FUND FULCRUM

August 2014

Mutual fund assets regained the Rs.10 lakh crore mark in July 2014, boosted by inflows in money markets and equity funds, according to industry data collated by CRISIL. The mutual fund industry’s AUM rose 3.26%, or by Rs.31,737 crore, to Rs.10.06 lakh crore in July 2014 from Rs. 9.75 lakh crore in June 2014 and fell slightly short of the record Rs.10.11 lakh crore in May 2014, according to the monthly numbers released by the Association of Mutual Funds in India (AMFI), according to CRISIL. The rise in AUM was primarily due to inflows in equity and liquid funds. Equity mutual funds’ AUM rose to a record high of Rs.2.52 lakh crore in July 2014 boosted by inflows of Rs.10845 crore, the highest since January 2008. Total inflows since the start of 2014 amount to Rs. 18934 crore, compared to net outflows of Rs.10426 crore and Rs.15620 crore in the preceding two calendar years respectively. The underlying equity asset class represented by the Nifty gained 1.44% in July 2014 and 22.48% since the start of 2014 buoyed by hopes +of economic reforms by the Modi government. Liquid funds’ AUM rose 13.07%, or by Rs.28,225 crore, to Rs.2.44 lakh crore, led by inflows of Rs.25,589 crore plus mark-to-market gains. Inflows in the category were basically cyclical in nature as companies and financial institutions ploughed the surplus money back into the funds that were withdrawn in June 2014 due to payment towards advance tax.

Investors pumped in over Rs 1 lakh crore in various mutual fund schemes in July 2014 after pulling out around Rs 60,000 crore in the preceding month. As per the latest data available with the Securities and Exchange Board of India, there was a net inflow of Rs 1,13,216 crore in July 2014 as against a net outflow of Rs 59,726 crore in the previous month. In May 2014, investors had pumped in Rs 33,661 crore in various mutual fund schemes, while in April 2014 they had put in Rs 1.12 lakh crore in several such products. At gross level, mutual funds mobilised Rs 35.37 lakh crore in July 2014, while there were redemptions worth Rs 34.24 lakh crore as well. This resulted in a net inflow of Rs 1.13 lakh crore. This significant level of funds mobilisation has also led to increase in the total assets under management of mutual funds that surged to Rs 10.06 lakh crore as on July 31, from Rs 9.75 lakh crore in the previous month. The strong inflow in mutual fund schemes coincided with a gain in BSE's benchmark Sensex by 2% last month. Overall, during the current financial year so far, mutual funds on a net basis have mobilised around Rs 2 lakh crore as compared to Rs 53,783 crore garnered in the entire 2013-14 fiscal. 

 

Piquant Parade

Axis Mutual Fund unveiled a tab version of its Shubhchintak platform in July 2014. Launched in March 2014, the platform was so far available only in desktop and laptops. Axis Mutual Fund has tied up with Freedom Intermediary Infrastructure (FIINFRA) which has developed the software based on the inputs provided by Axis. IFAs have to pay a subscription fee of Rs. 599 per month for using the facility. ShubhChintak has 800 subscribers currently. Shubhchintak platform is designed to take care of the entire back end, pre-sales, and post-sales requirement of IFAs. Shubhchintak is an open architecture platform which means that IFAs can deal with any fund house. Moreover, apart from mutual funds, distributors can deal in a host of asset classes like insurance, bonds, and direct equity. As of now, users have not been provided an option to execute transactions. Axis is planning to provide IFAs to transact through this platform soon. Shubhchintak provides email enterprise, tools, data analysis, risk profiling, and goal planning for IFAs.

Kolkata based Ask Circle group presented awards to the most innovative AMC at the 7^th Annual Mutual Fund Round Table (MFRT) event held in Agra. Fund houses were recognized for their excellent effort in areas like training, investor awareness, product positioning, etc. A total of 16 awards were presented. ICICI Prudential and Birla Sunlife stole the show. The winners were selected based on the feedback received from advisors. 

