Monday, May 30, 2011

May 2011

The domestic mutual fund industry may see decline in assets under management (AUM) following the recent regulatory changes, according to ICRA Ltd. While 2010-11 proved challenging with decline in the AUM levels on introduction of new valuation guidelines from August 2010 and a tight liquidity regime, ICRA expects the pressure to continue in 2011-12 on account of increase in the dividend distribution tax for corporate investments in liquid/debt funds and cap on banks' investments in select debt mutual funds. Nonetheless, the crucial factors such as higher returns, ease of transaction and liquidity may arrest the decline of inflows in the debt schemes and thereby the overall industry AUM levels.

Mutual funds have lost 22.61 lakh folios over a period of two years. There has also been a huge outflow of Rs1,365 crore from equity mutual funds in April 2011—the highest outflow since October 2010. The total number of folios in equity-oriented mutual funds for the retail category (which was 4.03 crore at the end of financial year 2009-10), has declined to 3.87 crore at the end of 2010-11. This decline has been continuous over the past two years. The financial year 2009-10 saw an exit of 6.13 lakh folios from equity-oriented schemes. The following year witnessed an exit of another 16.48 lakh accounts. This just shows that retail investors are withdrawing from equity investing in a big way at a time when income and prosperity are rising. In the past two quarters, from October 2010 to March 2011, the folio tally for equity-oriented funds increased marginally by 21,573 accounts. Proving this right, the addition of new folios has not made any difference in the total number of folios; in fact, the total number of folios has declined over the years. According to the CAMS report, the average new folio creation over a period of two years, from August 2007 to July 2009, was 4.6 lakh new folios per month and from August 2009 to July 2010, the period post the ban on entry load, it averaged just 2.8 lakh new folios per month, even when the markets were doing well. All these symptoms point to a much deeper problem. The equity market has turned hollow and the equity cult is shrinking, instead of spreading.

Piquant Parade

SBI Funds Management Private Limited (SBI FMPL), the asset management company of the SBI Mutual Fund, is a joint venture between State Bank of India (SBI) and Societe Generale Asset Management S.A. (SGAM), a subsidiary of Societe Generale S.A (SG). On 9 July 2009, SG and Credit Agricole SA, entered into an agreement to undertake a global merger of their fundamental asset management business. Pursuant to the global merger, SBI FMPL will shortly become a joint venture between SBI and Amundi S.A. (Amundi), a leading European asset management company.

SBI Funds Management Pvt. Ltd. & UCO Bank have entered into an agreement on 20 May 2011 for distribution of SBI Mutual Fund products through UCO Bank's network of 2202 branches.

Retirement fund body EPFO will not take into account the past performance of previously engaged ICICI Prudential, HSBC, SBI and Reliance Capital while finalising the new asset management companies (AMCs) for managing its Rs 3 lakh crore corpus. Since the returns on investment provided by four fund managers was above the benchmark level of 8.52%, past performance as EPFO's fund manager would not be given any weightage while making fresh appointments. EPFO is in the process of appointing multiple fund managers for managing its funds for a three year period beginning July 1, 2011.

Regulatory Rigmarole

The Securities and Exchange Board of India is doing its bit to boost infrastructure funding in the country. The market regulator is working on a proposal for an infrastructure debt fund, specifically for mutual fund. The budget 2011 allowed FIIs to invest up to USD 25 billion in corporate infra bonds. FIIs will be investing their money into this proposed mutual fund infra debt fund. In turn, the fund houses will invest FIIs money into the various infrastructure projects across the country. However, the paper or security of the proposed fund would have a minimum residual period of maturity of five years at the time of investment. The budget had also promised that FII investments into infra funds will be exempt from the 20% withholding tax.

The authorisation given by the clients to stockbroker to run and maintain their accounts would continue to stand for ever, unless he/she asks for revocation of such authorisation. According to SEBI's earlier direction, it was necessary to get the authorisation from clients every year to maintain running accounts.

A panel set up by SEBI to boost mutual fund investments through distributors is considering a new incentive model, wherein investors could be asked to pay a service fee and commissions would be borne by fund houses. The proposals also involve a single-cheque payment for the combined amount of the agreed investment and service fee or transaction cost, which could be capped at an amount between Rs 100-200 per transaction. However, the distributors might be subjected to a stricter regulatory framework along with their new payment structure, so that they refrain from misleading investors.

SEBI has begun the process to standardise demat of mutual fund units. Mutual Funds will provide demat option to all investors from October 1, 2011. Demat option will be given for open and close-ended schemes. All mutual fund schemes should have international securities identification number (ISIN) from October 1 and mutual funds should display ISIN in all scheme statements to investors.

India's policy-makers are considering putting a cap or ceiling of between $5 and $10 billion on investment by foreign investors in Indian mutual funds to possibly limit the impact of any surge in inflows once this route is opened up soon. The government had announced in 2011 budget that it would allow overseas individuals to invest in equity schemes of Indian mutual funds as part of a move to diversify the class of foreign investors in the local equities market. The way the scheme will operate is that a foreign investor will have to open a dematerialisation or paperless trading account and a bank account here for which the Know Your Customer norms will be done by a local bank or intermediary registered with regulators here. Once this is done, foreign investors can buy into over 400 equity schemes.

For a change, SEBI and mutual fund distributors are fighting for the same cause — simplification of mutual fund products. Mergers are important because that will help and simplify the process in the mutual fund industry. U K Sinha, the new SEBI chairman, recently said the mutual fund committee would explore ways of “incentivising the industry and aiding growth”. He also talked about looking at models around the world and “in other financial products sold in India”. Constructive change is in the air!

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