The mutual fund industry is staring at tighter revenue limits after the Securities and Exchange Board of India (SEBI) proposed cuts in total expense ratio (TER) slabs and the removal of an additional 5 basis points charged on schemes with exit loads. The move, flagged in a fresh consultation paper, could directly squeeze profit margins of asset managers. But according to Nomura, the impact may not be as sharp if SEBI goes ahead with its plan to exclude certain statutory levies, such as GST on expenses, from the TER calculation.
Nomura on AMCs: A look at actual profit hit
Nomura’s analysis estimated a clear, measurable impact on the three listed fund houses it covers: HDFC AMC, Nippon Asset Management, and UTI AMC.
For HDFC AMC, the removal of the 5 basis points charge on equity assets under management (AUM) would shave off around Rs 333.8 crore in annual revenue, assuming FY27 equity AUM of Rs 6.68 lakh crore. That amounts to roughly 7.3% of its estimated FY27 profit before tax (PBT) of Rs 4,580.8 crore and 8.6% of its core PBT of Rs 3,871.2 crore.
For Nippon AMC, the hit works out to Rs 185.7 crore on AUM of Rs 3.71 lakh crore, equal to about 7.9% of the FY27F PBT of Rs 2,346.4 crore. UTI AMC’s loss would be smaller in absolute terms Rs 76.7 crore on AUM of Rs 1.53 lakh crore but still about 6.5% of its estimated FY27 PBT of Rs 1,172.3 crore.
Nomura called these numbers “pure arithmetic,” noting that fund houses could partly neutralise the fall through distributor negotiations and tweaks to product structures. The brokerage, however, warned that any such offset would depend on how quickly AMCs rework their payout arrangements.
Nomura on implication of SEBI proposal
The consultation paper suggests a cut of roughly 15 basis points across most AUM slabs, with one band showing a 10 basis points drop. On the surface, this means slimmer revenue per unit of AUM. But Nomura argues the picture changes if SEBI’s proposal to exclude statutory levies from TER is accepted in the final rules.
To make its point, Nomura broke down the expense structure of sample funds. In HDFC’s mid-cap fund, for instance, management fees accounted for 0.58% of AUM, while other operating costs were 0.76%. The GST charged on non-management expenses alone added 0.11 percentage point. In its multi-cap fund, the GST burden was even higher at 0.17 percentage point. Nippon AMC’s small cap and flexi-cap funds showed GST on non-management expenses in the 0.12–0.23 percentage-point range.
If SEBI allows these levies to sit outside the TER ceiling, the effective yield available to fund houses would be higher than it appears under the headline cap. For many schemes, that offset could fully absorb the proposed 15-basis-point reduction.
Nomura on SEBI proposal: Distribution costs a worry?
The brokerage also pointed to distributor commissions as the next battleground. With revenue limits tightening, AMCs are likely to revisit how much they pay intermediaries. Larger players with dominant brands are in a stronger position to push back on distributor demands, while smaller fund houses may struggle to protect margins. Nomura said some portion of the 5-basis-point loss could be recovered through lower commissions, but added that this will depend on existing contractual terms and the willingness of distributors to renegotiate.
Meanwhile, SEBI’s plan to reduce brokerage caps for cash and derivative trades adds another constraint. Lower caps can compress broker incomes, especially for smaller firms, and may change the economics of fund distribution.
Nomura on AMCs: Shift toward lower-cost products?
The regulatory push is expected to accelerate the trend toward passive investing. Lower TERs make index funds and exchange-traded funds more attractive relative to actively managed schemes, where fund managers typically charge higher fees. Nomura noted that AMCs have already been expanding passive product offerings to meet rising demand and to stay within the new cost limits.
If the proposals are implemented as drafted, the industry may see a gradual realignment of revenue sources: active fund margins could narrow, while passive products could contribute a growing share of AUM. Nomura said that over time, this would push AMCs to focus more on scale, cost efficiency, and automation.
Nomura view on 3 key AMC stock
Nomura’s target prices for the three listed AMCs based on discounted cash flow and implied price-to-earnings multiples already factors in modest TER compression. The brokerage sees limited risk to its base-case valuations if statutory levies are excluded from TER, but a narrower interpretation by SEBI could lead to further earnings downgrades.
HDFC AMC’s FY27 PBT is estimated at Rs 4,580.8 crore, Nippon AMC’s at Rs 2,346.4 crore, and UTI’s at Rs 1,172.3 crore. The note reaffirmed target prices of Rs 6,000 for HDFC AMC, Rs 920 for Nippon AMC, and Rs 1,300 for UTI, based on DCF valuations corresponding to implied P/E multiples of 35x, 31x, and 18x, respectively.
Nomura said SEBI’s final stance on levy exclusions will decide whether earnings drift below these levels or remain intact.
Nomura on AMCs: Risks ahead
The brokerage listed three key risks for investors to monitor. First, the wording of SEBI’s final notification will determine how broad the exclusions are and whether AMCs can actually reclaim part of the lost yield. Second, distributors may resist attempts to reduce commissions, delaying the benefit of any cost pass-through. Third, sustained fee compression could speed up the industry’s shift to passives, eroding long-term profitability in active strategies.
What to watch
Fund managers and investors alike will be watching how SEBI’s draft evolves. The removal of the 5-basis-point levy produces a clear, measurable earnings impact, but the regulator’s decision on levy exclusions could turn that into a minor accounting change rather than a profit shock.
The direct PBT hit is in the 6–8% range for leading fund houses, based on Nomura’s FY27 forecasts. But the bigger story lies in how quickly AMCs adapt to a cost-conscious environment where scale and efficiency decide survival.
If SEBI finalises the proposals in their current form, fund houses with broader product ranges and stronger distribution control, such as HDFC and Nippon, stand to absorb the change faster. Others will need to rework structures to stay competitive, the brokerage noted.