Two fund houses each manage Rs 1 lakh crore. One is 70% debt, the other 70% equity. Compare their revenue, and show what a 20% fall in equity markets does to each.

The rival earns Rs 670 crore against Kanakvalli's Rs 430 crore, and loses more when equity falls. Equity pays over three times the fee of debt, so the equity-heavy book earns 56% more on the same assets. A 20% equity fall cuts the rival's revenue by 17.8% and Kanakvalli's by 11.9%, and with fixed costs the profit falls are larger still: 32% against 22%. Equity-heavy fund houses earn more and swing more.

Because assets under management are not the product; the fee on them is. Think of two shops with the same floor space, one selling rice and one selling electronics: the footfall can be identical and the takings very different. An equity rupee pays the fund house 0.85% a year and a debt rupee 0.25%, so an equity rupee is worth 3.4 debt rupees of revenue. Kanakvalli's fee yieldRevenue the fund house keeps divided by its average assets under management, after paying distributors their share of the expense ratio. works out to 0.43% and the rival's to 0.67%. Debt funds charge less because debt investors, many of them corporate treasuries, compare every basis point, and because a bond portfolio needs less research per rupee than a stock portfolio.

Only the equity line moves, so each fund house loses 20% of its equity revenue. Kanakvalli loses Rs 51 crore, 11.9% of revenue; the rival loses Rs 119 crore, 17.8%. The quick check: revenue falls by the market fall times equity's share of revenue. Equity is 89% of the rival's revenue, so 20% of 89% is about 17.8%. For Kanakvalli, equity is 59% of revenue, not 30%, because equity earns more per rupee than debt, so the hit is 11.9%, not 6%.

Salaries, offices and technology do not shrink because the market did. With fixed costs, the rival's profit falls from Rs 370 crore to Rs 251 crore, 32%, and Kanakvalli's from Rs 230 crore to Rs 179 crore, 22%. This is operating leverageWhen a large share of costs is fixed, a given change in revenue produces a larger percentage change in profit., and it runs both ways: in a rising market the rival's profit rises fastest too.

Say the limit of the arithmetic before you close. It assumes no flows. In a real fall, equity investors pause SIPs and redeem, so equity assets usually fall by more than the market, and the rival's hit grows. Debt books have their own flow risk: treasury money leaves liquid funds at quarter ends and in credit scares. Close with the view the interviewer wants: the rival is the higher-quality revenue stream in a good market and the more cyclical one in a bad market, and anyone valuing a fund house should look at the asset mix before the asset total.