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IAI Actuarial Core Principles · Business Economics · Pricing strategies in the financial services sector

A mutual fund house in Mumbai expects to manage assets with total annual costs of ₹12 crore, comprising fixed costs of ₹8 crore and variable costs of ₹4 crore. It expects average assets under management of ₹2,000 crore and applies full-cost pricing with a 20% mark-up on full cost. What annual fee, as a percentage of assets, should it charge?

The fee is 0.72% of assets. Full cost of ₹12 crore plus a 20% mark-up gives ₹14.4 crore, and dividing this by average assets of ₹2,000 crore yields 0.72%. Omitting the mark-up gives 0.60%, and using variable cost only gives a lower figure.

  1. A0.60%
  2. B0.72%Correct
  3. C0.24%
  4. D0.48%
  5. 0.20%

Explanation

Full cost is ₹12 crore. Adding 20% gives ₹14.4 crore. Dividing by ₹2,000 crore gives 0.72%. Using only variable cost with the mark-up gives 0.24%, and full cost without mark-up gives 0.60%.

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