FUND FULCRUM
December 2015
Investors
pulled out more than Rs 31,000 crore from various mutual fund schemes in
November 2015, with liquid and money markets contributing the most to the
outflow. This follows an inflow of about Rs 1.35 lakh crore into mutual fund
products in the preceding month. According to data from the Association of
Mutual Funds in India, investors withdrew a sum of Rs 31,196 crore from mutual
fund schemes in November 2015. Mutual funds saw an outflow in mutual fund
schemes last month mainly on account of huge redemptions in liquid and money
market funds. However, investors continued to maintain bullish stance on the
equity schemes. Liquid or money market fund category saw Rs 42,059 crore being
pulled out last month, while equity and equity linked schemes saw an inflow of
Rs 6,379 crore. Liquid and money market funds invest mainly in money market
instruments like commercial papers, treasury bills, term deposits, and
certificate of deposits. These funds have a lower maturity period and do not
have any lock-in period. With the latest outflow, the net inflow in the schemes
was at Rs 1.84 lakh crore in the period April-November 2015. The asset base of
the country's 44 fund houses fell to Rs 12.95 lakh crore in November 2015 from
an all time high of Rs 13.24 lakh crore in October 2015.
Equity
mutual funds witnessed an addition of nearly 27 lakh investor accounts or
folios in the first eight months of the current fiscal, primarily on account of
strong retail participation. This follows an addition of 25 lakh folios for the
entire last fiscal, 2014-15. Folios are numbers designated for individual
investor accounts, though one investor can have multiple accounts. According to
the SEBI data on investor accounts with 44 fund houses, the number of equity
folios jumped to 34,367,673 last month from 31,691,619 at March-end, a gain of
26.76 lakh. April last year saw the first rise in more than four years. Prior
to 2014-15, equity mutual fund sector had seen a continuous closure of folios
since March 2009, following the global financial crisis in late 2008. From
March 2009, as many as 1.5 crore folios had been closed. The investor base
reached its peak of 4.11 crore in March 2009, while it stood at 3.77 crore in
March 2008. Before 2014-15, there was a complete lull in equity inflows as well
as generation of new folios, but in the past one year, equity markets have come
back to life and yielded solid returns. Heightened investor interest has led to
a sharp increase in retail folios. It is the optimism of investors because of
which the folios in equity segment have increased. Besides, increased
participation by retail investors in equities has led to an increase in folio
numbers. Mutual Funds have reported net inflows of Rs 66,314 crore
in equity schemes in the first eight months of 2015-16, helping the industry
grow the folio count. Besides, addition in equity folios helped increase
overall base to 4.52 crore in November 2015 from 4.17 crore at the end of March
2015.
Piquant parade
Shriram Asset Management Company Ltd. has
recently got the go-ahead from Securities and Exchange Board of India to
undertake 'offshore fund management'. Simplifying norms for domestic funds
to manage offshore pooled assets, SEBI earlier this year, among others had
dropped '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. India's
relatively higher growth and diversity of themes present an attractive
opportunity for foreign investors over the medium-to-long term. The sentiments
have become investor-friendly due to government's announcement of a series of
reform measures in recent months, such as not imposing retrospective MAT on
overseas investors for the years prior to April 1, 2015.
Nomura has initiated the process of exiting
from the mutual fund business in India. In a BSE filing, LIC Housing
Finance informed the markets that it is buying Nomura’s 19.3% stake in LIC
Nomura Mutual Fund. The deal has been pegged at Rs. 27.36 crore. The mutual
fund company is co-owned by LIC, LIC Housing Finance, and Nomura Holding with
45%, 20%, and 35% stakes respectively. With this deal, Nomura’s stake will come
down to a little above 15%. This is the first step towards Nomura completely
exiting the mutual fund joint venture.
