Monday, October 28, 2013



October 2013

The Average Assets Under Management (AAUM) of the mutual fund industry declined by 4.5% having fallen from Rs. 8,52,662 crore in April-June 2013 to 8,14,267 crore in July-September 2013, shows the quarterly data released by the Association of Mutual Funds in India (AMFI). This decline can be attributed to volatility in short-term interest rate during the second quarter. Investors pulled out their money from liquid funds and debt funds resulting in the decline in the industry’s AAUM. RBI’s unexpected rate hike and volatility in rupee have compounded the problem. Almost all the major fund houses have recorded a dip in their AAUM for the quarter ended September 2013. Among the top 10 fund houses in terms of AAUM, ICICI Prudential MF, UTI, Kotak Mahindra, and DSP BlackRock saw large outflows in percentage terms while Franklin Templeton and IDFC saw an increase of 4.7% and 1.5% respectively.   
Owing to profit booking and new issues of tax-free bonds, equity funds and liquid funds collectively witnessed huge outflows of Rs 30,135 crore in the month of September 2013. AMFI data shows that equity funds saw net outflow of Rs 2116 crore while liquid funds lost Rs 28019 crore in this period. In August 2013, both equity and liquid funds saw net inflows of Rs 467 crore and Rs 32123 crore respectively. Except fund of funds, which received net inflows of Rs 104 crore, all other categories saw total outflows of Rs 33910 crore in September 2013. International funds received healthy inflows due to depreciation in rupee against dollar in September 2013. Gold ETFs and gilt funds saw net outflows of Rs 294 crore and Rs 1546 crore respectively.
Top 10 AMCs have recorded a marginal growth of 2% in their Profit after Tax (PAT) margin by registering a net profit of Rs 1126 crore in FY 2012-13 as against Rs 1104 crore in the corresponding period last year, according to AMFI data. However, overall PAT of the industry stood at Rs 758 as most of the fund houses have posted losses. Among the top 10 AMCs, 7 fund houses saw an increase in their profitability. HDFC Mutual Fund has overtaken Reliance Mutual Fund as the most profitable AMC by registering 19% growth in PAT at Rs319 crore from Rs 269 crore last year. Reliance Mutual Fund’s PAT for fiscal 2012-13 stood at Rs 198 crore, down 28% from last year at Rs 276 crore. SBI Mutual Fund swung back to action by clocking a net profit of Rs 86 crore as against a net profit of Rs 61crore in the previous year. Similarly, IDFC posted a healthy growth of 170% in PAT margin at Rs 27 crore against Rs 10 crore last year. The profits of ICICI Prudential rose from Rs 88 crore in FY12 to Rs 110 crore in FY13. DSP BlackRock’s profit grew from Rs 50 crore in FY12 to Rs 57 crore in FY13. UTI’s PAT too increased from Rs 149 crore in FY 12 to Rs 134 crore in FY-13. Meanwhile, Franklin Templeton and Kotak Mahindra recorded a dip in their profits.
The folio numbers issued by mutual fund houses declined a marginal 0.47% in September 2013 to 4.13 crore from 4.15 crore in August 2013. The trend was despite the assets under management by 44 mutual fund houses increasing 13% in September 2013 to Rs 8.66 lakh crore, compared with Rs 7.66 lakh crore in the preceding month.  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 investor accounts. Mutual Funds lost an estimated over 15 lakh investors, measured in terms of individual accounts or folios, in the first six months of the current fiscal, mainly due to profit booking and various merger schemes
Polarisation of assets towards India's top 10 mutual fund houses is continuing unabated. Meanwhile, the year is proving to be a difficult one for smaller players. Preference among investors' community for larger fund houses is on the rise if statistics for the first half of the current financial year is anything to go by. AUM of top players has remained more or less stable while smaller and mid-sized fund houses are losing money big time. At a time when industry as a whole could see a mere decline of 1% in its AAUM, several small players lost anywhere between 15% to as high as 42% of their assets. For instance, Taurus Mutual Fund and Peerless Mutual Fund witnessed an erosion of about 42% during April-September period while, Principal PNB MF and ING MF saw about 23% of asset erosion. In contrast, the top ten players collectively managed to gain 1.3% in assets to Rs 6.36 lakh crore. With this, big fund houses captured about 2% more market share, taking it up to 78.7% during the period. HDFC MF, Reliance MF, UTI MF, and SBI MF are focusing more on retail now. As on 30 September 2013, industry had an average AUM of Rs 8.08 lakh crore against Rs 8.16 lakh crore in March 2013.  
