Tax hit on debt funds, regulatory overhang rattle AMC shares
2 min read 27 Mar 2023, 10:09 PM ISTAdding to the woes, on Friday, in an amendment to the Finance Bill, the government removed the taxation benefits on long-term debt mutual funds from 1 April.
PremiumShares of asset management companies (AMCs) have been under pressure for some time now. A key overhang in the past few months has been the anticipated regulatory changes that could result in lower total expense ratios (TERs). Adding to the woes, on Friday, in an amendment to the Finance Bill, the government removed the taxation benefits on long-term debt mutual funds from 1 April. With the recent amendment, long-term capital gains on debt mutual funds, which were earlier taxed at 20% with indexation benefit, and 10% without indexation benefit, will now be taxed at normal slab rates.
This is incrementally negative development for AMCs, although the impact isn’t expected to be high. “Industry debt assets under management or AUM (ex-liquid) at ₹6.5 trillion forms 16.5% of the AUM mix; however, only 9.6% falls in the medium to long-term category," HDFC Securities said in a report.
Even so, following the change in tax rates, investors could see some transition of money from debt mutual funds to other products such as bank fixed deposits. “We expect this move to be marginally dilutive on AMCs earnings with debt mutual funds contributing 5-25% of revenues for the listed AMCs," said Krishnan ASV, lead analyst-BFSI, HDFC Securities. “In the near-term, the last week of the March quarter (Q4FY23) could see strong inflows in debt mutual funds before new tax changes kick in from April," he added. But investors seem to be cautious. On Monday, shares of Aditya Birla Sun Life AMC Ltd and Nippon Life India Asset Management Ltd dropped to new 52-week lows on NSE. The AMC industry has had a rough time in the past year owing to intense competition and macroeconomic challenges that weighed on the stocks. In the past one year, shares of AMCs, including HDFC Asset Management Co. Ltd and UTI Asset Management Co. Ltd have fallen in the range of 22-42%. Gaurav Jani, research analyst at Prabhudas Lilladher, said, “The performance of AMCs is driven largely by equity markets, which have been weak in past few months owing to global challenges. This is one reason that has weighed on sentiments for AMCs stocks as equity segment accounts for a large share of revenue of these companies."
As such, any regulatory changes on TERs necessitates closer tracking for the AMC stocks. “Amid stiff competition, FY24 appears challenging. With the new tax changes, the relative attractiveness of debt mutual funds vis-à-vis bank fixed deposits has reduced," points out Krishnan.
