Differences between Discretionary and Non-discretionary PMS

Discretionary and Non-discretionary PMS

The main difference between Discretionary PMS (DPMS) and Non discretionary PMS (NDPMS) is that Discretionary PMS is independently managed by the portfolio manager whereas Non discretionary PMS requires client approvals for buy and sell transactions in the portfolio.

We compare DPMS and NDPMS in depth in this article. But before doing that, let's understand what Portfolio Management Services are and their different types.

Portfolio Management Services are investment solutions offered by experienced Portfolio Managers. The investment solutions are portfolios constructed using instruments like mutual funds, stocks and bonds.

There are almost 400 PMS Services in India today (as per SEBI). But not all operate in the same way because of the types of portfolio management services that exist.

What are the different types of Portfolio Management Services?

Portfolio Management Services are of 3 types based on the investment and execution control:

  1. Discretionary Portfolio Management Services (DPMS)
  2. Non-discretionary Portfolio Management Services (NDPMS)
  3. Advisory Portfolio Management Services

Discretionary PMS and Non-discretionary PMS are the most popular types of PMS among individual investors.

What is the difference between Discretionary and Non-discretionary PMS?

Discretionary PMS are exclusively managed by the portfolio manager of the PMS. This means that the portfolio manager can execute the changes he/she believes are required and make them without the consent of the investor.

Non-discretionary PMS are managed by both: the portfolio manager and the investor of the PMS. This means that the portfolio manager can recommend changes based on his/her analysis but the investor needs to consent to the changes. In the absence of investor approval, the changes cannot be executed by the portfolio manager.

 Discretionary PMSNon-discretionary PMS
Portfolio recommendations by Portfolio ManagerPortfolio Manager
Is investor consent required?NoYes
Can investors suggest portfolio changes?NoYes
Transactions executed byPortfolio ManagerPortfolio Manager

Should you invest in Discretionary PMS or Non-discretionary PMS?

You should invest in a non-discretionary PMS only if you understand investing and want to retain control of investment decisions. For all other investors, discretionary PMS makes more sense because it gives the portfolio manager full authority to do what’s best for your money.

If you choose a non-discretionary PMS without a firm understanding of investing principles, it could backfire. You may not know what investment recommendations to approve or reject because you lack the knowledge to analyse them. Further, a delayed approval to the portfolio manager can result in different results than intended.

For example: The portfolio manager believes that a stock currently at Rs. 1,000 can see its price go up to Rs. 1,500 in 2 months. Suppose you approve the investment decision after a week and the price has already gone up to Rs. 1,200, you will end up buying the stock at Rs. 200 extra. Under a discretionary PMS, this would have not happened.

If you are not sure whether you should invest in a discretionary PMS or non-discretionary PMS, just go for the discretionary option.

Advisory Portfolio Management Services

Advisory PMS is the third type of PMS that is offered by some portfolio managers. It gives even more control over the investment decisions to the investor.

The role of portfolio manager in an advisory PMS is to only recommend investment decisions like buy and sell. Other steps, accepting and executing the investment decisions, are the responsibilities of the investor.

It is clear that the advisory PMS option is only for the most sophisticated investors who have the knowledge and bandwidth to analyse and execute investment decisions.

Discretionary PMS vs Non-discretionary PMS: FAQs

Do all portfolio management services offer the discretionary and non-discretionary options?

No, all portfolio management services don’t offer both the options. However, portfolio manager services are obligated to offer at least one among discretionary, non-discretionary and advisory options and can offer all the options if they wish to.

How many types of PMS options are available?

There are three types of PMS options available: discretionary, non-discretionary and advisory portfolio management services. There are ~320, ~100, ~130 discretionary, non-discretionary and advisory PMS options available in India as of March 2023 (as per SEBI).

Do I save money by choosing non-discretionary PMS instead of discretionary PMS?

Generally, no. The fee structure is generally identical for all the 3 PMS options: discretionary, non-discretionary and advisory. In fact, choosing a non-discretionary/advisory PMS could be inefficient for the reasons discussed in the paragraphs above.