Want someone to manage your mutual funds? How SEBI’s Rs 25-lakh PRIM route will work
PRIM lets investors outsource mutual fund selection and allocation, but it adds another layer of fees.
Representative Image: How SEBI’s Rs 25-lakh PRIM route will work
Choosing mutual funds is only one part of managing a portfolio. Investors must also decide how much to put in each category, check whether their schemes hold many of the same stocks and determine when the portfolio needs to be rebalanced.
The Securities and Exchange Board of India (SEBI) has now approved a route under which investors can hand over these decisions to a registered portfolio manager.
Called the Portfolio Managers Route for Investing in Mutual Fund Units, or PRIM, it will allow portfolio managers to build and manage portfolios using direct plans of mutual funds. These can include actively managed funds, exchange-traded funds (ETFs), index funds and specialised investment funds (SIFs) offered by Indian asset management companies.
Earlier, an investor needed at least Rs 50 lakh to have their money managed through a regular PMS. The portfolio manager could invest in mutual funds, but the portfolio could also include shares, bonds and other permitted investments.
PRIM creates a dedicated route for managing only mutual fund investments and lowers the entry point to Rs 25 lakh.
Existing portfolio managers can offer PRIM through a separate investment approach, while an entity that plans to operate only under PRIM can seek a fresh registration.
What will the portfolio manager do?
A mutual fund already has a fund manager who selects the stocks, bonds or other securities held by the scheme. A PRIM manager will operate one level above this.
The portfolio manager will select mutual fund schemes, decide how the investor’s money should be divided among them and make changes in line with the agreed investment approach. The underlying investment decisions within each scheme will continue to be taken by that mutual fund’s fund manager.
This is also different from conventional PMS, where the portfolio manager may invest the client’s money directly in shares, bonds or other permitted securities. A PRIM portfolio will be built from fund units.
“SEBI’s approval of PRIM creates a new way for investors to have portfolios built from mutual funds professionally managed,” said Aditya Agarwal, co-founder of Wealthy.in.
Registered portfolio managers will be able to construct customised portfolios using direct plans of mutual funds, including ETFs, index funds and SIFs, he added.
Agarwal said the Rs 25 lakh minimum, compared with Rs 50 lakh for conventional PMS, could bring the service within reach of more affluent investors. “It will open up a wider set of people being able to offer fee-based management of fund portfolios, which was previously available only to RIAs,” he said.
How much could it cost?
SEBI has capped the fixed management fee under PRIM at 1% of the client’s assets under management.
At the maximum permitted rate, an investor with Rs 25 lakh under PRIM could pay up to Rs 25,000 a year. The fee could rise to Rs 50,000 for a Rs 50 lakh portfolio.
The approved ceiling is lower than the 2.5% fixed management fee cap proposed in SEBI’s July consultation paper.
However, the 1% fee will not represent the investor’s total cost. The underlying mutual fund schemes will continue to charge their own expense ratios, which are deducted from the schemes’ assets.
SEBI has also permitted performance-based fees. The Board release does not specify how these fees will be calculated. Investors will have to examine the benchmark, performance threshold and other conditions once providers disclose their fee structures.
Will exit loads apply?
SEBI has waived the exit-load provisions applicable at the PMS level for PRIM. Its consultation paper said this was intended to protect clients from being charged exit loads at two levels.
This does not necessarily remove an exit load imposed by an underlying mutual fund scheme. If units are sold within the period specified by that scheme, its exit load may still apply. Selling one fund to invest in another can also have tax implications.
Also read: SIP underperforming? When should you wait, review or exit? Union AMC CEO Rajkamal Tiwari explains
What safeguards will apply?
A PRIM portfolio cannot invest more than 25% of its assets in schemes belonging to an affiliated, group or associate asset management company. This restricts a manager from placing an excessive share of a client’s money in funds connected with it.
SEBI has also prescribed segregation between a provider’s mutual fund distribution and PRIM activities and clients, except in the case of accredited investors.
PRIM can give affluent investors professional help with fund selection, allocation, monitoring and rebalancing. It also adds a fee over the costs charged by the underlying funds. Investors will therefore need to understand what the portfolio manager will do, the complete fee structure and how the service’s performance will be measured after costs.
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