FUND FULCRUM
July 2011

After two quarters of decline, the average assets managed by the mutual fund industry, comprising 43 active players, surged by 6 per cent to Rs 7.43 lakh crore, even as the country's largest fund house Reliance Mutual Fund saw a drop in its AUM. The combined average AUM of the 43 fund houses stood at Rs 7,43,083.91 crore at the end of June 2011, down from Rs 7,00,537.7 crore at the end of March 2011. Among the top five players, ICICI Mutual Fund registered the highest growth of 8.5 per cent, as its assets inched closer to Rs 80,000 crore. The average assets of HDFC Mutual Fund in the quarter ended June 2011 grew 6.7 per cent to Rs 92,032 crore, followed by Birla Sun Life Mutual Fund which posted growth of a little less than six per cent, for assets of Rs 67,475 crore. UTI Mutual Fund witnessed 2.85 per cent growth in its assets. The largest fund house, Reliance Mutual Fund, showed a marginal decline of 0.3 per cent in its average assets but continued to maintain assets of over Rs 1 lakh crore. Mid-sized mutual fund houses outpaced the industry's top majors in building assets in the June quarter. This is due to the shift in allocation of funds by institutions in fixed maturity plans (FMPs) leading to a burgeoning corpus in their debt category. SBI Mutual Fund, IDFC Mutual Fund, Tata Mutual Fund, Deutsche Mutual Fund and Kotak Mahindra Mutual Fund, which manage between Rs 10,000 and Rs 50,000 crore, witnessed their assets under management rise by as much as 35 per cent. At a time when the assets’ growth rate for the top five players is below 10 per cent, players in the second rung are riding on a higher growth trajectory. As many as 32 fund houses saw an increase in their AUM figures. The industry has seen an AUM decline of 5 per cent in the December quarter and 2 per cent in the March quarter. With a growth of 6% in the June 2011 quarter, the industry has attained its highest average AUM since May 2010.

Equity mutual fund schemes have seen a massive fall in net inflows in June 2011 as compared to May 2011. Though inflows remained in the positive zone, yet they plunged to a mere Rs 20 crore as against Rs 1,546 crore in May 2011, one of the highest in recent times. The Greek crisis, coupled with talk of the Mauritius tax treaty being under review, hit the retail investors’ participation in equity markets through mutual funds in June 2011. If net outflows of Rs 80 crore in the equity-linked-saving-schemes (ELSS) are taken into consideration, the overall flows in the equity category were in the negative zone. According to the latest available folio statistics till April 2011, the equity category saw a decline of over 400,000 folios. Many fund managers are playing safe, choosing to sit on cash rather than invest in stocks. A range-bound market, bearish sentiment and downgrade fears after first quarter results are driving them to keep higher cash positions in their portfolios.

Over the last 24 months alone, there have been 187 fund manager changes for equity funds. The total equity assets managed by the Indian fund industry is Rs2 lakh crore. Over the last 24 months, there has been a change in fund managers handling about Rs98,000 crore - almost half of the total industry.

Piquant Parade

Tata Mutual Fund has parted ways with Credit Suisse as its offshore fund management partner in May 2011.

UTI Mutual Fund entered into an arrangement with Srei Sahaj e-Village to provide village level entrepreneurs as well as other similar category of eligible investors associated with the latter an investment opportunity through a micro-pension initiative under UTI-Retirement Benefit Pension Fund. The micro-pension initiative facilitated by UTI MF and Srei Sahaj aims to provide social security cover to the investors associated with Srei Sahaj during their old age. Under the initiative, the investors will contribute a minimum amount of Rs 200 every month towards UTI-Retirement Benefit Pension Fund which will enable them to receive pension in the form of periodical income when they become 58 years old. Presently, more than 1.75 lakh members are covered under this initiative.

Chennai-based IFA Galaxy, an online group of distributors, is likely to become the first official representative body of the mutual fund distributors in the country. With 10,000 members (a quarter of the total active independent financial advisors (IFAs) in the country), the two-year-old organisation now plans to become an umbrella body of distributor associations across the country, wherein district-level and the state-level associations could enroll. IFA Galaxy started as a Google group in August 2009, when the ban on entry load came into force. What started as a window to vent frustration over painful regulatory changes is now on the verge of becoming a national body.

Regulatory Rigmarole

In an attempt to manage the volatile capital flows, the finance ministry allowed foreign individuals to invest up to $10 billion in domestic mutual funds. The Securities and Exchange Board of India will notify the rules by August 1, 2011. The move was announced in the 2011 Union Budget. At present, besides resident Indians, only foreign institutional investors (FIIs), sub-accounts registered with SEBI and Non-Resident Indians can invest in mutual funds in India. The move will give mutual funds access to more foreign money. The fund industry, however, reacted with caution and said it would wait for the final guidelines.

