The wording of the proposed regulation on TER applicable forswitches is very loose. Even if we get an explicit clarification that STPs areexempt, it still can create huge challenges for MFDs who rebalance clientportfolios periodically as part of asset allocation monitoring. Each time yourebalance by a switch from debt to equity, the MFD’s commission will be basedon debt TERs while the AMC will get equity TER benefit. While SEBI is acting tocurb churn, an unintended consequence is to disincentivize portfoliorebalancing.
Definition of churn must be limited within an asset class.Moving across asset classes is asset allocation, not churn. If churn is indeedlimited within an asset class, the proposed uniform TER at asset class levelwill anyway take away the arbitrage opportunity across schemes and thereforechurn. So why then do we need a separate anti-churn regulation for switches?
All-inclusive TER which includes trxn execution costs (stockbroking) can act as a hurdle for nimble fund managers who are aligned with thenew realities of shorter and sharper market cycles and sector rotation as theirnimble strategy driven transaction costs can have a direct P&L impact ontheir AMCs. Some of the best performing funds are very nimble – will they nowbecome more circumspect as they start evaluating cost-benefit of every trade?
Since hybrid funds’ TERs will now depend on level of equityexposure, will fund houses want to tweak their BAF models to allocate higher toequity in a bid to claim higher TER? Are we likely to see hybrids become morerisky in an effort to protect margins?
While most the principles expressed by SEBI in its consultative paper are undisputable, the one aspect worth reconsidering is wading into the territory of how much profit is enough for AMCs. This is an operating leverage driven business – higher the scale, higher the profitability. To suggest that AMC profits have grown too rapidly and that they must therefore part with some of that to their investors is perhaps looking at the issue from the wrong end. The question to be asked is are Indian mutual fund investors paying too high a cost – vs other financial products in India and vs mutual fund investors in other countries. If answers to both are negative, is the product really so costly that you must cut operating leverage in the industry?