Explained in 5 charts: Mutual funds and the art of pleasing shareholders

The business model of mutual funds is simple. The industry is regulated in terms of what it can charge customers—the management fee is usually a percentage of AUM. Thus, the higher the AUM, the greater the revenues. That’s also why industry stocks fell this week when the regulator proposed an effective cut in the management fee. The challenge before AMCs is to grow their AUMs in a choppy market and amid intense competition, both among themselves and from alternative avenues.

Mixed showing

Besides Canara Robeco, the other four fund houses whose shares are listed are HDFC Asset Management Co. Ltd, Aditya Birla Sun Life AMC Ltd, Nippon Life India Asset Management Ltd, and UTI Asset Management Co. Ltd. In the past year, two of them, HDFC and Nippon, have outperformed the Nifty Financial Services Index, while the other two have underperformed.

But this performance is really split into two distinct periods. Between October 2024 and March 2025, all four stocks underperformed this benchmark index. After March, they rallied strongly amid a general rise in share prices. The stocks of these four listed AMCs gained 29-67% during this period, which is significantly higher than the rise of 17% in the Nifty Financial Services Index.

While AMCs function across both equity and debt, and a range of sub-categories within those two broad asset classes, their revenues are heavily affected by overall equity market conditions. Across 20 fund houses (both listed and unlisted), the median share of equity investments in mutual fund assets is around 60%.

Volatility in flows

The fiscal year 2024-25 was a record one for mutual funds in the country. Net inflows into mutual funds—fresh investments minus redemptions—stood at ₹8.15 trillion, the most ever in a fiscal year. So far, 2025-26 is shaping up to top that. In the first half (April to September), net inflows stood at ₹5.43 trillion—an increase that is greater than any full-year net inflows up to 2023-24. The total net AUM of mutual funds has almost doubled between March 2023 and September 2025, increasing from ₹39.4 trillion to ₹75 trillion.

But mutual fund flows go through cycles. For example, in 2016-17, net inflows hit a record ₹3.4 trillion. But it wasn’t until 2023-24 that this was topped. In between, net inflows remained volatile, ranging from ₹76,000 crore to ₹2.7 trillion. Similarly, in the aftermath of the global financial crisis of 2008, the industry endured three years of net outflows and had to wait nine years to top its 2007-08 high.

Economies of scale

Indian fund houses listing their shares is a recent phenomenon, starting with Nippon in 2017. They have all since benefited from the equity market's turn to buoyancy. In general, a rising stock market tends to pull in more investors and boost mutual fund AUM. Once listed, they face the challenge that any other listed company faces: increasing revenues and containing costs.

In general, larger fund houses have been more effective in this, as demonstrated by their lower cost-to-income ratio, notably for HDFC and SBI. The lower this ratio, the greater the extent to which an AMC’s income covers costs. So, lower values indicate greater profitability. AMCs earn revenues as a share of their AUMs. But on the other side of the equation, there are economies of scale—costs don’t rise linearly with AUM. Thus, larger fund houses tend to be more profitable. Interestingly, a bunch of smaller AMCs with similar AUMs differ sharply in cost-to-income ratios, an indication of the efficiency with which AMCs manage their operations.

Passive gains

Since the fees that AMCs can charge their unitholders are regulated, the primary way to significantly increase profitability is to increase AUMs. Currently, a majority of the AUM managed by Indian fund houses is held in actively managed schemes, where fund managers exercise discretion to select a portfolio of shares or securities.

Globally, however, the trend is toward passive funds, and within them, exchange-traded funds (ETFs). Passive funds track an index such as the Nifty 50, and therefore tend to charge investors lower fees than active funds. Between 2020-21 and 2024-25, the share of passive funds in the industry AUM has increased from about 9.5% to about 16%.

“As awareness about passive investing continues to grow, financial advisors are increasingly recommending these funds to their clients," said a report prepared by Crisil for ICICI Prudential AMC. “Additionally, high-net-worth individuals (HNIs) and family offices are also shifting their investments towards passive funds, drawn by their cost effectiveness and the inconsistent performance of actively managed funds."

Bit by bit

For the industry, the rise of systematic investment plans (SIPs), where customers invest a fixed sum every month into a scheme, is a silver lining of sorts. SIPs are a good investment practice, as most investors, even skilled ones, have mixed results in timing the market. It’s also good for mutual funds, as they have an assured stream of inflows into their schemes.

According to the Crisil report, 37% of equity AUM was from SIP flows in 2024-25, as compared to 34% in 2020-21. Crisil expects this to increase to 41-44% by 2029-30. “Popularity of equity funds, rising participation of investors, recent investor education initiatives, and apparent benefits of SIPs to households that traditionally did not invest in mutual funds indicate that growth in inflows from SIPs is expected to accelerate over the foreseeable future," its report said. “This is expected to make SIPs an increasingly important component in overall AUM growth." When markets turn choppy, AMCs will need to pull all such levers to maintain AUM growth.

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