NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Operational Aspects of Portfolio Managers

Fees and Expenses in PMS: Fixed, Performance and Hybrid

Updated 11 October 2026 · Fact-checked

PMS fees are what a portfolio manager charges a client for managing the portfolio. The main structures are fixed fee, performance-based (profit sharing) fee and hybrid fee, which combines the two. Separately, actual operating expenses such as brokerage, custody and audit costs may be charged to the client. Fees must be disclosed and agreed in advance.

Understand Fees and Expenses in PMS

A portfolio manager earns money from the client in two broad ways: fees for its service, and reimbursement of operating expenses actually incurred for the client's portfolio. Keep these two buckets apart. Most exam questions test whether you can tell them apart.

There are three common fee structures. A fixed fee is a percentage of assets under management (AUM), charged whether the portfolio gains or loses. A performance-based fee, also called profit sharing, is a share of the profit the manager earns for you. A hybrid fee has a smaller fixed part plus a performance part.

Profit sharing usually works with a hurdle rate and a high water mark. A hurdle rate is a minimum return the portfolio must earn before the manager takes a share of profit. A high water mark is the highest portfolio value on which performance fee was last charged. The manager can charge performance fee only on profit above that level, so you do not pay twice for recovering earlier losses.

Operating expenses are the real costs of running your account. Typical examples are custodian and depository charges, registrar and transfer agent fees, brokerage and transaction costs, certification and professional charges, audit and legal costs, and similar charges incurred for the portfolio. The manager passes these on at actual cost and cannot use them as a hidden extra fee.

Fees and expenses must be set out in the portfolio management agreement and the disclosure document, so the client knows them before investing. A distributor should explain which structure suits the client. A fixed fee suits a client who wants cost certainty. A performance fee aligns the manager's pay with results but can raise cost in good years. Check the latest NISM workbook and SEBI regulations for exact limits and conditions, as these are revised from time to time.

Key formulas to remember

Fixed fee: Fixed fee = AUM × fee rate % × (period ÷ 12 months); Charged irrespective of performance. Use average or stated AUM basis as per the agreement.
Profit sharing fee (no hurdle): Performance fee = Profit × profit-share %; Charged only on profit, normally above the high water mark.
Profit sharing with hurdle: Performance fee = (Profit above hurdle or high water mark) × share %; No fee if the portfolio stays below the hurdle or high water mark, as defined in the agreement.
Hybrid fee: Total fee = Fixed fee + Performance fee; Fixed part is usually lower than in a pure fixed structure.
High water mark: Chargeable profit = Current value − High water mark (if positive); If the value is at or below the mark, no performance fee.
Net return to client: Net value = Closing value − fees − chargeable expenses; Compare returns after costs, not before.

How to solve Fees and Expenses in PMS questions

Use this method for any question on PMS fees and expenses, whether it is conceptual or numerical.

1Identify whether the question is about a fee or an operating expense.
2Name the structure: fixed, performance-based or hybrid.
3For numbers, note AUM, fee rate, period, hurdle rate and high water mark.
4Compute the fixed part first, on AUM, for the stated period.
5Compute profit above the hurdle or high water mark. If it is zero or negative, the performance fee is zero.
6Apply the profit-share percentage to that profit only.
7Add the parts for a hybrid structure, then deduct from the client's value if net return is asked.
8Check the answer against the options and discard those that charge performance fee on a loss or below the mark.

Quickest way: Three-question shortcut

When to use it: Use it for MCQs that ask which fee applies or whether a fee is payable.

Is there a gain above the high water mark or hurdle? If no, performance fee is nil.
Is there a fixed component? If yes, it is payable regardless of returns.
Is the item a real cost paid to a third party for the account? If yes, it is an expense, not a fee.

Common mistakes in Fees and Expenses in PMS

Charging performance fee on the whole portfolio value instead of the profit.
Students confuse a fee on AUM with a fee on profit.
Fix: Performance fee is a percentage of profit only, never of total AUM.
Charging performance fee when the portfolio is below the high water mark.
Students see a gain over the last period and ignore earlier losses.
Fix: Always compare the closing value with the high water mark before computing profit.
Thinking a fixed fee is waived when returns are negative.
Mixing it up with profit sharing.
Fix: A fixed fee is charged irrespective of performance.
Treating brokerage or custody charges as part of the management fee.
Both reduce the client's returns, so they look the same.
Fix: Management fee pays for the manager's service. Operating expenses are separate costs charged at actual.
Ignoring the period and charging a full year's fee for part of a year.
Rates are quoted per annum and students forget to pro-rate.
Fix: Multiply by months ÷ 12 when the period is shorter than a year.

Worked examples

Example 1

A client's PMS account has AUM of ₹50,00,000. The manager charges a hybrid fee of 1% per annum fixed plus 20% of profits above the high water mark. The high water mark is ₹50,00,000 and the portfolio value at year end, before fees, is ₹58,00,000. Compute the total fee for the year, treating the fixed fee on ₹50,00,000 and ignoring expenses.

Show the solution

Fixed fee = ₹50,00,000 × 1% = ₹50,000.
Profit above high water mark = ₹58,00,000 − ₹50,00,000 = ₹8,00,000.
Performance fee = ₹8,00,000 × 20% = ₹1,60,000.
Total fee = ₹50,000 + ₹1,60,000 = ₹2,10,000.

Answer: Total fee = ₹2,10,000.

Example 2

A portfolio under a pure profit-sharing structure (30% share) had a high water mark of ₹40,00,000. After a fall, the value recovered to ₹38,00,000 and later rose to ₹43,00,000. What is the performance fee when charged at ₹43,00,000?

Show the solution

The performance fee is charged only on profit above the high water mark.
Profit above the mark = ₹43,00,000 − ₹40,00,000 = ₹3,00,000.
Performance fee = ₹3,00,000 × 30% = ₹90,000.
The rise from ₹38,00,000 to ₹40,00,000 is only recovery of earlier loss and earns no fee.

Answer: Performance fee = ₹90,000.

Exam tips

Read whether the question asks for a fee or an expense. The options often mix both.
Remember the fixed fee is payable even in a loss year, while profit-sharing fee is nil below the high water mark or hurdle.
In numerical questions, write the high water mark and profit first, then multiply by the share percentage.
For exact limits and permitted expense heads, rely on the current NISM workbook and SEBI regulations. Do not guess figures.
Negative marking is 10% of the marks for the question, so skip a question only if you cannot narrow it to two options.

Practice questions from Operational Aspects of Portfolio Managers

Fees and Expenses in PMS: frequently asked questions

What is the difference between fixed fee and profit sharing in PMS?

A fixed fee is a percentage of AUM charged regardless of returns. Profit sharing is a percentage of the profit earned, usually above a hurdle or high water mark. If there is no qualifying profit, no performance fee is charged.

What is a high water mark in PMS?

It is the highest portfolio value on which performance fee was last charged. The manager earns performance fee only on profit above it. This stops the client paying again for recovering past losses.

What is a hybrid fee structure?

A hybrid structure combines a fixed fee with a performance fee. The fixed part is usually lower than in a pure fixed structure. The client pays both parts, with the performance part applying only when there is qualifying profit.

Are operating expenses part of the PMS fee?

No. Operating expenses such as custody, brokerage, registrar, audit and similar costs are charged separately at actual to the client's portfolio. They must be disclosed in the disclosure document and agreement.