This blog provides a structured overview of SEBI’s PMS fee framework, performance-linked charges, operating expenses, and compliance requirements.
March 03, 2024
SEBI-Approved Fee Structures in PMS
Portfolio Managers can charge fees under two categories:
✔ Fixed Fees – A predefined charge, irrespective of investment performance.
✔ Performance-Linked Fees – Fees based on returns, following the high-water mark principle.
SEBI’s Key Rules on PMS Fees
✔ No Upfront Fees – Portfolio Managers cannot charge any entry or onboarding fees.
✔ High-Water Mark Principle – Performance fees can only be charged on new gains that exceed the previous peak portfolio value.
✔ Disclose Fee Illustration – PMS providers must disclose a real-world fee calculation example in disclosure documents.
Example: A client invests ₹50 lakh, and the portfolio grows to ₹60 lakh. In the next year, if it drops to ₹55 lakh, then rises to ₹65 lakh, the performance fee is only charged on ₹5 lakh (₹65 lakh - previous high ₹60 lakh), not on the full ₹10 lakh gain.
Brokerage Charges & Additional Costs
Portfolio Managers incur expenses on executing transactions, custodial services, and regulatory compliance. However, SEBI has capped the charges to prevent excessive deductions from client portfolios.
Permissible Additional Charges
✔ Brokerage Charges – Capped at 0.50% of turnover per transaction.
✔ Custodian Fees – Fees paid to SEBI-registered custodians for managing securities.
✔ Audit & Compliance Costs – Charges for statutory audits and SEBI compliance filings.
✔ Operating Expenses – Excluding brokerage, all other operating expenses must not exceed 0.50% per annum of the client’s average daily AUM.
✔ Taxes & Regulatory Levies – Applicable GST, stamp duty, and SEBI turnover fees.
Example: If a Portfolio Manager executes trades worth ₹1 crore in a month, the brokerage fees cannot exceed ₹50,000 (0.50%) and total operating expenses (including custodian fees, audit and compliance cost etc.) cannot exceed ₹50,000 (0.50%) under SEBI’s cap .
SEBI’s Exit Load Restrictions in PMS
Exit load is a charge levied when a client withdraws funds from the PMS before a specified period. SEBI has standardized exit load structures to prevent excessive charges.
Exit Load Guidelines
✔ Portfolio Managers can charge exit loads only in the first three years.
✔ SEBI allows a reducing exit load structure based on withdrawal timing.
✔ No Exit Load beyond Three Years – Clients who remain in PMS beyond three years cannot be charged exit loads.
Permitted Exit Load Structure
Within 1st year – Portfolio Managers can charge up to 3% exit load.
2nd Year – Exit load capped at 2%.
3rd Year – Exit load capped at 1%.
Beyond 3 Years – No exit load is allowed.
Example: A client invests ₹1 crore in PMS and withdraws ₹50 lakh after 1.5 years. The exit load charged can be a maximum of 2% on ₹50 lakh (₹1 lakh). If the withdrawal happens after 3 years, no exit load can be applied.
Fee Disclosure & Transparency Requirements
SEBI mandates Portfolio Managers to clearly disclose all charges before onboarding clients.
Mandatory Disclosures
✔ Fee Structure & Calculation Method – Displayed in PMS Disclosure Document & Client Agreement.
✔ Illustrative Examples of Fee Impact – Simulated fee calculation for a ₹50 lakh portfolio over one year.
✔ Segregation of Fixed & Performance Fees – Clear breakdown of costs deducted from client portfolios.
✔ Quarterly Fee Statements – PMS providers must send quarterly fee reports to all clients.
Example: If a Portfolio Manager charges fixed fees of 1% per year + a 10% performance fee, a client with ₹50 lakh in PMS would see clear disclosure of ₹50,000 fixed fees + ₹X performance fees (if applicable based on gains).
Disclaimer
For detailed Fee Regulations for PMS, please refer to SEBI’s official website (www.sebi.gov.in). This content is for informational purposes only and should not be considered legal advice.
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