Monday, May 25, 2015


May 2015

Mutual fund industry's asset base has grown around 10% to Rs 11.86 lakh crore at the end of April 2015 from 10.83 lakh crore in March 2015, primarily driven by huge inflows in equity and money market segments. In fact, mutual fund industry's assets under management hit a record Rs 12.02 lakh crore in February 2015 itself. The mutual fund assets base of retail investors rose by a staggering 51% over Rs 2.43 lakh crore at the end of March 2015 as against Rs 1.62 lakh crore held by them in March 2014. These individuals' assets have mainly come from the top 15 cities and are primarily distributor driven. Among the top mutual fund houses, Reliance Mutual Fund saw the highest growth, in the assets under management of retail investors, both in percentage and absolute terms. Reliance Mutual Fund's asset base for retail investors rose 95%, or Rs 13,270 crore, to Rs 27,307 crore at the end of March 2015. This was followed by ICICI Mutual Fund, which saw a growth of 80% in its retail investors AUM to Rs 24,639 crore, Birla Sun Life Mutual Fund (63% to Rs 16,020 crore), HDFC Mutual Fund (46% to Rs 40,272 crore), and UTI Mutual Fund (34% to Rs 35,124 crore). Together, all 44 mutual fund houses manage assets worth nearly Rs 12 lakh crore. Most of the money was pumped in equity-oriented schemes, which was supported by a sharp rally in stock markets. The growth in assets base is in line with the BSE's benchmark Sensex surging by 25% in the past financial year.

Mutual fund managers pumped in over Rs. 7,600 crore in equity markets in April 2015, making it their highest net inflow in more than seven years, mainly on account of positive investor sentiment and the government’s reforms agenda, improved fundamentals of the domestic economy, and increased participation from retail investors. However, the Association of Mutual Funds of India’s decision to put one per cent cap on upfront commission paid to distributors may impact the sector. In comparison, they pulled out Rs. 2,698 crore from the stock markets in April 2014. According to the latest SEBI data, mutual fund managers invested Rs. 7,618 crore in April 2015. This was the highest net inflow in equities since January 2008, when fund managers poured in Rs. 7,703 crore. Besides, fund managers invested Rs. 28,650 crore in debt markets in March 2015. Fund managers have shown interest in equity markets in the past one year. They have pumped in over Rs.40,000 crore in equity markets in 2014-15, making it their first net inflow in six years, for an entire fiscal. Retail investors joined the stock market rally in droves with folios or investor accounts with equity mutual funds increasing by nearly 22 lakh or 7.6% in 2014-15. But larger peers such as HNIs (high net-worth individuals) got more bang for their bucks by making higher investments in equities by cashing in on the rise in markets effectively. The huge inflows also helped the mutual fund industry reach around Rs. 12 lakh crore mark in assets under management at the end of the financial year. Moreover, mutual funds are upbeat about overall inflows in equities and debt markets for the current financial year as well.
Piquant Parade
SEBI has decided to tap social media and other popular internet and mobile platforms to make investors aware about their rights and to safeguard them against possible frauds. SEBI is already present on platforms such as TV, radio, and print newspapers for investor education and awareness programmes. The regulator has also carried out a number of campaigns in various languages including English, Hindi, and regional languages spoken across India. SEBI is now planning to explore various other mediums such as outdoor media, advertising, and social media in the current fiscal 2015-16, to spread investor awareness. In the SMS space, SEBI is specially targeting the schemes where investors are promised doubling of their investments within a few months. Besides, SEBI is continuing its investor education and awareness programmes through newspapers.

BSE announced the introduction of Overnight (Liquid Fund) product on the exchange's Mutual Fund platform, BSE StAR MF - India's largest mutual fund platform. It allows even the smallest investor or a corporate or a trust to invest even for one night in liquid funds anywhere in India. It will be an alternative investment avenue for idle monies by investing in mutual fund liquid schemes for better returns and relatively lower risk. Members should take consent from clients and open a liquid fund account and transact through BSE StAR MF platform. This will result in returns to investors as well as additional service for member brokers. Further to the launch of non-demat transactions on BSE Mutual Fund Platform, the Exchange is now introducing an order entry functionality which shall allow MFI/MFD to place purchase and redemption orders simultaneously in liquid schemes. This facility would be available only for non-demat mode. The bulk order upload facility was made available to MFIs/MFDs with effect from May 18, 2015 for Overnight (Liquid Fund) product.
Regulatory Rigmarole
SEBI Chairman UK Sinha said that the market regulator is working on a blueprint to facilitate electronic KYC or e-KYC in order to expedite the process of client verification and reduce paperwork for intermediaries. e-KYC enables financial institutions to complete KYC process online with direct authorization of clients. By going electronic, KYC can be done on a real time basis. The key objective of e-KYC is to reduce turnaround time and paper work. Typically, KYC Registration Agencies (KRAs) take 8 to 10 days to verify a KYC application. Earlier, SEBI had allowed fund houses to accept e-KYC of UIDAI as a valid proof for the KYC verification. The e-KYC service offered by UIDAI enables individuals to authorize service providers to receive electronic copy of their proof of identity and address. Investors have to authorize intermediaries to access their Aadhaar data through UIDAI system to avail this facility. However, it has not taken off in a big way due to lack of coordination between UIDAI, financial institutions, and KRAs. Banks and insurance companies are already using Aadhaar linked e-KYC service to carry out their KYC verification procedure. However, many banks and insurance companies insist on submitting physical documents even after carrying out eKYC. It remains to be seen whether the new eKYC can address these issues and provide hassle free service to investors.

