Shares of Asset Management Companies (AMCs) were on a roll on Friday’s intraday trades after the Securities and Exchange Board of India (SEBI) announced a decision. HDFC AMC shot up 14.63 percent, Nippon India Life AMC clocked an impressive 16.50 percent gain and Aditya Birla Sun Life AMC clocked 8.85 percent gains to reach their respective intraday highs.
According to stock market experts, in a recent board meeting, the SEBI deferred the proposal of a reduction in expense ratio, sparking a buying interest in AMC stocks. Investors expect that the market regulator’s meeting outcome would enable AMCs to maintain stability in their profits in the near term.
The expense ratio is one of the major sources of income for mutual funds. It is the percentage that denotes the amount of money a mutual fund investor pays to an AMC, as a fee to manage their investments. Mutual funds are permitted to charge certain operating expenses like sales & marketing/advertising expenses, administrative expenses, transaction costs, investment management fees, registrar fees, custodian fees, audit fees and so on, for managing a mutual funds scheme. All such costs are collectively referred to as the Total Expense Ratio (TER).
Earlier, the SEBI had proposed that TER should be imposed based on the scheme’s performance. Further, it was proposed to remove the 5 basis points (bps) charge on those schemes where there is a provision for exit load. Experts estimated that there would be a reduction in TER anywhere between 3 to 40 bps, leading to a decline in the profitability of AMCs by as much as 13 percent.
If the TER increases, the income of AMCs increases and vice versa. Therefore, if the proposal of reducing the expense ratio would have been approved, the profitability of AMCs would take a hit. However, deferring this proposal means that the profitability of the AMCs won’t go down in the near term, which is good for their balance sheet. This proposal might be considered in SEBI’s subsequent meetings.
SEBI brought up a new consultation paper to put a cap on the fees charged by mutual funds. A new discussion paper on expense ratio will be out soon and the regulator hopes that it will be welcomed by the industry. This paper will be formed on the basis of new data, as per reports.
Written by Simran Bafna
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