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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's portfolio has a high-water mark of Rs 1,20,00,000. At the end of the year the portfolio value, before performance fee, is Rs 1,30,00,000. The agreement charges a 20% performance fee on profits above the high-water mark. What is the performance fee payable?

The performance fee is Rs 2,00,000. Only the gain above the high-water mark counts: Rs 1.30 crore minus Rs 1.20 crore is Rs 10 lakh, and 20% of that is Rs 2 lakh. Fees are not charged on the earlier, already-fee-paid portfolio value.

  1. ARs 2,00,000Correct
  2. BRs 2,60,000
  3. CRs 4,00,000
  4. DRs 24,00,000

Explanation

Profit above the high-water mark is 1,30,00,000 - 1,20,00,000 = Rs 10,00,000. Fee is 20% x 10,00,000 = Rs 2,00,000. Rs 2,60,000 wrongly applies 20% to the full value of 13 million less nothing, Rs 4,00,000 doubles the excess, and Rs 24,00,000 charges on the whole high-water mark.

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