FUND FULCRUM
September 2015
The mutual fund industry
witnessed a drop of nearly 5% in assets under management (AUM) to Rs 12.55 lakh
crore in August 2015, mainly on account of fall in inflow into such schemes. The
assets base of the country's 44 fund houses declined from an all time high of
Rs 13.17 lakh crore in July 2015 to Rs 12.55 lakh crore in August 2015, according
to the latest data. The fall in asset base can be attributed to redemptions
from investors during the month amid volatility in the stock market. Overall
inflow in mutual fund schemes have fallen to Rs 1.58 lakh crore at the end of August
2015 from Rs 2.05 lakh crore at the end of July 2015. However, fund managers
have purchased shares worth a staggering Rs 10,533 crore in August 2015 even
though overseas investors sold stocks worth Rs 16,877 crore during the same
period — its highest monthly selloff in more than seven years. They made
intensive buying in the last week of August 2015 when the domestic market
crashed due to the rout in Chinese equities. The sell-off by overseas investors
in the Indian equity markets has meant an opportunity to mutual fund managers. The
top five mutual fund houses — HDFC, ICICI Prudential, Reliance, Birla Sun Life,
and UTI AMC, which together hold about 55% market share in the mutual fund
industry — have bought stocks that have been beaten down and were trading at
attractive levels in August 2015. HDFC Mutual Fund bought Tata Steel and
Vedanta, while ICICI Prudential bought into NTPC and Ambuja Cements. Among
midcap stocks, fund houses bought stocks such as Thomas Cook, Sun TV Network,
and Exide Industries.
According to data from the
Association of Mutual Funds in India (AMFI), investors withdrew a net amount of
Rs 46,750 crore in mutual fund schemes in August 2015. Mutual funds saw an
outflow in mutual fund schemes in August 2015 mainly on account of huge
redemptions in liquid and money market funds. However, investors continued to
maintain their bullish stance on the equity schemes. Liquid or money market
fund category witnessed Rs 70,489 crore being pulled out in August 2015, while
equity and equity linked schemes saw an inflow of Rs 9,156 crore. With the
latest outflow, the net inflow in the schemes was at Rs 1.58 lakh crore in the
April-August period of the current fiscal, 2015-16.
Piquant Parade
C V R Rajendran, former
Chairman and Managing Director of Andhra Bank, has taken charge as the new CEO
of AMFI on September 16, 2015. Rajendran’s tenure as CMD at Andhra Bank
ended in April 2015. Prior to this, he was the Executive Director at Bank of
Maharashtra. He has held key positions in many financial institutions like
Asian Development Bank, Corporation Bank, and MCX Stock Exchange. He joined
banking sector in 1978 as an Officer with Corporation Bank. Earlier, AMFI had
invited applications from candidates having a minimum experience of 25 years in
the financial markets with at least 5 years of experience in a role of a CEO or
whole time director before June 1, 2015.
AMFI is running
advertisements, on television, which urge people to use mutual funds to
diversify their investments. The advertisements went on air on August 22,
which coincides with AMFI completing 20 years of operation. The campaign
is being aired on general entertainment and news channels. AMFI is also
planning to communicate this message through print media and FM channels. AMFI
said that the pan-India campaign is being aired on TV in 13 languages. AMFI
will roll out the print and digital campaign soon. AMFI had earlier run a TV
campaign ‘Savings ka naya tareeka’ in September 2011 for five weeks. The budget
for this campaign was estimated to be Rs. 8 crore. Apart from television
commercials, AMFI had developed a 36 page booklet to explain the basics of
mutual funds. Over 30,000 SMSes enquiries about mutual funds were generated
within four weeks of running these ads on national television
channels. The initiative is the brainchild of AMFI Financial Literacy
Committee.
Sahara Mutual Fund,
which has been ordered by the Securities and Exchange Board of India (SEBI) to
transfer its asset management business to a new fund house by December 2015, is
unlikely to find a buyer as fears of litigation and regulatory issues keep fund
houses away. The fund house has been scouting for a buyer through various
investment bankers but existing entities are sceptical of acquiring it due to
potential liabilities that may come along with the fund, which could impact the
overseas fund-raising activities of the acquiring entity. The fund has limited AUM
of around Rs.130 crore.
Regulatory
Rigmarole
In its report published to recommend measures for curbing mis-selling
and rationalizing distribution incentives in financial products, the
nine-member committee headed by Sumit Bose, former Union Finance Secretary has
recommended that fund houses should not pay any upfront commission to
distributors for selling mutual funds. Further, the committee has
recommended that the commissions should only be paid on reducing AUM based
trail. For instance, in case of lump sum investments, the trail will decline
over the tenure of investment and become nil after a certain period of time.
