FUND FULCRUM

May 2014

The average assets under management of mutual funds witnessed a 14.6% rise to touch a record Rs 9.45 lakh crore in April 2014 on the back of a spurt in inflows into liquid funds, according to rating agency CRISIL. Assets under equity funds gained for the third consecutive month, tracking the uptick in the equity indices. According to the agency, liquid funds attracted inflows of Rs 1.24 lakh crore, which is the biggest in three years, as corporates and banks ploughed the surplus money back into the funds that were withdrawn in March 2014 due to advance tax payout and requirement during the end of the fiscal period. The liquid funds' assets rose 94.6% to touch Rs 2.59 lakh crore by April 2014. However, income funds registered outflows, with assets under this category touching Rs 4.58 lakh crore, mainly due to outflows from close-ended and interval funds. Gilt funds saw outflow for the fifth consecutive month with AUM falling to Rs 5,895 crore in April 2014. However, equity fund AUM gained for the third month in a row with April 2014 witnessing a gain of 0.6% or Rs 1,139 crore to Rs 1.92 lakh crore. The gains were led primarily by mark to market gains in the broad market. Meanwhile, investors continued to exit gold exchange traded funds (ETFs) for the eleventh straight month with consolidated outflows amounting to Rs 2,400 crore till April 2014. Other ETFs saw record outflows of Rs 1,213 crore and assets declined 18.20% to Rs 3,700 crore in April 2014. Fund of funds investing overseas too saw outflows with the category's AUM falling by 0.2% to stand at Rs 3,186 crore as of April 2014.

 

During the entire financial year 2013-14, mutual funds had garnered nearly Rs 54,000 crore from investors as against over Rs 76,539 crore in the preceding fiscal. ICICI Prudential, IDFC, and Birla Sun Life emerged as the highest gainers in equity assets. ICICI Prudential recorded the highest growth (absolute terms) in equity assets. Its equity AUM increased by Rs. 3,675 crore or 22%. Eighth largest fund house by assets IDFC saw its equity AUM jump by 27% or Rs. 1619 crore while Birla Sun Life and Kotak saw their equity assets increase by Rs. 619 crore and Rs. 232 crore respectively. India's largest fund houses, HDFC and Reliance saw their equity assets dip by Rs. 2,741 crore and Rs. 426 crore respectively. SBI and UTI too recorded a decline in their equity assets by 9% and 7% respectively. Among the top ten fund houses, DSP BlackRock too witnessed a decline of 22% in its equity AUM. Its equity assets fell from Rs. 10,796 crore to Rs. 8,437 crore in FY 2013-14. Though the equity AUM of industry has grown, no new investments have come in equity funds. Thanks to mark-to-market gains and closed-end equity funds launches, equity AUM of the industry grew by 11% from Rs. 1.72 lakh crore to Rs. 1.91 lakh crore in FY 2013-14. However, total equity AUM of the top ten fund houses saw a marginal decline of 2% from Rs. 1.55 lakh crore to Rs. 1.53 lakh crore. This decline can be attributed to redemptions as many investors exited equity mutual funds after booking profits. The S&P BSE Sensex rose by 19% while CNX Nifty grew 18%. Equity funds saw net outflows of Rs. 9,268 crore.

Mutual funds lost about 33 lakh investors, measured in terms of individual accounts or folios, in the financial year 2013-14, primarily on account of volatility in the equity market. It was the fifth consecutive year of loss of folios by mutual funds. According to market regulator SEBI’s data, on total investor accounts with 44 fund houses, the number of folios fell to around 3.95 crore at the end of 2013-14, from 4.28 crore in the financial year 2012-13. In the past five financial years till 2013-14, the mutual fund industry had lost more than 88 lakh investor accounts. Mutual fund sector, which held 4.75 crore folios at the end of financial year 2008-09, saw an increase of 3.66 lakh new investors account to 4.8 crore in 2009-10. However, later the number of folios continued to witness a southward trend and tumbled to 3.95 crore during 2013-14. The number of investor folios for equity schemes fell by 40 lakh during 2013-14. The total number of folios in equity funds were 2.92 crore by the end of 2013-14, as against 3.31 crore by the end of the preceding fiscal. According to SEBI data, the total number of folios in debt funds rose by about 7.28 lakh to 68.67 lakh at the end of March 2013. Balanced schemes, which invest in equity and debt category, gained 10,824 folios to end at 26.13 lakh during the last financial year. However, exchange traded funds saw a drop of 34,773 folios to 7.04 lakh investor accounts at the end of March 2014.