National Institute of Securities Markets (NISM) is likely to introduce its online continuing professional examination (CPE) for mutual fund distributors soon. The new online training module of CPE is likely to be for a shorter duration of four hours and will be conducted in two 2-hour slots. Distributors can register for this online CPE through NISM website. To start with, this online test will be only available in Vashi (Navi Mumbai) centre. More centres will be equipped to offer this online test in future. The class room CPE trainings will also be continued simultaneously. The fee for one-day offline CPE training is around Rs. 2,000. The fee for this online CPE is likely to be around Rs. 2,500. NISM conducts roughly 500 CPE trainings for mutual fund distributors across India annually. Distributors have to renew their ARNs six months prior to license expiry. In order to renew the ARN license, distributors have to undergo a mandatory six hours of class room training. Once distributors appear for this training they are issued a certificate. Distributors have to send their certificates to CAMS. The license has a validity of three years.

India's securities market regulator is in talks with Asian peers to develop uniform standards for launching financial products in the region. The move will help domestic financial services tap investors in Singapore, Hong Kong, and Australia. Similarly, local investors could see more investment options from major Asian financial firms. SEBI and other Asian securities regulators are in talks to devise a framework, termed Asian passport, expected to be finalised before the end of this financial year. This mechanism is expected to be formulated along the lines of the Undertaking for the Collective Investment in Transferable Securities (UCITS) in Europe, invented mainly for retail investors. UCITS works as an investment fund, taking money from investors and investing these in a basket of professionally managed funds. Singapore, Hong Kong, and Australia are likely to be part of this arrangement. This would be the second instance where SEBI would look at enhanced collaboration with international markets. Last month, it had signed bilateral memoranda of understanding with 27 European regulators for the marketing and sale of alternative investment funds (AIFs).The agreement will enable Indian fund managers to manage and market AIFs in the EU region and for EU fund managers to be able to tap Indian markets. This agreement came three years after the European Council adopted an EU Alternative Investment Fund Managers Directive, requiring adequate supervisory cooperation arrangements between regulatory authorities. Similarly, the Asian arrangement would lay down a framework for the design, launch, and marketing of products in the respective countries. Sectoral entities are looking at this as an opportunity to expand the reach of Indian financial products.

Regulatory Rigmarole

 

Distributors can change their status on transaction charges (TC) from September 1, 2014 till September 25, 2014^.  The first window was open from March 1 till March 25, 2014^. After the abolition of entry load, many distributors complained that collecting a separate cheque from clients was not practical. To address this issue, SEBI allowed distributors to charge Rs 150 for getting a new investor and Rs 100 from existing investors if they mobilize Rs 10,000 or above. The transaction charge is deducted from the subscription amount and paid to distributors. However, the transaction charge, which has an in-built mechanism for deduction has not found favour with many advisors and investors. A major inconvenience with TC is that distributors do not have the flexibility to change status at a client level. If distributors opt in, the TC is deducted from the subscription amount from all clients. Thus, distributors cannot charge one client and not charge another client. Earlier, distributors had the option to opt in or opt out on all categories of products only which was creating problems. Subsequently, in September 2012, distributors were allowed to opt in or opt out based on the scheme categories. Distributors can choose to levy TC from 11 scheme categories. (Liquid, gilt, debt, IDFs, ELSS, other equity schemes, balanced schemes, Gold ETFs, Other ETFs, fund of funds investing overseas and fund of funds – domestic.) The option exercised for a particular category of scheme is applicable across all fund houses. AMFI shares the status of distributors regarding TC with all fund houses. Distributors have to submit an option letter to CAMS unit of AMFI. Distributors are required to inform all their clients about transaction charges. Transaction charge is not paid if schemes are sold through the stock exchange route. Around 6000 distributors had opted in when the rule was introduced in 2011. According to CAMS, 8,648 ARN holders have opted in for transaction charges. Distributors say that the introduction of direct plans has also led many distributors to opt out of TC in order to retain their clients. Most national distributors and platforms have opted out of transaction charges.

