Share of high-fee yielding equity slips in MF industry's asset mix

While price-led erosion will have an impact on the asset base, the slowdown in equity flows will also weigh on industry’s ability to expand the asset size
The hit on the equity markets is likely to translate into lower revenues for the Rs 24-trillion MF industry, with the share of higher-fee generating equity assets shrinking to 37 per cent as of March 31 this year, as against 43 per cent a year ago.

“The fees charged on equity assets are usually higher than those charged on debt assets. With the share of equity shrinking in the overall pie, industry players will see their revenues come under pressure,” said a senior executive of a fund house.

In 2018, the Securities and Exchange Board of India (Sebi) had tweaked the total expense ratio (TER) structures so that as schemes gain scale and size, TERs come off, and vice-versa.

While the cut in assets will allow MFs to charge higher TERs, overall revenues are likely to be hit.
“In the current context, as equity AUM (assets under management) have dipped materially, TERs on some funds have increased marginally. (But) trail commissions on AUM are fixed irrespective of the TER charged. Hence, yields may improve marginally, but the absolute revenue will fall, led by a dip in AUM,” Axis Capital said in a client note.


Besides tweaking the asset slabs, Sebi had reduced the cap on equity TERs to 2.25 per cent, from 2.5 per cent.

Meanwhile, fund houses seeing significant outflows from their debt schemes face a double-whammy. 

“Some fund houses have lost a significant market share in debt-oriented schemes, with investors avoiding such schemes because of a higher level of credit risks sitting in their portfolios,” said a fund manager.

“For these fund houses, both debt and equity businesses are likely to yield muted revenue growth in the new financial year,” he added.
While the price-led erosion will have an impact on the asset base, the slowdown in equity flows will weigh on the industry’s ability to expand the asset size. 

“Investor sentiment has been weak, given the volatility in the markets. Further, the Covid-19-induced lockdown has taken a toll on investors’ cash flows, hurting their investing capacity. As a result, investors have become cautious and are sitting on the sidelines,” said Srikanth Matrubai, chief executive officer of SriKavi Wealth.

After showing resilience in March, equity flows saw a sharp slowdown in April, falling 47 per cent. Equity schemes garnered Rs 6,212 crore, as against Rs 11,722 crore in the previous month.

After a recovery in April, the equity markets have returned their downward trajectory. 

So far, the benchmark Nifty is down over 10 per cent in May, after recouping 14.68 per cent last month.

On Monday, the Nifty cracked 3.4 per cent, as the details of the Rs 20-trillion stimulus package announced by the government did not cut ice with the markets. Concerns over recessionary pressures on India's economy and the US-China trade tensions added to the risk-off sentiment. 

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