FUND FULCRUM
June 2010

The assets under management of the mutual fund industry grew by Rs 34,393.67 crore, or 4.47%, in May 2010. The combined average AUM of the 37 fund houses stood at Rs 8,03,559.06 crore (Rs 8.07 lakh crore in November 2009). In May 2010, Reliance Mutual Fund, the largest fund house, saw an addition of Rs 7,154 crore to its average assets at Rs 1.19 lakh crore. After a gap of six months, the assets of HDFC Mutual Fund breached the Rs 1 lakh crore mark in May 2010. The third-largest fund house, ICICI Prudential Mutual Fund, saw its assets rise by Rs 4,674.30 crore to Rs 87,709.81 crore. However, UTI Mutual Fund bucked the trend and saw a decline of Rs 840 crore from its assets to Rs 78,617.15 crore during May 2010. Fund houses like Axis, Edelweiss, Kotak, L&T, Peerless, Shinsei, and Taurus, which have a dominant debt portfolio, have registered a double-digit percentage growth in their AAUM. Simultaneously, fund houses with a larger equity asset base have witnessed a marginal decline in their assets in May, 2010. These include AIG, DSP Blackrock, Fidelity, HSBC, Mirae, Morgan Stanley, and Sundaram BNP Paribas.

After witnessing net inflows of Rs 1, 85,956 crore in April 2010, the mutual fund industry witnessed net outflows worth Rs 62,960 crore in May 2010. Equity mutual funds registered the highest net inflows of Rs 1,256 crore in May 2010. On the other hand, the income category saw the highest net outflows of Rs 35,084 crore during the month. The magnitude of such outflows is probably due to the higher-than-expected payout on account of 3G auctions that has led corporates to withdraw the money parked with mutual funds.

According to AMFI’s data for May 2010, the industry's overall number of folios has slipped to 4.07 crore against 4.11 crore in November 2009. This is a reduction of just 1% in six months. The number of accounts closed is not uniform across fund houses. Of the 38 AMCs, eight managed to tide over the storm and added new folios in the past six months. Among the top 10 fund houses in terms of number of folios, HDFC, Sundaram BNP Paribas, and Birla Sun Life were the ones that added folios.

Piquant parade

DSP BlackRock Mutual Fund tied up with State Bank of India for SIP Auto Debit Facility at all core banking branches and locations covering over 12,500 branches of State Bank of India across the country. Until now SIP Auto Debit with State Bank of India was available only in 80 ECS locations.

Dhanalaxmi Bank has entered into an alliance with HDFC Mutual Fund for distributing the latter's financial products through its branches across the country. HDFC Mutual Fund's schemes will be provided to the bank's customers through its 271 branches in over 130 cities and towns across the country.

UTI Mutual Fund is embarking on a pan-India investor education and financial inclusion plan that could help it, and also the mutual fund industry in general, make inroads into the Indian hinterland. Beginning July 6, 2010, and spread over 100 days, three specially-designed vans will start moving around the country, trying to use popular forms of communications like street plays, video films, leaflets and investor meets to educate people on the virtues of financial planning and financial literacy.

Regulatory Rigmarole

SEBI Mutual Fund Advisory Committee, comprising SEBI and mutual fund industry representatives, recommended retaining the expense ratio at 2.25 per cent.

The SEBI panel has also decided to make disclosure norms more transparent for investment in equity options as mutual funds could suffer losses by getting into the derivatives business.

The fund houses have come under SEBI's scanner for allegedly giving their agents and distributors lavish incentives like cash payouts and foreign junkets in return for higher sales.

The mutual fund agent certification process has come under the National Institute of Securities Market (NISM) from June 1, 2010. AMFI used to conduct these exams earlier. However, agents with AMFI certification prior to June 1, 2010 will be exempted.

SEBI has given mutual funds a breather to implement a norm for valuing money market and debt securities with maturity of over 91 days in their schemes by stretching the deadline for its implementation to August 1, 2010 from July 1, 2010 earlier.

SEBI has told AMCs not to indulge in ‘dynamic pricing’ while managing debt funds. Fund houses, in their bid to attract more investments, do not levy asset management charges on institutional investors when portfolio yields come off sharply. Likewise, when yields go up significantly, fund houses charge a higher expense ratio on institutional portfolios, making good the loss (of fund management charges) they have suffered when yields go down. The market regulator has told fund houses to stop this practice and limit changes in fees to 5-basis points on a daily basis (0.05%), or 0.5% in a year.

Telemarketing agents soliciting customers by promising huge returns on mutual fund investments may do well to think twice before making tall claims for, market watchdog SEBI may be listening. SEBI will bring out a working paper on mis-selling practices prevalent in the mutual fund industry by the end of September 2009.

