AMCs will have to put in more concentrated efforts to earn the additional TER
AMCs may have to work harder to enjoy the benefit of additional 30 basis points TER. Going by the additional clause in the latest SEBI circular, for AMCs to qualify to charge 30 basis additional TER, it seems that many players would only be able to enjoy 15 to 20 basis points additional TER. Earlier, many had assumed that AMCs would be able to charge a full 30 basis if the inflows from towns beyond the top 15 were 30% of the total inflows.
Take a closer look at the new clause and how it would be calculated:
Additional TER can be charged up to 30 basis points on daily net assets of the scheme if the new inflows from beyond top 15 cities are at least (a) 30% of gross new inflows in the scheme or (b) 15% of the average assets under management (year to date) of the scheme, whichever is higher.
In case inflows from beyond top 15 cities is less than the higher of (a) or (b) above, additional TER on daily net assets of the scheme shall be charged as follows:
Daily net assets X 30 basis points X New inflows from beyond top 15 cities / 365 X Higher of (a) or (b) above
An operations head of a leading fund house says that enjoying 30 basis could be a challenge. “Based on the current sales trends, I don’t think any fund house will be able to enjoy the benefit of full 30 basis points additional TER. It will be anywhere between 15 basis to 20 basis points,” said this operations head.
“Take for instance a scheme with Rs 10,000 crore corpus which clocks up gross sales of Rs 3000 crore. As per the earlier assumption this scheme would have charged 30 basis extra if it would have collected Rs 900 crore (30% of Rs 3,000 crore is Rs 900 crore) from beyond the top 15 cities. Now, the same scheme has to ensure that sales from the cities beyond top 15 is greater than 15% of the AAUM in order to enjoy 30 basis extra,” explains the above quoted official.
AMCs already having a presence in smaller towns through a banking channel or on their own could find it easier to raise their share from the cities beyond the top 15. “It all depends now on the AMC’s ability to reach out and spread awareness. Those who already have a base in small towns may be able to build their business. Others could have a challenge,” says a sales head of a large fund house.
Some laud SEBI’s formulae to charge additional TER and say that the ball is now in the AMC’s court to cash in on the new opportunity. “SEBI has balanced the benefit of 30 basis with the right amount of rigour. There is a huge incentive but it’s going to come with a lot of challenges. If we spend one rupee to become eligible for 30 basis, we’ll actually earn six rupees. It’s a win-win for AMCs and IFAs. AMCs will get more customers and in turn revenue. The distributors from smaller towns will get more attention. The incentive is good but AMCs will have to do more focused work,” says an industry expert.
Industry watchers believe that no fungibility may not shore up the balance sheets of AMCs as they would not be able to charge additional management fee from the extra 30 basis points. “No fungibility would mean that the additional TER collected would get spent on distribution in whatever manner – whether overall higher or higher in beyond 15 towns. If there was fungibility AMCs could be tempted to take higher management fees instead,” add the above quoted official.
SEBI’s new clause poses a challenge for the industry to incur upfront costs to attract small town investors. “It will be easier for large AMCs as they have the geographical reach. It will be difficult for smaller fund houses to mobilise inflows from small towns. Additional TER minus fungiblity doesn’t make so much of sense,” says a CEO of a small fund house.
It is believed that additional TER will be only applicable to equity funds. AMCs will have to claw back if investors from small towns redeem their investments before one year.
