FUND FULCRUM

September 2017

Despite decline in key market indices, the average assets under management (AAUM) of the mutual fund industry touched an all-time high of Rs.21 lakh crore in August 2017. AMFI’s latest data shows that AAUM of the mutual fund industry has reached Rs.20.97 lakh crore in August 2017. The average AUM of the mutual fund industry has increased from Rs.19.92 lakh crore in June 2017. However, the monthly AUM of industry stood at Rs.20.59 lakh crore in August 2017. While AAUM is the average assets of the entire month, which is calculated by factoring in all working days of the month, month end AUM is the assets of the industry as of the last working day of the month. The growth has come largely because of higher inflows in arbitrage funds and equity funds through SIPs. AMFI data shows that the industry has received net inflows of Rs.61,700 crore across all categories. The good news is that the industry has mopped up Rs.31,000 crore in equity funds including ELSS, ETFs that tracks indices and balanced funds. AMFI said, “The AUM in the retail schemes (i.e. equity + ELSS + balanced schemes) increased by 3% from Rs.750,699 crore as on July 31, 2017 to Rs.772,246 crore as on August 31, 2017 and registered an increase of 48% YOY. Retail AUM constitutes about 37.5% of the overall Industry AUM, and including debt funds, the overall retail participation in mutual funds was little over 50% of the overall Industry AUM.” Another positive trend for the industry is increasing contribution in mutual funds through SIP. The latest AMFI data shows that the mutual fund industry received a monthly inflow of Rs.5,206 crore through SIPs. The monthly SIP inflows increased by Rs.1,709 crore from Rs.3,497 crore in August 2016, a growth of 48%.

Investors have pumped in close to Rs 62,000 crore into various mutual fund schemes in August 2017, driven by equity and money market funds. With this, total net inflow in mutual fund schemes has risen to Rs 2.2 lakh crore in the first five months (April-August) of the ongoing fiscal, as per the latest data available with Association of Mutual Funds in India (AMFI). The Indian mutual fund industry has been witnessing phenomenal growth since 2014. According to data from AMFI, investors have poured in a net of Rs 61,701 crore in MF schemes in August 2017 as compared to Rs 63,504 crore in July 2017. The latest inflow has been mainly driven by contribution from liquid funds and money market funds. Besides, investors continued to maintain bullish stance on the equity schemes. Liquid or money market fund category witnessed Rs 21,352 lakh crore being poured in August 2017. In addition, equity and equity linked schemes attracted Rs 20,362 crore. Further, balanced and debt funds received Rs 8,783 crore and Rs 8,390 crore respectively. However, gold ETFs continued to see net outflow of Rs 58 crore.

Mutual fund houses saw a surge of over 40 lakh investor accounts during the first four months of this fiscal, taking the total count to an all-time high of 5.94 crore on strong participation from retail investors. This comes following an addition of 77 lakh folios in the entire 2016-17 and 59 lakh in 2015-16. According to SEBI data on total investor accounts with 42 active fund houses, the number of folios rose to a record 5,9,420,864 at the end of July 2017 from 5,5,399,631 at the end of March 2017, a gain of 40.21 lakh. The rise in investors’ accounts has come mainly from the retail category, which is evident by the strong double-digit growth in folios in equity, balanced and debt categories. Notably, participation from retail investors, especially from small towns, has been growing. Besides, steps taken by the Securities and Exchange Board of India such as giving extra incentives for fund houses expanding into smaller cities, coupled with increasing investor education programmes to increase the penetration of mutual funds, is paying dividend. Retail investor accounts — defined by folios in equity, equity-linked saving schemes (ELSS) and balanced categories — grew over 36 lakh to more than 4.8 crore during the period under review.

