Monday, July 28, 2014


July 2014

The average asset under management (AUM) of the mutual fund industry rose by 9.05% or by Rs 81,957 crore to touch Rs 9.87 lakh crore in the June 2014 quarter, according to the data released by CRISIL. However, stock markets fared better surging 13.53% in the same quarter. Growth was driven by the rise in assets of equity funds, short-duration debt funds, and fixed maturity plans (FMPs). Equity mutual funds saw record absolute rise in average AUMs which rose by Rs 33,007 crore or 16% to Rs 2.36 lakh crores, led by mark to market gains and inflows. In addition, equity funds' contribution to gains in assets was the highest among all categories. Assets of FMPs continued to ride at record high levels with a rise of 12%, or by Rs 18,643 crore, to touch Rs 1.74 lakh crore. Consolidated assets of the debt fund category rose almost 11.87% or by Rs 46,903 crore to Rs 4.42 lakh crore. Individually, assets of ultra-short term funds rose by Rs 13,669 crore (highest since September 2012) to Rs 97,431 crore, liquid/money market funds by Rs 28,689 crore to Rs 2.69 lakh crore, and short-term debt funds by Rs 4,546 crore.  Infrastructure debt funds, which have recently commenced business, have started declaring their average asset numbers that stood at Rs 1,023 crore in June 2014, up compared with Rs 583 crore at the end of March 2013. However, long-term debt and gilt funds fell by a record Rs 16,168 crore and Rs 954 crore to end the quarter at Rs 78,522 crore and Rs 5,913 crore respectively. Average AUMs of exchange traded gold funds (ETFs) fell for the third consecutive quarter, down by Rs 853 crore or 9.37% to Rs 8,247 crore, due to outflows led by subdued performance by the underlying asset. The category witnessed monthly outflows from June 2013 to May 2014.

HDFC Mutual Fund retained its leadership in the June quarter with an increase in AUM of Rs 17,073 crore (or 15.11%) at Rs. 1.30 lakh crore. Increase in the fund house's assets was also boosted by the acquisition of Morgan Stanley Mutual Fund, which held Rs 2,572 crore of average AUM as of March 2014. ICICI Prudential Mutual Fund maintained the second position at Rs 1.18 lakh crore; it saw the second highest absolute gain of Rs 11,234 crore or 10.52 %. Reliance Mutual Fund maintained third rank with the asset tally at Rs 1.13 lakh crore; its average assets moved up 9.05% or by Rs 9,373 crore. In percentage terms, Goldman Sachs Mutual Fund saw the highest rise of 64% to Rs 6,179 crore. AMCs, which witnessed a major fall in AUM, included JP Morgan Mutual Fund whose average AUM fell by Rs 1,704 crore to Rs 14,544 crore, and LIC Nomura Mutual Fund whose average AUM fell by Rs 1,095 crore to Rs 9,489 crore. Out of the 45 fund houses (including IDFs) that have declared their average AUM, 35 posted a rise in AUM. The share of the top five mutual funds' assets rose to 55% in the June quarter from 54% in the previous quarter, while the share of top 10 funds' assets was 78% (same as the previous quarter). The bottom 10 fund houses continued to occupy less than 1% of the average AUMs.

After witnessing a steady decline in folio count, the mutual fund industry has finally managed to grow its investor base in equity funds. The S&P BSE Sensex was up 1,196 points and breached    the 25000 mark in June 2014. CNX Nifty closed at an all-time high of 7600 points in June 2014. This helped the industry grow its folio count in equity funds by close to 45,000 in June 2014, according to SEBI data.  Largely due to fall in redemption and fresh inflows in existing as well as new schemes, equity funds saw a net inflow of Rs. 7,309 crore in June 2014. The total investor count in equity funds stands at 2.92 crore now. SEBI data shows that the industry has gained close to one lakh folios across all scheme categories in April-June 2014. The folio count has increased from 3.89 crore in May 2014 to 3.90 crore in June 2014. Similarly, the debt category also saw a moderate increase in investor accounts. Close to 60,000 new folios were generated in debt funds in June 2014. Likewise, balanced funds, income funds, and ETFs saw a marginal increase in folios count in June 2014. Both the categories have added close to 12,500 folios. The industry’s AUM fell below the Rs. 10 lakh crore mark in June 2014, thanks to net outflow of Rs. 67,697 crore from liquid funds. The industry’s AUM fell 4% from a record high of Rs. 10.11 lakh crore in May 2014 to Rs. 9.74 lakh crore in June 2014.

