Lesson 3 of 5 · PMS Foundation

PMS Fees — Fixed, Performance-Linked and the High-Water Mark

A portfolio manager's fee is set in the agreement with each client, within limits SEBI lays down. This lesson explains fixed and performance-linked fees, the high-water-mark principle, and SEBI's limits on upfront fees, operating expenses and exit loads.

Fact-checked 8 October 20263 practice questions in the game

Where the fee comes from

SEBI does not fix a common fee schedule for PMS. Each client's fee is what that client and the portfolio manager record in the client agreement, so the agreement is the place to look.

Under SEBI's regulations the fee may be a fixed fee, a return-based (performance) fee, or a combination of the two. SEBI does not restrict managers to one type, and it does not require a fixed-fee-only option to be offered.

Fixed and performance-linked fees

A fixed fee is an agreed fee that does not depend on performance; it may be set as a percentage of the portfolio's value. It is payable whether the portfolio gains or falls in the period.

A performance fee is linked to the return: the manager takes an agreed share of the gain. Every fee, of either kind, reduces the client's net return.

The high-water-mark principle

A performance fee must follow the high-water-mark principle. The high-water mark is the highest value the account has previously reached, and the fee is charged only on gains above it.

The reason is fairness over time. Without the rule, an account that fell and then climbed back to where it had been could be charged a performance fee on the climb, so the client would pay twice for the same ground. With it, a recovery up to the earlier peak carries no performance fee.

The principle applies to discretionary and non-discretionary services, not to advisory services. It limits when a fee can be charged. It does not limit losses.

SEBI's limits

SEBI does not allow upfront fees, that is, a fee taken when the client invests. Operating expenses, other than brokerage and over and above the management fee, are capped at 0.50% a year of the client's average assets.

Exit loads are capped as well. Where the client agreement provides for one, it cannot exceed 3% of the amount withdrawn in the first year of the investment, 2% in the second and 1% in the third, and no exit load may be charged after that (these caps do not apply to large-value accredited investors). The load actually charged, within these limits, is what the client agreement provides.

Rules at a glance

Fee structureFixed, return-based (performance), or both, as agreed with the clientSEBI (Portfolio Managers) Regulations, 2020

Upfront feesNot allowedSEBI Master Circular for Portfolio Managers

Performance feeOnly on the high-water-mark principleSEBI Master Circular for Portfolio Managers; discretionary and non-discretionary services

Operating expenses (excluding brokerage, over and above the management fee)Not more than 0.50% a year of the client's average assetsSEBI Master Circular for Portfolio Managers

Exit load cap3% in the first year, 2% in the second, 1% in the third; nil after thatSEBI Master Circular for Portfolio Managers; on the amount withdrawn

Illustration

Why the earlier peak matters

Shabnam's PMS account, under an agreement that provides for a performance fee, reaches ₹80 lakh, its highest value so far. Markets then fall and the account drops to ₹70 lakh. Over the following year it recovers to ₹78 lakh, with no money added or withdrawn.

The account has gained ₹8 lakh in that year, but it is still below its high-water mark of ₹80 lakh. No performance fee is due on the recovery. A fee can arise again only on gains that take the account above ₹80 lakh. Any fixed fee in her agreement is payable throughout.

Worked example

The cap on operating expenses

Assumption of this example: a client's average assets in the PMS account over the year are ₹80,00,000.
SEBI's cap is 0.50% a year of the client's average assets: ₹80,00,000 × 0.50% = ₹40,000.

Result. On these figures, operating expenses charged to the account for the year (excluding brokerage and the management fee) cannot exceed ₹40,000. The cap is a ceiling, not the amount that will be charged.

Key points

The fee may be fixed, performance-linked or both, as set out in the client agreement.
SEBI does not mandate a fixed-fee-only option; it does bar upfront fees.
A performance fee follows the high-water-mark principle: it is charged only on gains above the account's previous highest value.
Operating expenses, other than brokerage and over and above the management fee, are capped at 0.50% a year of the client's average assets.
Exit load, where the agreement has one, is capped at 3%, 2% and 1% in the first three years and is nil afterwards.

Common misunderstandings

It is wrong to say SEBI requires every manager to offer a fixed-fee-only option: the regulations allow a fixed fee, a performance-linked fee or both, as the client agreement provides.
The high-water mark does not protect against losses: it only stops a performance fee being charged on a recovery up to the earlier peak.
The 0.50% cap does not cover everything: brokerage and the management fee sit outside it.

Questions people ask

Can a portfolio manager charge a fee at the time the client invests?

No. SEBI's rules do not allow upfront fees.

Does the high-water-mark principle apply to all three service types?

It applies to discretionary and non-discretionary services, not to advisory services.

Is the fee the same for every PMS client?

Not by regulation. SEBI does not fix a common fee schedule; each client's fee is what the client agreement provides, within SEBI's limits.

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.