Piquant Parade

The mutual fund industry has been going through a consolidation phase. Birla Sun Life Asset Management Company, part of the Aditya Birla Financial Services Group, has acquired the mutual fund schemes and portfolio management services of ING Investment Management (India), part of the Dutch financial services company ING. With this acquisition, Birla Sun Life Mutual Fund has added Rs 1,100 crore to its assets under management (AUM). This is yet another exit of a foreign mutual fund from its Indian operations. The Dutch financial services company has been looking to exit its AMC and insurance business in Asia for long. In December 2013, HDFC Mutual Fund had bought schemes of Morgan Stanley. Earlier, Japan based AMC, Daiwa Mutual Fund sold its schemes to SBI Mutual Fund and Fidelity sold its AMC businesses to L&T MF.

Sundaram BNP Paribas Fund Services has bagged the International Standards for Assurance Engagements (ISAE) Type II certification for high quality operating models and effective controls. Sundaram BNP Paribas Fund Services has the unique distinction of being the only RTA (registrar and transfer agent) in the country to have been awarded the ISAE Type II certification for high quality operating models and effective controls. The certification is a reflection of better quality data, richer experience and basically, a reassurance on the effectiveness of the design and controls of the operating model. Sundaram BNP Paribas Fund Services had already completed its assessment for ISAE Type I certification in the year 2013.

Mutual fund industry’s much-awaited platform MF Utility is closer to reality. The platform will be unveiled in two phases. Channel partners will be appointed in the second phase. The platform will be owned by all AMCs. The platform will help advisors cut down their operational costs. A common account number will be allotted to an investor which can be used to log in and invest across all mutual funds. An investor can invest in multiple schemes with a single cheque. Distributors can get industry wide consolidated MIS. Distributors can make data entry in the portal. The portal will have five bank mandates for individual investors and seven for corporates. Distributors will have access to account statement based on their ARN. The portal will generate different types of alerts. Distributors have to scan and upload the forms on the portal which they can submit to the R&T later. Time stamping will be done immediately after forms are uploaded.

Regulatory Rigmarole

AMFI has come out with fresh set of guidelines for product labelling to standardize the methodology for colour coding schemes. SEBI had introduced product labelling so that investors can make an informed choice regarding the suitability of products based on their risk appetite. As per earlier SEBI guidelines, schemes with low risk were denoted with blue colour, those with medium risk were assigned yellow and schemes with high risk brown colour mark. However, there was confusion regarding its implementation among AMCs. AMCs were following different methods to classify their schemes. To end this confusion, SEBI had asked AMFI to standardize the methodology for uniform application of product labelling across industry. All debt-oriented schemes, comparatively lower in risk, will be denoted with ‘Blue’ colour. All diversified/blended schemes, with a mix of debt and equity into the portfolio construct, will be assigned ‘yellow’ colour to indicate moderate risk. All equity-oriented schemes will have ‘brown’ colour to show higher risk. All static allocations domestic feeder funds which have a predominant equity allocation will be colour-coded as ‘brown’ and which have a predominant debt allocation should be colour coded as ‘yellow’. All active allocations domestic feeder funds (i.e., where the allocation is based on a model or parameter etc.) will be colour-coded as ‘brown’. All foreign feeder funds will be colour-coded as ‘brown’. The revised guidelines will be effective from July 01.

