Monday, June 30, 2008


Fund Fulcrum
(June 2008)

The Boston Consulting Group forecasts that the Indian mutual fund industry could more than triple assets to Rs 20 lakh crore by 2015, a prospect that has attracted global players to queue up for a priced piece of the Indian mutual fund pie. The mutual fund industry hit a historic milestone in May 2008 when its total assets under management topped the psychological Rs 6 lakh crore mark. But the rate of growth — even in absolute terms — appears to be slackening. Whereas it took just about four months for the total industry AUM to move from Rs 4 lakh crore to Rs 5 lakh crore, it has taken twice that time to reach the next Rs 1 lakh crore milestone. This can be attributed to the slump in the stock market since January 2008. Reliance, the largest player retained its dominant position by increasing its assets by 3.23 percent in the past one month to Rs 98431 crore, followed by ICICI Prudential with Rs 59060 crore, HDFC Mutual Fund with Rs 56107 crore, UTI with Rs 54652 crore and Birla Sun Life with Rs 41423 crore. The top five players accounted for 51% of the total assets managed by the Indian mutual funds. The assets have grown by 6.94 percent in May compared to 6.20 percent in April. The market size of the mutual fund industry has grown by more than 44% in the past one year.

Piquant Parade

If all mutual fund applications lined up with SEBI fructify, the number of AMCs will soon shoot up to 50. Over 15 financial services institutions are warming up to take a plunge into the Indian mutual fund industry over the next one year. Axis Bank has obtained RBI’s permission to get into the mutual fund business. Indian Bank plans to revive its asset management arm after forging a foreign tie-up. UBS Fund arm hopes to enter the Indian mutual fund industry by the end of 2009. BBVA, a Spanish financial services major, may foray into the Indian mutual fund space in the next year in partnership with either Bank of India or Corporation Bank. Punjab National Bank, which has 30% stake in Principal AMC, may exit from the AMC.

Fidelity India is set to enter the mutual fund distribution business in India. It was the first fund house to launch a separate agency of its own to distribute mutual fund schemes of all fund houses in the country.

Strategic tieups have been entered into for distribution of products by DSP Merrill Lynch Fund Managers with South Indian Bank, Sundaram BNP Paribas Mutual Fund with Jammu and Kashmir Bank and Mirae Asset management with Corporation Bank. Corporation Bank is already having tie-ups with 16 mutual fund companies.

UTI may postpone its public issue (HDFC Mutual Fund plans to list before 2009). UTI Mutual Fund opens Financial Centres at Salem and Kottayam. UTI Mutual Fund has entered into an agreement with Geogit Financial Services for providing its employees a retirement planning opportunity through UTI Retirement Benefit Pension Fund.
Mutual funds are resorting to unfair practices to remain in the good books of investors. Mutual funds are dressing up NAVs of liquid and floater schemes by resorting to creative accounting to camouflage mark-to-market losses. Mutual funds, which hitherto did not invest more than 7 to 10% of their portfolio in unrated NCDs, are crossing this level in search of higher returns.

Regulatory Rigmarole

Market regulator SEBI has announced a new facility where FIIs and domestic institutions such as mutual funds and insurance firms will be allowed to directly execute their buy and sell orders without any manual intervention by their brokers. Under this new facility, brokers will be able to offer their clients direct access to the stock exchanges through their own infrastructure. This facility has been termed as Direct Market Access and will bring in a number of advantages. For example, direct control of clients over orders, faster execution of client orders, reduced risk of errors associated with manual order entry, lower impact costs for large orders, better audit trails and better use of hedging and arbitrage opportunities through the use of decision support tools/algorithms for trading. In DMA, the broker's infrastructure is bypassed. But the trade and settlement obligations - and risk management compliance involving payment of margins and exposure limits - arising from the orders and trades in the DMA terminal will continue to apply to the broker.

SEBI has simplified norms for registration of FIIs and sub-accounts and allowed sovereign wealth funds, university funds, endowments and charitable trusts to register as Foreign Institutional Investors. SEBI has decided to accord FII status to asset management companies promoted by NRIs and allow them to buy shares in the open market, provided they do not invest in ‘proprietary funds’. FIIs have also been permitted to invest in collective investment schemes, where individuals and institutions collectively invest in various instruments.
The Fourth Mutual Fund Summit was organised by the Confederation of Indian Industry. Securities and Exchange Board of India plans to set up an advisory committee on mutual funds, to understand the needs and problems of the industry and to see if any regulatory changes are necessary. The committee would seek advice from participants for the betterment of the industry. SEBI is planning to hold a workshop for the trustees to get their feedback and to know their requirements. SEBI is contemplating legalising the practice of rebates while selling mutual funds that AMFI had banned in its moral code of conduct for distributors in 2002. SEBI has suggested setting up of a depository that will maintain database of all mutual fund investors across the country, much in line with the depositories for the equity market. In order to expand the geographical reach of mutual funds to people in remote areas, who are not expected to have ready PAN cards, AMFI has made a case for relaxation of PAN on investments between Rs.25000 and Rs 50000, if not scrapping it completely. Indian fund houses are coming together to set up an electronic platform, exclusively for trading mutual fund units. This could be on the lines of Indonext, a platform on the BSE specifically for small- and mid-cap stocks. An electronic platform is one of the easiest, safest, efficient and effective ways to bring down the cost of reaching out to investors across the country by reducing unnecessary paperwork. Fund houses feel that the current process where investors have to go via a distributor (or indeed directly) is extremely cumbersome. RBI had recently said mobile phone owners in the future will be allowed to transfer funds from their accounts to other mobile phone owners across network service providers. The AMFI committee is hoping that this facility can eventually be tapped while transacting in Mutual Funds.

With a plethora of forward looking changes on the cards and influx of funds in the Indian mutual fund arena, the volatile equity market, thanks to the boiling oil prices and the galloping inflation, may take the backstage!