FUND FULCRUM

February 2018

2018 started with positive news for the mutual fund industry. The AAUM (average assets under management) of the mutual fund industry is at an all-time high. The latest AMFI data shows that AAUM of the mutual fund industry crossed Rs.23 lakh crore to reach Rs.23.25 lakh crore in January 2018. It increased by 2.8%, or Rs.64,000 crore, from Rs.22.61 lakh crore in December 2017. In the last five and half years, the AUM has increased three and half times, from Rs.5.87 lakh crore as on March 2012 to Rs.22.41 lakh crore as on January 2018. The data shows that in a span of three and half years, the AUM has increased more than two times, from Rs.10 lakh crore in May 2014. Institutional inflows, SIP inflows from retail investors and mark-to-market gains have resulted in the growth of AUM in the mutual fund industry. Typically, in the first month of every quarter, we see strong inflows in liquid funds after redemption in the previous quarter. In addition, short-term rates are going up; hence, it has become more attractive for institutions to park their excess funds in liquid and ultra-short-term funds.

AMFI data shows that equity AUM, including pure equity funds, balanced, ELSS and equity ETFs, of the industry touched a record high at Rs.10.35 lakh crore in January 2018. Equity AUM increased by 2.61% or Rs.27,000 crore in a month. AMFI data also shows that despite the record AUM, inflows in equity in January 2018 have declined compared to December 2017. Equity funds, including pure equity funds, balanced, ELSS and equity ETFs, received inflows of Rs.20,821 crore in January 2018 compared to net inflows of Rs.24,239 crore in December 2017. This can be attributed to the cautionary approach of investors ahead of the Union Budget 2018. Many investors who invest in equity through lump sum were in a wait-and-watch mode last month due to Budget 2018. Except ELSS, all equity funds have witnessed a marginal decline in inflows in January 2018 compared to December 2017. Pure equity funds received the highest net inflows of Rs.13,404 crore among the equity funds. The AUM of these funds was Rs.7 lakh crore in January 2018. Balanced funds, which saw continuous upsurge in its inflows in 2017, have seen decline in inflows. The category witnessed inflows of Rs.7,700 crore in January 2018 as against Rs.9,800 crore in December 2017. Barring income funds, gold ETFs, gilt funds and FOFs investing overseas, all other categories witnessed inflows. Overall, the industry witnessed inflows to the tune of Rs.1.06 lakh crore while the total AUM for the month of January 2018 stood at Rs.22.41 lakh crore.

SEBI’s latest data shows that the mutual fund industry has added a record 18.31 lakh new equity folios in January 2018. Equity folios include pure equity funds, ELSS, balanced funds and ETFs. A rough calculation indicates that the industry has added an average of 61,000 equity folios per day in the month of January. Thanks to the strong rally in the equity markets, the total equity folio count went up to 5.72 crore in January 2018. In the equity funds category, pure equity funds have added over 12.84 lakh folios last month and the total number of pure equity folios stood at 4.11 crore. The shift to large-cap funds from mid- and small-cap funds can be the key reason for this increase in equity folios. ELSS followed pure equity funds. The category added over 3.11 lakh folios in January. The total ELSS folios in January were 97.60 lakh. Demand for ELSS funds remained strong due to the tax season. The balanced funds category which had witnessed significant traction in 2017, continued with its growth run. In percentage terms, the category witnessed the highest increase in folios. Folios under the category increased by 4.70% to 55.66 lakh folios in January. On the other hand, equity ETF folios decreased for the second consecutive month by 1.86% to 7.47 lakh folios. Though the folios have increased, AMFI data also shows that inflows in equity funds in January 2018 have declined compared to December 2017. Equity funds received inflows of Rs.20,821 crore in January 2018 compared to net inflows of Rs.24,239 crore in December 2017. Overall, the industry added 18.45 lakh folios in January 2018 while the total industry folio count was at 6.83 crore. The mutual fund industry has close to 1.54 crore unique investors.

