Monday, March 25, 2013


March 2013

Assets under management (AUM) of the mutual fund industry fell 1.5% to Rs 8.14 lakh crore in February 2013 from the record high in January 2013 due to mark-to-market fall in equity-oriented mutual funds following the 6% decline in the CNX Nifty during February 2013, according to a report by CRISIL Research. The AUM of equity funds declined to Rs 1.76 lakh crore, which was down over 7% or Rs 13,800 crore, marking the largest decline in the past 15 months. In addition, the inflows saw sharp drop in net inflows of Rs 3,600 crore in February 2013 as compared to Rs 60,700 crore in January 2013. However, net outflows from the category slowed to Rs 160 crore in February 2013, which was the lowest in the past nine months. On income funds front, the AUM in this category fell by 1.4% to Rs 3.93 lakh crore in February 2013, primarily due to outflows of Rs 5,300 crore from the category. Tight liquidity conditions towards the end of the financial year saw redemptions from short maturity debt funds. While FMPs (fixed maturity plans) have seen redemptions of Rs 1,600 crore, these have been balanced by inflows of Rs 2,100 crore into interval funds. The major share of inflows of Rs 8,600 crore came into the liquid or money market funds. Gilt funds continued to see inflows for the sixth consecutive month in February 2013 despite being lower than the previous month. Inflows were lower at over Rs 400 crore in February 2013 compared with Rs 1,100 crore inflow in January 2013. Interestingly, gold ETFs saw outflows for the first time since June 2012 with the AUM falling by 4% to Rs 11,600 crore in February 2013 due to mark to market losses and outflows.

Despite declining gross sales in the equity segment, the country’s mutual fund sector has something to cheer about. Its largest client base, the retail investors, did not shrink as fast in February 2013 as was the case so far in the financial year 2012-13. At a time when equity schemes came into the limelight due to the sharpest decline in asset under management in 15 months, the near-halving of equity account closures is some respite. Data from the Securities and Exchange Board of India show a closure of 230,000 equity folios in February 2013, far less than the average monthly loss of a little over 400,000 till the immediate previous month. Till June 2012, the number of accounts closures ranged between 180,000 and 300,000 a month. In the second half of the calendar year, the pace accelerated, with some months seeing 500,000 folios getting closed. February 2013 saw less of cancellations of systematic investment plans but fresh purchases also declined. Overall net outflow from the equity segment was the lowest in many months at Rs 163 crore. Gross sales of equity schemes dipped 33% to Rs 3,713 crore though, against Rs 5,600 crore in January 2013.
Investors have put in more than Rs 1.2 lakh crore in various mutual funds during the first nine months of the ongoing financial year compared to cumulative net outflow of nearly Rs 80,000 crore in the last two financial years. There was a net inflow of Rs 1,20,269 crore between April and December 2012, against outflows of Rs 28,602 crore in the entire fiscal 2011-12 and Rs 49,406 crore during 2010-11, according to the Economic Survey. Prior to that, mutual funds had mobilised Rs 83,000 crore in 2009-10. This significant level of fund mobilisation from the market in 2012-13 has also helped the total assets under management of mutual funds to grow to Rs 7.59 lakh crore as on December 31, 2012 compared to Rs 5.87 lakh crore as on March 31 2012, an increase of 29.4%. Equity mutual fund redemptions decelerated in February 2013 as S&P BSE Sensex dipped more than 1000 points. Equity mutual fund net outflows slowed down to Rs 128 crore in February 2013 as against Rs 2501 crore in January 2013 as the S&P BSE Sensex declined 5% during the same period, according to the latest AMFI data. 

Piquant Parade
AMFI has initiated the process of forming a company to run MF Utility. AMFI’s MF Utility committee has shortlisted Chennai based software company Polaris from a list of nine players for developing the much-awaited online investment portal. Each AMC is likely to contribute Rs 5 lakh each for this project. The proposed company, which will oversee the day-to-day operations of MF Utility, is to be run on a no-profit no-loss basis. At this juncture, the committee has not envisaged recovering any transaction fee from users. The portal will connect with RTAs, AMCs, stock exchanges, DPs, banks, and centralized KYC repository. The portal will facilitate industry MIS, common account statement (CAS), capital gains statements, complaint module/feedback module, dashboard, manage profile/settings, call centre access and technical helpdesk, client level alerts for investors and distributors (email /mobile), downloads, etc. Investors have to first get their KYC done after which they have to fill up a common account opening form and submit them to centralized account opening repository. The system will then generate a unique account number, which could be used across AMCs.

