FUND FULCRUM

March 2017

Mutual fund industry's asset base rose to an all-time high of Rs 17.89 lakh crore at the end of February 2016, primarily on account of strong inflows in equity, income and money market segments. Besides, buoyant investor sentiment, growing participation from retail investors and phenomenal growth in systematic investment plans (SIPs) also helped in the growth of assets under management. The industry, comprising 43 active players, had average assets under management (AUM) of Rs 17.37 lakh crore at the end of January 2017, according to the latest data of the Association of Mutual Funds in India (AMFI). The industry AUM had crossed Rs 10 lakh crore in May 2014, and it is expected to reach Rs 20 lakh crore this year. Overall inflow in mutual fund schemes stood at Rs 30,273 crore in February 2017. Of this, income funds, which invest in a combination of government securities saw Rs 10,864 crore coming in while liquid funds or money market category, which invest in cash assets such as treasury bills, certificates of deposit and commercial paper for short investment horizon, witnessed an infusion of Rs 8,227 crore. Further, equity and equity-linked saving schemes saw an infusion of Rs 6,462 crore. With the latest inflow, total mobilisation in equity schemes has reached Rs 62,151 crore in April-February of the current financial year. The robust inflow has pushed up assets under management (AUM) of equity mutual funds to Rs 4.96 lakh crore at the end of February 2017, from Rs 3.86 lakh crore at the end of March 2016. However, gilt and gold exchange-traded funds (ETFs) witnessed a pull out of Rs 772 crore and Rs 46 crore, respectively during the period under review.

According to the latest SEBI data, the mutual fund industry has witnessed an addition of over 7 lakh folios in February 2017. The AUM of the mutual funds industry rose to an all-time high of Rs.17.89 lakh crore in February 2017. This growth is largely because of increase in equity folios. SEBI data shows that equity funds have added 4 lakh folios in February 2017. The folio count went up from 3.15 crore in January 2017 to 3.19 in February 2017. Experts attributed this to rising number of SIP accounts. The MF industry has received inflows of Rs.4300 crore through SIP of which 99% is in equity funds. In February, equity funds have received inflows of 5465 crore. ELSS funds have also witnessed a good traction in February 2017 due to tax season. The category has added over 2 lakh folio this month. AMFI data shows that ELSS has received net inflows of close to Rs.1000 crore in February 2017. Balanced funds continued the positive momentum by adding 1.09 lakh folios.  The category received net inflows of Rs.4562 crore in February 2017. ETFs, which track the equity indices, witnessed a drop in its folio count this month. The category has lost close to one lakh folios in February 2017 largely because of profit booking. Barring ETFs, all other categories either saw a growth or remained flat in terms of folio count. Equity mutual funds witnessed an addition of around 41 lakh investor accounts, or folios, in the current fiscal so far. Overall, the mutual fund industry has been witnessing a continuous increase in its folio count. In order to boost mutual fund penetration, many awareness initiatives have been taken up by the fund houses. 

Piquant Parade

Financial services major, IDFC, has decided to buy Natixis Global Asset Management's 25 percent stake in IDFC Mutual Fund for over Rs 244 crore. The shares will be purchased through IDFC Financial Holding Company, a wholly-owned subsidiary of IDFC. IDFC Financial Holding Company holds 75 percent stake of IDFC Asset Management Company (AMC) and IDFC AMC Trustee Company. The remaining 25 percent stake is held by Natixis. In December 2010, Natixis had entered into a share purchase agreement to pick stake in IDFC AMC and IDFC AMC Trustee.

As part of the agreement, there was a requirement that both shareholders would review the partnership at the end of five years. Following a review clause in the agreement, IDFC "agreed to acquire through IDFC Financial Holding Company the balance stake (about 25 percent) in IDFC AMC and IDFC AMC Trustee from Natixis Global Asset Management", the financial major said in a filing. It has agreed to buy the stake for Rs 244.24 crore. The deal, subject to regulatory approvals, is expected to conclude by the end of March 2017.

Regulatory Rigmarole

Issuing a clarification on its latest circular in which SEBI has allowed fund houses to take an exposure to REITs and InvITs, the market regulator has directed them to provide an exit option to the investors if they incorporate such changes in the investment mandate of the fund. That means, investors who wish to discontinue the fund due to exposure of REITs and InvITs can redeem their investment without any exit load. However, SEBI has given a window of 15 days from the date of announcement to avail this benefit. SEBI has said, “Any existing scheme intending to invest in units of REITs/InvITs shall abide by the provisions of regulation. For investment  in  units  of  REITs/InvITs  by  an  existing  mutual  fund  scheme, unitholders of the scheme shall be given a time period of at least  15 days for the purpose of exercising the exit option.” Earlier this month, SEBI had allowed fund houses to invest up to 10% of their corpus in REITs and InvITs, adding that only 5% of the corpus can be invested in the units of a single issuer. This has come into immediate effect.

