Average daily AUM

A portfolio's value changes every day — new money comes in, money is withdrawn, and the market moves. Charging a fee on the value from a single day, like the first or the last, would be easy to game.

So SEBI ties one important cost cap to an average taken across every single day of the period. Average daily AUM is exactly that: the client's assets under management, averaged day by day, not just measured once.

SEBI's circular of 13 February 2020, read with Regulation 22(11) of the SEBI (Portfolio Managers) Regulations, 2020, sets out the cost rules that use this measure:

1. No upfront fees may be charged to clients, directly or indirectly.
2. Brokerage is charged to clients at actuals, as an expense.
3. Operating expenses, excluding brokerage and the management fee itself, must not exceed 0.50% per annum of the client's average daily AUM.
4. Exit load on redemption is capped at 3% in year one, 2% in year two, 1% in year three, and nil after three years from the date of investment.

The 0.50% cap applies to operating expenses only — costs like custody and fund accounting — and sits on top of, not instead of, the portfolio manager's own management fee, which is negotiated separately and is not capped by this circular.

Illustrative figures. Ms Bhavana Reddy's PMS account starts the quarter at Rs 80,00,000. She adds Rs 10,00,000 midway through, and the portfolio's market value drifts between Rs 78 lakh and Rs 95 lakh across the 90 days.

Suppose the average daily AUM for the quarter, computed by summing each day's closing value and dividing by 90, works out to Rs 87,50,000.

Maximum permitted operating expenses for the quarter = 0.50% p.a. × Rs 87,50,000 × (90 ÷ 365) ≈ Rs 10,788.

If the portfolio manager's actual custody and accounting costs for the quarter come to Rs 14,000, the manager must absorb the Rs 3,212 excess rather than pass it to Ms Reddy — the 0.50% figure is a ceiling, not a target. Her negotiated management fee (say, 1.5% p.a.) is charged separately, on top of this cap.

Chapter 8 (Operational Aspects of Portfolio Managers), in the fees and charges discussion, sets out the SEBI circular's four points verbatim, with average daily AUM as the base for the 0.50% operating-expense cap. Expect a computation combining an AUM figure with the 0.50% cap, and a question distinguishing operating expenses from brokerage and from the management fee.

• 0.50% caps operating expenses only, not the total cost of the PMS. The management fee and brokerage are separate, uncapped items.
• No upfront fee is permitted at all, directly or indirectly — this is an outright ban, not a cap.
• Brokerage is passed through at actuals, so it is neither capped nor marked up.
• The exit load schedule (3% / 2% / 1% / nil) runs by year of investment, not by calendar year — each client's clock starts on their own investment date.
• Average daily AUM is a daily average across the whole period, not the AUM at the start, the end, or any single valuation date.