Monday, March 28, 2016


March 2016

Inflows into equity funds have dried up substantially as the Sensex went on a free fall in the run up to the Budget 2016. The latest AMFI data shows that the pace of inflows into equity funds, including ELSS, has come down substantially, especially during the last three months. Equity funds received net inflows of Rs. 2,522 crore in February 2016, down from the peak of over Rs. 12,000 crore net inflows received in June 2015. The AUM of equity funds fell from Rs. 3.84 lakh crore in January 2016 to Rs. 3.54 crore in February 2016 as the Sensex fell 8% last month. Inflows into equity ETFs too slowed down in February 2016 with net inflows of Rs. 1,190 crore. The decrease in inflows in equity funds can be attributed to the recent volatility in the market. However, due to sustained inflows through SIPs, net inflows in the category are still positive. Riding high on the optimism surrounding the market, investors had poured in Rs. 8,000 crore on an average during April-Nov 2015 in equity funds. This has helped the industry garner close to Rs.75,000 year to date.
Balanced funds
Balanced funds are the flavor of the season. The AUM in this category has jumped by 45% from Rs. 27,015 crore in April 2015 to Rs.39,104 crore in February 2016. In February 2016 too, balanced funds received net inflows of Rs. 941 crore.
ELSS inflows saw a moderate growth with the tax season coming to an end in a few days. The category saw net inflows of Rs. 888 in February 2016 as compared to inflows of Rs.786 crore in January 2016. ELSS funds manage Rs.36,409 crore AUM as on February 2016, which is 3% of the total industry AUM.
Other categories like income funds, gilt funds, gold ETFs, and overseas fund of funds witnessed outflows in February 2016.
The only category which saw healthy inflows in February 2016 was liquid funds which received net inflows of Rs. 20,039 crore.
All in all, the industry AUM dipped marginally by 0.85% from Rs. 12.73 lakh crore in January 2016 to Rs. 12.64 lakh crore due to mark-to-market losses in equity funds.

ICICI Prudential Mutual Fund has overtaken HDFC Mutual Fund to become the largest fund house in India. According to Value Research data, as on February 29, 2016 ICICI Prudential Mutual Fund’s assets stood at Rs 1.74 lakh crore against HDFC Mutual Fund’s Rs 1.7 lakh crore. In April 2015, ICICI Prudential Mutual Fund toppled Reliance Mutual Fund to become the third-largest fund house in terms of assets under management. What helped ICICI Prudential Mutual Fund shore up its assets is its fund performance across the board, particularly its consistently growing equity schemes. According to Value Research data, Reliance Mutual Fund is the third largest fund with assets of Rs 1.54 lakh crore, followed by Birla Sun Life Mutual Fund (Rs 1.31 lakh crore), and SBI Mutual Fund (Rs 1.06 lakh crore).

Overall, mutual funds witnessed an addition of 53 lakh investor accounts in the current fiscal, taking the total number of folios to Rs 4.7 crore. For a long time, investor accounts were not going beyond 2 crore. Out of 53 lakh folios added this financial year, 25 lakh are from towns beyond top-15 cities. Growing participation from retail investors, especially from small towns, huge inflow in equity schemes and several measures taken by SEBI has led to sharp increase in folios. The regulator has given extra incentives for those expanding into smaller cities. Mutual funds have reported net inflows of Rs 75,000 crore in equities in the current financial year, much higher than Rs 71,000 crore witnessed in the preceding fiscal. Interestingly, smaller towns have contributed 44% of such inflows. However, Foreign Portfolio Investors (FPIs) have pulled out more than Rs 27,000 crore from the stock markets in the current fiscal. This indicates that mutual funds are emerging as a new and very strong counterbalance to FPIs.

Piquant Parade

Reliance Capital has completed the transaction for receipt of approximately Rs 1,200 crore (US$ 180 million) from Nippon Life Insurance for additional 14% (from existing 35% to 49%) stake sale in Reliance Capital Asset Management (RCAM). Nippon Life Insurance, a Fortune 500 company and one of the largest life insurers in the world, has become a co-sponsor of Reliance Mutual Fund, along with Reliance Capital, and will own 49% in Reliance Capital Asset Management. The Board of Directors of Reliance Capital Asset Management approved the transfer of an additional 9.57% stake to Nippon Life Insurance, with the balance 4.43% to be transferred in the next couple of weeks. The transaction pegs the valuation of Reliance Capital Asset Management at Rs 8,542 crore (US$ 1.3billion), the highest valuation till date for any asset management company in the country. In line with the new shareholding, the name of Reliance Capital Asset Management would also be changed to Reliance Nippon Life Asset Management.