Regulatory Rigmarole
Investors need to work again to complete their
KYC. New KYC requirement expects investors to furnish their networth details,
and if they are politically exposed. There are a couple of details that
every investor needs to provide and one of them relates to the fact that they
should indicate the amount of income that they earn or their net worth which
will give the fund an idea of the kind of income or the assets that are held by
the investor. This is meant so that there is some sort of linkage of the amount
that is invested and the income or the assets held so that there is no big
discrepancy present. This is meant to ensure that there is no money laundering
that is going on and that the investor is investing the funds that are his own.
The investor also needs to indicate whether he is a politically connected
person and this has to be answered in the form of a yes or no. The other detail
that has to be submitted relates to the coverage under the new agreement signed
for disclosure of foreign assets if a US citizen invests in India and hence
this is also a significant thing as it could put the mutual fund at risk if it
is discovered that the investor has hidden assets in the country from the US
tax department.
SEBI is likely to come out with guidelines
on electronic KYC soon to expedite the process of client verification. 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.
In a fresh twist on e-commerce distribution
space, SEBI is likely to ask e-commerce distributors either to develop their
own skill sets like IFAs or work in a tie up model with IFAs (market place
model). SEBI has reportedly decided to come out with the guidelines on
distribution of mutual funds through e-commerce websites like FlipKart, Amazon,
and Snapdeal at a meeting of SEBI’s Mutual Fund Advisory Committee. SEBI said
that there would be three routes through which mutual funds would be
distributed on e-commerce – distributor route (both online and offline
facility), only distribution route (online distribution), and advisor route
(direct route).
In a bid to rationalize costs, SEBI has
barred new ELSS schemes from charging an additional 20bps TER. Thus, the
three recently launched ELSS – Mirae Asset Tax Saver Fund, DHLF Tax Savings
Fund, and Peerless Long Term Advantage Fund are not charging this 20bps extra
TER. SEBI had allowed fund houses to charge an additional TER to the extent of
20 bps with effect from October 2012 in lieu of exit loads. Also, the market
regulator had mandated that the entire exit load should be credited back to the
schemes. Typically, ELSS schemes have a lock in period of three years and have
no exit load period. ELSS category manages Rs. 40,313 crore as on October 2015.
A rough calculation shows that the industry is charging close to Rs. 81 crore
in lieu of exit loads in ELSS. Most closed end schemes are charging an
additional 20bps. In fact, a few no-load schemes are also charging this
additional expense from investors. Meanwhile, IFAs are demanding that all
closed end schemes and schemes with no exit loads should be barred from
charging extra TER. Almost all existing ELSS schemes and closed end schemes
charge this additional TER despite the fact that these schemes do not have exit
load periods. SEBI should look at these schemes to make mutual funds more cost
effective for investors.
SEBI will introduce norms that will
restrict investments by mutual funds in rated debt instruments. There could
be some sort of sectoral cap or single-company investment limit (in terms of
bonds). The new norms are aimed at preventing excessive exposure of a mutual
fund to a single company and come in the wake of Amtek Auto defaulting on Rs.
190-crore worth of bonds held by funds of JP Morgan. At present, a mutual fund
scheme can invest up to 15% in debt papers issued by a single company.
Even
though the year started with great expectations around economic reforms and
revival, these hopes were belied to a large extent over the next few months. As
a result, stock markets corrected sharply in the second half of the year,
dragging down the benchmark indices nearly 15% from their peaks. The main cause
for the correction was global markets, which were hit by expectation of Fed
raising interest rates and sharp fall in commodity prices, leading to capital
outflows from emerging markets in general and the debt crisis in Greece. The
slowdown in corporate earnings growth was another factor that led to the
downfall. In spite of these factors, Indian markets exhibited a Buddha-like
calm to begin with. But what upset the scale was fear of massive slowdown in
China along with weakness in major global economies such as Brazil, Russia, and
Japan. "Currency war" was the other oft-heard thing during the year
as China sharply devalued the yuan, which put pressure on most emerging market
currencies. The positive side of these developments was that market valuations
became reasonable and retail investors invested in a big way, effectively filling
in the void created by the exodus of foreign investors.
