A Portfolio Management Service works tirelessly to give its investors a stellar return, but how does the PMS make money in the first place? This is where the fee structure comes in!
Here's a roadmap for navigating the intricacies of PMS fees:
Breaking Down the Fee Structure
PMS fees in India typically encompass a combination of charges:
Management Fees: A percentage of your Average Assets Under Management (AUM) levied annually for portfolio management services. This fee typically ranges from 1% to 3% in India, with some providers offering tiered structures where fees decrease as AUM increases.
Performance Fees: An incentive fee charged only if the portfolio outperforms a benchmark index. Performance fees typically range from 10% to 20% of the profits generated above the benchmark. Some PMS providers may have a hurdle rate (minimum return threshold) that needs to be surpassed before the performance fee kicks in
Custodial Fees: Charged by the custodian bank for holding your securities in your PMS account. These fees are usually minimal, ranging from Rs. 200 to Rs. 500 per annum.
Entry Load and Exit Load: Some PMS providers may charge a one-time fee for entering or exiting the service. These fees are becoming less common but are still worth investigating before signing up.
The Impact on Returns: Counting the Cost
Let's illustrate the impact of fees with a practical example:
Scenario: You invest ₹10,00,000 in a PMS with a 2% management fee and a 10% performance fee (with a 20% hurdle rate). The portfolio generates a 15% return in a year.
Fee Breakdown:
Management Fee: ₹10,00,000 * 2% = ₹20,000
Performance Fee: Since the return (15%) doesn't exceed the hurdle rate (20%), no performance fee applies.
Total Fees: ₹20,000 (Management Fee)
Net Return: ₹1,50,000 (Gross Return - Total Fees) = ₹1,30,000 (15% return on ₹10,00,000) - ₹20,000 (Fees)
If the returns had crossed the hurdle rate, 10% of that would be allocated to the PMS - a small price to pay for beating the benchmark!
By understanding the various types of PMS fees, their impact on your returns, and exercising your ability to negotiate, you can position yourself for greater success in maximizing your PMS investment returns.
Scrutinize fees, assess the value offered by your PMS provider, and continually evaluate the fee-to-performance ratio. By taking these steps, you can align your PMS investment with your long-term financial aspirations and optimize your wealth creation journey.