Piquant Parade
The mutual fund industry is expected to give Rs. 50 crore to AMFI and SEBI to carry out investor awareness programs. SEBI and AMFI have asked for 15% and 10% of investor awareness program (IAP) corpus available with the fund houses respectively. Earlier in 2013, SEBI had asked fund houses to spend 2 basis points of their AUM on investor awareness program. Currently, the mutual fund industry has close to Rs. 200 crore in IAP corpus.

Fund houses are likely to merge or wind up their debt schemes which are managing very small AUM in order to comply with a SEBI diktat which requires them to maintain a minimum of Rs. 20 crore assets during their lifetime. According to Value Research, there are 74 schemes which have an AUM of below Rs. 20 crore. In the gilt category, some funds are managing assets as small as Rs. 4 lakh. AMCs will now focus on streamlining their products. If there are two schemes having similar features/objective only one scheme gets majority of inflows. Investors typically invest in gilt funds in anticipation of a rate cut. Since there have been no rate cuts, investors have moved out of gilt funds which has resulted in drastic fall in AUM in certain schemes. AMCs have not wound up these schemes because they would find it difficult to get SEBI approval to launch similar schemes in the future. 

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Regulatory Rigmarole

Fund houses have to register with US authorities by December 31, 2014 as part of Foreign Accounts Tax Compliance Act (FATCA) regulations. SEBI has asked fund houses to register with US authorities and obtain a Global Intermediary Identification Number (GIIN) as a part of Foreign Accounts Tax Compliance Act (FATCA) regulations by December 31, 2014. Enacted in 2010, the legislation is meant to prevent wealthy US individuals who park money overseas to avoid paying taxes. The FATCA rules came into effect in US from July 01, 2014. In its circular, SEBI said that India and the United States of America (US) have reached an agreement in substance on the terms of an Inter-Governmental Agreement (IGA) to implement Foreign Accounts Tax Compliance Act (FATCA). Registration should be done only after the formal IGA is signed. India is now treated as having an IGA in effect from April 11, 2014. Once implemented, fund houses will be required to report information on US investors to US IRS (Internal Revenue Service) through CBDT. As far as US retail investors are concerned, they are more likely to invest in US domiciled funds for ease of convenience. Very informed investors, who are traditionally institutional investors, may invest in India domiciled mutual funds. Fund houses have stopped accepting fresh investments from US residents as a part of FATCA rules since last year.

According to market regulator SEBI, investors with inactive accounts, with zero balance and no trades for a year, will now get their physical annual account statements upon request from the second year. So far, Depository Participants were automatically providing such investors physical annual statements. According to the new rules, "the dispatch of the physical statement may be discontinued for the account which continues to remain zero balance even after one year" in case no 'Annual Maintenance Charge' has been received by the DPs.

The Securities and Exchange Board of India has embarked upon an ambitious plan of doing away with physical share certificates by making dematerialisation compulsory by the end of this financial year. The move is likely to impact shares worth about Rs 2.3 lakh crore, currently held in paper format. SEBI has already set the ball rolling to make necessary amendments in the Depositories Act to eliminate physical shareholding from the securities market. As of June 2014, about 2100 crore shares in about 4,000 listed companies, 5% of the total shares, were in paper format. Under the current provisions of the Depositories Act, non-promoter investors have an option to hold securities either in physical form or in demat format. To encourage these investors to convert physical shares into demat form, SEBI plans to initially approach large investors such as the government, companies, sand institutional investors. Subsequently, SEBI might mandate all new shares issued through a rights issue or a follow-on public offering to be in demat form. Shares issued to investors through initial public offerings have to be in demat form. SEBI is in talks with market participants to finalise the modalities of the transition to the demat mechanism.  The concept of demat, or an electronic record of share certificates, was introduced in 1996. Currently, all trades are settled in demat format; however, certain sections of the market continue to hold physical certificates.

