SEBI’s MF-Only PMS Proposal Raises Concerns Over Distributor Revenue Model

Mutual fund distributors have expressed concerns over the Securities and Exchange Board of India’s (SEBI) proposal to introduce mutual-fund-only portfolio management services (MF-only PMS), saying the framework could accelerate the shift away from the traditional commission-based distribution model. Industry participants believe the proposal may increase competition for affluent investors while direct mutual fund plans continue to gain traction among self-directed investors.

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SEBI has proposed allowing MF-only PMS with a minimum investment of ₹25 lakh and a minimum investor net worth of ₹2 crore. According to the proposal, these portfolios would invest only in direct mutual fund plans, with portfolio managers charging clients separately through fixed fees, performance-linked fees or a combination of both. The regulator has proposed a maximum fee cap of 2.5%.

Distribution Model Faces Pressure

The proposed structure changes how intermediaries are compensated. Under the existing distribution model, investors buying regular mutual fund plans generate trail commissions for distributors through the scheme’s expense ratio.

In contrast, MF-only PMS portfolios would invest exclusively in direct plans, eliminating distributor commissions. Instead, clients would pay portfolio management fees directly to the portfolio manager.

According to Satwik Jain, Founder and Executive Chairman of Generational Capital, blended trail commissions across the mutual fund industry are estimated at around 42-45 basis points of assets. Under the proposed framework, distributors would not receive any commission if an investor shifts from a regular mutual fund to an MF-only PMS because the investment would bypass the regular-plan structure entirely.

Lower Entry Threshold Broadens Market

Industry executives said the impact of similar structures has remained limited because portfolio management services currently require a minimum investment of ₹50 lakh.

SEBI’s proposal reduces that threshold to ₹25 lakh while introducing a ₹2 crore minimum net worth requirement. Market participants believe the lower investment threshold could make the structure accessible to a larger segment of affluent investors.

According to Dhirendra Kumar, Founder and Chief Executive of Value Research, the broader challenge for distributors is the continued rise of direct mutual fund plans, which allow investors to invest in the same schemes without paying distributor commissions.

Opportunity Alongside Competition

Not all industry participants view the proposal as unfavourable for distributors.

Kumar said MF-only PMS could provide distributors with an additional offering for high-net-worth clients who prefer discretionary portfolio management instead of managing investments independently. Under such a structure, advisers would earn advisory or portfolio management fees directly from clients rather than relying on trail commissions.

He also said discretionary mandates typically create longer-term client relationships because portfolio managers execute investment decisions on behalf of investors without requiring approval for every transaction.

Regulatory Separation Proposed

SEBI has also proposed safeguards to separate distribution and portfolio management businesses. Firms operating both mutual fund distribution and PMS businesses would be required to maintain clear segregation, and the same client cannot be serviced under both models simultaneously.

Industry executives said the proposal would also formalise practices that have already emerged through non-discretionary PMS structures. According to market participants, the regulatory framework is intended to bring greater oversight to an investment model that has been increasingly used for mutual fund portfolios while preserving investor safeguards under a defined structure.