FUND FULCRUM

October 2014

The mutual fund industry's total assets under management rose 7.24% to a new record high of Rs 10.59 lakh crores in the September 2014 quarter, boosted by a surge in equity plans and gains in short-term debt schemes. This was revealed in the data released by CRISIL quoting Association of Mutual Funds in India (AMFI) numbers. Industry assets were primarily boosted by a sharp rise in equity AUM besides being supported by gains in short duration debt funds. Equity funds boosted industry assets in the latest quarter, with the category average AUM up 23.49% (highest rise since September 2010 when AMFI started declaring quarterly average AUM) to its fresh record high of Rs 2.91 lakh crores. Shorter duration debt funds, which include money market funds, ultra-short term and short-term debt schemes, reported a rise in assets (consolidated) for a fourth consecutive quarter as investors continued to prefer these categories since they are less sensitive to interest rate uncertainty vis-à-vis longer duration plans. Consolidated assets of the short-term debt category rose 8.34% to Rs 4.79 lakh crore. Assets of fixed maturity plans (FMPs) slipped 4.85% to Rs 1.65 lakh crore from a record high of Rs 1.74 lakh crore. The fall is an outcome of the change in taxation announced in the July 2014 Budget. Gold ETFs marked their fourth consecutive quarterly fall, slipping 6.65%, to Rs 7,698 crore in the July-September 2014 period. The average AUM of direct plans rose 3.85% to Rs 3.53 lakh crore in the same period. Mutual funds managing the lion’s share of the industry - HDFC Mutual Fund, ICICI Prudential Mutual Fund, and Reliance Mutual Fund - logged highest absolute gains in the September 2014 quarter. HDFC Mutual Fund maintained its premier position both in terms of AUM and gain in assets, followed by ICICI Prudential Mutual Fund, and Reliance Mutual Fund.

According to the Securities and Exchange Board of India data on investor accounts with 45 fund houses, the number of equity folios rose to 2,96,85,807 at the end of September 2014 from 2,91,80,922 at the end of the last fiscal (March 31, 2014), registering a gain of 5,04,885 during the April- September 2014 period. The additions came at a time when the market was scaling new highs. April 2014 saw the first rise in more than four years. Prior to that, the equity mutual fund sector had seen a continuous closure of folios since March 2009 after the market crashed due to the global financial crisis in late 2008. Since March 2009, it has seen a closure of 1.5 crore folios.

Investors pumped around Rs 30,500 crore into various mutual fund schemes in September 2014, making it the third consecutive month of inflows. As per the latest data available with the Securities and Exchange Board of India, investors put Rs 30,517 crore in mutual fund schemes in September 2014 after pouring in, a staggering Rs 1,00,181 crore in August 2014. Investors had poured in Rs 1,13,216 crore in mutual fund schemes in July 2014. Prior to that, there was an outflow of Rs 59,726 crore in June 2014. At gross level, mutual funds mobilised Rs 54.1 lakh crore in September 2014, while there were redemptions worth Rs 53.8 lakh crore as well. This resulted in a net inflow of Rs 30,517 crore. Overall, during the current financial year so far (April-September), mutual funds on a net basis have mobilised over Rs 3 lakh crore as compared to Rs 53,783 crore garnered in the entire 2013-14 fiscal.

Fund managers showed strong preference for equity schemes over debt as the money market category saw a massive outflow of over Rs 67,000 crore in September 2014. In comparison, equity mutual fund schemes attracted a net amount of Rs 7,789 crore during the month. As per the latest data available with the Association of Mutual Funds in India (AMFI), debt-oriented mutual fund schemes (liquid or money market category) saw an outflow of Rs 67,318 crore last month. There was withdrawal of Rs 5,800 crore from the liquid or money market segment in August 2014. The outflow can be attributed to diversion of funds from debt to equity schemes as well as to increase in long-term capital gains tax on debt-oriented mutual funds. The government increased the long-term capital gains tax on debt-oriented mutual funds from 10% to 20% and changed the definition of 'long term' for debt mutual funds to 36 months from 12 months.

Piquant Parade

Birla Sun Life Asset Management Company Ltd. has completed acquisition of all mutual fund schemes and portfolio management accounts of ING Investment Management India. Following the acquisition, six equity and six debt schemes acquired from ING Investment Management India have been merged with existing schemes at Birla Sunlife AMC as per the no-objection received from SEBI. A few schemes, including multi-manager funds, have however been retained in line with Birla Sunlife AMC's strategy to grow and serve even more investors. The current acquisition is the third by Birla Sunlife AMC as it has already acquired schemes of Alliance Mutual Fund in 2004 and Apple Mutual Fund in 1999.

