FUND FULCRUM

November 2013

 

The mutual fund industry witnessed its fastest month-on-month percentage growth this fiscal with nearly 12% rise in assets under management (AUM) to Rs 8.34 lakh crore in October 2013 due to sound inflows into liquid schemes, according to a CRISIL report. According to the Association of Mutual Fund in India (AMFI) data, AUM of liquid funds rose by 55% to Rs 1.89 lakh crore due to inflows of Rs 67,500 crore, which is the highest in the past six months on the back of cyclical inflows and RBI's liquidity easing measures. Meanwhile, assets under income and gilt funds also witnessed rise on MTM gains. While the income funds category saw inflows of Rs 3,100 crore in October 2013, resulting in 2.2% rise in its AUM to Rs 4.34 lakh crore; gilt funds posted 1.5% gain in its assets to Rs 7,500 crore. Despite outflows of over Rs 3,500 crore in October 2013, which is the highest for equity funds in the past 13 months, assets under this category rose 7% to Rs 1.73 lakh crore. Continued underperformance of small- and mid-cap stocks has prompted fund managers to increase the size of their cash holding. A mix of redemption pressure and a lack of conviction in the recent rally have prompted them to remain cautious and they are not deploying money into the stocks despite the recent outperformance. In the gold ETF category, assets declined by 5% to fall below Rs 10,000 crore due to MTM losses. Fixed maturity plans continued to get inflows due to rise in bond yields in the past couple of months.

Equity AUM of top 10 fund houses saw a decline of 8% from Rs 1,50,336 crore to Rs 1,38,870 crore, a fall of Rs 11466 crore, during the period September 2012 to September 2013 despite an overall rise of 8% in the AAUM of the industry. India's largest fund houses, HDFC MF and Reliance MF saw a decline of Rs 2226 crore (7%) and Rs 2876 (12%) respectively in the equity corpus.  DSP BlackRock also saw its equity AUM dipping by 21% or Rs 2255 crore during the same period. Those fund houses which had garnered maximum inflows in their equity funds during the 2007-08 run are the worst affected during September 2012 to September 2013 since investors were looking to break even and exit. Of the top 10 fund houses, only two fund houses – ICICI Prudential MF and IDFC, witnessed growth of 1% and 11% respectively in their equity AUM during the period. ICICI Prudential MF has recorded an inflow of Rs 121 crore whereas IDFC MF added an additional Rs 579 crore in its equity funds from September 2012 to September 2013. This growth in equity funds can be attributed to better performance of fund managers, launch of investor-centric products, and co-ordination with advisors.

Investors have pulled out nearly Rs 34,000 crore from various mutual funds in September 2013 as against a high inflow of  Rs 23,713 crore in such schemes in August 2013. According to SEBI data, at gross level, mutual funds mobilised Rs 8.67 lakh crore in September 2013, but also witnessed redemption worth Rs 9 lakh crore -- resulting in a net outflow of Rs 33,910 crore. This has brought down the total assets under management of mutual funds to Rs 7.46 lakh crore as on September 30, 2013 from Rs 7.66 lakh crore in the previous month. The huge outflow coincides with 494 points or 2.6% rise in the benchmark S&P BSE Sensex during the period under review. During the financial year 2013-14 so far (Apr-Sept), mutual funds mobilised Rs 35,342 crore as compared to Rs 1,01,875 crore mobilised in the corresponding period of 2012-13. In the entire fiscal 2012-13, mutual funds had garnered Rs 76,539 crore from investors while a net amount of over Rs 22,000 crore moved out of the mutual funds' kitty during the preceding fiscal.

 

Piquant Parade

With the improvement in liquidity conditions, Reserve Bank of India has decided to close the special window of Rs 25,000 crore for commercial banks to meet the cash requirements of the crisis-ridden mutual funds with immediate effect. 

FundsIndia.com, a mutual fund investment platform, has launched 'Instant Investing' that will enable investors to invest in a host of mutual fund schemes. Any investor who is KYC certified with CVL KRA can now logon to FundsIndia.com and enter their PAN and bank details to start investing, without any paperwork or signatures. Currently, investors can invest in the schemes of five mutual fund companies through this process and more are expected to join very soon.

