How do mutual fund companies make money?

Summary: Ever wondered how mutual fund companies earn their income? Here’s a simple explainer on how AMCs make money and how their incentives align with yours. Learn how to keep costs low and maximise your gains.

When you invest in a mutual fund, your money is pooled with that of other investors and managed by a professional fund manager. The mutual fund invests this pool into stocks, bonds or other securities, with the goal of growing your money over time.

But have you ever wondered: How do mutual fund companies themselves earn money? After all, they provide professional management, research and a range of services to run the fund efficiently. Here’s a clear breakdown of how mutual fund companies make money, explained simply.

Understand how mutual funds work

When you put money into a mutual fund, you receive units of that fund. The value of those units is determined by something called the net asset value (NAV). This NAV fluctuates daily based on market movements and the fund’s underlying portfolio.

A fund house (also called an asset management company or AMC) employs fund managers, analysts, compliance teams and technology to manage your investments efficiently. For providing this service, the AMC charges a small fee, which is its primary source of revenue.

The primary source: Expense ratio

The main way mutual fund companies make money is through something called the expense ratio.

• The expense ratio is a percentage of your fund’s assets charged annually to cover management costs.
• Management costs include fund manager salaries, research expenses, administration costs and the AMC’s profit.

For example, if a mutual fund has an expense ratio of 1 per cent and you invest Rs 1 lakh, the AMC charges Rs 1,000 annually. This fee is deducted from the fund’s NAV, so you don’t pay it separately.

According to AMFI (Association of Mutual Funds in India) data for June 2025, the Indian mutual fund industry manages Rs 74,40,671 crore in AUM. Even if we assume an expense ratio of 0.5 per cent, that’s about Rs 37,203 crore annually in management fees industry-wide.

As per SEBI guidelines, the maximum expense ratio for equity funds is capped at 2.25 per cent for the first Rs 500 crore of assets and reduces progressively for larger fund sizes. Debt funds typically have lower expense ratios.

How AMCs grow their income

While expense ratios remain the core revenue source, AMCs boost their fee income by growing their assets under management (AUM):

1. Launching new funds (NFOs): New fund offers bring in fresh investor money, increasing the AMC’s total AUM and, therefore, its fee income.
2. Managing multiple fund categories: AMCs run various equity, debt, hybrid and solution-oriented funds. The larger the combined AUM across these funds, the higher their revenue from expense ratios.

Other income sources for AMCs are:

1. Portfolio management services (PMS): For high-net-worth individuals (HNIs), AMCs offer PMS, which charge higher fees than mutual funds due to personalised management.
2. International tie-ups and feeder funds: AMCs also earn from offering international funds in partnership with global fund houses, allowing Indian investors to access overseas markets.

Why AMCs want your money to grow

Interestingly, mutual fund companies benefit directly when your investments grow. Since fees are charged as a percentage of your investment value (AUM), if your portfolio increases from Rs 1 lakh to Rs 1.5 lakh, their earnings rise too. This alignment creates an incentive for AMCs to focus on long-term performance.

Direct vs Regular plans: Why the fee differs

Mutual funds come in two variants:

• Regular plans: You invest through distributors or advisors, who receive a commission from the AMC. Here, the expense ratio is higher because it includes this commission.
• Direct plans: You invest directly with the fund house. The expense ratio is lower since there’s no distributor commission.

Consider this simple example:

• Monthly SIP: Rs 10,000
• Investment period: 15 years
• Assumed return: 12 per cent per annum
• Expense ratio: 0.5 per cent (direct) vs 1.5 per cent (regular)

After 15 years, here’s how it plays out:

• Direct plan value: Rs 47.6 lakh
• Regular plan value: Rs 43.7 lakh

That’s a difference of Rs 3.9 lakh purely because of lower costs in the direct plan.

What does this mean for you as an investor?

1. Focus on expense ratios: Lower costs mean more of your returns stay with you. Always check the expense ratio, especially when comparing similar funds.
2. Choose direct mutual fund plans if you know which fund to invest in: By cutting out distributor commissions, direct plans save you money over the long term.
3. Performance over hype: While AMCs earn fees regardless of market conditions, they rely on performance and trust to retain investors. Stick to funds with proven track records.
4. Understand value for cost: Paying an expense ratio is worth it if the fund delivers consistent returns, sound risk management and professional expertise you couldn’t easily replicate yourself.

Value Research’s view

At Value Research, we believe mutual funds offer a simple, cost-effective and transparent way to build wealth, especially compared to unregulated or opaque investment products. By focusing on low-cost, time-tested funds, you can benefit from professional management without letting fees eat into your returns.

Want funds chosen with cost-efficiency in mind?

At Value Research Fund Advisor, our Analyst’s Choice features handpicked mutual funds that excel on factors like low expense ratios and consistent performance. These curated recommendations help you invest smartly, keep costs low and stay on track for your goals.

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This article was originally published on August 13, 2025.