Monday, July 26, 2010

July 2010

The domestic mutual fund market has seen the steepest fall in assets since the global financial crisis of October 2008. According to the latest data from the Association of Mutual Funds in India, the industry’s average assets under management plunged 15.89%, or Rs 1,27,695 crore, in June 2010 to Rs 6,75,864.20 crore, compared to May 2010. But the AUM figure is up 26% compared to that in 2009. At the end of June 2010, the AUM of Reliance Mutual Fund dropped by nearly 15% or Rs 18,000 crore to Rs 1.01 lakh crore. The AUM of the second largest fund house, HDFC Mutual Fund, declined 15% or over Rs 15,000 crore to Rs 86,648 crore. ICICI Prudential Mutual Fund saw its average assets plunge by 16% to Rs 73,800 crore. Of the 38 mutual fund houses, the AUM of 32 shrank in June 2010, with the drop being more than 10% for 20 fund houses. The top five mutual funds lost between 14% and 18%. Six fund houses bucked the trend — Edelweiss Mutual Fund, Fidelity Mutual Fund, JP Morgan Mutual Fund, Morgan Stanley Mutual Fund, Mirae Asset Mutual Fund, and Peerless Mutual Fund. These fund houses have a smaller asset base compared to the larger fund houses with less institutional participation.

Income and equity fund categories saw a huge outflow in June 2010. Their net outflows were at Rs 1.34 lakh crore and Rs 1446 crore respectively. Liquid funds had a net inflow of Rs 17029 crore, the highest in the industry. The net inflow of the industry for the year to date in 2010 was at Rs 3547 crore which is lower than the net inflow of Rs 1 lakh crore in the year to date in 2009. Withdrawal by banks and corporates has been the major reason for the decline in assets in June 2010. Banks had withdrawn from schemes to lend it to 3G and BWA bidding. On the other hand, the corporates had withdrawn their money to meet their advance tax payment commitments. In addition, the debt valuation norms which are to be implemented from August 1, 2010, created fear among the corporates leading them to shift their money into liquid schemes.

Despite the sharp drop in AUM, the number of folios has risen marginally by 21,350, according to AMFI data. Quite a feat, if we consider that in the previous six months (between November 2009 and May 2010), the number of folios moved at a snail’s pace of a mere 49,153. UTI Mutual Fund, the country’s oldest fund house and the fourth-largest in terms of assets, crossed the 1-crore mark by adding the largest number of folios during the period – almost 1.2 lakh. The number of folios of Reliance Mutual Fund, the biggest loser among the top five funds, fell by 28,324. The overall rise in the number of folios was mainly due to the fact that investors shifted from equities to debt funds. The number of folios in debt funds rose by 190,000. This sharp rise offset the fall in all other categories – equities (147,000), balanced (13,437), exchange-traded funds (225), and fund of funds (7,530). Total equity folios stood at 4.05 crore in June 2010 as compared to 4.07 crore in May 2010. More than two-thirds of the mutual fund assets are in income funds, mostly from companies, and just a quarter of them in equity, reflecting modest retail participation.

Piquant Parade

As many as 24 entities have lined up before SEBI to enter the mutual fund space. The applications with SEBI fall under three categories – approval to set up mutual fund under consideration (14 applicants), registration under consideration (8 applicants), and approval to set up real estate mutual fund under consideration (2 applicants). Prominent among these applicants include Indiabulls, India Infoline, Schroder Singapore, SREI, Union Bank – KBC, ASK, Karvy, Mahindra & Mahindra, First Global, Bajaj Finserv, Enam, and Parag Parikh.

Sundaram Finance plans to acquire the 49.9% stake of BNP Paribas in its AMC arm. Having acquired the financial services arm of the Fortis Group, BNP Paribas cannot be part of two AMCs. There will be no impact on the other three joint ventures - Sundaram BNP Paribas Home Finance, Sundaram BNP Paribas Fund Services, and Sundaram BNP Paribas Global Securities Operations.

The National Stock Exchange has extended the existing fee waiver on mutual fund transactions till March 31, 2011 to encourage more buying and selling of schemes through its platform. Due to lack of clarity about revenues from this business in the foreseeable future, most brokers are unwilling to invest in a big way to service mutual fund trades. Buying or selling mutual funds through stock exchanges requires opening a demat account and many mutual fund investors do not have one. Moreover, there is no cost advantage for investors who purchase mutual funds schemes in smaller numbers.

Computer Age Management Services (CAMS) is expected to launch eNFO service to support online submission of NFO applications by the end of July 2010. The facility will enable fund applicants to submit applications within time in an easy and hassle-free manner. It will also enable AMCs to reach and collect applications from multiple cities where there are no official transaction points. The facility will be available to investors on the CAMS website,

UTI Mutual Fund, in partnership with the Ministry of Corporate Affairs, launched its investor education initiative to create awareness among people about the concepts of financial planning and benefits of investing in mutual funds. As part of the initiative, christened as Swatantra, investor meets will be held in various centres.

National Institute of Securities Markets and Financial Planning Corporation (India) Pvt. Ltd. entered into a Memorandum of Understanding to launch a purely voluntary joint Certification Examination for Financial Advisors. Developing a cadre of professionals who can provide quality and informed financial advice to the retail investor is the main reason for this joint initiative.

