Share prices of asset management companies surged in Thursday’s trade a day after the Securities & Exchange Board of India (Sebi) board increased the brokerage fees from the proposed 2% to 6%.
Experts believe that while this will reduce costs of mutual fund investors, it will also have a negligible impact on mutual funds as well as the brokerages working with them.
Sundeep Sikka, AMFI chairman and ED and CEO, Nippon India Mutual Fund told reporters at the CII National Summit on Alternative Investments on Thursday that Sebi has come out with a very balanced set of regulation after a wide-ranging consultation process which is positive for the MF investors and also fund houses. “As an industry, it gives us the certainty as the outcome of consultation paper will help in further growth and penetration of the Mutual Fund industry,” he said.
On Thursday, the Nifty Capital Market index closed 2.6% higher at 4,645.75 points led by a sharp increase in the shares of AMC stocks. HDFC AMC, Canara Robeco AMC, and Nippon Life AMC rose between 5.5%-7.2%. Motilal Oswal’s stocks closed 4.3% higher, while BSE, Aditya Birla Sunlife AMC, and Nuvama Wealth rose around 2% each.
BER Shift
Sebi on Wednesday (effective April) has changed the cost framework for mutual fund industry and has replaced total expense ratio (TER) with base expense ratio (BER) which will only include the fee charged by an asset management company (AMC) for managing investors’ money and exclude pass-through costs such as brokerage, securities transaction tax (STT), stamp duty, and exchange fees.
A JM Financial report on Thursday said: “We believe that while making the charges more transparent for customers, the approved changes also protect the mutual fund ecosystem, which has generated wealth for retail customers and enhanced financial inclusion. The separation of levies while changing the TER structure should counter the impact from removal of exit load, while the cut in brokerages is much lower than initially proposed. We expect the impact on AMCs, distributors and brokers to be very marginal.”
Profitability Paradox
While the broker expects the removal of exit loads to hit the revenues of AMCs, the impact of this will be offset by the removal of GST by the introduction of BER. It said that the net impact from change in slabs (and carving out GST), and removal of exit load will be 2- 3bps, this would result in a 2-4% hit to revenues and a 3-4% hit on FY27e PAT for HDFC AMC/NAM/UTI. “This is significantly lower than the 6-8% impact we had estimated after the consultation paper.
Further, we expect the mutual funds to pass on some of the impact to the distributors, effectively resulting in an earnings cut of less than 2%. Hence, we do not change our estimates for the AMCs at this point,” the report said.AMC and wealth management stocks had seen a negative reaction following the draft regulations on 28th October. The report said that given that the final regulations are considerate towards the mutual funds and the brokerages working with them, we expect a positive response from markets. At CMP, we prefer Nuvama WM and 360 ONE WAM amongst wealth managers and NAM and HDFC AMC amongst AMCs.”