Monday, January 28, 2013


January 2013

After two consecutive years of plunge, the mutual fund industry managed to register a smart turnover in 2012, with its assets base seen nearing Rs 8 lakh crore with an increase of about Rs 2 lakh crore in 2012. Touching the highest level in nearly three years, the assets managed by mutual funds jumped by more than 5% to Rs 7.86 lakh crore in the three months ended December 2012. The country's 44 fund houses together had an average AUM (Asset Under Management) of Rs 7,86,543 crore in the October- December quarter of 2012, up from 7,47,333 crore in the previous three-month period. This is the highest level since September 2010 (when AMFI started declaring quarterly average numbers) and the third consecutive quarterly gain in mutual fund assets. Further, assets grew by 15%, or Rs 1.05 lakh crore, in the calendar year 2012 versus 1% growth in 2011. The total industry AUM stood at Rs 6.11 lakh crore at the end of 2011, while the same was about Rs 6.26 lakh crore at 2010-end and Rs 6.65 lakh crore in 2009. The rise in AUMs is due to sharp inflows into long-term debt and government securities (gilts) on expectations that the Reserve Bank of India, or RBI, would start lowering key interest rates soon. Bond yields and prices move inversely. As some wide-ranging reforms, initiated by the market regulator SEBI and the government, are yet to translate into true business gains for the investors and fund houses, the industry is hopeful of even better days ahead in 2013.

Inflows in income and liquid funds have contributed the most to the industry's rising AUM. With inflows of Rs 89,302 crore, money market funds AUM surged to Rs 1.77 lakh crore. A similar trend was seen in liquid funds, where inflows rose to Rs 80,880 crore taking the assets managed by the fund to Rs 3.87 lakh crore.
Similarly, equity funds' AUM rose to Rs 1.65 lakh crore despite registering outflows of more than Rs 9,300 crore. AUM of equity linked savings scheme too increased to Rs 25,027 crore though it saw investors pull out over Rs 1,400 crore in 2012.Interestingly, equity fund managers of mutual fund industry have betted big on banking space with investments worth more than Rs 42,000 investment, which was 20.59% of the industry's total equity assets under management.

The total AUM of all the fund houses put together has soared by an impressive 30% on strong inflows in categories such as fixed income, gold schemes, and liquid funds, according to industry estimates. About 80% of the fund houses logged a rise in the average AUM in the December 2012 quarter. L&T Mutual Fund registered the highest growth in assets in absolute as well as percentage terms. The fund house’s assets grew by more than three times from Rs 3,900 crore to Rs 12,100 crore in the latest quarter mainly due to the addition of Fidelity Mutual Fund’s AUM post completion of its acquisition of the latter in December 2012. Fidelity Mutual Fund had reported an average AUM of Rs 7,100 crore in the September 2012 quarter as per AMFI data. In absolute terms, ICICI Prudential Mutual Fund followed with its average assets up by Rs 5,000 crore to Rs 81,400 crore in the December 2012 quarter. In percentage terms, BOI AXA Mutual Fund recorded the second highest rise of 142% to end with assets of Rs 700 crore. Among losers, Daiwa Mutual Fund declined the most, in percentage terms, by nearly 32% in assets to end the quarter at Rs 500 crore. HDFC Mutual Fund retained its top average AUM position across fund houses in the December 2012 quarter with respect to total assets managed. The fund’s average AUM was up by Rs 3,600 crore or 3.7% to Rs 1,01,000 crore. Reliance Mutual Fund maintained the second position at Rs 90,600 crore, up by 5% or Rs 4300 crore. ICICI Prudential Mutual Fund was ranked third in the asset tally at Rs 81,400 crore; its average assets were up Rs 5000 crore or 6.6%. The share of top 5 mutual funds’ assets was 54% in the December 2012 quarter while the share of top 10 funds’ assets was 77%. The bottom 10 fund houses continued to occupy less than 1% of the AUM.

Piquant Parade

Capital market regulator, SEBI, has cancelled the registration of Fidelity Mutual Fund following its buyout by L& T Finance. Consequently, Fidelity Mutual Fund, FIL Trustee Company, and FIL Fund Management cannot carry out any activity as a mutual fund, trustee company and asset management company, respectively, with immediate effect. In November 2012 L&T Finance, a part of diversified group Larsen & Toubro, had completed the acquisition of Fidelity's mutual fund business in India for an undisclosed amount. L&T Finance is a part of engineering conglomerate L&T Group and Fidelity Mutual Fund is part of the US-based Fidelity Worldwide Investment.

ICICI Prudential Mutual Fund bagged the best asset management company award at the Money Today - Financial Planning Corporation (FPCIL) Awards held in Mumbai. Franklin Templeton won the best equity fund house award while DSP Black Rock walked away with the best debt fund house award.  The best AMC was awarded based on parameters like product education and awareness for customer, training of agents and customers, number of complaints raised by customers, average turnaround time for resolution of complaints, regulatory compliance, compliance with regulations, penalties paid under various categories during 2011-12. The best performing fund houses were selected on the basis of scheme return along with weighted average yearly performance across all schemes as on 31 March 2012, quality of the asset base, determination of internal prudence limits, size and scale, assets under management, number of employees, number of retail investors and AUM for retail investments, product effectiveness, sector product diversification, product innovativeness, etc.

Regulatory Rigmarole

In a move to regulate mutual fund distribution business, SEBI has notified regulations to set up a Self Regulatory Organisation (SRO) to monitor distributors of mutual fund and portfolio management products on January 8, 2013.

