Mutual Funds: TER cut – Larger equity MF schemes to take big hit

By: |
New Delhi | Published: September 21, 2018 12:15:42 AM

Equity MF schemes with AUM above Rs 20 billion will have to reduce their TER by 15-70bps

Mutual Funds: TER cut – Larger equity MF schemes to take big hit

In its board meeting, Securities and Exchange Board of India (Sebi) has notified reductions in the maximum total expense ratio (TER) that can be charged to mutual fund schemes. The regulator has also notified that all commissions and expenses are to be expensed from the mutual fund (MF) schemes alone and not through any other route (AMC/Trustee P&Ls—a common industry practice). Moreover, asset management companies (AMCs) will no longer be allowed to pay out upfront commissions except for certain relaxations in the case of SIPs.

While the move is a positive step towards increasing reach and reducing costs for retail MF investors and also improves transparency, it has a negative impact on profitability for AMCs. We believe there will be a period of growth/profitability reset as the industry reconfigures to the new cost structure. We expect the brunt of the impact to be borne by equity MF schemes which are heavily dependent on distributors, with direct plan accounting for only 17% for the industry. The cut in TER is larger for larger MF schemes.

Brunt of TER cut to be borne by larger schemes

Larger TER cuts have been handed out for large MF schemes. This is expected to have a negative impact on AMCs which operate large MF schemes. Equity MF schemes with assets under management (AUM) above `20 billion will have to reduce their TER by 15-70bps. The brunt of the impact of TER reduction is expected to be borne by equity MF schemes, which largely operate close to the current TER cap of 2.1%. This is mainly because they are heavily dependent on commission payouts to distributors (83% of industry equity AUM is sourced through distributors as of August 2018).

AMCs with stronger contribution of direct plan AUMs are expected to be better off, as they are less reliant on upfront commission payouts. Moreover, overall fee yields will be less detrimentally impacted from the TER cuts for AMCs with high direct-plan contribution.

Edited extracts from J M Financial’s report

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Next Stories
1National Pension System: PFRDA caps equity mutual funds investment by NPS
2Sebi clears proposal to bring cost effectiveness in mutual funds – Know what it means
3Mutual Fund Investment: Top 10 mutual funds you can bet on for long-term growth