The government plans to monetise it’s holding in Specified Undertaking of UTI, or Suuti, through an ETF. Top fund houses including Reliance Mutual Fund, SBI Mutual Fund, Birla Sunlife Mutual Fund, and Goldman Sachs are expected to submit bids. This will be the second time the government will use the ETF route to meet its disinvestment target. Last year, the government had mopped up Rs 3,000 crore through central public sector enterprise (CPSE) ETF by selling small quantity of its holdings in ten companies. Goldman Sachs and ICICI Securities were appointed as the manager and advisor respectively for the CPSE ETF, which was launched in March 2014. ICICI Securities has once again been appointed as the advisor for Suuti ETF. As a result, sister firm ICICI Prudential AMC will not be able to apply for being the manager for the ETF. The request for proposal (RFP) floated by the government states that the Suuti ETF will have seven underlying PSU stocks, besides Axis Bank, IT, and Larsen & Toubro - the three companies in which Suuti holds sizeable stake. The government-owned Suuti owns 11.27% stake in ITC, 8.18% L&T, and 11.66% Axis Bank. The stake at current market price is valued at more than Rs 55,000 crore. The exact shareholding that the government will divest in each of the companies has not yet been ascertained. The proposed ETF will serve as an additional mechanism for the government to monetise its shareholdings in Suuti and other selected CPSEs that eventually form part of the ETF basket. The NFO for the Suuti ETF is expected to hit the market in March 2015. Just like the CPSE ETF, the new ETF too will be a close-ended scheme and will have a tap structure.

Regulatory Rigmarole

Investors redeeming mutual fund units might end up paying higher fees, as most fund houses have revised the exit load structure by increasing the limit of the investment tenure. The changes are across fund categories, including the debt segment. Now, an investor will have to pay three per cent as exit load on redemption of units in less than a year, against only one per cent earlier. To pay one per cent exit load, one will have to remain invested for three years. The move follows tax changes to debt mutual fund schemes. In the 2014-15 Budget, the government had introduced a flat 20% tax on debt funds. It had also extended the period of investment from 12 months to 36 months.

SEBI may add two more colours to the existing list of three colours used to denote product suitability for investors. AMFI is said to have communicated that SEBI is working on streamlining product-labelling guidelines. Currently fund houses assign brown, yellow, and blue to indicate the degree of risk in a scheme. According to SEBI guidelines, schemes with low risk are denoted with blue colour, those with medium risk are assigned yellow, and schemes with high risk brown colour mark.

The revision in computation of dividend distribution tax (DDT) for debt funds proposed in the Union Budget FY2014-15 becomes effective from October 1, 2014. Fund houses pay DDT for dividend income distributed by debt funds, which is tax free in the hands of investors. Debt funds currently pay DDT of 25%+ 10% surcharge + 3% cess on net basis when they distribute income to resident individuals. Calculation on net basis reduces the actual pay out to 22%. Now, fund houses are required to pay DDT on gross basis, which will hike the actual DDT payout to 28.32% for retail investors. For corporates, the DDT will be 33.99% in liquid and debt funds. Since the DDT is 28.325% now, the post-tax return will be less. Fund houses and distributors are likely to promote growth plans of debt funds from now on. There is no point opting for dividend payout option for an individual falling under 10% and 20% tax bracket if investment horizon is less than three years. However, investors who fall in the highest tax slab of 30% can still opt for dividend option since they have to pay 28.32% in debt funds compared to 30.90% in bank fixed deposit. Short-term capital gains are taxed as per the investor’s tax slab. If your time horizon is more than three years, you can invest in growth options of debt funds as you can benefit by paying a less tax of 20% with indexation. An alternative is to opt for systematic withdrawal plan (SWP) if you need a regular income. SWPs are more tax efficient. Investors belonging to the highest tax slab will have to pay 10.3% on the SWP income compared to 30.9% for withdrawing from bank fixed deposits.

AMFI has modified the format of self-certification form of distributors, which would be applicable for FY15-16. Distributors are required to send this self-certification annually to AMFI, vouching that they adhered to AMFI code of ethics and SEBI guidelines. This is a mandatory compliance requirement for all distributors. As a part of this compliance, distributors are supposed to disclose the percentage of commission offered by AMCs for different scheme categories to their clients. The form has undergone a change in keeping with the new Investment Advisor Regulation, which came into effect in 2013. Earlier distributors were supposed to send this form to each R&T. AMFI has eased this process. Distributors now have to send this form only to the AMFI unit of CAMS, which then circulates the data to all AMCs.

AMFI has put forward a proposal to AMCs to do away with upfront commissions. The idea of moving to an all trail model is not new. This issue has been debated for a long time in the industry to control the menace of churning. During the entry load era, upfront commission was considered as the main incentive behind churning. The introduction of claw back rule in 2013 has been able to control this unhealthy practice to some extent. Currently, AMCs pay upfront commissions from their own pockets. Smaller AMCs grudge that the big guys have deeper pockets to pay upfront commissions, which creates an unfair advantage in mobilizing assets in NFOs. To keep up with the competition, even medium sized players have to hike commissions to remain competitive.

A major part of the financial year 2013-14 was bad for the Indian mutual fund industry, but that did not stop the top seven asset managers from registering healthy profits. Stringent cost control measures in the wake of redemptions from equity schemes helped these mutual funds to stay profitable during the year. The profits of these seven fund houses contributed 66% to the industry’s total assets under management of Rs 9.05 lakh crore as on March 31, 2014. HDFC Mutual, the country's largest asset management company in AUM, reported a net profit of Rs 358 crore for the year ending March 31, 2014, up 12% from the previous year. ICICI Prudential, the second largest, posted a net profit of Rs 183 crore during the year, up 66% from the previous year. SBI Mutual Fund's net profit grew 82% to Rs 156 crore during the year. The numbers are healthy given the fact that there were redemptions from equity schemes to the tune of about Rs 7,600 crore during the year.