Piquant Parade

A stock broking and mutual fund distribution firm, Quant Capital, is likely to foray into asset management business soon with the acquisition of Escorts Mutual Fund. AMFI data shows that Quant capital had assets under advisory of Rs.520 crore as on March 2017. Of 245 crore total AUM of Escorts Mutual Fund as on Dec 2017, the fund house manages Rs 43-44 crore in equity schemes, which is about 18% of its total assets under management. Typically, the fund house is valued based on the assets in its equity schemes. In the last one year, the AUM of Escorts Mutual Fund had plunged 14%. India’s mutual fund industry has already seen a slew of deals, including Prudential Financial Inc’s purchase of Deutsche Asset Management’s India unit, Edelweiss Asset Management acquiring JP Morgan Asset Management’s India unit and Essel Finance acquiring stake in Peerless Mutual Fund in 2016. The fortunes of India’s asset management sector have revived since 2014, when stock markets started a powerful rally, ending years of scant retail interest in mutual funds. Domestic mutual funds have seen net inflows of a record Rs 1.3 lakh crore in equity mutual funds in 2017 in the last calendar year. This the first time a mutual fund distribution and a brokerage firm will be venturing into the asset management business.

Mirae Asset Mutual Fund has joined MF Utility to expand its digital footprint. All financial and non-financial transactions pertaining to their schemes can also be submitted through MFU either electronically or physically through the authorized Points of Service (“POS”) of MFU from February 19, 2018. With the addition of Mirae Asset Mutual Fund, the AUM of the funds participating in MF Utility is over 96% of the industry AUM. The AUM of the CAN Holders as on January 31, 2018 is over Rs.92,000 crore, which has doubled in the last 10 months. On an average close to 1,000 account opening (CAN) requests are being received every day of which about 40% are electronic. Over Rs.3.50 lakh crore of MF transactions are being put through MFU every month. Mirae Asset Mutual Fund manages AUM of Rs.15,000 crore as on January 2018.

Regulatory Rigmarole

Existing independent trustees and independent directors, who have held office for nine years or more, can continue for two more years. This means, trustees and independent directors of AMCs can hold their positions for 11 years. Earlier in November 2017, the market regulator had said that existing independent trustees and independent directors, who have been with AMCs for nine years or more, could continue for one more year. Another key change in the corporate governance structure is compliance for auditors. SEBI said that auditors who have conducted audits of the mutual fund for nine years or above can continue until the end of FY2018-19. This replaces the part of the circular, which said that auditors who have conducted audit of the mutual fund for nine years or more can continue for a maximum of one year from date of issuance of the circular.

The Prime Minister gave approval to ban Ponzi schemes or unregulated deposit schemes to protect the savings of investors. The Bill contains a substantive banning clause which bans deposit takers from promoting, operating, issuing advertisements or accepting deposits in any unregulated deposit scheme. The principle is that the bill would ban unregulated deposit taking activities altogether, by making them an offence ex-ante, rather than the existing legislative-cum-regulatory framework which only comes into effect ex-post with considerable time lags. Ponzi schemes and unregulated deposit schemes have duped investors on the pretext of making them rich. Most of these schemes follow multi-level-marketing approach, i.e., creating a community of people who come together to invest in a scheme with no pre-defined objective. Many people, especially from small cities and towns, fall prey to such schemes.

SEBI has barred close ended funds from charging an additional 20 bps TER in lieu of exit loads. In a circular, SEBI said, “It is clarified that mutual fund schemes including close ended schemes, wherein exit load is not levied / not applicable, the AMCs shall not be eligible to charge the above-mentioned additional expenses for such schemes. Further, existing Mutual Fund schemes  including close ended schemes, wherein exit  load is  not  levied  /  not  applicable,  shall  discontinue,  with  immediate  effect, the levy of above mentioned additional expenses, if any.” SEBI had allowed fund houses to charge an additional TER to the extent of 20 bps with effect from October 2012 in lieu of exit loads. Also, the market regulator had mandated that the entire exit load should be credited back to the schemes. Generally, close ended funds have a lock in period of three years to five years and have no exit load period. While the industry manages Rs.32,000 crore in close ended equity funds, Rs.1.19 lakh crore was in close ended debt funds as on December 2017. A rough calculation shows that the industry is charging close to Rs.64 crore in close end equity funds and Rs.238 crore in close end debt funds in lieu of exit loads. Earlier, in December 2015, SEBI had barred new tax saving schemes from charging such an additional fee. Currently, most closed end schemes are charging an additional 20bps. In fact, a few no-load schemes are also charging this additional expense from investors. The move will reduce cost of ELSS and close end equity funds.

SEBI reclassifies cities for additional TER. Fund houses can charge additional TER only for B30 cities instead of B15. Now T15 and B15 have become T30 and B30. SEBI has revised the definition of top cities and beyond top cities for additional TER. This means, fund houses can charge an additional TER of up to 30 basis points if the net inflows from beyond top 30 (B30) cities are at least (a) 30% of gross new inflows in the scheme or (b) 15% of the average assets under management (year to date) of the scheme, whichever is higher. In a circular, SEBI said, “The additional TER for inflows from beyond top 15 cities (B15 cities) was allowed with an objective to increase penetration of mutual funds in B15 cities. Since more than five years have elapsed and on review, it is now decided that the additional TER of up to 30 basis points would be allowed for inflows from beyond top 30 cities instead of beyond top 15 cities.” With this, the additional incentive will no longer be payable to distributors in top cities ranked 16 to 30. This will come into effect from April 1, 2018.

