FUND FULCRUM

November 2015

Driven by strong inflows in equity and liquid schemes, the asset base of the country's mutual fund industry surged 11.5% to an all-time high of over Rs 13.24 lakh crore in October 2015. The country's 44 fund houses together had an average asset under management (AUM) of over Rs 11.87 lakh crore in September 2015, 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 equity and money market liquid categories. Besides, retail participation in equity schemes has risen significantly in recent months. Investors remained buoyant on equity mutual funds despite the ongoing volatility. Overall inflow in mutual fund schemes stood at Rs 1.35 lakh crore at the end of August 2015, compared with an outflow of Rs 77,142 crore at the end of September 2015. Of this, liquid or money market category saw Rs 1.03 lakh crore coming in while equity segment saw an inflow of Rs 6,005 crore. Participation from retail investors has been rising in equity schemes as the segment witnessed an addition of over 21 lakh investor accounts or folios in the first six months of 2015-16. Besides, addition in equity folios helped increase overall base to go up to 4.44 crore in September 2015, from 4.17 crore at the end of March 2015.

Mutual fund industry’s folio base continues to show an upward trend. The latest SEBI data shows that the industry has added a total of over 28 lakh folios in seven months, i.e. April-October 2015. Among categories, equity funds saw the highest growth in folio count. The category saw addition of more than 21 lakh folios. Of this, equity funds added 19.22 lakh folios while ELSS added 2.17 lakh folios. The increase in folio count in equity is evident by the inflows in equity funds. From April till October 2015, equity funds (including ELSS) have received net inflows of Rs. 59,935 crore.  Some part of the money has also gone in new fund offers as the total number of equity funds went up to 407 in October 2015 from 383 in April 2015. The total folio count in equity funds went up from 3.19 crore in April 2015 to 3.41 crore in October 2015. Balanced funds too saw an addition of 2.26 lakh folios during April-October 2015. The total folio count in debt funds went up to 76.44 lakh in October 2015 from 71.86 lakh in April 2015, an increase of 4.58 lakh folios. Gilt and liquid funds added 3,518 and 25,396 folios respectively. In the debt category, income funds added the maximum folios (4.29 lakh). Gold ETFs continued to lose folios due to the lackluster performance of the yellow metal. The category has seen erosion of 22,751 folios in the last seven months. On the other hand, ETFs which track equity indices, continued to gain traction. Equity ETFs added 15,621 folios during the same period. Overall, the total folio count (across all categories) went up from 4.20 crore in April 2015 to 4.48 crore in October 2015.   

Piquant Parade

SEBI is likely to come out with the guidelines on distribution of mutual funds through e-commerce websites like FlipKart, Amazon, and Snapdeal. In addition to regular and direct plans, SEBI is looking to introduce a third plan in mutual funds called e-commerce plan. The TER of such schemes would be somewhere between direct plan and regular plan. The commission on mutual fund schemes sold through such websites will be capped at 50 bps. Two months back, SEBI has constituted a committee headed by Nandan Nilekani to suggest measures to reduce cost structure in mutual funds. The committee has already met three times and is likely to give its recommendations shortly.

Robo advisory is the new buzzword in the financial advisory profession. One more e-commerce startup Innovage Fintech has launched a robo advisory platform called ‘5nance.com’. 5nance.com will provide financial advisory service without charging any fees. The portal will distribute investment products like mutual funds, insurance, FDs, gold, bonds, equities, loans, credit cards, etc. The company is planning to acquire new clients through digital marketing initiatives and investor awareness programs. The company aims to build a client base of 3 lakh by 2016 and cross 70 lakh in the next 5 years. Innovage Fintech has raised over $3 million through angel investors and is planning to raise another $15 million in the coming months. Robo advisors use algorithms and model portfolio to construct client portfolio. Investors have to fill up their details and goals based on which these advisors recommend a plan or a list of schemes to invest in. In India, Fundsindia, Fundsupermart, MyUniverse, Scripbox, and Arthyantra claim to follow Robo advisory model.

