HDFC AMC, Reliance Nippon Plunges with Mutual Fund Expense Ratio Cut

The recent cut in Mutual Fund Total expense Ratio has rattled the revenue projections of AMCs with HDFC AMC, Reliance Nippon being the worst losers in the day’ trade with 7 to 8% fall in share prices.

HDFC AMC had garnered substantial interest over its listing since August, 2018 and had listed at a price of Rs 1,100. In the overall segment, the prices of AMC companies have tanked up to 10.3%. Reliance Capital Ltd. Also fell by 24.4%.

The reason for this drastic fall has been the announcement by financial regulator, Securities and Exchange Board of India (SEBI) to bring significant changes to the Total Expense Ratio (TER) structure in the benefit of the retail customers. It has decide to limit the total expense for investment in open ended equity  mutual funds to 2.25%, for closed ended equity schemes to 1.25% and other equity expense to 1%. It has shown a direction of adopting full-trail model of commission for the industry. Total Expense Ratio is the amount a fund house deducts from an investor’s capital for the annual management of salaries and administrative expenses.

The idea is to promote longer duration investment in mutual funds. For this the fund houses will have to attract the investors with an aim of goal-fulfillment and create a demand like in financial planning. The purpose is to reduce the incentive in push sales to generate commissions. Trail commissions are in essence financial planning annual charges for varied advice and investment in different products. This will open a gamut of universe for financial planners who were being upstaged by commission based agents. The ease of investment has already been existing and the idea of making the client understand investment products per his needs is the need of the hour.

This has brought revenue estimate revisions by analysts and companies on their future projections. Brokerage firm Morgan Stanley has cut its equity gross revenue prediction by 0.2% and they aim to save 0.06% in the overall cut from the fees paid to distributors. HDFC AMC’s target price has been cut from Rs 1,765 to Rs 2,050 per share by analysts of the brokerage house.

Reliance Nippon has been downgraded by Nomura Research from a “BUY” recommendation to a “NEUTRAL” with a decrease in the price target from Rs 315 per share to Rs 210 per share.

Mutual Fund Investors 

The cut has certainly brought a smile to the small investor’s face. The power of total expense ratio was certainly a thorn in the roses of compounding returns when invested over a period of time. This thorn has been chopped off. On a capital of Rs 1 lakh an expense ratio of 1.5% would eat up nearly 14% of your returns over a 10 year period. As most analysts feel, any move in the interest of investor is always a positive direction for the industry, even if they lose in the short run.