Monday, September 28, 2009

(September 2009)

The AUM of mutual funds grew by nearly 9% in August, 2009 to Rs 7.49 lakh crores. The country’s largest fund house, Reliance Mutual Fund, saw an increase of Rs 8,980 crores in its AUM, which stood at Rs 1,17,314 crores in August, 2009. The second largest fund house, HDFC, recorded the highest increase of Rs 10,508 crores with the total standing at 93,874 crores in August, 2009. While ICICI Prudential, the third largest fund house, saw an increase in AUM by Rs 4,638 crores (Rs 77,967 crores in August, 2009), UTI Mutual Fund’s assets saw an increase in AUM of Rs 6674 crores (Rs 73,926 crores in August, 2009). The cash levels of open-ended equity funds declined to 8% in August, 2009, an eighteen-month low. This comes after they had hit a high of nearly 22% in March 2009, when the market was at its nadir.

The increase in AUM can mainly be attributed to the continued parking of money with liquid funds by institutional investors, which have not been affected by the abolition of entry load and rise in market prices of shares rather than due to the increase in the sales of equity mutual fund schemes. Equity assets have recorded a net outflow to the tune of Rs 142 crore in August, 2009 despite an increase in the AUM on an overall basis. In fact, nine fund houses saw a fall in their AUM. Nearly Rs 1000 crore of NFO money was accounted in August, 2009. So, while the numbers look rosy, things are not so great for the industry, with many mutual funds still in the process of re-negotiating distributor margin given the change in business dynamics.

Piquant Parade

Axis Bank has got SEBI approval to set up an AMC. SREI Infrastructure, a non-banking finance company, has got an in-principal approval from SEBI. IDBI Bank, Union Bank, Motilal Oswal, ASK Invesment Holdings, India Bulls, and Mahindra and Mahindra Financial Services have applied to SEBI for approval.

Goldman Sachs has revived its plans to start an AMC in India. It had got the SEBI approval in September, 2008, but had deferred the launch due to uncertain market conditions.

L&T Finance has purchased 100% shareholding in DBS Chola Mutual Fund for Rs 48 crores. Appropriate regulatory approvals are yet to be obtained.

With the launch of interest rate futures on August 31, 2009, the mutual fund industry has got an additional option to invest in. Interest rate futures consist of a contract to buy or sell a debt instrument, where the price has been decided in advance, for delivery at some future date.

The common trading platform for mutual funds is likely to be operational from March 2010. According to AMFI, there would be a designated agency in which you would have to register after which you would be provided with special identification numbers. This may either be their password and personal account number. Therefore, anybody who wants to get some information or even do a transaction can do so just by logging on to the website.

Regulatory Rigmarole

SEBI has ordered the mutual fund industry to have systems audit conducted by an independent CISA/CISM auditor at least once in two years. To ensure that the audit is comprehensive, it should encompass “audit of systems and processes inter alia related to examination of integration of front office system with the back office system, fund accounting system for the calculation of Net Asset Values (NAVs), financial accounting and reporting system for the asset management companies (AMCs), unit-holder administration and servicing systems for customer service, funds flow process, system processes for meeting regulatory requirement, prudential investment limits and access rights to systems interface.” The report generated will have to be placed before the trustees, which will thereafter be handed over to SEBI. According to the SEBI circular, for the financial year April 2008 – March 2010, the systems audit should be completed by September 30, 2010.

SEBI has revised the Code of Conduct for intermediaries of mutual funds. The intermediaries will have to disclose the material information, including their commissions. They should be fully conversant with the key provisions of the Offer Document and operational requirements of the mutual fund schemes. They should send investor-related statutory communications on time. They need to take necessary steps to ensure that the clients’ interests are protected. Maintenance of confidentiality in all investor deals and transactions is of paramount importance. The intermediaries should avoid colluding with clients in faulty business practices, avoid commission-driven malpractices and avoid making negative statements about any AMC or scheme.

The Pension Fund Regulatory and Development Authority (PFRDA) have recommended the removal of load for all retail financial products by 2011. This, if implemented, might have far reaching consequences on the insurance industry and place it on a level playing field with the mutual fund industry, where the removal of load has already been made operational.

SEBI may allow mutual fund units to be traded on exchanges. Under the new mechanism, fund houses have to offer two-way quotes based on the previous day’s NAV for trading. Last year, listing of FMPs was made mandatory. Stock exchanges would have to do minor modifications to their software to allow for trading of mutual funds through their terminals. The move would also require dematerialising mutual fund units.

The fall in subscription to equity mutual funds is only a knee-jerk reaction to the abolition of entry load on mutual funds. With over-dependence on distributors for equity mutual funds expected to take a back seat, thanks to the common platform for mutual funds which is expected to be operational in six months’ time and the high likelihood of mutual fund units being traded on exchanges, retail investor reach is bound to expand by leaps and bounds.

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