scorecardresearchWill arbitrage fund houses escape the brunt of SEBI’s proposals on AMCS’

Will arbitrage fund houses escape the brunt of SEBI’s proposals on AMCS’ expenses?

Updated: 14 Jun 2023, 01:50 PM IST

Arbitrage fund houses and large AMCs are slated to suffer the most from SEBI’s recent guidelines on total expense ratio.

Arbitrage and large fund houses react to SEBI's proposed guidelines to cap TER.

Arbitrage and large fund houses react to SEBI's proposed guidelines to cap TER.

The recent guidelines by the Securities Exchange Board of India (SEBI), if implemented, may have a devastating effect on asset management companies (AMCs), especially, those running arbitrage schemes that fall under the hybrid category. The mutual fund houses now complain that they might find it difficult to continue operating as they deem the same financially unviable.

The potential implementation of SEBI guidelines regarding mutual fund charges is causing concern for arbitrage fund houses, as it could result in a substantial loss of revenue. These new guidelines propose a cap on the TER of arbitrage funds at 1.5 per cent, significantly lower than the current average TER of 2.5 per cent. As a result, the amount of income that arbitrage fund houses can generate from management fees and other charges would be reduced.

The inability to recover transaction costs will cause the arbitrage fund segment to suffer losses, thus, resulting in the closing down of some of these funds currently operating in the market. For the unversed, arbitrage involves the simultaneous purchase and sale of the same underlying security or its derivatives across different market segments, allowing for the generation of risk-free profits.

The fear surrounding arbitrage fund houses having to close down their businesses stems from SEBI’s recent proposals on mutual fund charges. The purpose of these modifications is to enhance transparency and affordability for investors in the realm of mutual funds.

Viral Bhatt, Founder, Money Mantra said, “The new guidelines are designed to make arbitrage funds more affordable for investors. They would also help to level the playing field between arbitrage funds and other types of mutual funds, such as index funds. Index funds are a type of mutual fund that tracks a specific market index, such as the S&P 500. They are typically much cheaper than arbitrage funds, which is why they have become increasingly popular in recent years.”

Bhatt added, “The SEBI guidelines are still in the proposal stage, and it is not yet clear when they will be implemented. However, if the guidelines are implemented, it is likely that arbitrage fund houses will face significant revenue losses. This could lead to some fund houses exiting the arbitrage fund market altogether.”

Multiple AMCs have requested the regulatory authority to exempt arbitrage funds from the scope of the recent consultation paper. The paper proposes the inclusion of brokerage and transaction costs within the Total Expense Ratio (TER) limit, the elimination of redundant charges on investors, and the introduction of limited-purpose membership for AMCs to execute trades for their own schemes. These proposed changes aim to strengthen accountability, transparency, and investor protection in the mutual fund industry.

In this chaos surrounding the proposed guidelines by SEBI, investors will stand to gain while large mutual fund houses will see a dent in their profits if implemented.

The effect on profits by mutual fund houses would be too palpable with some of the top AMCs having to bear the brunt of SEBI suggesting the TER to be the sole measure of the expenses mutual fund houses charge from their customers.

The impact of the SEBI guidelines on the arbitrage fund market is yet to be determined, and the actual implementation and consequences are still uncertain. Nonetheless, it is evident that arbitrage fund houses are apprehensive about the potential ramifications of these new guidelines.


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First Published: 14 Jun 2023, 01:50 PM IST