Mutual fund company stocks bleed this year, thanks to tax hit on debt funds and strict expense ratio norms

• The pain in the mutual fund companies’ finances is reflected in the latest corporate earnings of some mutual fund companies.
• Among the top mutual fund companies Aditya Birla Sun Life AMC reported a 13% on- year decline in net profit to ₹136 crore from ₹156 crore last year.
• For HDFC AMC, on a sequential basis, its profit rose by a marginal 2% to ₹376 crore in March quarter from ₹369 crore in the previous quarter.
• Government’s changes in debt funds tax structure, rising competition and stricter norms on tax expense ratios (TER) are some triggers that have impacted the mutual fund companies.
• As a result, shares of all the listed asset management companies have been in the red so far in 2023 underperforming the broader market.

The year 2023 has not been kind to asset management companies listed on Indian stock exchanges. They have been battered 20-32% so far this year as several stricter regulatory norms hit their profit avenues.

Government’s changes in debt funds tax structure, rising competition and stricter norms on tax expense ratios (TER) are some triggers that have impacted the mutual fund companies.

The pain is visible in the latest corporate earnings of some mutual fund companies. Among the top mutual fund companies Aditya Birla Sun Life AMC reported a 13% on-year decline in net profit to ₹136 crore from ₹156 crore last year.

“While we are constructive on Aditya Birla Sun Life AMC’s strong and diversified distribution network, given rising competitive intensity, we believe yields will plummet faster than assets under management (AUM) growth, posing a high risk to earnings from negative operating leverage,” said analysts at HDFC Securities. The brokerage house downgraded the rating on the company’s stock to ‘Add’ from ‘Buy’.

As a result, shares of Aditya Birla Sun Life AMC have been the top loser among its peers, slipping 21% in 2023 so far.

Rival HDFC Asset Management Company posted a sequential 2% rise in profit to ₹376 crore in the March quarter while its revenue fell 3% to ₹541 crore.

However, in the case of HDFC AMC, analysts feel that the impact of the total expense ratio (TER) changes on the company’s stock may be limited due to strong AUM growth and potential benefits from its HDFC Bank parentage.

Housing Development Finance Corporation (HDFC) is the parent company of HDFC AMC that is expected to complete its merger with HDFC Bank by July this year as per reports.

“While we remain watchful of the proposed changes in the TER structure and HDFC AMC’s stock has corrected by c.9% over the last 3 months on fears regarding the changes, we expect the impact to be limited and current valuations (20x FY25 EPS) adequately factor in the expected cut in earnings. HDFC AMC is our top pick in the space and the stock can see a meaningful rerating in the near to medium term driven by robust AUM growth and potential benefits from HDFC Bank parentage,” said analysts at JM Financial.

On the other hand, UTI AMC’s profit grew strongly to ₹86 crore in March quarter from ₹60 crore in the previous quarter and ₹54 crore during the same period last year. However, Nippon Life Asset Management’s profits were flat sequentially at ₹198.96 crore while revenue from operations fell nearly 2% at ₹325 crore.

As a result, shares of all the listed asset management companies have been in the red so far in 2023 underperforming the market. The benchmark Sensex is up almost 1% so far this year.

Asset management companies	Share price gains/losses in last 5 days	Share price gains/losses YTD
Aditya Birla Sun Life AMC	5%	-21%
UTI AMC	0.34%	-23%
Nippon Life India AMC	0.02%	-5%
HDFC AMC	0.50%	-17%

Source: NSE

Fall in average ticket size of retail investors show signs of weakness
While mutual funds are popular among investors, the average ticket size of retail investors has dropped nearly 3% to ₹68,321 in March 2023 from ₹70,199 last year, according to data from the Association of Mutual Funds in India (AMFI).

The amendment in the Finance Bill that proposed to do away with long-term capital gains tax benefits on debt investments was the latest trigger that impacted the mutual fund companies. As per the proposed changes in the Finance Bill, investors in debt funds will have to pay tax according to their income slabs. Investors had so far benefited from indexation while calculating long-term capital gains from debt funds but this will now longer be available effective 1 April.

Adding to it, as per reports, the Securities and Exchange Board of India (SEBI) is considering taking action against big fund houses that charge very high expense ratios from their customers.

Currently as per SEBI’s rules, mutual funds can charge a total expense ratio (TER) of up to 2.25%, if the AUM reaches ₹500 crore. However, the regulator might now reduce this expense amount to benefit investors.

Also, since distributors earn more commission by selling new funds, there are cases of mis-selling. Hence to protect investor interest, the regulator is looking to bring a uniform expense ratio for mutual fund schemes.

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