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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 distributor receives a hybrid-fee structure where the client pays a fixed fee and a profit-share. Under SEBI rules, the performance fee is charged on returns above which of the following?

Under SEBI rules, performance fees are charged using the high-water mark principle, often combined with a hurdle rate agreed in the contract. The fee applies only to gains above the portfolio's previous peak value, so past losses must be recovered first.

  1. AZero return, regardless of any past loss
  2. BA hurdle rate and subject to the high-water mark principleCorrect
  3. COnly the risk-free rate of 91-day T-bill
  4. DAny rate set by the distributor

Explanation

Performance or profit-sharing fee must be based on a high-water mark principle, so fee is charged only on returns exceeding the previous highest value of the portfolio, and a hurdle rate may be specified in the agreement. Charging from zero ignoring past losses violates the high-water mark principle.

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