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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Overview of Alternative Investment Funds (AIFs)

Caselet: Mr. Rao invests Rs 50 lakh in a Category III AIF. The fund charges a performance fee of 20% over a hurdle of 10% with full catch-up, and the investment grows to Rs 60 lakh before fees. With full catch-up, how much performance fee is payable, ignoring management fee and taxes?

The performance fee is Rs 2 lakh. The gain is Rs 10 lakh, exceeding the Rs 5 lakh hurdle, and with full catch-up the manager charges 20% on the entire profit rather than only the excess above the hurdle.

  1. ARs 1 lakh
  2. BRs 2 lakhCorrect
  3. CRs 5 lakh
  4. DRs 10 lakh

Explanation

Gain = 60 - 50 = Rs 10 lakh. Hurdle is 10% of 50 = Rs 5 lakh, which is met exactly. With full catch-up, the manager takes 20% of the entire profit: 20% x 10 = Rs 2 lakh. Rs 1 lakh wrongly applies 20% only to the amount above the hurdle (20% x 5), which is without catch-up.

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