DHFL Pramerica Mutual Fund has completed its acquisition of Deutsche Mutual Fund. This acquisition will add Rs. 24,786 crore (AUM of Deutsche mutual fund in December 2015) to the kitty of DHFL Pramerica Mutual Fund. Currently, DHFL Pramerica is managing Rs. 2,163 crore as on December 2015. The deal was finalized for nearly Rs. 400 crore. The acquisition will catapult DHFL Pramerica to 13th position in the AAUM pecking order.The fund house has appointed former CEO of Deutsche Mutual Fund Suresh Soni as the new CEO of DHFL Pramerica Mutual Fund. Suresh, a Chartered Accountant and a Cost Accountant, has over 23 years of experience in the mutual fund industry, including several years as a fund manager and CIO of Deutsche Mutual Fund.

Edelweiss Asset Management Limited (EAML) has executed an agreement to acquire the onshore fund schemes managed by JP Morgan Asset Management India Private Limited (JPMAM), including its India based onshore mutual fund business and the international fund of funds, subject to regulatory approvals. The assets under management (AUM) of JPMAM stands at approximately Rs. 7081 crore, while the combined AUMs of both entities amount to approximately Rs. 8757 crore (as on Dec 31, 2015). Along with the schemes, EAML is committed to absorbing majority of employees of JPMAM ensuring business continuity as well as a platform for enhanced growth across the Edelweiss Group. Given the complementary business advantages and the significant business that JPMAM has built, this acquisition is a natural win for both Edelweiss and JP Morgan. This acquisition will give further impetus to EAML and move it to the next level of growth.
Regulatory Rigmarole

The Budget 2016 has proposed to introduce Krish Kalyan cess of 0.5% on service tax for the welfare of farmers. That means, the gross service tax burden on distributors commission is likely to go up by 50 basis points i.e. from 14.5% to 15%. The cess will come into force with effect from June 1, 2016. Input tax credit of this cess will be available for payment of this cess. Earlier in November 2015, the government had imposed 0.5% Swachh Bharat cess on service tax which had raised the service tax from 14% to 14.5%.

The Budget 2016 has proposed that AMCs can also merge multiple plans under one scheme. Such merger of plans within a scheme will be exempted from capital gains tax. The Budget 2015 had provided tax neutrality on transfer of units of mutual fund for scheme mergers only. Thus, many AMCs were awaiting clarity on whether merging multiple plans within a scheme would also attract capital gains tax. Now, there will be more consolidation of multiple plans within a scheme in the industry.  It may be recalled that in 2012, SEBI had asked fund houses to do away with multiple plans within a scheme. The regulator had asked AMCs to accept fresh subscriptions in existing schemes with multiple plans based on the amount of investment (i.e. retail, institutional, super-institutional, etc.) only under one plan. Other plans were supposed to be continued till the existing investors remain invested in the plan. Fund houses charge a lower expense ratio under institutional plans and a slightly higher TER under regular plans, since regular plans need to be sold through distributors by paying commissions which entails higher costs. The minimum investment amounts of institutional and regular plans differ. Typically, institutional plans accept Rs. 1 lakh as initial investment which can go up to Rs. 5 crore depending on the scheme. After the budget clarification on capital gains tax, many AMCs are expected to merge multiple plans within a scheme.

The government has proposed to exempt service tax levied on small mutual fund distributors earning a commission of less than Rs. 10 lakh annually. However, agents earning more than the threshold limit will have to pay a service tax of 14%. The move is aimed at increasing retail participation in the mutual fund industry. As per Budget document for 2016-17, the services offered by mutual fund agent/distributor to a Mutual Fund or AMC are being made taxable under forward charge with effect from April 1, 2016 so as to enable the small sub-agents down the distribution chain to avail small-scale exemption having a threshold turnover of Rs. 10 lakh per year, subject to fulfilment of other conditions prescribed. There are around 5,000 active mutual fund distributors and only 1,200 of them earn more than 10 lakh annually.

