PMS Charges: A Complete Guide to PMS Fees Structure in India

Introduction: What are PMS Charges & Why are They Charged?

Investing in PMS (Portfolio Management Services) can be a lucky point for your portfolio, but understanding the PMS charges is even more crucial before committing your money. 

Unlike mutual funds, PMS offers personalized portfolio management, and that comes at a cost. In India, PMS is usually targeted at high-net-worth investors, and the fees are more competitive than those of mutual funds. While returns can be higher, costs can also eat into your profits if not understood properly.

In this guide, we break down the PMS fees structure, explain how it affects your returns, and help you decide if PMS is right for you.

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What Are PMS Charges & Why Are They Charged?

PMS charges are fees levied by portfolio managers for managing your investments professionally. These charges compensate fund managers for their expertise, research, operational costs,  and active management of your portfolio.

It's worth noting that any financial product involving professional management (be it a PMS or a mutual fund) comes with fees. 

The key, however, is ensuring that the cost you pay translates into meaningful returns and value for your investment. 

Types of PMS Fees in India

When exploring or committing to any strategy, it's important to know the different types of PMS fees involved. 

Some of the commonly applicable PMS fees in India include;

1. Brokerage 

It is charged to both Stocks and ETFs, depending on the type of delivery or transaction type. 

2. Annual Management Charge (AMC)

This is a fixed annual fee charged by the fund manager (or Asset Management Company - AMC) for managing your portfolio.

Typically ranges from 1% to 2.5% of assets under management (AUM).

And this PMS fee is charged regardless of performance, but it can also be clubbed with a variable component.

3. Performance Fees / Incentive Fees

A performance fee is charged when your portfolio generates profits above a certain benchmark.

Usually, the fee is 10–20% of profits above a hurdle rate. But in some cases, the PMS provider may set a 0% hurdle rate, above which performance fees will apply. 

The intention of this fee is to ensure you only pay when new profits are made.

4. Exit Loads

Some PMS providers do charge fees, also known as "Exit Load," when you redeem or sell your investments before a specific time period (defined by the AMC) from your portfolio.

Not all AMCs (Asset Management Companies) or Portfolio Managers charge an exit load on PMS (Portfolio Management Services) schemes, but it is a very common industry practice.

For instance;

• Redeem within a year - 2 %
• Redeemed between 12 months and 2 years - 1%
• Beyond 2 years - Nil 

5. Other Charges

• STT (Securities Transaction Tax)
• DP charge 
• Regulatory charge
• Taxes, including GST (despite any fee model, GST is mandatory)

PMS Fee Structures Explained

PMS fees are typically structured in one of three ways:

1. Fixed Fee Model

Investors pay a fixed annual management fee, up to 2.5%.

2. Performance-Linked or Variable Fee Model

Fees depend on portfolio returns and apply beyond the hurdle rate (if specified). 

For example, if the hurdle rate is 10%, and the PMS portfolio delivers 15%, the performance-linked fee will be applicable on the extra profits earned above the hurdle rate. 

Likewise, the fee will depend on the AMC and the applicable rates. 

It can be beneficial for clients, especially in bearish cycles, as they need not pay the entire rate. 

3. Hybrid Fee Model

The hybrid model combines both fixed and performance-based fees.

It is the most popular model in India, as it balances risk for investors and reward for managers.

How AMC Charges Affect Your Returns?

Even a small difference in PMS charges can have a big impact over time.

For example, suppose you invest ₹80 lakhs in a PMS scheme. And the portfolio generates 15% returns, which equals ₹12,00,000 profit.

Here's how PMS fees will be charged:

#1 - Management Fee

If the PMS provider charges 2% annually, the fee would be:

2% of ₹80,00,000 = ₹1,60,000 per year, charged regardless of portfolio performance.

#2 -  Performance Fee

If the PMS has a 10% hurdle rate, performance fees apply only to profits above this level.

15% (Total profits) - 10% (Hurdle rate) = 5% (Excess Profit over and above hurdle rate)

5% of ₹80,00,000 = ₹4,00,000 (Profit above hurdle rate) 

If the performance fee is 20%, the charge would be ₹80,000 (20% of ₹4,00,000).

#3 - Total PMS Charges

Based on your fee model, you may be charged either -  

• Fixed management fees (₹1.6L)
• Variable fees (₹80,000),
• Or a mix of both. 

(Note: The amounts calculated are just estimates and may vary in actual calculation.)

PMS vs Mutual Fund Charges

Often, investors choose a financial product primarily based on the fees they have to pay. However, it is equally important to understand that different products come with distinct features and services, which may influence the overall cost.

For instance:

1. Mutual Funds -  Typically have lower management fees (around 0.5%–2%), which are usually fixed and included in the expense ratio.
2. PMS -  Usually involve higher management fees along with performance-based charges, but they also offer personalized portfolio management and the potential for alpha generation.

While PMS may provide customized investment strategies and potentially higher returns, it also comes at a cost. Therefore, investors should always compare PMS charges in India with available providers and evaluate whether the additional benefits justify the fees.

Things to Consider Before Choosing a PMS

Before investing in a PMS, it's important to look beyond returns and assess the overall structure and suitability.

• Transparency

Ensure the PMS provider clearly discloses the complete PMS fee structure, including management fees, performance fees, and any additional costs.

• Portfolio Performance vs Fees

Evaluate the historical performance of the strategy in relation to the fees charged. Higher fees should be justified only if the portfolio consistently delivers strong returns.

• Hidden Charges

Check for additional costs such as custodian fees, brokerage, transaction charges, or GST that apply to the gross returns, which may increase the overall expense.

• Investment Goals

Make sure the PMS strategy aligns with your risk appetite, investment horizon, and financial objectives before committing your capital.

Conclusion

Understanding PMS charges is critical for making informed investment decisions. While PMS offers personalized management and potentially higher returns, the PMS fee structure can significantly impact your net gains. Always evaluate charges, compare schemes, and ensure your portfolio manager's incentives align with your goals.

For more information on the PMS fee structure, contact a suitable PMS provider!

Invest Smart, Because It's Your Hard-Earned Money After All.