FUND FULCRUM

August 2017

The mutual fund industry's asset base has touched a record high of nearly Rs 20 lakh crore at the end of July 2017, mainly driven by fresh inflows in equity and debt segments. The assets under management (AUM) of mutual fund industry rose from Rs 18.96 lakh crore at the end of June 2017 to Rs 19.97 lakh crore by the end of July 2017, as per the data of Association of Mutual Funds in India (AMFI). Asset base of the industry, comprising 42 players, had crossed the milestone of Rs 10 lakh crore for the first time in May 2014 and in a short span of less than three years, the AUM size almost doubled to touch Rs 19 lakh crore last month. The monthly rise in asset base can be attributed to inflows in income and equity categories. Besides, buoyant investor sentiment and phenomenal growth in systematic investment plans (SIPs) helped in the growth of assets under management. Overall inflow in mutual fund schemes stood at Rs 63,504 crore last month. Of this, income funds which invest in a combination of government securities saw inflow of more than Rs 60,000 crore. Further, equity and equity-linked saving scheme (ELSS) saw an infusion of Rs 12,727 crore. This marks the 16th straight month of inflows into equity schemes. Prior to that, such funds had witnessed a pullout of Rs 1,370 crore in March 2016. The strong inflows have pushed the asset base of equity mutual funds by more than 6% to Rs 6.3 lakh crore at the end of July from Rs 5.91 lakh crore in the preceding month. However, the liquid funds or money market category -- with investments in cash assets such as treasury bills, certificates of deposit and commercial paper for shorter horizon -- witnessed a pullout of over Rs 19,500 crore. Indian mutual fund industry is going through a very exciting growth phase and advertising campaigns started by SEBI and AMFI have helped in increasing penetration of mutual funds.

One of the key indicators to gauge the confidence of retail investors in mutual funds is the growth in the number of folios. The latest SEBI data shows that the mutual fund industry has added over 28 lakh folios in the first quarter of FY 2017-18. As a result, the total folio count has reached close to 6 crore. Of the total 28 lakh folios, the mutual fund industry added over 26 lakh folios in equity funds. Equity funds include pure equity funds, ELSS, balanced funds and ETFs that track indices. Reflecting the positive sentiment, the total folio count in equity has reached 4.75 crore. In percentage terms, balanced funds have witnessed the highest growth in folio count. The category has added more than 5 lakh folios between April 2017 and June 2017, a growth of 15%. The 31 balanced schemes in the industry have more than 40 lakh folios at the end of June 2017. HNIs are increasingly investing in balanced funds to take advantage of both the worlds – equity and debt markets. AMFI data shows that the AUM of balanced funds under the HNI category increased to Rs. 51,000 crore from Rs. 19,200 crore a year back. It has grown by Rs. 31,782 crore or 166% in the year. In debt category, the industry has added close to 2.50 lakh folios. Barring ETFs that track indices, gold ETFs and funds of funds, all other categories saw an addition in folio count.

Contribution of the country's small towns to mutual funds asset base surged 46% to Rs 3.5 lakh crore by June-end due to initiatives taken by markets watchdog SEBI and the sectoral regulator AMFI. Mutual funds' AUM from B15 locations - small towns beyond top 15 (T15) cities - grew from Rs 2.42 lakh crore in June-end 2016 to Rs 3.54 lakh crore at the end of June 2017, according to latest data available with AMFI. Currently, B15 accounts for 18% of the total assets of the industry. Besides, these locations have a better balance of equity and non-equity assets. Moreover, a large proportion of direct investments were in non-equity oriented schemes where institutional investors dominate. B15 are the locations beyond top 15 (T15) cities namely - New Delhi (including NCR), Mumbai (including Thane and Navi Mumbai), Kolkata, Chennai, Bengaluru, Ahmedabad, Baroda, Chandigarh, Hyderabad, Jaipur, Kanpur, Lucknow, Panjim, Pune and Surat. About 54% of the assets from B15 locations are in equity schemes, while the same is 31% for T15 assets. About 26% of assets held by individual investors are from B15 cities and 10% of institutional assets come from such places. On the other hand, institutional assets are concentrated in T15 locations, accounting for a little over 90% of the total. Further, about 9% of the retail investors chose to invest directly, while over 17% of HNI assets were invested directly. About 41.1% of the assets of the mutual fund industry came directly. A large proportion of direct investments were in non-equity oriented schemes where institutional investors dominate. Together, all 42 mutual fund houses managed assets worth Rs 19.52 lakh crore at the end of June 30, 2017, a growth of 36% from Rs 14.41 lakh crore managed by the industry in June 2016.

