Fee Caps Expected To Significantly Impact MF Profits, Jefferies Study Finds

The implementation of proposed fee caps for mutual fund schemes is expected to significantly impact the profits of asset management companies (AMCs). The larger AMCs could face a more substantial dent in profits, potentially reaching up to 50 per cent. 

The lower fees imposed on larger funds may discourage consolidation and merger and acquisition (M&A) activities within the sector.

According to a report by Jefferies, the change in equity-linked total expense ratio (TER) could result in a 30 per cent reduction in profits for AMCs. This impact is expected to increase as select debt funds, which currently have higher TER than the proposed caps, are included, and arbitrage funds incur losses. 

The effect on profits is also divergent among different fund categories, with the top five funds projected to experience a 50 per cent decline, the next five funds a 17 per cent fall, the next ten funds a 37 per cent rise, the following ten funds a 28 per cent fall, and others below the top 30 witnessing a 25 per cent rise.

Jefferies' calculations indicate that the proposed fee caps on equity-linked assets under management (AUMs) could lead to a 30 basis point decrease in equity fees for larger AMCs, while smaller AMCs with AUMs below USD 10 billion may experience an increase of approximately ten basis points. This discrepancy in fees, ranging from 60 to 100 basis points, could potentially result in a loss of market share for smaller AMCs, while larger ones may benefit.

The Securities and Exchange Board of India (Sebi) has recently proposed a uniform TER across mutual fund schemes to enhance transparency in costs charged to unitholders. The proposed norms are expected to have a greater impact on the top five mutual funds and enable 20 funds to generate additional blended yields on equity-oriented AUMs. 

However, the report suggests that the arbitrage fund segment worth less than Rs 1 trillion may need to be wound down as MFs would incur losses due to the inability to recover transaction costs.

The proposed changes come at a time when the assets under management have already been under pressure due to factors such as alterations in the tax structure for debt funds, increased competition, and the removal of long-term indexation benefits. 

Several AMCs, including Aditya Birla Asset, HDFC AMC, UTI AMC, and Nippon Life, have experienced declines in their year-to-date performance.

To mitigate the impact of fee caps, Jefferies suggests that AMCs have the potential to share the burden with various stakeholders in their value chain, including distributors, stockbrokers, and RTA partners. By distributing the impact across the value chain, AMCs can alleviate the overall financial strain. 

Additionally, adjusting fee caps for arbitrage funds, creating headroom for securities transaction tax (STT), and balancing total expense ratios (TERs) could help lower the impact of the proposed fee caps and provide flexibility to address the financial pressures faced by AMCs.