FUND FULCRUM

October 2015

Buoyed by strong inflows in equities, the asset base of the country's mutual fund industry surged 7% to an all-time high of Rs 13.16 lakh crore in the July-September quarter of the current fiscal. The country's 44 fund houses together had an average asset under management (AUM) of over Rs 12.28 lakh crore in the September quarter of 2014-15, according to the latest data of the Association of Mutual Funds in India (AMFI). The quarterly rise in AUM is largely on account of inflows in equities. Besides, retail participation in equity schemes has risen significantly in recent months. HDFC Mutual Fund has retained its numero uno position with an average AUM of Rs 1.71 lakh crore, up 3.53%, while ICICI Prudential Mutual Fund's asset base grew 5.86% to Rs 1.65 lakh crore. The top league features Reliance Mutual Fund (Rs 1.53 lakh crore), Birla Sunlife Mutual Fund (Rs 1.33 lakh crore), and UTI Mutual Fund (Rs 1.04 lakh crore) in terms of average AUM in the second quarter of 2015-16. Mutual funds' assets base rose Rs 87,239 crore, or 7.1%, during the quarter primarily due to huge net inflow in equities. India's mutual fund sector lost about 5.5% of its assets in September 2015 as its AUM dipped to Rs 11.87 lakh crore as against Rs 12.55 lakh crore in August 2015 — a drop of Rs 68,000 crore. Further, with this decline, the sector has lost one-tenth of its assets ever since it hit a high of Rs 13 lakh crore in July 2015.

Investors pulled out over Rs 77,000 crore from mutual fund schemes in September 2015, making it the highest outflow in six months, with liquid and money markets contributing the most to the outflow. This comes on top of net outflow of about Rs 46,750 crore from mutual fund products in August 2015. According to data from AMFI, investors withdrew a net Rs 77,142 crore in mutual fund schemes in September 2015. This was the highest outflow in a single month since March 2015, when the industry had seen a withdrawal to the tune of Rs 1,09,897 crore. Liquid or money market fund category witnessed Rs 60,861 crore being pulled out in September 2015, income funds too saw net outflows of Rs 26,717 crore.

Equity mutual funds witnessed an addition of over 21 lakh investor accounts or folios in the first six months of the current fiscal (2015-16), primarily because of strong retail participation. This follows an addition of 25 lakh folios for the entire last fiscal, 2014-15. According to the Securities and Exchange Board of India (SEBI) data on investor accounts with 44 fund houses, the number of equity folios jumped to 3,38,40,981 in September 2015 from 31,691,619 at the end of March 2015, a gain of 21.5 lakh. April 2014 saw the first rise in more than four years. Mutual funds have reported net inflows of Rs 53,666 crore in equity schemes in the first six months of 2015-16, helping the industry grow the folio count. Besides, addition in equity folios helped increase overall base to 4.44 crore in September 2015 from 4.17 crore at the end of March 2015.

Piquant Parade

Forward Market Commission (FMC) has finally been merged with SEBI as announced in the budget 2015. This is the first time when two regulators have been merged in India. This merger may enable fund houses to come up with commodity mutual funds. Commodity funds invest in metals like copper, aluminium, oil, gold, silver, platinum, and agriculture produce. In India, mutual fund houses are not permitted to invest in commodities other than gold. However, a few fund houses have thematic funds which invest in companies engaged in commodity businesses. 

In an effort to increase financial awareness among children, all four financial regulators of India – RBI, SEBI, IRDAI, and PFRDA have joined hands to conduct national level test called National Financial Literacy Assessment Test (NFLAT) for school students of class VIII to X. The test will be conducted on November 28 and 29 across the country. The regulators have appointed National Institute of Securities Markets (NISM) which has further set up National Centre for Financial Education (NCFE) to carry out this exam. 

