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Understanding PMS returns

Portfolio Management Services (PMS) offer very high transparency to investors as all the trades are done in their own account and they can see every trade, price of execution, brokerage etc. along with the exact performance of their portfolio.

Since PMS service is a bespoke service, investors may choose different schedule of investments even within the same overall PMS scheme. Most common variation in a PMS scheme is whether the investor wants to have his/her entire corpus invested in the strategy at one go (non STP option) or does he/she want the fund manager to phase in his/her investments over several instalments (STP option). For example, in the STP option chosen by many investors in the Helios PMS the corpus is invested in the stocks gradually over 5 monthly instalments. Rest of the corpus is invested in debt funds while it waits to be deployed in equities.

Although each investor can see his/her own returns exactly each day, what we are discussing here is how the Fund manager reports overall performance of the PMS scheme and the impact that mix of STP/Non STP investors can have on this reported aggregate performance.

SEBI mandates that fund managers use the TWRR (time weighted rate of return) method to report aggregate performance of the PMS. Effectively what this means is that the fund manager has to calculate the aggregate performance of the entire AUM on a daily basis and then compound those daily returns to report the monthly performance of the PMS.

Mix of STP and non STP investors can skew this reported performance (although of course their own actual performance is exactly available to each investor) as we explain below. Let us assume (dream) that equity portfolio of PMS outperforms relevant index by 1.0% each month.

Index PerformanceReturns of Equity Portfolio of PMS
Month 15.00%6.00%
Month 25.00%6.00%
Month 35.00%6.00%
Month 45.00%6.00%
Month 55.00%6.00%
Month 65.00%6.00%


Let us say that we have 2 NEW non STP investor and 1 NEW STP investor investing Rs. 1 crore each at the beginning of each month in a PMS (So 1/3rd investor AUM is STP).


Q. How will the aggregate performance be reported with these assumptions?

A. Even though the Fund Manager is generating 6.0% return per month and delivers 41.85% over 6 months on the equity portfolio, the reported TWRR performance, with the assumptions above, will be as follows:

Index PerformanceReturns of Equity PortfolioReported Performance
Month 15.00%6.00%4.40%
Month 25.00%6.00%4.63%
Month 35.00%6.00%4.85%
Month 45.00%6.00%5.07%
Month 55.00%6.00%5.27%
Month 65.00%6.00%5.41%

Cumulative Performance




(For simplicity, assume debt returns are zero and cost of running PMS are also zero)



A. This drag on reported performance due to STP investors is substantial if the market is rising very sharply. Similarly, STP investors will help improve reported performance if the markets were declining sharply. This is qualitatively easy to understand as uninvested cash of STP investors works as a drag when markets are going up but helps buffer performance when prices are falling sharply.

B. This strong influence of STP investors is most prominent when the PMS is new. Over time, returns on the larger AUM of existing invested investors (for even STP investors become fully invested after a few months) is not easily influenced by new (relatively smaller number/AUM) STP investors joining the PMS.

C. Effect of STP investors on overall reported performance of the PMS is high if the ratio of STP AUM is high (during the period when the STP investors cash has not been fully invested). In the example above, we have taken as an example 1/3rd of the inflows being STP flows (For Helios this ratio is near 40%).

D. Details of all calculations are available on request (Write to

E. Sample calculations (for first two months is below):

      End of Month 0:

      3 investors (2 Non STP and 1 STP)

      Total AUM invested in Equities: Rs. 2.2 crores (2 crores for non STP and first Instalment for 1 STP investor)

      Debt: 0.8 crores (balance amount of 1 STP investor parked in debt fund)

      End of month 1:

      AUM invested in Equities: Rs. 2.332 crores (Appreciation of 6%)

      Debt: Rs. 0.8 crores

      Total AUM pre new subscriptions: Rs. 3.132 crores

      Reported performance: 4.4%

      3 new investors come in (2 Non STP and 1 STP)

      Total AUM in Equities: Rs. 4.732 crores

      (Rs. 2.332 crores +Rs. 2.0 crores (2 new non STP investors) + Rs. 0.4 crores (1 instalment each for the 2 STP investors from Month 0 and Month 1)

      Debt: Rs. 1.4 crores (balance amount of 2 STP investors parked in debt fund i.e. 0.6 crores of Month 0 STP investor and 0.8 crores of Month 1 STP investor)

      Total AUM post new subscriptions: Rs. 6.132 crores

      End of month 2:

      AUM invested in Equities: Rs. 5.01592 crores (Appreciation of 6% on Rs. 4.732 crores)

      Debt: 1.4 crores (balance amount of 2 STP investors parked in debt fund)

      Total AUM pre new subscriptions: Rs. 6.41592 crores

      Reported performance: 4.63%

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