A fixed-cost structure charges a specific percentage fee on the total assets under management (AUM) on a quarterly basis, amounting to about 2.5 -3 per cent annually. On the other hand, a variable cost structure is linked to the portfolio's performance or the profits generated in a financial year.

A pure 'variable' cost structure is rarely offered. A fixed fee of about 1.5 per cent of the AUM (lower than that charged under the fixed cost structure) is charged as the fund management fee. There is a performance fee, too.

Despite this, Rao is veering towards the variable cost structure.

Reason: He wouldn't have to dole out a high fee if his portfolio is not generating good returns.

An added incentive comes with the Securities and Exchange Board of India (Sebi) making it mandatory for fund managers to use the high watermarking principle while calculating variable costs. The principle marks the highest achieved value of the portfolio in a year, and performance fee is charged only if the portfolio value crosses this watermark.

Understand with an illustration: Say you invest `10 lakh and this amount increases to `13 lakh in the first year.

The portfolio manager will share profits worth 10-20 per cent.

Industry officials say that Sebi has only provided a broad principle for the calculation of the watermark. Fund managers have the flexibility of ducting the fixed fee and the profits taken by the portfolio manager, or, after deducting the fixed fee only.

Such nitty gritties are governed by the contractual agreement between the client and fund manager. The client can negotiate the terms of the contract with the fund manager.