FUND FULCRUM

March 2014

Mutual fund industry’s assets under management reached a record high of Rs. 9.16 lakh crore in February 2014 from Rs. 9.03 lakh crore in January 2014 on the back of inflows in income funds, according to the latest AMFI data. Income funds or fixed maturity plans received net inflows of Rs. 12,955 crore. The industry launched 128 FMPs which mopped up Rs. 21,307 crore while gross redemptions stood at Rs 30,812 crore which resulted in net inflows of Rs. 12955 crore. Fund houses typically launch long tenure FMPs during February and March, which if held for more than one year by investors, offer double indexation benefits. Income funds constitute Rs. 4.47 lakh crore or 47% of the industry’s total AUM of Rs. 9.16 lakh crore. The AUM of equity funds went up from Rs. 1.52 lakh crore to Rs. 1.57 lakh crore due to mark to market gains. The S&P BSE Sensex gained 606 points in February 2014. Gold ETFs continued to see redemptions in February 2014. The category saw net outflows of Rs. 178 crore. There are 14 Gold ETFs in the industry with assets under management of Rs. 9330 crore. ETFs linked to other indices also saw net outflows of Rs. 19 crore.

Investors have pumped in more than Rs 1.6 lakh crore in various mutual fund schemes in the first ten months of the ongoing financial year, more than double the amount infused by them in the entire financial year 2012-13. According to the latest data available with SEBI, there was a net inflow of Rs 1,59,631 crore during the 2013-14 fiscal (April-January) as against over Rs 76,000 crore in the preceding fiscal. Prior to that, a net amount of more than Rs 22,000 crore and over Rs 49,000 crore moved out of the mutual funds' kitty during 2011-12 and 2010-11, respectively. At a gross level, mutual funds mobilised over Rs 81.4 lakh crore during the April-January period of 2013-14, while there were redemptions worth Rs 79.8 lakh crore as well. This resulted in a net inflow of Rs 1,59,631 crore. Of the total net investment made in the first ten months of this fiscal, the huge part of inflows in the mutual fund schemes came during April and May 2013. Investors have infused a net amount of Rs 1.44 lakh crore during the period. In April 2013, mutual funds mobilised around Rs 1.08 lakh crore in various schemes. This was the highest net inflow by investors in such schemes in a single month since April 2011, when investors had put in a whopping Rs 1.84 lakh crore.

The mutual fund industry lost close to 30 lakh folios during April 2013 till February 2014, according to the latest SEBI data. A majority of this decline was due to rapid fall in equity folios. Equity funds lost more than 36 lakh folios during the same period due to redemptions and folio consolidations. Equity folio counts dropped from 3.31 crore in March 2013 to 2.95 crore in February 2014. Equity funds account for 74% of industry’s total 3.98 crore folios. With equity markets scaling new high, investors are looking for every opportunity to cash out of equity funds. This is evident from the Rs. 7333 crore net outflows during April-February 2014. The industry clocked sales of Rs. 39,417 crore during the same period while investors redeemed Rs. 46,751 crore which resulted in a net outflow of Rs. 7,333 crore. While the industry is reeling under unabated redemptions, new equity fund launches brought some relief for the industry. Fund houses launched 17 equity funds (open-end and close-end) during April-February 2014 which mopped up Rs. 1,995 crore. Majority of these were close-end funds. With interest rates remaining at peak, debt funds continued to attract investors. More than six lakh folios were added in debt funds category. Investors poured in Rs. 1.73 lakh crore in debt funds during April-February 2014. Inflows in debt funds helped the industry’s assets under management reach new high at Rs. 9.02 lakh crore in February 2014 from Rs. 7.94 lakh crore in March 2013. Exchange traded funds which comprise of Gold ETFs and Other ETFs tracking equity indices lost 66590 folios. Majority of folio erosion was seen in the Gold ETFs which saw net outflows of Rs. 2145 crore. ETFs currently manage AUM of Rs. 10,585 crore. Apart from the above categories, fund of funds which invest in overseas and balanced funds saw growth in number of folios.

Piquant Parade

 

The Bombay Stock Exchange (BSE) launched a mutual fund transaction platform called BSE StAR MF on March 6, 2014, which allows independent financial advisors or mutual fund distributors to directly buy and sell fund units on the stock exchange. They can even register systematic investment plans (SIPs) for their clients on this platform. The platform launched in December 2009 was only open to BSE brokers. Earlier, a mutual fund distributor had to become a sub-broker with any broker to use StAR MF platform. Around 300 distributors, including 65 IFAs, have taken membership of BSE StAR MF platform so far. In October 2013, BSE started giving limited membership to mutual fund distributors for a fee of Rs. 15000.