Two new domestic players – Yes Bank and Mahindra Finance are likely to foray into asset management business soon. While Yes Bank has received RBI nod to set up an AMC, Mahindra group has formed its senior management team to set up their AMC. Incidentally, both Yes Bank and Mahindra Finance are mutual fund distributors. AMFI data shows that Yes Bank and Mahindra & Mahindra Financial services have assets under advisory of Rs.678 crore and Rs.1,552 crore respectively as on March 2015. 

AMFI has named Leo Puri, MD, UTI Mutual Fund as its new Chairman. Puri has replaced Sundeep Sikka who was appointed as the AMFI Chairman in 2013. A Balasubramanian, CEO, Birla Sun Life Mutual Fund will continue to be the Vice Chairman of AMFI. Meanwhile, Kailash Kulkarni, CEO, L&T Mutual Fund has been appointed as the Chairman of the Financial Literacy committee. Currently, there are 15 members in AMFI board of which seven are from top ten fund houses and four each from mid and small sized AMCs.

To make it easier for investors to buy or sell mutual fund products, fund houses are offering an electronic, or e-KYC, initiative to first-time investors. This new service will help investors buy or sell mutual fund products in a simpler and faster way. Quantum Mutual Fund and Reliance Mutual Fund are already off the block, which offer e-KYC (Know Your Customer) that allows first-time investors to fill a simple form and complete the formalities in a paperless manner. Others are likely to follow suit. After completing the KYC formalities, fund houses schedule a video conference with the investor over Internet to do in-person verification (IPV). Once the IPV is done, fund houses send a confirmation. Currently, lengthy paperwork for the KYC process demands several documents to be submitted as proof, which takes a lot f time. Furthermore, fund houses are in discussion with market regulator SEBI to allow investors to invest in mutual fund products by using the Aadhaar number. Fund houses are taking several steps to raise their share through this route. They have been tapping social media platforms like WhatsApp and Facebook and a host of other calling and messaging apps to facilitate transactions in mutual fund products.

In addition to regular and direct plans, SEBI is said to be looking to introduce a third plan in mutual funds called e-commerce plan to be sold through e-commerce websites like Flipkart, Amazon, and Snapdeal. The TER of such schemes would be somewhere between direct plan and regular plan.

Reliance Capital Asset Management is set to acquire Goldman Sachs Asset Management’s (GSAM) onshore business in India for Rs. 243 crore. The acquisition would add Rs. 7,132 crore to Reliance Mutual Fund’s kitty. Reliance Mutual Fund manages Rs. 1.52 lakh crore as on September 2015. The transaction is expected to be completed by the end of this fiscal year, subject to regulatory approvals. RCAM will extend offers of employment to substantially all of GSAM India’s employees dedicated to supporting the ETF business. Reliance is open to acquiring more businesses to strengthen its market share. GSAM currently manages 12 schemes, including 10 ETFs, and is the largest ETF provider in India. It has a total AUM of Rs. 7,132 crore which includes Rs. 2,172 crore in the Central Public Sector Enterprises (CPSE) ETF.

Japanese financial services firm Nomura is looking to sell its stake in LIC Nomura Mutual Fund. Nomura holds 35% in LIC Nomura Mutual Fund. LIC Housing Finance and LIC of India which hold 20% and 45% respectively, would reportedly buy Nomura’s 35% stake. LIC Mutual Fund has been in existence for the last 25 years. LIC's partnership with Nomura began in January 2011. Most of the funds managed by them (LIC-Nomura MF) are performing extremely well and looking at the wide experience of their fund managers, it will only get better from here.

Regulatory Rigmarole

Nandan Nilekani, former chairman of UIDAI and co-founder of Infosys is heading a SEBI committee which has been formed to look into cost reduction in mutual funds. SEBI has constituted a committee to suggest measures to reduce cost structure in mutual funds. Bose committee has recommended that SEBI should lower the cost caps (within the TER) with growth in AUM. The committee has also recommended that fungibility within the TER should be done away with. The committee will oversee systems and processes in the mutual fund industry and suggest measures to reduce cost structure. 

