FUND FULCRUM

February 2014

The Indian mutual fund industry's assets under management jumped 9.4% to a record high of Rs 9.03 lakh crore in January 2014 on the back of strong inflows into liquid funds. According to a report by CRISIL, the mutual fund industry's AUM was at Rs 8.25 lakh crore in December 2013. The figure stood at Rs 8.90 lakh crore in November 2013. There are about 45 fund houses in the country. The rise in monthly AUM in January 2014 was primarily on account of Rs 83,500 crore inflows -- the highest since April 2013. According to the CRISIL report, liquid funds saw net inflows worth Rs 77,500 crore, the highest in nine months, leading to a 43% rise in the segment's AUM to Rs 2.59 lakh crore.

The year 2014 has begun on a positive note for India's equity mutual funds when it comes to net inflows. However, it is still not out of the woods as investors' base continues to decline. For the third month in a row, the equity segment witnessed a net inflow of money. According to the latest statistics available from the industry body Association of Mutual Funds in India (AMFI), the equity segment saw a net inflow of Rs 427 crore in January 2014. Inflows remained in the positive territory despite the fact that overall markets remained weak throughout the month, with fear of tapering hitting sentiments. Prior to this, the sector had got Rs 699 crore and Rs 857 crore in the months of November 2013 and December 2013, respectively. Sales of equity funds which recently reached over Rs 5,500 crore are once again down to Rs 4,558 crore - which is not encouraging.

 

On top of it, the sector has failed to arrest the decline in folio numbers in equity funds. According to SEBI, January 2014 saw erosion in equity investors' base by 2.21 lakh. Though, it is the lowest decline in the past five months, it is still beyond the sector's comfort zone. In August 2013, the industry could bring the folio closures to below 1 lakh mark to as low as 62,000. But in the ensuing months, the situation worsened further with over a ten lakh folio closures in the successive two months. Mutual fund industry has lost an estimated over 29 lakh investors, measured in terms of individual accounts or folios, in the first 10 months of the current fiscal, mainly due to profit-booking and various merger schemes. Of more than 29 lakh investors lost during April 2013 to January 2014, most of the folio closures were seen in the equity portfolio despite the efforts of the mutual fund industry to educate investors about staying invested for the long-term. According to SEBI data on total investor accounts with 45 fund houses, the number of folios fell to around 3.99 crore at the end of January 2014 from 4.28 crore in the last fiscal (2012-13), indicating a decline of 29.41 lakh. The last financial year 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.

 

Piquant Parade

Market regulator SEBI has given an in-principle approval to the Institution of Mutual Fund’s Intermediaries (IMFI) to form self-regulatory organization. According to SEBI rules, the SRO must be a company registered under section 25 of the Companies Act, 1956, and must have a minimum net worth of Rs 1 crore. SEBI had invited applications for SRO in March 2013. The regulator had said there will be only one SRO to regulate mutual fund distributors. There were two more applicants in the race for SRO - Organization of Financial Distributors (OFD) floated by Financial Intermediaries Association of India (FIAI) and Financial Planning Standards Board of India. SEBI’s decision to give AMFI promoted Institution of Mutual Funds Intermediaries (IMFI) the go ahead to form self-regulatory organization (SRO) for distributors has evoked mixed responses from industry stakeholders. Some believe that AMFI is best placed to regulate distributors while others feel that a distribution association should have been entrusted the responsibility to form SRO.

Despite incentives, assets from smaller cities rise only 40 bps in the last five quarters. It was in September 2012, that SEBI had permitted fund houses, an extra 30 basis points (bps) if they got assets from the B-15, the smaller cities and towns. Fifteen months later, the situation remains almost the same. Against 12.57% in September 2012, the sector has 12.97% of their assets under management from B-15 as on December 2013. The contribution from top cities - Mumbai, Delhi, Kolkata, Bangalore and Chennai - had in fact, scaled up higher during this period, though marginally, from 74.32% to 74.37%. It was thought that SEBI's incentives would encourage players to penetrate B-15, though it would take some quarters to see positive growth. It is over five quarters now and the inertia remains. Setting aside the recent explosive expansion by SBI MF and UTI MF, wherein the former opened 51 branches and the latter 101 centres in one go, expansion in the B-15 cities is pathetic.

