FUND FULCRUM
December 2011

With the prevailing uncertainty in equity markets and an indefinite postponement of hopes of any recovery, retail investors accessing stock markets through equity mutual fund schemes are wriggling out fast. Around 125,000 equity investors closed their folios in November 2011 — the second highest in the current financial year after July 2011, when equity folios had shrunk by 330,000. Since the beginning of the current financial year, the industry has lost 770,000 equity folios. The gross sales of equity schemes hit a 31-month low in November 2011. According to the Association of Mutual Funds in India, gross equity sales in November 2011 were Rs 3,183 crore, the lowest since April 2009. Earlier months fetched fund houses an average sale of between Rs 4,000 crore and Rs 5,000 crore. In April 2009, they had sold equity schemes amounting to Rs 1,836 crore. Marred with poor performance, redemption pressure and distributors’ unwillingness to push mutual fund products, fund houses are finding it increasingly difficult to attract investments in equity. Even systematic investment plans (SIPs), which were a saving grace, have started showing a decline on the back of terminations and cancellations. Since August 2011, equity funds continued to get positive net inflows but in November 2011, the initial signals of redemption pressure were visible, with a marginal net outflow of around Rs 50 crore. Interestingly, the drastic decline in equity sales is the highest since the capital market regulator abolished the entry load on equity schemes with effect from August 2009. Despite the load ban, equity sales in some months had crossed Rs 8,000 crore. Currently there are a little over 300 pure equity schemes available.

The mutual fund industry is beginning to bear the brunt of tight liquidity and market uncertainty. All schemes except liquid funds recorded net outflows to the tune of Rs. 2,088 crore, according to the latest AMFI data. The inflows in liquid funds have also fallen compared to last month. In October 2011, liquid funds witnessed net inflows of Rs. 32,745 crore while in November 2011 the net inflows stand at just Rs. 5,861 crore. The AUM of equity funds dropped 8% to Rs. 1.48 lakh crore in November 2011 from Rs. 1.61 lakh crore in October 2011. The industry’s AUM slipped 2% from Rs. 6.95 lakh crore in October 2011 to Rs. 6.81 lakh crore in November 2011.

Piquant Parade

Financial services group IDFC has sold 25% stake in its mutual fund business to French major Natixis Global Asset Management (NGAM) for an undisclosed amount. The new partnership would help IDFC AMC reach international investors interested to pump money into Indian equity markets. Besides, NGAM's presence in Asia, including Japan, Singapore, Taiwan, and China would also receive a boost though this agreement. IDFC AMC now has the ability to offer domestic investors access to international investment opportunities through NGAM investment products.

A few large overseas fund houses like Vanguard, Old Mutual etc. are vying for a strategic stake of anywhere between 26% and 49% in Axis Mutual Fund, promoted by India’s third largest private sector bank, Axis Bank. The foreign players' interest in the asset management firm displays a renewed appetite for the domestic mutual fund story that has been witnessing consolidation in recent times.

Bank of India announced the acquisition of a 51% stake in the mutual fund joint venture between telecom major Bharti Enterprises and Axa Investment Managers for an undisclosed amount. With the acquisition, Bharti Enterprises, which has about 25% stake in the fund house, will exit the asset management business.

Edelweiss Financial Services, a leading financial services firm in India, is in talks with global investors to be a partner in their mutual funds arm Edelweiss Asset Management that manages assets worth about Rs 447 crore.

To enhance investor convenience and ease of accessibility, Quantum Mutual Fund, India’s first and only direct-to-investor mutual fund has tied up with Yes Bank to use its drop box facility across Mumbai. Investors can now drop their subscription applications at any Yes Bank drop box having the Quantum Mutual Fund logo. These drop boxes are located at various locations across the city, including 37 locations at railway stations, 38 ATM sites and 5 airports. However, investors will have to follow a few steps like enclosing the application along with the cheques and supporting documents in a sealed envelope with ‘Quantum Mutual Fund’ written on it, before dropping the application into the drop box.

ICICI Prudential Asset Management Company Limited has partnered with Bloomberg UTV to present on mutual funds and investing with a twist through live plays titled ““Tarakki ke Tarikey – An Innovative Investor Mela. Tarraki ke Tarikey is a part of many such initiatives under the AMC’s investor awareness platform “Tarakki Ahead”. Cutting across conventional financial programmes, the play titled “Tarakki ke Tarikey” by the theatre group “Circus” endeavors to “entertain while educating” investors on mutual funds and breaking some common investment myths. Beginning from Rang Sharda auditorium in Bandra, Mumbai, theater artists would take to the roads across 5 cities entertaining the audience through their 11 appealing short stories related to investment myths.

It seems that the AMFI’s Mutual Fund Utility Platform will take a longer time to be operational. The three month deadline given by AMFI to develop the software is too short.