SEBI has formed a committee on Disclosure and Accounting Standards (SCODA) to seek recommendation on improving disclosure standards of financial products including mutual funds through offer documents, application forms, and advertisements. The committee will also give its recommendation on improving disclosure requirements of financial intermediaries registered with SEBI like Registered Investment Advisers (RIAs) and stock brokers. The committee was formed following the recommendations of the Finance Ministry Committee headed by Sumit Bose, former Union Finance Secretary. 

AMFI has issued uniform guidelines for fund houses to follow in order to ensure compliance with Foreign Account Tax Compliance Act (FATCA). FATCA is an anti-tax evasion law under which fund houses are required to report information on US investors to US IRS (Internal Revenue Service) through CBDT. India has agreed ‘in substance’ to FATCA by signing an Intergovernmental Agreement Model 1 (IGA-1) with US in effect from July 9, 2015. Simply put, the legislation is meant to prevent wealthy US individuals from parking money overseas to avoid paying taxes. AMFI had appointed KPMG to advice fund houses on FATCA compliance. Recently, AMFI in consultation with Karvy, KPMG, and other key stakeholders has come out with guidelines, declaration forms, and FAQs on FATCA. The new declaration form will capture information like type of address (residence, business, registered office, etc.), country of tax residence, tax identification number, Global Intermediary Identification Number (GIIN) and seek investors consent for sharing the information with relevant tax authorities. Distributors are expected to update the details of their existing foreign investors by adding this information. While many fund houses had stopped accepting fresh investments from US investors due to stringent compliance requirements under FATCA, a few AMCs had asked their distributors who have clients from USA to furnish the documentary evidences of tax residency and other information. US NRIs can potentially be a sizeable market for the Indian mutual fund industry. The new guidelines will help AMCs to seek mandates from US entities to manage investments in India. AMCs will have to follow AMFI’s guidelines on FATCA from November 1, 2015.

RBI has issued operational guidelines for Gold Monetization Scheme (GMS) in which it has allowed mutual funds to invest in these instruments. GMS enables households and jewelers to keep their gold with the banks and earn interest on it. The Finance Ministry intends to replace Gold Saving Scheme with the GMS. The deposits under the this scheme can be made for a short-term period of 1-3 years (with a roll out in multiples of one year); a medium-term period of 5-7 years and a long-term period, of 12-15 years. Like a fixed deposit, breaking of lock-in period will be allowed in either of the options and there would be a penalty on premature redemption (including part withdrawal). The amount of interest rate payable for deposits made for the short-term period would be decided by banks on the basis of prevailing international lease rates, other costs, market conditions, etc. and will be denominated in grams of gold. For the medium and long-term deposits, the rate of interest (and fees to be paid to the bank for their services) will be decided by the government, in consultation with the RBI. The interest rate for the medium and long-term deposits will be denominated and payable in rupees based on the value of gold deposited. The minimum deposit should be equivalent to 30 grams of gold of 995 fineness. There is no maximum limit for deposit under this scheme. The gold will be accepted at the Collection and Purity Testing Centres (CPTC) certified by Bureau of Indian Standards (BIS) and notified by the Central Government. The deposit certificates will be issued by banks in equivalence of 995 fineness of gold.

The AUM of the mutual fund industry can grow to Rs.40 lakh crore in the next five years according to C V R Rajendran, CEO, AMFI. He also expects that the unique investor count would double from the current 1 crore to 2 crore by FY 2020-21. Striking an optimistic note on the growth prospects of the industry, he said that mutual fund industry is likely to grow at a CAGR of 25%. He expects that the retail investor base would grow due to increasing awareness about mutual funds. Also, additional inflows from pension fund managers and EPFO will provide a fillip to the industry. Rajendran is of the view that the mutual fund industry can leverage investor awareness program to achieve a sustainable growth.