UTI Mutual Fund has roped in more than 500 new cadre of distributors after SEBI opened up a new channel of distributors like postal agents, retired government and semi-government officials, retired teachers, retired bank officers, and bank correspondents. UTI Mutual Fund has also sponsored the certification for new cadre of distributors. UTI is also imparting training on preparing a financial plan and on operational procedures like KYC, bank account requirements, etc. Other AMCs like HDFC and ICICI Prudential too are in the process of enrolling new distributors. Enrolling these distributors has not been an easy task for AMCs. Firstly, NISM verifies the experience of new cadre of distributors after which they are given training. After this training, AMCs approach CAMS for registering and procuring ARNs. CAMS also conducts a second layer of due diligence by verifying the original documents of distributors. 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. The new cadre of distributors will not be required to shell out any ARN registration fee till June 30, 2013. SEBI’s efforts to add a new layer of distributors comes in the wake of declining distribution force in the industry. Out of the 80,000 registered ARNs with AMFI, today, there are about 50,000 odd KYD compliant distributors. Out of these 50,000 distributors, unofficial reports peg the active distributors number at a much lower 10,000.

AMFI is once again running its advertisement campaign ‘Savings Ka Naya Tareeka’ to spread awareness about the benefits of investing in mutual funds. It is a 360 degree campaign. There are also plans to do some on-ground events. The response on these commercials has been positive. The first campaign went on air in September 2011 with a budget of around Rs 10 crore. The campaign had received over 30,000 sms from people. AMFI had also sent mutual fund booklets to those people who had sent an SMS to 56070. It had also set up a call center to answer people’s queries. Parallely, AMCs have been running ground level events to create a higher grass roots level awareness. According to AMFI, 36 AMCs had conducted 11402 programs in 405 cities covering 318,991 participants in 2011-2012.

UTI Equity Fund has won the best equity fund award while Birla Sun Life MNC Fund has won the best small/mid-cap fund award. HDFC Mutual Fund walked away with the best equity fund house for fourth year in a row and best multi-asset fund house for the third year in a row at the Morningstar Fund Awards 2013. Birla Sun Life Mutual Fund bagged the best debt fund house award. The other two contenders in the best debt fund house category were ICICI Prudential and UTI. In the best equity fund house category, the other two contenders were Franklin Templeton and Reliance. Winners for seven fund categories were selected by applying a quantitative methodology, along with a qualitative overlay, which emphasized one-year performance but also considered the three- and five-year performance history of all eligible funds.

Regulatory Rigmarole

Complicated KYC norms are deterring first time investors to invest in mutual funds. Mutual funds distributors are seeking uniform and standardized Know Your Customer (KYC) norms as the existing norms have been creating complications and inconveniencies for them as well as investors. At present, a separate KYC is needed for different financial products. The recent announcement of Finance Minister P Chidambaram to consider bank KYC as good enough for insurance products, has raised expectations among mutual fund distributors too. A single KYC for all the financial transaction would boost investments in the mutual fund industry.

India’s capital market regulator wants under performing asset management companies to stop charging fees from investors, in a controversial move aimed at protecting the interests of mutual fund buyers. The fund managers must justify their performance and fees for schemes that have consistently failed to perform. SEBI has also asked AMCs to explain why they do not wind up non-performing schemes before they launch a new one and has refused to clear applications for launching new funds by asset managers that have non-performing schemes.
Many AMCs are planning their next series of Rajiv Gandhi Equity Savings Scheme (RGESS) but this time in an open-ended avatar so that the product could be available to investors right through the year. AMCs like LIC, UTI etc. have approached SEBI to give them the go ahead for launching open-ended variants of RGESS. Currently, as per RGESS notification only closed end or FTFs structures are possible. The listing and demat requirements stipulated in the notification are deterrents to the launch of open-ended RGESS. The open-ended structure allows them to market the fund more effectively.

Distributors wanting to either opt in or opt out of transaction charge (TC) have to inform CAMS. The first window of changing the status on transaction charge for distributors ends on March 25, 2013. The next window starts after six months from September 1 to September 25, 2013.  The transaction charge was initially allowed to be levied on all types of products and later in September 2012, SEBI allowed distributors to charge TC based on the type of the product. Many distributors faced operational difficulties in charging for debt funds. Now distributors have a choice to opt in or opt out of TC from 11 scheme categories. The option exercised for a particular category of scheme is applicable across all fund houses. AMFI shares the status of distributors regarding TC with all fund houses. In order to prevent unfair practice, AMFI has warned distributors against splitting applications to earn more transaction charge. In 2011, around 6000 distributors were estimated to have opted in for TC.

