FUND FULCRUM

 February 2013

The New Year began on an optimistic note for the Indian mutual fund industry. Month-end assets under management (AUM) increased to an all-time high of Rs 8.26 lakh crore in January 2013. Led by inflows into money market and income funds, AUM rose nearly 9% to record the highest percentage rise in the past nine months. Inflows of Rs 60,700 crore in January 2013 were the highest since April 2012 compared with outflows of Rs 40,900 crore in December 2012. Equity funds (including ELSS) saw net outflows of Rs 2690 crore in January 2013 from Rs 1718 crore in December 2012.  This is despite the fact that the BSE Sensex breached the 20,000 mark and gained 468 points in January 2013. Gilt funds continued to attract investors attention, registering net inflows of Rs 1145 crore as these funds are expected to benefit from a softening interest rate environment. Gilt funds saw net inflows of Rs 985 crore in December 2012 when the expectations of rate cut were high. Gold ETF inflows moderated in January 2013 with Rs 81 crore net inflows compared to Rs 474 crore in December 2012.

As per the latest data available with SEBI, there was a net inflow of Rs 1,20,269 crore between April and December 2012, as against total fund mobilisation of Rs 36,918 crore in the corresponding period of last fiscal 2011-12. However, there was a net outflow of over Rs 22,000 in the entire 2011-12, while a net amount of more than Rs 49,000 crore moved out of the mutual funds' kitty during 2010-11. At gross level, mutual funds mobilised over Rs 53.10 lakh crore in April-December period of 2012-13, while there were redemptions worth Rs 51.90 lakh crore as well. This resulted in a net inflow of over Rs 1.2 lakh crore. This significant level of fund mobilisation has also helped the total asset under management of mutual funds to grow to Rs 7.6 lakh crore as on December 31, 2012. 

The industry saw more than 36 lakh folios dip in equity mutual funds while debt funds added 7.31 lakh folios from April 2012 to December 2012. More than six lakh folios were closed in the equity mutual funds category in December 2012 as investors continued to book profits. From April to November 2012, more than 30 lakh folios have closed. A point to note is that 36 lakh folios does not equate to 36 lakh individual investors exiting the industry as many investors hold multiple folios across AMCs. The fall in folios can be attributed to the consolidation and redemption in the mutual fund industry.

Despite being allowed to charge extra fees in order to bring more assets from smaller towns and cities, the dependence of mutual fund houses on top cities to mop up funds, continues. According to the latest statistics issued by AMFI, the proportion of assets from the top 15 cities has risen for the third quarter in a row. During the quarter ended December 2012, as much as 87.7% of total assets came from Mumbai, Delhi, Bangalore, Kolkata, Chennai, Ahmedabad, Pune, Hyderabad, and Baroda, among other big cities. In the immediate previous quarter, the assets from these cities were 87.4% of the total pie. In the April-June 2012 quarter, the figure was 86.95%.

Piquant Parade

Nippon Life purchased 26% stake in Reliance Mutual Fund for Rs 1,450 crore and Nomura bought 35% in LIC Mutual Fund for Rs 3,080 crore. India has 44 asset management companies led by HDFC Mutual Fund with Rs 1 lakh crore of assets.

Regulatory Rigmarole

Red is the colour of danger, or even risk. Risks come in different shades, and SEBI thinks colour coding can say it all for mutual funds. The capital market regulator will shortly issue a guideline on “product labelling” with colour coding for mutual fund products to help investors assess the risk. SEBI is proposing this as an extension of its investor education agenda. The labelling may not stop mis-selling altogether, but the colour code should at least curb the marketing overdrive.

SEBI has allowed mutual funds to accept investor funds in new offers under the newly introduced Rajiv Gandhi Equity Savings Scheme (RGESS) for 30 days, as against a 15-day subscription period in other schemes. The relaxation has been made only for mutual fund schemes under RGESS, a Government initiative aimed at attracting small investors into the capital market. Besides, the time-frame for RGESS mutual funds allocating the refund money and issuance of statements by mutual fund houses would be 15 days from the closure of the initial subscription. The deadline remains at five days for other mutual fund schemes. As per the notification issued by SEBI on the RGESS, there would be a lock-in period of one year on investments made under the scheme. For transactions undertaken by investors through their RGESS designated demat account, depositories would be required to seek necessary transactional details from stock exchanges for enforcing lock-in. AMCs are prepared to pay commissions of as high as 6% to distributors for selling RGESS.