According to CAMS data, IFAs have created over 11 lakh new SIP accounts between January and June 2017. IFAs are truly the SIP kings as they have created the highest number of SIP accounts. The latest CAMS data, which covers 63% of the industry AUM shows that mutual fund distributors and distributors empanelled with national distributors have created 11.19 lakh new SIP accounts in the first six months of the calendar year i.e. between January and June 2017. While mutual fund distributors have created 5.50 lakh new SIP accounts, national distributors such as NJ India and Prudent who partner with distributors under sub-broking model added over 5.60 lakh folios in January-June 2017. Surprisingly, IFAs have added more SIP accounts in B15 cities than T15 cities. The CAMS data shows that IFAs have created 3.06 lakh SIP folios in B15 cities compared to 2.51 lakh SIP folios in T15 cities. On the other hand, national distributors have created 2.58 lakh SIP folios in B15 compared to 3.04 lakh SIP accounts in T15 cities. The data shows that both IFAs and NDs account for 60% (30% each) of new SIP accounts. Many IFAs cater to retail clients who are salaried employees. These salaried employees are comfortable contributing small amounts every month through SIP instead of lumpsum amount. Banks account for 22% of new SIP registrations with 4.20 lakh SIP accounts. While private banks have created 2.40 lakh SIP accounts, their PSU counterparts registered close to 1.90 lakh new SIP accounts in January-June 2017. However, in B15 cities, PSU banks have created 1.39 lakh SIP folios compared to 1.14 lakh SIP folios of private banks. Overall, the mutual fund industry has created close to 18 lakh SIP accounts in CAMS serviced fund houses.

Piquant Parade

IDFC Mutual Fund has released a short movie titled ‘Return of One Idiot’ to spread financial awareness among people. This movie is a sequel to its first movie ‘One Idiot’ that was released in 2012. This movie highlights the need to save for retirement. The fund house will screen this movie across the country through cinema halls and distribution networks. In fact, the fund house has received approval from Central Board of Film Certification. The film aptly captures a common challenge in our society and proposes a simple solution to avoid a pitfall of not saving enough for retirement. The idea that your savings will always provide you support, no matter what the future holds is both empowering and liberating. The movie attempts to deliver a simple message in an engaging manner, making it relatable to all. The videos are meant for both advisors and investors. Advisors can use these videos in their IAPs. Another initiative of the fund house is IAP platform for IFAs. The fund house has recently launched a website for IFAs called oneidoit.in to help IFAs with content and literature that may come in handy to them to conduct IAPs. The fund house will provide templates such as invitation, presentation and videos. The fund house will also provide financial support to IFAs who conduct IAPs using this content. IFAs need not take formal approval from the AMC official to conduct IAPs. They just need to register themselves with the AMC platform. The AMC will help them with all the support they need to conduct IAPs.

Regulatory Rigmarole

In line with the Government’s instructions to link Aadhaar number with mutual fund folios, Karvy Computershare introduced a host of facilities through which clients can update their Aadhaar number. To start with, Karvy Computershare launched Aadhaar linking facility on their website. Investors can link their Aadhaar through one time password sent to their registered email id and mobile number with Karvy. All the clients need to do is SMS (ADRLNK ) to the designated mobile number mentioned on their website. For example, if the pan number of client is BJQPP5878J and Aadhaar 512245739980, he will have to type ADRLNK BJQPP5878J 512245739980 Y. "Y" in the SMS stands for investor consent to authenticate and seed Aadhaar.  A reply SMS will be sent to the investor saying, thanks for visiting our website, sharing Aadhaar and consent of investors to authenticate and seed, followed by a link to the site as well. However, this facility is not available for PAN exempted mutual fund folios. Another option for investors is to send a self-attested Aadhaar update form available on Karvy’s website. Investors can either submit the forms at Karvy branches, dispatch to Karvy’s HO or submit to their distributors, who in turn will scan & upload on Karvy’s portal, through Distributor log-in services. This mode helps the investors from B15 locations. The mutual fund investors will have to update their Aadhaar number before December 31, 2017. The government will freeze the non-compliant folios after this date.

