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Small investors’ portfolios may get extra ‘protection’

The capital markets regulator, Securities and Exchange Board of India (Sebi), is planning a fourfold increase in the minimum investment amount allowed under portfolio management services (PMS). This is to make this investment facility more inaccessible to small investors, given the high risks involved. The regulator wants to realign the PMS facilities, typically offered by brokerages and wealth managers, with alternative investment funds (AIF).

Currently, the minimum size for a PMS is Rs 25 lakh. That for an AIF is Rs 1 crore. “The regulator will soon enhance the investment limit under PMS to Rs 1 crore, to bring it in line with AIFs,” said a source with direct knowledge of the development.

Sebi had previously raised the entry limit for PMS in 2012, from Rs 5 lakh to Rs 25 lakh. Under PMS, portfolio managers offer customised investment advice to clients, typically high net worth investors (HNIs).

Currently, the assets managed by portfolio managers have swelled to Rs 7.5 lakh crore. According to sector officials,  though the minimum investment size is only Rs 25 lakh, the average investment size per client is about Rs 13 crore. The total PMS client base is about 55,000.

“The average ticket size of investors in PMS has gone up substantially in the past two years. This is a specialised service, with complex products. There is a need to safeguard retail investors from getting lured into them,” said a source close to the development. In 2012, Sebi had introduced the concept of an AIF, with similar investment mandates. The prime difference between PMS and AIF is that the former isn’t allowed to pool money and has to offer a customised service to investors.

Raising the entry limit will reduce the regulatory gap between the two products, said experts. “With the higher entry cap, retail investors would be prompted to go for direct equity or mutual fund investment,” says Prateek Pant, head of wealth solutions, India, RBS. “With a minimum investment limit of just Rs 25 lakh, PMS products had become accessible to a wider number of investors. AIF, which has a higher cap, is generally accessed by savvy investors.”

Some entities in the sector, however, said a steep increase in the PMS investment limit could reduce the service’s attraction. “The demand for PMS has steadily being going down, as it is not tax-efficient. HNIs prefer to invest via AIFs and investors with small-ticket size prefer to invest via the mutual fund route. This plan, if it becomes a reality, would shrink the assets managed by portfolio managers. This would become particularly damaging if the move is retrospective in nature, as existing investors with low-ticket size might not be able to continue with the service,” said Ambareesh Baliga, an independent financial services expert.

Earlier, when Sebi had increased the limit, it was applicable only to new investments. Existing ones were allowed to continue till maturity.

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