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Investors Beware: Mutual Fund Companies Hit Hard by New Tax Law and Expense Ratio Limits

Mutual fund companies

So far in 2023, asset management companies listed on Indian stock exchanges have lost 20-32% of their value as several stricter regulatory norms affect their profit margins.

A change in the tax structure for debt funds, increased competition and stricter tax expense ratios (TER) are some of the factors affecting mutual fund companies.

Among the top mutual fund companies, Aditya Birla Sun Life AMC reported a 13% drop in net profit from last year to 136 crore from 156 crore.

While we are constructive on Aditya Birla Sun Life AMC’s strong and diversified distribution network, we believe yields will plummet faster than assets under management (AUM) growth, creating a high risk to earnings from negative operating leverage,” said HDFC Securities analysts. The brokerage house downgraded the company’s stock to ‘Add’ from ‘Buy’.

Aditya Birla Sun Life AMC shares have fallen 21% so far in 2023, making it the top loser among its peers.

A sequential 2% increase in profit was posted by HDFC Asset Management Company in the March quarter, while revenues fell 3% to $541 crore.

AUM growth and potential benefits from HDFC Bank parentage may limit the impact of the total expense ratio (TER) changes on HDFC AMC’s stock.

The Housing Development Finance Corporation (HDFC) is the parent company of HDFC AMC, which is expected to merge with HDFC Bank by July.

Analysts at JM Financial have argued that the proposed changes in the TER structure are being closely monitored, and HDFC AMCs stock has declined by around 9% over the past 3 months in response to worries about these. However, they believe that the effect will be minimal and current valuations (20x FY25 EPS) already reflect any anticipated reduction in earnings. HDFC AMC is their top pick in this market and they anticipate noteworthy rerating of the share price within a short to medium time frame due to impressive AUM growth and potential advantages coming from its parent organization, HDFC Bank.

Despite this, UTI AMC’s profit grew strongly to $86 crore in the March quarter, up from $60 crore in the previous quarter and $54 crore last quarter. Despite the flat profits of Nippon Life Asset Management, its revenue from operations declined nearly 2% to $325 crore.

The shares of all listed asset management companies have been in the red so far in 2023, underperforming the benchmark Sensex.

Retail investors’ average ticket size falls, showing signs of weakness

According to the Association of Mutual Funds in India (AMFI), even though mutual funds are popular among investors, the average ticket size of retail investors has declined nearly 3% to 68,321 in March 2023 from 70,199 in March 2022.

Mutual fund companies were most impacted by the amendment in the Finance Bill that proposed eliminating long-term capital gains tax benefits for debt investments. In accordance with the proposed changes to the Finance Bill, debt fund investors will have to pay taxes in accordance with their income slabs. Since 1 April, investors will no longer be able to calculate long-term capital gains from debt funds using indexation.

The Securities and Exchange Board of India (SEBI) is considering taking action against big fund houses that charge their clients very high expense ratios, according to reports.

According to SEBI’s rules, mutual funds can charge a total expense ratio (TER) of up to 2.25%, if their AUM reaches 500 crores. But the regulator may now reduce this fee.

To protect investor interest, the regulator is looking to bring a uniform expense ratio for mutual fund schemes, since distributors earn more commission by selling new funds.

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I'm Shruti Mishra, Editorial Director @Newsblare Media, growing up in the bustling city of New Delhi, I was always fascinated by the power of words. This love for words and storytelling led me to pursue a career in journalism. In this position, I oversee the editorial team and plan out content strategies for our digital news platform. I am constantly seeking new ways to engage readers with thought-provoking and impactful stories.

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