HDFC AMC, Nippon Life, Aditya Birla Sun Life: Why did AMC stocks shoot up today?

Sebi board meet mutual funds TER: Shares of asset management companies (AMCs) zoomed on Friday after the capital market regulator, the Securities and Exchange Board of India (SEBI), deferred the decision to overhaul the total expense ratio (TER) for mutual funds in its latest board meeting held on June 28. Among individual stocks, HDFC Asset Management Company jumped as much as 12 per cent to Rs 2,295.50 on the BSE while Nippon Life leapt 19 per cent to Rs 301.25 on the BSE. Aditya Birla Sun Life AMC was up over 6 per cent at Rs 401.25 on the BSE and UTI Asset Management Company's stock skyrocketed 10 per cent to Rs 800 on the BSE.

SEBI BOARD MEETING OUTCOME

The Sebi board, including chairperson Madhabi Puri Buch, discussed total expense ratio (TER) in mutual funds, and now a new discussion paper on TER will be out soon, the regulator informed the media. It further said that it hopes the new paper will be welcomed by the industry. It further said that the new discussion paper would be formed on the basis of new data, Zee Business reported. 
 
Why was a consultation paper brought up?

The consultation paper was brought up by the Sebi to put a cap on fees for mutual funds.

What is the total expense ratio (TER) of mutual funds? 

The TER is the cost of managing a fund that is expressed per unit. It is the percentage that denotes the amount of money one pays to the AMCs as a fee to manage their investments. According to the Association of Mutual Funds in India (AMFI), under the SEBI (Mutual Funds) Regulations, 1996, Mutual Funds are permitted to charge certain operating expenses for managing a mutual funds scheme – such as sales & marketing/advertising expenses, administrative expenses, transaction costs, investment management fees, registrar fees, custodian fees, and audit fees—as a percentage of the fund’s daily net assets.

All such costs for running and managing a mutual fund scheme are collectively referred to as the ‘Total Expense Ratio’ (TER).

What were the proposals?

The proposals were to include brokerage fees, GST, and other expenses in TER. Further, it was proposed to remove the 5 basis points (bps) charge on those schemes where there is a provision for exit load. The regulator also proposed that TER be imposed on the scheme's performance. It was estimated that due to the change in rules, there would be a reduction in TER between 3 and 40 bps. Additionally, it was estimated that SEBI's rule would impact AMCs' profitability by as much as 13 per cent. 

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As per AMFI, the average assets under management (AAUM) of the Indian Mutual Fund Industry for May 2023 stood at Rs 42,94,788 crore. Assets Under Management (AUM) of the Indian Mutual Fund Industry as on May 31, 2023, stood at Rs 43,20,468 crore. The AUM of the Indian MF Industry has grown from Rs 8.68 trillion as on May 31, 2013, to Rs 43.20 trillion as on May 31, 2023, around a five-fold increase in a span of 10 years. 

The total number of accounts (or folios as per mutual fund parlance) as on May 31, 2023, stood at 14.74 crore (147.4 million), while the number of folios under Equity, Hybrid and Solution Oriented Schemes, wherein the maximum investment is from retail segment stood at about 11.76 crore (117.6 million), AMFI added.

Brokerages' view

Listed Indian AMCs have faced a raft of regulatory and market forces in recent years that have put pressure on earnings growth. As a result, valuations have seen a derating despite record equity flows and market levels. "While initiating coverage on the sector in early December, we took the view that prevailing mutual fund regulations in India are much more balanced and well-aligned across the value chain and can spur market expansion in the next decade. While the fresh regulatory scrutiny by the SEBI (notified end December 2022) led to the derating of stocks in the last six months, we are now possibly heading towards closure on this issue," said Kotak Institutional Equities in its latest report.

Meanwhile, AMC stocks are down 10–20 per cent from last year's peak levels (versus Nifty 50, up 3-4 per cent), whereas equity AUM is up nearly 10 per cent in the last six months. "We reversed a part of the equity yield cuts that we had pre-emptively built into the numbers, leading to an upgrade to earnings and FVs," the brokerage added.

Morgan Stanley has maintained an "equalweight" rating on the HDFC AMC with a target price of Rs 1,840.