SEBI's Four PMS Strategies and Style Labels

Four Strategies, and no other official classification

A portfolio manager may offer several investment approaches, each with its own way of choosing securities. SEBI's Master Circular for portfolio managers requires each approach to be tagged to one of four Strategies: Equity, Debt, Hybrid or Multi Asset. It is also tagged to a benchmark.

These four are the only classification of investment approaches that SEBI recognises for PMS. Managers may not mention or imply any other classification of an investment approach in performance reports or other communications. The effect is that every approach can be placed in one of four groups and read against a stated benchmark.

What a benchmark is

A benchmark is a reference, usually a market index, against which a portfolio's performance is compared over the same period. It gives the reader a yardstick: the same return looks different once it is set beside what the reference index did.

A benchmark is not a promise. A portfolio can do better or worse than its benchmark, and both can fall in value together. It does not limit fees or losses.

Style labels

Names such as 'small-cap growth', 'concentrated value' or 'quality' are style labels. The manager chooses them to describe how it picks securities. They are not SEBI categories, and a manager may not imply that they are.

This matters because similar words carry rules in mutual funds. A mutual fund scheme in the Small Cap Fund category must, under SEBI's categorisation of schemes, keep at least 65% in equity of small-cap companies, defined as those ranked 251st onwards by market capitalisation. A PMS approach labelled 'small-cap growth' is not bound by that rule. Market-capitalisation bands such as large cap and small cap are mutual fund terms.

A style label also says nothing about future returns and does not reduce market risk. Whatever the label, a portfolio carries market risk, may be concentrated and does not assure returns.

Changing the tagging

A manager cannot quietly move an investment approach to a different Strategy or benchmark. A change in Strategy or benchmark tagging is allowed only after clients have been offered an option to exit without exit load.

The logic is that a change of tagging alters what the client signed up for, so the client is given the chance to leave without paying an exit load first. The Master Circular does not fix a period for this exit option.

Rules at a glance

Key points

• SEBI's PMS Strategies are four: Equity, Debt, Hybrid and Multi Asset.
• Each investment approach is tagged to one Strategy and to a benchmark.
• Managers may not mention or imply any other classification of an investment approach in performance reports or other communications.
• Style labels such as 'small-cap growth' or 'concentrated value' are the manager's own descriptions, not SEBI categories.
• A change in Strategy or benchmark tagging is allowed only after clients are offered a load-free exit.

Common misunderstandings

• 'Small-cap growth' is not a SEBI PMS category: SEBI's Strategies are only Equity, Debt, Hybrid and Multi Asset.
• A PMS label that sounds like a mutual fund category does not carry that category's rules: mutual fund category rules apply to mutual fund schemes.
• A benchmark is not a floor or a target the manager must reach: a portfolio can do worse than its benchmark, and both can fall.
• Hybrid and Multi Asset are Strategies, not service types: the service types are discretionary, non-discretionary and advisory.

Questions people ask