FUND FULCRUM

June 2016

Mutual fund managers have pumped in nearly Rs 38,000 crore into the debt market in the first two months (April-May) of the current fiscal, largely on the back of increased participation from retail investors. Besides, the fund managers invested a net amount of Rs 6,500 crore in equity markets during the period under review. According to latest data with markets regulator SEBI, equities witnessed a net outflow of Rs.575 crore in April 2016, while a net inflow of Rs.7,149 crore was seen in May 2016, resulting in a net inflow of Rs.6,573 crore. This comes on the top of more than Rs.64,000 crore invested in the entire past fiscal. Fund houses are upbeat about the overall inflows in equity and debt markets for the current financial year (2016-17). Increased participation from retail investors is at work for the inflows in the debt market. As per data released by the capital markets regulator, the Securities and Exchange Board of India (SEBI), mutual fund managers invested a net sum of Rs 35,523 crore in the debt market in April 2016 and another Rs 2,317 crore in May 2016, taking the total fund mobilisation to Rs 37,839 crore in the two months.

Investors have pulled out more than Rs 58,000 crore from various mutual fund schemes in May 2016 on account of huge outflow from money market and gilt funds. In comparison, a total of Rs 243 crore was invested in May 2015. The outflow was mainly due to withdrawal of money from liquid or money market and gilt funds. According to data from the Association of Mutual Funds in India, investors withdrew a net Rs 58,185 crore from mutual fund schemes in May 2016 as against an inflow of Rs 1.7 lakh crore in the preceding month. Generally, liquid funds witness heavy outflow towards the end of the March and the trend gets reversed in April as banks and corporates reinvest the surplus, which they had withdrawn to pay their financial and advance taxes. The liquid or money market segment witnessed Rs 69,399 crore being pulled out last month while Rs 837 crore was taken out from gilt funds. However, inflows continued in equity schemes on strong retail participation. The category saw an infusion of Rs 4,721 crore. Overall, the asset base of the country's fund houses dropped to Rs 13.81 lakh crore in May 2016, from Rs 14.22 lakh crore in April 2016.

Driven by addition in equity fund folios, mutual fund houses registered a surge of more than 7.85 lakh investor accounts in the first two months (April-May) of the current fiscal, taking the total tally to 4.84 crore. This is on top of an addition of 59 lakh folios in 2015-16 and 22 lakh in 2014-15. In the last two years, investor accounts increased mainly due to robust contribution from smaller towns. According to data from AMFI on total investor accounts with 43 fund houses, the number of folios rose to 48,448,079 at the end of last month from 47,663,024 in March 2016, a rise of 7.85 lakh. Growing participation from retail investors, especially from smaller towns and huge inflows in equity schemes, have helped in increasing the overall folio counts. The equity category witnessed an addition of over three lakh investor folios to 3.64 crore in the first two months of the current fiscal.

Piquant Parade

BSE StAR MF has extended its online payment services for demat mode of transactions to payment gateways – direct mode, payment gateways – nodal banks, one-time mandate and cheque collection services for mutual fund distributors, apart from existing NEFT (National Electronic Fund Transfer) and RTGS (Real Time Gross Settlement) collection service.

To remain relevant and ahead of time, Prudent has recently launched a portal www.fundzbazar.com for its IFAs. It is a step towards moving from investing to e-investing. The new platform allows sub-brokers to acquire clients online through the unique link. For instance, they can send a mailer to their database with a provided link. Once the investor clicks and invests through this link, the sub-brokers ARN/EUIN code will be automatically captured in the system. Similarly, they can use this link on social media sites. This ensures that they will get the commissions for all the investments coming through these clicks from investors. The platform provides login access to both distributors and their clients. Distributors can initiate transactions on behalf of their clients, which needs to be approved by investors. Unique features offered by FundzBazar to IFAs include 1. Automatic Mapping of Existing Clients - If any existing client of IFA comes for registration on portal, it will be mapped automatically to that partners based on his PAN No. in Prudent database. 2. Partner Initiated Transaction Facility – It is a facility where partner can initiate any transaction for his client. Client will receive mail for transaction initiated by his partner which a client can either accept or reject. 3. Partner Code Embedded for Digital Marketing - Partner Code embedded customized marketing material for various digital marketing including email, social media etc. 4. Partner Co-Branding - Various material for co-branding which can be used for What’sApp, email marketing, etc.  Investors can also invest on their own. All they need to do is to sign up by filling in their details and can start investment through net banking, Mandate, and RTGS. For Mandate, investor has to provide duly signed NACH mandate. FundzBazar is a simple to operate online investment platform, which provides many extraordinary features. Apart from investing and redeeming, it also provides features like Step-up SIP, Trigger Facility, WRAP Portfolios, Goal Planner, Goal based investing etc. Most important part is that Prudent Partner can execute transaction for any of the above-mentioned features for his/her clients. The platform aims to help sub-brokers cut down paperwork and manage their tasks more effectively. The portal allows the company’s partners to make client goals, generate reports, initiate transactions, analyze funds and do much more. As of now, the portal only allows investments in mutual funds and fixed deposits and product suite will be expanded going forward. According to fundzbazar website, it will not charge any transaction fee from investors. However, investors will have to cough up a fee to use its premium advisory services like Financial Planning.

