6B.5 How fund houses make money · M06B Funds and ETFs

Motivation

An AMC is a toll on the pool: it earns a percentage of assets, every day, whatever the fund's return. Its business is therefore a leveraged bet on the size of the pool, which depends on markets and on flows. You read fund-house economics for two reasons: to understand the incentives of the people selling you funds, and because listed AMCs are a sector of the stock market.

6B.5.1Revenue, costs and the P&L#

Revenue An AMC's revenue from operations is the management fee summed over schemes:

\text{Revenue} = \sum_{s} y_s\,\bar A_s, \tag{6B.10}

where $\bar A_s$ is the scheme's average AUM over the period and $y_s$ is the management-fee yield the AMC keeps. The yield is well below the TER the investor pays: from the TER come the distributor's trail (in regular plans), GST, and the registrar, custodian, audit and other scheme expenses. Since October 2018 commissions are paid from the scheme within the TER, not from the AMC's own books (6B.3.1), so an Indian AMC's revenue is close to a pure management fee. Yields differ by asset class: equity schemes carry the highest, debt schemes less, liquid and overnight funds and ETFs the least. A shift of AUM toward passive products and direct plans lowers the average yield even when AUM rises.

Worked example 6B.5the P&L of a large listed AMC, FY26

HDFC Asset Management Company, standalone, year to 31 Mar 2026 (₹ cr)¹:

Line	₹ cr	Note
Revenue from operations	4,118.53	management fees
Other income	498.73	return on the AMC's own investments
Employee benefits	480.88	includes ₹69.2 cr non-cash ESOP charge
Other expenses	334.32
Depreciation and amortisation	72.70
Finance costs	13.27
Fees and commission	5.91	commission is paid by the schemes, not by the AMC
Total expenses	907.08
Profit before tax	3,710.18
Tax	850.82	22.9% of PBT
Profit after tax	2,859.36

The company reports the same business per unit of average AUM: operating revenue 45 bp, operating expenses 10 bp, core operating margin 35 bp in FY26 (46, 10 and 36 bp in FY25)². The implied average AUM is $4{,}118.53/0.0045 \approx \text{₹}9.15$ lakh cr, consistent with the reported quarterly average AUM of ₹9.28 lakh cr in Q4 FY26, of which 65.2% was equity-oriented (55.9% for the industry). Core operating profit was $4{,}118.53 - 907.08 = \text{₹}3{,}211.45$ cr, a margin of 78% of revenue. Employees were 1,713 (permanent) [V]: profit after tax of about ₹1.7 cr per permanent employee. Return on equity was 32.9% [V]. The latest quarter, to 30 Sep 2026, showed revenue from operations of ₹1,168.9 cr and profit after tax of ₹749.9 cr on quarterly average AUM of ₹9.69 lakh cr³.

Three features matter for what follows. (i) Costs are small and mostly fixed in the short run: people, technology, offices. (ii) Revenue moves one for one with AUM, which moves with the market and with flows. (iii) There is almost no capital at risk: the AMC does not guarantee returns or lend.

For comparison, Nippon Life India Asset Management reported FY26 profit after tax of ₹1,529 cr on Q4 FY26 average AUM of ₹7.25 lakh cr, of which ₹2.42 lakh cr was in ETFs⁴: about 78% of HDFC AMC's AUM, but 53% of its profit. A larger share of low-yield ETF and index assets, and a smaller equity share (₹3.30 lakh cr, about 46%), explain most of the gap.

6B.5.2Operating leverage: the beta of AMC profits#

Proposition 6B.5.1beta of AMC profits to the market

Let equity AUM $A_e$ and other AUM $A_d$ earn fee yields $y_e, y_d$ . Costs are a fixed amount $F$ plus a share $v$ of revenue. Let $\beta_A = d\ln A_e/d\ln M$ be the elasticity of equity AUM to the market level $M$ (1 from market moves alone, more if flows chase returns), and let $A_d$ not depend on $M$ . Profit is

\Pi = (1 - v)(y_eA_e + y_dA_d) - F, \tag{6B.11}

and its elasticity to the market is

\beta_\Pi = \frac{d\ln \Pi}{d\ln M} = \beta_A\,\frac{(1 - v)\,y_eA_e}{\Pi}. \tag{6B.12}

If all AUM is equity, $\beta_\Pi = \beta_A(1 + F/\Pi)$ .

Proof

$d\Pi/dM = (1 - v)y_e\,dA_e/dM$ , so $d\ln\Pi/d\ln M = (M/\Pi)(1-v)y_e\,dA_e/dM = (1-v)y_eA_e/\Pi \cdot d\ln A_e/d\ln M$ . With $A_d = 0$ , $(1 - v)y_eA_e = \Pi + F$ .∎

The ratio $(\Pi + F)/\Pi$ is the operating leverage: contribution over profit. A fall in the market cuts revenue in proportion but leaves fixed costs in place, so profit falls more than proportionately. Flows strengthen it: Indian SIP flows have been steady, but lump-sum equity flows rise after good years and fall after bad ones, so $\beta_A > 1$ .

