FUND FULCRUM

January 2015

The year 2015 gets off on a high note for the Indian mutual fund industry. The industry's AAUM exceeded the Rs 11 lakh crore mark during the December 2014 quarter. Average AUM rose by 4.34%, Rs 45946 crore, to Rs 11.06 lakh crore (excluding fund of funds) in the quarter ended December 2014, according to a CRISIL report. The industry's average assets increased by 26.14% or Rs 2.29 lakh crore in 2014. Growth in the third quarter was primarily driven by rise in assets of equity funds. Equity funds' average AUM gained 15.53% or Rs 45121 crore to hit record high of Rs 3.36 lakh crore. During the year 2014, the category gained 71.68% or Rs 1.40 lakh crore. For 11 months of the year, the category registered inflows of Rs 49726 crore, compared with outflows of Rs 12705 crore in the similar period of 2013. Long-term debt funds' average AUM gained 6.37% or Rs 4191 crore to Rs 70030 crore, while gilt funds' assets rose 22.86% or by Rs 1299 crore to Rs 6984 crore. For the calendar year, long-term debt and gilt funds' assets declined 35% and 9 % respectively. Short-term debt funds rose for the third consecutive quarter, up 11.04% or by Rs 9530 crore to Rs 95831 crore. Ultra short-term debt funds rose for the fourth consecutive quarter, up 7.48%, or Rs 7970 crore, to Rs 1.15 lakh crore. In 2014, short-term debt funds and ultrashort-term debt funds witnessed 32% and 42% rise in assets respectively. Liquid funds were the biggest drag on industry assets, with the category falling 5.25 %, or Rs 15025 crore, to Rs 2.71 lakh crore. The category witnessed 17% rise in assets in 2014. Assets of fixed maturity plans (FMPs) fell for the second consecutive quarter, down 4.29%, or Rs 7085 crore, to Rs 1.58 lakh crore. Gold exchange traded funds (ETFs) continued the downtrend as the category marked its fifth consecutive quarterly fall. The category's AUM fell 6.76%, or Rs 521 crore, to Rs 7178 crore. This is due to persistent outflows despite a marginal rise in price of underlying assets during the quarter. Average AUM of direct plans rose 4.14%, or Rs 14619 crore, to Rs 3.68 lakh crore at the end of 2014. The share of direct plans, however, remained steady at 33% of the industry's AUM (excluding fund of funds) in the reported quarter compared with the previous quarter but was higher compared with 30% a year ago.  Equity mutual funds reported an addition of over 12 lakh accounts of investors in the first nine months of the current fiscal (2014-15). The number of equity folios rose to 3,0,392,991 till December 2014  -- the nine month period of the current fiscal from 2,91,80,922 for the entire last fiscal ended March 31, 2014, according to SEBI data. Mutual funds industry reported net inflows of over Rs 50,000 crore in equity funds in the April-December period of the current fiscal (2014-15), which helped the industry grow its folio count.

HDFC Mutual Fund has retained its top position across fund houses in the December 2014 quarter with respect to total assets managed as per data released by the Association of Mutual Funds in India (AMFI). The fund's average AUM was up by Rs 8987 crore or 6.35%, to Rs 1.50 lakh crore -- an industry milestone. ICICI Prudential Mutual Fund maintained its second position at Rs 1.37 lakh crore, up by 7.13%, or Rs 9100 crore. Reliance Mutual Fund was ranked third at Rs 1.26 lakh crore as its average AUM rose by Rs 4001 crore or 3.28%. Of the 43 mutual fund houses that declared their average AUM, 30 fund houses posted a rise. The share of the top-five fund houses was 55%, which is same as the previous quarter. 

Piquant Parade

PSU behemoth SBI 's mutual fund arm has evinced interest in acquiring the country's oldest fund house UTI MF -- a deal that could create the country's biggest mutual fund with assets in excess of Rs 1.5 lakh crore. The deal, if it happens, would also be the biggest ever M&A transaction in the Indian mutual fund industry, which has over 45 players together managing Rs 11 lakh crore. There have been a few M&A deals, but mostly involving smaller players. UTI MF at present is the fifth largest fund house of the country, while SBI MF ranks sixth. Interestingly, SBI is also one of the four sponsors of UTI Mutual Fund. UTI MF was carved out of the erstwhile Unit Trust of India (UTI) in February 2003. At that time, UTI was bifurcated into Specified Undertaking of Unit Trust of India (SUUTI) and UTI MF. UTI Mutual Fund is promoted by the four of the largest public sector institutions -- SBI, LIC, Bank of Baroda, and Punjab National Bank, with each of them presently holding a 18.5% stake. US-based T Rowe Price had acquired a 26% stake in UTI Asset Management Company Limited, which runs UTI MF. If a deal goes through for UTI MF's acquisition by SBI MF, the merged entity can overtake HDFC Mutual Fund as the country's largest fund house. Currently, UTI MF has average asset under management of Rs 87,390.13 crore, while that of SBI MF was Rs 72,140.63 crore at the end of 2014.

Franklin Templeton Mutual Fund is planning to acquire Deutsche Mutual Fund. Both the parties have completed the due-diligence process. DWS AMC is valued at 3-4% of its AUM, i.e. not less than Rs. 680 crore. Franklin Templeton Mutual Fund manages AUM of Rs. 63,643 crore while DWS AMC manages Rs. 22,670 crore as on December 31, 2014. If the deal goes through, Franklin Templeton Mutual Fund will overtake SBI Mutual Fund to become the sixth largest AMC in terms of AUM.