The AUM of mutual funds is unevenly distributed across the country. Presence of mutual funds is heavily skewed in favour of 60 districts, out of which a lion’s share originates from Mumbai. Lack of penetration may be due to low demand of mutual fund from the public outside the top 15 cities (T-15). This may be due to low level of financial literacy, cultural attitudes towards savings and investments, etc. Further, low supply of mutual funds outside the major cities may be on account of perceived lack of demand from general retail investors or due to lack of good talent for training and hiring mutual fund agents. The distribution costs as a function of AUM generated in the top districts are far higher than in the lower districts. Demographic and social development factors such as adult literacy, bank penetration (Savings accounts) do not show strong co-relation with mutual fund presence.

Regulatory Rigmarole

SEBI shakes up the mutual fund sector and revamps governance norms for listed entities with a series of new rules. These norms aim to make independent directors on company boards more accountable and give a bigger say to public shareholders in these entities. SEBI introduced a number of curbs on independent directors, considered torch-bearers for minority investors, and brought new restrictions to related-party transfers. An independent director could be on the board of a maximum of seven companies; it could be no more than three if the person is a wholetime director. The move is in line with the new Companies Act. This cap is an important way of making sure that they are able to perform their duties adequately, especially if the role or responsibility is large. SEBI also mandated all companies to have at least one woman as a director on the board and restricted the total tenure of independent directors to two terms of five years each. The regulator also mandated companies to make more disclosures on their renumeration policies and to disclose the performance evaluation of their board, a move likely to put more of a spotlight on the pay and performance of senior officials at listed companies. The regulator also mandated prior approvals of the audit committee, and restricted promoters from voting, on related-party transactions (RPT). The move is aimed at curbing the menace of “abusive RPTs”, which put minority shareholders in a disadvantageous situation. The new corporate governance norms, which take effect from October 1, 2014, will apply to all listed companies.

To ensure only serious asset management companies (AMCs) stay in business, SEBI increased the minimum net worth from Rs 10 crore to Rs 50 crore and also asked all entities to invest at least one per cent, or a maximum of Rs 50 lakh, as “seed capital” in all their open-ended schemes. Seed capital will ensure the 44 players in the sector have a stake in the performance of their schemes. Having fund houses invest in their own scheme could help in creating a track record for the fund. It will also help investors take a safe and informed decision while investing.

SEBI proposed Mutual Fund Linked Retirement Plan (MFLRP), which will be a long term investment product with additional tax incentive of Rs 50,000 under 80C of Income Tax Act. The regulator will implement the proposed non-tax related changes for the mutual fund industry. However, it will have to wait for the new government to clear the tax-related proposals. 

Making Know-Your-Client process easier for investors, SEBI cleared a proposal to allow various market entities such as brokers and mutual funds to get investor details from centralised KYC agencies, rather than carrying out a fresh KYC verification procedure. Presently, there is an option available to a market intermediary that it may access the centralised KRA (KYC Registration Agency) system in case of a client who is already KYC compliant, or it may also carry fresh KYC process. SEBI decided to do away with the second option of fresh KYC processing being carried out, if the concerned investor has once gone through the KYC procedure with any of the registered intermediaries.

SEBI unveils stringent disclosure norms for mutual funds. To bring in greater transparency, market regulator SEBI has asked the players to make monthly disclosures about group investment in their assets under management.

 

 

 

Market regulator SEBI expects its new long-term policy for mutual funds to help their total asset base to grow to Rs 20 lakh crore within five years, from about Rs 9 lakh crore currently. According to the draft policy, which will be notified after changes suggested by the SEBI board, there is a huge scope for expanding the reach of mutual funds and channelising household savings into them. This growth would be accompanied by an increase in folio numbers, substantial contribution from smaller cities and a higher number of distributors, among others, according to SEBI. The policy calls for measures to weed out non-serious players and safeguard investors' interest while promoting mutual funds as a key long-term investment option. Growth in the mutual fund industry has remained sluggish in the past couple of years although the regulator has taken several measures to re-energise the sector. According to an estimate, over 44% of households in the US have their savings in mutual funds, while in India the figure is a mere 2.5%. The growing Indian middle class can be tapped to augment the mutual fund retail investor base