AMCs confident in passing on additional impact due to TER rule tweaks: Kotak Institutional

Sebi has said it will take some time for any outcome from these discussions and to frame rules. However, most believe most of these proposals will be accepted and turned into rules.

Even as the Sebi’s recent proposals on making Total Expense Ratio (TER) or mutual funds more transparent has raised concerns on profitability of asset management companies (AMC), companies themselves believe that they will be able to pass on the increasing cost.

Abhijeet Sakhare, an analyst with Kotak Institutional Equities, said the recent interactions with AMCs and distributors reflect high confidence from AMCs to pass on a very large share of TER hit and impact on distributors to be shared with sub-brokers with greater push for other products (insurance and credit).

TER is the commission that a mutual fund company charges from investors. The market regulator has proposed to make TER all inclusive with taxes, transaction and brokerage costs, etc. being added to this.

ALSO READ: Six charts that influenced SEBI’s mutual fund total expense ratio proposals

The proposals also suggest mutual fund companies to set up their own broking divisions to minimise costs. They also propose asset wise TER cap rather than scheme wise TER cap that is applicable presently.

“With the regulatory overhang addressed, a high (75-100 percent) pass-through of the impact could present upside possibilities for AMC stocks,” Sakhare said.

Also read: SEBI bringing in Mutual Fund Light regulation to foster passive fund growth: Ananta Barua

However, Sakhare added that the proposals are in discussion phase and the contours of outcome may be different. Sebi has said it will take some time for any outcome from these discussions and to frame rules. However, most believe most of these proposals will be accepted and turned into rules.

The impact, when passed through by AMCs, will be borne by intermediaries such as distributors, brokers and Registrar and Transfer agents (RTAs), and in some cases through better control and calibration of portfolio churn.

In the medium to long-term, the new regulations could help deliver better alpha versus passives, which will get slightly more expensive, Sakhare pointed out.

Also read: It's a long process, will take time: Ananta Barua on SEBI’s mutual fund TER proposals

In 2019 as well, when existing regulations regarding TER came into force, AMCs were able to pass on a major share – about 75-90 percent – of the impact, largely to the distributors. A repeat is on the cards, according to Kotak.

Kotak highlighted that due to this reason, mutual fund distributors will likely see greater changes in the medium term. It added that due to this, we are unlikely to see similar new fund offer (NFO) activity as in FY21-22 that led to higher commission payouts.