Monday, October 26, 2009

(October 2009)

The AUM of the mutual fund industry grew a mere 0.93% in September, 2009 to Rs 7,42,920 crore. A ban on the entry load, uniform exit load for different classes of investors, heavy redemption in debt funds, and profit-booking by investors due to a sharp rise in the stock markets were behind the flat growth of the industry. The heavy redemption in the debt funds in September 2009 should get reversed soon and mutual funds are expected to get back the entire flow in October 2009. Historical evidence suggests that debt funds face redemption pressure at the end of every quarter. This pressure is considerably higher at the end of the first as well as the second half of the financial year since advance tax payments are made at that time of the year.

The top five funds saw a miniscule rise in the AUM, with HDFC and UTI Mutual Funds registering a fall in assets. Reliance Mutual Fund rose by 0.79% to Rs 1,18,251 crore, HDFC Mutual Fund registered a fall of 3.67% to Rs 90,427 crore, ICICI Prudential Mutual Fund saw an increase of 2.76% to Rs 80,120 crore, UTI Mutual Fund dipped by 0.45% to Rs,73,589 core and Birla Sun Life Mutual Fund rose 0.3% to Rs 63,056 cr. Interestingly, it is the smaller fund houses that have shown a healthy rise in their asset figures for September, 2009. Fund houses like Taurus, Shinsei, and JP Morgan have reported around 25% increase in AUM while assets of Benchmark and Bharti AXA grew by 13% and 20% respectively.

In view of the sky-rocketing stock market, mutual funds are sitting on a whopping Rs 13,957 crore of cash, waiting to be deployed at the opportune time.

Piquant Parade

Close to 18 mutual fund applications – both domestic and foreign players – are pending with the market regulator, SEBI. Schroder Investment, Singapore, Kuwait’s Global Investment House, US-based PGLH of Delaware, and Nikko AM of Japan are among the overseas fund managers planning to enter the Indian asset management space, which is already crowded by global standards.

Union Bank of India has got SEBI approval to start mutual fund business. The Union Bank of India-led AMC will be a joint venture with Belgium-based KBC Group. Union Bank of India will have a 51% stake in the joint venture and contribute Rs 48.07 crore as against 49% by the KBC Group, with a contribution of Rs 46.93 crore. It is expected to roll out its first mutual fund product in February, 2010. Union Bank plans to use its 2700 branches for its service rollout. It also intends changing at least 200 branches as dedicated centres to sell mutual fund products.

Brokerage firm, India Infoline, is expected to launch its mutual fund at the end of the current fiscal, 2009-2010, after getting the necessary approvals from the market regulator. The first level of approval has already been obtained.

UTI AMC, having 1250 lakh shares valued at Rs 2500 crores, will sell 26% stake to US-based T Rowe Price. T Rowe Price will pay Rs 200 per share and Rs 650 crore for the 26% stake in UTI AMC. The deal would be valued between 3.2 and 3.3% of the AUM (AUM of UTI AMC in September, 2009 was Rs 73,500 crore).

The Postal Department, which had suspended the sale of mutual fund products since August, 2009 in retaliation to SEBI’s ban on entry load, has announced its decision to resume the sale of mutual funds in selected branches. The Postal Department is presently in talks with SEBI to chalk out the distribution norms related to selling of mutual fund schemes. The process is expected to be initiated once the modalities are worked out.

Regulatory Rigmarole

According to SEBI, AMCs can come out with NFOs provided they can justify investment strategy and risks (details discussed in NFO Nest dated October 19, 2009).

SEBI has announced that all trades in corporate bonds between mutual funds, FIIs, Venture Capital Funds, and other RBI-regulated entities would necessarily be cleared and settled through the National Securities Clearing Corporation or Indian Clearing Corporation effective from December 1, 2009. This announcement has been made with a view to bringing about transparency, enhancing liquidity, and improving efficiency in the bond market. In addition, it will help in the right price discovery, improvement in volumes, and doing away with counterparty risk. At present, mutual fund houses are either dealing in corporate bonds directly or through brokers.

SEBI has allowed the bourses to extend the trading hours from 9:55 a.m.-3:30 p.m. at present to 9 a.m.-5 p.m. so as to enable the market participants to align their trades to the happenings in the international markets.

SEBI has proposed that mutual funds offering retail and institutional plan options have to segregate their investment in two different portfolios. A substantial difference exist between both the plans in terms of initial investment amount and, hence, the corpus. At present, when corporate investors redeem, fund managers sell the most liquid investments to meet the outflows, thereby, affecting retail investors who remain loyal to the fund. This proposal, if implemented, is likely to benefit retail investors to a great extent.

Consolidation looms large for some asset managers as revenue declines continue unabated, according to McKinsey’s 11th Asset Management Survey. The Report states that the margin in 2009 has suffered a strong squeeze – 0.09% in 2009 down from 0.108% in 2008. The melting margins outweighed steep cost-cutting measures and can be attributed to higher rebates demanded by distributors in the wake of the abolition of entry load.

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