According to SEBI’s Investment Adviser Regulation, an individual registered as investment advisor shall have a certification from NISM or any other organization or institution provided that such certification is accredited by NISM. The accredited organisation can brand and decide the course curriculum. However, the curriculum should be in line with the existing courses of NISM such as NISM-Series X-A, Investment Adviser Level 1 and Level 2, etc. NISM may suggest changes to the course curriculum, administrative capacity, etc. Keeping in mind the criteria like background of the organization and policies and processes followed for the certification examination, NISM will accredit the certification. Initially, the accreditation will be given for one year which can be later renewed for two more years. However, NISM can terminate accreditation if it receives complaints like poor quality of content, lack of periodic updates or irregularity. To ensure the quality of accredited certification examinations, NISM will conduct inspections from time to time and may also audit the processes and procedures followed to conduct accredited certification examinations. Applicants have to pay a non-refundable fee of Rs 1 lakh for accreditation along with their application forms. Accreditation committee will scrutinize the applications and make recommendations to NISM for grant of accreditation. The accredited organisations have to pay accreditation fees of Rs 1 lakh per certification accreditation and Rs 2 lakh for renewal of each accreditation. In addition, NISM will charge fees of Rs 300 per candidate for maintenance of record. The last date of submission of application is November 15, 2013. 

 

Regulatory Rigmarole

SEBI's mutual fund advisory committee has suggested revising the existing networth criterion from Rs 10 crore to Rs 25 crore and giving three years for mutual funds with assets of less than Rs 1,000 crore to meet the new norms. Those with assets under management (AUM) of more than Rs 1,000 crore should not be given more time to meet the Rs 25 crore criteria. The committee has suggested Rs 25 crore as the minimum net worth for new players. The committee has also recommended that fund houses need to put in seed capital of Rs 50 lakhs for each scheme. This would be counted as part of net worth and excludes fixed maturity plans. The recommendations of the mutual fund advisory committee would be sent to SEBI for approval. Previously, SEBI had put in place a Committee on Review of Eligibility Norms, which had recommended a higher net worth of Rs 50 crore for AMCs, in 2010.

The proposal to levy a ‘super-rich’ tax, at the rate of 35%, on those earning more than Rs 10 crore a year might not receive support of the Union Cabinet, which is to consider the Direct Taxes Code (DTC) Bill this month. This is because the government might not like to sully the business environment in the country in the run-up to the general elections. The finance ministry is moving a supplementary note to propose changes in the DTC Bill sent to the Cabinet in August 2013. The other amendments to the DTC Bill, 2010, that the Cabinet might consider this month are retention of current exemption limit for IT at Rs 2 lakh, fast-track courts for black money cases, doing away with Settlement Commission to resolve tax disputes, continuation of exemption from tax on maturity of some long-term saving instruments, and retention of MAT on book profits.

The RBI plans to extend the ambit of its policy on 'Treating Customers Fairly' (TCF) beyond banking products to third-party ones such as insurance and mutual funds. The move comes on allegations that several public and private sector banks were guilty of practices that encouraged money laundering and violated know-your-customer (KYC) norms and anti-money laundering (AML) rules in the sale of gold and other third-party products. TCF is a consumer protection policy, designed to address the problem of asymmetric information in the financial services sector. It is a regulatory initiative in which companies are required to consider their treatment of customers at all stages of the product life-cycle, including the design, marketing, advice, point-of-sale, and after-sale stages. RBI says it has taken a lead in ensuring banks' customers in India are treated fairly.

The performance of mutual funds is not that rosy over a one-year time frame, if you compare the performance to the gains they made against the benchmark - a key factor in evaluating a fund's performance. Out of 139 mutual funds of the top 10 equity mutual fund houses by AUM, only 59 could outperform their benchmarks in the past year. At first look, these numbers should paint a grim picture. In the previous bull markets, more funds beat their benchmarks. This time, performance has been concentrated in a select few sectors and stocks. On the other hand, funds have been keeping a more diverse holding in their portfolios, even from sectors that have not participated in this market rally. Funds face redemptions and have to keep some of their money in liquid counters. This tends to impact performance. However, the performance over three years gets better. Nearly 60% of the existing funds of the top houses have beaten their benchmarks. Time plays a crucial role in this outperformance. The more a fund stays invested in a sector or stock, the better its returns can get. Performance over the past five and 10 years gets even more impressive. It shows the returns getting progressively better. In those two time spans, 68% and 93% of the funds managed to beat their benchmarks. This exercise suggests that over a short time-frame, funds are not able to beat their benchmark; but over the longer one, more of them can easily do so. Then, why are so many investors dumping their funds instead of staying put for the long run? Among the many reasons are that investors look at just the very short-term performance of funds. They are not eyeing long-term returns. Studies have found that a combination of good funds with better risk-adjusted returns can give a much better performance for the same amount of risk. In the long run, it is about having the right combination of funds as well. If one selects a few funds with a good diversified focus, then they can also beat the benchmarks even if one of these funds is not doing well in the short-run. A combination of mixing and matching between different segments of the market, such as large- mid- and small-cap funds is a better way to buy mutual fund investments. However, even if majority of your funds are not working in the short run, there is a greater chance that given enough time, majority of these will deliver better returns.