Overview of Portfolio Management System
individual investor or company has a sufficient amount of investment, the
individual or company would consider investing it in some areas. The motive
behind the investment is to maximize profits and the rate of return on the
investment. The individual investor would want to get the maximum benefits from
the investment. The sum of the
investment would be invested in a portfolio comprising of shares, securities,
bonds, and mutual funds. Therefore a portfolio is considered as a combination
or cluster of different tools related to investment. This portfolio would
comprise of shares, securities, mutual funds, and bonds which provide a
different rate of returns on investment.
A portfolio is a combination of the above securities,
which provide a maximum rate of return on the investment. An individual would
want to consider investing in the portfolio for securing the maximum about of
portfolio of securities would depend on the amount of income that is earned by
the individual investor. It would also depend on the amount of risk that is
taken in the market, the market size, and other factors.
Portfolio Management System- SEBI Portfolio Management System
A portfolio management system is a process and procedure for making investment decisions for a particular investment in a portfolio of securities. The portfolio management system is done by portfolio and asset managers. This system has been considered as the management of assets by a portfolio manager. Managing assets would comprise of the following:
- Having an initial contract or
agreement with the investor and the portfolio manager;
- The terms of the agreement
between the investor and portfolio manager;
- Any form of fee arrangement
that is present between the investor and the manager;
- Assets that are allocated to
individuals that become a part of the portfolio;
- Calculating and assessing
the amount of risk that the assets pose for the
- Ensuring that there is sufficient
compliance and monitoring; and
- Ensuring that portfolio managers protect sensitive data of investors.
process would apply to a system of portfolio management. Portfolio management
can be understood as the process of managing individuals’ investments in
securities. The securities would
comprise of mutual funds, shares, stocks, bonds, and debentures. The type of
investment would be taken into consideration for portfolio management. When
accessing the amount of returns that would be expected from a proper system of
portfolio management, the following factors are followed:
SWOT Analysis (Strengths, Weaknesses, Opportunities and Threats)
- Strengths- One of the main objectives of active portfolio management is to identify and access the advantages of a particular portfolio. Apart from this, the portfolio manager would consider the available income of the investors. This is regarded as one of the preliminary stages of portfolio management.
- Weaknesses- The manager also considers the weakness of a particular portfolio. A prudent manager would not suggest a weak portfolio. Therefore determining the strengths and weaknesses of a specific portfolio is one of the main responsibilities of a portfolio manager.
- Opportunities- In this part of portfolio management, the portfolio manager would consider the type of opportunities available to the investor. If a particular portfolio has the potential opportunity to secure more amount of investment, then the manager would recommend the investor to consider that portfolio.
- Threats- With a new form of
opportunity, there would also be risks present with the portfolio. Every portfolio manager must explain the
risks and threats which pose a danger to the investor. Usually, when it comes
to advertising and promotions, portfolio management companies would demonstrate
the potential impact of the investor. For
example, a portfolio management company that is dealing in the business of
mutual funds has to explain the amount of risks that are present in the
investment opportunity to the investor. If the mutual fund company is promoting
advertisements, then there would be a disclaimer effectually stating that
market risks are present when an investor considers the opportunity of
investing in mutual funds.
One of the main threats of the portfolio
is market-related risks. Market activities are always volatile and depend on
various factors. These factors can,
directly and indirectly, affect the market in multiple ways. Therefore a
portfolio manager has to keep the threats in mind before explaining the
investment opportunity to an investor.
The Securities Exchange Board of India (SEBI)
is the regulatory body for managing portfolio management systems in India.
SEBI portfolio management system has established a framework ever since it was
introduced in 1992. SEBI portfolio
management system regulations have come out intending to manage portfolio
managers and ensure that they act in the best interests of the investors. The
first portfolio management regulations were brought out in 1993. This is
considered as the SEBI (Portfolio Managers) Regulations, 1993. These regulations were related to registration, management, and governance of portfolio managers
across the country. Due to various mismanagements and corporate governance
frauds in the past, these regulations have been amended from time to time to
come in line with the SEBI Portfolio Management system adopted by companies
Karvy Securities Mismanagement
Mismanagement of funds was present in Karvy Securities
Limited. The portfolio management company, without the consent of the
investors, took shares from their Demat accounts.
These shares were transferred to the Demat account, which was used by Karvy. After this, the shares were pledged with
the bank for money. This money was transferred to another subsidiary of
Karvy. In light of the above reasons, transparency is a requirement when it
comes to Portfolio Management Systems.
