A recent report by foreign brokerage firm Jefferies suggests that fixing the maximum limit of fees for Mutual Fund Schemes could have significant implications for the profits of Asset Management Companies (AMCs).
The report estimates that the companies running these schemes could experience a drop of up to 30% in their profits.
Large companies may face an even greater impact, with their profits potentially falling by up to 50%.
According to Jefferies, lower fees imposed on large AMCs could also result in a decline in merger and acquisition (M&A) activities within the sector.
The brokerage firm stated, “The adjustment in equity-linked total expense ratio (TER) has the potential to reduce the profitability of asset management companies (AMCs) by as much as 30%.”
Jefferies further outlined the expected effects on different fund categories:
1) The profits of the top 5 funds may decrease by 50%.
2) The profits of the next 5 major AMCs may experience a 17% decrease.
3) The profits of the subsequent 10 largest AMCs are projected to increase by 37%.
4) The profits of the next 10 largest AMCs are anticipated to decline by 28%.
5) AMCs below the top 30 ranks may see an increase in profits by 25%.
As per Jefferies’ calculations, the proposed cap on equity-linked assets of mutual funds could result in a reduction of equity fees for large AMCs by 0.30%.
Conversely, smaller AMCs with assets under management (AUM) of less than $10 billion may witness an increase in equity fees of up to 0.10%.
This discrepancy in fees ranging from 0.60% to 1% may potentially lead to smaller AMCs losing market share, while larger mutual fund companies stand to benefit.
The Securities and Exchange Board of India (SEBI), the market regulator, aims to introduce a uniform total expense ratio (TER) for all mutual fund schemes to enhance transparency in the fees charged to investors.
Until now, asset management companies have levied various charges on investors in addition to TER, including brokerage fees, transaction costs, exit loads, and GST.
SEBI’s proposal states that the Total Expense Ratio (TER) should encompass all expenses charged to investors, eliminating additional charges.
Explaining the concept of Total Expense Ratio (TER), it refers to the total costs borne by asset management companies to operate a mutual fund scheme.
This includes expenses related to scheme selling, marketing, administration, investment management fees, and other expenditures.
SEBI has historically capped the TER limit at 2% to 2.5%.