Piquant Parade

The capital market regulator SEBI has approved Essel Finance Wealthzone, a wholly-owned subsidiary of Essel Finance Management to acquire stake in Peerless Funds Management. The company has received approval to acquire entire shareholding of Peerless Fund Management Company Limited (Peerless AMC) and the Peerless Trust Management Company Limited (Peerless Trust). The pan India presence of Essel Finance and its expertise across a comprehensive range of investment capabilities will help them serve their clients better. Last November, Essel Finance has signed an agreement with Essel Finance Management for acquiring 100% shareholding in the asset management company and trustee. This paves the road for Essel Finance in expanding the existing bouquet of financial services.

SEBI Chief Ajay Tyagi has urged AMCs to improve the quality of investor awareness programmes (IAPs) and utilise the two basis-point of AUM set aside for investor education more efficiently. Last year, SEBI had asked fund houses to give 50% of the two basis-point corpus meant for investor awareness programmes to AMFI. Based on AUM of Rs20 lakh crore, as on June 2017, AMFI has close to Rs200 crore to invest in creating awareness about mutual funds this year. This means the industry body will get Rs17 crore every month from the industry. AMFI data shows that 35 AMCs have conducted 8,203 programmes in 211 cities covering over 4.03 lakh participants across the country in FY 2016-17. In April 2017, 25 AMCs conducted 483 programmes in 145 cities covering 23,471 participants. So far, 40 AMCs have conducted 71,610 programmes in 485 cities, covering 25 lakh participants, between May 2010 and April 2017.

SEBI has formed a committee called ‘Committee on Financial and Regulatory Technologies (CFRT)’ to understand how digital technology and fintech would help the financial markets grow. In a circular, SEBI has said that it has set up a committee to reap the opportunities provided by fintech and deal with relevant risks and challenges in digital space. T.V. Mohandas Pai, Chairman, Manipal Global Education will head this committee. The other members of the committee are experts from various areas such as digital payments, e-brokerage, financing, investment platform, product reengineering, data analytics and eCommerce. The committee will recommend measures on how fintech can help grow the penetration of mutual funds in India and simplification of KYC.

Here are the areas that the committee will look into:

·         Recent and medium term trends (within next 5 years) in fintech developments in securities market worldwide

·         Opportunities and challenges from new fintech solutions and its impact on Indian securities market

·         Fintech solutions for further widening and deepening of Indian securities market

·         Approach and framework for regulatory sandbox in Indian market conditions to facilitate adoption of fintech and promote financial innovations

·         Preparing Indian securities market and regulatory framework to adopt to new fintech solutions while promoting market integrity, market development, consumer protection and managing change, business models and market disruptions

·         Assessing technological solutions for regulatory functions of SEBI viz. information management and data mining, risk management including cyber security, intermediary supervision and consumer protection through application of new technological solutions like application of distributed ledger technology, big data, data analytics, artificial intelligence and machine learning.

