FUND FULCRUM

June 2012

The mutual fund industry posted a nearly 3% growth in its average assets under management in May 2012 as against 16% in April 2012 to close marginally below the Rs 7 lakh crore mark at Rs 6.99 lakh crore in May 2012 as against Rs 6.8 lakh crore in April 2012. The mutual fund industry, on an average, lost about 1.5 lakh folios in May 2012. Folio numbers fell from 4.64 crore in March 2012 to 4.61 crore in May 2012, losing 3.02 lakh in two months. The decline was led by a decrease in equity folios. The number of equity and income fund folios decreased by 1.3% and 3.3% in May 2012 and April 2012 respectively.

Reliance Capital Asset Management Company had overtaken HDFC AMC as the country's most profitable fund house during the previous fiscal 2010-11 and has managed to retain its leadership position. Reliance Capital Asset Management managed Rs 1,40,853 crore as on March 31, 2012, across mutual funds, pension funds, managed accounts and hedge funds. Reliance Mutual Fund figures among the top two mutual funds in India, in terms of AUM, with market share of nearly 12% and its average AUM stood at Rs 78,112 crore for the period ended March 31, 2012.

According to the CRISIL report, equity funds witnessed a net inflow of Rs 400 crore in May 2012 but assets declined on mark to market losses. This was because the underlying equity markets represented by the benchmark S&P CNX Nifty fell by over 6% in May 2012, dragged down by weak global and domestic cues. The CRISIL report further said that the money market /liquid funds saw net inflow of Rs 25000 crore, garnering around 94% of the total inflow (of Rs 26700 crore) seen by the industry in May 2012. However, the inflows were sharply lower compared to Rs 75800 crore seen by the industry in April 2012. The assets of this category were up by 16% to Rs 1.83 lakh crore in May 2012, the highest since May 2011. The average returns of the category were 0.80% as of May 2012 compared to 0.85% in the previous month. The CRISIL report said that the income funds witnessed inflows and share of FMPs too rose. Income funds (including ultra short-term debt funds and fixed maturity plans or FMPs) continued to see inflows for the second month in a row. The category logged inflows of around Rs 1600 crore in May 2012, sharply lower than Rs 17900 crore seen in April 2012. The category AUM rose by Rs 3700 crore to Rs 3.13 lakh crore in May 2012 which included Rs 1.34 lakh crore AUM under FMPs. The rising interest rates in the economy over the past two years have seen the share of FMPs in the category grow to 43% in May 2012 from 8% in May 2010. The current inflows in this category too are largely on account of FMP NFOs where investors are able to lock into higher yields.

Piquant Parade

South Korea's Mirae, United States’ Vanguard and Pramerica are interested in purchasing Dutch firm ING Asset Management's Indian mutual fund business, which may be carved out of the Asian operations and sold separately.

Reliance Capital has received approval from SEBI for its proposed stake sale in Reliance Capital Asset Management (RCAM), India's largest and most profitable Asset Management Company. Approval for the stake sale has also been received from the Monetary Authority of Singapore (MAS). The Reserve Bank of India (RBI), Competition Commission of India (CCI), and the Pension Fund Regulatory and Development Authority (PFRDA) have already granted their approval for the proposed stake sale. The company had signed final agreements with Nippon Life Insurance to sell 26% stake in RCAM earlier this year, subject to regulatory approvals. Nippon Life will invest an aggregate value of Rs 1450 crore to acquire 26% strategic stake in RCAM. The transaction pegs the total valuation of RCAM at approximately Rs 5600 crore.

Barring Reliance Mutual Fund, none of the fund houses has given enough thought to cast their votes on behalf of investors in their respective funds, much to the discomfiture of SEBI. Mutual Funds vote to safeguard the interests of the unit holder (investor) on a corporate resolution. As per data aggregated from fund house submissions, ICICI Prudential Mutual Fund abstained from about 225 of the 227 votes it had to cast last fiscal. DSP BlackRock skipped 1,091 of the 1,475 resolutions. UTI Mutual Fund had to vote on 2,600-odd resolutions last year - it abstained from 2,455 resolutions, voted against 2 and supported 170 corporate proposals. HDFC Mutual Fund abstained from 126 of the 345 management proposals it had to vote last year.

The government plans to introduce financial literacy in the school curriculum very soon, with the long-term aim of increasing the household contribution into equity markets, currently very limited, to reduce over-dependence of the economy on foreign capital. Chapters on financial and capital markets are to be included in the primary and secondary school syllabi. Human Resources Ministry is working on a detailed programme on how basic knowledge on each segment of the capital market could be covered in classroom teaching. Students would also be taught about the gains and risks attached to investments in the market. This would enable people to understand and become comfortable with such investments. They would realise the importance of these markets and how it can work.

Market regulator SEBI is likely to give its okay for MF Utility in the next three days. AMFI had shortlisted nine companies for developing MF Utility platform. The platform is likely to be run on a no-profit, no-loss basis. The MF Utility will provide order routing and payment mechanisms with connectivity to R&TAs, AMCs, stock exchanges, DPs, banks, centralized KYC repository, etc. The platform would allow distributors to execute transactions across all schemes of all AMCs.

