Monday, April 24, 2017

April 2017

The Assets Under Management (AUM) of the Indian mutual fund industry witnessed an exceptional growth of 42% in the FY2017. According to Association of Mutual Funds in India (AMFI) data, AUM grew from Rs. 12.3 lakh crore in March 2016 to Rs. 17.5 lakh crore in March 2017. The Quarterly Average Assets Under Management (QAAUM) also registered a QoQ growth of 8% in the last quarter of FY2017. The growth can be attributed to strong retail participation and overall market gains. FY2017 turned out to be a very good year for the mutual fund industry with investors pouring in Rs. 3.4 lakh crore across categories. The net inflows in liquid, income and equity (including Equity Linked Savings Schemes or ELSS) categories have been to the tune of Rs. 1.2 lakh crore, Rs. 0.96 lakh crore, and Rs. 0.70 lakh crore, respectively. Equity funds (including ELSS) witnessed net inflows of Rs. 8,216 crore in March 2017 compared with Rs. 6,462 crore in February 2017. In March 2017, the assets of Equity funds (including ELSS) reached an all-time high of Rs. 5.4 lakh crore. The category witnessed MoM jump of 4.5% and YoY growth of 40.7%. In FY2017, total inflow in the category has been Rs. 70,367 crore with net inflows in every month. Retail participation in the equity category is high because of the popularity of the Systematic Investment Plan (SIP) route. According to AMFI, the mutual fund industry added about 6.2 lakh SIP accounts every month on an average during FY2017 (till February 2017), with an average ticket size of Rs. 3,100 per account.
The total folio count at the end of March 2017 stood at 5.54 crore, 1.9% higher than February 2017, according to data from the Securities and Exchange Board of India (SEBI). In FY2017, the mutual fund industry added 77.4 lakh new folios or around 6.4 lakh new folios every month despite volatility in overall market conditions. March 2017 saw the highest number of folios added in a month in FY2017 at 10.1 lakh. The growth was driven by the ELSS category that added 3.2 lakh folios in the month. Out of the 10.1 lakh folios, 7.4 lakh came from the equity (including the ELSS) category. The folio count for the liquid category more than doubled in FY2017, suggesting retail investors are looking at this route for surplus cash deposit.

SBI Mutual Fund saw the highest growth in its AUM in absolute terms. The fund house has added over Rs.16,000 crore to its kitty to reach 1.57 lakh crore AUM in March 2017 as against Rs.1.41 lakh crore in December 2016, a growth of 11%. HDFC Mutual Fund and Reliance Mutual Fund closely follow SBI in terms of AUM growth in absolute terms. Both the fund houses added over Rs.15,000 crore to their AUM kitty. In terms of size, fund houses like ICICI Prudential, HDFC, Reliance and Birla Sun Life still rule the roost with the highest recorded AUM for the last quarter at Rs.2.43 lakh crore, Rs.2.37 lakh crore, Rs. 2.11 lakh crore and Rs.1.95 lakh crore respectively. In terms of percentage, emerging fund houses like Mahindra, IIFL and BOI AXA have recorded growth of 37%, 33% and 23% respectively, largely on account of small base. The growth is largely due to sustained inflows in equity funds through SIP and mark to market gain. While fund houses have been receiving close to Rs.4000 crore each month through SIP, BSE Sensex has gained 11% in the last quarter of FY 2015-16. Thanks to increasing participation of retail investors in mutual fund through SIP and mark to market gain, the industry has witnessed a healthy growth in its assets in FY 2016-17.

Piquant Parade

BSE Star Mutual Fund distribution platform claims to have received nearly 10 lakh orders in March 2017. The total value of these orders is over Rs. 15000 crore. The platform has received over 1 lakh order in a single day on March 10, March 15 and March 27.The number of transactions has doubled in FY 2016-17. Such transactions have increased from 33 lakh in FY 2015-16 to 65.5 lakh in FY 2016-17. In terms of value, it has grown to Rs.75,000 crore in FY 16-17 from Rs.44,000 crore in FY 15-16. It is now the largest distribution platform for mutual funds in India. Currently, there are 3400 members registered with the platform of which 1340 members are active.

Tata Sons are planning to globalise their mutual fund by getting a foreign strategic partner, who will hold a stake of at least 26%. Discussions were underway with Vanguard Group, Allianz SE, Japanese and Belgian asset management firms. Currently, Tata Sons hold 67.9% stake in Tata Asset Management; and the remaining 22.09% is with Tata Investment Corporation.

AMFI, the mutual fund industry body has launched a multimedia campaign, as a part of the investor awareness programme. The campaign will aim to position mutual funds as a preferred investment option. The core message will be “Mutual Funds Sahi Hai”, and will be delivered through different media outlets such as TV, Digital, radio, print, cinema and outdoor hoardings. The campaign will aim at assuring the prospective investors that mutual funds are the right option for them. To improve the investment environment in equity markets, and to create awareness on mutual funds as a distinct asset class, SEBI has mandated mutual funds to set apart two basis points (bps) of their net assets for investor education. 1 bps of the said collection, i.e. half the amount given out by each fund house will be used by the financial literacy committee of AMFI to spread financial awareness.