Besides, the committee has said that B15 distributors should not get higher
commission. It said that AMCs themselves should tap such unexplored markets to
increase their market share. SEBI has allowed AMCs to charge a higher TER for
sourcing applications from B15 cities. Currently, distributors from B15 cities
are exempted from the current 1% cap on upfront commission imposed by AMFI. The
committee has also recommended that SEBI should lower the cost caps (within the
TER) with the growth in AUM. Besides, it has also recommended that fungibility
within the TER should be done away with. The committee has recommended measures
in three areas – commissions, product structure, and disclosures.
Recommendations related to product structure: Merge similar schemes to reduce
confusion among investors. Benchmarks should be made more relevant and schemes
should be periodically tested to see if the asset allocation is conforming to
the benchmarks. Schemes should remain true to label. Promote ETFs among retail
investors. Similar to insurance, introduce free look policy in mutual funds.
Recommendations on disclosure: Penalize distributors pitching NFOs as cheap
products on the basis of highlighting NAV “at par” value of Rs.10. Disclose
past returns (along with benchmark returns) of schemes while selling products.
Investors should be disclosed a range of past returns appropriate to the
product tenure and should include returns of last 6 months and annualized
returns since inception and 2 year returns thereafter. Disclose trail
commission to investors at the time of sale. In addition to the disclosure of
scheme performance subject to market risk, put additional disclosure stating
that the fund’s performance is subject to fund house/manager’s competence.
Inform all investors when fund manager of a scheme changes. The AUM rankings
published by AMCs on their websites, information memorandum, etc. are presently
combined for all products which give a misleading picture. For retail products,
the AUM rankings should be shown only for the retail AUM. The committee has
also recommended that there can be various regulators for the same product
keeping in view the different functions of the product. For instance, it wants
SEBI to regulate the investments made by Ulip funds, while IRDA to regulate the
insurance part of the same fund. Currently, Ulips are regulated by the
insurance regulator IRDA, while mutual funds are controlled by the markets
regulator SEBI.
AMFI is planning to cut expense ratio by 30 basis points by October
2016. So, investors from smaller towns may have to pay less for investing
in mutual funds. Besides, it is
planning to do away with the current practice of disclosing overall AUM by fund
houses and restrict it to only retail AUM. The development comes following the Sumit
Bose Report. In the letter, AMFI has asked asset management companies to
voluntarily bring down the expense ratio in centres outside the top 15 cities,
called B-15 cities. The industry body has proposed to slash expense ratio by 10
basis points, effective October 1, 2015 followed by another 10 basis points
reduction, effective April 1, 2016 and further 10 basis points, effective
October 1, 2016. The removal of extra commission in B-15 centres will help in
creating a level-playing field and maximize returns for investors.
AMFI has said that AMCs should not pay any marketing support expense
which would be surrogate for upfront commission. AMFI has issued a revised
best practice circular on September 11, 2015 related to commission payouts. AMFI
has clarified that meetings/training programs for sub-brokers/RMs of a
distributor will not be considered as marketing support expense. However, these
expenses should be incurred only for the event and should be executed by the
AMC. AMCs are not supposed to make any payment to distributors for these
events. In addition, gifts and advertisements on websites/publications of a
distributor will be excluded from marketing support expense. AMFI has said that
AMCs should not pay any marketing support expense which would be surrogate for
upfront commission or advancing of trail. Also, it said that all expense
incurred during marketing support should be backed with necessary
documents/evidence. The total marketing support expense per distributor per
scheme should be within the total surplus (distributable TER less upfront less
trail of all transactions for the year). In order to calculate the expense
incurred on distributors, the circular says that if expense is identified to a
particular scheme, it should be divided by the gross mobilization of the
distributor for that scheme. If not, it should be divided by the gross
mobilization of the distributor across schemes (excluding liquid and
ultra-short term bond category). AMFI has also revised guidelines
relating to upfront and trail commission. It has clarified that trail and
upfront commission already paid by AMCs should not exceed the distributable
TER. For instance, if upfront commission paid is 1% and assuming the trail
commences from 5th month at 75 basis points, the total commission paid would be
considered as 1.75% in the first year, which needs to be within distributable
TER. Further, the trail commission in subsequent years cannot exceed 75 basis
points. Further, the trail fee for subsequent years should be less than the
distributable TER. Distributable TER is gross TER minus operating
expense. AMFI has also issued clarification regarding operational
implementation of commission payout in ELSS, RGESS, and retirement plans which
qualify for tax deduction under section 80C and 80CCG of the Income Tax Act
1956. For instance, in ELSS, no trail commission will be paid for 36 months (if
1% advance upfront is paid for a period of 3 years). Also, for the 37th month,
the trail fee can be up to distributable TER less upfront commission. On the
B15 commission payouts, the revised clause says that the ‘additional’ payout
for B15 locations at scheme level for any financial year should be within the
B-15 expenses accrued to the scheme. SEBI has allowed AMCs to charge additional
TER of up to 30 basis points on daily net assets of the scheme if the new
inflows from beyond top 15 cities are at least (a) 30% of gross new inflows in
the scheme or (b) 15% of the average assets under management (year to date) of
the scheme, whichever is higher. Besides, IAP expense (two basis points) will
now be a part of scheme operating expense. The Board of Directors of AMCs
will have to confirm to AMFI on a yearly basis that they have adhered to these
guidelines.