AMFI, in its best practice circular, has clarified that in-person verification of investors can be done through web camera. SEBI’s new KYC rule which came into effect from January 2012, required distributors to personally verify their clients, a process known as in-person verification (IPV). Individual investors are required to undergo In-Person Verification (IPV) as a part of updation of additional/ missing information with KRA. In-person verification through web camera can be performed by any intermediary and records of the same shall be maintained, according to the AMFI circular. IPV can be done by any SEBI registered entity like an AMC or NISM/AMFI certified distributors who are KYD compliant. Banks are also allowed to do IPV.

While AMCs are preparing to raise their net worth, they are unhappy with SEBI’s decision to raise net worth to Rs. 50 crore instead of Rs. 25 crore recommended by SEBI Mutual Fund Advisory Committee. SEBI has raised the net worth of AMCs to Rs. 50 crore in its gazette notification published on May 06, 2014. AMCs which do not have Rs. 50 crore net worth get three years to comply with this regulation. In the meanwhile, they cannot launch any new schemes. SEBI has kept closed-end schemes exempt from this rule. Further, the net worth capital rule of SEBI is far higher than what is required in countries like US, Japan, and UK.

Stringent compliance requirements under Foreign Account Tax Compliance Act (FATCA) have led several fund houses to stop taking fresh investments from US investors. The FATCA regulations (an anti-tax evasion law) will come into effect from July 1, 2014. Once implemented, fund houses will be required to report information on US investors to US IRS (Internal Revenue Service) through CBDT. India has agreed ‘in substance’ to FATCA by signing an Intergovernmental Agreement (IGA) with US. There are hardly any US investors who are investing in Indian funds. US citizens can anyway invest in funds which are domiciled locally which have exposure to India. Fund houses are not accepting investments from investors residing in Canada either because the Canadian Securities Administrator (CSA) requires AMCs to register with it before selling any schemes to its residents. If existing investors subsequently become U.S. or Canada residents, they too will not be able to make any additional investments. Fund houses have allowed existing US citizens to redeem their investments from their schemes.

In order to boost investor participation into mutual funds from smaller cities, SEBI has allowed asset management companies to accept cash investments of up to Rs 50,000. Earlier, the cash transaction limit was set at Rs 20,000. This would help mobilise funds from beyond 15 cities. Although SEBI has allowed cash transaction up to Rs 50,000, it has said the repayments, dividends for all investments will continue to be paid only through the banking channels. Currently, only a few fund houses like UTI MF and SBI MF offer the facility of cash transactions to investors.  A lot of fund houses had taken a conscious decision of not accepting cash. Cash investments are aimed at those investors who want to invest in the so-called micro systematic investment plans (Micro SIPs). Micro SIP is a facility that allows investors to invest in very small tranches at periodic intervals. The KYC norms too are relaxed for Micro SIPs investments.

Indian mutual fund houses seem to have finally cracked the code for attracting investors from outside the big cities. More than half the folios, or accounts, opened in 2013-14 under a Systematic Investment Plan have come from tier-II or smaller cities — known in sector parlance as B-15, meaning, beyond the top 15 cities. From data provided by registrar Computer Age Management Services, 53% of the nearly 700,000 SIP folios opened in FY14 came from B-15. This data covers about 60% of the sector size. The concerted efforts to ensure the reach extended beyond the top cities could have finally begun to yield results. However, given the low investment size in smaller centres, the assets under management from B-15 was only a third of the total from SIPs. According to sector estimates, the average equity size in a B-15 centre was Rs 1,000-2,000, compared to Rs 5,000-10,000 in the top 15 cities. The total AUM under SIPs was Rs 39,449 crore as at end-March 2014. While the number of SIP folios coming in from the smaller centres has increased, the corpus remains low, as the average ticket size there is much smaller. Growing investment from smaller cities is an encouraging sign for the Rs 8 lakh crore MF sector.