The tax benefit currently available to investors on investment in the equity-linked saving scheme would not be extended under the Revised Direct Tax Code which could impact the industry which is already facing stiff competition from insurance and pension industry.

Asset management companies (irrespective of the size of assets they manage) have slashed upfront margins payable to distributors for pushing their schemes to investors from 1.75-2% to 0.90-1%. Their strategy now revolves around increasing trail commissions, which will, to some extent, ensure that money (investment collected by the distributor) stays with the fund house for at least one year. Trail commissions — which is paid quarterly or annually to fund distributors on the portion of money invested in the fund — have gone up from (an average of) 40 basis points to around 1% post the SEBI ban.

A controversy over the regulation of ULIPs broke out between the IRDA and the SEBI on April 9, 2010, with the latter issuing a ban on the sale of these products by 14 life insurance companies. This move was challenged by IRDA. The Insurance Act was amended to specifically mention that the life insurance business included ULIPs under the complete jurisdiction of IRDA. The Securities Contract Regulations Act was amended to say that securities do not include ULIPs. A provision which says that “ULIPs are neither mutual funds nor collective investments” was also inserted in the SEBI Act. The Government has also put in place a joint mechanism to sort out differences among the regulators over the nature and jurisdiction of any financial product by amending the RBI Act. In an Ordinance promulgated on June 18, 2010 by the President of India, the Government made amendments to the RBI Act 1934, the Insurance Act 1938, the Securities and Exchange Board of India Act 1992, and the Securities Contract Regulations Act 1956, to bring about this clarity.

At the CII Mutual Fund Summit 2010, SEBI chairman C.B. Bhave came up with the proposition that AMFI take up more responsibility and consider playing the role of a self-regulator for the industry. Mr H.N. Sinor, Chief Executive, AMFI, said that if they were to become an SRO, micro issues would be taken care of by them and SEBI would regulate all the macro issues. This would require a reconstitution of the AMFI board wherein 51% would comprise of AMFI members and the rest would be nominated by SEBI.

The norms governing personal transactions of all key persons — including fund managers and equity dealers employed with mutual funds — is likely to be tightened and the number of empanelled brokers (shortlisted by mutual funds to execute their buy/sell orders) may be increased to rein in front-running. The call to tighten the norms relating to personal transactions comes in the wake of SEBI penalising an employee of HDFC AMC for tipping off his close associates about the substantial buying and selling pattern of the AMC so that they could place their orders ahead of the AMC. These associates could square off their positions within the same trading session even as the AMC's orders were coming, thereby making huge profits.

SEBI is contemplating options to bring in major changes in the way mutual fund trustees operate and how they are regulated. One of the options is adopting the UK model, which allows professional trustee companies. The other option is to regulate the AMC more closely. This issue could be put on fast track by SEBI following unearthing of the HDFC Mutual Fund front-running case.

In 2002, SEBI told mutual funds to disclose the benchmark returns as part of their performance disclosures. Before this rule, mutual funds used to provide only the returns generated by a scheme over various time periods while providing the performance. According to the advisory committee’s proposal, at least one of the benchmarks for equity schemes has to be either the Nifty or Sensex. The other benchmark could be the one disclosed by the fund house in the scheme information document (SID). Similarly, it has suggested that the benchmark for debt schemes should be either the 364-day T-bill rate or the 10-year G-Sec rate depending on the maturity profile of the scheme. There could be a separate benchmark for the scheme disclosed in the SID. While disclosing the performance of balanced schemes, one of the benchmarks should be a composite of Nifty and G-Secs, apart from the benchmark disclosed in the SID.

A joint report by CII-PwC was released on ‘Indian Mutual Fund Industry – Towards 2015: Sustaining Inclusive Growth-Evolving Business Model’ at the CII summit. The overview of the report was that despite the increasing year-on-year AUM growth rate of 47% in 2009-10, mutual fund industry is facing several challenges like, low retail participation, heavy reliance on institutional sales, an underpenetrated population on account of the inaccessibility to small towns due to a lack of efficient distribution, lack of investor education, and cost pressure resulting from inefficient systems and processes. The GDP, borrowing and saving growth rate of India looks promising. However, the AUM of mutual funds is considerably low at 5% of GDP whereas the rate is about 70% in USA. Proactive measures in India are required to guide the investors. Tectonic changes in Business Models - discount brokers, directly from AMC, and advisory model – have been necessitated to sustain profitability. The assessment of regulatory and business trends in other global economies on similar businesses is the need of the hour. According to the BCG-CAMS report, equity mutual funds are increasingly gaining acceptance as a financial savings instrument by retail investors. Currently, there are nearly 22.5 lakh active SIPs with an average ticket size of Rs 2,300 every month and 97% of all retail SIP transactions are electronic. The focus of fund houses should be to develop a plan that will bring in more retail money, support small distributors, and strengthen the PSU bank network for widening distribution reach.