Regulatory Rigmarole 

AMCs cannot place restrictions on redemption requests of up to Rs. 2 lakh and the redemption restriction period should not exceed 10 days in three months. Following the Amtek episode, SEBI has come out with a fresh set of regulations which bars AMCs from placing redemption restrictions due to illiquidity of a specific security in the portfolio of a scheme arising from a poor investment decision. SEBI has said that AMCs can restrict redemptions only in the event of three circumstances – operational, liquidity, and market failure. The regulator has said that fund houses can place redemption restrictions in the event of a systemic crisis which constricts market liquidity. AMCs should have in place sound internal liquidity management tools for schemes. Restriction on redemption cannot be used as an ordinary tool in order to manage the liquidity of a scheme. Further, redemption restrictions can be placed in case of market failures/exchange closures or unexpected events related to political, economic, military, monetary or other emergencies. Also, redemption restrictions can be placed when there are operational issues which are unpredictable.  Existing schemes have to comply with this circular from July 1, 2016 while all new schemes launched from May 31, 2016 will have to follow the rules with immediate effect. Currently, fund houses can restrict redemptions in any scheme only after seeking approval from the Board of Directors of the AMC and the Trustees. The redemption restriction provisions are general in nature and do not specifically spell out the circumstances in which restriction on redemption may be applied; leading to discretionary disclosures and practices in the industry. SEBI has asked AMCs to disclose this information to investors prominently in the scheme related documents.

AMFI has requested SEBI to disclose distributors commissions only if investors insist on such disclosure. The trade body has recommended that such investors can submit a letter to the respective fund houses along with name of scheme and folio number to get the commission details of their distributors. Also, AMFI has requested SEBI that instead of disclosing both direct and regular plan TER, SEBI should allow AMCs to disclose the TER only of the plan under which the investor has invested. In a letter sent to SEBI, AMFI has recommended that only the TER of the plan should be carried in the Account Statement along with a footnote which among other things says, “In case you wish to know the amount of commission paid against your investment, please submit a request to the respective mutual fund, mentioning your folio number and the name of scheme.” AMFI further said, “For the investors’ perspective, the TER is the more relevant and pertinent rather than individual components thereof. Fungibility of TER is a clear indication of this. The extant regulations allow both direct and regular plans and the choice is with the investor. Hence, the disclosure of the amount of commission along with the TER of direct plan, after the investor has already taken an informed decision to invest in the regular plan, is not warranted. In any case, the regulations already mandate adequate disclosure before an investment is made. We also believe that displaying the TER of direct plan along with TER of regular plan is not warranted, unless the investor has investment in both direct plan and regular in the same folio.” AMFI has also requested SEBI to permit AMCs to disclose the TER of the scheme in the half-yearly statements instead of disclosing commissions in absolute terms. “It is suggested that instead of disclosing the amount of commission in absolute monetary terms in the half-yearly CAS, the AMCs may be permitted to disclose only the TER of the applicable plan in which the investors has invested.” AMFI had sent these recommendations to SEBI on May 27, 2016 and the market regulator is yet to respond to this request.   

Many fund houses are rushing to comply with the stringent Foreign Account Tax Compliance Act (FATCA) norms to meet the deadline on August 31, 2016. Earlier, CBDT had issued a circular in which it had asked fund houses to submit self-declaration of all the investors who had invested in mutual fund schemes between July 1, 2014 and August 31, 2015 to comply with FATCA regulations. The circular stated that failing to comply with the norms may attract closure of unreported accounts.  Fund houses are expected to submit the self-declaration forms by August 31, 2016. 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. Simply put, the legislation is meant to prevent wealthy US individuals from parking money overseas to avoid paying taxes. It is practically impossible to reach out to lakhs of investors and get their self-declaration certificates. A sizeable chunk of AUM from a few lakhs of investors comes under these norms. If the industry fails to comply with the norms before the deadline, it could affect the growth of the industry in a big way. Investors who have invested in mutual funds after August 31, 2015 are FATCA complaint since fund houses insist investors to submit a self-declaration form before initiating any transaction. In fact, all registrar and transfer agents have introduced online facility for distributors and investors to update their FATCA information.

India is home to 1.20 lakh ultra-high net worth individuals (UHNIs). In fact, India has the world’s fastest growing ultra HNIs population, according to ‘Winds of Change – wealth management reimagined’, a report jointly released by Cafemutual - EY at the Cafemutual Confluence: Wealth Management 2016 (CCWM 2016) event. A person with a minimum net worth of Rs. 25 crore is considered to be an ultra HNI. The report shows that these ultra HNIs have a combined wealth of close to Rs. 100 trillion or (Rs.1 crore billion) with investible surplus of Rs. 20 trillion. Further, the report reveals that 512 relationship managers are managing Rs. 2.8 trillion of 20,000 ultra HNIs. A rough calculation indicates that each relationship manager manages 40 ultra HNI clients. The silver lining of this insight is that only 3% of the total net worth of ultra HNIs across India is currently managed by advisors, implying a huge untapped opportunity for wealth managers. Over the next five to seven years, India is expected to stand-out as a growth story in terms of increasing wealth and will continue to drive increase in new wealth across the globe. According to industry estimates, the combined net worth of wealthy Indians is expected to rise to US$6t over the next five years. The rise in HNI population has been partly driven by e-commerce start-ups and rising income levels. First generation e-commerce entrepreneurs have also made a significant impact on the ultra-HNI (UHNI) landscape, which is a fast growing segment as well. In this context, this report is a goldmine of insights and knowledge, making it essential reading for wealth managers and all those who seek a better understanding of wealth management. Its coverage and articulation of the important developments in technology which are shaping the wealth management business gives us great clarity on the shape of things to come. In particular, its perspective on the hot topic of the day - robo-advisors is deeply insightful.