Types of PMS: discretionary, non-discretionary and advisory
Who decides the trade, and who places it: that is the whole difference.
SEBI recognises three kinds of portfolio management service: discretionary, non-discretionary and advisory. The only question that separates them is who decides what to buy and sell, and who then places the trade.
A distributor has to get this right before the first meeting ends, because the service type changes what the client signs, what they can hold and how fees can be charged.
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The three services
- Discretionary
- The portfolio manager decides and executes. SEBI's definition is a manager who 'exercises or may exercise, any degree of discretion' over the investments. It must manage each client's funds individually and independently, in line with that client's needs.
- Non-discretionary
- The client decides; the manager executes and handles the back office (custody, settlement, accounting, reporting). Regulation 23(1) says the non-discretionary manager manages funds 'in accordance with the directions of the client'.
- Advisory
- The manager only advises. The client decides and executes through their own broker. The Investor Charter says the manager has no back-office responsibility for trade execution, custody of securities or accounting.
Side by side
Who decides
Discretionary
Portfolio manager
Non-discretionary
Client
Advisory
Client, on the manager's advice
Who places trades
Discretionary
Portfolio manager
Non-discretionary
Portfolio manager, on client instruction
Advisory
Client
Custody and accounting
Discretionary
Manager, through its custodian
Non-discretionary
Manager, through its custodian
Advisory
Not the manager's job; an advisory-only manager need not appoint a custodian
Unlisted securities
Discretionary
Not permitted, except for large value accredited investors
Non-discretionary
Up to 25% of the client's AUM
Advisory
Advice on up to 25% of the client's AUM
High water mark on performance fee
Discretionary
Applies
Non-discretionary
Applies
Advisory
Does not apply
₹50 lakh minimum
Discretionary
Applies
Non-discretionary
Applies
Advisory
Regulation 23(2) does not exempt advisory, though the Investor Charter states the figure only for the other two
| Discretionary | Non-discretionary | Advisory | |
|---|---|---|---|
| Who decides | Portfolio manager | Client | Client, on the manager's advice |
| Who places trades | Portfolio manager | Portfolio manager, on client instruction | Client |
| Custody and accounting | Manager, through its custodian | Manager, through its custodian | Not the manager's job; an advisory-only manager need not appoint a custodian |
| Unlisted securities | Not permitted, except for large value accredited investors | Up to 25% of the client's AUM | Advice on up to 25% of the client's AUM |
| High water mark on performance fee | Applies | Applies | Does not apply |
| ₹50 lakh minimum | Applies | Applies | Regulation 23(2) does not exempt advisory, though the Investor Charter states the figure only for the other two |
What a discretionary manager may buy
Regulation 24(3) limits a discretionary manager to securities listed or traded on a recognised stock exchange, money market instruments, mutual fund units and other securities SEBI specifies. Non-discretionary and advisory services may go further, up to 25% of the client's assets under management in unlisted securities.
For a large value accredited investor (an accredited investor whose agreement is for at least ₹10 crore), all three services can go up to 100% in unlisted securities, with disclosure in the Disclosure Document and terms agreed with the client.
On September 24, 2026 SEBI's Board approved new Portfolio Managers Regulations, 2026, which would let a discretionary manager put up to 10% of a client's AUM in investment-grade unlisted debt with the client's consent. They are approved, not in force: until they are notified, the limits above apply.
Free account, this exam preselected.
Matching the client to the service
Three common client types at a wealth desk.
Salaried professional with ₹75 lakh and no time to track markets
Likely fit
Discretionary
Why
Wants the decisions taken off their hands
Business owner with ₹1.2 crore who wants to approve every trade
Likely fit
Non-discretionary
Why
Keeps control but hands over execution and paperwork
Active investor with their own broker and demat
Likely fit
Advisory
Why
Wants ideas, not execution or custody
| Client | Likely fit | Why |
|---|---|---|
| Salaried professional with ₹75 lakh and no time to track markets | Discretionary | Wants the decisions taken off their hands |
| Business owner with ₹1.2 crore who wants to approve every trade | Non-discretionary | Keeps control but hands over execution and paperwork |
| Active investor with their own broker and demat | Advisory | Wants ideas, not execution or custody |
'Any degree of discretion' is the trap
If the manager can make even some decisions without asking, for example it buys and only informs the client afterwards, the service is discretionary. Non-discretionary means the client gives the instruction for each transaction. Candidates often pick non-discretionary because the client 'is consulted'. Consultation is not instruction.
How XXI-A tests this
Most questions are short scenarios: a client approves every trade, a manager trades and reports later, an adviser suggests stocks and the client buys them through their own broker. You name the service. Others test who executes under advisory (the client) and whether the high water mark applies to advisory (it does not).
Older study material sometimes also classifies PMS by provider (AMC-run, broker-run, boutique). That is a description of the market, not a SEBI category; the regulatory types are the three above.
FAQs
What is the difference between discretionary and non-discretionary PMS?expand_more
In discretionary PMS the portfolio manager decides what to buy and sell. In non-discretionary PMS the client decides and the manager executes the trades and handles the back office.
Who executes trades in advisory PMS?expand_more
The client. An advisory portfolio manager only gives advice and has no responsibility for execution, custody or accounting.
Can a discretionary PMS invest in unlisted shares?expand_more
Not for ordinary clients: a discretionary manager is limited to listed or traded securities, money market instruments, mutual fund units and other securities SEBI specifies. The exception is a large value accredited investor, where up to 100% can be unlisted with disclosure.
Is non-discretionary PMS the same as advisory PMS?expand_more
No. In both the client decides, but in non-discretionary PMS the manager places the trades and runs custody and accounting. In advisory PMS the client places the trades and the manager has no back-office role.