The capital markets regulator’s recent revision of mutual funds fee has come as a big blow to asset management companies (AMCs) and the mutual fund industry as a whole. Even as mutual fund investments have now become attractive for investors — who can now expect higher returns — the fee cut is expected to have an adverse impact on mutual funds companies.
According to analysts, the revised tax expense ratio (TER) slab structure for mutual funds will slow down flows and also reduce earnings of AMCs by around 20%. TER is the fee that mutual fund houses collect from investors every year to manage their money.
“For the mutual fund industry, there will be a slowdown in the inflows to MFs and distributors will push higher income products like PMS (Portfolio Management Services) and AIF (Alternative investment funds). However, it will benefit investors as costs will come down and returns will increase,” VK Sharma, Head Private Client Group & Capital Market Strategy at HDFC Securities, told FE Online in a note.
“The new revised charges on mutual funds will reduce earnings of AMCs by around 20%,” he said. According to Sharma, large AMCs — which have AUMs of more than Rs 5,000 crore — will be affected.
In a bid to reduce the cost of investing and bring transparency in mutual fund investments, the Securities and Exchange Board of India (SEBI) on Tuesday revised the TER slab structure for mutual funds for the first time since its introduction in 1996.
In its revisions, Sebi cleared the proposal to cap the maximum TER for closed-ended equity schemes to 1.25% and other than equity schemes to 1%. The maximum TER for open-ended equity schemes will be 2.25%, said Sebi. It also said that the mutual fund industry must adopt the full-trail model of commission in all schemes without payment of any upfront commission or upfronting of any trail commission.
“The cut on the upfront commission will ensure quality advice by intermediaries. It’s good for regular plan investors since the funds suggested by the advisor has to be good enough to sustain the interest of the investor and keep him invested to earn trial revenues,” Jeevan Kumar, Head of Investment Advisory, Geojit Financial Services, told FE Online.
Following the announcement, shares of AMCs slumping to record low levels over fears of the impact of the revisions on revenues and profits. On Wednesday, HDFC AMC’s share price fell 9.1% to an all-time low of Rs 1,396.50 since its listing on the domestic bourses. Reliance Nippon Life AMC’s stocks, too, slumped 12.35% to a new 52-week low of Rs 187.25 per share.
“SEBI on Tuesday surprised the market by reducing the charges that investors pay to mutual fund houses to manage their money, in some cases slashing it by almost 50%,” said Rahul Sharma, Senior Research Analyst, Equity99. “As the SEBI cut total expense ratio, the shares of asset management companies (AMCs) slumped over the fears of the impact on revenue and profitability but making it cheaper to invest in mutual funds and protecting the interests of small investors,” Sharma told FE Online.