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

A PMS client invests Rs 50 lakh. The portfolio value after one year is Rs 56 lakh before fees. Fixed fee is 2% of the initial corpus (Rs 1 lakh) and there is a performance fee of 20% of profits above a 10% hurdle, charged on returns over the hurdle amount only (hurdle profit Rs 5 lakh), with profit computed after the fixed fee. What is the performance fee payable?

The performance fee is nil. Profit of Rs 6 lakh less the Rs 1 lakh fixed fee leaves Rs 5 lakh, exactly equal to the 10% hurdle of Rs 5 lakh, so there is no excess return on which the 20% performance fee can be charged.

  1. ARs 0Correct
  2. BRs 20,000
  3. CRs 1,00,000
  4. DRs 1,20,000

Explanation

Profit before fees is Rs 6 lakh; after the fixed fee of Rs 1 lakh it is Rs 5 lakh. The hurdle profit is 10% of Rs 50 lakh = Rs 5 lakh. Excess over the hurdle is nil, so the performance fee is zero. Rs 20,000 or Rs 1,20,000 arise from ignoring the fixed fee or the hurdle.

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