In a bid to boost the number of distributors and enhance mutual fund sales, AMFI has decided to waive registration fees, estimated at Rs 3,000, for all registrations of first time distributors for a period of five months from February 01, 2013 to June 30, 2013. This initiative is largely with the intention of enlarging the distribution network and attracting new cadre of Distributors/IFAs (Independent Financial Advisors) for selling mutual fund products. The distributors registering under the category of individuals (including senior citizens) and new cadre of distributors need not pay the registration fees if they register during the same period and fulfill conditions outlined by AMFI. In November 2012, AMFI had slashed registration fees to Rs 3,000 for three years per distributor from Rs 5,000. NISM has launched the much-awaited one-day certification for the new cadre of distributors. These distributors include postal agents, retired government and semi-government officials (class III and above or equivalent) with a service of at least 10 years, retired teachers with a service of at least 10 years, retired bank officers with a service of at least 10 years, and bank correspondents. People qualifying as new cadre of distributors can either pass the existing NISM-Series-V-B: Mutual Fund Foundation Certification Examination or complete a one day NISM Mutual Fund Foundation CPE Program. These certificates will be valid for three years.

The government is considering an expansion in the scope of the Rajiv Gandhi Equity Savings Scheme (RGESS) to attract more small investors to stocks. RGESS currently offers tax breaks to new investors who do not have a demat account—an electronic registry for stocks and debentures—or have a demat account, but are yet to invest in equities. The government may now extend the scheme to investors with some equity investments. RGESS allowed retail investors with no exposure to equities and annual income of up to Rs10 lakh to invest a maximum of Rs 50,000 in stocks and deduct half the amount from their taxable income. Going by the current income-tax rate, this translates into a saving of a little more than Rs 7,500 for taxpayers who invest Rs 50,000.The government is also exploring the possibility of raising the tax benefit as well as the maximum investment allowed under the scheme. For instance, the tax benefit may be raised from the current 50% to 100%. This means an investor will save at least Rs 15,000 in tax on an investment of Rs 50,000. The maximum investment permissible may also be raised from Rs 50,000 to Rs 60,000, or even more. The scheme was notified in December 2012 by SEBI. The government initially insisted on direct investment in stocks, but SEBI also allowed investments through mutual funds to be eligible for tax benefits under the scheme. According to SEBI’s notification, securities eligible for investment should belong to the BSE-100 or CNX 100 indices; investments in shares of some high-profile public sector units are also eligible. Several mutual fund houses are linking some of their investment plans to RGESS, but most of them are not very upbeat, given the complexity of the scheme.

SEBI registration is a must for all investment advisors — both individual and corporate, according to a new regulation by market regulator SEBI. However, professionals such as lawyers, chartered accountant and those giving generic view on economic situation without charging and incidental to discharging their professional services are exempt according to a SEBI notification on January 21, 2013. SEBI has mandated a minimum net worth requirement of Rs 25 lakh for corporate and Rs 1 lakh for individuals. The new Investment Advisors Regulations seek to impose numerous compliances on the investment advisors from the perspectives of disclosures, record maintenance, and risk profiling of clients. The regulations prescribe minimum educational qualifications, capital requirements, infrastructure requirements and personnel requirements such as compliance officers. The regulations also bar advisors from earning any remuneration other than fees from investors. SEBI also seems to be contemplating a scenario wherein once a SRO is identified, the regulation of investment advisors may be delegated to such a body. In the absence of such delegation, it would be a daunting task for SEBI to regulate hundreds of thousands of investment advisors. Hence the new regime would be challenging for both investment advisors and SEBI.

An assessment by the International Monetary Fund has found significant improvement in SEBI’s implementation of IOSCO’s (International Organisation of Securities Commissions) principles related to the securities markets. In its evaluation of the 25 systemically important economies including India, IMF said SEBI’s regulations for every market participant (including issuers, collective investment schemes, brokers, portfolio managers, underwriters and recognised regional stock exchanges) are robust. IMF observed that SEBI’s efforts in recent years to build a robust market surveillance system as well as separate investigation and enforcement departments have translated into effective enforcement of unfair trading practices. IMF pointed out that SEBI faced three challenges in the form of supervision of intermediaries (including fund managers and the mutual funds they administer), improve its mechanisms to ensure compliance of issuers with reporting requirements and develop better mechanisms to ensure compliance with accounting and auditing requirements. It said SEBI’s decision to rely on exchanges for self regulation or reviewing information submitted by listed companies itself or leaving it to a quality review board for independent oversight of auditors, will impact regulator’s resources. Though SEBI was independent in practice, it could be superseded by the Government on policy matters and its members could be removed without cause. The credibility of the supervisory process would be strengthened further if these provisions were remedied. The IMF said the securities market infrastructure in India is segmented by product type, which could raise concerns on the overall efficiency of the capital market. They are traded, cleared, and settled through different entities subject to different legal frameworks and regulators. The cooperation between RBI and SEBI on payment and settlement systems would benefit from formal arrangements for information sharing and policy coordination.
Forty-two mutual funds investing in Asia stormed into the list of the world's top 100 best performing equity funds in 2012 as regional markets from India to Southeast Asia rallied. The top 100 list includes 14 equity funds each from Pakistan and Thailand and nine from India, according to an analysis of data for 27,153 actively managed equity mutual funds tracked by Thompson Reuters Lipper globally. The Karachi Stock Exchange's benchmark 100 share index surged 49%, while Bangkok's benchmark SET index finished 35.8% up last year, making them the two best performing share markets in Asia. The Asia-focused funds produced an average return of 61.5%, outperforming the top market in the region as well as the 18.6% advance in the MSCI's broadest index of Asia-Pacific shares outside Japan. Nearly 7,300 equity funds investing in Asia and tracked by Lipper returned an average of 17.9% in 2012. By comparison, non-Asian funds gained 13.3%. 

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