Under SEBI (Portfolio Managers) Regulations, how must a Portfolio Management Services (PMS) provider calculate and report client investment performance?

[ A ]Performance is reported as simple arithmetic addition of stock prices.

[ B ]Performance must be calculated and reported using Time-Weighted Rate of Return (TWRR), net of all management fees, operating expenses, and transaction costs.[ CORRECT ]

[ C ]Performance can be reported using arbitrary hypothetical simulations.

[ D ]PMS providers are prohibited from reporting performance to clients.

Takeaway

SEBI requires PMS providers to calculate and report client performance using Time-Weighted Rate of Return (TWRR), net of all management fees, operating expenses, and transaction costs.

Derivation

TWRR strips out the distorting effect of when the client added or withdrew money, isolating the manager's actual investment decision-making skill — a client who deposited right before a rally shouldn't make the manager look artificially better, nor should one who withdrew before a downturn make the manager look worse. Mandating that this be reported net of all fees and costs further ensures clients see the return they actually experienced in their pocket, not a gross, fee-inflated figure. This SEBI (Portfolio Managers) Regulations requirement is tested because candidates sometimes assume MWRR/IRR (which reflects the client's own cash-flow timing) is what regulators mandate, when the standard is specifically the manager-skill-isolating TWRR.

Why the others fail

A — Performance is reported as simple arithmetic addition of stock prices.

Simple arithmetic addition of stock prices is not a recognized return-calculation methodology at all and bears no resemblance to any standard portfolio performance measurement approach.

C — Performance can be reported using arbitrary hypothetical simulations.

Reporting arbitrary hypothetical simulated performance to clients would violate SEBI's principles-based prohibition on misleading performance claims, which mandate real, standardized.

D — PMS providers are prohibited from reporting performance to clients.

SEBI mandates transparent performance reporting to clients as a core investor-protection requirement — PMS providers are required to report, not prohibited from reporting, performance.