FUND FULCRUM (contd.)

February 2016

Individual investors hold 45% or Rs. 6.13 lakh crore of the total Rs. 13.54 lakh crore AUM of the mutual fund industry as on January 2016, according to the latest AMFI data. Individual investors include HNIs who invest Rs. 5 lakhs or above. They have mostly invested in equity funds. AMFI data shows that 83% of equity assets is held by individual investors. However, overall share of individual investors in the industry has not seen any growth in the last two years. As on December 2014, individual investors’ AUM share in the industry stood at 46% which has come down slightly to 45.3% in January 2016. Of the Rs. 13.54 lakh crore total AUM of the industry, the remaining 55% AUM is held by institutions, banks, and FIIs. Institutional investors have mainly invested in liquid and money market schemes (93%), debt oriented schemes (61%), and ETFs and FOFs (73%). AMFI data shows that the AUM of institutional investors has grown faster as compared to individual investors. Institutional assets have grown by 18.3% from Rs. 6.26 lakh crore in January 2015 to Rs. 7.41 lakh crore in January 2016. On the other hand, retail assets have grown by 14% from Rs. 5.37 lakh crore to Rs. 6.13 lakh crore during the same period.

Regulatory Rigmarole

The government’s ambitious central KYC (CKYC) project, which was announced in the Union Budget 2012-13, is expected to be operational soon. This essentially means that all investor data will be stored at one place which can be accessed by all financial institutions to verify the KYC. All investors need to do is obtain a central KYC number from Central KYC Registry through the financial institutions and use it to invest in any financial product.  There will be no need to do multiple KYC. Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) has been entrusted with the task of setting up the Central KYC Registry. CERSAI has appointed DotEx International Limited, a NSE group company, as its managed service provider for the Central KYC Registry. Ten financial institutions, including insurance companies, banks and mutual funds, have already done a pilot testing on their platforms. Banks currently spend anywhere around Rs. 150 - Rs. 200 to store KYC data of customers and DotEx will provide the same service an average cost of Re. 1 per upload, download or for making any data modification. Similarly, the cost of performing customers KYC will come down drastically for fund houses which currently have to spend around Rs. 25 - Rs.30 per KYC. In addition, the turnaround time to complete KYC will be much faster as compared to the current practice.  The access to DotEx platform will be limited to financial institutions which are regulated by SEBI, PFRDA, and IRDAI. The system will allow financial institutions to upload KYC data in bulk and DotEx will take up to 24 hours to process this data. In case the records of investors already exist or there are any discrepancies, DotEx will alert the financial institution within 24 hours. If you have already done CKYC or if someone applies with the different ID proofs/different address then we will be able to flag it to the financial institution based on demographic details. To begin with, DotEx will use Aadhar and PAN to authenticate the ID proof submitted by investors. It will be extended to passport and driving licenses later on. The verification will happen online. CKYC number will be provided in one day. The new KYC platform is also expected to be of great help to investors who move to different cities for work. You can provide your permanent and temporary address. You have to provide a proof of address for permanent address and no proof will be required for temporary address. Those who move to different cities always face problem with banks as they require proof of address for changing the address in their records which can be at times cumbersome. In this platform, if you are moving to another city you can just change your correspondence/temporary address without any proof. Once this record is changed at one bank an update notification will be sent to all financial institutions which are linked to that CKYC record.   To begin with, the KYC data will be used for financial transactions only. Going forward, this database can also be used by other competent authorities to verify customer records which can perhaps virtually eliminate the need to submit physical documents. The launch of central KYC is expected to be of great help for distributors, financial institutions and especially investors who have to undergo multiple KYC for investing in different financial products.

