Related articles on expense ratio:
Mutual Funds Expense Ratio Comparison – Direct and Regular Plans
How to Buy Online Mutual Fund Plans
Expense Ratio’s Effect on Your PMS Returns
Unlike mutual funds where expense ratio for each fund is pre-decided for every investor, in a PMS scheme, investors can choose from different fees/structure offered by different portfolio managers.
Examples of Fee Structures in PMS Schemes
Note – Apart from management fee of 1%-2.5%, PMS has additional charges like upfront fees, custody fees, depository charges and so on; all of which is in the range of about 0.2%-0.3%. The profit sharing and distribution commission cost comes over and above, depending on the PMS fund manager and strategy.
| Upfront Fee | 2% (ONE TIME) |
| Fixed Management Fees based on AUM | 2.50 % per annum |
| Exit Load: Exit Within 12 months from date of investment – 2 %. Exit after 12 months – Nil | |
| Custodian Fees | 0.25% per annum |
| Depository Charges | As applicable |
| Brokerages | As applicable |
| Service tax, STT & Other statutory levies | As applicable |
Example to Explain How Fee Structures in PMS Schemes Affects Your Returns
- Size of sample portfolio: Rs. 25 lakh
- Period: One Year
- Upfront Fee (2%)
- Other Expenses including Brokerage/ DP Charges/ Custodian Charges assumed at 0.70%
- Management Fee (2.5%)
- Exit Load assumed to be 2%
Scenario 1: Charges on Portfolio performance: Gain of 20%
| PROFIT @ 20% | |
| Nature of Fees | Amount in Rs. |
| Capital Invested | 25,00,000 |
| Less: Upfront fees @ 2% | 50,000 |
| Asset Under Management | 24,50,000 |
| Add: Profit (20%) on Investment | 4,90,000 |
| Gross Value of the Portfolio | 29,40,000 |
| Less Other Expenses (0.70%) | 20,580 |
| Gross Value of the Portfolio less Other Expenses | 29,19,420 |
| Less Management Fees @ 2.5% | 72,986 |
| Portfolio Value after Charging Management Fees | 28,46,435 |
| % CHANGE OVER CAPITAL CONTRIBUTED | 14% |
Scenario 2: Charges on Portfolio performance: No Change
| No Change | |
| Nature of Fees | Amount in Rs. |
| Capital Invested | 25,00,000 |
| Less: Upfront fees @ 2% | 50,000 |
| Asset Under Management | 24,50,000 |
| Add: No Change on Investment | – |
| Gross Value of the Portfolio | 24,50,000 |
| Less Other Expenses (0.70%) | 17,150 |
| Gross Value of the Portfolio less Other Expenses | 24,32,850 |
| Less Management Fees @ 2.5% | 60,821 |
| Portfolio Value after Charging Management Fees | 23,72,029 |
| % CHANGE OVER CAPITAL CONTRIBUTED | (5%) |
Scenario 3: Charges on Portfolio performance: Loss of 20%
| LOSS @ 20% | |
| Nature of Fees | Amount in Rs. |
| Capital Invested | 25,00,000 |
| Less: Upfront fees @ 2% | 50,000 |
| Asset Under Management | 24,50,000 |
| Less: Loss (20%) on Investment | 4,90,000 |
| Gross Value of the Portfolio | 19,60,000 |
| Less Other Expenses (0.70%) | 13,720 |
| Gross Value of the Portfolio less Other Expenses | 19,46,280 |
| Less Management Fees @ 2.5% | 48,657 |
| Portfolio Value after Charging Management Fees | 18,97,623 |
| % CHANGE OVER CAPITAL CONTRIBUTED | (24%) |
In the above scenarios, you can see how expense ratio eats away your returns. If PMS made around 20%, ~ 6% goes to fund managers, distributors etc. In reality, for distributor and the fund manager, the return is always positive when you select a fixed management fee structure. In many cases, investors lost large chunks of principal in paying expenses .
CHECK THIS ARTICLE FOR DIFFERENT EXPENSE RATIO STRUCTURES BEFORE BUYING INTO A PMS
So the question arises – Do PMS Fees Justify Their Returns Vs Mutual Fund Fees? In all circumstances mutual fund expenses are far less than that of a PMS. There is no upfront 2% charge or a profit share. The overall expenses of a mutual fund is about 1% to 2% per annum.
About Author
Dear sir, Since in above example 20% profit or Loss or No change hasbeen taken, sir i just wanted to know that how we can determine the profit or Gain on the day of investment. be cause we FMC is being charged after adjusting profit or loss on portfolio.