FUND FULCRUM

November 2018

The assets under management (AUM) of the mutual fund industry stood at Rs 22.24 lakh crore at the end of October 2018, up 3.8% compared to last year according to Association of Mutual Funds in India (AMFI), data. On a sequential basis, the AUM growth was almost stagnant growing by less than 1% in October 2018. The mutual fund industry’s AUM has grown from Rs 8.34 lakh crore as on October 31, 2013 to Rs 22.24 lakh crore as on October 31, 2018, more than two and half times increase in a span of 5 years. AMFI expects AUM to grow almost four-fold to Rs 94 lakh crore by 2025 on the back of increased distribution reach and strength. The total AUM of the Mutual Fund industry grew by 0.9% MoM to Rs22.23 lakh crore in October 2018 against contraction of 12.5% MoM to Rs22.04 lakh crore in September 2018. In October 2018, the AUM of all categories of mutual funds decreased except liquid funds. The AUM of equity funds (excluding Arbitrage Funds), ELSS and Balanced Funds slipped 0.6%, 1.4% and 1.6% respectively in October 2018. Overall, the minuscule increase in AUM of mutual funds was basically due to 15% expansion in the AUM of liquid funds. Income funds and Gilt funds continued to witness net outflows for consecutive six months. Investors are dumping income funds owing to their disappointing returns due to rising yields. The yields are expected to continue to rise due to fear of rising crude oil prices and the IL&FS financial crisis. After the IL&FS defaults, many fund houses are reducing their exposure to NBFCs and are reluctant to buy fresh papers of NBFCs, which is spiking the yields. Besides, investors are also redeeming their debt mutual funds fearing fall in NAVs. However, the net inflows into Equity Schemes (excluding Arbitrage Funds) increased 11.6% MoM to Rs11,422 crore in October 2018 compared to Rs10,237 crore in September 2018. Balanced funds witnessed decline in net inflows to Rs519 crore in October 2018 compared to Rs731 crore in September 2018. Surprisingly, Arbitrage funds witnessed net inflows of Rs2,161 crore in October 2018 compared to Rs79 crore in September 2018. The drop in inflows in arbitrage funds during the previous months was attributed to decline in post-tax returns of arbitrage funds after 10% capital gain tax on equity mutual funds. Liquid/money market funds observed net inflow of Rs55,296 crore in October 2018 against net outflow of Rs2.1 lakh crore in September 2018.

The latest SEBI data on mutual fund industry folios shows that the industry added 11.60 folios in October 2018. As the equities wobbled, investors jumped into the markets with the hope of benefitting from the correction. This is reflected in the folio numbers. Equity schemes have added 8.78 lakh folios last month. If we include equity, balanced and ELSS then the number of folios in equity funds went up to 10.6 lakh. This effectively means that 93% of the industry folios have come in equity schemes. Liquid fund and other ETFs grew at a robust pace at 5% last month. The growing interest in liquid funds can be attributed to low duration funds gaining favour in the current increasing interest rate scenario. Overall, majority of the fund categories reported a growth in their folios. Gold ETF, income and gilt funds were the only categories, which saw a decline in their folio count. Range bound gold prices are mainly responsible for the category falling out of favour while rising interest rates are to be blamed for the decline in gilt folios. Income funds, which are suffering under the twin assault of interest rate hike and credit related fears saw the highest decline in absolute terms in October 2018.     

According to data provided by AMFI, the industry garnered Rs 7,985 crore through SIPs in October 2018, slightly higher than Rs 7,727 crore collected in September 2018. Mutual funds attributed the increased interest in SIPs to investor education and matured investor behaviour. Investors have continued to keep faith in SIPs during volatile markets. Over the last one year, AMFI and players from the industry have launched campaigns such as 'mutual funds sahi hai' and Jan Nivesh, which is helping garner interest for mutual funds. Fund houses have applauded the increase in average ticket size of SIPs. AMFI data shows the mutual fund industry added 10.05 lakh SIP accounts each month on an average during FY19, with an average SIP size of about Rs 3,200 per SIP account. Currently, domestic mutual funds have about 2.49 crore active SIP accounts, through which investors regularly invest in Indian mutual fund schemes.

