SEBI Approves PRIM Route: A Rs. 25 Lakh Discretionary Gateway to Mutual Funds

In a landmark restructuring of how professionally managed capital interfaces with India's mutual fund industry, the Securities and Exchange Board of India has approved a dedicated discretionary investment mechanism called the Portfolio Managers Route for Investing in Mutual Fund units, abbreviated as PRIM. Cleared during the regulator's 215th board meeting in Mumbai under Press Release No. 59/2026 as part of the new Securities and Exchange Board of India (Portfolio Managers) Regulations, 2026, the framework establishes a formal, regulated channel through which portfolio managers can construct and operate portfolios consisting exclusively of mutual fund units.

By setting the minimum investment threshold at Rs. 25 lakh, SEBI has positioned PRIM directly between conventional retail mutual fund participation and the standard Portfolio Management Services threshold of Rs. 50 lakh. The reform establishes clear statutory boundaries around portfolio-level fund selection, asset allocation, rebalancing, and fee limits, offering an institutionalised solution for affluent investors seeking hands-off management of mutual fund holdings without entering individual-stock PMS mandates.

The Regulatory Framework and Architecture of PRIM

Under the 2026 regulations, which supersede the earlier 2020 PMS rules, SEBI has designed PRIM to operate through two distinct entry structures. Existing registered portfolio managers can offer PRIM to their clients by filing a separate, dedicated investment approach with the regulator. Simultaneously, entities seeking to operate exclusively within the PRIM framework can apply for a specialised portfolio manager registration with a reduced minimum net worth requirement of Rs. 2 crore, contrasted with the Rs. 5 crore net worth threshold mandated for general portfolio managers dealing in individual equities, bonds, and derivatives.

The permissible investment universe under PRIM is explicitly confined to direct plans of schemes offered by Indian asset management companies. Portfolio managers utilizing the route can allocate capital across:

• Direct plans of open-ended and close-ended mutual fund schemes.
• Equity and debt Exchange Traded Funds traded on stock exchanges.
• Index funds tracking domestic benchmarks.
• Specialised Investment Funds, the newly operationalised asset class designed for high-conviction strategies.

By restricting all scheme investments to direct plans, SEBI has eliminated the distribution commissions embedded in regular plans from the portfolio construction equation. The portfolio manager acts as a fiduciary decision-maker, executing purchase, switch, and redemption transactions on behalf of the client under a discretionary mandate.

Bridging the Execution Gap in Mutual Fund Portfolios

While the Indian mutual fund industry offers hundreds of primary schemes across active and passive categories, wealth management practitioners have long pointed out a structural gap in portfolio execution. In a traditional mutual fund arrangement, an investor owns units across several schemes. However, maintaining strategic asset allocation requires continuous monitoring, calculating rebalancing triggers, selecting replacement funds when an active strategy underperforms, and manually placing buy and sell orders.

Even when investors work with Registered Investment Advisers, the adviser can only recommend adjustments; the legal burden of logging into investment platforms, approving transactions, and handling operational settlements rests with the unitholder. This operational friction frequently leads to portfolio drift, where equity allocations expand unchecked during bull markets or cash sits unallocated during market pullbacks.

Under PRIM, the portfolio manager holds legal discretion over the portfolio under a registered agreement. When a portfolio model requires rebalancing—such as trimming equity index funds and redeploying into short-duration debt or arbitrage funds—the manager executes the switch across all participating client accounts without requiring individual trade confirmations. This combines the diversification and liquidity of mutual fund schemes with the disciplined execution of professional portfolio management.

Fee Structure and Expense Ratio Caps

To prevent unitholders from facing excessive layers of operational and management costs, SEBI has instituted strict pricing rules within the PRIM architecture. Because the underlying holdings in a PRIM mandate are direct plans, the investor already incurs the scheme-level Total Expense Ratio charged by the respective asset management companies.

To address the advisory and discretionary overlay, SEBI has placed an upper ceiling on the fixed management fees that a portfolio manager can levy under PRIM:

• The fixed management fee charged by the portfolio manager is capped at an upper limit of 1% per annum of client assets under management.
• Portfolio managers are also permitted to offer performance-linked fee models, aligning manager compensation with excess portfolio return above a predetermined, hurdle-adjusted benchmark.
• Portfolio managers are barred from receiving any trail commissions, distribution fees, or transaction fees from asset management companies whose direct schemes are chosen for the portfolio.

