Monday, April 28, 2014

April 2014
The huge run-up in the capital markets in March 2014 resulted in assets under management (AUM) of mutual funds gaining 3% to 9.09 lakh crore in the March quarter against 8.82 lakh crore recorded in the December quarter, according to the latest data compiled by the Association of Mutual Funds in India. The 47 active mutual funds have registered a total AUM of Rs 8.23 lakh crore in the March quarter of the financial year 2012-13. HDFC Mutual Fund retained its top position with average assets in the March quarter increasing 4% to Rs 1.13 lakh crore, from Rs 1.09 lakh crore in the December quarter. Baroda Pioneer registered 11% rise in AUM due to investor addition. ICICI Prudential registered a growth of 9% in AUM at Rs 1.06 lakh crore, while Reliance Mutual Fund was up 1% at Rs1.05 lakh crore (Rs 1.04 lakh crore). The top three mutual funds — Reliance Mutual Fund, ICICI Prudential Mutual Fund, and HDFC Mutual Fund — together managed about 38% of the total assets of the industry, according to AMFI data. Birla Sun Life Mutual Fund and State Bank Mutual Fund recorded increase of 5% and 1% respectively, at Rs 89,136 crore (Rs 85,086 crore) and Rs 66,311 crore (Rs 65,415 crore). The average AUM of 24 mutual funds dipped in the March quarter compared with the same quarter last year, eroding the value of investors’ investments. Twenty eight mutual funds had assets under Rs 10,000 crore, while six had assets above Rs 50,000 crore. During the financial year ended March, the total asset base of the entire mutual fund industry grew by over Rs 40,000 crore, from Rs 8.6 lakh crore at the end of financial year 2013-14.
The industry’s average assets under management increased by 13% from 7.94 lakh crore to Rs. 8.96 lakh crore largely on account of inflows in debt funds. Investors poured in Rs. 63,339 crore in debt funds. This is reflected in the growth in debt folios which increased by over seven lakh from 61 lakh in FY12-13 to 68 lakh in FY13-14. A lot of investments has moved to FMPs which were highly attractive when the yields were hovering around 9.50 % to 10% during September 2013. A lot of FMPs were launched in March 2014. Equity schemes have seen Rs 5,526 crore in outflows, according to data from the Association of Mutual Funds in India. This is the second year in which the money pulled out of equity Mutual Funds by investors is more than what was put in. In 2012-13, net outflows stood at Rs 12,931 crore. In 2011-12, there were net inflows of Rs 264 crore. The mutual fund industry lost close to 40 lakh folios in equity funds in FY2013-14, according to the latest SEBI data. This decline can be attributed to redemptions and folio consolidation. As on FY2013-14, there were 2.91 crore equity fund folios, down from 3.31 crore the previous year. Investors pulled out Rs. 9,269 crore from equity funds last year as the markets continued the uptrend in 2014. Fund houses launched a slew of close end equity funds which managed to collect decent money from investors. The industry launched 19 closed end funds last year. The number of equity funds has gone up to 363 in FY13-14 from 347 the previous year. However, inflows in existing schemes continued to be low. The pace of folio closures though slowed down in FY13-14. The industry lost close to 40 lakh equity folios in FY13-14 compared to 45 lakh decline in FY2012-13. The industry’s total folio count dropped by 32 lakh from 4.28 crore in FY2012-13 to 3.95 crore in FY2013-14.
Investors pumped in nearly Rs 54,000 crore in various mutual fund schemes in 2013-14, 30% lower than the amount infused by them in the preceding fiscal. However, fund mobilisation in mutual fund schemes is expected to grow in the coming months. This is in view of SEBI recently clearing its first ever long-term policy for the sector, proposing a number of tax benefits and measures for growth of Mutual Fund business. The policy is aimed at channelising household savings into equities and mutual funds. According to the latest data available with SEBI, there was a net inflow of Rs 53,782 crore during the 2013-14 financial year as against over Rs 76,539 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 97.68 lakh crore during 2013-14, while there were redemptions worth Rs 97.14 lakh crore as well during the period. This resulted in a net inflow of Rs 53,782 crore. Of the total net investment made in the past fiscal, a huge part of inflows in the mutual fund schemes came during April 2013 and January 2014. In April, 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 fund houses mobilised Rs 83,533 crore in various schemes in January 2014.The significant level of fund mobilisation has also helped the total asset under management of mutual funds to grow to Rs 8.25 lakh crore at the end of March 31, 2014 from Rs 7.01 lakh crore during fiscal 2012-13.
