How does expense ratio relate to AUM?

The debate on expense ratio is getting hotter and hotter and is taking centre stage in almost all the conference held on the mutual funds. In the second AMFI Annual Summit held in Mumbai, SEBI chief Ajay Tyagi, said there is a scope to rationalize total expense ratio (TER) in mutual funds further: “We feel that there is a scope to rationalize TER. Currently, we are reviewing TER structure very closely.”

Every party to the mutual fund industry is giving his own argument for higher or lower expense ratio. There has also been an argument that higher AUM should have a lower expense ratio. This also applies to fund houses too. This means that fund houses with higher AUM should have a lower expense ratio.

To check this, we studied AUM of all the equity funds (Direct and Regular) and their average expense ratio. Although, the correlation between the total AUM of a fund house and the expense ratio is negative of 0.129, statistically it is not significant. This is best reflected in the following graph. Fund houses like Taurus has lower AUM and higher expense ratio. Nevertheless, fund houses like DHFL with similar AUM have a much lower expense ratio. The average expense ratio of the fund houses for ‘Direct’ option is 1.37 per cent and for ‘Regular’ option it is 2.27 per cent.

This is even the case with the regular fund.  Hence, it is all about how better a fund house manages its expenses. We can see that the average expense ratio is hardly tied to AUM.