NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Portfolio Manager
A discretionary portfolio manager manages Mr. Rao's portfolio with a hurdle rate of 10% per annum, profit sharing of 20% of returns above the hurdle, using the 'high water mark' principle. The opening value is Rs 1,00,00,000 and the closing value at year-end is Rs 1,25,00,000 (ignoring other fees). What is the profit share payable?
The profit share is Rs 3,00,000. Profit is Rs 25 lakh, the hurdle takes Rs 10 lakh, leaving Rs 15 lakh above the hurdle, and 20% of that excess is Rs 3 lakh. Charging on the whole profit would overstate the fee.
- ARs 3,00,000Correct
- BRs 5,00,000
- CRs 2,50,000
- DRs 1,50,000
Explanation
Return is Rs 25,00,000. Hurdle amount is 10% of Rs 1 crore = Rs 10,00,000. Excess is Rs 15,00,000. 20% of that is Rs 3,00,000. Rs 5,00,000 wrongly applies 20% to the whole profit; Rs 2,50,000 wrongly applies 10% to the profit; Rs 1,50,000 applies 10% of excess.
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