The Union Budget is a mixed bag for the mutual fund industry.  80 C investment limit has been hiked from Rs. 1 lakh to Rs. 1.50 lakh. This can boost investments in ELSS category. Other investment avenues like PPF, insurance schemes, fixed deposits are eligible for tax exemption under Income Tax Act 80 C. This can increase investments in such instruments at the cost of mutual funds. 

Uniform KYC for investing in all financial instruments and single operating demat account will be introduced, which will allow transactions of all financial assets. This will do away with the requirement to perform multiple KYC for investing in products regulated by different regulators. This will help investors and intermediaries to seamlessly transact across all financial instruments.

The increase in long term capital gains tax for debt funds from 10% to 20% and the change in withholding period for long term from 12 months to 36 months has ended the arbitrage which existed between debt funds and other debt instruments, particularly bank deposits. One year FMPs will be hit the most. The increase in tax will make bank deposits more attractive. This directs the energies of the mutual fund industry from short to long term and towards more stable investible inflows. The arbitrage available while calculating the dividend distribution tax has also been removed. The investors have been prepared for a long-term and more objective approach towards the mutual funds - more investments and less tax arbitrage. Investors who redeemed their debt fund investment between April 1 and July 10 2014 will not have to pay long term capital gains tax on debt funds which was proposed in the Union Budget.

This year's budget lays the road map for providing long-term funds on a sustained basis to the cash-starved infrastructure sector. It envisages the creation of Infrastructure Investment Trust (InvITs) and Real Estate Investment Trusts (REITs). The finance ministry has proposed a range of tax incentives for these trusts in line with its promise to create a framework of fast-track, investment friendly and predictable public private partnerships (PPPs) to build large-scale projects that are of vital importance for India to compete in global markets. The Infrastructure Investment Trusts will be listed on the bourses and their units will attract same levy of Securities Transaction Tax (STT) as equity shares of a company. The investors in the trusts will get similar tax treatment on capital gain as in the companies. They will not have to pay long-term capital gains tax while the applicable short-term capital gains tax would be 15%. In addition, the interest income from the trusts' investment in infrastructure projects will not be taxable and there would be no withholding tax at the level of infra projects. The dividend income of the trusts will be subjected to dividend distribution tax on the company that is paying the dividend. The dividend received by the trusts can be distributed to the trusts' unit holders without any tax. It can acquire controlling stake in income-generating infra projects, giving an exit option to cash-starved infrastructure promoters.

"The mutual fund penetration in the country is very low compared to global and peer benchmarks. The AUM-to-GDP ratio currently stands at 7-8% compared to a global average of 37%," according to a PwC-CII report. The report also noted that the fund houses badly need to tap the large untapped market as a whopping 74% of the current AUM comes from the top five cities, 13% from the next top 10 cities and 6 % from the next top 20 cities with the next 75 cities contributing a paltry 3%. There was no change in this break-up since 2009. However, when it comes to AUM break-up by investor class, the share of the corporates rose by 2% to 51% in 2014, which was 49% in 2009, followed by FIIs with 21% during the same period, which stood unchanged. The share of Banks/FIs was 2% in 2014, down from 5% in 2009; HNIs at 27%, up from 21% in 2009 and retail remaining unchanged at 21% since 2009. The domestic AUM has grown from Rs 4.7 trillion in March 1993 to Rs 8.25 trillion in March 2014 and over Rs 10 trillion by May 2014, reflecting a CAGR of over 15% over the past 21 years. In the same period the Sensex grew from 2280.52 points as of March 31, 1993 to 22,386.27 points as of March 31, 2014, a CAGR of 11.5%, according to the report. According to PwC, the global aggregate AUM stood at $ 64 trillion in 2012, led by the US with $ 27 trillion and the global AUM is expected to exceed USS 100 trillion by 2020.