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The word "custody" often serves as an umbrella term for a person or an asset that is meant to be protected. It also applies to your investments and assets held with portfolio managers. But, largely, these licensed managers are only responsible for managing your investments. So, who takes care of the assets then? That's where the custodian role in PMS comes into play.
Through this blog, let us explore the actual definition of a custodian, its role in portfolio management services, why it's crucial for HNI investors, and much more.
Keep reading to find out how the custodian watches over your assets!
Custodian is a third-party institution that oversees your assets and investments. They act as a guardian for the assets held by the portfolio managers. The primary role of a custodian is to safeguard the financial assets of the PMS clients.
In PMS, the custodian holds your shares and securities, settles trades, and ensures transparency. They don't make investment decisions, as it is the fund manager's job. However, the counterpart ensures that the assets are safe and compliant.
Think of the custodian as a bank locker where people store their valuables. At this point, where people are clueless about where to store and secure them, this vault acts as a guardian. The same applies to the custodian role in portfolio management services as well.
Here's a complete breakdown of the custodian role in PMS:
Well, at the most basic level, custodians keep your investments safe. Think of them as the behind-the-scenes guardians of your portfolio. They ensure that these assets are held securely and separately, by not mixing them with the fund manager's (or other investors') assets.
PMS allows flexibility, and hence the fund manager does adjust the investments when required. And when these adjustments happen, the custodian's role is to maintain detailed records of all holdings, transactions, and any changes in ownership.
As a result, these custodians regularly verify asset holdings, ensuring there are no discrepancies in client accounts and the actual securities held.
Custodians assist PMS providers in the daily mark-to-market valuation of securities, ensuring accurate NAV computation, fair pricing, and alignment with SEBI valuation norms.
Investments made in equities (like stocks) make HNI investors eligible for corporate actions. But knowing that you're bound to receive is the custodian's role. So, whenever a company announces dividends, stock splits, mergers, or rights issues, they ensure that the entitled PMS clients receive the correct benefits.
Likewise, they may also facilitate proxy voting, thus allowing clients to vote on shareholder matters through their PMS.
Custodians provide an additional layer of operational safety by flagging:
- Settlement mismatches
- unauthorized trades
- Delayed credits or demat inconsistencies
This strengthens overall risk control and accountability.
Associating with PMS brings in certain regulatory requirements from the Securities and Exchange Board of India. Custodians ensure that all transactions and holdings comply with SEBI guidelines. Also, they provide independent reporting, helping both investors and regulators monitor the health and legality of the PMS.
Once trades are executed by the portfolio manager, the custodian ensures their timely settlement by facilitating the transfer of funds and securities. Although the custodian manages the settlement process, the beneficial ownership always remains with the investor.
PMS is mostly opted for by HNI investors with a minimum investment of ₹50 lakhs. When such a large corpus is involved, having a custodian is not optional, but essential. For example;
Recruiting a custodian creates an atmosphere of security and safety within the PMS clients. It instills a sense of confidence among investors that their assets are in safe hands and that a separate entity is handling them.
With the feature of individuality, they ensure your securities are held securely and separately from the portfolio manager's assets. It protects you from any fraud, mismanagement, or unauthorized access by anonymous identities.
With the involvement of custodians, they ensure that you receive independent reports on your portfolio holdings, transactions, and asset valuations.
Trade settlements, record maintenance, dividend processing, and corporate actions often involve complex operations. For this purpose, such institutions ensure these activities are executed accurately and timely, minimizing manual errors, delays, or record mismatches.
Operating as a custodian within India demands few regulatory compliance from the SEBI. It includes;
In the world of PMS, where large-ticket investments and personalized strategies are the norm, a custodian plays a silent yet powerful role. From safeguarding your assets to ensuring regulatory compliance and providing independent reporting, the custodian role in portfolio management services is vital, not optional. They act as the invisible shield that protects your wealth behind the scenes.
By default, custodial services are mandatory for PMS providers, except for advisory-only services. According to the guidelines, the SEBI requires all Portfolio Management Services in India to appoint an independent custodian to hold investor assets.
Both have different roles to perform. For instance, a portfolio manager manages your investments, which may include stocks, bonds, ETFs, or other securities. In contrast, a custodian securely holds and safeguards your assets (also, the Power of Attorney of the Bank account and demat account). They perform separate but complementary roles in PMS.
The eligible fund managers licensed by SEBI can appoint a custodian for their PMS clients.
Disclaimer: The information provided in this article is for educational and informational purposes only. Any financial figures, calculations, or projections shared are solely intended to illustrate concepts and should not be construed as investment advice. All scenarios mentioned are hypothetical and are used only for explanatory purposes. The content is based on information obtained from credible and publicly available sources. We do not guarantee the completeness, accuracy, or reliability of the data presented. Any references to the performance of indices, stocks, or financial products are purely illustrative and do not represent actual or future results. Actual investor experience may vary. Investors are advised to carefully read the scheme/product offering information document before making any decisions. Readers are advised to consult with a certified financial advisor before making any investment decisions. Neither the author nor the publishing entity shall be held responsible for any loss or liability arising from the use of this information.
