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NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Regulatory, Governance and Ethical Aspects of Portfolio Managers

PMS Fees, Operational Requirements and Investment Restrictions

Updated 11 October 2026

Under the SEBI (Portfolio Managers) Regulations, 2020, a portfolio manager may charge fixed fees, return-based fees or a mix, but no upfront fees. It must keep client money and securities separate, follow investment limits, report to clients at least quarterly, and keep audited records. Solve questions by identifying the rule, then checking its exact limit.

Understand Operational Requirements, Fees and Investment Restrictions

A portfolio manager handles a client's money and securities under a signed agreement. Because it holds client assets, SEBI sets rules on how it earns, what it can buy, how it keeps accounts and how it reports. The rules protect the client from conflicts of interest.

Fees. The agreement must state fees clearly. Fees can be fixed, return-based or a combination. A portfolio manager cannot take an upfront fee from the client, directly or indirectly. Expenses actually incurred, such as brokerage, custody, registrar and audit costs, can be charged if disclosed. An exit load is allowed but capped on a sliding scale over the first three years.

Return-based fees. A hurdle rate is a minimum return the portfolio must beat before a performance fee is earned. A high water mark is the highest value on which a performance fee was previously paid. No new performance fee is earned until the portfolio value goes above that mark. This stops the client from paying twice for the same gains after a fall.

Investment restrictions and operations. Limits stop concentration and self-dealing. They cover investment in group companies, a single issuer and unlisted securities, and a ban on borrowing on the client's behalf. Client funds and securities must be held separately from the portfolio manager's own, in client-specific accounts. The manager must report to clients at periodic intervals, report performance on a standard method (time-weighted return) and keep books that are audited every year.

Key formulas to remember

Performance fee with hurdle
Fee = fee % × (Ending value − Hurdle value), only if Ending value > Hurdle value
Hurdle value = Opening value × (1 + hurdle rate). Check what the agreement says the fee applies to.
Performance fee with high water mark
Fee = fee % × (Ending value − High water mark), only if Ending value > High water mark
The high water mark is the highest value on which a fee was previously paid. No fee on recovering a past loss. The excess over the high water mark is the base for the fee.
Fee structures allowed
Fixed fee, or return-based fee, or a combination
No upfront fee. Only actual, disclosed expenses may be charged.
Exit load cap
Exit load not exceeding 3% of the amount withdrawn in year 1, 2% in year 2 and 1% in year 3; nil after 3 years
These are maximums, not fixed charges. The agreement may set a lower load and must disclose it. The load is charged as a percentage of the amount withdrawn. After deducting actual expenses, the exit load is credited to the client's account.
Investment limits
Single issuer: not more than 25% of the client's AUM in securities of a single issuer (AAA-rated and government securities are excluded). Group or associate companies: not more than 25% of the client's AUM in securities of the portfolio manager's group or associate companies. Unlisted securities of associates or group companies: not permitted.
Each limit has its own object and conditions. Examiners test the number and the type of security. Confirm the exact conditions in the Regulations and your latest NISM workbook.
Client reporting interval
At least once every 3 months
Reports should cover portfolio composition, transactions, income received, expenses charged and performance versus benchmark.

How to solve Operational Requirements, Fees and Investment Restrictions questions

Use this method for any question on fees, limits, reporting or audit.

  1. 1Identify the type of rule: fee, expense, investment limit, account segregation, reporting, performance or audit.
  2. 2Underline the key words in the question: upfront, discretionary, group company, unlisted, single issuer, quarterly.
  3. 3Recall the exact rule or number from your notes for that type. Do not rely on a guess.
  4. 4For fee calculations, find the opening value, hurdle value or high water mark, and ending value before fees.
  5. 5Compute the base on which fee applies (excess over hurdle or high water mark). If it is zero or negative, the fee is nil.
  6. 6Multiply by the fee percentage and check the arithmetic once.
  7. 7Scan the options for traps such as the wrong percentage, the wrong base or 'always' and 'never'.
  8. 8Choose the option that matches the rule exactly. Skip if you cannot narrow it down, as wrong answers lose marks.

Quickest way: Rule-then-trap check

When to use it: Use when you have under a minute for a rule-based question.

  1. Name the rule category in your head in three seconds.
  2. Recall the one number or condition that defines it, such as 25%, quarterly or no upfront fee.
  3. Eliminate options that break it.
  4. For fee sums, compute fee % × (ending value − hurdle or high water mark) and compare with the options.
  5. If two options remain, prefer the one that protects the client.

Common mistakes in Operational Requirements, Fees and Investment Restrictions

  • Quoting one flat 25% for every investment limit, or allowing unlisted group company securities.