While the mutual fund industry is spending a large sum of money on television and digital platforms to spread awareness, newspapers and distributors remain the major sources of information for mutual fund investors. In a survey called SEBI Investor Survey (SIS) 2015, the market regulator has found that many investors prefer traditional channels such as newspapers, distributors and SID to gather information about mutual funds. While 55% of respondents acquire information about mutual funds through newspapers, 47% rely on mutual fund distributors for this information. Another key source of information for the mutual fund investors is friends and family members. SEBI has said that the influence of financial intermediaries and word of mouth marketing are extremely important in the mutual fund market. Surprisingly, mutual fund investors do not prefer acquiring information through internet and television. SEBI attributed this to a large number of young population in this segment. SEBI said, “It has remained a young person’s domain with 75% of internet users below the age of 34, 16% of users in the 35-44 years range, and only 9% users over the age of 45-64. Since Indian investors tend to be older (average age of surveyed investors is 41 years), despite the rising internet penetration in India and the large television audiences in the country, information flow concerning mutual funds and new fund offerings is still controlled by traditional news sources. According to the SIS 2015 data, although 55% of investors acquire information concerning mutual funds from newspapers, a mere 24 percent use the Internet to receive information while an equal percentage procures this information from television,” said SEBI. However, SEBI believes that investors will increasingly leverage digital media to access the information about mutual funds in future.

Regulatory Rigmarole

SEBI has instructed credit rating agencies (CRAs) to give one-month notice to investors before withdrawing ratings from any open end mutual fund. In a circular, SEBI has said, “Open ended mutual fund schemes being perpetual in nature and having no specified maturity, withdrawal of rating of such schemes is permitted. However, as units of such schemes are held by many investors, such ratings shall be placed on notice of withdrawal for at least 30 days, which shall be publicly available on the CRA’s website.” In addition, CRAs will have to cite appropriate reasons on withdrawal of rating. Further, CRAs will have to issue a press issue before such a withdrawal. Typically, credit rating agencies incorporate assessment of debt funds depending on investment objectives, management and creditworthiness of the portfolio. Though credit rating gives confidence to investors and distributors, the fund selection largely depends on the portfolio of a scheme. Further, the market regulator has asked CRAs to withdraw their ratings after receiving request from AMCs. Currently, very few AMCs use CRAs to rate their funds. The primary purpose is to cater to institutional clients as such clients have internal guidelines for selecting a fund for investments.

The Securities and Exchange Board of India is mulling a review of performance benchmark index for mutual fund schemes. The country's market regulator is considering a Total Returns Index for benchmarking equity mutual fund schemes. Currently, equity schemes are benchmarked against exchange provided indices Sensex and Nifty. SEBI’s argument for bringing a new index is that while computing the net asset value of any scheme it takes into consideration the valuation of security and also needs to factor in the dividend or the corporate announcement. Say an equity scheme is benchmarked against the Nifty. Suppose the Nifty has given 8 percent and the scheme has delivered 10 percent return in one year. Within this scheme, return 1.5-2 percent dividend yield is also included. So, when the Net Asset Value performance is compared to Nifty, it is misleading as it does not consider the dividend yield. This means SEBI may change a methodology to calculate NAV of an equity scheme. Also, these guidelines will be in line with global standards as SEBI gradually intends to move towards uniform calculation standards adopted overseas. 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. In total returns index, it assumes that the figure representing returns, 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 and a few have only 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, whereas a total return index assumes all stocks issued dividends. If a 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 the National Stock Exchange and the Bombay Stock Exchange will follow suit and make a total returns index on Nifty and Sensex public and transparent on a daily basis to enable the fund industry have a transparent benchmark provided by exchanges. SEBI may have to address the issue with the exchanges. In the reform of mutual fund regulations in 2012, when realisable 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 the situation back to the prescription days again rather than the principle-based days (Principle based regulation is high on IOSCO [International Organisation of Securities Commission] agenda in developed markets). 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? That is the question that SEBI has to consider.

SEBI’s Investor Survey (SIS) 2015 had some key findings on mutual fund investors. Among the 5,356 respondents with financial investments, around 66% (or 3,536 investors) have put money in mutual funds, making mutual funds the most favoured financial instrument among Indian investors. The survey found that 42% of the mutual fund investors are regular investors; 60% of them prefer the SIP route; 88% are aware that schemes can be bought and sold online, but the medium is not used frequently; 24% use exchanges and platforms offered by stock exchanges for their investment; 58% claimed that they will continue with their investment even in market volatility, but only 25% hold onto their investments beyond three years.

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