FUND FULCRUM

July 2013

The industry’s assets under management increased from Rs 8.16 lakh crore in March 2013 to Rs 8.46 lakh crore in June 2013 mainly due to robust inflows in debt funds according to the latest AMFI data. Out of the 44 fund houses, 24 recorded a surge in their assets with all the top ten fund houses seeing a growth in their assets. IDFC and UTI saw the highest growth in their assets with an increase of Rs 6052 crore and Rs 5256 crore respectively. HDFC retained its position of being the largest AMC by assets. Its AUM increased 3% from Rs 1.01 lakh crore to Rs 1.04 lakh crore. Reliance Mutual Fund also saw its AUM increase by 3% from Rs 94,580 crore during Jan – Mar 2013 to Rs 97,771 crore during April – June 2013. ICICI Prudential Mutual Fund was ranked third in the asset tally at Rs 91,700 crore; its average assets were up 4.4%. Share of the top five mutual funds’ assets was 53% in the June 2013 quarter (same as previous quarter) while the share of top 10 funds’ assets was 78% (higher than 77% in the previous quarter). The bottom 10 fund houses continued to occupy less than 1% of the average AUM. Daiwa saw the steepest AAUM decline of 51% from Rs 266 crore during January - March 2013 to Rs 131 crore in April – June 2013.

The mutual fund industry has been facing consistent equity folio closures in the past few months mainly due to profit booking and various merger schemes in the industry. Folios are numbers designated to individual investor accounts, although one investor can have multiple folios. The mutual fund industry lost more than 36 lakh investors in 2012-13. The last financial year also marked the fourth consecutive year of loss of folios by mutual funds. During the preceding three financial years, the mutual fund industry had lost over 15 lakh new investor accounts. According to latest Sebi data, mutual funds lost 10 lakh investors, measured in terms of individual accounts or folios, in April-June 2013-14. The total investor accounts with 44 fund houses, fell to around 4.18 crore at the end of June 2013, from 4.28 crore in the last fiscal (2012-13). During the April-June period of 2013, the number of investor folios for equity schemes fell by 11 lakh. The total number of folios in equity funds were 3.20 crore at the end of June 2013 against 3.31 crore at the end of March 2013. As per the SEBI data, total number of folios in debt funds rose by about 1.7 lakh to 63 lakh at the end of June 2013.

Piquant Parade

The Chennai-based Shriram group has filed a draft offer document with the market regulator, Securities and Exchange Board of India, to launch its first mutual fund scheme in over a decade. The Shriram Balanced Fund will allocate a minimum of 65% and a maximum of 100% in equities. Its debt holdings could vary between zero and 35%. The group had first established a mutual fund presence by incorporating its asset management business in July 1994. The company had wound up all its schemes, according to the company’s annual report in the financial year in March 2012. Other schemes in the pipeline include the Shriram Dynamic Bond Fund and the Shriram Liquid Fund, according to information included in the latest draft offer document. Partha Ray has been designated the fund manager for the scheme.The fund will be open-ended, which means that investor money will not be subject to a lock-in.

UTI Mutual Fund announced the appointment of Leo Puri as the Managing Director of UTI AMC. Leo Puri, 52, is a dual master degree holder from Oxford and Cambridge University, UK. In his professional career, spanning more than 30 years, He has worked as Director and Senior Advisor with McKinsey & Company and as Managing Director with Warburg Pincus. He has worked in the UK, and USA. Since 1994, he has been based in India. UTI Mutual Fund has been headless ever since U K Sinha left the fund house to join as SEBI Chairman in February 2011. The fund house appointed Imtaiyazur Rahman as its interim CEO in January 2012.

Many IFAs are initiating the process to register with SEBI as Investment Advisors. IFAs, especially those who run fee based financial planning practice, are incorporating changes in their business model to comply with SEBI’s Investment Advisor Regulations. SEBI registered Investment Advisors will have to comply with a host of rules like maintaining client records for five years, risk profiling, copies of agreements with clients, appointment of auditors, among others. IFAs have to pay a non-refundable amount of Rs 5000 as application fee and Rs 10,000 thereafter for getting Investment Advisor Certification from SEBI. Corporates have to shell out a much higher fee of Rs 1 lakh as registration fee. Corporate advisors need to have a net worth of Rs 25 lakh while individuals Rs 1 lakh.

Regulatory Rigmarole

All mutual fund advertisements, application forms, key information memorandum (KIM), and scheme information documents (SIDs) will now bear colour codes which denote the level of risk associated with schemes. For instance, FMPs will bear blue colour code which means these schemes carry low risk and the principal is protected. The schemes which aim to generate capital appreciation and income (for instance, hybrid funds) will bear yellow colour. Equity schemes will bear brown colour which means these schemes have a high risk. The colour codes will be described in text beside the colour code box. Application forms will also have a disclaimer stating that investors should consult their financial advisors if they are not clear about the suitability of the product. Financial advisors feel that the move will encourage mis-selling. Investors will just go by the colour and invest. One has to read the investment mandate, offer document, and the strategy of the fund.