SEBI portfolio management system ensures that this
framework is obtained by having an efficient method of corporate governance in
to such mismanagement of funds, there was a requirement to bring out stringent
regulations related to the SEBI Portfolio Management System. The SEBI portfolio management system is
used by firms that are registered as portfolio managers. These companies have
to comply with the laws related to the SEBI portfolio management system.
SEBI portfolio management system ensures that the interest of investors is
A portfolio can
be managed according to the requirements of the investor. Therefore the
portfolio management company has to be compliant with the SEBI portfolio
management regulations. The SEBI
Portfolio Management Regulations define the meaning of a portfolio manager as a
corporate body who has some form of agreement with the investor and provides
consulting services either directly or indirectly. Consulting services here
also involves management of the portfolio.
The various types of portfolio management under the SEBI portfolio management system are:
- Discretionary Portfolio Management-
The investors here consider the advice from professional portfolio managers.
Investors having no information regarding the management of securities would
opt for this form of portfolio management. The
Portfolio manager would maintain the portfolio of funds according to the
requirements of the client.
- Non Discretionary Portfolio Management- There is no control or discretion by the portfolio manager in managing this form of Portfolio Management System. The manager would manage the funds according to the requirements of the investors.
Objectives of SEBI Portfolio Management System
- Investment would be catered according to the needs of the client– The client can opt for discretionary portfolio management or
non-discretionary portfolio management. Therefore
the investor is the decision-maker behind handling investments in an effective
way to maximize profits.
- Gateway to investment options-
Through an effective system of portfolio management, the investor would get an
opportunity to choose from various portfolio management options. The investor can access the strengths,
weaknesses, opportunities, and threats through this system. Through this
system, an informed decision can be made by the investor.
- Experience and Skill- Portfolio Managers would be qualified in handling
risks and making decisions. Therefore by considering the process of
portfolio management, the portfolio would be handled by experienced
professionals, thus reducing the risk.
- Liquidity- One of the main aims of
portfolio management is to improve the amount of return from the investment. By
investing in a portfolio of different securities, the investor would get the
option to obtain liquidity from various sources of funds. Consider taking an example of an investor who engages a portfolio
manager to invest a certain amount in a portfolio comprising of shares,
securities, real estate, and bonds. Depending on the market performance, the
portfolio would provide continuous liquidity to the investor from different
- Reduction of Tax- Certain investors
can reduce the amount of tax through active portfolio management.
Therefore SEBI Portfolio Management System portrays the above objectives of managing a portfolio.
SEBI Portfolio Management System- Guidelines for Portfolio Managers
To establish governance and transparency, SEBI has
brought out specific guidelines related to the management of portfolio by
portfolio managers. These guidelines have taken
considerations of the past activities of mismanagement of funds by portfolio
managers. The guidelines specify the following:
- The guidelines are issued based
on the Securities and Exchange Board of
India (Portfolio Managers) Regulations, 2020 (‘2020 Regulations’).
- Specifications regarding the
eligibility to act as a portfolio manager can only be through the board.
- There are specific eligibility criteria as per Schedule II of the Securities and Exchange Board of India (Intermediaries)
- To be registered as a portfolio manager the manager should have a
net worth of Rs. 5 Crore and this amount must be present from three years
of commencement of the business of portfolio management.
- SEBI Portfolio Management System has been brought out based on the
2020 regulations related to portfolio management.
Payment of Fees (SEBI Portfolio Management System)
- Regulation 22(11) of the 2020 regulations do not require a fee to be paid to the portfolio manager. This fee should not be charged either directly or indirectly from the client.
- Brokerage fees which would be charged to the client. This would be considered as expenses.
- Other fees such as operating fees apart from the service fee should not be more than 0.50% per annum for the Investor/ Client Assets under Management (AUM)
- If the portfolio of the investor or client is redeemed in full or par, then the following exit load would be charged:
- 1st year – up to 3% is charged as exit load;
- 2nd year – up to 2% is charged as exit load;
- 3rd year- up to 1% is charged as exit load; and
- 4th year- No form of exit load is charged on the redemption for the 4th year.
- Brokering Charges should be capped to a maximum of 20% as per the value related to the associate
Requirements for Direct onboarding (SEBI Portfolio Management System)
- The portfolio manager would provide consulting services through
- All the information on
disclosure documents have to be published in the website regarding the direct
process of onboarding.
