Monday, November 28, 2011

November 2011

The mutual fund industry saw its asset base grow by 8.3% in October 2011, led by inflows from the corporate sector. According to the Association of Mutual Funds in India, assets under management stood at Rs 695,437 crore in October 2011 (Rs. 6.41 lakh crore at the end of September 2011). Of this, equity assets contributed 23% at Rs 1,61,532 crore, as against 24% of the industry’s assets in September 2011. The start of every quarter sees inflows into the industry as money that moves out as advance tax payments finds its way back into the system. Liquid/money market funds get a bulk of this investment. The total AUM under liquid/money market funds increased from Rs 1.28 lakh crore to Rs 1.62 lakh crore in October 2011, an increase of 26.46%. Gold ETFs were the next big gainers in October 2011 with the total AUM moving from Rs 8,173 crore to Rs 9,090 crore. Equity schemes have increased in AUM by 4.3% from Rs 1.54 lakh crore in September 2011 to Rs 1.61 lakh crore in October 2011. After collecting good inflows of Rs. 1,401 crore in September 2011, equity funds mopped up just Rs. 181 crore in October 2011. Overall inflow during the month was Rs 41,287 crore, which pushed the flows so far in 2011-12 to Rs 96,566 crore, against net outflows of Rs 6,194 crore during the previous corresponding period.

Equity mutual funds lost another six lakh folios in the first half of this fiscal. From 3.92 crore folios as at end March 2010, the total number of equity folios came down to 3.86 crore folios. However, the debt folios have seen an increase of 3.8 lakh or nine per cent, in folios during the same period. This fiscal has seen a lot of consolidation of schemes which has probably led to a decrease in the number of folios in the equity schemes. Moreover, there is now an overall acceptance of debt as an asset class. The number of SIP folios in the industry has seen a steady rise. There are about 75 lakh SIP folios in the industry and they bring in close to Rs 1,200 crore a month. However, the creation of SIP folios does not amount to an increase in the total number of folios.

The total number of folios in the industry is 4.71 crore, down by 62,413 folios from 4.72 crore as at end March 2011. However, in the last one year period, the number of folios has risen from 4.69 crore, as at end September 2010 to 4.71 crore as at end September 2011. According to data available with the Securities and Exchange Board of India, 61,000 equity folios were closed during October 2011.

In an interesting turn of events, the two leaders in the mutual fund sector have swapped positions. For four-and-a-half years, there was a single market leader in assets, Reliance Mutual Fund. In the quarter ended September 2011, HDFC Mutual Fund took that slot. The latter, however, has yielded the slot of the most profitable asset management company to Reliance Mutual Fund.

Foreign-owned fund houses lost market share (assets under management) by 11.4% in the last one year, when the industry AUM itself remained flat. According to data on the AMFI website, the cumulative AUM of the foreign fund houses stood at Rs 77,411 crore in September 2011, down by Rs 9,942 crore from Rs 87,353 crore in September 2010. The industry, during the same period, declined by about Rs 618 crore — from Rs 7.13 lakh crore to Rs 7.12 lakh crore. The Indian mutual fund houses, however, have fared better and added Rs 9,323 crore to their cumulative AUM. The AUM of the Indian fund houses moved from Rs 6.26 lakh crore to Rs 6.35 lakh crore during this period. Of the foreign fund houses, Bharti AXA saw the highest decline in AUM at 65.5% from Rs 510 crore to Rs 176 crore. JP Morgan Asset Management was next with a decline of about 44 % from Rs 8,447 crore to Rs 4,747 crore. Fund houses say that the decline is mainly due to the erosion in the value of the fund schemes themselves.

Piquant Parade

Parag Parikh Financial Advisory Services (PPFAS), Bank of India, and Bajaj FinServ Ltd. have announced their plans to enter the Indian mutual fund industry. While PPFAS is one of India’s oldest portfolio management services firms, Bank of India is a public sector bank which was in the mutual fund business in the 1990s, and Bajaj FinServ is the financial services firm of the Bajaj Group. Already two asset management companies (AMCs), India Infoline and Indiabulls have launched their operations recently.

A leadership vacuum at UTI Asset Management is taking a toll on the health of India's oldest mutual fund, dealing a setback to the Asian growth ambitions of its joint venture partner, US money manager T Rowe Price Group. The US-based asset manager, which holds 26% in the fund house, has been protesting at the appointment of an IAS officer without enough fund management experience as the company’s chairman. UTI had been headless for nine months since the last incumbent, U K Sinha, quit to take over as chairman of the Securities and Exchange Board of India. A similar delay happened after M Damodaran left to join IDBI Bank.

UTI Mutual Fund flagged off its second UTI Knowledge Caravan from Mumbai as part of its Investor Education Initiative called “Swatantra”. The Investor Education Initiative is in partnership with Ministry of Corporate Affairs, Government of India. During its journey, the caravan will cover more than 14000 kms in about 260 days. As a part of this initiative four UTI Knowledge Caravans will travel through the length and breadth of the country for spreading financial literacy. The first caravan was flagged off on October 31, 2011 from Delhi. UTI Mutual Fund will conduct Investor Meets for investors and educational programs at schools and colleges to spread the message of savings and investments to the youth of India.

