FUND FULCRUM

November 2012

India’s mutual fund industry has continued to see money going out of its equity segment for the fifth month in a row in October 2012. Compared to the previous month — when the sector witnessed two-year high net outflows — it is relatively better. However, the sector is still not out of the woods. The equity segment, where contribution by retail investors is the highest, is unable to increase its gross sales. Instead, redemption continues to be high. During October 2012 when the country's benchmark indices traded more or less in a range-bound fashion and lost a little less than one-and-a-half-percentage points, investors continued to book profits and exit their investments. According to the statistics available from AMFI, October 2012 witnessed a net outflow of Rs 1,984 crore from equity schemes, including the equity-linked saving schemes (ELSS). Though the figures are still high, it was a relief for fund managers as in September 2012, when markets rose steeply industry had seen outflows of a whopping Rs 3,559 crore. With the latest outflows, the current financial year so far has seen overall net outflow of Rs 9,258 crore from equities alone, which during the same period last year stood in the positive territory with net inflows of Rs 3,750 crore.

Total Assets Under Management (AUM) of the mutual fund industry increased by 6.7% (by Rs 48,045 crore) to Rs 7.68 lakh crore in October 2012, due to huge inflow into income and liquid funds. AUM of gilt funds increased sharply by 30.9% (by Rs 1,037 crore) to Rs 4,393 crore in October 2012 and it reported net inflow of Rs 1,018 crore, the highest in the last thirty four months. AUM of liquid funds increased by 13.6% (by Rs 19,703 crore) to Rs 1.64 lakh crore in October 2012 and the net inflow was Rs 18,176 crore. AUM of income funds rose for the seventh consecutive time in October 2012 by 8.8% (by Rs 31,076 crore) to Rs 3.83 lakh crore. The income fund category witnessed net inflow of Rs 29,340 crore. On the other hand, AUM of equity funds fell by 2% (by Rs 3,242 crore) to Rs 1.59 lakh crore, while assets of equity-linked saving schemes (ELSS) dipped by 1.8% (by Rs 452 crore) to Rs 24,183 crore, due to mark-to-market loss. Net inflow into the industry stood at Rs 46,721 crore in October 2012 as against net outflow of Rs 51,908 crore in September 2012.

More than 25 lakh equity folios have dropped in the last six months when the Sensex gained more than 2000 points. After reaching a peak of 4.11 crore folios in March 2009, equity folios have been falling relentlessly since 2009. The latest data published by SEBI for the period April 2012-October 2012 shows that the industry saw a drop of 25.77 lakh folios. The total investor count in equity funds stands at 3.50 crore now. While AMCs are witnessing redemptions in equity funds, the debt category is seeing a healthy rise in investor accounts. More than five lakh folios have been opened in debt funds in the last six months.

Piquant Parade

The board of Daiwa Mutual Fund, the Indian asset management arm of Japan's Daiwa Securities Group, will sell its schemes but may retain the mutual fund licence. The group has decided to adopt a 'scheme transfer' method to exit its domestic fund business. The Daiwa board has chosen to cut down India exposure amid "difficult business conditions"; instead, it will focus resources on the group's overseas fund management and advisory business. Though Daiwa may exit its domestic fund business, it will continue to have a toehold in India to manage the asset manager's offshore funds and advisory business. The Japanese asset manager has offshore portfolios worth $275 million, down about $525 million from peak levels. Daiwa Mutual Fund started its India operations in 2010 when it acquired the fund assets of the Shinsei Bank-owned Shinsei Asset Management Company.

The Aditya Birla group, led by Kumar Mangalam Birla, has taken charge of its mutual fund joint venture with Sun Life Financial of Canada by buying 1% stake from the latter. The Birlas will now own 51% stake in Birla Sun Life Asset Management Co. Ltd. and Sun Life will be left with 49%. The Birlas and Sun Life had set up the mutual fund venture in 1994. Since then, it has grown into one of India’s leading mutual fund companies, with assets under management of Rs 72,900 crore as of September 2012, growing at an annual rate of 8.5%.