Additionally, SEBI has provided for the waiver of exit-load provisions for transactions carried out under the PRIM framework, reducing the drag of frictional switching costs when managers execute asset allocation changes across schemes.

Prudential Limits and Conflict-of-Interest Safeguards

A central focus of SEBI's 215th board meeting was mitigating conflicts of interest within financial conglomerates that operate both asset management companies and portfolio management arms. In the absence of regulatory caps, a portfolio manager affiliated with a large banking or financial group could face incentives to allocate client capital disproportionately into in-house mutual fund schemes, generating asset growth for the parent entity's AMC.

To neutralise this risk, the PRIM framework mandates a strict 25% prudential cap:

• A portfolio manager managing money under PRIM cannot allocate more than 25% of a client's total portfolio value to mutual fund schemes sponsored or managed by affiliated, group, or associate asset management companies.
• The remaining 75% of client assets must be diversified across schemes managed by unrelated fund houses.

Furthermore, SEBI has mandated the institutional segregation of activities and clients between mutual fund distribution and PRIM services. Entities or corporate groups providing both distribution and portfolio management must maintain structural ring-fencing between the two lines of business, and individual retail clients cannot be serviced across both distribution and PRIM simultaneously, with an exception provided only for accredited investors who meet SEBI's net worth and income thresholds.

Operational Mechanics and Tax Implications

For investors assessing the PRIM route, the operational and tax mechanics differ fundamentally from both traditional mutual funds and standalone Fund of Funds (FoF) products.

In a traditional Fund of Funds scheme managed by an AMC, the pooling takes place at the fund level. When an AMC's FoF rebalances by selling units of an underlying scheme, that internal portfolio turnover does not trigger an immediate capital gains tax liability for the unitholder; tax arises only when the investor finally redeems units of the FoF. However, FoFs are subject to statutory investment restrictions, often hold schemes primarily from the parent fund house, and incur two layers of mutual fund expenses.

Under PRIM, the investment structure is non-pooled:

• Mutual fund units are held directly in the client's own demat account or mapped under individual folios.
• Each switch, rebalancing redemption, or exit executed by the portfolio manager constitutes a taxable capital gains event for the investor under the Income-tax Act, 1961. Short-term and long-term capital gains taxes apply based on the holding period of each underlying scheme sold.
• The investor receives direct scheme account statements, capital gains statements, and portfolio-level disclosures detailing every underlying purchase and redemption price.

This structure demands that portfolio managers operating under PRIM balance tactical rebalancing with tax drag, ensuring that turnover does not erode the cost savings gained from direct plan expense ratios.

How PRIM Shapes the Indian Wealth Spectrum

The introduction of PRIM reshapes the entry ladder of Indian wealth management by formalising an intermediate tier between mass-market mutual funds and high-ticket portfolio management.

Under the prevailing framework, an investor with an investable surplus of Rs. 25 lakh faced limited structured choices: deploy capital across standalone mutual fund schemes through DIY platforms or distributors, or wait until accumulating Rs. 50 lakh to access a discretionary equity PMS. The standard PMS route, however, exposes the investor to single-stock concentration risk and volatile cash calls.

| Parameter | Retail Mutual Funds | PRIM Framework | Traditional PMS | Specialised Investment Funds | | :--- | :--- | :--- | :--- | :--- | | Minimum Ticket | Typically Rs. 100 to Rs. 5,000 | Rs. 25 lakh | Rs. 50 lakh | Rs. 10 lakh | | Asset Universe | Underlying stocks, bonds, money market | Direct MF plans, ETFs, Index Funds, SIFs | Equities, unlisted debt (up to 10%), derivatives | Alternative/unconstrained mutual fund strategies | | Discretion | Fund manager manages scheme pool; investor manages allocation | Portfolio manager executes allocation and switches across funds | Portfolio manager executes single-stock and bond trades | Fund manager manages scheme strategy; investor picks fund | | Manager Fee | Included in scheme TER | Capped at 1% of AUM or performance-based | Contractual management and performance fees | Included in scheme TER | | Associate AMC Cap | Not applicable | Maximum 25% allocation to group schemes | Standard prudential limits | Standard scheme concentration limits |

By establishing PRIM, SEBI provides wealth managers, multi-family offices, and registered investment firms with a clear regulatory blueprint to run managed mutual fund accounts legally, transparently, and cost-effectively. For the mutual fund industry, PRIM creates an institutional demand channel for direct plans, exchange-traded funds, and SIFs, reinforcing professional oversight across retail-facing investment pools.