An asset manager earns 1.0% on active assets and 0.1% on passive. Five points of assets move from active to passive every year while total assets grow 12%. Project revenue for five years and say what the firm should do.

Revenue grows only 14% in five years while assets grow 76%, and with costs rising 8% a year profit falls 40%, from Rs 240 crore to Rs 144 crore. The average fee drops from 0.64% to 0.415% as money moves to passive. The firm should slow the shift where its active funds earn their fee, price active more keenly, and hold cost growth down. Together those keep year 5 profit near Rs 317 crore on these assumptions.

A restaurant whose customers keep coming but switch from the Rs 1,000 thali to the Rs 100 snack: the dining room is fuller every year, and the till barely moves. Revenue is assets times the average fee, and the average fee is falling because each rupee that moves to passive takes its fee from 1.0% to 0.1%. Five points of the mix moving each year removes 0.045% of fee yield a year, which almost cancels the effect of 12% asset growth on the active book.

Run it year by year: assets grow 12%, the active share falls from 60% to 35%, and each part earns its own fee. Active revenue stays between Rs 600 crore and Rs 632 crore throughout, because a shrinking share of a growing base is flat; passive revenue nearly triples but from Rs 40 crore to Rs 115 crore. Total revenue grows from Rs 640 crore to Rs 731 crore, and growth slows every year, from 4.1% in year 1 to 1.0% in year 5.

Costs do not follow the mix. Salaries of fund managers and analysts rise with the market for talent, not with the fee yield. With revenue growing about 3% a year and costs 8%, profit falls 40% in five years even though the firm looks successful on every asset chart. This is the arithmetic that has pushed asset managers worldwide towards mergers and cost cutting.

Three moves, each tied to a number. First, price the active book to slow the shift: cutting the active fee to 0.85% costs revenue immediately, but if it halves the move to 2.5 points a year, year 5 revenue is Rs 804 crore instead of Rs 731 crore and profit Rs 216 crore instead of Rs 144 crore. Second, hold cost growth to 4%, which with the fee change keeps profit at Rs 317 crore. Third, put active effort where it can charge for genuine skill, such as mid caps or credit, and run passive at scale as a low-cost utility rather than a growth story.

Say the limit: the response rests on one behavioural assumption, that a cheaper active fee halves outflows. Test it on past data from fee cuts, and present it to the board as a scenario, not a forecast.