The Reserve Bank of India’s move to relax norms for Non-Banking Financial Corporations (NBFCs) to sell mutual funds is expected to help the industry expand its footprint in B-15 cities. RBI has come out with a circular in which it has done away with norms like maintaining net owned fund of Rs.100 crore and two years of profitability for distributing mutual fund schemes. With the relaxed norms, NBFCs who stayed away from mutual fund distribution business due to stringent RBI norms may become mutual fund distributors which would mutually benefit both NBFCs and the mutual fund industry. Some NBFCs like India Infoline and L&T Finance are already into mutual fund distribution.

SEBI has done away with the colour coding of mutual fund schemes and has introduced Riskometer which will depict the level of risk through a meter. In 2013, SEBI had introduced colour coding in mutual fund schemes to make investors understand the risk associated with mutual funds. Many financial advisors felt that the colour coding system has only created confusion in the minds of investors. The regulator feels that Riskometer would provide investors an easy understanding of the kind of product/scheme they are investing in and its suitability to them. The decision was taken after consultation with Mutual Fund Advisory Committee (MFAC) of SEBI which has reviewed the system of product labelling in mutual funds. AMCs are supposed to put Riskometer in all their advertisement materials, front page of initial offering application forms, key information memorandum (KIM), scheme information documents (SIDs), and common application forms. The Riskometer will indicate five level of risks – low (principal at low risk), moderately low (principal at moderately low risk, moderate (principal at moderate risk), moderately high (principal at moderately high risk), and high (principal at high risk). This will come into effect from July 1, 2015. However, fund houses are allowed to implement this guideline immediately.

SEBI has asked all existing research analysts in the capital markets to register by May 31, 2015 to continue providing their services, failing which they will face strict penal action. Under the new norms, no person or entity can act as research analyst or research entity without obtaining a registration certificate from SEBI. The Research Analysts Regulations, which came into effect from December 1, 2014, are aimed at safeguarding investors from misleading advice coming from unregulated entities. Under the regulations, foreign entities acting as research analysts for Indian markets or India-listed companies need to tie-up with a registered entity in India, while domestic players are also subjected to strict disclosures and scrutiny. Every individual or entity desiring to function as a research analyst would need to get registered after meeting the prescribed criteria regarding qualifications, capital adequacy, establishment of internal policies and procedures, firewalls against conflict of interest, sufficient and timely disclosures, among others. The regulation also provides for penal actions that SEBI can take against erring research analysts. Such actions would include cancellation of registration, debarment, or penalties similar to any other market intermediary. The framework registers and regulates research analysts as well as those entities that make recommendations related to securities and public offers such as brokerage houses, merchant bankers and proxy advisors. However, Investment Advisers, Credit Rating Agencies, Portfolio Managers, Asset Management Companies, fund managers of Alternative Investment Funds or Venture Capital Funds would not be required to be registered under these regulations.

In its best practice circular issued to AMCs, AMFI has asked fund houses to discontinue bonus options. This has come in the wake of a sudden spurt in the demand for bonus options in equity funds. A few fund houses have introduced bonus options, particularly in arbitrage funds and balanced funds which enable corporates to do bonus stripping for tax planning. Bonus stripping arises on sale or purchase of units of equity mutual funds after/before certain period. It helps in setting off capital loss against capital gain in other capital assets. For instance, if an investor buys mutual fund units under bonus option 91 days prior to record date of bonus and sells the original units subsequently after record date, he/she can set off this loss against any capital gain. Also, the same holds true if investor sells original units after nine months of record date. However, corporates do not prefer the latter option due to its long holding period. The accumulated bonus units are treated as tax free after a year since the arbitrage funds are treated like equity funds for tax treatment. In addition, SEBI rule says that bonus units should not be subject to exit load. The industry body had emphasized that the rule should be followed in true spirit.

Simplifying norms for domestic funds to manage offshore pooled assets, SEBI has dropped the '20-25 rule', which required a minimum of 20 investors and a cap of 25% on investment by an individual, for funds from low-risk foreign investors. As per the existing norms, a fund manager who is managing a domestic scheme is allowed to manage an offshore fund, subject to three specific conditions. The first requires the investment objective and asset allocation of the domestic scheme and of the offshore fund to be the same. The second condition requires at least 70% of the portfolio to be replicated across both the domestic scheme and the offshore fund. The third condition, which was being considered as the most stringent by the industry, requires that the offshore fund should be broad-based with at least 20 investors with no single investor holding more than 25% of the fund corpus. Otherwise, a separate fund manager is required to be appointed for managing an offshore fund. In a notification uploaded on SEBI's website, the regulator said these restrictions would not apply "if the funds managed are of Category I foreign portfolio investors (FPIs) and/or Category II foreign portfolio investors which are appropriately regulated broad based funds." These regulations would be called the Securities and Exchange Board of India (Mutual Funds) Regulations, 2015. SEBI has classified FPIs into three categories, with the first two broadly being low-risk foreign institutions that include sovereign wealth funds, pension funds, banks, mutual funds, insurers, multi-lateral institutions and well-regulated foreign entities, including portfolio managers. The relaxation in the norms have been made keeping in view the challenges faced by the local fund managers in managing offshore pooled assets and the introduction of FPI Regulations which have rationalised  investment routes and monitoring of foreign portfolio investments and also streamlined categories of overseas investors. 

About Rs.1.63 lakh crore of retail money was pumped into the mutual fund industry since the government took charge, up 3 times over the past year. But the mutual fund penetration in the country continues to be relatively low with just 4 crore mutual fund folios, representing 3% of the population. If this is compared with 97 crore telecom subscribers and 21 crore bank accounts, the potential for the mutual fund industry remains big. Asset managed by the mutual fund industry is expected to rise to Rs. 20 lakh crore by 2018, at a 22% CAG and the Indian mutual fund industry is set to achieve an investor base of 10 crore accounts in the next five years.

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