FUND FULCRUM

August 2016

Investors pumped in a staggering over Rs 1 lakh crore into various mutual fund schemes in July 2016, with liquid and income segments contributing most to the inflow. This follows an outflow of Rs 21,535 crore in June 2016. According to data from the Association of Mutual Funds in India (AMFI), investors poured in a net of Rs 1,02,720 crore in mutual fund schemes in July 2016. With this, total net inflow in mutual fund schemes has crossed over Rs 1.93 lakh crore in April-July of 2016-17. In comparison, fund houses had witnessed an inflow of Rs 2.05 lakh crore in the same period a year ago. The liquid or money market funds category saw Rs 54,212 crore being brought in July 2016. Income funds too saw net inflows of Rs 43,913 crore. However, equity and equity-linked schemes saw an inflow of Rs 2,500 crore. The huge inflow has also pushed the asset base of mutual fund industry, comprising 42 active players, to an all-time high of Rs 15.2 lakh crore in July 2016, from Rs 13.81 lakh crore in the preceding month. 

According to data from the Association of Mutual Funds in India on total investor accounts with 43 fund houses, the number of folios rose to 48,924,391 at the end of June quarter from 47,663,024 in March-end, a gain of 12.61 lakh. This is on top of an addition of 59 lakh folios in 2015-16 and 22 lakh in 2014-15. The equity category witnessed an addition of over 6 lakh investor folios at 3.66 crore during the quarter ended June 2016. Mutual funds have reported a net inflow of Rs 9,479 crore in equity schemes during the period under review. In the last two years, investor accounts increased mainly due to robust contribution from smaller towns. Growing participation from retail investors, especially from smaller towns, and huge inflows in equity schemes have helped in lifting the overall folio count.

Contribution of small towns -- known as beyond the top 15 cities (B15) -- to mutual funds' asset base in India has surged 19% to Rs 2.02 lakh crore in last fiscal. Mutual funds' assets under management (AUM) from B15 grew from Rs 1.7 lakh crore in March 31, 2015 to Rs 2.02 lakh crore at the end of March this year, according to SEBI data. A major portion of the products sold within this fast growing pocket of the industry are equity-linked unlike the top 15 space, where institutional dominance tilts the balance towards fixed income products. The growth in the asset base could be attributed to a positive outlook in domestic markets along with well-timed initiatives by SEBI to re-energise the mutual fund industry. During 2015-16, SEBI has taken a slew of regulatory reforms including introduction of mandatory stress testing of liquid fund and money market mutual fund schemes; modification of product labelling; tightening of exposure limits on investments by mutual funds and enhancement of scheme related disclosures. Besides, the number of folios or investors' accounts in B15 cities rose by 16.1% to 2.09 crore during the period under review. Currently, the overall folio base stands at 4.92 crore. B15 cities are those which are beyond these top 15 cities New Delhi (including NCR), Mumbai (including Thane & Navi Mumbai), Kolkata, Chennai, Bengaluru, Ahmedabad, Baroda, Chandigarh, Hyderabad, Jaipur, Kanpur, Lucknow, Panjim, Pune and Surat. To increase penetration and popularise mutual fund products in rural areas, SEBI had in 2012 mandated fund houses to go to 'B15' cities. At present, all the mutual fund houses together manage assets worth over Rs 15 lakh crore.

Piquant Parade

Yes BANK, India's fifth largest private sector bank, has received an in­ principle approval from the Securities & Exchange Board of India (SEBI) to sponsor a Mutual Fund and to setup an Asset Management Company (AMC), and a Trustee Company. The AMC and the Trust Company shall be set up as wholly owned subsidiaries of YES BANK Limited. This is further to the Reserve Bank of India (RBI) approval granted to YES BANK in October 2015. The Bank has already identified senior leadership and technology architecture to establish this business, and will commence operations within 12 months. The Asset Management Company (AMC) will channelize the savings of retail, corporate, and institutional investors in equity and debt capital markets by leveraging YES BANK's Knowledge Banking expertise. This will complement YES BANK's retail liabilities strategy, and also allow the AMC to leverage the bank's 'DIGICAL' distribution network for customer acquisition, and provide customers a seamless experience for their investments & savings solutions. The bank will simplify and integrate "manufacturing to distribution" of equity and debt investment products for all its customers.The AMC will further strengthen YES BANK's expertise in wealth management solutions, debt  capital markets and gain from its significant and growing customer base & distribution network, and overall execution expertise, to build  a large and profitable fund management franchise.

