Fee Arithmetic — How Fixed and Performance Fees Are Computed
PMS fees are whatever the client agreement provides, within SEBI's limits, and the arithmetic is simple once the terms are known. This lesson works through a fixed fee, a performance fee with a hurdle rate, and the high-water mark over several years. All percentages are illustrations only.
Start from the agreement
There is no standard PMS fee to memorise. SEBI allows a fixed fee, a performance fee or both, bars upfront fees, and leaves the percentages to the agreement between the client and the manager. Every calculation therefore begins with the terms written in that agreement. The percentages used in this lesson are invented so that the arithmetic can be shown.
The fixed fee
A fixed fee is an agreed percentage of the portfolio's value: fixed fee = agreed percentage × portfolio value, on the basis the agreement sets, for example the average value over the year.
Because it is charged on value and not on gain, it is payable whether the portfolio rises or falls. On invented terms of 1.25% a year, an account whose average value over a weak year is ₹60,00,000 pays ₹60,00,000 × 1.25% = ₹75,000, ignoring taxes on the fee, even though the portfolio lost value that year.
The performance fee and a hurdle rate
A performance fee is a share of the gain. An agreement may set a hurdle rate: a threshold return that must be crossed before any performance fee arises. Where the hurdle works as a threshold, the fee is charged only on the gain above it: performance fee = agreed share × (gain − hurdle amount).
As an illustration on invented terms of a 20% share above a 10% hurdle: an account that starts the year at ₹50,00,000, which is also its high-water mark, and ends it at ₹58,00,000, with no money added or withdrawn, has a gain of ₹8,00,000. The hurdle is 10% × ₹50,00,000 = ₹5,00,000, the gain above it is ₹3,00,000, and the fee is 20% × ₹3,00,000 = ₹60,000. Other agreements may work differently, and the client agreement decides.
The high-water mark
Under the high-water-mark principle a performance fee applies only to gains above the highest value the account had previously reached. A recovery up to an earlier peak carries no performance fee: it only restores value the account had already reached.
The principle decides which gains can be charged. It does not limit losses, and it does not affect a fixed fee.
What these sums leave out
The examples ignore taxes on the fee and other charges to the account, such as brokerage and operating expenses; SEBI caps operating expenses, other than brokerage and over and above the management fee, at 0.50% a year of the client's average assets. Every fee and charge reduces the client's net return, and no fee structure assures a gain.
Rules at a glance
A high-water mark across three years
- Assumptions of this example (terms invented for arithmetic only): the client agreement provides for a performance fee of 10% of gains above the high-water mark, with no hurdle rate, charged once a year at year-end. The account starts at ₹2,00,00,000, which is also its high-water mark. No money is added or withdrawn. Other fees and taxes are ignored, and the year-end values are taken as given.
- Year 1: the account ends at ₹2,30,00,000. Gain above the high-water mark = ₹2,30,00,000 − ₹2,00,00,000 = ₹30,00,000. Fee = 10% × ₹30,00,000 = ₹3,00,000. The high-water mark becomes ₹2,30,00,000.
- Year 2: the account ends at ₹2,10,00,000, below the high-water mark. No performance fee. The high-water mark stays at ₹2,30,00,000.
- Year 3: the account ends at ₹2,50,00,000. Gain above the high-water mark = ₹2,50,00,000 − ₹2,30,00,000 = ₹20,00,000. Fee = 10% × ₹20,00,000 = ₹2,00,000.
Result. The performance fee is ₹3,00,000 in year 1, nil in year 2 and ₹2,00,000 in year 3. In year 3 the account rose by ₹40,00,000 from ₹2,10,00,000, but the first ₹20,00,000 of that rise only recovered ground up to the earlier peak and carries no fee.
Key points
- Fixed fee = agreed percentage × portfolio value; it is payable whether or not the portfolio gains.
- Performance fee = agreed share × gain above any hurdle rate in the agreement.
- High-water mark: no performance fee on a recovery up to the account's previous highest value.
- SEBI does not allow upfront fees.
- Fee percentages are set in each client agreement; the figures in these examples are illustrations only.
Common misunderstandings
- The percentages in these examples are not typical or regulated fee levels: they are invented terms, and the actual rates are those in each client agreement.
- With a threshold hurdle, the performance fee is not charged on the whole gain: it is charged only on the gain above the hurdle, and other agreements may work differently.
- The high-water mark does not reset after a fall: a recovery up to the previous highest value carries no performance fee.
Questions people ask
Is a performance fee charged every time the account rises?
No. Under the high-water-mark principle it applies only to gains above the highest value the account had previously reached.
Does SEBI set the hurdle rate or the manager's share?
No. Fee percentages, and whether there is a hurdle rate at all, are set in each client agreement, within SEBI's limits.
Why do the examples say 'ignoring other fees and taxes'?
To keep each calculation to one idea. Several fees and charges can apply to the same account, and each reduces the client's net return.
What this lesson relies on
- SEBI (Portfolio Managers) Regulations, 2020 (as amended to 3 September 2025)
- SEBI Master Circular for Portfolio Managers, 16 July 2025
This lesson was reviewed independently against these sources on 8 October 2026. Rules change: check the current regulation, scheme document or policy wording before relying on any figure. This is education, not advice.