In what can be called as a trend-setter for the mutual fund industry, IDFC Mutual Fund has allowed investors to invest less than Rs.1 crore as well as redeem mutual funds in its IDFC Money Manager Fund (Treasury Plan). It plans to extend the same facility to other funds as well in the days to come. The investor does not need to sign a cheque every time he wishes to invest. Just one SMS can help him buy funds on the same day’s NAV, thanks to the electronic time stamping mechanism. What makes this initiative different from the already existing mobile buying facility is that investors do not need to own a GPRS or smart phone with internet connection. India has more than 72 crore mobile phone users and the potential seems huge. The facility is currently available for sole proprietors, resident individuals (including guardians on behalf of minor). The AMC has tied up with SBI, Standard Chartered, Kotak Mahindra, HSBC, Axis Bank, ING Vysya Bank, Citibank and plans to extend the facility to more banks going ahead.

The Securities and Exchange Board of India has appointed K V Kamath, chairman of an advisory committee for the regulator’s Investor Protection and Education Fund (IPEF). The committee will be responsible for advising SEBI on investor education and protection activities that may be undertaken directly by the SEBI board, or through any other agency, for utilisation of the SEBI Investor Protection and Education Fund.

Regulatory Rigmarole

The Securities and Exchange Board of India plans to make it more difficult for investment banks to influence the recommendations of analysts through strict new rules aimed at a clear separation of the two functions. There is an inherent conflict of interest in research activities unless it is done by a pure research firm which is not involved in other activities. There should be a Chinese wall between advisory and research; the moment the wall is broken one could influence the other.

The Securities and Exchange Board of India will soon make it mandatory for compliance officers of all market participants to take a certification programme. The programme will be conducted by the National Institute of Securities Markets (NISM). The SEBI move assumes significance in the light of the recent regulatory changes that have made compliance officers responsible for many activities. In one such action, Sebi made compliance officers responsible for unsubstantiated news or rumours related to a listed entity spread by an employee of a market intermediary.

The Securities and Exchange Board of India has directed market intermediaries not to outsource core business activities and compliance functions. The direction comes in the wake of instances wherein intermediaries resorted to outsourcing, to reduce costs and at times, for strategic reasons.

SEBI in its recent circular announced to simplify the Know Your Client (KYC) process to make investing a friendly affair among investors. It has issued guidelines for uniform KYC process for the investors who intend to open accounts with different intermediaries in the securities market. The new KYC procedure will do away with the duplication of KYC registering with different intermediaries. As of now, if an investor intends to open accounts with different intermediaries for the purpose of trading / investment in the securities market, he has to undergo the process of Know Your Client (KYC) again and again. Therefore, to avoid duplication of KYC process with every intermediary, a mechanism for centralization of the KYC records in the securities market has been developed by SEBI. Thus once the investor has undergone the KYC process, an intermediary shall perform the initial KYC of its clients and upload the details on the system of the KRA. If investor intends to open account with another intermediary, the concerned intermediary can verify and download the client’s details from the system of the KRA. For the proper implementation of the KYC process, SEBI has notified KYC Registration Agency (KRA) Regulations. The Regulations cover the registration of KRAs, functions and responsibilities of the KRAs and intermediaries, code of conduct, data security, etc. An applicant for KRA status must also have a net worth of Rs 25 crore and have expertise for technology and systems and safeguards for maintaining data privacy and preventing unauthorised sharing of data. Initial registration would be valid for a period of five years. KRAs would be eligible for applying for permanent registration three months before the expiry of the period of certificate of initial registration. SEBI has also made provisions for inspections of KRA regarding books of accounts, records, infrastructure, documents and procedures.

The April 1, 2012 deadline for implementation of the new DTC (Direct Taxes Code) may not come into force on time.

India's advertising regulator has upheld an allegation that promotional booklets published by Association of Mutual Funds in India were misleading investors about returns from mutual fund investments. An investor had complained against the advertisements to the Advertising Standards Council of India's consumer complaints council, claiming that the promotional campaigns wrongly assured 'better' returns on mutual fund investments.

It has been a tumultuous couple of years for India's mutual fund business. A host of regulatory changes, especially the abolition of entry loads has meant a rapid reinvention of the business. Independent Financial Advisors (IFAs), who have been grappling with regulatory changes over the last two years, are still betting more on mutual funds than other financial products. IFAs are coming together for the first time to form a body, which will lobby to protect their interests. The association, planned on similar lines as the domestic mutual fund industry body AMFI, will voice its views in matters related to rules governing financial product distribution and investment advisory business. The association will function as the voice of IFA community. It will also double up as a knowledge sharing platform for IFAs. The association will cater to about five lakh IFAs, who sell a gamut of financial products from insurance to bank deposits, bonds, postal savings schemes and mutual funds, across the country.