Regulatory Rigmarole

The number of distributors opting in for transaction charges has gone up to 9000 from around 6000 earlier. Absence of clarity on rollback of entry load and whispers of ban on upfront commission has led more distributors to opt for transaction charges. The window for changing status on transaction charges was open from March 1 to March 25, 2012. The numbers show the strain on revenues. Transaction charges, at least, takes care of the distributors’ staff salaries.

SEBI panel wants non-certified nominees to receive all dues on commissions as also commissions on SIP investments. According to a current SEBI rule – “the nominee of individual distributor will receive trail brokerage/commission on business done before the demise of the distributor holding ARN card. The nominee will not be entitled for any brokerage/commission on SIP instalments post demise of Distributor.” Therefore, an IFA’s nominee who does not have an ARN and NISM certification cannot receive trail commission on the business acquired after the death of an IFA. Moreover, SEBI does not allow any non AMFI certified broker to receive trail brokerage and this rule is applicable even for IFA’s nominee.

Norms for valuing securities while calculating NAV have been standardised and there is little scope for manipulation now. Defaults relating to manipulation of net asset value or other mutual fund defaults where the actions of the asset management company/ mutual fund sponsor, result in substantial losses to the unit holders, except cases where the entity has made good the losses of the unit holders to the satisfaction of the board.

AMFI has asked AMCs to process switches the same way they process redemptions from June 1, 2012. In its latest best practices circular issued on May 15, 2012, AMFI has asked fund houses to reject redemption or switch-out requests if they have not realised money in their scheme accounts, from June 1, 2012. For instance, A invests in a liquid fund on Monday and requests to switch out to an equity fund on Tuesday. This way, A earns returns for one day when the AMC has not yet received the funds. Fund houses usually receive money on the third or fourth day. These returns, in effect, are being paid out by existing investors. The money is realised only on Thursday. Now, investors cannot redeem unless the money is realised by the AMC. Earlier, a few investors were earning returns from these switch-out requests.

Non-updation of address, bank details, PAN, and discrepancies in account statements are the most common complaints received by AMCs. Most complaints were resolved within 30 days. As per the latest AMFI data, most AMCs were able to redress investor complaints within 30 days. AMCs received maximum complaints relating to non-updation of changes like address, PAN, bank details, nomination and discrepancies in account statements. Error or omission on the part of investors while filing up application forms is one of the main reasons for such complaints. Apart from mistakes made by investors, some errors are also made by data entry operators at the R&Ts.

According to a circular dated June 15, 2012, SEBI has said that complaints received by SEBI against stock exchanges and depositories should be sent electronically through SCORES (SEBI Complaints Redress System) and the Action Taken Report (ATR) submitted along with supporting documents electronically in SCORES. The regulator has asked the exchanges and depositories to address the complaints within 15 days upon receipt of complaint on SCORES. In case additional information is required from the complainant, it should be sought within seven days of receipt on SCORES. The circular also mentions to indicate contact details (phone number, email ID and postal address) of the person heading the complaint services division, besides maintenance of monthly record of complaints which are not addressed within 15 days along with the reason of delay. SEBI said the ATR should be updated on SCORES and failure to do so shall be considered as non-redressal of the complaint and the complaint will be shown as pending.

SEBI has made many pro-industry changes. The mutual fund industry, beset by net redemptions by investors and adverse global and local market conditions, shrank by 1.6% in terms of assets under management during the year FY2011-2012.The benchmark BSE Sensex and the assets under management for the mutual fund industry have risen in tandem. Booming markets in 2006 saw increased investor participation in the industry, leading to fund inflows enabling the AUM to grow at a pace greater than the Sensex. However, volatile market conditions in the last two years have led to net withdrawals by investors to the tune of Rs.49,406 crore in FY 2010-11 and Rs.22,023 crore in FY 2011-12, leading to a further drop in AUM, in addition to the drop caused by adverse market movements. The mutual fund industry is primarily debt-oriented with debt funds (including liquid funds) forming 64% of the AUM. As in the past, increased equity participation is the need of the hour for the mutual fund industry. With a population of 1.2 billion, 330 million houses and a varied customer profile investing in capital markets, just consider the untapped market at hand. The potential for the mutual fund industry is enormous. We have to see the present situation through the prism of an evolutionary opportunity. The industry is at a point where a few key innovative initiatives could result in a change of trajectory going forward. The issues and problems we face are not dissimilar to those faced by financial services sector here and globally. There are valuable lessons to be learnt from a keen observation and understandings of how other markets have reacted in similar situations. At present, the Indian mutual fund industry is facing interesting times. The last few years have seen a series of events, both within and outside the Indian economy, which have impacted the industry. Additionally, investors appear to have adopted a more cautious approach. The present scenario demands vigorous innovation and reinvention. Among others, the purpose may be served by adopting a cluster of key initiatives in the areas of cost efficiency, product design and positioning, alternative distribution models, revenue diversification and capacity creation.