Do you see a big impact on the profitability of AMCs because of this? That is something which everybody wants to know.
I think that if you look at the listed space, they are mostly the larger AMCs and as you are aware, this is a high operating leverage business. Fixed costs are very, very high. So to that extent that cost-conscious investors would naturally migrate to larger AMCs, I see that from an investor side effect, larger AMCs will get more volume of business. Now, on the commercial aspect of the reduction in the TER, how much they take the hit and how much they pass on to the distributors, again, larger distributors would push back and there would be an arrangement but it is the smaller mutual fund distributors who would take the biggest hit. So I think the impact on the listed players would be minimized to the extent that they will benefit from larger flows, I would say, because their costs would be much lower compared to a smaller AMC.
So within the industry, I expect this move to help the larger players. So from a listed player perspective, I guess these are all larger players. So I think that the pass-on ability of the larger AMCs should be able to protect their margins falling. It is not as if there will be zero impact, there will be some impact but I think that they will be able to cushion a large part by passing on to the mass distribution. So I think that this move, like I said, it should help the larger AMCs get a larger share of investor-oriented direct business.
The debt mutual fund is where the TER, according to what SEBI is proposing, should come below 2%. But can I say that it is already below 2% for big AMCs so in totality, the impact is not going to be large?
You are absolutely right. Not only that, if you look at the debt side, institutions still play a big part and institutions have driven down expense ratios on debt mutual funds quite some time back so very few debt schemes were operating at the high level.
In fact, if you take another aspect, there is a direct impact on investor returns because you are talking about, wherever you have indicated yields, you know at what rate you are lending to the corporate, you know what the margin is going to be.
So institutional investors are very acutely aware of their returns. So already liquid schemes are at about 10 basis points, short-term duration schemes are at about 25 to 30 basis points and medium duration funds, I would say, whichever the larger players are there, they are all operating around the 1%.
So the debt mutual fund impact is actually very limited. A few small schemes may be charging very high from the smaller AMCs, but overall for the industry, while on the headline, it looks like a huge drop for the debt, the actual TER impact on debt will be marginal because anyway the cost-savvy institutional investors were driving the TERs down already. So I do not expect that to have significant impact.