Worked example 6B.6HDFC AMC's operating leverage

With FY26's revenue of ₹4,118.53 cr and expenses of ₹907.08 cr treated as fixed ( $v = 0$ ), revenue over core operating profit is $4{,}118.53/3{,}211.45 = 1.282$ (the same as 45 bp over 35 bp). Suppose (illustrative assumptions) that 80% of revenue comes from equity schemes, and that equity AUM has an elasticity of 1.2 to the market level once flows are included. Then (6B.12) gives $\beta_\Pi = 1.2 \times 0.80 \times 1.282 = 1.23$ : a 10% market fall cuts core operating profit by about 12%. The stock's beta can be higher still, because the multiple investors pay for the profits also falls in a bear market. AMC stocks are therefore best read as levered, flow-sensitive claims on the equity market, with a bond-like cushion from their own treasury income.

6B.5.3The value of a customer: AUM as an annuity#

Proposition 6B.5.2present value of the fees on a SIP customer

A customer invests $P$ at the start of each of the first $n$ months. Holdings grow at monthly rate $g$ (net of fees). The AMC earns a monthly fee $y_m = y/12$ on the end-of-month holding. Each month, independently, the customer leaves with probability $\lambda$ (redeeming everything and stopping the SIP). With monthly discount rate $k$ , put $a = (1 - \lambda)/(1 + k)$ and $q = (1 + g)a$ , and assume $q < 1$ . Then the present value of fees is

PV = y_m P\,\frac{q}{1 - q}\cdot\frac{1 - a^{n}}{1 - a}. \tag{6B.13}

Proof

The instalment made at the start of month $s+1$ ( $s = 0, \dots, n-1$ ) is worth $P(1+g)^{t-s}$ at the end of month $t > s$ , and earns the fee $y_mP(1+g)^{t-s}$ then if the customer is still present, which has probability $(1-\lambda)^t$ . Its discounted expected fees are

\sum_{t > s} y_mP(1+g)^{t-s}(1-\lambda)^t(1+k)^{-t} = y_mP\,a^{s}\sum_{j\ge 1}q^{j} = y_mP\,a^{s}\frac{q}{1-q}.

Summing over $s$ , $\sum_{s=0}^{n-1}a^s = (1 - a^n)/(1 - a)$ .∎

Worked example 6B.7what a ₹10,000 SIP is worth to an AMC and to a distributor

A SIP of ₹10,000 a month for 10 years; holdings grow at 11% a year net; attrition is 10% of customers a year; the discount rate is 13% a year; all converted to monthly rates. With an equity fee yield of $y = 0.55\%$ (illustrative; HDFC AMC's average of 45 bp includes lower-yield debt), (6B.13) gives a PV of fees of ₹21,210. A distributor earning a trail of 0.80% a year on the same customer in a regular plan has a PV of ₹30,851. At 20% annual attrition the AMC's PV falls to ₹7,712. Three lessons: the customer is worth about two years of instalments in fees, almost all of it from AUM that does not exist yet; retention dominates the value; and the trail on a regular plan is worth more to the distributor than the management fee is to the AMC, which is why distribution is fought over.

6B.5.4Distributors and advisers#

An MFD (mutual fund distributor) holds an ARN from AMFI after passing the NISM Series V-A certification. It sells regular plans and is paid trail commission from the scheme's expenses. Commission paid on each investor's holdings must be disclosed in the investor's consolidated account statement [S].
An RIA (registered investment adviser) is registered with SEBI under the Investment Advisers Regulations, 2013, charges the client a fee directly, and must use or recommend plans without commission (direct plans). Advice and distribution must be kept separate: an individual adviser cannot also earn distribution commission from the same client [S]. SEBI also caps the fees an RIA may charge individual clients (check the current limits on sebi.gov.in).
The economic difference is who pays and how: a trail of $\Delta c$ a year on the whole holding (Worked example 6B.3) against a fee that does not grow with the portfolio. For a large, long-held portfolio a fixed fee is cheaper by construction; for a small portfolio a trail can be cheaper than any fixed fee.

Practitioner notes

The question to ask of any recommendation: what does the recommender earn if you follow it? A regular plan pays a trail; an ETF pays an AMC little and a distributor nothing.
When AMC stocks rise after a strong market, part of it is operating leverage (Proposition 6B.5.1). The same leverage works in reverse.
See the data: listed AMCs publish quarterly shareholder presentations with revenue and costs in basis points of AUM; AMFI's monthly note gives industry AUM by category, SIP flows and the passive share (in September 2026: industry AUM ₹82.64 lakh cr, SIP inflow ₹32,490 cr from 10.06 crore contributing SIP accounts, and index funds plus ETFs ₹14.70 lakh cr, about 17.8% of AUM)⁵.

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