What is the High-Water Mark concept?
The High-Water Mark concept is often used in relation to fees for performance-based fund management. It is the highest value an investment fund has reached.
Geojit's PMS service uses this concept to determine the performance fees to be charged to our clients. This is taken as the highest NAV (Net Asset Value; Total Portfolio Value) at which performance fees have been paid in the past. Hence, if a client pays performance fees at a particular NAV, future performance fees will be charged only if their PMS holdings value exceeds this high-water mark (at which fees have been paid in the past).
|Year||Mr Ram's PMS Investment|
Mr. Ram's initial investment is Rs. 75 lakhs.
In the first year, it rises to Rs. 100 lakhs.
Therefore, a performance fee is payable on the profit of Rs. 25 lakhs.
Rs.100 lakhs will be considered as the high-water mark for future performance fee charging.
His portfolio value drops to Rs. 90 lakhs.
Since the holding value is below his high-water mark of Rs.100 lakhs, he is not charged a performance fee for the year.
His portfolio value rises to Rs. 120 lakhs.
Since the holding value exceeds his high-water mark of Rs. 100 lakhs, he is charged a performance fee on Rs. 20 lakhs i.e., the gain above the high-water mark of Rs. 100 lakhs.