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.