Market watchdog SEBI
has advised fund houses to reassess their risk management policy related to
fixed income schemes. In an email sent to AMC CEOs on September 11, the
regulator advised fund houses to reduce concentration risk in their fixed
income portfolios. SEBI has also asked fund houses not to rely only on
external research/ratings and recommended them to do their own research before
buying any instrument.
In its latest best
practices circular, AMFI has asked AMCs to gather the missing KYC information
from investors and ensure that all investors have undergone IPV (in-person
verification). IPV means that information provided in the KYC form has to
be verified in-person by distributors. Earlier, AMFI had asked distributors to
collect missing KYC information from investors who had undergone KYC
registration before January 1, 2012. The missing KYC details includes (for
individual investors) name of father/spouse, marital status, nationality and
gross annual income/latest net worth, etc. In addition, IPV was made mandatory
from 2012. Apart from distributors, IPV can be done by employees of AMCs,
R&Ts, and authorized officials of commercial banks (only in case of direct
applications). So far, AMCs were accepting transactions even if IPV was not
done by distributors. From January 2016, AMCs will not accept incomplete
applications (where KYC is done and IPV is incomplete). For ease of doing IPV,
SEBI has allowed distributors to perform IPV through web camera. SIP and STP
mandates already registered till December 2015 are exempted from this
requirement. AMFI has urged distributors to make sustained efforts
to obtain missing KYC information and complete IPV and updated the same in KYC
Registration Agency (KRA) records till December 2015. AMFI has directed
AMCs to reject applications from November 2015 if KYC status is ‘deactivated’,
‘not available’, and ‘rejected’. If investors KYC status is ‘on hold’ then AMCs
and RTAs need to intimate investors and get it rectified. From November 1,
2015, AMCs will reject all purchase and switch transactions if the missing
information is not complete. From January 01, 2016, AMCs will reject all
purchases and switch transactions if the missing KYC information is not
provided and IPV is not completed. Distributors have to make sure that they
have performed IPV till December 31st and update missing KYC
information by 31st October 2015.
Paving way for active fund management in National Pension System (NPS),
PFRDA has allowed pension fund managers (PFMs) to invest NPS corpus in mutual
funds. PFMs can now invest pension corpus in large cap equity funds, ETFs
that track index, gilt funds, income funds, and liquid funds. NPS is a
voluntary pension scheme launched by PFRDA which aims to provide pension to
people in both the organized and unorganized sectors. Currently, there are three
schemes under NPS – gilt, fixed income, and equity. NPS can deploy up to 50%
corpus in equities depending on the type of scheme or age of subscribers. In
its investment guidelines, PFRDA has allowed PFMs to invest in mutual funds
having at least 65% exposure to large cap stocks. The pension fund regulator
has also allowed PFMs to take equity exposure through low cost index ETFs and
CPSE ETFs. However, PFMs can also deploy NPS corpus in shares having a minimum
market capitalisation of Rs.5,000 crore on their own. In addition, PFMs are
allowed to invest in income funds, gilt funds, and liquid funds to take
exposure to debt instruments. The move will help the mutual fund industry to
position itself as a long term investment vehicle, besides helping to increase the
AUM of the mutual fund industry.
According to a recent Cafemutual report
called ‘Mutual Funds in India Being Future Ready’ an analysis of RBI and AMFI
data shows that the AUM of mutual fund industry is likely to reach Rs.20 lakh
crore in the next three years. This translates to a growth of 19% i.e. from Rs.
12 lakh crore in 2015 to Rs.20 lakh crore in 2018. Factors like increasing
awareness among investors about mutual funds, government’s initiative on
financial inclusion and growing population of young investors will help mutual
fund industry achieve this growth. The Indian mutual fund industry is in a sweet
spot with all the enabling ingredients in place. While a sound macroeconomic
environment and favourable demographics ensure availability of long-term
capital inflow, a proactive and conductive regulatory regime facilitates the
industry’s growth. Surprisingly, the report has found that Indian mutual fund
industry has outpaced global mutual funds in terms of AUM growth. AUM of the
Indian mutual fund industry has grown at a CAGR of 17% compared to the global average
of only 9% since 2008. Strong fundamentals of the Indian economy helped cushion
the Indian financial markets against the global financial crisis. B15 centers
will be the key growth driver for the mutual fund industry. Fuelled by robust
farm growth, rising rural wages and increased government spending, the B15
centers have shown commendable growth and are likely to maintain this pace.
