Understanding Fixed Pricing and Variable Pricing in Portfolio Management Services (PMS)
Portfolio Management Services (PMS) generally offer two commercial models for charging fees to investors—Fixed Pricing and Variable Pricing (Performance-linked). Investors can choose the model that best aligns with their investment objectives and preferences.
- Fixed Pricing Model
Under the Fixed Pricing model, the Portfolio Manager charges a predetermined fee, usually calculated as a percentage of the Assets Under Management (AUM), irrespective of the investment performance.
Illustration:
- Investment Amount: ₹1,00,00,000
- Fixed Management Fee: 2% per annum
- Annual Fee Payable: ₹2,00,000
Whether the portfolio generates a return of 8%, 15%, or even a negative return, the management fee remains ₹2,00,000 (plus applicable taxes).
- Variable Pricing (Performance-linked) Model
In the Variable Pricing model, the Portfolio Manager earns a fee only when the portfolio generates returns above a predefined hurdle rate. This structure aligns the interests of the investor and the Portfolio Manager, as fees are linked to performance.
Illustration:
- Investment Amount: ₹1,00,00,000
- Hurdle Rate: 10%
- Profit Sharing: 20% of gains above the hurdle rate
- Portfolio Return: 18%
Calculation:
- Total Gain = ₹18,00,000
- Hurdle Return = ₹10,00,000
- Excess Gain = ₹8,00,000
- Performance Fee = 20% of ₹8,00,000 = ₹1,60,000
If the portfolio return is 10% or below, no performance fee is payable (subject to the terms of the respective PMS agreement).
Which Model is Right for You?
- Fixed Pricing is suitable for investors who prefer predictable and transparent fee structures.
- Variable Pricing is ideal for investors who prefer fees to be linked with portfolio performance and value the alignment of interests with the Portfolio Manager.
The commercial structure varies across Portfolio Managers and is governed by the PMS agreement. Investors should carefully review the fee terms, hurdle rate, high-water mark provisions, and other applicable conditions before investing.
Check our Profit Sharing Calculator for more real time illustration !!
Disclaimer: Investment in securities market is subject to market risks. Please consult a SEBI registered Investment Adviser or APRN registered PMS Distributor(s) before making any investment decisions.