Portfolio Management Services (PMS) offer a specialized investment solution tailored to individual needs. However, like all financial services, PMS comes with its own cost structure. In this blog, we'll break down the cost components of PMS in straightforward terms.

Flat Fee

Imagine you're dining at a buffet restaurant that charges a fixed price for unlimited access to all the dishes. No matter how much or how little you eat, the cost remains the same. This is similar to how a flat fee works in Portfolio Management Services (PMS).

In PMS, a flat fee is a predetermined percentage charged on the total amount you invest, regardless of how well or poorly your investments perform.

Example:

Let's say you decide to invest ₹100,000 in a PMS that charges a flat fee of 1% annually on the average of the total assets under management during the period.

Here's how it works:

1% of ₹100,000 = ₹1,000

This means, every year, you'll pay ₹1,000 as a fee for the management of your investments. Whether your portfolio value increases to ₹110,000 or drops to ₹90,000, the fee remains ₹1,000. It's straightforward, predictable, and not tied to the performance of your investments.

In essence, a flat fee offers clarity and simplicity. You always know the exact amount you'll be charged, making it easier to plan and budget for your investment costs.

Performance Fee

Imagine you hire a personal trainer to help you get in shape. Instead of charging you upfront, the trainer asks for a bonus for every kilogram you lose beyond your initial goal. The more you exceed your target, the more the trainer earns. This is akin to how a performance fee works in Portfolio Management Services (PMS).

In PMS, a performance fee is charged only on the returns that exceed a certain benchmark or "hurdle". It's a way to reward the portfolio manager for delivering superior performance.

Example:

Let's say you invest ₹100,000 in a PMS. The agreed performance fee is 10% with a hurdle rate of 10%.

1. Scenario A: At the end of the year, your investment grows by 15%. This means you've earned ₹15,000 (15% of ₹100,000).

Since the hurdle rate is 10%, the first ₹10,000 of your earnings isn't subject to the performance fee. However, the remaining ₹5,000 (₹15,000 - ₹10,000) exceeds the hurdle.

The performance fee on this ₹5,000 is: 10% of ₹5,000 = ₹500

So, you'd pay ₹500 as a performance fee.

2. Scenario B: If your investment only grows by 8%, which is below the hurdle rate, you won't pay any performance fee, as the returns didn't exceed the 10% benchmark.

In essence, a performance fee aligns the interests of the investor and the portfolio manager. The better the manager performs (beyond the set benchmark), the more they earn, ensuring they're motivated to maximize your returns.

High Water Mark

Imagine you're playing a video game where you're trying to achieve the highest score possible. You reach a score of 5,000 points, but in your next attempt, you only manage 4,000 points. However, the game remembers your highest score (5,000 points) and challenges you to beat that score in subsequent attempts. This highest score is similar to the high water mark in Portfolio Management Services (PMS).

In PMS, the high water mark ensures that investors aren't charged performance fees multiple times for the same level of performance. It represents the highest value that an investment portfolio has ever reached.

Example:

Let's say you invest ₹100,000 in a PMS. By the end of the year, thanks to excellent management, your investment grows to ₹120,000. This becomes your high water mark.

Now, imagine the next year isn't as favorable, and your portfolio decreases to ₹110,000. Then, in the following year, it rebounds to ₹120,000. Even though there was growth from ₹110,000 to ₹120,000, you won't be charged a performance fee. Why? Because ₹120,000 was your previous high water mark, and the portfolio hasn't exceeded that value.

Only when your portfolio value goes beyond the high water mark, say to ₹130,000, will you be charged a performance fee on the additional ₹10,000 gain.

In essence, the high water mark ensures fairness. It guarantees that you're only paying performance fees for genuine new highs in your portfolio's value, rather than for recovering from a dip.

Fee Structure at the Wright PMS

Fee Structure I - Flat Fee

This structure involves a fixed fee, regardless of the performance of your investment.

Flat Fee (1.5%): This is an annual fee calculated on the average of the total assets under management during the period. So, if you invest ₹100,000, you'll be charged ₹1,500 as a management fee for that year.

Performance Fee (0%): This fee is charged based on the returns generated by the PMS. Since our flat fee structure has a 0% performance fee, you won't be charged any additional fee based on the returns.

Fee Structure II - Performance Based with Fixed Hurdle

This structure is more aligned with the performance of your investment.

Flat Fee (0%): In this structure, there's no fixed annual fee. You're only charged based on the performance of your investment.

Performance Fee (15% with 10% hurdle): This is where things get a bit more nuanced. A performance fee is charged only on the returns that exceed a certain benchmark or "hurdle". In our case, the hurdle is set at 10%. This means if your investment grows by 20% in a year, you'll be charged a fee on the 5% excess return.

We follow the high watermark principle while charging the performance fee.

Fee Structure II - Performance Based with BSE 500 as Hurdle

This structure is more aligned with the performance of your investment with a higher benchmark

Flat Fee (0%): In this structure, there's no fixed annual fee. You're only charged based on the performance of your investment.

Performance Fee (15% with BSE 500 as hurdle): A performance fee is charged only on the returns that exceed a certain benchmark or "hurdle". In our case, the hurdle is set at the BSE 500 Returns. This means if your investment grows by 15% in a year and the BSE 500 grows by 12% you'll be charged a fee on the 3% excess return.

We follow the high watermark principle while charging the performance fee.

Entry/Exit Fee

This refers to the fees associated with the buying and selling of shares within the PMS.

• Entry Load (0%): This is the fee charged when you invest money into the PMS. In our case, there's no entry load, meaning you won't be charged any fee when you start your investment.

• Exit Load (0%): This is the fee charged when you withdraw money from the PMS. Again, our PMS doesn't charge an exit load, ensuring you can withdraw your funds without any additional charges.

Conclusion

Understanding the cost structure of PMS is crucial to make informed investment decisions. While fees are an essential aspect to consider, it's also vital to look at the overall value and potential returns a PMS can offer. Always ensure you're clear on all charges and consult with financial experts before making any investment decisions.

Want to learn more about PMS? Here are some interesting articles related to Portfolio Management Services in India:

1. What is Portfolio Management Service - Types and Benefits

2. What is the Minimum Investment Ticket Size for Portfolio Management Services (PMS)?

3. Complete Guide to Factor Investing & the Wright Factor Fund PMS

4. Fee Structure for the Wright Portfolio Management Service
5. Path to Wealth Creation: Timeline To Initiate a PMS Account in India
6. Understanding the PMS Process: Fund Pooling and Fund Accounting
7. How to Open a PMS Account as an Investor in India?
8. Understanding Portfolio Rebalancing in PMS: A Crucial Strategy for Wealth Management
9. Risks of Investing in Portfolio Management Services (PMS): A Comprehensive Analysis