Key takeaways
- PMS fees are usually fixed, performance-linked, or a hybrid of the two.
- A hurdle rate is the return the manager must beat before earning a performance fee; a high-water mark stops you paying twice for the same gains.
- SEBI bans upfront fees in PMS and caps exit loads at 3%, 2% and 1% in the first three years.
- AIFs typically charge a management fee plus carried interest above a hurdle.
- GST at 18% applies to fees — include it when you compare.
The three PMS fee structures
| Structure | How it works | Typical range | Cheapest when… |
|---|---|---|---|
| Fixed fee | A set percentage of your portfolio value each year, whatever the performance. | 1% to 2.5% a year | returns are very strong — you keep all the upside. |
| Performance fee | A share of returns above a hurdle rate, charged against a high-water mark. | 10% to 20% of returns above the hurdle | returns are modest — you pay little or nothing in weak years. |
| Hybrid | A lower fixed fee plus a performance fee. | e.g. 1% fixed + 15% above the hurdle | you want a balance between the two. |
Ranges are indicative. The binding terms are in each manager’s Disclosure Document and your agreement.
Hurdle rates
A hurdle rate is the minimum return the portfolio must earn before a performance fee applies — often 8% to 10% a year. With a 10% hurdle and an 18% return, the performance fee is charged on the 8% excess, not on the full 18%.
Check whether the hurdle is hard — the fee applies only to returns above it — or soft, where, once the hurdle is cleared, the fee applies to the whole return. A catch-up clause, which lets the manager earn a larger share of returns just above the hurdle until it has “caught up”, has a similar effect. Both can materially change what you pay.
High-water marks
A high-water mark is the highest value your portfolio has reached on which a performance fee was charged. SEBI requires PMS performance fees to be charged on this basis, so after a fall the manager must first recover your losses before earning a performance fee again.
| Year | Portfolio value at year-end | Performance fee? |
|---|---|---|
| Start | ₹1.00 crore | — |
| Year 1 | ₹1.20 crore | Yes, on the gain above the hurdle. The high-water mark becomes ₹1.20 crore. |
| Year 2 | ₹1.05 crore | No — the portfolio is below its high-water mark. |
| Year 3 | ₹1.25 crore | Only on the growth above ₹1.20 crore (subject to any hurdle) — not on the recovery from ₹1.05 crore. |
Worked example: what ₹1 crore costs under each structure
Take ₹1 crore invested for one year. For simplicity, fees are calculated on the opening value, and GST and expenses are left out. The performance fee is 20% of returns above a 10% hard hurdle; in the hybrid, it is calculated on the return after the fixed fee.
| Gross return | Fixed 2.5% | Hybrid: 1.5% + 20% above 10% | Performance only: 20% above 10% |
|---|---|---|---|
| 5% | ₹2.50 lakh | ₹1.50 lakh | Nil |
| 12% | ₹2.50 lakh | ₹1.50 lakh + ₹0.10 lakh = ₹1.60 lakh | ₹0.40 lakh |
| 20% | ₹2.50 lakh | ₹1.50 lakh + ₹1.70 lakh = ₹3.20 lakh | ₹2.00 lakh |
The higher the return, the more a performance fee costs. In this example the hybrid overtakes the 2.5% fixed fee once the gross return passes 16.5%, and the performance-only structure overtakes it above 22.5%. Choose a structure based on the returns you realistically expect from the strategy — and add 18% GST to every figure above.
Other PMS costs — and SEBI’s protections
- No upfront fees: SEBI prohibits upfront fees in PMS.
- Exit loads: capped at 3% of the amount redeemed in the first year, 2% in the second and 1% in the third; nil after three years.
- Operating expenses: custody, fund accounting and similar charges, excluding brokerage, are capped at 0.5% a year of average assets.
- Brokerage and transaction costs: charged separately; high-turnover strategies incur more.
- GST: 18% on management and performance fees.
How AIF fees work
- Management fee: often 1.5% to 2.5% a year. Many closed-ended funds charge it on committed capital during the investment period and on invested capital afterwards.
- Carried interest (carry): typically 10% to 20% of profits above a hurdle — commonly 8% to 10% a year in rupee terms — paid after investors have received their capital back plus the hurdle.
- Set-up and fund expenses: legal, audit, trustee and administration costs, borne by the fund.
- Category III funds: usually a fixed fee plus a performance fee, often with a high-water mark — closer to PMS in structure.
Read the PPM’s “distribution waterfall”, which sets out the order in which returns are shared between investors and the manager. For the funds themselves, see AIFs explained.
What your distributor earns
Distributors such as IndiaHedgeFunds are paid by the portfolio manager or fund out of the fees it already charges — not as an extra charge to you. In PMS, SEBI allows distribution commission only on a trail basis, not upfront.
We take ₹0 upfront commission and disclose, in writing, the trail we receive on every strategy we shortlist for you — before you sign anything. Ask the same of anyone you deal with.
Frequently asked questions
What are typical PMS fees in India?
Fixed fees commonly range from 1% to 2.5% a year. Performance fees are typically 10% to 20% of returns above a hurdle, often combined with a lower fixed fee. GST at 18% applies on top.
What is a high-water mark in PMS?
It is the highest portfolio value on which a performance fee has been charged. SEBI requires PMS performance fees to be charged against a high-water mark, so you do not pay a performance fee again until earlier losses have been recovered.
What is the exit load in PMS?
SEBI caps PMS exit loads at 3% in the first year, 2% in the second and 1% in the third, with no exit load after three years.
Are there upfront fees in PMS?
No. SEBI prohibits upfront fees in PMS, and distributor commissions can only be paid on a trail basis.
Is a fixed fee or a performance fee better?
It depends on the returns you expect. Performance fees cost less in weak years and more in strong ones. Compare the total fee each structure would charge across a range of realistic returns.
