PMS 2 and 20 Math
Pulled the fee math on a 2-and-20 PMS structure last week. Not the abstract version. The rupee version. The one where you look at the brochure CAGR and the statement CAGR sitting on the same page and ask the compounder to settle the argument.
Here is the line by line on a Rs 25L book that grows 18 percent in year one.
Management fee of 2 percent on AUM is 2.0 percent gone. GST at 18 percent on that fee is another 0.36. Performance fee at 20 percent above a 10 percent hurdle, calculated on the return net of management fee, is 1.20. GST on that is 0.22. Trading drag from STT, brokerage and exchange charges is roughly 0.30. The stack is 4.08 percent. The net return to the investor is 13.92 percent. The brochure said 18.
A four-point gap looks small in basis points. Compound it for ten years. Rs 25L at 18 percent gross lands at Rs 1.31 Cr. Rs 25L at 13.92 percent net lands at Rs 0.93 Cr. The compounding gap is Rs 38 lakh. Bigger than the original ticket. The fee stack across structures laid side by side is at https://rupeecase.com/compare and what compounding actually does to small drags over long horizons is at https://rupeecase.com/learn/
The point is not that 2 and 20 is a bad structure. PMS gives you a custodian, a discretionary execution layer, and a relationship manager. That is a real service and the price tag for it is the fee stack. If you have a Rs 50L plus portfolio and you genuinely do not want to place trades or rebalance yourself, the structure earns its keep. The fee math is not the issue. The math is just the math.
The issue is the comparison most investors never run. After the four-point fee stack, can the manager still beat what a low-cost index, or a transparent rule-based system, would have given you? That is the only number that matters. Alpha after fees. Not gross. Not before. After.
If you are willing to push the buttons yourself, the same picks at a fraction of the drag sit at https://rupeecase.com/strategies/ and the behavioural-fit test that tells you whether you can actually run them yourself is at https://rupeecase.com/risk-profile.html
The compounder does not care about brochures. Always run the rupee math. Always run it long.
Educational content only. Figures are illustrative and computed on historical or representative data for teaching purposes. Not investment advice. Past performance does not guarantee future returns. Sourced from NSE, BSE, SEBI, AMFI, and RBI public data.