SEBI’s new proposal on MF TER an alphabet soup, AMC stocks mixed

SEBI has proposed a uniform total expense ratio (TER) across mutual fund schemes in an attempt to enhance transparency in the costs charged to unitholders. The market seems to have a muddled view of a slew of changes proposed by the capital markets regulator in a consultation paper.

Nirav Karkera, Head of Research, Fisdom, is of the view that the new proposal is in the best interests of mutual fund investors but could lead to intermittent challenges for the asset management industry. Such challenges would be majorly attributable to the transition and limited visibility on the outcomes of such a transition in the near term.

He thinks that with AMCs being under SEBI scanner, investors in shares of such AMCs may want to pause and watch for developments. This would especially hold true for shorter-term portfolios. In fact, in a reactive fashion, the sentiments of most investors could be dented and the same can be expected to reflect in share prices.

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Shares of HDFC Asset Management Company, Aditya Birla Sun Life AMC, UTI AMC and Nippon Life India Asset Management were down 1-2 percent whereas Shriram Asset Management Co and Escorp Asset Management were up 3 and 10 percent respectively.

However, Karkera quickly shed light on the other side of the story. He believes in the long term though, adverse knee-jerk reactions could offer longer-term investors to invest in asset management companies at relatively lower prices. Proposed changes are still in the consultative stage, most variables remain unknown, and consequences are even farther from known.

At the same time, almost certainly, the mutual fund industry is slated to witness robust market expansion and Indian capital markets are growth-bound. These two vectors form the foundation of a robust growth narrative for the asset management space in the long run while the proposed transition shakes up things in the near term.

Manoj Nagpal, Outlook Asia Capital told CNBC-TV18, that the new changes proposed are very positive. He sees SEBI’s proposal as making Mutual Funds lucrative and is indirectly a positive for AMCs and distributors.

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Even ICICI Securities said, “The proposed framework shall bring in more transparency and will lead to a lower TER cap especially for big AMCs”. The higher commission structure for inflows from B-30 cities will reward distributors for bringing new investors to the industry, as per the domestic brokerage firm.

On the contrary, Mohit Gang of Moneyfront told the news channel that as the industry grows in size, it is right on the part of the regulator to be more retail-friendly. Though the margin of AMCs could be impacted by 4-5 percent, the volumes can absorb it easily, he added.

At present, SEBI allows asset management companies to charge four additional expenses—brokerage and transaction costs, TER for distribution commission for B-30 (beyond top 30) cities, GST and exit load—over and above the specified TER limits, as per reports.

TER is a percentage of a scheme’s corpus that a mutual fund house charges towards expenses.

The paper is currently at the consultation stage, awaiting feedback from industry participants. The paper in all put forth 15 topics of consultation.

SEBI has also proposed the idea of performance-based TER and put forward two approaches but said the new concepts can be first tested in a regulatory sandbox structure. For the new framework, the capital markets regulator has proposed that at the AMC level, the maximum TER that can be charged for an equity scheme is 2.55 percent.

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