Fixed cost
In a Portfolio Management Service, the charge the investor pays regardless of performance — usually a set percentage of assets managed, plus brokerage — as against the separate performance-linked fee.
In plain language
A Portfolio Manager's fee is not always tied to how well the portfolio does. Part of it is charged no matter what the outcome is — the workbook calls this the fixed cost.
It is usually set as a fixed percentage of the amount actually managed or invested in the PMS. On top of it, costs like brokerage on the buying and selling of securities are added and charged to the investor as they are actually incurred — the workbook treats these transaction costs as part of the fixed cost as well, since they, too, are unrelated to performance.
This sits alongside a separate, performance-linked fee that only kicks in when the portfolio actually delivers.
How it works
The fixed cost is typically quoted as a percentage of assets under management — the workbook gives around 1% as an illustrative figure — charged whatever the portfolio's return turns out to be, positive or negative. Alongside it sits the performance-linked cost, or profit-sharing fee, which is only charged if agreed targets set when the PMS agreement was signed are actually met, and which can turn out to be a large cost in a strong year.
A further protection sits on top of the performance fee: the high watermark principle. Once fees have been paid on a given level of the portfolio's value, the next performance fee is only charged once the portfolio crosses that same previous high again — a manager cannot charge a fresh performance fee for merely recovering from a loss.
A worked example
An investor puts Rs 50,00,000 into a PMS charging a fixed cost of 1% a year. Regardless of whether the portfolio gains or loses value that year, the fixed cost is Rs 50,000, plus brokerage on whatever buying and selling the manager actually does.
Suppose the portfolio also carries a performance fee above a hurdle rate, and its value rises from Rs 50 lakh to Rs 60 lakh in year one — the manager can charge a performance fee on that Rs 10 lakh gain, using the high watermark of Rs 60 lakh going forward. If the portfolio then falls to Rs 55 lakh in year two, no performance fee is charged at all until the value again crosses Rs 60 lakh — even though the fixed cost of roughly Rs 55,000 (1% of Rs 55 lakh) is still payable that year regardless.
Why NISM asks about it
Chapter 12 (Portfolio Manager), section 12.6 (Cost, expenses and fees of investing in PMS), defines fixed cost immediately before performance-linked costs and the high watermark principle. Expect a question distinguishing fixed from performance-linked PMS costs, or a high watermark calculation.
Common exam traps
- The fixed cost is charged regardless of performance — even in a loss-making year, the investor still pays it, unlike the performance-linked fee.
- Brokerage and other transaction costs are charged as actually incurred, on top of the fixed percentage fee, not folded into a single flat number.
- Do not confuse the fixed cost itself with the high watermark principle, which governs only the performance-linked fee, not the fixed one.
Where this is taught
Free preparation for NISM Series X-ARelated terms
- Asset-based feeA financial planning fee charged as a percentage of the client's assets under advice, instead of a flat rupee amount.
- Benchmark portfolioA reference portfolio, typically an index, matched in composition to a client's own portfolio so the client's actual returns can be fairly compared against it, comparing 'apple with apple'.
- Catch-up and no catch-upTwo ways a PMS profit-sharing fee is calculated once returns cross the hurdle rate: 'no catch-up' charges only the gains above the hurdle; 'catch-up' charges the entire gain from the first rupee.
- Direct access facilityA facility requiring portfolio managers to let investors come to them directly, without a distributor, so that the investor avoids distribution costs — the PMS counterpart of a mutual fund direct plan.