SEBI has asked fund houses to disclose total expense ratio (TER) of each scheme on a daily basis. With this, fund houses will have to introduce a separate tab called ‘Total Expense Ratio of Mutual Fund Schemes’ on their website in a downloadable spreadsheet. In a circular, SEBI said that they have observed frequent changes in TER in mutual fund schemes and such changes are not prominently disclosed to investors. “In order to bring uniformity in disclosure of actual TER charged to mutual funds and to enable the investor to take informed decisions, AMCs shall prominently disclose on a daily basis, the TER of all schemes under a separate head on their website in a downloadable spreadsheet,” said SEBI. Fund houses will now have to intimate investors by sharing a notice through email or SMS at least three working days prior to making any revision in TER of the scheme. In addition, fund houses are required to put such a notice of change in base TER on their website prominently. So far, fund houses have been disclosing change in TER on their website within two working days of making such changes. Fund houses will have to inform the board of directors of the AMC about the revision in TER along with the rationale for their decision. The circular has come into effect immediately for new schemes and from March 1, 2018 for existing schemes. Another key development is the change in the format of TER disclosure on a scheme information document (SID).

Mutual fund houses will now have to pay a Dividend Distribution Tax (DDT) of 10% on dividends declared under equity schemes. This will make dividend payout and capital gains equitable in terms of tax for equity funds. Currently, mutual funds already pay DDT of 28.84% on dividends declared under debt schemes, while there is no DDT on equity-oriented mutual fund schemes, i.e., mutual fund schemes that invest at least 65% of its assets in equities. This move may prompt mutual fund houses to promote growth option of equity mutual funds over dividend option offered by equity schemes to defer the tax liability. The proposal may hit balanced funds, as many senior citizens used to park their money under the dividend option so as to get regular income.

Long-term (over one year) capital gains on equities are to be taxed at 10% on gains of over Rs 1 lakh on investments without the benefit of indexation. The gains will be calculated on the difference of price between 31st January 2018 and the day on which it is sold. The LTCG tax on debt funds is 20% with inflation indexation benefit. Say a debt fund generates 8% returns and the inflation is 5%. The tax will come to about 20% on 3% or 0.6%. This comes to slightly less than 10% of the returns. In short, taxation ceases to be the critical factor in selecting asset classes now. Short-term (less than one year) capital-gains tax remains unchanged at 15%. The new LTCG tax has been introduced with grand-fathering of gains till January 31, 2018, which minimises any potential short term disruptions. While the tax is a negative for the markets, the fact that equity instruments still attract the lowest rate of tax means that the asset class will continue to see good flows. There, however, may be some knee jerk reaction in the short term. Given that there is a tax even on LTCG, it would be best to keep portfolio churn to the minimum whether in debt investments, debt mutual funds, direct equities or in equity mutual funds. Purely tax-driven products like dividend plans of balanced funds, arbitrage funds, etc., may fade away.

India is poised to be the fourth wealthiest country in the world with total wealth of $24,691 billion by 2027, says a report released by New World Wealth. The report states that India will be the fastest growing among top 10 countries, growing at a massive rate of 200% in 10 years. Currently, India is the sixth wealthiest country with a total wealth of $8,230 billion. Strong growth in financial services, IT, business process outsourcing, real estate, healthcare and media sectors will pave the way for India’s growth. A large number of entrepreneurs, good educational system and the widespread use of English will also boost India’s wealth. In the last 10 years, India was the second fastest growing economy among the top 10 countries, with a growth rate of 160% between 2007 and 2017. India is also the best performing wealth market in the past one year at 25% on the back of strong stock market gains. Total wealth refers to the private wealth held by all the individuals living in each country/city. It includes all their assets (property, cash, equities, business interests) less any liabilities. The report has excluded government funds. The other countries that will witness rapid increase in wealth are China (180%) and Australia (70%). It also mentions some of the major risks that these top 10 countries may face in the future. It includes rising pension obligations, religious tensions and public healthcare costs. New World Wealth is a global market research group, based in Johannesburg, South Africa. They specialise in ratings, surveys, country reports and wealth statistics.