The Definitive Guide to PMS Fee Structures
Management fees, performance fees, hurdle rates, high watermarks, catch-up clauses — and why the fee structure you choose matters more than the fee percentage you pay.
01 — The Simplicity of Mutual Fund Fees
Before we wade into PMS territory, let's appreciate how elegantly simple mutual fund fees are. When you invest in a mutual fund in India, there's exactly one number that captures your entire cost: the Total Expense Ratio (TER).
The TER covers everything — fund management, administration, marketing, custodian charges, audit fees — bundled into a single annual percentage deducted daily from the fund's NAV. You never see a separate bill. The fee is invisible and automatic.
Your only real decision? Direct plan or Regular plan.
| Feature | Direct Plan | Regular Plan |
|---|---|---|
| Distributor commission | None | 0.5% – 1.5% built in |
| Typical equity fund TER | 0.3% – 1.0% | 1.0% – 2.25% |
| Typical index fund TER | 0.05% – 0.3% | 0.3% – 0.7% |
| Performance-linked fee | No | No |
| SEBI-capped maximum TER | Yes — varies by AUM slab | Yes — varies by AUM slab |
The Compounding Effect of 0.5%
Invest ₹25 lakh via SIP over 20 years at 12% pre-expense return. A direct plan at 0.8% TER grows to ~₹2.05 crore. A regular plan at 1.3% TER grows to ~₹1.88 crore. That "small" 0.5% gap costs you ₹17 lakh — nearly 70% of your original investment.
The beauty of mutual funds is this: no surprises. No performance fee, no hurdle rate, no watermarks to track. The TER is what you pay — period. SEBI even caps the maximum TER based on the fund's AUM, and fund houses must disclose it daily.
This simplicity is wonderful — until your portfolio crosses ₹50 lakh and you start exploring PMS.
02 — Why PMS Fees Are Different
A mutual fund pools money from lakhs of investors into a common portfolio. Economies of scale keep fees low. Everyone gets the same portfolio, the same NAV, the same return.
A PMS creates a separate demat account in your name. You directly own every stock. The portfolio manager buys and sells securities specifically for you. This individual attention — customised portfolios, direct ownership, separate accounts — costs more to operate.
With a minimum investment of ₹50 lakh, PMS providers manage serious capital for serious investors. The fee structures reflect this — they're more nuanced, more negotiable, and more varied.
Key Difference: In mutual funds, fees are standardised and capped by SEBI. In PMS, fees are disclosed and negotiated — SEBI mandates transparency but doesn't cap the percentage.
03 — The Three Fee Models
Every PMS in India operates under one of three fee structures — three fundamentally different philosophies about how a fund manager should be compensated.
| Model | How It Works | Typical Range | Manager Incentive |
|---|---|---|---|
| Fixed-Fee Only | Flat annual % on AUM, regardless of performance | 1.0% – 2.5% p.a. | Grow AUM |
| Variable-Fee Only | No fixed fee. Manager earns only if profits exceed a hurdle | 10% – 25% of profits above hurdle | Maximise returns |
| Hybrid | Lower fixed fee + performance fee above a threshold | 1%–1.5% fixed + 10%–20% perf. | Balanced |
In India, the hybrid model is the most popular. The fixed-only model is gaining popularity among fee-conscious investors, particularly after vocal advocacy by firms like Capitalmind. Pure variable structures are relatively rare.
04 — Management Fee — Explained
The management fee is a fixed annual percentage of your portfolio value, charged regardless of performance. Think of it as rent — you pay it whether the shop makes money or not.
Formula: Management Fee = Portfolio Value × Fee % ÷ Frequency
Most PMS providers charge quarterly — so a 2% annual fee becomes ~0.5% deducted every quarter, calculated on your average portfolio value during that period.
Example: Management Fee in Action
You invest ₹1 crore in a PMS charging 2% p.a. management fee. Portfolio grows to ₹1.15 crore. Average value ~₹1.075 crore. Annual fee = ₹1,07,50,000 × 2% = ₹2,15,000 Add 18% GST → Total = ₹2,53,700 Gross return ₹15L. After fee + GST, you keep ₹12.46L — effective return 12.46% instead of 15%.
⚠️ Don't Forget GST — All PMS fees attract 18% GST. A 2% management fee effectively becomes 2.36%. A 20% performance fee becomes 23.6%. Always calculate net-of-GST.
How management fees are calculated
Some providers calculate on opening portfolio value, others on closing value, and some on daily average AUM. The daily average method is most equitable — it accounts for market movements and any additions/withdrawals. Always check which method your PMS uses.