To safeguard investor interest, SEBI has notified a stricter set of norms for mutual funds, wherein it has capped the investment limit in bonds of a single company at 10%. The move comes after JP Morgan Mutual Fund got into trouble due to its exposure to debt securities of Amtek Auto, while a few other fund houses have also faced similar problems with regard to corporate bonds of other distressed firms. Under the norms, mutual fund houses will not be able to invest more than 10% of a scheme's corpus in debt securities of a single company. However, it can be extendable to 12% of net assets value (NAV) after trustee's approval. Currently, the limit is 15%. The investment within such limit can be made in mortgage backed securitised debt, which are rated not below investment grade by a credit rating agency registered with SEBI. However, such limit will not be applicable for investments in government securities, treasury bills and collateralised borrowing and lending obligations. The new norm -- Securities and Exchange Board of India (Mutual Funds) Regulations, 2016 -- has come into force from February 12, 2016 when the regulator notified it. The regulator said that schemes already in existence shall within an appropriate time and in the manner, as may be specified by the Board, conform to such limits.

In an email sent to distributors, AMFI Unit of CAMS has requested mutual fund distributors to ask new investors to submit National Automated Clearing House (NACH) form which will replace Electronic Clearing Services (ECS) form to invest in mutual funds through SIPs. This comes into effect immediately. The email says that banks may not accept ECS mandate forms from new investors for SIP registration. Earlier in February 2016, National Payments Corporation of India (NPCI) said that ECS which is used for servicing mutual fund SIPs will soon be replaced by NACH forms. This was supposed to be implemented from March 1, 2016. As of now, registering a SIP through ECS mandate takes up to 30-35 days and there is no way to track if the ECS has been confirmed at the bank’s end. However, most banks, especially private sector banks issue mandates within 15-20 days. With NACH, the turnaround is expected to reduce to only up to 10 days as banks have to answer within T+5 days to confirm the transaction. Also, NACH is cost effective as compared to ECS as it entails less paperwork. While new investors are required to submit NACH forms to invest in mutual funds through SIP, ECS mandate of existing investors will automatically be migrated on NACH platform, clarified the CAMS email. That means, distributors need not collect NACH form from existing investors even if their SIP expires. Also, NACH on its own does not replace existing direct debit arrangements. NACH can help investors and distributors in a big way. Earlier, distributors had to register multiple mandates if their clients wanted to invest through SIP in say, four different schemes. With the new system, distributors can register four SIPs through one mandate. The process has become simpler even in case of lump sum investments. NACH can be also utilized to pay utility bills and insurance premiums. NACH is a one-time registration process which gives flexibility to investors to invest lump sum and through SIP without having to make individual payments each time.

SEBI has allowed the new cadre of distributors to sell Mutual Fund Linked Retirement Plans (MFLRPs) and liquid funds. This has come into effect immediately. So far, the new cadre of distributors was allowed to canvass diversified equity funds, index funds, and FMPs having track record which equals to or is better than their benchmark for at least three years. In a circular, SEBI has said, “New cadre of distributors was allowed to sell simple and performing mutual fund products. It has been decided that simple and performing mutual fund schemes shall also comprise of retirement benefit schemes having tax benefits and liquid schemes/money market mutual fund schemes.”

From April 1, 2016, SEBI has allowed fund houses to invest the unclaimed redemption and dividend corpus in a separate plan of a liquid scheme which is meant exclusively for deploying unclaimed amounts. However, AMCs will not be allowed to charge any exit load in this plan and the TER will be capped at 50 bps. To ensure that mutual funds play a pro-active role in tracing the rightful owner of the unclaimed amount, SEBI has asked fund houses to publish a list of names and addresses of investors in whose folios there are unclaimed amounts. AMFI will also publish a consolidated list of such investors on its website. Also, fund houses will have to publish information about the process of claiming the unclaimed amount on their websites. Investors who claim the unclaimed amount during a period of three years from the due date will be paid initial unclaimed amount along with the income earned on its deployment. Investors who claim these amounts after three years will be paid the initial unclaimed amount along-with the income earned on its deployment till the end of the third year. After the third year, the income earned on such unclaimed amounts will be used for the purpose of investor education. Today, most investors opt to receive their dividend or redemption proceeds directly in their bank accounts through electronic clearing service (ECS). But there are instances where the dividend or redemption cheques return to the fund house because investors have not updated their address with the fund house.

The Budget 2016 did not have much for individual taxpayers and investors. There were no changes in Income Tax slabs, no extra tax deductions on investments, and no change in long-term capital gains tax on equity.  In fact, it did not have any specific provisions for mutual fund investors.