NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Role of Portfolio Managers
A PMS has a hurdle rate of 10% per annum and charges a profit share of 20% of returns above the hurdle on a Rs 1 crore corpus (hard hurdle, no fixed fee). The portfolio earns 16% for the year. What is the profit-sharing fee?
The fee is Rs 1.2 lakh. With a hard hurdle, profit share applies only to the excess over 10%. The excess is 6% of Rs 1 crore, or Rs 6 lakh, and 20% of that equals Rs 1.2 lakh.
- ARs 1.2 lakhCorrect
- BRs 2.0 lakh
- CRs 3.2 lakh
- DRs 1.0 lakh
Explanation
Under a hard hurdle, profit share applies only to returns above the hurdle. Excess return = 16% - 10% = 6% of Rs 1 crore = Rs 6 lakh. 20% of Rs 6 lakh = Rs 1.2 lakh. Rs 3.2 lakh would apply 20% to the full 16% return, which is a soft hurdle treatment.
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