Piquant Parade
I-Can Financial Solutions has launched an investment advisory platform called ‘Multi-MF Platform’ through which an IFA can recommend mutual fund schemes on the basis of his client’s goals and risk assessment. Unlike other platforms, which facilitate only transaction, the I-Can Multi-MF platform claims to provide online solutions for various financial goals such as retirement planning, wealth education, child education, buy a home or buy a car. Based on details given by IFAs, the platform can generate risk profiling, asset allocation, portfolio building, and product recommendations. In addition, the advisor can frequently customize the portfolio of his/her clients. Very soon, the platform will offer other facilities like investments, redemptions or switching. I-Can states that their research team will not only recommend suitable products but also provide other necessary financial planning inputs such as how much to invest, tenures of investments, short listing of products etc. Moreover, it will provide regular periodic review of portfolios. To enable this service, advisors need to empanel with I-Can Financial Solutions through the website and pay annual fees depending on geographical locations of advisors.
AMFI appointed Sundeep Sikka, Reliance MF President and Chief Executive, as its Chairman. The association has also elected Sandesh Kirkire, Chief Executive Officer of Kotak Asset Management Company, as its vice-chairman. Sikka, who was earlier the vice-chairman of AMFI, succeeds Milind Barve, Managing Director of HDFC MF. By convention, AMFI vice-chairman takes over as the Chairman of the organisation though Barve was re-elected as Chairman last year. Before that, UK Sinha, who was heading UTI MF at that time, prior to his appointment as the head of market regulator SEBI, was appointed AMFI Chairman in 2010. AMFI, which is the industry association of mutual funds, interacts with market regulator SEBI regarding mutual fund related issues and also represents the industry to the government, RBI, and other organisations. It also serves as a self- regulatory body for mutual funds.
Regulatory Rigmarole
SEBI has allowed mutual fund distributors, who are ARN holders, to use recognized stock exchange platform to purchase and redeem mutual fund units directly from AMCs on behalf of their clients. Earlier, only stock brokers and clearing members were allowed to carry out such transactions. However, the distributors cannot handle pay-in and payout of funds on behalf of their investors. Stock exchanges have to put the necessary system in place so that pay-in and payout will be directly made to the account of investors. Similarly, units can be credited or debited directly from the demat account of investors. The recognized stock exchange should grant permission to distributors on request of AMFI. AMFI will send its request on the basis of fee, code of conduct etc. Those ARN holders who have already taken permission from stock exchange can start executing such transactions. BSE has started giving membership to mutual fund distributors to access its ‘BSE StAR Mutual Fund Platform’. Distributors need to have a minimum paid up capital of Rs 1 lakh to register with BSE. BSE is charging a lifetime membership fee of Rs 15000. There will be no annual fees. The platform was launched in December 2009. Around 2650 schemes of 34 AMCs are available on BSE StAR Mutual Fund Platform. 
SEBI has accepted e-KYC service offered by Unique Identification Authority of India (UIDAI) as a valid process for KYC verification. To avail this facility, the investors have to authorize intermediaries to access their Aadhaar data through UIDAI system. The e-KYC service offered by UIDAI enables individuals to authorise service providers to receive electronic copy of their proof of identity and address. The service makes KYC instantaneous, totally secure and paperless while enhancing privacy of data. Presently, e-KYC is free of cost. However, UIDAI can charge for its authentication service in future. The information containing relevant client details and photograph made available from UIDAI as a result of e-KYC process shall be treated as sufficient proof of Identity and Address of the client. Besides mutual funds, SEBI has allowed stock exchanges, brokers, depository participants, portfolio managers, alternative investments funds and collective investment schemes to accept e-KYC service. Banks and insurance companies are already using e-KYC service to carry out their KYC verification procedures.
AMFI has further extended the ARN fee waiver period till March 2014. AMFI started issuing ARN free of cost to individuals and new cadre of distributors (for those who register for the first time) from February 2013 in a bid to expand the distribution force. This is the second time AMFI has extended the fee waiver period. AMFI is also trying to enroll 100 new distributors from each of the 200 districts where it is conducting District Adoption Program (DAP), an investor awareness initiative, with AMCs.  Large AMCs like Reliance, HDFC, UTI and SBI are trying to enroll new cadre of distributors. The fee waiver strategy seems to have paid off going by the new ARN registrations with AMFI. As per information available on AMFI's website, around 1200 people have applied with AMFI for an ARN license till March 2013. Around 200 applications under the new cadre of distributor category were received till March 2013.