SEBI has expressed concerns over a few mutual fund houses allowing investors the option of instant withdrawal from their liquid schemes. In the recent past, a few fund houses have begun offering retail investors an option to withdraw upto Rs 2 lakh in a day. Investors who opt for this facility get the money in their bank accounts via the IMPS (immediate payment service) route. The regulator feels instant redemption is akin to a bank account dispensing money on demand. Currently, Reliance Mutual Fund, ICICI Prudential Mutual Fund and DSP BlackRock Mutual Fund offer instant redemption facility for their liquid funds, while Birla Sun Life Mutual Fund launched instant redemption facility under Birla Sun Life Cash Plus Fund two weeks ago.

The capital market regulator, Securities and Exchange Board of India, is mulling a review of performance benchmark index for mutual fund schemes. SEBI is contemplating linking mutual fund schemes to total returns indices for benchmarking equity mutual fund schemes. Currently, equity schemes are benchmarked against primary indices provided by exchanges, such as Sensex and Nifty, which are typically principal returns indices. SEBI’s argument in linking mutual fund plans to total returns index is that fund companies, while computing net asset value of some schemes, should take into consideration the valuation of securities the scheme holds as well as corporate actions such as dividends. For instance: If an equity scheme claims to have returned 10 percent, versus 8 percent returns for the benchmark Nifty, the Nifty's return does not include the 1.5-2 percent dividend yield that the index may have clocked. SEBI now wants to change the methodology to calculate NAV and bring them in line with global standards that are used to assess fund returns. As per Global Investment Performance Standards or GIPS, all portfolios must be valued in consonance of fair valuation. In 2012, SEBI had amended regulations to incorporate the fair valuation norms, which prescribes that ‘in order to ensure that there is fair treatment to all investors, including prospective investors, the portfolio should be valued on the principles of fair valuations and it should be reflective of the realizable value of the assets’. The SEBI regulations also prescribed that a uniform method should be used to calculate total returns. However, industry experts have a different argument on the proposal. They say that while linking fund schemes to a total returns index formula may drive it from principles to a prescriptive approach, it may not be suitable for all market conditions. In a total returns index, the assumption is that the returns figure is a measure after all dividends are re-invested. However, the practice of dividend distribution is not uniform across all equity mutual fund schemes. A few schemes also have the dividend option while a few only have growth option. A total returns index may not be a uniform measurement for both the dividend and growth schemes. While total return index will more aptly represent portfolio stocks that regularly issue dividends, some Nifty stocks may not issue dividends at all, even as a total return index assumes all stocks issue dividends. If the regulator decides to go ahead with Total Return Index, it needs to address this dichotomy to avoid confusion among investors. Further, it remains to be seen whether NSE and BSE will make a total returns index on Nifty and Sensex public and transparent on daily basis to enable the fund industry have a transparent benchmark. In the 2012 reform of mutual fund regulations, when realizable value of assets was installed as the fair value principle, this was the over-riding principle for all valuations. Thus, re-prescribing a standard formula will take back to prescription days again rather than the principle based days (Principle based regulation is high on the agenda of International Organisation of Securities Commission in developed markets). To conclude, if a total return index is prescribed, the actual total returns for each equity portfolio may be different. So, will a single formula based—Total Returns Index do justice to all schemes in that category.

Mutual fund industry is likely to double its investor base and register growth in the next three years. The industry is betting big on investor awareness initiatives like Mutual Fund Day to achieve the goal. The mutual fund industry has seen a moderate growth in investor folios-from 4.7 crore to 5.3 crore in last five years-while retail participation has shown a healthy growth with overall MF AUM touching Rs 18 lakh crore at present from Rs 3.5 lakh crore in 2007. The Mutual Fund Day initiative, launched by Reliance Mutual Fund, is amongst the biggest investor awareness initiatives to encourage investments in mutual funds. As per industry estimates, less than 3 percent of the country's population invests in mutual funds. With recent policy changes and the revived investor interest in the mutual fund  sector, the industry will cross the Rs 20 lakh crore in AUM faster than expected. Currently the mutual industry is getting Rs 4,000 crore every month only from SIPs, and we see this number rising significantly in future.