Fee cut to dent mid-, small-sized funds' profitability by Rs 200-400 mn

Fund houses making minimal profits to feel the pinch

The Securities and Exchange Board of India’s (Sebi’s) decision to bring down the overall total expense ratio (TER) could lead to near-term pain for smaller fund houses. According to industry experts, the revised TER structure would impact the profitability of mid- and small-sized fund houses by Rs 200-400 million.

Experts say there are still at least eight fund houses making profits of less than Rs 100 million. These fund houses could feel an immediate impact on their operations when the new structure comes into effect, they add. As things stand, as many as 11 fund houses are already making losses.

Sebi last month had announced new slabs for charging TER. Equity schemes with assets of up to Rs 5 billion could charge 2.25 per cent TER. Earlier, regulations allowed 2.5 per cent TER for the first Rs 1 billion of an equity scheme’s net assets.

The data from Value Research shows small- and mid-sized asset management companies (AMCs) have as many as 37 open-ended equity schemes with assets under management (AUM) of less than Rs 1 billion. On the basis of the earlier TER structure and AUM as of August, these schemes earned a fee of Rs 279 million. The new TER cap of 2.25 per cent could bring down this fee to Rs 233 million.  

The data also points out cases where the TER charged by the smaller AMCs for these small schemes was much higher than the regulatory ceiling of 2.5 per cent. In some cases, the TER was 35-80 basis points higher than the regulatory limit. These AMCs face a bigger hit than the others. As these fund houses have a limited basket of scheme offerings, their ability to offset the hit with profits in other schemes is also restricted.

However, industry players welcomed the changes. “The decision to move away from upfronting model to an annuity model should work in favour of smaller AMCs. The distributors will focus more on performance than just fees. Given their smaller asset sizes, the smaller AMCs should also be able to generate higher alpha. This move should level the playing field for the smaller players,” said Rajesh Iyer, chief executive officer, DHFL Pramerica Mutual Fund (MF).

Sebi wants to encourage competition in the 42-player MF industry. As things stand, seven AMCs account for more than 60 per cent of the industry’s total revenue. The profit margin of these large AMCs stands at a robust 40-50 per cent. Experts say in the near-term, the larger AMCs would be better placed to absorb the cuts than the smaller AMCs.

MFs profits
Infogram