- No charges should be added when
Marketing/ Promotion for Investment Approach (SEBI Portfolio Management System)
- All particulars related to
investment must be the same across
websites, regulatory documents, client documents, disclosure documents, and
- Descriptive information on the
investment approach related to the portfolio management company should contain
- Objectives/ Goals related to
- Types of securities that are
present in the portfolio- whether the securities debt listed or equity listed
or convertible instruments;
- Basis of selection of the
- Portfolios which are offered
across different types of investments;
- Market risks associated with
the investments; and
- Tenure or period of the
Corporate governance reporting (SEBI Portfolio Management System)
- In compliance with proper
standards of corporate governance and
reporting, portfolio managers/portfolio companies have to report to the SEBI
one a year or twice a year.
- Portfolio managers to be
compliance with Corporate Governance reporting have to submit the following:
- Certificate from Qualified Chartered Accountant – the net
worth of the portfolio manager as of 31 March every year based on accounts
which are audited within six months from the end of the financial year.
- Compliance Certificate regarding the SEBI Portfolio Management
System and SEBI Portfolio Management Regulations.
This has to be signed by the principal officer within 60 days of each financial
year. Any form of actions related to correction have to be brought out in this
- Every portfolio manager has to submit a monthly report regarding the
portfolio management activity. This must be submitted on the online SEBI Intermediaries within seven
working days before the end of every month.
- Apart from the above, a report has to be furnished by the
Portfolio Managers every quarter.
Performance of Managers (SEBI portfolio Management system)
Regulation 22(4) e, the performance reports of portfolio managers have to have
- Performance is based on the actual cash holdings and the liquid funds. For
understanding the performance of a portfolio manager, all the above has to be
- All fees and expenses have to
- If there is any alteration in the investment approach,
which would directly or indirectly affect the portfolio of the client. This
change must also be brought out in the marketing material.
- Performance report which is submitted to SEBI must be the same which is
mentioned in the marketing material and the website of the portfolio manager.
- The aggregate performance should be the same as the total performance
of the portfolio manager.
- A disclaimer has to be provided that SEBI does not verify the marketing
requirements have to be complied with
and reported to SEBI within 60 days at the end of each financial year.
Director or Partners of the portfolio manager has to
verify and certify the report.
Material Adverse Change (Disclosure Documents) (Regulation 22(7))
If there is any
form of change in the structure of the portfolio manager or material change,
then this must be reported to SEBI. The following would be considered to apply
as a material Change:
- Change of Portfolio;
- Change in Directors;
- Services Includes; and
- Change in Fees.
changes are material changes according to SEBI Portfolio Management System.
Monitoring Distributors- SEBI Portfolio Management System Regulation 23(10)
- Services of famous distributors have to be used. The
valid distributors should have a valid AMFI (Association of Mutual Funds in
- The expenses such as fees and commission must be paid to the
distributors on a trial basis.
- Any fee or expense that is paid to the distributor must be informed to the client/
- Ensure that distributors are compliant with the code of conduct.
- Self-certification has to be provided by distributors at the end of
Impact of the SEBI Guidelines on Portfolio Managers
were brought out to increase the amount of corporate governance norms and
reporting standards. The new rules of
the SEBI portfolio management system ensure there is transparency between the
investors and the managers. Portfolio managers are not allowed to charge
fees to the clients, but the only amount that can be charged to clients are the
operating expenses. In the wake of the new guidelines and rules, the managers
would not be affected as most of the investors who invest in portfolio are high
net individuals. Though these rules and
guidelines would impact the profitability of the portfolio manager, still the
motive behind bringing out the law was to improve transparency in the portfolio
management system. Through the SEBI Portfolio Management System an effective
framework can be maintained.
Conclusion for SEBI Portfolio Management System
Portfolio management is a process in which companies
manage a pool of investments. This pool of investments is called a portfolio.
The portfolio would normally comprise of securities such as shares, bonds,
debentures and other securities. To effectively
manage a portfolio for an investor, a manager has to use the SWOT analysis. Through the above an investment
can be matched to the correct portfolio. SEBI
portfolio management system has a set framework of guidelines which portfolio
managers across India follow. The SEBI portfolio management system ensures that
there is a proper framework for corporate governance established in portfolio
managers firms. This is due to the mismanagement of funds by Karya
Securities. By using the SEBI portfolio management system, the standards of
reporting and governance have improved.