Decline in AUM to make equity MFs costlier, dent investor returns

An increase in TER could further dent investor returns, which have fallen significantly over the last month.

The total expense ratio (TER) of equity mutual fund (MF) schemes may rise following a steep drop in their assets under management (AUM) in the past two months. This could further dent investor returns, which have fallen significantly because of the market crash last month.

The AUM of equity schemes have declined 27 per cent to Rs 5.8 trillion at the end of March, from Rs 7.9 trillion two months ago. In the same period, the number of equity schemes that managed between Rs 10,000-50,000 crore has reduced to 14 from 21. Similarly, the number of schemes that fell in the range of Rs 5,000crore and Rs 10,000 crore has dropped to 23 from 35, the data from Value Research shows. This assumes significance as the TER for these schemes will have to be realigned

“The TER is a function of the size of the fund. Size changes with inflows and the net asset value (NAV) growth. So when the AUM grows the cost comes down. Similarly, if the AUM comes down, the TER would change as per slab,” said Swarup Mohanty, chief executive officer, Mirae Asset MF.

The TER is an annual charge deducted from the NAV daily. It includes fund management charges, marketing and distribution costs, and registrar and transfer agent (R&T) expenses, among others. Expenses for direct plans are typically lower as there are no commissions paid to the distributor.

The TER is calculated on a slab-based formula, and had seen a downward revision last year across equity and non-equity categories following a regulatory diktat.

“It is likely that TER might go up a bit to the extent the regulations permit. Moreover, the decline in the AUM has put pressure on the margins of fund houses and may necessitate an increase in expense ratios to the extent possible,” said Amol Joshi, a distributor.

Fund houses have to disclose the TER of their schemes daily. Investors need to be informed via email or SMS at least three working days before any changes in the TER are effected.

Why India's asset managers are trouncing their global peers this year

Industry bulls say domestic asset managers' profits are growing as they expand. That's in contrast with many global peers.

Market News : Indian asset managers’ shares are trouncing global peers this year as domestic money managers benefit from the tectonic shift in savings from gold and real estate to stocks and bonds.

Reliance Nippon Life Asset Management Ltd. and HDFC Asset Management Co., whose shares have more than doubled in 2019, are the third- and fourth-best performers among 36 peers with a market value of at least $2 billion, data compiled by Bloomberg show.

Retail investors piled into mutual funds after the government ban on high-value currency bills in 2016 hurt returns from gold and property. While total assets have more than tripled to $382 billion in the past five years, only 1.5% of Indians own funds, suggesting a long runway for growth. And passive investing that’s decimated fees for U.S. managers is still to take hold in India.

“Mutual funds have become an asset class of choice with policy makers pushing for the formalization of savings,” Sundeep Sikka, chief executive officer of Reliance Nippon, said in an interview. The decline in deposit rates has also made funds more popular than other financial products, he said.

The parabolic surge in Reliance Nippon and HDFC Asset is also down to the fact that the duo is India’s only listed fund houses. The shortage could ease after UTI Asset Management Co. goes public next year.

To be sure, the two stocks have come off their peaks in recent days as above-average valuations deterred buyers. Problem is, they’re still expensive relative to history and trade at prices slightly above their 12-month targets, data compiled by Bloomberg show.

That’s as inflows to equity funds, the most profitable category for asset mangers, shrank to the lowest in over three years in November even as the main indexes hit new highs. The S&P BSE Sensex held at a record on Wednesday, and is set for the biggest annual gain since 2017.

“We are watching to see whether the slowdown continues for the next few months,” said Sikka. “If the manager has scale and sticky investors, this can be ridden out like in the previous cycles.”

Industry bulls say domestic asset managers’ profits are growing as they expand. That’s in contrast with many global peers, many of whom could become “zombie firms” unable to attract new flows, according to PGIM chief executive officer David Hunt.

IL&FS mess: India's shadow banks run out of options, sell bonds to public

Mutual funds and institutional investors are still wary of lending to non-bank financiers, and tighter market liquidity has weighed on company ratings, which deteriorated at the fastest pace in 6 yrs.

Faced with high borrowing costs and a sustained shortage of liquidity in India’s money markets, shadow banks are increasingly pitching bonds with high coupon rates to the public, who may not be aware of the risks they’re taking on.

Still roiling from the shock of defaults at Infrastructure Leasing & Financial Services Ltd., non-bank financing companies are exploring this relatively expensive funding channel. Mutual funds and institutional investors are still wary of lending to non-bank financiers, and tighter market liquidity has weighed on company ratings, which have deteriorated at the fastest pace in six years.

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Individual investors in other markets have gotten burned. In Singapore, about 34,000 buyers of Hyflux Ltd.’s debt stand to lose almost everything with the fate of the water and power company in the balance. In the Indian market, a lot of companies are selling public bonds with the purpose of building a retail base, said Ashish Agarwal, executive director at A. K. Capital Services.

“The risks of these segments are obviously there and one must be mindful while taking investment calls,” said Karthik Srinivasan, group head of financial sector ratings at ICRA Ltd., the local unit of Moody’s Investors Service. Retail investors may have been swayed by the potential returns on offer and haven’t totally taken into consideration the risks involved, he said.

Public corporate bond issuance by NBFCs increased to 337 billion rupees ($4.87 billion) in the April-to-January period, the highest for a fiscal year in at least a decade, data from the securities regulator show. Volumes stand to increase for the year ended March as final amounts raised from deals by three more shadow banks, including L&T Finance Holdings Ltd. and Indiabulls Consumer Finance Ltd., are incorporated.

Five non-bank lenders, including L&T Finance again and Shriram City Union Finance Ltd., have come to the market so far in April. About 80 percent of L&T Finance’s base offering of 5 billion rupees has been reserved for individual investors, according to the stock exchange.

Retail investors typically don’t understand factors such as shadow banks’ liquidity and the sectors they’re exposed to in their loan book, said Rajat Bahl, chief analytical officer at Brickwork Ratings Ltd.

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