A Citi India says a key takeaway based on its meeting with HDFC AMC is that the fund house expects that TER rationalization would have moderate impact on most of its equity schemes and minimal impact on its debt funds.
Overall, the blended TER reduction due to the new SEBI norms would be 0.24% on equity funds, which the fund house is likely to pass on to distributors to a large extent. The fund house is likely to absorb up to 0.10% on one of its largest scheme, HDFC Balanced Advantage Fund having AUM of Rs.38,500 crore as the TER impact in this scheme would be 0.35%.
However, the good news for distributors is that the fund house is likely to absorb some cost impact on the incremental inflows. “For new inflows that come in, HDFC MF will have to absorb some cost impact. The extent (whether it is 50:50 or 60:40) will be determined in due course based on how the competition pans out,” said the Citi report.
Also, there will be minimal impact of TER rationalisation on debt funds, expects the fund house.
Here are other key takeaways of the Citi report based on its meeting with HDFC AMC
- Ban on upfront commission will improve the working capital of the fund house
- Further, if SEBI put a cap on promotional expenses, the fund house would be able to reduce its spending on marketing activities.
- Abolition of upfront commissions and the move to a complete trail model should improve the quality of flows, lead to lower churn among investors and benefit the larger fund houses.
Last week, research reports from brokerage houses on the impact of rationalization of TER suggest that AMCs would pass on the impact of TER cut to their distributors. While CLSA says that AMCs would pass on majority of this reduction to distributors, Citi report on AMCs said that fund houses could cushion lower TER impact by passing it to distributors and by lowering their promotional expenses.
Also, a few AMCs to whom Cafemutual spoke to signalled that they will have to pass on this reduction to distributors to sustain this business.
