The new proposed changes in the total expense ratio (TER) for mutual funds is set to pose a major challenge for smaller fund houses in attracting investment and may lead to consolidation at the bottom half of the industry.
As envisaged by market regulator SEBI, the higher TER for fund houses with lower asset under management (AUM) will help them compete in the market, but investors would always prefer MFs with lower TER.
The recent consultation paper of the market regulator plans to shift the TER levied on individual scheme to the overall AUM of mutual funds.
Under the new proposal, the TER for AUM up to ₹2,500 crore has been fixed at 2.55 per cent, while it falls to 2.45 per cent and 2.30 per cent for the next ₹2,500 crore and ₹5,000 crore of AUM.
On the next ₹40,000 crore to ₹50,000 crore of the daily net assets, the TER reduces 0.05 per cent for every increase of ₹5,000 crore of daily net assets or part thereof of the AUM of equity and equity-related instruments.
On the next ₹50,000 crore to ₹1-lakh crore of the daily net assets, the TER is cut by 0.10 per cent for every increase of ₹10,000 crore of daily net assets or part thereof of the AUM of equity and equity-related instruments.
On the balance of the assets, a TER of 1.30 per cent will be charged. Though the highest TER slab will increase to 2.55 per cent from the current 2.25 per cent, it will include all costs and expenses, including GST on management fees, brokerage and transaction costs and B-30 incentive.
Jimmy Patel, Managing Director, Quantum Asset Management Company, said that though SEBI has allowed higher TER for fund houses with lower AUM, investors would still prefer to invest in funds that offer lower TER and this will indirectly benefit larger fund houses.
As it is, the operational cost of smaller fund houses are much higher compared to bigger ones which have the benefit of scale and have better understanding with distributors due to bigger business they provide, he said.
Currently, the mutual fund industry with 42 entities is largely skewed to the top-10 players ruling the market. The top-10 fund houses account for 80 per cent or ₹32.38-lakh crore of the overall AUM of ₹40.51-lakh crore as of March-end.
Even among the top-10 players, 69 per cent of the asset is held by top-5 AMCs, led by SBI Mutual Fund and ICICI Prudential MF.