In a circular, SEBI has announced certain changes in the REITs and InvITs regulations to facilitate growth. SEBI has allowed real estate investment trusts (REITs) and infrastructure investments trusts (InvITs) to raise capital by issuing debt securities, introduced the concept of Strategic Investor for REITs on similar lines of InvITs, allowed single asset REIT on similar lines of InvIT, allowed REITs to lend to underlying Holdco/SPV and amended the definition of valuer for both REITs and InvITs. Further, the Board has, after deliberations, decided to have further consultation with the stakeholders on a proposal of allowing REITs to invest at least 50% of the equity share capital or interest in the underlying Holdco/SPVs, and similarly allowing Holdco to invest with at least 50% of the equity share capital or interest in the underlying SPVs. SEBI rule mandate fund houses to invest up to 10% of NAV in REITs and InvITs. Currently, fund houses can also invest up to 5% in single issuer. REITs invest in rent yielding commercial and residential properties to generate regular income while InvITs invest in infrastructure projects to generate income by way of toll. 

The capital market regulator has asked Registrar and Transfer (R&T) agents to incorporate multi-level encryptions and firewalls ensuring safety of data. In a move to minimise cyber threats and protect investor data, SEBI has asked R&T agents like CAMS and Karvy Computershare to level up their cyber security system by maintaining a robust cyber security framework in the organisation. The recent ransomware attacks and increasing cyber threats have catalysed this move. R&T agents act as a storehouse for maintaining records of mutual fund transactions on behalf of the fund house through a wide network of their offices across the country. Commenting on the same lines, SEBI said, “Since RTAs perform important functions in providing services to holders of securities, it is desirable that RTAs have robust cyber security and cyber resilience framework in order to provide essential facilities and perform systemically critical functions relating to securities market.” The circular highlighted the broad norms such as authorised access to systems, annual audits, monitoring of suspicious activities and so on that R&T agents will follow. SEBI has clarified that the circular is applicable for R&T agents servicing more than two crore folios.

The Securities and Exchange Board of India (SEBI) is set to usher in rules that will require the mutual fund industry to introduce asset categories, a move that will spark scheme mergers and is aimed at helping investors identify the right plan from within the product heap. The capital market regulator intends to classify mutual fund schemes into three broad product groups — equity, debt and hybrid — which will be sorted further into subcategories as per the investment mandate. There is currently no official classification for mutual fund schemes. Once products are brought under these categories, asset managers will have to merge those that are similar. For instance, a fund house operating two separate schemes that invest in mid-caps will have to merge them or scrap one. SEBI will issue a circular with the list of classifications asking fund companies to comply with the requirement within six months. The regulator's decision to simplify the process of investing in mutual funds comes at a time when retail investors are pouring money into various schemes. India's 42-member mutual fund industry handles over Rs 19.5 lakh crore in assets across 2,000 schemes. Unhappy about the number of products, SEBI has been informally asking fund houses to consolidate the schemes. But with this falling on deaf ears, the regulator has decided to push them into consolidation through new rules. The SEBI-appointed panel has identified a little over 30 subcategories to classify schemes. Within the equity category, there will be eight to 10 divisions such as large-cap, multicap, mid-cap and small cap funds among others. In debt, there will be around 16 categories such as liquid, ultra short term and dynamic schemes among others. In hybrid, there will be four subsections depending on the scheme's exposure to stocks and bonds. The regulator will issue guidelines defining all the categories. For instance, if a scheme has to be classified as a large-cap scheme, it should have invested 80% of its corpus in such stock. The definition will be based on the IISL (India Index Services and Products Ltd) indices. IISL is a National Stock Exchange unit that provides indices and services related to that. SEBI will ask mutual funds to describe the product in a tagline, currently restricted to whether they are open ended or close ended. Once the rules are implemented, the taglines will need to provide more details. The new classification will bring the legitimacy of superiority of comparability and it would be usable. The SEBI-appointed committee also discussed aligning mutual fund regulations with the Companies Act with regard to the appointment of directors, independent directors, trustees and auditors. As per the Companies Act, there has to be a rotation of directors every three years. In addition, there will be an upper age limit of 70 years for directors. The panel also recommended easing rules for mutual funds' exposure to interest rate futures. Till now, mutual funds could only do securities-based hedging in their bond portfolio. Now, SEBI could allow duration based hedging. 

The last three years and especially 2016 have been characterised by large inflows into equity and balanced funds, with increasing participation from retail and HNI investors. Indian investors have now eventually assimilated mutual funds and the credit goes to awareness programmes and endeavours by regulators and asset management companies.