Piquant Parade
ICICI Prudential Mutual Fund bagged four awards at the Morningstar Fund Awards event. The fund house was adjudged as the Best Equity Fund House, Best Debt Fund House, and Best Multi-Asset Fund House. ICICI Prudential Dynamic Plan bagged the Best Large-Cap Equity Fund Award. Awards were presented in eight fund categories. The Morningstar Awards are designed to help investors identify the year’s most exceptional funds and fund houses. These awards honour the funds and fund houses that outperformed their peers and added value for investors.
To create more awareness about capital market and to protect investors' interests (across the country in 13 major languages) SEBI plans to initiate campaigns through mobile as well as Internet platforms and by collaborating with industry bodies, stock exchanges, and depositories. In December 2013, SEBI began a campaign on 'Investor Grievance Redressal Mechanism', through mass media. SEBI has proposed to carry forward the campaign through media in the next financial year 2014-15 under which it would inform investors about grievance redressal mechanism, Collective Investment Schemes (CIS) as well as promote securities through mutual funds and primary and secondary markets.
A new portal called Moneybase provides online investing facility for investors and acts as a sub-broking platform for IFAs. More players are tapping the online route to distribute mutual funds among masses. Similar to FundsIndia and Fundsupermart, the portal  provides online investment facility for investors as well as distributors. One has to initially sign up by providing his/her details like name, address, PAN, etc. After creating a login id one has to submit KYC, bank mandate, cancelled cheque and other documents to Moneybase. Once the account is created, investors can start transacting through the portal. Based on information like goal, risk appetite and time-horizon provided by investors, the portal recommends funds to invest in.
Regulatory Rigmarole
Some of the non-tax related proposals set out by SEBI in its long term policy for mutual funds have become effective from April 01, 2014. SEBI has issued a circular in which it has asked AMCs to make a number of disclosures. SEBI has also specified the voting norms of AMCs. Other decisions taken by SEBI board like seed capital and net worth are likely to come after a gazette notification.
AUM disclosure
Currently fund houses disclose the AUM break up of T-15 and B-15 cities and the AUM of different categories of schemes like equity, balanced, debt, ETF, etc. on a quarterly basis on their websites. In addition to this, AMCs will have to disclose the AUM contributed by sponsors, contribution to AUM from investors type (retail, corporate, etc.) in different scheme types (equity, debt, ETF, etc.) and state-wise/union territory-wise contribution to AUM. This will now be a monthly disclosure.
In order to encourage AMCs to actively take part in casting voting rights on behalf of their investors SEBI had asked fund houses to disclose their general policy of voting and the actual exercise of their proxy votes in the AGMs/EGMs of the investee companies from 2010-11. In addition to disclosing voting patterns, fund houses now have been asked to share the rationale behind casting vote for or against any matter. Further, AMCs will be required to publish summary of the votes cast across all its investee company and its break-up in terms of total number of votes cast in favour, against or abstained from. AMCs will have to disclose this data on their website on a quarterly basis. AMCs will have to obtain a certificate from auditor on the voting reports annually. This report has to be submitted to trustees and published in the annual report and website. SEBI has asked the trustees and boards of AMCs to monitor and ensure that the votes cast by AMCs are prudent and adequate.
EUIN remediation period will remain 30 days as opposed to the seven days proposed earlier by AMFI. EUIN is a unique seven digit alpha numeric number assigned to the employees of distributors which was introduced by SEBI to tackle the menace of mis-selling. If distributors fail to quote EUIN within the remediation period their commissions were forfeited. Effective April 01, 2014, distributors have sufficient time (30 days) to remediate EUIN. Commissions are withheld for 30 days within which distributors have to furnish EUIN. The commissions are released by fund houses if distributors remediate it within this period. 
