Relationship Between AUM and Expense Ratio
1. Asset management companies charges fees for the management of funds, this fees is calculated as a percentage based on the assets under management by the AMC. This fee allows AMC’s to cover the charges which they incur in order to manage funds. The fees are deducted from the returns and combined are called as Total expense ratio.
2. Example of such expense are Government charges, Fund manager salary, Fees to credit agencies, brokerage, etc. Higher the AUM, higher will be the managing cost for these funds and more efforts will be required by the AMC to properly manage these funds and generate the best returns out of it.
3. It can also be propounded that cost is directly proportional to the asset holdings. In order to manage funds AMC’s are required to charge expense ratio as a percentage of AUM. An expense ratio is calculated by dividing the fund’s total operating expenses by the average value of its assets under management (AUM).
4. In order for the safeguard of investors interest, SEBI (Securities and Exchange Board of India) has directed guidelines in terms of expense ratio that can be charged from the investors. SEBI has considered AUM as a deciding factor to determine the exchange ratio.
The limit for expense ratio is as follows:
Assets Under Management by the AMC | Total Expense Ratio for Equity Funds | Total Expense Ratio for Debt Funds |
|---|---|---|
0-500 | 2.25 | 2 |
500-750 | 2 | 1.75 |
750-2,000 | 1.75 | 1.5 |
2,000-5,000 | 1.60 | 1.35 |
5,000-10,000 | 1.50 | 1.25 |
10,000-50,000 | 1.5 + 0.05 (for every increase of ₹5,000 crores of daily net assets) | 1.25 + 0.05 (for every increase of ₹5,000 crores of daily net assets) |
50,000+ | 1.05 | 0.008 |