Sebi's Mutual Fund Fee Revamp Threatens AMC Profits by 10%

According to a recent report by international brokerage firm Jefferies, the Securities and Exchange Board of India's (Sebi) new consultation paper proposing sweeping changes to mutual fund fee structures could significantly impact the profitability of top asset management companies (AMCs).

Jefferies estimates that the proposed cuts to exit load charges, brokerage fees, and total expense ratios (TER) could collectively dent the earnings of leading AMCs such as HDFC AMC and Nippon Life India AMC by as much as 8-10% from FY27, if implemented as drafted.

One of the key proposals is the removal of the additional 5 basis points (bps) charge that mutual funds can currently levy on schemes with exit loads. Jefferies believes this change alone could directly hit AMC earnings by 8-10%. The brokerage notes that while mutual funds may seek a "balancing act" to offset the impact, a significant portion of the cut may have to be absorbed by the AMCs.

Sebi has also proposed slashing the ceiling on brokerage and transaction charges from 12 bps to 2 bps for cash market trades and from 5 bps to 1 bp for derivatives. This move aims to align equity schemes with arbitrage funds, which typically pay lower brokerage fees. Jefferies warns this could hurt institutional brokers and, to a lesser extent, the AMCs themselves.

Meanwhile, Sebi's plan to reduce TER by roughly 15 bps while allowing statutory levies such as GST and STT to be charged separately may prove neutral for the industry, according to Jefferies. The brokerage notes this would allow funds to pass on future changes in statutory costs directly to investors.

Overall, Jefferies expects the mutual fund industry to lobby Sebi for a "balancing act" before the November 17 feedback deadline, as the proposed changes, while investor-friendly, could substantially compress margins across the AMC ecosystem.