Mutual funds may soon face some tough questions from market regulator SEBI regarding the exercise of their vote on key business proposals of the companies in whose shares they have put in investors' money. The market watchdog is irked by the casual approach adopted by most of the funds when it comes to voting on proposals put forth by the company management for shareholder approval, as also the disclosure of these votes. The regulator wants funds to adopt the role of conscience-keeper for listed firms by actively raising their voice on the listed companies' corporate governance practices. Last year, SEBI made it mandatory for fund houses to make public their 'voting policy' and also their votes, but it took another reminder by the regulator last month for them to declare their voting details. Subsequently, the funds have disclosed their votes for the fiscal year 2010-11, but SEBI is unsatisfied with details provided by some of them. In some cases, funds have disclosed their votes without even naming the company, while there are also instances of all votes not being disclosed. Some funds are now considering outsourcing their voting job to specialist entities.

The mutual fund industry has approached market regulator SEBI to allow entry into the pension product market, in a bid to garner long-term funds. Currently, pension products are offered by only insurance firms and Pension Fund Regulatory and Development Authority (PFRDA). AMFI has made a presentation to SEBI for allowing asset management companies to raise funds through pension products. AMFI is of the view that this would help in the penetration of pension products as well as raising stable assets for the industry. AMFI has said that since the AMCs already have experience in managing investor money, it should be considered for entry into the pension fund market. In the United States about 68 per cent of the households own mutual fund products through the pension route, perhaps through the pension reforms that took place in America.

Looking for ways to incentivize mutual fund distributors, SEBI is planning to do away with sublimits within the annual fees that asset management companies are allowed to charge from investors. Instead, the market regulator is weighing options of allowing a consolidated fee structure as per the limits already in place. At present, fund houses are allowed to charge 2.5% annual fee for the first Rs 100 crore of equity assets they manage, and this comes down by 25 basis points (100 basis points = 1%) for every additional Rs 300 crore assets under management with the lower limit capped at 1.75%. However, following SEBI's stand of not charging investors more in any case, the overall limit for annual charges or expenses would remain the same. At present, the annual expenses that AMCs charge have sub-limits under different heads like fund management charges, custodian fees, marketing expenses, etc. For example, the limit for annual fund management fee is 1.25% for the first Rs 100 crore worth of equity AUM, and 1% for AUM above this limit. Another way of incentivizing mutual fund distributors is to increase the expense ratio but, at the same time, include broking fees and STT within it. At present, broking charges are accounted for as total cost of buying assets. For example, if a stock is bought at Rs 100 per share and the fund house pays 5 paise per share as broking commission. For the fund house, the cost of buying this stock is taken as Rs 100.05. Although ultimately investors pay for the brokerage, it is not accounted for within the annual expenses. SEBI's rationale is that the mutual funds should include brokerage fees as well as the STT in the total expense ratio. This is a better option because this would lead to less portfolio churning by fund houses and fund managers. On the other hand, brokers believe this will further dent their broking commissions from domestic fund houses.

Complaints regarding discrepancy in account statements filed by mutual fund investors have increased by about 56 per cent in 2010-11. However, for the same period, the total number of investor complaints under all categories declined by 74 per cent. Of the total 12 categories of complaints, only two categories recorded a hike in their numbers – Discrepancy in Statement of Accounts and Deviation from Scheme Attributes. Before 2010, only written complaints duly signed by customers were considered as complaints. After a SEBI circular in May 2010, any request by investors through calls at call centres or branch offices, through walk-ins, emails or through web sites were to be taken into account as complaints. Another reason for the increase was the subjectivity involved in the classification of these complaints.

SEBI directed 14 companies to act on pending investor complaints within 15 days, failing which a penalty of Rs 1 lakh for each day during which such failure continues or Rs 1 crore, whichever is less, will be imposed on each of them. It had received the complaints and sent them to the companies concerned, advising them to resolve the grievances and submit status reports within 30 days. These companies have not responded to SEBI's letter to resolve the complaints and some of the letters were returned undelivered.

Is the mutual fund industry in India doomed or is it growing at a fantastic rate? Clearly visible to all of us is the size of the industry and growth at a good pace. Unfortunately, all the growth is in the debt portfolios. Let us look at the positive side of the whole thing. Will the debt funds continue to attract more and more amounts? However, given the bank branch expansion, they are likely to sell SIPs aggressively which will ensure that the SIP target of 110 lakh SIPs is achieved over the next 4 to 5 years, thereby, creating an equity culture. What the government and regulator need to figure out urgently are ways to increase domestic retail inflows into mutual funds.