FUND FULCRUM

January 2014

Following a smart turnaround in 2013 with an increase of over Rs 1 lakh crore in its asset base to nearly Rs 9 lakh crore, the mutual fund industry is looking forward to 2014 in the hope that it would be even better. Mutual fund industry's AUM hit a record high of Rs 9.58 lakh crore in August 2013 and was hovering around Rs 9 lakh crore as 2013 drew to a close. Fund houses are upbeat about an even better performance in 2014 on account of various measures initiated by market regulator SEBI as well as plans of individual players to expand the distribution network across the country, particularly to smaller cities. In 2013, the total assets under management of all fund houses put together soared by 11% on strong inflows in categories such as bonds and liquid funds. With inflows of a staggering Rs 1.4 lakh crore, AUM of liquid funds surged to Rs 2.46 lakh crore. A similar trend was seen in income funds, where inflows rose to around Rs 23,000 crore taking the assets managed by the fund to Rs 4.31 lakh crore. This was the second consecutive yearly rise in the mutual fund industry AUM, after a drop in the assets base for two preceding years.

The assets managed by mutual funds jumped by nearly Rs 85,000 crore or about 11% to Rs 8.78 lakh crore in 2013, with HDFC Mutual Fund retaining its top position. The country's 44 fund houses together had an average AUM of Rs 7,93,331 crore at the end of 2012, which increased to Rs 8,77,973 crore in 2013, as per latest data available with industry body Association of Mutual Funds in India (AMFI). Of the 44 fund houses, 26 saw their AUMs rise during the period, while 17 witnessed a decline. During 2013, the performance of the mutual fund industry has, to an extent, mirrored the performance of the Indian economy, the stock markets and the FII investment flows. This year, not a single new licence was issued and the sector has not witnessed any fresh foreign investment. On the contrary, 2013 was a year of consolidation for the industry. HDFC Mutual Fund, with assets of over Rs 1 lakh crore, agreed to buy all eight schemes of Morgan Stanley with combined assets of Rs 3,290 crore. Besides, Daiwa sold its assets to SBI Mutual Fund for an undisclosed amount. 

Among the large funds, ICICI Prudential MF was the biggest gainer followed by Reliance MF, while HDFC MF saw the smallest growth. In terms of total funds, HDFC MF managed to retain the top slot, followed by Reliance MF and ICICI Prudential. HDFC MF had an average AUM of about Rs 1.09 lakh crore at the end of 2013, a 7.5% rise from the preceding year. ICICI Prudential's AUM rose by an impressive over 19% to Rs 97,200 crore, while Reliance MF's AUM climbed by 13% to Rs 1.02 lakh crore. Besides, Reliance MF has surpassed Rs 1 lakh crore mark after a gap of two quarters. Mutual funds, which saw a gain in AUM, included UTI, SBI, Axis, Baroda Pioneer, Birla Sun Life, and Franklin Templeton. However, Canara Robeco, Goldman Sachs, Edelweiss, IDBI, Indiabulls Mutual and Tata Mutual Fund, among others witnessed a decline in their AUMs from the levels seen in 2012. Interestingly, 57% of industry growth has been contributed by top five mutual fund houses, while Reliance MF and ICICI Prudential together provided 31% of this increase.

Choppy markets and folio consolidation see the number of equity fund folios drop to 2.98 crore from 4.11 crore in 2009. The industry has seen a continuous exodus of investors since 2009 which is evident by the rapid dip in equity folios. The industry received a record net inflow of Rs. 46933 crore in FY 2007-08 when the industry launched 46 new equity funds. Despite distributors and AMCs efforts to educate investors to remain invested and continue their SIPs, the trend of equity fund closure continues, albeit at a slower pace. The BSE Sensex gained 379 points in December to reach 21171. From April to December 2013, equity funds have seen net outflows of Rs. 8341 crore. Investors poured in Rs. 30929 crore in equity funds and pulled out Rs. 39271 crore during the same period which resulted in a net outflow of Rs. 8341 crore. Many AMCs are launching close end funds to bring investors. AMCs have launched nine close end equity funds so far which have mopped up close to Rs. 1500 crore. More such funds are expected to be launched. Apart from equity funds, balanced funds and ETFs also saw a dip in folios. There was so much desperation among investors that no single month of the year saw any rise in folio numbers. The average monthly folio losses were close to 350,000. The most shocking period for the equity segment was the month of May 2013, which saw a record high number of folio closures at a massive 700,000 - an erosion never seen in the sector’s history. The only category which has seen growth in folios is debt funds. Debt funds added 40,290 in December 2013 and from April till December 2013, the category has seen a growth of more than five lakh folios. Debt funds have received net inflows of Rs. 87391 crore during the same period.

Piquant Parade

Investors can check the value of their investments, access their account balances, know the current valuation and get a summary of all their investments via KTrack. Karvy Computershare has launched first of its kind smartphone app for mutual fund investors called KTrack. The application provides quick and simple access to investment information to investors. This free app is available on Android iOS and Blackberry platforms, providing investors with instant investment updates on their mobile devices. 60-70% of the calls received from investors are about information regarding their investment value. KTrack© is a pioneering innovation in this regard. Through this application, investors can check the value of their investments in an instant, access their account balances, know the current valuation, get a summary of all their investments, and access a host of other things. The idea is to render sheer convenience and cost effectiveness.