Come 2018 and the financial year in India could commence from January instead of April as the Centre appears set to make the historic transition to end the 150-year-old tradition. Accordingly, the next Budget could be presented by the Centre in November this year. The government is working on aligning the financial year with the calendar year. This would be another historic change after advancement of the Budget presentation to February 1 this year, ending the decades-old practice of presenting the annual exercise in the last week of February. The Budget Session of Parliament would have to be held well before December so that the budgetary exercise can be concluded by the year-end. Since it takes nearly two months for the conclusion of the budgetary exercise, the possible dates for holding the Budget session could be the first week of November.  The financial year from April 1 to March 31, currently in vogue nationally, was adopted in 1867 principally to align the Indian financial year with that of the British government. Till then, the financial year in India used to commence on May 1 and end on April 30 of the following calendar year. After Modi expressed his desire to align the financial year with the calendar year, the government had last year appointed a high-level committee to study the feasibility of shifting the financial year to January 1. The panel submitted its report to the Finance Minister in December 2017. Among the various factors, a NITI Aayog note had said that a change in the financial year was required as the current system leads to sub-optimal utilisation of working season. It had also noted that the current financial year cycle was chosen without any reference to national culture and traditions or convenience of legislators. In addition, the financial year is not aligned with international practices and it impacted data collection and dissemination from the perspective of national accounts. A few months back, the Parliamentary Standing Committee on Finance also recommended shifting the financial year to the January-December.  Madhya Pradesh became the first state to announce shifting of its financial year format to January-December from 2018.

Regulatory Rigmarole

In a bid to expedite the ARN registration and renewal process, AMFI has introduced an online ARN registration and renewal facility for distributors. Distributors need to furnish Aadhaar cards to register and renew their ARN number. Currently, distributors have to undergo a mandatory six hours of classroom training in order to renew their ARN. To ease the registration renewal process, NISM has already introduced an online CPE training for distributors. Once distributors take this training, NISM issues a certificate. Distributors have to send their certificates to CAMS along with a DD of Rs1,500 in favour of AMFI as renewal fee. Typically, the entire ARN renewal process takes around two months. The proposed online renewal facility is expected to reduce the total turnaround time to a few days. The licence has a validity of three years. Distributors have to renew their ARN six months prior to its expiry.

Distributors earning over Rs20 lakh a year had to take GST registration by July 30, 2017 to avoid penal action. The limit is Rs10 lakh­­_­ for distributors from special states. Special category states comprise Arunachal Pradesh, Assam, Jammu and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh and Uttarakhand. Apart from distributors earning over Rs20 lakh, distributors selling schemes of a fund that is based outside his/her home state will have to take a GST registration number. Suppose, a Chennai based distributor is selling the schemes of a Mumbai based fund house, he or she will have to take a GST registration. Since most AMCs work out of Maharashtra, Gujarat and Tamil Nadu, distributors based in other states will have to obtain their GST registration. Who stands exempted then? For example, Maharashtra-based distributors, earning less than Rs20 lakh and dealing only with Maharashtra-based AMCs, need not take GST registration, but unlike service tax, GST has to be paid from Re. 1 onwards. Hence, IFAs are better off taking their GST registration number – they will not only get gross commission irrespective of their income, they can also save some amount through input credit. Distributors need to file an online application form on the GST registration portal clicking and keying in details of PAN, email id and mobile number. Once the platform verifies these three details, you will have to key in details of your distribution business. You can upload the application form online by attaching scanned copies of your documents. You will get your GST registration within three working days.

Aadhaar may soon become mandatory for buying shares and mutual funds. The government and the Securities and Exchange Board of India (SEBI) are planning to link Aadhaar to financial market transactions to try and curb sharp practices such as conversion of black money into white through the stock market. The government has realised that the permanent account number (PAN) may not be enough to plug tax leaks.

India’s stock markets have been among the best performing in the world this year, with benchmark indices gaining close to 20%. The rise in stock prices has prompted a rush of investor money into mutual funds, taking the industry’s assets under management to close to Rs. 20 lakh crore at the end of July 2017. Investor interest in equities, particularly through the systematic investment plan (SIP) route, where a fixed amount is invested at regular intervals, has meant that assets under management have doubled since May 2014, in a little over three years.