    The single-issuer figure is well known, so students apply it to unlisted securities and group companies as well and drop the conditions.

    Fix: Write each limit with its object and conditions: single issuer, group companies, unlisted or unrated securities. Unlisted securities of associates or group companies are not permitted. Check exact figures in your workbook.

  • Charging the performance fee on the whole profit instead of the excess over the hurdle or high water mark.

    Students remember 'fee on profits' and skip the threshold.

    Fix: Always subtract the hurdle value or high water mark first. Fee applies only to the excess.

  • Thinking an upfront fee is allowed if disclosed.

    Students confuse upfront fees with expenses or a fee payable later.

    Fix: Remember: no upfront fee, directly or indirectly. Only actual disclosed expenses can be charged.

  • Resetting the high water mark after a loss.

    Students think the mark is the latest opening value.

    Fix: The mark is the highest value on which a fee was paid. After a fall, the portfolio must first recover above it.

  • Treating client money as pooled with the portfolio manager's own funds.

    Students link PMS with pooled vehicles like mutual funds.

    Fix: PMS is individual. Funds and securities stay in client-specific accounts, separate from the manager's own.

  • Mistaking reporting frequency, saying annually.

    Students confuse client reports with the annual audit.

    Fix: Client reports go out at least every three months. The audit of books is annual.

Worked examples

Example 1

A client invests ₹1,00,00,000 in a PMS. The agreement has a hurdle rate of 10% a year and a performance fee of 20% on returns above the hurdle. At year end the portfolio value before fees is ₹1,18,00,000. Find the performance fee and the net value.

Show the solution
  1. Hurdle value = ₹1,00,00,000 × 1.10 = ₹1,10,00,000.
  2. Ending value ₹1,18,00,000 is above the hurdle, so a fee is due.
  3. Excess over hurdle = ₹1,18,00,000 − ₹1,10,00,000 = ₹8,00,000.
  4. Fee = 20% × ₹8,00,000 = ₹1,60,000.
  5. Net value = ₹1,18,00,000 − ₹1,60,000 = ₹1,16,40,000.

Answer: Performance fee is ₹1,60,000. Net value is ₹1,16,40,000, which becomes the high water mark for later fees.

Example 2

The high water mark is ₹1,16,40,000 and the performance fee is 20% on value above it, with no hurdle. At the next fee date the portfolio value before fees is ₹1,22,00,000. What is the fee? (a) ₹1,12,000 (b) ₹4,40,000 (c) ₹5,60,000 (d) Nil

Show the solution
  1. Ending value ₹1,22,00,000 is above the high water mark ₹1,16,40,000, so a fee is due. Option (d) is out.
  2. Excess = ₹1,22,00,000 − ₹1,16,40,000 = ₹5,60,000.
  3. Fee = 20% × ₹5,60,000 = ₹1,12,000.
  4. Option (c) ₹5,60,000 is the excess, not the fee.
  5. Option (b) ₹4,40,000 is 20% of the total gain of ₹22,00,000 over the opening ₹1,00,00,000, which ignores the mark. It uses the wrong base.

Answer: (a) ₹1,12,000

Exam tips

  • Learn each number with its object: the single-issuer limit, 3 months for reports, and exit load caps of 3%, 2% and 1% by year (maximums, nil after 3 years).
  • Read fee questions for the base: hurdle value or high water mark. Most wrong options use the wrong base.
  • Watch for words like 'always', 'never' and 'upfront'. Rules here are exact, and extreme words are often traps.
  • Negative marking applies to NISM-Series-XXI-A at 10% of the marks for a question. Guess only after you remove at least two options.
  • Check your latest NISM workbook for any recent SEBI changes to limits and fee rules before the exam.

Practice questions from Regulatory, Governance and Ethical Aspects of Portfolio Managers

Operational Requirements, Fees and Investment Restrictions: frequently asked questions

What fee structures can a portfolio manager charge under SEBI rules?

A portfolio manager can charge a fixed fee, a return-based fee or a combination of the two. It cannot charge any upfront fee, directly or indirectly. Actual disclosed expenses such as brokerage and custody can be charged.

What is the difference between a hurdle rate and a high water mark?

A hurdle rate is the minimum return the portfolio must earn before a performance fee is due. A high water mark is the highest value on which a fee was already paid. A fee is earned only on gains above it, so past losses must be recovered first.

How often must a portfolio manager report to clients?

Reports must go to clients at least once every three months. They cover portfolio composition, transactions, income received, expenses charged and performance versus benchmark. This is different from the annual audit of the manager's books.

Can a portfolio manager keep client funds with its own funds?

No. Client funds and securities must be kept separate from the manager's own, in client-specific accounts. The manager also cannot borrow funds or securities on behalf of the client.