Asset management companies together, under the guidance of AMFI, have roped in global consultant KPMG to help them meet the complex requirements under the Foreign Account Tax Compliance Act (FATCA), a new anti-tax avoidance law in the US, which has come into effect from July 1, 2014 globally. FATCA, expected to be implemented in India by the end of the year, aims to track investments made by US citizens outside the US and bring it under the US tax-net. Financial institutions such as mutual funds receiving money from US investors will have to make extensive disclosures about the investors and the investments made to the US tax authorities. The documentation process is expected to push up costs for the mutual fund industry. Among the measures suggested by KPMG include implementing single KYC norms across SEBI intermediaries capturing information of FATCA-impacted clients, integration of common account numbers for enabling FATCA compliance, and data sharing of the relevant customer profile to reduce duplication of information. The possible hurdles in implementing these measures could be the integration of the KRAs (KYC Registration Agencies) to facilitate FATCA compliance and client consent for confidential data or information sharing at the industry level. The sector is also mulling the introduction of a declaration form for identifying investors with income generated in the US. While most of the investors would likely fall outside of this income bracket, the sector does not want to leave any stone unturned. At present, all disclosures have to be made directly to the US tax authorities, which would mean establishing physical presence in the US and a rise in costs which the industry is not yet ready to meet. India is expected to sign an Intergovernmental Agreement (IGA) with the US later this year. The signing of the IGA would mean the segment only needs to make disclosures to the Indian government, which in turn would send the information to the US tax authorities.

SEBI has issued final guidelines for infrastructure investment trusts (INVITs) and real estate investment trusts (REITs), instruments expected to help these sectors raise resources to meet a funds crunch. Trusts are like mutual funds that raise resources from many investors to be directly invested in realty or infrastructure projects. Once the relevant changes in other regulations are made, overseas investors will be able to bring funds into India through these vehicles, reducing the need for bank funds for these sectors. SEBI has said REITs and INVITs should have a starting asset value of at least Rs 500 crore and the initial offer has to be Rs 250 crore or more. Importantly, REITs will be allowed to invest only in commercial property. They have to be listed on a recognised stock exchange and would have to meet stringent disclosure norms. Trading lot will be Rs 1 lakh with minimum subscription size of Rs 2 lakh. For INVITs, this will be Rs 5 lakh and Rs 10 lakh, respectively. REITs will invest in commercial real estate through special purpose vehicles (SPVs) in which they must hold a controlling stake of more than 50%. The SPV in turn must hold at least 80% of its assets directly in properties and will not be allowed to invest in other SPVs. Expediting REITs and INVITs norm notification will facilitate infusion of $15-20 billion in the sector, and an alternative to bank finances. INVITs will allow infrastructure developers to monetise specific assets, helping them use proceeds for completing projects of theirs stalled for want of funds.

Stock brokers have cause for cheer as they can now go in for a simple one-time process of registration for operating as a broker or a clearing member in any stock exchange or clearing corporation. They also henceforth do not need to obtain multiple certificates from SEBI for operating in the different segments of equity, equity derivatives, currency derivative and debt. The latest SEBI move will also obviate the need for separate certificate for each category of operations – trading member, trading-cum-self clearing member and professional clearing member. Under the proposed regime, initial certificate of registration as stock broker/clearing member will be granted by SEBI and subsequent permissions to act as stock brokers/clearing member of other stock exchanges/clearing corporations will be granted by respective stock exchange/clearing corporation after following the prescribed procedure. Indications are that even existing stock brokers will get to migrate to the new regime of single registration.

SEBI’s proposal to the government asking all public sector companies to be allowed to invest in mutual funds could potentially add up to Rs 2.74 lakh crore to mutual fund assets. The calculation is based on the cash and bank balances of existing public sector companies, currently not allowed to invest in mutual funds. In case the base of the CPSEs (Central Public Sector Enterprises) is expanded and all the CPSEs are allowed to invest in mutual funds, such a provision would lead to a substantial inflow in mutual funds. The Public Enterprises Survey 2011-12 pegged the total cash and bank balance of these 257 companies at Rs 2.74 lakh crore as of March 31, 2012. Existing government norms only allow certain classes of public sector companies to make use of mutual funds. Even these are only allowed to invest in mutual funds backed by other public sector entities. Presently, only Navratna and Miniratna CPSEs are allowed to invest in mutual funds.

Taking cue from an ever-growing number of people using Internet for banking, shopping and ticketing needs, SEBI wants mutual funds to increase the use of online medium for sale of investment products. The regulator is of the view that a greater use of Internet as a distribution channel can help increase the penetration of mutual funds, especially among young investors. 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 there is a need to promote and make it more user-friendly for investors by improving the infrastructure and efficiencies. Online distribution not only increases customer convenience, but also significantly improves distributor economics. The regulator would also ask mutual fund players to tap burgeoning mobile-only Internet users for direct distribution of investment products. According to an estimate, number of Internet-enabled mobile phones in the country is expected to increase from 10-15 million in 2010 to 300-400 million in 2015.