How Are Management Fees and Profit Sharing Charged in a PMS?

A PMS fee structure can have two components: a Fixed Management Fee and a Performance Fee (Profit Sharing). Understanding how both are calculated is important when evaluating the actual cost of a PMS investment.

Simple Illustration

Assume an investor invests ₹50 lakh in a PMS with:

• Fixed Management Fee: 1% p.a.
• Hurdle Rate: 12%
• Profit Sharing: 20%
• Portfolio Return: 20%

Step 1: Fixed Management Fee

Assuming the PMS agreement provides for a 1% fee on the investment amount:

₹50,00,000 × 1% = ₹50,000

The fixed management fee is ₹50,000.

Note: The actual fee may be calculated on the initial investment, AUM, average AUM, or another basis as specified in the PMS agreement.

Step 2: Calculate Portfolio Profit

20% return on ₹50 lakh:

₹50,00,000 × 20% = ₹10,00,000

Step 3: Apply the Hurdle Rate

The hurdle rate is 12%:

₹50,00,000 × 12% = ₹6,00,000

Profit eligible for profit sharing:

₹10,00,000 − ₹6,00,000 = ₹4,00,000

Step 4: Calculate Profit Sharing

The Portfolio Manager receives 20% of the profit above the hurdle:

₹4,00,000 × 20% = ₹80,000

Final Picture

In Simple Terms

The Fixed Management Fee is charged separately for managing the portfolio. The Profit Sharing is an incentive fee that is calculated on the eligible profits generated above the agreed hurdle rate, subject to the terms of the PMS agreement.

Therefore, when comparing PMS fee structures, investors should look beyond the headline "1% management fee + 20% profit sharing" and understand what the 1% is charged on, how the hurdle is calculated, and how the performance fee is determined.

Understanding this distinction is essential for investors, wealth managers, and distributors when evaluating the true economics of a PMS investment.

Check our Profit Sharing Calculator for more details here: