FUND FULCRUM

 August 2013

During 2012-13, mutual funds' assets under management (AUM) rose by a staggering Rs 1.51 lakh crore or an increase of 23% to touch Rs 8.2 lakh crore. Investors have pulled out more than Rs 48,000 crore from various mutual fund schemes in June 2013 after putting in a staggering Rs 1.44 lakh crore in the preceding two months (Rs 37,435 crore in the previous month). In April 2013, investors had pumped in Rs 1.06 lakh crore in various mutual fund schemes, the highest in two years. This was the highest net inflow by investors in mutual fund schemes in a single month since April 2011, when investors had put in Rs 1.84 lakh crore. At gross level, mutual funds mobilised Rs 6.98 lakh crore in June 2013, while there were redemptions worth Rs 7.46 lakh crore as well. This resulted in a net inflow of Rs 48,403 crore. This significant level of funds withdrawal has also contributed to the decline in the total assets under management of mutual funds that fell to Rs 8.11 lakh crore as on June 30 2013, from Rs 8.68 lakh crore in the previous month. 

Mutual funds are facing a tough time in trying to temper redemptions from various schemes. But, this gloom is not reflecting in the fortunes of top mutual fund distributors. In 2012-13, there were 31 individuals who earned commissions of Rs 1 crore to as high as Rs 8.5 crore. In 2011-12, the individuals who made it to the Rs 1 crore commission league were 23. These individual distributors have made it big in an area dominated by multinational and private banks. Many distributors had trimmed mutual fund scheme sales after the Securities and Exchange Board of India asked funds to stop charging entry load. Further, what is striking is that growth in individual distributors' collective commissions for a year rose 36% to Rs 81.6 crore in FY13 against Rs 60.1 crore in FY12. This growth is proportionately more than the overall growth of commissions across all distributors in mutual funds. The total commission paid in FY13 was Rs 2,367 crore, compared with Rs 1,860 crore earlier, up 27%.

Within six months of their launch, direct plans of mutual funds have cornered 25% of the total AUM of the industry. According to CRISIL, the average AUM of direct plans crossed Rs 2,14,000 crore in the April-June 2013 quarter. This was a 70% rise over the previous quarter when the direct average AUM was Rs 1,26,700 crore. Reliance Mutual Fund had the largest AUM under direct plans in the June quarter, with almost Rs 22,400 crore invested in these schemes. UTI Mutual Fund is at second place with direct AUM of Rs 21,800 crore followed by ICICI Prudential Mutual Fund at Rs 21,300 crore. CRISIL's research shows that direct plans are increasingly attracting large investors, such as corporates and institutional investors. While direct plans now constitute 25% of the total industry AUM, 98% of this is accounted for by debt-oriented mutual funds. Equity funds account for just 2% of direct AUM. Liquid funds, fixed maturity plans (FMPs), and ultra short-term debt funds were the biggest contributors to the average AUM of direct plans during the June quarter. The direct AUM of liquid funds rose by Rs 24,400 crore. Liquid funds account for nearly 49% of the total direct AUM. FMPs saw inflows of Rs 21,700 crore while ultra short-term debt funds AUM rose by Rs 16,200 crore. According to CRISIL, the rise in the AUM in these categories is mainly due to institutional investors (who dominate the category) shifting to less expensive plans. The total expense ratio of direct plans is lower than that of regular plans to the extent of distribution costs. Returns from these plans are thus higher than returns from regular plans. CRISIL compared the returns of direct and regular plans and found that the direct plans of long-term income funds category were the biggest outperformers. They gave 0.19% higher returns during the June quarter. MIPs and ELSS schemes came second with 0.16% higher returns than their regular counterparts. Higher returns from direct plans are an outcome of lower expense ratio for these plans as distribution costs are excluded. In future, more institutional investors and high networth individuals are likely to shift to direct plans as these investors are far more capable of taking informed investment decisions. Retail investors too could start shifting to these plans as awareness about the benefits of these plans increases. Retail investors can use mutual fund rankings in the public domain and invest directly in top ranked funds.

Piquant Parade

The National Institute of Securities Markets (NISM) has decided to discontinue Certified Personal Financial Advisor (CPFA) exam from September 2013. The exam was launched by NISM and Financial Planning Corporation India Pvt. Ltd. (FPCIL) in January 2011. CPFA was launched for advisors, employees of organizations engaged in financial advisory services, employees of AMCs, banks, and wealth management companies. It was meant to be a ‘lighter’ version of the CFP. 

AMFI has launched a district adoption programme (DAP) as part of its investor awareness campaign. First of its kind by an industry body to aim financial inclusion, the initiative will involve voluntary participation of fund houses. The objective is to expand the overall reach of the industry in Tier II & III cities. AMFI plans to conduct 5,000 investor awareness camps spread across 200 districts through its member mutual fund houses this fiscal. This follows the capital market regulator SEBI’s diktat on spending two basis points of their assets under management for investor education. Two basis points of the mutual industry’s total assets under management (Rs 7.6 lakh crore) as on July 31, 2013 amounts to just over Rs 152 crore. The industry aims for fresh enrolment of 50-100 independent financial advisors in each of these districts. AMFI plans to allocate as many as 10 districts to larger players and one to the smaller ones. AMCs are organizing events at various locations. The list of cities will help AMCs to operate in a structured manner and will ensure that every major city or district is covered. AMCs are also taking help from their independent agencies, distributors, and media houses to conduct IAPs. In fact, some AMCs have tied up with regional newspapers so as to reach out to people in far off areas.

Sundeep Sikka, Reliance Mutual Fund President and Chief Executive, is likely to be appointed as the Chairman of AMFI, while the hunt is still on for the Vice-Chairman's post. By convention, AMFI Vice-Chairman takes over as the Chairman of the organisation though Milind Barve, Managing Director of HDFC Mutual Fund was re-elected as Chairman last year. Before that, UK Sinha, who was heading UTI Mutual Fund at that time, prior to his appointment as the head of markets regulator SEBI, was appointed AMFI Chairman in 2010. AMFI, which is the industry association of mutual funds, interacts with the market regulator SEBI regarding mutual fund related issues and also represents the industry to government, RBI and other organisations. It also serves as a self-regulatory body for mutual funds.

Held at Hyderabad, the ‘Innovative AMC Awards’ honoured the innovative minds in the fund industry. Kolkata-based IFA association ASK Circle’s Mutual Fund Round Table (MFRT) held an Awards Ceremony for AMCs during the two-day conference to recognize the AMC innovations and initiatives that have made an impact on the investor and the distribution community. ICICI Prudential and Birla Sun Life bagged three awards each. Other winners were DSP BlackRock, Franklin Templeton, HDFC, IDFC, L&T, Axis, Motilal Oswal, Reliance, SBI, and UTI.

Regulatory Rigmarole

Fund houses have withheld commissions on transactions where the recently introduced Employee Unique Identity Numbers (EUINs) have not been mentioned in applications from June 01, 2013. According to rough industry estimates, EUINs are missing in 15% to 18% of transactions received by AMCs every month since June 2013. Quoting EUIN is mandatory on ‘advisory’ transactions from June 2013. Distributors do not need to mention EUIN on ‘execution only’ transactions. CAMS has issued close to 80,000 EUINs so far. EUINs are missing in transactions originating from large distributors who have enrolled many sub-brokers. Almost all IFAs have received their EUINs now. It takes about a month to generate EUIN. EUIN is mandatory to be mentioned in transactions like purchases, switches, registrations of SIP/STP/trigger STP/dividend sweep plans. Only overseas distributors are exempted from getting EUIN.

Enabling mutual funds to directly trade on the debt platforms of the bourses, SEBI has permitted asset management companies appointed by the fund houses to take membership of the stock exchanges. With the notification of norms by the Securities and Exchange Board of India in August 2013, asset management companies can register themselves under ‘proprietary trading members’ category.  Subject to certain conditions, the custodian in which, the sponsor of a mutual fund or its associates hold 50% or more of the voting rights, would be allowed to act as custodian “for a mutual fund constituted by the same sponsor or any of its associates or subsidiary”. These include the sponsor having a net worth of at least Rs 20,000 crore at all points of time, and 50% or more of the directors of the custodian having to be those who do not represent the interests of the sponsor or its associates. Generally, custodians are referred to entities that are responsible for safe keeping of securities and they also offer other services. Other conditions include the custodian and the AMC of a mutual fund not being subsidiaries of each other and no person is a director of both the custodian and the AMC of a mutual fund.

SEBI is considering a proposal on the treatment of exceptional items in the way companies present their accounts. The regulator issued a Discussion Paper on "Revision of Clause-41 of Equity Listing Agreement" for public comments. Clause-41 of Equity Listing Agreement provides the framework for preparation, authentication and submission of Financial Results by listed companies. Based on the requests/suggestions received from various market participants, some of the provisions of Clause-41 have been revised. It is proposed to replace the existing Clause-41 of Equity Listing Agreement.  Exceptional items are usually one-off gains or losses outside the usual scope of business. The regulator is looking to bring in greater visibility and more consistency to disclosures. Exceptional items are highly judgmental and it was observed that many companies follow divergent and inconsistent practices. The exceptional items shall be disclosed as a line item in the main table instead of in the 'Notes' to enhance visibility. Moreover, the definition of exceptional items has also been modified to bring more clarity in disclosures.

In order to check stock market losses caused due to technical errors, SEBI has made it mandatory for the brokers and traders to get their trading systems and software tools tested and audited in consultation with the stock exchanges. The market regulator has also asked the stock exchanges to levy "deterrent penalties" in the form of fines or suspension to the concerned stock broker and traders in cases of any malfunctioning of software systems used by them. Various incidents of malfunctioning of software used by market participants have been observed in Indian as well as foreign securities market in the recent past. Such incidents have emphasized the need for a stringent and thorough testing of software before its introduction in the securities market. This applies equally to any subsequent changes to the software used by the stock brokers/trading members. Thus, all market participants would have to follow a stringent testing procedure before deploying any software system or applications for connecting to the stock exchanges and for the purposes of trading and real-time risk management. These would include systems like Internet Based Trading (IBT), Direct Market Access (DMA), Securities Trading using Wireless Technology (STWT), Smart Order Routing (SOR) and Algorithmic Trading (AT). According to the new guidelines, the stock exchanges have been asked to frame appropriate testing policies for functional as well as technical testing of the software. The exchanges would also organise mock trading sessions on regular basis, at least once in a month, to facilitate testing of new software or existing software that has undergone any change, in a close-to-real trading environment. In addition, the brokers and traders would have to engage system auditors to examine reports of these tests to ensure a satisfactory compliance which is expected to come into effect from October 1, 2013.

Having been given greater authority to take on market manipulators and fraudulent schemes, SEBI has begun the process of beefing up the headcount to around 1,000 for faster and more effective execution of powers. While an independent consultant recently suggested to SEBI that it increases the headcount by more than 50% within 2-3 years, from about 600 employees currently, the regulator now aims to expand its workforce at a faster pace. The government decision to grant greater execution powers and a larger oversight role for potential investment frauds would require SEBI to have a much larger workforce, and the regulator would soon begin hiring officers and other staff members across its various departments and offices. SEBI has also been given direct powers to attach properties and bank accounts of persons and companies failing to comply with directions, involving payment of penalties, refunds to the investors and other dues. The regulator can also order arrest and detention of defaulters in prison.

Going by the data on SEBI website on status of applications of new entrants seeking mutual fund license, interest has dried up. In the last two years, just two applications have been filed by Karvy Stock Broking and Microsec Financial Services. While Karvy Stock Broking runs a broking and distribution business, an affiliate company runs an R & T business. Microsec is a NBFC headquartered in Kolkata which provides retail broking and investment banking services. There are two other pending applications - from Bajaj FinServ Ltd - Allianz Asia Pacific GMBH and Mahindra & Mahindra Financial Services. While Bajaj Finserv had applied with SEBI for a mutual fund license in July 2009, it received an in-principle approval in January 2011. Similarly, Mahindra & Mahindra Financial Services had applied for mutual fund license with SEBI in December 2008 and it got an in-principle approval from the regulator in October 2011. Both Bajaj and Mahindra are supposed to revert to SEBI with further information, according to the information available on SEBI website. Reduced interest can be attributed to the tough market conditions. Only a handful of players are making money in the mutual fund business. Among the domestic players, PPFAS is the only Indian entity which has entered the industry recently. The Chennai-based Shriram group, which acquired SEBI license in 1994 and wound up its business in 2004,is trying to make a comeback now. Mumbai based HDIL Constructions has sought SEBI’s approval to start a real estate mutual fund in 2008 and is yet to get an approval.