A distributor explains a hypothetical PMS fee statement

The case and its answers

Every question of this case, with its answer and why each other option is wrong.

A PMS account starts the year at ₹100 lakh and reaches ₹112 lakh before any fees, with no external cash flows. The fictional agreement charges a fixed fee of 1% of opening value. That fixed fee is deducted first. A performance fee of 20% then applies only to the remaining account value above the higher of two thresholds: the opening value grown by a 6% annual hurdle, or the previous high-water mark of ₹108 lakh. There is no catch-up and no fee on amounts below that threshold. Ignore taxes and other costs. The distributor must explain each deduction and the resulting net annual return.

These are stipulated contractual terms, not statutory PMS fee rates.

The high-water mark is provided, with no reset or cash-flow adjustment.

1. Q1What fixed fee is deducted first?

   • A

     Option A. ₹1 lakh — Correct answer

   • B

     Option B. ₹1.12 lakh

     Why it is wrong: This applies the fee to closing pre-fee value instead of the stated opening base.

   • C

     Option C. ₹0.12 lakh

     Why it is wrong: This applies 1% only to the profit.

   • D

     Option D. ₹2 lakh

     Why it is wrong: This uses a 2% fee instead of 1%.

   Answer: A. Fixed fee = ₹100 lakh × 1% = ₹1 lakh. The value before the performance fee becomes ₹111 lakh. Remember: A fee percentage must be paired with its contractual calculation base.

   Hint, shown before you answer in practice mode: Use 1% of the opening ₹100 lakh.

   XXIA-P-C01-Q1mediumnumerical

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2. Q2What threshold must be exceeded before a performance fee applies?

   • A

     Option A. ₹114 lakh

     Why it is wrong: This adds the hurdle amount to the high-water mark without such a contract term.

   • B

     Option B. ₹100 lakh

     Why it is wrong: This ignores both contractual thresholds.

   • C

     Option C. ₹106 lakh

     Why it is wrong: This satisfies the hurdle but ignores the higher high-water mark.

   • D

     Option D. ₹108 lakh — Correct answer

   Answer: D. The hurdle value is 100 × 1.06 = ₹106 lakh. The higher of ₹106 lakh and ₹108 lakh is ₹108 lakh. Remember: A hurdle and a high-water mark can constrain the same fee calculation.

   Hint, shown before you answer in practice mode: Calculate the hurdle value and choose the higher threshold.

   XXIA-P-C01-Q2mediumnumerical

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3. Q3What is the performance fee?

   • A

     Option A. ₹2.40 lakh

     Why it is wrong: This charges 20% on the full pre-fee profit.

   • B

     Option B. ₹0.80 lakh

     Why it is wrong: This calculates the fee before deducting the fixed fee.

   • C

     Option C. ₹1.00 lakh

     Why it is wrong: This uses the hurdle of ₹106 lakh instead of the higher threshold.

   • D

     Option D. ₹0.60 lakh — Correct answer

   Answer: D. Performance fee = (₹112 lakh − ₹1 lakh − ₹108 lakh) × 20% = ₹0.60 lakh. Remember: The order of deductions affects a performance fee.

   Hint, shown before you answer in practice mode: After the fixed fee, only ₹3 lakh lies above the effective threshold.

   XXIA-P-C01-Q3mediumnumerical

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4. Q4What is the account’s annual return after both fees?

   • A

     Option A. 12.0%

     Why it is wrong: This is the return before fees.

   • B

     Option B. 11.0%

     Why it is wrong: This deducts only the fixed fee.

   • C

     Option C. 9.6%

     Why it is wrong: This uses a different performance-fee calculation from the stated agreement.

   • D

     Option D. 10.4% — Correct answer

   Answer: D. Ending value = 112 − 1 − 0.6 = ₹110.4 lakh. Net return = (110.4 ÷ 100 − 1) × 100 = 10.4%. Remember: Explain performance after the fees actually charged.

   Hint, shown before you answer in practice mode: Subtract both fees, then compare with the opening value.

   XXIA-P-C01-Q4hardnumerical

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