At a time when mutual fund distribution business has taken a hit due to regulatory changes, the brokerage firm Geojit BNP Paribas plans to hire 400 people for its mutual fund advisory business in 2010, which would help the company to earn significant revenues in the next three years.

Regulatory Rigmarole

SEBI has made it tougher for non-finance business houses to set up mutual funds. No business house without at least five years of experience in financial services will be permitted to own stake in an AMC. Anyone who owns over a 10% stake in the fund house would be deemed a sponsor, and will have to go through ``tough screening’’ before getting an approval. Some subjective measures such as past customer service record will also be applied while giving out new licences.

Mutual fund investors can choose to have their holdings in dematerialised form, with National Security Depository Ltd (NSDL) announcing that it will enable the same for its demat holders. A demat account will allow the investors to view their holdings with all the AMCs in a single statement, thereby, enabling them to manage their portfolios better. However, this demat holding would entail a charge, much like shareholders paying for their demat accounts.

SEBI has asked mutual fund houses to ban the use of cell phones in dealing rooms by people trading in securities on their behalf. AMCs have to put in place recording facilities in the dealing room and preserve the records of the same for at least eight years. AMCs shall ensure that they have put in place the systems/procedures to review these recordings by designated personnel of AMCs on a periodical basis. Report of this review shall be submitted to Trustees/ Trustee Board. AMCs shall also ensure that the terms of reference of internal auditors include review of these reports filed and the same shall be made available for SEBI inspection process.

SEBI has directed mutual funds to have a uniform exit load for investments through the lump sum route as well as systematic investment plans (SIPs). AMCs usually waive off the exit load for large investors, who invest a lump sum, as the situation demands. In the case of SIP, they charge an exit load according to the period mentioned in the prospectus.

Banks and mutual funds have been asked to stop accepting third party cheques for investment. This comes in the wake of an employee of a mutual fund distributor embezzling a large sum of money from a mutual fund investor.

SEBI has reiterated its concern over mutual funds charging higher expense fees in schemes meant for retail investors compared with the same product for institutions. Mutual funds offer two versions or plans — institutional and retail — of the same scheme. The segregation is to ensure that in case of redemptions, the withdrawal of money by the dominant institution does not hurt retail investors. Though the portfolio of stocks that constitute the schemes is the same for both plans, at times, institutional plans fetch higher returns than retail plans in view of the higher expense ratio charged in the case of the latter. Fund houses are opposing this move on the grounds that retail investors are costlier to service.

SEBI is considering a proposal to make it compulsory for mutual funds to have the Nifty or the Sensex as the primary benchmark and the index chosen by the fund house as the secondary benchmark. This follows feedback from investors that at times, the benchmark indices chosen by a fund house are not easily available in public domain.

SEBI is planning a standard set of disclosures for mutual fund fact sheets, advertisements, and scheme information documents (SID). SEBI has proposed certain quantitative parameters to assess the performance of various types of schemes. For instance, in the case of equity schemes, fund returns will have to be mentioned on an annualised basis after accounting for short-term capital gains tax and the dividend paid out during that period. Further, funds should also calculate volatility as the annualised standard deviation of the weekly returns over the concerned period. Similarly, the recurring expenses being charged by the scheme are also important for the investor as most funds in their SID only disclose the maximum expenses they would charge. Similarly, in debt schemes, the fund must reveal the short-term and long-term risk-free rates to help the investor assess whether the fund manager has actually attained higher returns for them. SEBI also wants the mutual funds to give advertisements that have specific quantitative parameters apart from just the scheme and benchmark returns.

The government will bring a bill in the monsoon session to seek Parliament’s sanction for the ordinance it issued to end the dispute between IRDA and SEBI over regulation of ULIPs of insurance companies. RBI is not in favour of the legislation in its present form as it feels that it will weaken its independence.

To make investors aware of the risk involved in a fund, SEBI has mandated fund houses to declare their exposure in equity derivatives. SEBI’s Mutual Fund Advisory Committee (MFAC) has also proposed to cap the exposure of any scheme to derivatives at 100% of its actual holding in stocks. The requirement of only margin money in derivatives allows them to have a much higher exposure.

MFAC has also come up with recommendations that would make agents more responsible for their advice to investors. The committee has proposed that agents categorise investors based on their risk profile, investment objective, and affordability before selling funds. They have to maintain written records of all recommendations and transactions. The committee has also proposed that while advertising, fund houses should present the entire picture of the scheme’s performance – both outperformance and underperformance.

SEBI wants trustees and independent directors to become more proactive in the functioning of fund houses and enhance their roles to ensure investor protection. To achieve this, SEBI plans to conduct workshops for trustees and independent directors of AMCs, through NISM. The first workshop, on September 15, is to cover topics such as discharging fiduciary duties, insight into debt and money markets, and reviewing fund performance beyond returns. NISM will run at least three workshops every year, which will focus on technical subjects and the regulatory perspective.

Even as their AUM dwindles, equity mutual funds have something to cheer about. A study conducted by iFAST Financial has revealed that Indian diversified equity funds are among the top performers globally in 2009 compared to their counterparts in other advanced markets. The performance of Indian equity mutual funds for the period from January 10 to June 10, 2010 is also quite convincing. If we consider the returns given in the last one year as a benchmark, Indian and Indonesian funds clearly dominated the list of 20 top performing equity funds. There are 13 Indian funds in the top chart, followed by 6 from Indonesia and one from Philippines. A splendid show indeed!