Due diligence on a portfolio manager
Registered and sound, a real process, honest numbers, fees and risks that fit the client.
Due diligence is the homework a distributor does on a portfolio manager before putting a client's ₹50 lakh or more with it: is the firm properly registered and sound, is its process real and repeatable, are its numbers honest, and do its fees and risks fit the client?
SEBI's Code of Conduct for PMS distributors requires you to be fully conversant with the disclosure document, investment approaches, fees and agreement terms, and to give clients full and latest information. You cannot do that for a manager you have not examined.
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A due diligence sequence
- 1
Registration and standing
Confirm the firm's SEBI registration on SEBI's website (the Investor Charter tells clients to do the same). A portfolio manager must maintain a net worth of at least ₹5 crore. Search SEBI's published orders for the firm and its key people.
- 2
Disclosure document
Read it in full; it is certified by an independent chartered accountant and must be on the PM's website. It sets out fees for each service, portfolio risks for each investment approach, related-party transactions and investments, conflicts of interest, diversification policy, performance and three years of audited financial statements.
- 3
People
Who manages the money, how long they have done it, whether the team that built the track record is still there, and depth beyond one star fund manager.
- 4
Philosophy and process
Read the investment approach description: objective, securities used, selection basis, allocation, benchmark, horizon and risks. Then test whether the actual portfolio matches it.
- 5
Performance
Compare the approach's TWRR, net of fees and expenses, with its selected benchmark and with other approaches in the same Strategy, across several periods including a bad market. Check risk-adjusted measures, not just return.
- 6
Costs and terms
Fee structure, operating expenses, exit load, and the multi-year illustration from the PM's fee calculation tool. Check custody, reporting quality and grievance handling.
Red flags
| What you see | Why it matters |
|---|---|
| A guaranteed or "assured" return | SEBI bars PMs from guaranteeing or assuring any return, directly or indirectly. It is a compliance failure, not a selling point. |
| Model portfolio returns or one star client's returns | SEBI prohibits both in performance communication. Only the IA's aggregate TWRR and investor XIRR statistics may be shown. |
| Performance quoted gross of fees | PMS performance must be reported net of all fees and expenses, including taxes. |
| Marketing numbers differ from APMI or SEBI-reported data | Performance must be reported uniformly across SEBI filings, marketing, client reports and the website. |
| Frequent benchmark or Strategy changes | Each change wipes the earlier track record from reporting and must be justified; repeated changes can hide underperformance. |
| Large holdings in the PM's own group companies | Related-party investments need client consent and carry conflict of interest risk; check the disclosure document. |
| A higher trail being the main reason to recommend | The Code of Conduct says commission must never form the basis of a recommendation. |
Free account, this exam preselected.
An example
An RM is comparing two equity approaches for a client with ₹1 crore. Manager X shows 28% last year in a brochure built from a model portfolio. Manager Y shows a five-year TWRR slightly above its benchmark, a top-half position in the Equity Strategy on APMI's data, a stable team and a clear sell discipline.
X's figure cannot be used at all, and the brochure itself is a warning sign. Y passes the first screen; the RM now checks fees, the fee illustration and fit with the client's profile before recommending.
How XXI-A tests this
Scenario questions: a manager promising a guaranteed 12% (red flag, not an advantage), a client impressed by one year's return (look at longer periods and risk-adjusted figures), "SEBI registration means SEBI vouches for performance" (false: marketing must state performance is not verified by SEBI). Fee calculations, especially high water mark sums, also appear under this topic.
FAQs
How do you select a good PMS manager?expand_more
Check SEBI registration and standing, read the disclosure document, assess the team and process, compare net-of-fee TWRR against the selected benchmark and Strategy peers over several periods, and weigh fees and risks against the client's profile.
Can a PMS guarantee returns?expand_more
No. SEBI's Portfolio Managers Regulations bar a portfolio manager from guaranteeing or assuring any return, directly or indirectly, and distributors must not assure returns either.
Does SEBI registration mean SEBI has verified a PMS's performance?expand_more
No. Registration is permission to operate. PMS marketing must carry a disclaimer that the performance information is not verified by SEBI.
What should a distributor check in a PMS disclosure document?expand_more
Fees for each service, risks of each investment approach, related-party transactions and investments, conflicts of interest, diversification policy, past performance and the PM's audited financial statements.