HDFC MF continued to be the most profitable fund house with profit after taxation (PAT) of Rs.721 crore in FY 2017-18. ICICI Prudential MF and Reliance MF followed HDFC MF with PAT of Rs.626 crore and Rs.505 crore, respectively. In percentage terms, LIC MF and Motilal Oswal MF have witnessed a healthy growth in profitability. In fact, Motilal Oswal MF has recorded PAT of Rs.132 crore that is higher than some big AMCs. The fund house has witnessed healthy growth in its PMS and advisory business. Among top ten fund houses, DSP recorded the highest growth in profits. The financial data shows that the fund house has witnessed 132% growth in its PAT i.e. from Rs.85 crore in FY 2016-17 to Rs.201 crore in FY 2017-18. A further analysis of profit figures of all AMCs shows that of 37 AMCs, 28 have reported profits in FY2017-18. The rise in profitability can be attributed to the growth in retail assets in equity funds. AMFI data shows that the AUM of equity funds rose 59% to reach Rs.10.68 lakh crore and the industry added 1.60 crore retail folios in FY 2017-18. Apart from mutual fund business, AMCs derive profits from portfolio management, alternative investment funds and offshore advisory services. However, a few AMCs witnessed decline in their profit margins. IDFC MF witnessed the highest decline in profit figures last fiscal. Its profit decreased to Rs.55 crore from Rs.97 crore last fiscal. On the other hand, a few AMCs such as Union and Edelweiss reported loss largely due to amortisation. While Union Mutual Fund acquired the entire stake from the KBC Asset Management, Edelweiss MF took over schemes of JP Morgan AMC in FY 2016-17.

Piquant Parade

Mutual funds transfer agency Computer Age Management Services (CAMS) has introduced a new facility titled advanced net asset value (NAV) search for distributors and investors. Investors and distributors can use this facility on www.camsonline.com or myCAMS app. The advanced NAV search will allow investors and distributors to check NAVs using either old or new scheme name and look at its asset class through partial or full string search. This option was designed to help investors explore the value of multiple funds in a single class, helping them compare their performance. The enhanced NAV search facility will help investors to check for NAV of a specific fund and similar funds based on various criteria. Users can also compare it with funds that are identical to the preferred funds or with funds having similar features. Users can also check historical NAVs of a scheme on CAMS as the R&T agent has eliminated 90 day limit for historical NAV viewing.

ICRA Online has launched its cloud-based research and analysis tool for mutual fund distributors and RIAs called MFI 360. MFI 360 is conceptualised and designed to empower brokers, IFAs, RIAs and AMCs to gain critical insights and timely access to accurate data on mutual funds. MFI 360 can be used on www.icrainsights.com. The platform provides a comprehensive fund review, enables analysis of performance trends, provides portfolio details and attributes and peer comparisons. The tool:

·                     Tracks more than 10,000 active domestic mutual fund schemes

·                     Gives access to more than 20 years of mutual fund database

·                     Dynamically aligns with industry regulatory mandates

·                     Provides timely updates and data refresh

·                     Offers user-friendly and interactive dashboards

·                     Allows settings configurations to enable users to generate customized reports

Yes Bank will soon launch its mutual fund business under the name of Yes Mutual Fund. In fact, the fund house has filed draft offer documents with SEBI to launch its ultrashort term fund and liquid fund. The fund house has hired Piyush Baranwal as its debt fund manager. Baranwal was earlier associated with BOI AXA Mutual Fund, Morgan Stanley and Principal Mutual Fund. CAMS is the registrar and transfer agent for the company. Similar to other bank sponsored AMCs, Yes Bank will leverage its banking network to distribute its funds. The AMC will channelize the savings of retail, corporate and institutional investors in equity and debt capital markets by leveraging Yes Bank’s expertise. This will complement Yes Bank’s retail liabilities strategy and also allow the AMC to leverage the bank’s distribution network for customer acquisition and provide customers a seamless experience for their investments and savings solutions. Yes Bank manages AUM of Rs.1730 crore from its MF distribution business. The fund house received SEBI’s in-principle approval to float an asset management business this year.

