Ask most investors what their PMS charges, and you'll get the headline number.
Ask them how the performance fee is actually calculated - on what base, above what threshold, protected by what mechanism - and the conversation usually goes quiet.
Fee structures aren't complicated. But they're rarely explained properly. Here's the complete picture.
The three fee models in Indian PMS
Fixed fee only. A flat annual percentage of assets under management - typically 2% to 2.5% - charged regardless of performance. Simple, predictable, and the manager earns the same in a great year and a terrible one.
Fixed plus variable (hybrid). A lower fixed fee - often 1% to 1.5% - combined with a share of profits above a threshold, typically 10-20% of gains above a hurdle rate. The most common structure in Indian PMS.
Pure variable. No fixed fee at all; the manager earns only a share of profits generated. Rare, and superficially attractive - though it can incentivise risk-taking, since the manager participates in upside but not downside.
The two terms that matter most
Hurdle rate. The minimum return threshold before any profit-sharing applies. With a 10% hurdle, the manager's variable fee applies only to gains above 10%. Below that, you pay only the fixed component.
High watermark. The investor-protection mechanism that prevents paying performance fees twice on the same gains. Your portfolio's highest previous value becomes the watermark - performance fees apply only to gains above that level.
Worked example, ₹50 lakhs:
Year 1: Portfolio grows to ₹60 lakhs. Performance fee applies on gains above the hurdle. The watermark is now ₹60 lakhs.
Year 2: Portfolio falls to ₹52 lakhs. No performance fee - obviously.
Year 3: Portfolio recovers to ₹58 lakhs. Still no performance fee - because ₹58 lakhs remains below the ₹60 lakh watermark. The manager must first recover your previous peak before earning profit share again.
Without a high watermark, Year 3's recovery would have been charged as fresh "performance." With it, you never pay twice for the same rupee of gains.
Why fee structure shapes behaviour
A pure fixed-fee manager is paid for assets, not outcomes - their commercial incentive is retention and AUM growth. A hybrid-fee manager shares your upside - which aligns interests, provided the hurdle is honest and the watermark is present. Reading a fee schedule is really reading the manager's incentives.
The honest caveat
Remember from our TWRR explanation: published PMS returns are already net of fixed fees - but not variable fees, which are personal to each investor's entry point and watermark. Two strategies showing identical TWRR can deliver different net outcomes to you depending on their variable structures. The published number starts the comparison; the fee schedule completes it.
The takeaway
Never evaluate a fee in isolation. A 2.5% fixed fee on a strategy generating consistent 8% Alpha is excellent value. A 1% fee on a strategy that trails its benchmark is expensive at any price.
Fee structures for every strategy - on our fund cards