As more retail investors enter equities through the mutual funds route, new players are lining up to win a share of the rapidly growing domestic asset management business. At least three new fund houses, including Ireland-based Zyfin Funds, Mahindra and Mahindra Financial Services, and Yes Bank are set to throw their hats into the ring, for a share of the industry that currently manages assets worth Rs. 13 lakh crore. Zyfin Funds is likely to announce its launch within the next few weeks. Zyfin (formerly Blufin) is a macro-analytics firm that publishes research and indices on macroeconomics, consumer sentiment, and the capital market. The company is backed by investment firms Zodius and Anthemis Group. Zyfin Funds, according to its website, is set to offer ETF products based on emerging market indices for global investors through an offshore fund platform. Zyfin Holdings will also offer advisory services (with regard to product modelling, theme selection, index generation) to global financial institutions, which will then co-brand their products with Zyfin. M&M Financial Services (Mahindra Finance) has also speeded up the process of launching its own fund house. The company received approval from SEBI in October 2011, but is yet to launch the fund house as it was unsure about entering the market. According to SEBI officials, the company’s application for final approval is under process. Mahindra Finance already has an extensive distribution network in place as it sells mutual funds for other fund houses. It is bound to capitalise on this network to help grow its business. Earlier this month, YES Bank received RBI approval to set up a mutual fund and will apply for approvals from capital market regulator, SEBI. The bank expects to launch its AMC within a year, and may even take over an existing mid-sized fund house (Rs.30,000-40,000 crore of assets). According to the SEBI website, Karvy Stock Broking, Trust Investment Advisors, and Fortune Financial Services/ Fortune Credit Capital are awaiting in-principle approval from the regulator on their mutual fund applications.

Religare Enterprises has entered into binding agreement to sell 51% stake in Religare Invesco Asset Management Co., which manages assets worth 21,594 crore, to foreign partner Invesco for 6% of assets under management (AUM) or 660-700 crore. The company is planning to mobilise resources through asset sales. The money from the divestment will be used to reduce debt at the holding level besides infusing funds in the health insurance and lending businesses. Religare Enterprises has debt of about Rs. 600 crore. 

The Securities and Exchange Board of India is planning to mandate fund houses to disclose the compensation paid to the senior management and also their individual investments in the schemes to investors. The regulator feels some of the fund officials are overpaid compared to the corpus they manage after examining the information provided by asset management companies on the compensation structure. Since executive compensation is paid from the management fees charged to the scheme, SEBI feels it is important that adequate disclosures regarding the same are made to investors. The move is aimed at promoting transparency in remuneration policies so that executive compensation is aligned with the interest of investors. At present, fund houses decide on the compensation structure for its employees and there are also no disclosure requirements on the payout to employees. In developed markets such as US, Europe, and Canada there are no regulatory restrictions on executive remuneration. However, post the global financial crisis, regulators across the globe are focusing on improving disclosure standards with respect to executive remuneration. In India, the Reserve Bank has mandated a compensation policy for the whole-time directors and CEO of domestic private sector and foreign banks and has also restricted payment of guaranteed bonuses to them. Listed companies too are required to disclose remuneration paid to key managerial personnel. SEBI feels managers' investment within the fund should also be provided to investors. 

In order to spread awareness about mutual funds, AMFI has put up a mutual fund stall in which it has invited AMCs to participate in the 35th India International Trade Fair held in Delhi. This 14-day-long fair has started on November 14. SEBI has organized a financial literacy campaign called ‘Bharat Kaa Share Bazar’ at this trade fair in which it has asked associations and stock exchanges like AMFI, NSE, BSE, NSDL, CDSL, NCDEX, MCX, and NISM to put up their stalls to create awareness. 12 fund houses are participating in this exercise to create awareness on mutual funds. Such events attract a lot of visitors and by setting up stalls investors will get to know more about mutual fund products. The idea is to make people aware about mutual funds and how versatile they are in meeting investor needs no matter what their goals, time horizons, or risk appetite are. The participating AMCs include UTI, Axis, BNP Paribas, Birla Sun Life, Reliance, IDBI, Peerless, Franklin Templeton, and L&T Mutual Fund. These fund houses are attracting visitors through a variety of activities like quizzes, skits, and game shows.

…to be continued…