05 — Performance Fee — Explained
This is where PMS fees get genuinely complicated — and genuinely interesting.
A performance fee is a share of the profits your manager earns for you, but only profits above a certain threshold. No performance, no fee. But the devil is in the details. Three critical mechanisms govern how performance fees work:
Hurdle Rate — sets the minimum bar · High Watermark — prevents double-charging · Catch-Up — determines how profits are split
06 — Hurdle Rate — Your First Line of Defence
The hurdle rate is the minimum return your portfolio must generate before the manager can charge any performance fee.
If you can earn 8% in a fixed deposit, why pay a fund manager a bonus for delivering 8%? The hurdle rate says: "earn me more than this baseline, and then we'll talk."
Two types of hurdle rates
| Type | Definition | Example | Common In |
|---|---|---|---|
| Hard Hurdle | Fee applies only on returns above the hurdle | Hurdle 10%, return 18% → fee on 8% | Most Indian PMS |
| Soft Hurdle | Once hurdle is crossed, fee applies on the entire return | Hurdle 10%, return 18% → fee on full 18% | Some AIFs, hedge funds |
Watch Out — A soft hurdle is significantly more expensive. 20% perf. fee with soft hurdle of 10%, portfolio returns 20% → you pay 20% × 20% = 4%. With hard hurdle → 20% × 10% = 2%. Double the fee. Always confirm: hard or soft?
Hard Hurdle vs. Soft Hurdle — Side by Side
Portfolio: ₹1 crore → ₹1.20 crore (20% return) · Perf. fee: 20% · Hurdle: 10%
Hard hurdle: Fee on (20% − 10%) = 10% excess → 20% × ₹10L = ₹2,00,000
Soft hurdle: Fee on full 20% → 20% × ₹20L = ₹4,00,000
Hard hurdle saves you ₹2 lakh in this single year.
Fixed hurdle vs. benchmark hurdle
A fixed hurdle (e.g., 8% p.a.) gives certainty. A benchmark hurdle (e.g., Nifty 50 TRI) means the manager must actually beat the market. In a year where Nifty returns 25%, a 10% fixed hurdle is easy to clear; a benchmark hurdle demands genuine alpha.
Pro Tip: Benchmark hurdles align interests better — the manager only gets paid for genuine outperformance. But fixed hurdles protect you in flat/down markets.
07 — High Watermark — Your Second Line of Defence
SEBI mandates this for all PMS performance fee calculations. The simple principle:
The High Watermark Rule: A manager cannot charge performance fees on recovering losses. They can only charge when your portfolio exceeds its previous peak.
Without a high watermark, you could pay performance fees on the same rupee twice. The HWM prevents this.
Year 1 — The Good Year: ₹1 crore → ₹1.25 crore. Perf. fee on ₹25L gain. HWM set at ₹1.25 Cr.
Year 2 — The Bad Year: Portfolio falls to ₹1.05 crore. No perf. fee — below HWM.
Year 3 — Partial Recovery: Recovers to ₹1.18 crore. Still no fee — hasn't crossed ₹1.25 Cr.
Year 4 — Back and Beyond: Reaches ₹1.40 crore. Fee only on ₹15L above HWM of ₹1.25 Cr. New HWM: ₹1.40 Cr.
08 — Catch-Up vs. No Catch-Up
This is the concept most investors find confusing — and the one that can quietly cost (or save) you the most money.
No Catch-Up (Investor-Friendly)
Performance fee applies only on returns above the hurdle. The manager never earns a fee on the hurdle portion.
No Catch-Up Example
Portfolio: ₹1 Cr · Return: 20% · Hurdle: 8% · Perf. Fee: 20%
Hurdle amount = ₹8L. Excess = ₹20L − ₹8L = ₹12L
Performance fee = 20% × ₹12L = ₹2.40 lakh
The first ₹8 lakh is yours to keep.
With Catch-Up (Manager-Friendly)
Once the hurdle is cleared, the manager "catches up" by receiving a higher share until they've received their full percentage on the entire profit.
Full Catch-Up Example
Same scenario: ₹1 Cr · 20% return · 8% hurdle · 20% perf. fee · Full catch-up
Step 1: Investor gets first 8% (₹8L) — the hurdle.
Step 2 (Catch-up): Manager gets 100% of next profits until they've earned 20% of total. Target = 20% × ₹20L = ₹4L.
Step 3: Remaining ₹8L split 80/20 → Investor ₹6.4L, Manager ₹1.6L.
