Fund Fulcrum

(November 2007)

The total AUM of the 32 mutual fund houses in India stands at Rs 5,56,700 crore on 31 October 2007, with Reliance Mutual Fund leading the pack with the highest AUM of Rs 79,973 crore followed by ICICI Prudential Mutual Fund whose asset base swelled by 11 per cent to Rs 56,212 crore, according to data from AMFI. The growth rate of 17% in October is the third highest in the current year with the highest rate being recorded in the month of July. The latest increase is, however, on an expanded asset base. The augmenting AUM can be attributed to the surge in the stock market, large corpus raised by new fund offerings, lower redemptions and availability of liquidity in the banking industry, which saw short-term fund flows into liquid schemes. Investors, who withdrew money from equity schemes fearing a sharp correction when the benchmark indices were scaling new highs, typically reinvested these funds into liquid and liquid-plus plans.

Piquant parade

UTI Mutual Fund plans to come out with an IPO in February. All the four sponsors -- State Bank of India, Punjab National Bank, Bank of Baroda and Life Insurance Corporation - holding 25% each in the UTI Mutual Fund have already agreed to divest 49% stake. 20% would go to strategic partners through private placement which would help UTI expand its core businesses. No single investor will get more than 5% through the pre-IPO placement. Besides, the fund house would divest 29% of its stake through offer for sale for which Draft Red Herring Prospectus would be filed with the regulator by December, 2007.

UTI Mutual Fund is in talks with Société Générale Asset Management (SGAM) of France for managing its funds globally.The tie-up is a part of UTI’s plans to increase its global business to $1 billion by the end of 2007. SGAM, a dominant player in the global mutual fund arena with presence in over 20 countries in Europe, United States and Asia, is already managing SBI Mutual Fund’s products after it entered into an agreement nearly a year ago.

UTI Mutual Fund is planning to launch a special customized fund scheme for the public sector units (PSUs). The decision to launch a new product is in line with a recent circular from SEBI that allows 12 Navaratna and 54 mini-Navaratna PSUs to invest upto 30% of their investible surplus in the equity funds of the public sector mutual funds. Prior to this circular, the PSUs were only allowed to invest in liquid and debt schemes of UTI.

In the first of its kind among property consultants, the UK-headquartered Knight Frank Group will launch a $250 million India-focused real estate fund. The offshore fund will raise investments from high net worth individuals and other investors from the UK and will have an investment threshold of $0.5 million and above.

ICICI Prudential AMC has tied up with New India Co-operative Bank and Central Bank of India for distribution of its mutual fund schemes. Reliance Mutual Fund has entered into an agreement with the United Bank of India and State Bank of Saurashtra for distribution of its products. Doha Bank has signed an agreement with Kotak Mahindra Asset Management Company for the distribution of the latter’s mutual fund products in Qatar. Earlier Doha Bank had signed up with UTI Mutual Fund, Reliance Mutual Fund, Birla Sun Life Mutual Fund and Sundaram BNP Paribas Mutual Fund to offer a variety of mutual fund products.

Geojit Financial Services has launched an online trading platform for mutual funds.

Leading mutual fund research firm, Lipper, announced the launch of a rating system to help investors and their advisors to select right schemes to meet their investment goals. Lipper, a subsidiary of Reuters, provides information on mutual funds, retirement funds, hedge funds, fund fees and expenses to the asset management and media by covering 80,000 funds in 66 domiciles. The rating system is based on a numeric scale arranged in ascending order where '1' represents the lowest-scored funds (bottom 20 per cent) and '5' represents the highest-scored funds (top 20 per cent). In India, the Lipper Leader Rating System will judge funds based on three parameters - total return, consistent return and preservation.

Regulatory Rigmarole

SEBI reduced the expenses charged by Index Funds and ETFs. The total expenses shall not exceed one and one half percent (1.5%) of the weekly average net assets out of which investment and advisory fees shall not exceed three fourths of one percent (0.75%) of the weekly average net assets.

SEBI relaxed the duration of short-term investments by mutual funds in bank deposits to 182 days from the earlier limit of 91 days. This will give greater flexibility for mutual funds to choose the deposit option to park their money in and get slightly higher yields without any material impact on duration.

Enabling provisions have been made for a mutual fund to engage in short selling of securities as well as lending and borrowing of securities. However, these amendments will take effect on a later date to be notified by SEBI, which will be after the new framework for short selling of securities and securities lending and borrowing is put into place.

Currently, 50 per cent of the shares in an IPO is reserved for Qualified Institutional Buyers (QIBs). Of this portion, 5 per cent is reserved for mutual funds. Others competing for their share in this category include FIIs, banks and insurance companies. Allotments in IPOs happen on a pro-rata basis. This means that if there are about 100 FIIs and just about 15-20 mutual funds applying for the IPO, FIIs get a higher allotment compared to mutual funds.The quota for mutual funds in public offers of equity shares is proposed to be hiked in order to promote retail investments in share markets.

Proposals for introduction of Real Estate Investment Trusts (REITs) in India, guidelines for real estate mutual funds, and regulations for trading in securitised debt instruments are on the agenda of the capital markets regulator SEBI for the near-term.

These forward-looking strategic arrangements and the impending changes in the mutual fund regulatory environment bode well for the mutual fund industry.