Gone are the days when SIP registration took almost a month. With the advent of National Automated Clearing House system (NACH) platform developed by National Payment Systems Corporation India (NPCI), transacting in mutual funds has become much more convenient and faster. NACH is an online end-to-end electronic system which helps fund houses register SIP mandates swiftly. The concept is new to India, having become operational in December 2012. Currently registering a SIP ECS mandate takes 21 to 30 days and there is no process to track if the ECS has been confirmed at the bank’s end. The new system helps fund houses to register SIP mandates in just five days. Earlier distributors had to register multiple mandates if their clients wanted to invest through SIP in say four different schemes. With the new system, distributors can register four SIPs through one mandate. The process has become simpler even in case of lump sum investments. NACH can be utilized to pay utility bills, insurance premiums and mutual fund SIP ECS. Five fund houses – DSP BlackRock, UTI, Pramerica, HSBC, and Reliance have joined NACH platform so far.  ICICI Prudential is also evaluating the technology. Based on this technology, DSP Black Rock recently launched a One Time Mandate (OTM) facility which virtually eliminates any paperwork while investing. OTM allows an investor to authorize his/her bank to debit up to a certain amount daily based on the instructions given to DSP BlackRock Mutual Fund. Even if investors wish to transact physically (by filling up a transaction slip) they need not cut a cheque. In case investors are investing through DSPB’s website they do not need to use internet banking or debit cards and they can they instead can use the OTM facility. Even internet banking facility is not required. Further, net banking has restrictions on the number of transactions one can do which is not the case with NACH.

Pramerica has launched a facility called ‘Anywhere Transact’ based on the same platform which allows investors to invest in multiple ways. Investors can make a transaction through a phone call or through SMS.  Investors need to register for this facility by authorizing a debt mandate. Investors get a SMS and email from fund houses after every transaction. Once registration is done, investors can invest through phone, SMS or through internet. With the new technology in place, even investors who do not have smart phones can transact by simply sending an SMS. It is not that investors did not have an option to invest through SMS or phone call earlier. However, the earlier methods of investing through SMS or phone call required investors to remember their folios and scheme codes. Many fund houses had launched mobile based applications which allowed investors to transact through their phones. However, one drawback of these mobile applications was that investors were required to have smart phones with internet connection. Moreover, there were certain restrictions on the number of folios and schemes one could transact in. With fund houses having fixed some of these flaws of ‘anywhere transacting’, the investment process is likely to become much smoother for investors and reduce paperwork for distributors.

Regulatory Rigmarole

Fund managers are finding it a challenge to comply with a SEBI diktat which requires them to reduce debt funds exposure to a single sector to 30%. Fund houses have complied with this rule in all open end debt schemes like dynamic, short term, and income funds. However, fund managers are finding it difficult to offload their holdings in older FMPs to bring portfolio exposure to one sector below 30%. Fund managers say that there is a possibility that they could end up buying securities which offer lower yields which in turn could hamper the performance of their funds. The regulator had given one year’s time to AMCs to comply with this diktat. Due to the difficulties faced by fund managers in offloading their existing paper in FMPs, SEBI has given an extension to comply with its rule till March 2014. 

 

Morgan Stanley's exit from the Indian mutual fund  industry has revived the debate on the existence of smaller, loss-making asset management companies. The global financial giant - the first foreign mutual fund in India, launched in 1994 - sold its local schemes with assets worth around Rs 3,290 crore to HDFC Mutual Fund for approximately Rs 170 crore, about 5% of its AUM. Its corpus is less than 0.5% of the 44-member industry's total AUM of over Rs 8 lakh crore. HDFC's price was in line with earlier deals in the industry, as more than 40% of Morgan Stanley's AUM was equity - usually retail money, considered "sticky". The step raises a larger question: how long can many other funds with moderate assets and small marketing networks stay in business? They may not be as lucky as Morgan Stanley. Reportedly, many promoters of mutual funds outside the top 15 are entertaining prospective buyers. Perhaps six or seven mutual funds, both foreign and domestic, are actively looking for a buyer but are unable to find one. This is partly because most of the smaller mutual funds predominantly manage debt - institutional money, susceptible to sharp exits. This highlights the woes of the domestic mutual fund industry, where the share of the top 10 funds in the industry's total AUM has risen to almost 80%, and 70% of funds are still loss-making. Over the last four years, the strong players in the business have become stronger, while the weak got weaker. The ban on entry load - an upfront fee that funds charged investors to pay distributors - by the regulator in August 2009 was a turning point. Weak market conditions only hastened the slide. Without entry load, many mutual funds could not convince distributors to sell their products. That may have reduced mis-selling, but it meant large funds with deep pockets could market their schemes better. The mutual funds that have lost out in the race are the ones without strong products and a good investment team. Promoters of most mutual fund houses are unwilling to invest more in their ventures owing to uncertainty over growth. US-headquartered Fidelity Mutual Fund's sell-off of its Indian mutual fund business to L&T in 2012 may have triggered a panic among promoters. Fidelity's India operations were reeling from losses, but its schemes were on the buy list of most distributors because of their superior performance. Promoters of loss-making mutual funds asked: if Fidelity could not survive, how will they? That has aggravated the situation for foreign funds that do not see India as part of their core business strategy, especially in challenging times such as these. Some local fund houses - especially those that started after 2007 - are not in a hurry to exit but have trimmed their operations to the minimum. Their logic is that the business can be revived once market conditions improve. India has, however, seen several foreign entities entering as well. T Rowe Price, Schroders, Invesco and Nippon are prominent ones. However, all these acquired a sizable chunk, 25-26 per cent, in Indian entities; they did not start on a standalone basis.