AMFI has invited expression of interest (EOI) from software developers to develop, maintain, support and train for its long awaited Mutual Fund Utility Platform. The Mutual Fund Utility will provide order routing and payment mechanisms with connectivity to RTAs, AMCs, stock exchanges, DPs, banks and centralized KYC repository. The prospective software developers will have to develop the software in three months and maintain the software for five years post implementation. Investors will be able to make a single payment for multiple transactions. New investors into mutual funds will be required to open a ‘common account number’ and complete the KYC and submit the documents to the centralized account opening repository. The mutual fund Utility will then generate a unique account number for the investor which has to be used for all transactions in mutual funds. AMFI is likely to charge a fee for transacting through this platform in order to fund the maintenance costs. It will be operated on a ‘no profit no loss’ basis.

Regulatory Rigmarole

According to the Association of Mutual Funds in India the mutual fund industry has implemented the SEBI directive to issue consolidated accounts statement (CAS) to its investors from October 2011. This is an investor-friendly initiative to allow investors a single-window view of all their transactions in mutual funds. The consolidation of folios will be on the basis of the Permanent Account Number (PAN) provided by investors. Monthly CAS will include only those folios in which financial transactions have taken place during the month provided the folios have valid PAN numbers available for all the unit holders. CAS will include all types of financial transactions like purchase including NFOs, redemption including maturity, switches, systematic transactions like SIP, SWP, STP, dividend payouts or reinvestments, merger, bonus transactions etc. CAS will be sent on or before the 10th calendar day of the following month for folios which have been transacted in the previous month. Currently CAS will be sent only via physical and not electronic.

In order to improve transparency, market regulator SEBI has asked all mutual funds to disclose names of distributors, who receive commission in excess of Rs 1 crore annually or have presence in more than 20 locations, on their websites from March 2012. The disclosure, which would be uploaded on the mutual fund industry body AMFI’s website, is mandatory from November 10, 2011. Distributors earn an upfront commission from the mutual funds in the first year which is generally higher for selling equity schemes and lower for debt schemes. Further, they also earn a ‘Trail Commission’, which is a percentage of total business brought by the distributor. This commission is paid in the subsequent years and accounts for a huge earning for the distributors.

SEBI has allowed fund houses to participate in ‘AAA’ rated corporate debt securities with a 10% cap on exposure of the net assets of the scheme. The cumulative gross exposure through repo transactions in corporate debt securities along with equity, debt and derivatives shall not exceed 100% of the net assets of the concerned scheme. SEBI has directed fund houses to disclose the details of repo transactions of the schemes in corporate debt securities, including details of counterparties, amount involved and percentage of NAV in the half yearly portfolio statements and to SEBI in the half yearly trustee report.

Soon, you may be able to buy mutual fund units, shares, insurance policies, bank deposits and other such financial products with a single Know Your Customer (KYC) compliance. Financial Intelligence Unit-India (FIU-Ind), the national agency monitoring suspect financial transactions, has initiated discussions with different financial sector regulators to build a common database, which could be utilised by all financial services agencies. At present, each sectoral regulator - the Securities and Exchange Board of India, Insurance Regulatory and Development Authority, the Reserve Bank of India, Pension Funds Regulatory and Development Authority and the Forward Markets Commission have different KYC requirements. This means users are now required to fill in numerous columns in multiple forms every time they buy a new product. This common KYC database will help the different regulators and intermediaries monitor suspicious transactions and terrorist financing more efficiently.

Amid shrinking asset bases and declining investor folios, only a handful of mutual fund houses are pushing themselves to spread out to smaller towns and villages. As per data shared by asset management companies, about 15 of the 35 fund houses have over 80% of their assets mobilised from the top five cities - Mumbai, Delhi, Kolkata, Chennai and Bangalore. The industry body, Association of Mutual Funds in India (AMFI), had asked fund houses to disclose the geographical spread of assets managed by them. Higher proportion of fixed income assets - mainly belonging to banks and corporate treasuries headquartered in metros and top-tier cities - has skewed the spread of assets towards top cities. This, coupled with lower distributor support in smaller cities and increased focus of fund houses on city-based investors, has made mutual funds an exclusive investment product for urban Indians. Funds such as Peerless, Edelweiss Mutual, Sahara, Baroda Pioneer, Daiwa Mutual and Pramerica derive over 90% of their assets from four metros and tech-savvy Bangalore. The under-penetration of funds is not restricted to smaller and newer asset managers alone. Large fund houses like HDFC Mutual, Reliance, Birla Sunlife, and ICICI Prudential Mutual collect about 64-75% of their assets from top five cities. The asset spread of well-established large fund houses drop to about 11-15% in next 10 cities (cities after metros), about 4-5% in next 20 cities (after metros and top 10 non-metro cities) and about 2-3% in real small cities (cities beyond next 20 cities). Significantly, foreign fund houses such as DSP BlackRock, Franklin Templeton, Fidelity, and Mirae Asset have relatively strong presence in non-metro top-10 cities like Ahmedabad, Hyderabad, Rajkot, Indore, Pune, Nashik, and Jaipur. The obvious potential in smaller cities and towns (beyond the top 20) is largely retail which is long-term and sticky in nature. The fundamental challenge is of educating and hand-holding them to invest in the equity market through funds.

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