Total performance fee = ₹4L + ₹1.6L = ₹5.60 lakh
No catch-up: ₹2.40L. Catch-up costs you ₹3.20 lakh extra.
| No Catch-Up | Full Catch-Up | |
|---|---|---|
| Total profit | ₹20,00,000 | ₹20,00,000 |
| Performance fee | ₹2,40,000 | ₹5,60,000 |
| + GST (18%) | ₹43,200 | ₹1,00,800 |
| You keep | ₹17,16,800 | ₹13,39,200 |
The No Catch-Up Standard — Most Indian PMS providers follow no catch-up. Marcellus Investment Managers explicitly describes it: with an 8% hurdle, if portfolio grows from ₹100 to ₹120, profit share applies only on ₹12 (₹120 − ₹108), not on the full ₹20. Always verify in your PMS agreement.
9 — Real-World Fee Structures from the Industry
| PMS Provider | Model | Fixed | Perf. | Hurdle | Notes |
|---|---|---|---|---|---|
| Motilal Oswal (Founders) | Hybrid | 2.5% | 20% | 8% | Exit 2% (<1yr) |
| Marcellus (CCP) | Hybrid | 1.0% | 20% | Nifty 50 | No catch-up, HWM |
| ASK Wealth | Hybrid | 1.5% | 20% | 10% | — |
| Capitalmind (Momentum) | Fixed only | 1.0% | — | — | No perf. fee |
| Wright Research | Multiple | 1.5% | 0/15% | 10%/BSE500 | Client chooses |
| Kotak PMS | Fixed | 2.5% | — | — | Exit 1-3% |
Note: Fees may have changed. Always confirm directly with the provider. Fees are negotiable for larger tickets.
The case for fixed fees
Capitalmind's analysis compared fixed vs. performance fees on their Adaptive Momentum strategy over six years. On a ₹1 crore portfolio, fixed fees totalled ~₹12 lakh while performance fees extracted ₹31–33 lakh. Key insight: performance fees extract disproportionate value during exceptional years (the "front-loading problem") while offering no rebate during losses.
The case for performance fees
Proponents argue performance fees ensure genuine alignment — no performance, no pay. For managers generating genuine alpha, investors may prefer paying 20% of upside rather than a fixed 2% even in down years.
10 — PMS vs. Mutual Fund: The Full Cost Picture
| Component | MF (Direct) | MF (Regular) | PMS (Hybrid) |
|---|---|---|---|
| Management/Expense | 0.3%–1.0% | 1.0%–2.25% | 1.0%–2.5% |
| Performance fee | None | None | 10%–20% |
| GST on fees | In TER | In TER | 18% extra |
| Exit load | 0–1% | 0–1% | 0–3% |
| Brokerage | In TER | In TER | Separate |
| Total (15% return yr) | 0.5%–1.0% | 1.2%–2.2% | 2.5%–4.5% |
So Why Choose PMS? — PMS offers direct stock ownership (tax-loss harvesting), customised portfolios, transparent holdings, and potential genuine alpha. The question isn't "is PMS more expensive?" (it is). It's: "does the excess return justify the excess fee?"
📖 Why We Started Grey Sky Capital → — Our founding story — why quant-native PMS can deliver better risk-adjusted returns.
📈 MF Monitor — Compare Mutual Fund Performance → — See how top mutual funds stack up.
11 — How to Choose the Right Fee Model
| If You Believe... | Consider... | Why |
|---|---|---|
| Manager will consistently generate high alpha | Fixed-fee only | You keep more upside |
| Not sure about outperformance | Performance-fee only | No outperformance = no fee |
| Want alignment + predictability | Hybrid | Balanced; most common |
| Very long horizon (10+ yrs) | Fixed-fee only | Compounding of lower fees wins |
The Checklist Before You Sign
Your PMS Fee Due Diligence Checklist:
- What is the total fee structure? — Fixed, variable, or hybrid?
- Is the hurdle rate hard or soft? — Hard = investor-friendly.
- Is there a catch-up clause? — No catch-up = investor-friendly.
- Is the hurdle fixed (8%) or benchmark-based (Nifty 50)?
- Is HWM applied? — SEBI mandates it, but confirm specifics.
- How is management fee calculated? — Opening, closing, or average AUM?
- What is the exit load schedule?
- What are "other charges"? — Brokerage, custodian, audit, demat.
- Is GST included or extra? — Always extra. Budget 18%.
- Can fees be negotiated? — Especially for ₹2 Cr+ tickets.
🎯 Skin in the Game — Our Fee Calculator → — See exactly how Grey Sky Capital's fee structure works on your investment.
Ready to see fee structures in action?
Use our interactive tools to compare PMS fees across strategies, or explore Grey Sky Capital's Smart Core PMS.
Try the Fee Simulator → · Explore Smart Core PMS →
•
•