SEBI has asked for a share of the investor awareness program (IAP) corpus available with fund houses. The government was funding SEBI so far. Now they are looking at AMCs for this funding. Even before SEBI mandated AMCs to spend two basis points on investor awareness, AMFI was conducting its own investor programs through AMCs. It had run a media campaign ‘Savings Ka Naya Tareeka’.
Some mutual funds have come under scanner of the capital markets watchdog SEBI and industry's front-line regulator AMFI for allegedly window-dressing their fiscal-end assets base through illicit trades. In order to meet their redemptions, mutual funds have been involved in a transaction that typically include forward deal on corporate deposits, which are in violations of SEBI's norms and are entered into at pre-fixed prices. To avoid fall in AUM towards the financial year-end, Mutual Funds typically reach to cash-rich clients for such trades. Mostly funds with high focus on liquid assets tend to adopt such practices. In order to desist funds from such trades, AMFI has requested all Asset Management Companies to send, on a daily basis, their entire trade data, such as secondary market trades, primary market trades and inter-scheme trades to (rating agencies) Crisil/ICRA. These agencies internally have also been requested by AMFI to highlight individual Outlier Trades, if any, to individual AMCs on a weekly basis. In this connection, AMFI has also sent a Best Practice Circular to all AMCs requesting them to present Outlier Trades (variation in trade figures), if any, to their respective Boards as per the data provided by Crisil/ICRA.
The latest iteration of Direct Taxes Code Bill 2013 has been a mixed bag with some dampener for industry on R&D front and also some positive surprises on taxation of equity shares and equity oriented mutual funds. While equity shares held for more than 12 months would be considered as long-term investments and exempt from tax, the method of calculation of 12-month period has undergone a change. Now, the 12-month period is to be reckoned from the end of the financial year in which it is acquired and not from the date of acquisition. The Direct Tax Code proposes to levy 10% additional tax on resident recipient if the total dividend in his hands exceeds Rs 1 crore. The Code has rejected the recommendation of the Standing Committee to do away with the Securities Transaction Tax, in order to regulate day trading. In respect of investment assets being equity shares in a company or a unit of equity-oriented fund which are short-term in nature — that is to say their period of holding is 12 months or less than 12 months — a deduction amounting to 50% of the income so arrived shall be allowed for computation of short term capital gain. Currently, no deduction is available for computation of short term capital gains. Other investment assets (not including equity share or equity oriented fund) will be considered as long term when they are transferred at any time after one year from the end of the financial year in which they are acquired by the assessee. The DTC Bill proposes to scale down the R&D benefits.  The new Code now provides for a reduced weighted deduction of 150% for in-house scientific research. Similarly donations to specified institutions will qualify only for a deduction of 125%. This will be a major setback for corporates who had all geared up to set up R&D facilities given the attractive deductions.
SEBI’s new norms on related party transactions could pose practical difficulties for listed companies. The norms are part of a stringent corporate governance framework for listed companies that would be effective from October 1, 2014. Under the new corporate governance rules mooted by SEBI, all material related party transactions require shareholders’ approval through special resolution. Besides, the related parties should abstain from voting on such resolutions. According to SEBI, any transaction with a related party that exceeds 5% of the annual turnover or 20% of the networth of the company —— whichever is higher —— on the basis of latest audited financial statement would be considered “material”.  It would be applicable for transactions entered with a related party individually or taken together with previous transactions during a financial year. Among others, listed companies would be required to disclose policy on dealing with related party transactions on their website as well as in the annual report.
Mutual fund penetration is low in India — the total assets managed by the industry is just 4.7% of the country’s GDP, compared with 77% in the US, 41.1% in Europe, and 33.6% in the UK. Even as the long-term returns on mutual fund investments outscore other investment options, the product is yet to find favour with small investors. Customer service remains one of the most under-examined reasons for this. Customers very rarely protest against bad service. Instead, they simply switch investments to other fund houses. But does the industry take cognisance of the deficiencies in servicing customers? In India, customers of 47 AMCs are serviced by three registrar and transfer agents (RTAs) with the top two holding a 90% market share. We need an industry framework that provides enough attention to customer servicing aspects. Together, we need to walk that ‘extra mile’. It is our collective responsibility to track the customer, hand over the undelivered mail and hard-earned money with the same zeal with which the fund house had collected it.

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