SEBI has allowed Gold ETFs to invest in gold deposit schemes (GDS) of banks. The total investment in GDS cannot exceed 20% of the total asset under management of any scheme. Before investing in GDS of banks, mutual funds shall put in place a written policy with regard to investment in GDS with due approval from the Board of the Asset Management Company and the Trustees. The policy should have provision to make it necessary for the mutual funds to obtain prior approval of their trustees for each investment proposal in GDS of any Bank. The policy should be reviewed by mutual funds, at least once a year. Gold certificates issued by banks in respect of investments made by gold ETFs in GDS can be held only in dematerialized form. Gold ETFs investing in gold deposit of schemes could result in Gold ETFs outperforming their benchmarks. The objective of Gold ETF is to track the returns of gold. Placing of gold available in the ETF as deposit with banks will result in additional returns.

AMFI has revised code of conduct for mutual fund distributors by adding some of the new regulatory norms. Fund distributors were earlier governed by AMFI Guidelines and Norms for Intermediaries (AGNI) which was drafted in 2002. Some of the areas like perpetrating fraud, providing anti-money laundering details, observing high standards of ethics and integrity have been added in the revised code of conduct. The new guidelines prevent distributors from splitting of applications to earn higher transaction charges/commissions, make it mandatory for intermediaries to keep themselves abreast with the developments relating to the mutual fund industry, take reasonable steps to ensure that the investor’s details are filled and those filled in the mutual fund application form are accurate and updated and investor’s own details, and not of any third party. Intermediaries, including the sales personnel of intermediaries engaged in sales/marketing, should obtain NISM certification and register themselves with AMFI and obtain an Employee Unique Identification Number (EUIN) from AMFI apart from AMFI Registration Number (ARN). Intermediaries should comply with the Know Your Distributor (KYD) norms issued by AMFI, co-operate with and provide support to AMCs, AMFI, competent regulatory authorities, be diligent in attesting/certifying investor documents and performing In Person Verification (IPV) of investor’s for the KYC process in accordance with the guidelines prescribed by AMFI / KYC Registration Agency (KRA) from time to time. Intermediaries satisfying the criteria specified by SEBI for due diligence exercise shall maintain the requisite documentation in respect of the “Advisory” or “Execution Only” services provided by them to the investors. Last but not the least intermediaries should not indulge in fraudulent or unfair trade practices of any kind while selling units of schemes of any mutual fund. Most of the guidelines which were a part of AGNI are still present in the new code of conduct. Distributors are required to send a self-certification form to AMFI every year attesting that they have adhered to the code of conduct.

In a relief to aspiring distributors, AMFI has done away with the 10 year experience criteria required under the new cadre of distributors for insurance agents, FD agents, national savings scheme products, PPF agents. However, the first category of distributors who are retired teachers, government officials and retired bank officers will still require 10 years of experience. AMFI has created a second category of distributors who will not require 10 years of experience. This will hopefully benefit the industry in attracting more distributors. NISM has developed a one day CPE (NISM-Series-V-B: Mutual Fund Foundation Certification Examination) for new cadre of distributors.

India’s mutual fund sector, which saw an action-packed year in 2012, expects the government to continue with its reform measures for the sector. In Budget 2013-14, fund houses want the government to address the issue of double incidence of securities transaction tax (STT). They also want it to allow state-owned companies to invest in private sector mutual funds. In addition, mutual fund pension schemes should be allowed under the New Pension Scheme. Anomalies in taxation should be removed, especially for investments in fund-of-funds schemes, bonds and fixed-income instruments. There should be uniformity of tax treatment across states for VAT on gold. There should be income tax benefits for investments in mutual funds. PSUs should be allowed to invest their surpluses in all mutual funds. Investment in pass-through certificates by mutual funds should not be subject to income tax. Infrastructure development funds should get similar tax advantage of 5% withholding tax in case of similar funds from NBFCs.

The government will come up with a modified Direct Taxes Code (DTC) Bill after incorporating the suggestions of the Standing Committee on Finance, which had suggested a slew of changes to the legislation including raising annual income tax exemption limit to up to Rs 3 lakh.

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 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 Thomson 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%.