SEBI permitted AMCs to take membership of debt segment of stock exchanges under 'Proprietary Trading Member' (PTM) category to undertake trades directly on behalf of such schemes managed by them. The regulator also decided that the custodian in which the sponsor of a mutual fund or its associates are holding 50% or more of the voting rights of the share capital of the custodian would be allowed to act as custodian subject to fulfilling the following conditions i.e. (a) the sponsor should have net worth of atleast Rs 20,000 crore at all points of time, (b) 50% or more of the directors of the custodian shall be those who do not represent the interests of the sponsor or its associates, (c) neither the custodian nor the asset management company of a mutual fund shall be a subsidiary of each other, (d) no person shall be a director of both the custodian and the asset management company of a mutual fund and (e) the custodian and the asset management company of a mutual fund shall sign an undertaking that they will act independently of each other in their dealings with the schemes.

SEBI’s mutual fund policy will ‘disincentivize’ AMCs if they fail to get certain percentage of their assets from B-15 cities. 77% of AUM is contributed by top 10 AMCs and only 1% by the bottom 10 AMCs. SEBI has formed a committee which is working on a long term policy for mutual funds. Enough incentives have been provided to the industry to expand their market share and the mutual fund policy will have a disincentive for AMCs if they fail to garner a certain percentage share of their assets from B-15 cities.

SEBI approved the proposal to have single SRO for Distributors of mutual fund products after following a fair and transparent procedure. AMFI has already applied and has been advised by SEBI to constitute the Sec 25 Company, which AMFI proposes as the SRO and then submit the application from that entity. AMFI is in the process of doing this and is expected to file the revised application shortly. Meanwhile, FPSB - Financial Planning Standards Board is also engaged in discussions with SEBI on promoting the SRO. It however appears that FPSB is keen on promoting an "umbrella" SRO which would encompass self regulation of intermediaries across all financial products rather than confine it to a single product of mutual funds. Given that SEBI has currently asked for the SRO to be set up only for mutual fund distributors, it remains to be seen how keen FPSB may be in promoting a single product oriented SRO. Meanwhile, the idea of having multiple SROs for different distribution segments within mutual fund distributors is now clearly buried, after this decision from SEBI. As it stands now, it appears that the entity that will be promoted by AMFI may be the front-runner in the race to set up this SRO. In any event, regardless of who the promoting entity may be, SEBI will have 5 of its nominees on the 9 member Board and 4 directors will be from the industry. SEBI will therefore be able to exercise its due influence in critical aspects of the SRO, through its Board majority.

The total assets under management of mutual funds were around 11% of bank deposits in 2012. Similarly, profits have been elusive as well. Only eight of the 45 (private and public sector) players made profits of over Rs 50 crore in 2012. But private sector fund houses have much to celebrate as well. The top two asset management companies - HDFC Mutual Fund (assets of over Rs 1 lakh crore) and Reliance Mutual Fund (assets of Rs 95,000 crore) - are from the private sector. Both these fund houses, with profits of over Rs 250 crore in 2012, were the top two in the profitable list. UTI Mutual Fund, the oldest fund house, had profits of Rs 134 crore in 2012. If one looks at the pecking order, private sector fund houses dominate. They ushered in better fund management. There is definitely a wider reach of products and product innovation. Fund management has also improved tremendously over the years. With over 37 private sector fund houses, competition has increased and ensured that investors are receiving high quality service, in terms of information and buying/selling. However, a lot of fund houses, including the first entrant Kothari Pioneer, have either merged or shut shop. In fact, even global big-wigs such as Fidelity found the going tough. There are more than 40 different categories of funds, including dynamic funds and derivative-based funds, apart from traditional large-cap equity funds. Bigger private sector mutual funds have been able to increase their penetration and garner more funds. The industry is now growing at 10% per annum. The bigger companies with stronger distribution reach are at an advantage to garner more new funds, while smaller players are still trying to catch up. In the last five years, the growth of the industry slowed down due to the global crisis as investors turned risk-averse.

It is not easy growing up - especially, when you are under constant pressure to perform. The mutual fund industry is a perfect example. In 1993, when Kothari Pioneer - the first private sector player in the mutual fund industry - entered, industry experts were convinced they would do well. The reason: only traditional bank fixed deposits were competition. Converting even a fraction of bank savers would have meant high assets under management, and perhaps, profits as well. But even after 20 years, long-term assets continue to be a challenge. Around 80% or Rs 5.6 lakh crore of the Rs 8.2 lakh crore of assets continue to be in pure debt funds. And 50% of the debt assets, around Rs 2.5 lakh crore, are in liquid and short-term debt funds. Worse still, around 37% of retail investors exit equity funds within two years, while 48% of HNIs remain invested for over two years. The industry needs to convert many of these investors to longer-term investors. For that to happen, fund houses will have to show consistent performance.