A relief for potential investors in real estate investment trusts (REITs) has proposed a tax pass-through status for dividend income for investors. This comes through in the form of an exemption from dividend distribution tax (DDT) for REITs. REITs are income producing real estate investments under one trust. The investments are backed by physical assets and income arising through these assets is distributed on a regular basis to investors. In 2014, Securities and Exchange Board of India cleared the norms for launching REITs. Although these have not been launched in India, the pass-through status will help in taking this further.
SEBI has asked AMCs to disclose the actual commission paid to distributors in the half-yearly consolidated account statements (CAS) issued to investors. This commission figure will include all direct monetary payments and other payments made in the form of gifts/rewards, trips, event sponsorships etc. by AMCs to distributors, according to a SEBI circular. “The amount of actual commission paid by AMCs to distributors (in absolute terms) during the half-year period against the concerned investor’s total investments in each MF scheme,” states the SEBI circular. In addition to commissions, AMCs will also have to publish the scheme TER in percentage terms for the half-year period for both direct and regular plans. “Such half-yearly CAS shall be issued to all MF investors, excluding those investors who do not have any holdings in MF schemes and where no commission against their investment has been paid to distributors, during the concerned half-year period,” stated the SEBI circular. Further, the CAS will also mention the total purchase value of investment in each scheme. The circular is effective October 1, 2016.

SEBI has asked fund houses to disclose the remuneration of CEOs, CIOs, operating officers, sales head and other officials earning over Rs.60 lakh per annum. This will come into effect from April 1, 2016. According to a circular, SEBI has said, “With the underlying objective to promote transparency in remuneration policies so that executive remuneration is aligned with the interest of investors, MFs/AMCs shall make such disclosures.” In addition, the market regulator has directed AMCs to segregate the disclosure of their average assets under management based on equity and debt. In addition, fund houses will have to disclose rate of growth over the last three years. Last year, SEBI is said to have examined the compensation structure of the key AMC personnel including fund managers operating from abroad for the last three years.

In a bid to improve transparency, SEBI has asked AMCs to put additional disclosures in scheme information document (SID) and key information memorandum (KIM) of existing as well as new schemes, according to a SEBI circular. Here are the additional disclosures which will be a part of all SIDs/KIMs: The tenure for which the fund manager has been managing the scheme along with the name of the fund manager, scheme’s portfolio holdings (top 10 holdings by issuer and fund allocation towards various sectors), along with a website link to obtain scheme’s latest monthly portfolio holding, expense ratio of underlying schemes in case of fund of funds, scheme’s portfolio turnover ratio. Additional disclosures which will be a part of SID: The aggregate investments made by AMC’s board of directors, fund manager, key managerial personnel in all schemes, illustration of impact of expense ratio on scheme’s returns (by providing simple examples). Further, AMCs will be required to publish separate SID/KIM for each MF scheme on their websites. Also, AMCs will have to have a dashboard on their websites which will provide the details of scheme performance. They will have to disclose the scheme’s AUM, investment objective, expense ratio, portfolio details, scheme’s past performance, among other things. AMCs will have to provide this data in a comparable, downloadable (spreadsheet) and machine readable format, said the SEBI circular. The circular is effective May 1, 2016.

SEBI has instructed fund houses to reduce reliance on rating agencies while investing in debt instruments. In addition, the market regulator has asked fund houses to set up in-house credit risk assessment mechanism before investing in fixed income securities. This will come into effect from May 1, 2016. According to a circular, SEBI has said, “In order to ensure that MFs/AMCs are able to carry out their own credit assessment of assets and reduce reliance on  credit  rating  agencies,  all  MFs/AMCs  are  required  to  have  an  appropriate  policy  and  system  in  place  to  conduct  an  in-house  credit  risk  assessment/due  diligence before investing in fixed income products.­­­”

SEBI has directed fund houses to pass on the interest accrued during the NFO period to investors. Mutual funds are allowed to deploy NFO proceeds in Collateralized Borrowing and Lending Obligation (CBLO) before the closure of NFO period. CBLO is a money market instrument, which means that the scheme earns interest from this account till the closure of NFO period on a daily basis. However, AMCs cannot charge management fee or advisory fee during this period. In a circular, SEBI has said, “The appreciation received from investment in CBLO shall be passed on to investors. Further, in case the minimum subscription amount is not garnered by the scheme during the NFO period, the interest earned upon investment of NFO proceeds in CBLO shall be returned to investors, in proportion of their investment, along with the refund of the subscription amount.” The circular comes into effect from April 1, 2016.

At a time when foreign fund houses are exiting Indian asset management business, a few domestic players are gung ho about starting mutual fund business. SEBI’s latest data on ‘Status of Mutual Fund Applications’ as on March 1, 2016 shows that Yes Bank, Fortune Financial Services & Credit Capital, Trust Investment Advisors and Karvy Stock Broking are awaiting approval from SEBI to launch mutual fund business in India.

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