Goldman Sachs is in advanced talks to sell its mutual fund business, including the central public sector ETF launched with great fanfare last year. The firm is in talks with Wisdom Tree, a US-based exchange-traded fund (ETF) asset manager. Goldman may sell the business for about Rs 120 crore, the same price it paid to acquire Benchmark Asset Management in July 2011.

Four Indian fund houses – BNP Paribas, Baroda Pioneer, ICICI Prudential, and HSBC have won awards at Best of the Best Awards 2014. Asia Asset Management’s Best of the Best Awards gives recognition to financial institutions and pension funds for outstanding achievements over the past calendar year. Best of the Best Awards is broken down into three divisions: a) performance, b) country, and c) regional awards, to acknowledge each and every area where excellence has occurred. ICICI Prudential has won the award for India’s best fund house. Similarly, Baroda Pioneer and HSBC bagged awards for the best investor education and the best pension fund manager respectively. While Anand Shah of BNP Paribas bagged the CIO of the year award, Nimesh Shah of ICICI Prudential was adjudged as the CEO of the year. Meanwhile, Chennai based financial service provider, IFMR Investment Managers won award for the most innovative product.

Regulatory Rigmarole

  

Keeping in view the challenges faced by the fund managers in managing offshore pooled assets, market regulator SEBI may relax the restriction of appointing a separate fund manager, the requirement to replicate portfolio, and the criteria of minimum 20 investors (with no single investor holding more than 25%). To make it easier for domestic mutual funds to manage offshore pooled assets, SEBI proposed to drop '20-25 rule', which requires a minimum of 20 investors and a cap of 25% investment by an individual investor in a particular scheme, for certain foreign entities. Besides, SEBI has suggested to do away with the rule that requires appointment of separate fund manager for managing an offshore fund and replication of portfolio in regard to Category I and Category II FPIs (Foreign Portfolio Investors). Category I FPIs includes government and government related entities and Category II FPIs includes both broad based entities such as mutual funds, investments trusts and persons such as portfolio managers, investment managers, asset management companies, banks among others.

With the tax-saving season under way, mutual funds have started aggressively promoting their equity-linked savings schemes (ELSS). These get a benefit under the Section 80C limit of Rs 1.5 lakh.  However, investors are to no longer get the dividend reinvestment option. The Association of Mutual Funds in India (AMFI) has written a letter to asset management companies (AMCs) to stop offering this option.  The reason: Rising complaints during withdrawals. Fund houses already have Rs 36,257 crore in ELSS. The letter says investors often forget to tick the ‘Dividend payout sub-option’, resulting in reinvestment of the dividend by default. Since the original amount invested qualifies for deduction under section 80C, even though the dividend reinvested does not qualify for any such deduction, the lock-in period rule is often misconstrued by investors, who expect to withdraw the entire balance of units (including dividend reinvested) at the time of redemption, after a three-year lock-in period of the original investment. They cannot do it, due to lock-in of each transaction of dividend re-investment, leading to investor grievances.

Stringent compliance requirements under the Foreign Account Tax Compliance Act of the US have led to several mutual fund houses avoiding fresh investments from American investors. To lower the reporting burden, many mutual funds including HDFC MF, ICICI Prudential MF, Quantum MF, Baroda Pioneer MF, and DSP Blackrock MF have even barred investment from residents of US and Canada for some of their schemes, while others are not very keen on investments from such entities. Moreover, some MFs may even stop taking investments from NRIs till clarity emerges over FATCA agreement between India and the US. FATCA is a US law whereby foreign financial institutions across the world would have to report to the US Internal Revenue Service (IRS) on any transactions of clients who could be subjected to American tax laws. The non-compliance with FATCA entails 30% withholding tax on the US source payments. Moreover, wrong or incorrect reporting may also have similar consequences. While India and the US had agreed "in substance" last year to sign an Inter-Governmental Agreement over FATCA, the final pact could not be signed within the earlier deadline of December 31, 2014 and it had to be extended. All financial institutions with exposure to the US were also required to register with the US tax department IRS under FATCA before January 1, 2015, but many Indian entities are yet to do so. The US taxpayers under FATCA include US citizens, US residents (green card holders) and non-residents who own foreign financial accounts or other offshore assets. The FATCA provisions will have a big impact on flows from US. The Indian mutual fund industry, which is attracting a significant flow from NRIs is likely to be impacted by new FATCA.

Despite exponential growth of India’s mutual fund sector in 2014, the sector has gone through consolidation with a slew of mergers and acquisitions. The Rs 11-lakh crore sector saw three foreign entities selling out to domestic peers. The year began with the surprise exit of Morgan Stanley, acquired by HDFC MF for an undisclosed sum. It was the second US-based fund house, after Fidelity, to exit India operations in recent years. Then, in May 2014, Birla Sun Life Mutual Fund acquired ING MF, again for an undisclosed sum. The third deal was between Kotak MF and Pinebridge Investments in September 2014. The exit of the three smaller fund houses was due to the challenging landscape in MFs, dominated by larger entities. Small fund houses find the cost structure too high to sustain in a tightly-regulated sector. A higher net worth norm of Rs 50 crore introduced by the Securities and Exchange Board of India was also blamed for the exits. The year had begun with 46 asset management companies but the year ended with three less after the exits.