Regulatory Rigmarole

SEBI has issued a circular which states that AMCs will have to obtain a certification from a scrutinizer on the votes cast by them on behalf of unit holders. This certification has to be submitted to the trustees and also disclosed in the AMC annual report and website. So far, AMCs were required to obtain auditor's certification on the voting reports disclosed by them on a quarterly basis. The votes need to be certified by a scrutinizer under Companies (Management and Administration) Rules, 2014. This scrutiniser can be a chartered accountant, cost accountant, company secretary, or an advocate. SEBI has also asked the AMC Board and trustees to take an active role in making sure that AMCs vote on important decisions of their investee companies. “Board of AMCs and trustees of mutual funds shall be required to review and ensure that AMCs have voted on important decisions that may affect the interest of investors and the rationale recorded for vote decision is prudent and adequate. The confirmation to the same, along with any adverse comments made by the scrutinizer, shall have to be reported to SEBI in the half-yearly trustee reports,” states the SEBI circular. SEBI has also asked AMCs to submit the soft copy along with printed scheme information document (SID) seven days before launching a scheme. Currently, AMCs submit SID to SEBI two days prior to launching a scheme. The circular is applicable with immediate effect.

SEBI has issued a circular in which it has allowed fund houses to increase exposure in housing finance companies (HFCs) from 5% to 10% of the net assets of the scheme. The circular is applicable with immediate effect. “Presently, the guidelines for sectoral exposure in debt oriented mutual fund schemes put a limit of 25% at the sector level and an additional exposure not exceeding 5% (over and above the limit of 25%) in financial services sector only to HFCs. In light of the role of HFCs especially in affordable housing space, it has now been decided to increase additional exposure limits provided for HFCs in financial services sector from 5% to 10%,” states SEBI circular. SEBI has clarified that such securities have to be rated AA and above and these issuer HFCs are registered with National Housing Bank (NHB). However, the total investment in HFCs cannot exceed 25% of the net assets of the scheme.

Mutual fund distributors can now register themselves on BSE StAR MF platform online. This service has commenced from August 9, 2016. Thus, physical enrollment is now terminated. Currently over 2750 schemes of 39 AMCs are available on BSE StAR MF platform. BSE StAR MF has around 1,400 registered distributors. BSE StAR MF is a browser based automated online order collection system which can be accessed through web from anywhere. Distributors can initiate a number of transactions like invest, redeem, and start a SIP through this platform on behalf of their clients. It can be accessed via PDAs, tabs, laptops, or personal computer. Earlier this month, the exchange had introduced systematic withdrawal and systematic transfer plans.

AMFI is likely to approach government once PwC submits its assessment report on the impact of GST on the mutual fund industry. Earlier in July 2016, AMFI had organized a presentation on the model GST law through PwC for AMFI members. The report highlighted the implications of the proposed model GST law for the mutual fund industry. The consulting firm has offered to assist AMFI in conducting an impact assessment and also in drafting a representation to the government in the matter. While operations and procedural modalities are still awaited, there are some concerns about its impact on the mutual fund industry. One such concern is regarding requirement of state specific registration and compliance. The current Bill says that the service tax has to be paid at a place where it has been consumed. That means, both AMCs and distributors will have to register themselves with the service tax department of the respective states. As a result, the cost of compliance may go up. Another key issue for the industry is inclusion of securities in the definition of goods proposed by the Bill. Currently, there is no service tax on securities as it does not come under consumable goods.

SEBI is considering allowing the purchase of mutual funds using digital wallets, or e-wallets, in an effort to expand access to such investment products. SEBI is in talks with the Reserve Bank of India (RBI) to frame regulations allowing such transactions. RBI norms allow customers to conduct online transactions of up to Rs.10,000 through e-wallets without going  through  any know-your-customer (KYC) process. For transactions of more than Rs.10,000 and up to Rs.1 lakh, a KYC process is mandatory for e-wallet users. At present, e-wallets do not allow for transactions greater than Rs.1 lakh. But all mutual funds are mandated to be KYC-compliant. A decision to allow purchase of mutual funds using e-wallets will be another step towards building a cashless economy. Financial institutions and financial technology companies are pushing the use of the Aadhaar-enabled e-KYC process, wherein the identity and address of an investor is verified using the ID number issued by the Unique Identification Authority of India or UIDAI. That would do away with reams of paperwork that made investing in financial products difficult and time consuming. According to a report compiled and released by Boston Consulting Group and Google, the Indian digital payments market is set to grow by 10 times in the next four years to $500 billion, or 15% of the country’s gross domestic product. By 2020, the country’s internet user base will reach 500 million, and half of them will make digital transactions.