According to a SEBI circular, mutual fund houses are required to label products from July 1, 2013. The regulator feels that it would provide investors an easy understanding of the kind of product/scheme they are investing in and its suitability to them.  SEBI has taken this move to curb mis-selling. The AMCs are supposed to mention the level of risk, depicted by colour code boxes - blue colour coded box would indicate low risk, yellow would signify a medium risk, while brown would represent schemes with high risk. The fund houses are also supposed to mention the nature of scheme, such as short/medium/long term and a singled sentenced brief on the kind of product – equity/debt. The labeling is supposed to be printed on the front page of initial offering application forms, KIM, SID and in common application form along with the information about the scheme.  In the scheme advertisements, the labeling is to be placed in a manner so that it is prominently visible to investors. The fund house should also print a disclaimer to the effect that investors should consult their financial advisers if they are not clear about the suitability of the product.

Market regulator SEBI has invited applications for those who wish to become self-regulatory organization (SRO) for mutual fund distributors. According to SEBI rules, any group or association of intermediaries, which wants to become a SRO has to form a company registered under section 25 of the Companies Act, 1956. The SRO formed to regulate investment advisors will be registered under the SEBI (Self-Regulatory Organization) Regulations, 2004. SRO will have sufficient resources to perform its functions. Its duties would include registering and setting minimum professional standards, including certification of investment advisors, laying down rules and regulations and enforcing those; informing and educating the investing public; setting up and administering a disputes resolution forum for investors and registered entities etc. Persons desirous of registration as Investment Advisors shall obtain registration with the SRO established for the purpose. The SRO will be entitled to charge a fee for granting registration and an annual fee company under the Companies Act. Among others, the applicant should have a minimum net-worth of Rs one crore and have adequate infrastructure to enable it to discharge its functions as a SRO. Besides, the directors of the applicant entity would need to have professional competence, financial soundness and general reputation of fairness and integrity to the satisfaction of SEBI. In addition, the applicants and their directors must not be involved in legal proceedings connected with the securities market or have any conviction for an economic offence. According to the norms, the certificate of recognition as an SRO would be valid for a period of five years.

The Budget 2012-13 has liberalised the Rajiv Gandhi Equity Savings Scheme. Investors up to an annual income of Rs 12 lakh (Rs 10 lakh earlier) will be able to invest for 2 more years continuously. Earlier, they were allowed to invest for one time only.

The Budget has streamlined inflow from QFIs and different classes of portfolio investors and permitted Pension Funds (including NPS) and Provident Funds to invest in debt schemes of Mutual Funds. Pension and provident funds will be able to invest in equity markets through ETF route.

AMFI registered mutual fund advisors have been allowed to become brokers on Stock Exchanges for Mutual Fund division.

Securities Transaction Tax (STT) has been reduced on Exchange Traded Funds (ETFs) to 0.001%. Reduction in STT helps in the reduction of transaction cost, which in turn helps the schemes to perform better on the returns front.

Dividend distribution tax (DDT) paid by non-liquid debt funds has been increased to 25% from 12.5%. Over and above this, there is an education cess as well as a surcharge, which has been hiked from 5% to 10%. These ultra short-term funds are primarily used by individuals for parking their short-term funds. Typically what happens here is that one get higher returns compared to the savings bank account and the returns are also more tax efficient.

The Budget 2012-13 has brought clarity to the tax provisions relating to securitisation. This will help mutual funds to enter into securitisation deals.

Until further clarity, Direct Tax Code (DTC) is being put on hold. So, Equity Linked Savings Schemes (ELSS) will remain a tax saving option for the investors.

However there were some expectations from the budget as far as the mutual fund industry is concerned which were not realized. It was expected that the government would increase the limit of sec 80 C in order to accommodate higher investment in tax saving mutual fund schemes. This would have helped to mobilise household savings and channelize the same. It was also expected that the capital gain tax on the merged scheme would be done away with. However, there has been no announcement with regard to this. Investors have to pay tax on the schemes, which have been merged into one as it resulted in exit from one i.e. registered as a sale transaction even though it is combined. This notwithstanding, several path-breaking reforms have been brought about in the mutual fund arena that have changed the landscape of the mutual fund industry.

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