Fair trade regulator, Competition Commission of India (CCI), has approved Religare group's 49% stake sale in its mutual fund business to global investment management firm Invesco. According to the deal, reached in September 2012, US-based Invesco is acquiring 49% stake in Religare Asset Management Company and Religare Trustee Company Pvt Limited, which manage assets worth over Rs 14,600 crore for Religare group's mutual fund business. Invesco is acquiring the stake through a group entity, Invesco Hong Kong Ltd, from Religare Securities Ltd. and the deal is estimated to have valued Religare group's mutual fund business at about Rs 1,000 crore.

Regulatory Rigmarole

AMFI has reduced the registration fees for mutual fund distributors to increase the penetration of mutual funds and motivate distributors to look beyond the metros. The revised fee will be applicable from November 1, 2012. First time Individual Financial Advisors (IFAs) will now have to pay only Rs 3,000 for registration, compared with Rs 5,000 earlier. Even the renewal fees for existing IFAs are reduced to Rs 1500 from Rs 2500 earlier. In August 2012, SEBI created a new category of distributors, which includes individuals like senior citizens, postal agents, retired teachers, and other retired government officials who have been in service for at least 10 years in their respective organisations. The fee for this category has been fixed at Rs 3,000 per person. The registration fee for NBFCs has been reduced by 80% from Rs 5 lakh earlier to Rs 1 lakh now and the renewal fee from Rs 2.50 lakh to Rs 50,000 now. Earlier all types of banks, be it private, or co-operative had to pay Rs 5 lakh as registration fee. Now, AMFI has introduced a separate category for regional rural banks, district central co-op. banks that have to pay Rs 1 lakh for getting mutual fund distribution license. This reduction in fee will lead to higher number of distributors entering in Tier-2 and Tier-3 cities, which will benefit the industry over a period of time.

Market regulator SEBI allowed mutual funds to participate in Credit Default Swap (CDS) transactions, which allow business entities to hedge risks associated with the bonds market. Besides, mutual funds could invest in repo or short-term repurchase of forward contract of corporate debt securities having ratings of AA and above that. Mutual funds can participate in the CDS market for hedging their debt risks, but cannot enter into short positions in the CDS contracts. Mutual funds are required to disclose the details of CDS transactions of the scheme in corporate debt securities on the monthly as well as half yearly basis. 

If you have already invested in any particular fund house and now wish to invest in another fund house where you have not invested before January 1, 2012, then you will have to complete the KYC formalities again by filling up the new KYC form implemented after January 1, 2012. From December 1, 2012, certain additional information needs to be submitted as well as ‘in person verification’ (IPV) needs to be completed for further investments in any mutual fund (other than the one in which the investors have already invested). The revised KYC form before January 1, 2012 for individuals has additional provision for details such as father's / spouse name, marital status, nationality, gross annual income / net worth details and in-person verification. The revised KYC form can be used for changing contact details like address, email id and phone no. Hence, existing individual investors who are know your client (KYC) registered prior to January 01, 2012 through CDSL Ventures Ltd (CVL) and who wish to invest in any new mutual fund / through capital market should complete the additional KYC requirements/provisions (as mentioned above) using the KYC Details Change Form on or before November 30, 2012.

Market regulator SEBI allowed mutual fund houses to levy certain amount of brokerage and transaction costs on investors with regard to execution of trades. In a circular, the regulator said that fund houses can levy brokerage and transaction costs, with a ceiling of 0.12% for cash market transactions and 0.05 for derivatives dealings.

Karvy has recently released an India Wealth Report 2012 that gives an update on individual wealth in India. According to the report, the individual investors’ investment in mutual fund increased to Rs 3.11 lakh crore from Rs 2.84 lakh crore in FY 11. Debt-oriented funds grew by 17.2% while equity-oriented funds grew by 2% compared to last year. The individual wealth in the country grew to Rs 92.26 lakh crore as on March 2012 from Rs 86.5 lakh crore the previous year. The total individual wealth in India is expected to double to Rs 179 lakh crore in the next four years from the current Rs 92.26 lakh crore.