 To bolster awareness among investors and protect them from possible frauds, capital markets regulator, SEBI, plans to seek additional funds from the government for strengthening its IPEF (Investor Protection and Education Fund) programmes. SEBI has identified empowerment of investors, strengthening of enforcement and supervision framework and capacity building as among its core focus areas for 2014-15. With expenses towards various investor protection and education initiatives estimated to be nearly Rs 55 crore for next fiscal, SEBI may seek board's approval for additional funding for IPEF. Investor Protection and Education Fund (IPEF), set up by SEBI, had a corpus of Rs 35 crore at the end of January 2014. The SEBI board is also expected to consider a significant revision in fee charges from various entities so as to meet expenses for its regulatory and investor-centric activities. Meanwhile, SEBI wants to recover legal expenses incurred in such litigations from penalties imposed by it on defaulters before crediting the same to the government's coffers. The watchdog incurred litigation expenditure in the range of Rs 4-5 crore in each of the past three financial years and the same could be higher this fiscal.

Regulatory Rigmarole

 

Under its new long-term policy for mutual funds, which has been approved by the SEBI board and will soon be made public, the fund houses would be asked to enhance the online investment facility and tap the Internet savvy users to invest in mutual funds. At present, many fund houses are offering facility for online investment, but SEBI said that there is a need to promote and make it more user friendly for investors by improving the infrastructure and efficiencies. The regulator would also ask mutual fund players to tap burgeoning mobile-only Internet users for direct distribution of investment products.

In order to increase penetration of mutual fund products and to energise the distribution network, the Securities and Exchange Board of India has suggested that all PSU banks be encouraged to distribute schemes of all mutual funds. Apart from traditional banking products, PSU banks have been very successful in distributing third party insurance products. However, the same success is not reflected in the case of mutual funds. PSU banks which have wide bank branches network and best distribution reach in the nook and corner of the country, could play a key role in mutual fund distribution.

Investors might soon be allowed to buy in cash, mutual funds worth up to Rs 50,000, without declaring their Permanent Account Number (PAN). The increase in cap will lower the disadvantage faced by mutual funds vis-a-vis insurance products but not bring in a level playing field, as there is no cash limit for investing in insurance products. In addition, according to the income-tax rules, if an investment in financial instruments exceeds Rs 50,000, the investor is required to furnish PAN. So, the information will go to the I-T department, which could, potentially, ask the investor to reveal the source of this money.

The Securities and Exchange Board of India has decided to stop providing financial assistance to class action suits. Henceforth, investor associations wishing to file class suites should approach the Centre through the Ministry of Corporate Affairs (MCA). SEBI’s move might make it difficult for investors looking for legal aid. SEBI had introduced the regulation in 2009 by which, its Investor Protection and Education Fund could be utilised towards “aiding investors’ associations recognised by the Board to undertake legal proceedings in the interest of investors in securities that are listed or proposed to be listed”.

In a bid to counter money laundering and terrorist financing in the capital market, SEBI has asked intermediaries like brokers, sub-brokers, and mutual fund distributors to carry out risk assessment of their clients. As a part of this compliance, intermediaries will have to assess the country, nature and volume of transactions, payment methods used by clients, etc.  Intermediaries have to identify whether the client is acting on behalf of a beneficial owner. This task can be outsourced to a third party. The third party has to be supervised and should have measures in place for compliance with client due diligence (CDD) and record-keeping requirements in line with the obligations under the PML Act. The regulator has clarified that intermediaries will be ultimately responsible for client due diligence (CDD). Client records of the identity of clients, beneficial owners as well as account files and business correspondence will now have to be kept for five years after the business relationship between a client and intermediary has ended instead of ten years earlier. Registered intermediaries will have to preserve the records of information related to transactions which are reported to the Financial Intelligence Unit India (FIU-IND) for a period of five years from the date of the transaction between the client and the intermediary. FIU-IND can penalize the Designated Director for failure of the intermediary to comply with any of its anti-money laundering/combating financing terrorism (AML/CFT) obligations. To monitor compliance with these rules, intermediaries will have to appoint a Designated Director. The Designated Director can be Managing Director or a Whole-time Director in case of a company, managing partner in case of partnership firm, proprietor in case of a proprietorship concern, managing trustee in case of a trust. In case of mutual funds, compliance of these rules has to be monitored by the Boards of the Asset Management Companies and the Trustees and in case of other intermediaries, by their Board of Directors.

The SEBI board recently approved a long-term policy for mutual funds in India. The objectives were to ensure sustainable growth of the mutual fund industry and mobilisation of household savings for the growth of the economy. Why do these objectives remain unfulfilled even as the oldest mutual fund celebrates its 50 years? With the shift in financing pattern from centrally funded institutions to securities markets, the government should have acknowledged SEBI's construct of mutual funds as an efficient intermediary, and done two things. First, mutual funds should have been allowed to manage all portfolios of securities— pension funds, insurance portfolios, and every portfolio that holds securities and, hence, needs a manager. Second, the need to channelise household savings to fund the economy's long-term needs should have been backed by tax incentives for investing via mutual funds. In several regimes, including the US, a large chunk of the retail household money available to mutual funds is the mandatory retirement saving that enjoys tax concessions. Sebi is proposing a new retirement-linked product and an additional tax deduction under Section 80C. The amount allowed in tax-saving equity mutual funds has gone up from Rs 10,000 in 1991 to Rs 1 lakh. Equity assets of mutual funds have not moved up in the same proportion. Section 80C is crowded with choices, while retirement plans of retail investors remain underfunded in debt products.