FUND FULCRUM
February 2011

The year has begun well for the mutual fund industry as the assets under management of the industry grew by slightly more than 10% in January 2011, on the back of increased government spending and higher investments into liquid funds by banks and corporations. The AUM in January 2011 for the industry rose to Rs 6.91 lakh crore from Rs 6.26 lakh crore as at the end of December 2010. At the end of January 2010, the AUM stood at Rs 7.61 lakh crore. January 2011 has also seen net inflows of Rs 84,452 crore; a reversal of sorts for the industry that had experienced heavy net outflows to the tune of Rs 44,349 crore in December 2010. The highest net inflow was seen in the case of liquid/money market funds at Rs. 72,984 crore. Quarter-end generally sees a lot of outflows in the system due to the advance tax payment by corporations. But the money has now come back into the system and is flowing into the liquid funds. The government, which was earlier holding cash of up to Rs. 1.25 lakh crore, has also spent about Rs. 1 lakh crore, thereby, infusing further liquidity into the system. But from the retail equity point of view, this does not hold much significance as the equity portion has not seen too much growth for a while now. Equity funds saw a net inflow of Rs 881 crore. However, the 10% fall in the market in January 2011 caused shrinkage in the asset base of equity funds. At the end of January 2011, 39 fund houses had over Rs 1,65,000 crore in equity assets. Money is trickling into equity funds. We are seeing a gradual rise in the number of SIPs. Debt funds are seeing an increase in allocations because of higher yields. Though the new applications in December 2010 had gone up, January 2011 saw a drop due to poor market performance and KYC compliance issues. A total of 1005 schemes exist in the industry as at the end of January 2011.

CNBC-TV18 mutual fund of the year awards 2011 clearly belonged to HDFC that bagged the best mutual fund house of the year award, the best equity fund house of the year and the best debt fund house of the year among a host of other awards. Prashant Jain of HDFC won the award for the best equity fund manager while Maneesh Dangi of Birla Sunlife Mutual Fund walked away with the best fixed income fund manager of the year. The most investor-friendly fund house is UTI Mutual Fund. The best funds in the various categories are:

• Large-cap oriented fund: Fidelity India Growth Fund
• Equity diversified fund: Reliance Equity Opportunities Fund
• Small and midcap fund: DSP BlackRock Small & Midcap Fund
• Equity-linked savings scheme: Fidelity Tax Advantage Fund
• Balanced fund: HDFC Prudence Fund
• Income fund: Canara Robeco Income Plan
• Monthly income plan: HDFC Monthly Income Plan – LTP
• Index fund: Nifty Benchmark Ex-Traded Scheme - Nifty BeES
• Income funds—short term: IDFC Super Saver Income Fund
• Ultra short-term fund, retail: HDFC Cash Management Fund
• Liquid fund, retail: HDFC Cash Management Fund - Savings Plan
• Most innovative fund: Motilal Oswal MOSt Shares M50

Piquant Parade

The average assets managed by L&T Mutual Fund have increased by 76% on a year-on-year basis to Rs 3,955 crore at the end of January 2011. L&T Mutual Fund has completed its first year of operation since February 28, 2010, after the company was acquired by L&T Finance from Cholamandalam DBS Finance group. The total number of distributors has increased to 10,430 in February 2011, from 6,552 in the corresponding month a year ago. The company has added about 50,000 new folios during the past one year and opened 39 new branches.

The Peerless Group has shelved its plan for a foreign joint venture partner for its mutual fund venture as solo growth in the first year gives an assurance that it does not need a partner for the local market. The company’s assets under management at Rs 4,500 crore in less than a year gives it the confidence that it could be on its own in the domestic market which is at Rs 6.9 lakh crore. Principal Mutual found more than a decade ago has assets at Rs 5,642 crore and JM Mutual Fund’s AUM is at Rs 6,524 crore, according to data from the Association of Mutual Funds in India (AMFI) website.

Baroda Pioneer Mutual Fund has decided to change the face value of the units of Baroda Pioneer Treasury Advantage Fund (w.e.f. February 7, 2011) and Baroda Pioneer Liquid Fund (w.e.f. February 6, 2011) from Rs 10 to Rs 1000, consequent to which the Applicable Net Asset Value per unit (NAV) for the schemes will be based on Rs 1000.

UTI Mutual Fund announced its tie-up with HDFC Bank for its Investor Education Initiative called ``Swatantra`` in the states of Kerala, Karnataka, and Tamil Nadu. This initiative aims at creating investor awareness about different financial products and wealth creation options. Innovative formats will be used for communicating about financial products like mobile banking, web campaigns, face book, twitter, financial calculators, and planners. As part of this initiative, two UTI Knowledge caravans will travel through small towns in the states of Kerala, Karnataka, and Tamil Nadu spreading financial literacy. During their journey the caravans will cover more than 7,300 kms in about 56 days. Investor Meets will be held in approximately 130 towns and will be conducted in local languages i.e. Tamil, Malayalam, and Kannada. HDFC Bank’s huge network of rural and semi-rural branches across Kerala, Karnataka, and Tamil Nadu will interact with millions of people living in rural areas to impart financial knowledge which hitherto has been the domain of the urban rich.

Regulatory Rigmarole

Capital market watchdog Securities and Exchange Board of India (SEBI) has proposed a new reporting system for mutual funds based on XBRL (eXtensible Business Reporting Language) technology - a standardized business reporting tool that enables easy scrutiny of bulk documents without delay. SEBI has issued a draft structure of the proposed XBRL system for all the regulatory filings to be made by mutual funds. To start with, SEBI is likely to make the new business reporting mechanism mandatory for mutual funds and then expand this system to other segments in phases. XBRL Taxonomy is a classification system that can be considered as an electronic dictionary for business and financial terms. It consists of a delineation of all the business and financial concepts along with their basic accounting and XBRL properties as well as the interrelationships amongst the concepts.

The 2011-2012 Union Budget has permitted SEBI registered mutual funds to accept subscription from foreign investors, who meet KYC requirements, for equity schemes. This opens up a major new route for foreign investments to come to India, besides opening up a colossal business opportunity for Indian mutual funds, especially those with foreign promoters or foreign joint venture partners. The dividend distribution tax on debt schemes has been enhanced to 30% plus surcharge. This will eliminate the tax arbitration between debt mutual funds and alternative debt products.

Morgan Stanley has debunked mutual fund industry’s pet theory that entry load ban and the resultant lull in new fund offerings have impacted its profitability. The fund industry is gaining more stability since the SEBI ban on entry load. The Morgan Stanley report says that the SEBI entry load ban has not affected the relative position of the industry in the equity market. The mutual funds’ AUM in market cap is intact. Despite the entry loan ban in 2010, gross inflows in equity funds touched a 3-year high. Over the past three months, equity mutual funds have seen the highest cumulative inflows since August 2009. This is distinctly surprising in the context of market volatility.