SEBI is likely to allow Real Estate Investment Trusts (REIT) in India. It has put out a consultative paper on REITs for public comments recently. Earlier, in 2008 too, SEBI had come out with a draft regulation on REIT. REIT, somewhat like a mutual fund, pools the money of investors and invests in real estate. According to the consultative paper, REIT should have to invest at least 90% of their corpus in completed revenue generating properties so as to ensure regular income to investors. SEBI proposes to allow REIT to invest up to 100% of their corpus in a project with minimum asset size of Rs 1000 crore.  In addition, no REIT is to be allowed to invest in vacant, agriculture or mortgaged backed securities or lands. The structure of REIT will consist of trustees, sponsors, managers and a principal officer. Like a mutual fund house, trustee of REIT will play a supervisory role and will be independent of sponsor and manager. Once it gets SEBI approval, it will have to list itself so that it can raise funds through follow-on offers.  REITs will have to declare their NAV at least twice a year. SEBI has signaled that only large and resourceful players can enter the market since it has proposed that REIT should have a minimum asset size of Rs 1000 crore to float an initial offer. Further, the minimum size of initial offer should be Rs 250 crore to ensure adequate public participation. REIT can raise funds from retail investors, HNIs, foreign institutions etc. However, only HNIs and institutions are allowed to invest during the initial stage. Moreover, the minimum subscription size is proposed to be Rs. 2 lakh and unit size at Rs 1 lakh.
Some key features of REIT:
  • REITs will be managed by professional fund managers, who have diverse skill in property development, redevelopment, acquisition, leasing, and management.
  • Listed REIT will provide easy exit and liquidity benefits to the investors.
  • REIT will bring in transparency and accountability in the real estate sector.
  • Investors should have the right to remove the manager, auditor, principal valuer, seek delisting of units etc.
  • REITs have to organize an annual meeting of investors to discuss the matters related to accounts, valuation, performance, etc.
  • Approval of investors is mandatory for all transaction above a threshold limit.
SEBI is considering raising the minimum capital for a mutual fund to Rs 25 crore from the existing Rs 10 crore. The capital markets regulator initially wanted to enhance the net worth requirement to Rs 100 crore. Strong protest from the segment has prompted the Mutual Fund Advisory Committee (MFAC) to recommend raising the capital base to Rs 25 crore. SEBI is keen on raising the minimum capital to ensure only ‘serious’ companies to stay in the business.
SEBI has allowed AMCs to hold gold certificates issued by banks in physical form. Earlier AMCs were supposed to hold these certificates only in dematerialized form. In February, SEBI allowed Gold ETFs to invest up to 20% of their net assets in gold deposit schemes (GDS) of banks following the finance ministry’s move to link gold deposit schemes of banks with Gold ETFs. The advantage will be that a part of the gold lying in stock will be brought into circulation and will partially meet the requirements of the gems and jewellery trade. It is hoped that, consequently, there will be a moderation in the quantity of gold that is imported into the country. Before investing in GDS of banks, mutual funds need to have a written policy with regard to investment in GDS. Investing in gold deposit schemes of banks helps Gold ETFs/gold fund of fund schemes to get incremental returns which helps the performance of Gold ETFs. As on September 2013, there are 14 Gold ETFs managing Rs. 10415 crore.
To ward off any attempts to manipulate share prices through 'independent' reports on stocks and listed companies, SEBI may soon issue a new set of guidelines for research analysts covering Indian markets. While regulated entities like brokerage firms, investment banks and fund houses are already under SEBI's ambit for their research reports, the capital markets watchdog is now working on a detailed code of conduct and guidelines to be followed by the 'independent' research analysts. This would help remove a regulatory gap exploited by the individuals and entities who do not register themselves with SEBI to avoid any action for manipulative actions carried on the basis of research reports published by them on the Indian stock markets and individual shares.
Asset management companies (AMCs) are keeping a watch on the Foreign Account Tax Compliance Act (FATCA). FATCA requires foreign financial institutions, including mutual funds, to register with the American tax authorities and provide details on any assets held by American citizens. Despite the fact that it is US legislation, FATCA has global implications for all financial institutions. US financial institutions, acting as withholding agents, need to be compliant by July 2014, while financial institutions operating outside of the US – termed Foreign Financial Institutions (FFIs) – should implement new procedures for account opening and existing account review by July 2014, but will begin reporting by March 31, 2015. Institutions need to adopt procedures, processes, and systems necessary for U.S. account and US owner identification. The new rules require more stringent compliance practices and are likely to increase costs for the mutual fund industry, where roughly half the players are currently running losses.
Gearing up for a major overhaul of its role, functions, and organisational structure under 'Project Shikhar', markets regulator, SEBI, is looking to re-define its 'vision, mission and value statements'. SEBI's board has accepted the recommendations of the independent global consultant Oliver Wyman for overhaul of its functions, role, and organisational set-up with a stronger workforce and greater IT resources, and the same are in the process of being implemented. Among others, it has been recommended that SEBI should impart a greater focus on mobilising household savings into capital market assets, strengthen its supervisory functions and its oversight of listed companies. Meanwhile, SEBI is considering a 'triple-A approach' of spreading awareness among investors, promoting appropriate products and ensuring proper audit of the marketplace. The other goals identified in this project are building a diversified and balanced investor base in the country, developing viable alternatives to bank credit, enhancing ability to prevent and respond to crises, empowerment of investors and ensuring full trust and confidence of investors in the securities market.

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