PMS Fee Structures — Fixed, Variable, and Hurdle Rate
Definition
PMS fees in India typically combine three components: a fixed management fee (annual percentage of AUM), an optional performance fee (a share of returns above a hurdle rate), and direct expenses (brokerage, custodian, audit). SEBI mandates that all fees and expenses must be transparently disclosed to the investor, and every PMS must offer at least one "fixed fee only" option without performance fees.
In Simple Words
A typical Discretionary PMS in India today charges between 1.5% and 2.5% per annum as a fixed management fee, calculated as a percentage of average daily AUM. For an investor with ₹50 lakh allocated, this works out to roughly ₹75,000 to ₹1.25 lakh per year, deducted from the demat account quarterly or monthly. On top of this, many PMS schemes offer a performance-fee option — typically structured as 10-20% of returns above a hurdle rate of 8-12% per annum, with a high-water mark provision to ensure the Manager is not paid twice for the same gains. For example, a PMS charging 2% fixed plus 15% performance over 10% hurdle: in a year where the portfolio returns 18%, the Manager keeps the 2% management fee plus 15% × (18% − 10%) = 1.2% performance fee, totalling 3.2% in fees. In a year where the portfolio returns only 6%, the Manager keeps the 2% management fee but no performance fee. The high-water mark means that if the portfolio loses 10% in year 1, the Manager must first earn back that 10% in year 2 before any new performance fee can accrue. SEBI requires every PMS to offer at least one option where the investor can choose pure fixed-fee with no performance component — the investor decides whether to opt for the fixed-only or the fixed-plus-performance structure. Beyond management and performance fees, the investor also pays brokerage on every transaction the Manager executes (typically 5-15 bps per trade), custodian fees (₹5,000-15,000 per year), and audit/compliance fees. These are pass-through and are paid out of the demat account directly. Total annual cost of a PMS, including all fees and expenses, typically ranges from 2.5% to 4.5% per annum, materially higher than a mutual fund's 0.5%-2.0% TER.
Real-Life Scenario
Take an investor with ₹1 crore allocated to a Discretionary PMS that charges 2% fixed plus 15% performance over a 10% hurdle, with high-water mark. Year 1: portfolio returns 22%, ending value (gross) ₹1.22 crore. Management fee: 2% of ₹1.10 crore (avg AUM) = ₹2.2 lakh. Performance fee: 15% × (22% − 10%) × ₹1 crore = ₹1.8 lakh. Total fees: ₹4 lakh (4% of opening AUM, but only 1.8% on the gross gains). Net to investor: ₹22 lakh − ₹4 lakh = ₹18 lakh = 18% net return. Year 2: portfolio returns -10%, ending value ₹1.04 crore (down from ₹1.22 crore high-water mark). Management fee: 2% of ₹1.13 crore (avg AUM) = ₹2.26 lakh. Performance fee: zero (below high-water mark). Year 3: portfolio returns 30%, gross value back to ₹1.35 crore. The Manager must first earn back the dip from ₹1.22 crore to ₹1.04 crore (i.e., reach ₹1.22 crore high-water mark) before any new performance fee. Once the portfolio crosses ₹1.22 crore, the performance fee applies only on the gain above ₹1.22 crore — i.e., 15% × (₹1.35 crore − ₹1.22 crore) = ₹1.95 lakh. The investor reviews this calculation each year as part of the audited statement.
Key Points to Remember
Frequently Asked Questions
Test Your Knowledge
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Typical fixed management fee in an Indian Discretionary PMS is approximately:
Summary Notes
Fees: fixed (1.5-2.5%) + performance (10-20% over hurdle) + direct expenses.
High-water mark is critical for fair performance-fee accrual.
Total cost: 2.5-4.5% p.a. — higher than MF, must be justified by alpha.
Fees can be negotiated at higher ticket sizes.
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What you’ll learn in PMS Foundation
Portfolio Management Services (PMS) is the SEBI-regulated route through which High Net Worth Individuals access concentrated, professionally managed equity portfolios held in their own demat account. This foundation track covers the structure, the three PMS types, fee economics, and how to choose between PMS, mutual funds, and SIFs.
Frequently asked questions
Why is the PMS minimum ₹50 lakh?
SEBI set ₹50 lakh as the threshold to ensure PMS is accessed only by investors who can afford the operational complexity (separate demat, transaction-by-transaction tax, individual reporting) and absorb the higher concentration risk. The threshold also supports the Portfolio Manager's economic viability — managing customised portfolios for ₹10 lakh tickets would not be cost-effective.
Do I receive dividends and corporate actions directly?
Yes. Because the securities sit in your own demat account, all dividends, bonus issues, rights, buybacks, and other corporate actions accrue directly to you, on the same terms as if you held the stocks yourself. This is one of the structural differences from mutual funds, where these benefits accrue to the fund and are reflected in the NAV.
Can I see what the PMS is buying and selling in real time?
You receive transaction confirmations through your broker (since the trades happen in your demat account), and the Portfolio Manager provides quarterly portfolio statements with detailed positioning. You will not see real-time alerts on every trade, but you have full transparency on holdings and transactions through your demat account at any time.
How does PMS differ from a mutual fund operationally?
The most important operational difference: in a mutual fund, you hold units and the fund holds the securities. The fund's buy-sell activity is invisible to you (you only see the NAV). In a PMS, you hold the securities directly, so every Portfolio Manager transaction reflects in your demat — and creates a tax event on your books. This means PMS portfolios typically generate more granular tax reporting than mutual funds.
Is Discretionary PMS riskier because the Manager makes decisions independently?
Not necessarily. The Manager operates within a SEBI-mandated investment framework and the strategy disclosed in the Disclosure Document. The POA grants execution authority but not unlimited risk-taking. The investor reviews holdings quarterly and can withdraw at any time. The greater "risk" of Discretionary is psychological — investors must accept that they will not approve every trade.
Can I switch from Discretionary to Non-Discretionary in the same PMS?
Generally no — these are distinct service types under SEBI rules and require different agreements. Switching usually means redeeming from one and re-subscribing to the other, with the corresponding tax events.
In Advisory PMS, who is responsible if the recommended trade goes wrong?
The investor — because the investor executes the trade. The Advisory Portfolio Manager provides recommendations but does not bear execution risk. This is one reason Advisory is suitable only for sophisticated investors who can independently evaluate recommendations.
How is the POA structured in a Discretionary PMS?
The Power of Attorney is limited — it authorises the Portfolio Manager to buy and sell securities specifically within the agreed strategy and demat account, and does NOT permit fund transfers, account closures, or other transactions outside the investment mandate. Always read the POA carefully and consult your legal advisor before signing.
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