FUND FULCRUM

May 2012

 

According to rating agency Crisil Ltd, fund houses lost at least 700,000 folios in the six months ended March 2012.The retail category was the biggest loser in terms of folios, especially in the equity category, dragged down by the fall in the domestic markets in 2011. Domestic banks/financial institutions category also witnessed a decline of 77% in folios during the year ended March 2012, mainly due to RBI’s recent circular restricting bank investment in Mutual Funds to 10% of their net worth from January 2012. In 2010-11, the net inflow into the equity schemes of mutual funds was down by about Rs 13,500 crore. But, in the following year, it turned positive with a net flow of around Rs 700 crore. Indian retail investors, who access equities through the mutual fund (MF) route, continue to eschew investments in stock markets. The closure of 300,000 folios in one month at the beginning of the current financial year (April 2012) has further shrunk the equity investors’ base of the mutual fund sector. A worsening global market situation impacting Indian stocks is proving a big deterrent for investors. Between January and April 2012, 11 lakh retail equity folios have been closed. Data from the Securities and Exchange Board of India show the total number of equity folios was 3,73,47,567 on April 30 2012, down 3% from December 2011, at 3,84,96,253.

India's top asset management companies (AMCs) have continued to remain profitable, no matter whether mutual fund investors made money or not in the tough market conditions. Rather, top players have posted growth in their profitability during the financial year 2011-12. Reliance Mutual Fund, despite losing its top slot to HDFC Mutual Fund during the year, continued to remain the most profitable asset manager in the industry, with Rs 276 crore as net profit in FY12, a growth of 5.6% against Rs 261 crore in the previous financial year. HDFC Mutual Fund, the country’s largest fund house, grew faster to Rs 269 crore, growth of 11% compared with Rs 242 crore in FY11. The top five control 54% of the industry’s assets (there were 44 fund houses managing an average assets under management (AUM) of Rs 6,64,792 crore as on March 31, 2012). These players reported rise in profits in a year that saw erosion of a little over 5% of the industry’s AUM, while equity AUM dipped 6.7%.

A common perception is that investment in the capital markets, particularly equities, is largely an urban phenomenon, essentially a metro show. This seems to be true of mutual fund investments as well, if one goes by the data of geographic distribution of AUM with UTI MF available on its website. But what is surprising is that many small cities in the country have taken to the equity cult even if, in terms of percentage, their share in the overall pie of UTI MF is very small. In broad terms, investors from five cities account for a little more than 50% of the total AUM of UTI MF, which is in line with the general trend. But what is interesting is investors' preference for particular funds. While Mumbai occupies the top slot in all categories except one (Gilt fund where it is toppled by Jaipur), those that figure among the top five are not uniform across all the funds. For instance, Chennai does not figure among the top five in the income fund category as it is replaced by Ahmedabad. In equity funds, Hyderabad replaces Bangalore while the other four are common. In the balanced fund list, Mangalore and Jodhpur elbow out Bangalore and Chennai. In Gilt funds, Jaipur accounts for nearly half the investment with a 47.09% share while Mumbai came a distant second with 20.63% share. In the ELSS category, Chennai and Bangalore are edged out of the top five by Hyderabad and Pune. But in Gold ETF, Chennai ranks fourth with a 4.13% share.

Piquant Parade

Bharti Enterprises exits from the mutual fund business as Bank of India makes a re-entry. State-run Bank of India (BOI) has re-entered the mutual fund industry by buying 51% stake in Bharti AXA Investment Managers for an undisclosed sum. BOI has acquired 25% stake from Bharti Enterprises (which will exit the fund house) and 26% from AXA Investment Managers (Asia). The remaining 49% stake will be held by AXA Group. The fund house will be renamed ‘BOI AXA Investment Managers’. PSU banks have been able to leverage their extensive branch network for distributing mutual funds.

Competition watchdog Controller of Capital Issues (CCI) has approved the proposal of Japanese major Nippon Life to acquire 26% stake in Reliance Capital's mutual fund arm Reliance Capital Asset Management Ltd. The deal, which is valued at an aggregate amount of Rs 1,450 crore, is the largest Foreign Direct Investment (FDI) deal in any Indian asset management company till date.

 

Regulatory Rigmarole

The National Institute of Securities Market (NISM) has raised the cost of the Mutual Fund Distributor CPE Programme. It costs, at the most, Rs. 3,600 for adhering to the new mutual fund requirement norms stipulated by NISM at a time when the distributor business is dwindling. To provide a smooth transition, NISM will continue to offer the current CPE programme (the one-day programme) till May 31, 2012. An associated person holding a certificate whose validity will lapse on or before November 30, 2012 may undergo the current programme till May 31, 2012. Such a person holding a valid certificate whose validity will lapse between June 1, 2012 and November 30, 2012, and who has not undergone the above programme, may attend the NISM Mutual Fund Distributor (MFD) CPE as per the revised requirements from June 1, 2012 onwards, within the validity period of the said certificate. An associated person holding a certificate whose validity will expire on or after December 1, 2012 must undergo the NISM MFD CPE as per the revised requirements from June 1, 2012 onwards.

Fund houses such as SBI, Canara Robeco, Taurus, JP Morgan, Principal have introduced or increased exit loads on early exits by investors. The exit load would discourage very short term investments in debt schemes as it brings down the net gain to investors. Exit loads introduced are in the range of 0.15% to 0.5% and are for redemptions before completing 15 days to 180 days depending on the scheme. An income fund may charge exit load for redemptions up to 180 days from the date of allotment of units, whereas a short term bond fund, may charge exit load for redemption up to 90 days from the date of allotment.

Know-Your-Client (KYC) registration agency CDSL Ventures Ltd has asked market intermediaries to exercise caution while accepting KYC applications and supporting documents from investors. The agency has put out a list of 'reasons' that hinders smooth KYC clearance. Exclusion of PAN from income tax database, data mis-match or error, inadequate document support, differences in signatures, in-person verification not done, unsuitable address proof, mismatch between address on KYC Form and the proof submitted, incomplete KYC form etc. are some of the reasons for rejection of KYC.

In order to prevent fraudulent redemptions, AMFI has asked AMCs to stop accepting redemption requests along with change of bank mandate at the same time. The guideline came into effect from May 1, 2012 as part of AMFI’s best practices code. This is primarily being done to reduce operational risks. There are chances of fraud. So, AMFI has discouraged it. There has to be some cooling period between any change in bank account request and redemption. Fund houses allow retail investors to register five bank accounts and ten accounts for non-individual investors. Last year, SEBI disallowed third-party cheques to avoid fraudulent redemption practices.

The prolonged ebb in the market has taken its toll on the mutual fund industry. But hope remains in view of the strong fundamentals and the inherent nature of the market…