Regulatory Rigmarole

SEBI's new guidelines require a detailed disclosure about each rating factor in all the sectors which will increase the predictability of rating changes by credit rating agencies. Credit rating agencies need to disclose promoter support, links with subsidiaries and liquidity positions of the companies being evaluated. This is the result of a series of defaults by Infrastructure Leasing & Financial Services (IL&FS), as unclear and incomplete details were the primary reasons for the company's sudden fall. Poor ratings given to IL&FS papers after its collapse hurt many funds which had exposure to the group company. Presently, ratings are done on the basis of historical data, whereas investors should base their decisions on the future outlook. It is important that rating agencies start sharing key assumptions based on which they came up with the ratings. If disclosures were detailed, investors can protect themselves from sectors under pressure. Ratings in developed economies disclose the weights of sector-specific risk factors and the possible route ratings would take if the scenarios change.

AMFI has requested SEBI to allow ‘side-pocketing’ to reduce risks for investors. Following the IL&FS fiasco, AMFI has once again batted for the introduction of side-pocketing to mitigate risks in debt funds. The trade body has requested SEBI that the market regulator should allow fund houses to do side-pocketing in debt funds to mitigate risks in debt funds. Side-pocketing is a practice in which fund houses can segregate risky assets from the rest of their holdings and cap redemptions. Simply put, fund houses can create two funds one with risky assets where fund house will not allow redemption expecting recovery from stressed assets and another fund with other assets with existing features. This practice is prevalent among hedge funds in developed markets. Fund managers can create a separate account of stressed assets and try to recover the amount in the meantime without affecting the entire portfolio of the scheme. In 2016, JP Morgan Mutual Fund had pursued this practice in the absence of regulations. Later, AMFI had approached SEBI seeking formal guidelines to create uniform practices across fund houses. However, SEBI had earlier rejected the proposal citing that the practice may encourage fund managers to take undue risks.

SEBI has been reportedly deliberating introduction of mark-to-market valuations of all debt securities, regardless of maturity. Just like equity funds, liquid funds may become more volatile going forward. This means fund houses may have to do mark-to-market valuation of debt securities having maturity of less than 60 days. Currently, SEBI rule says that fund houses have to do mark-to-market valuations of securities having maturity of up to 60 days and more. Liquid funds hold securities having maturity of up to 91 days. However, most liquid funds hold securities having maturity of less than 60 days. As a result, post IL&FS crisis, NAVs of only a very few liquid funds witnessed a sharp decline due to mark-to-market loss. This would ensure that fund managers would not take undue risks to deliver attractive performance in liquid funds. Most fund managers buy short term corporate bonds which carries high credit default risk. Since short term funds are meant for conservative investors, taking undue risk is against the scheme’s mandate. Since debt securities are illiquid in nature and not traded like equities, mark-to-market valuation is challenging for fund houses since they have to quote NAV on a daily basis. Hence, most fund houses rely on rating agencies to derive NAV. Often rating agencies look at accrual to value debt securities. Credit rating agencies reflect the rating agencies’ opinion about the credit risk of debt securities based on historical data and some assumptions about the future, which underplays the possibility of default. In fact, SEBI has recently tightened disclosure norms for credit ratings agencies.

SEBI will soon start the process to appoint self-regulatory organisation (SRO) for mutual fund distributors. In fact, the market regulator has asked AMFI to start preparing for SRO. SRO for mutual fund distributors will be responsible for micro-regulations of its members. The SRO will spread awareness about mutual funds among people, educate and train distributors and conduct screening test for them. Earlier, SEBI had invited applications for SRO in March 2013. In fact, the market regulator gave its go ahead to AMFI promoted Institution of Mutual Funds Intermediaries (IMFI) to form SRO in February 2014. However, SAT quashed SEBI’s decision to grant in-principle approval to IMFI after Financial Planning Supervisory Foundation (FPSF) intervention. Later the Supreme Court upheld SAT’s decision and asked the market regulator to start the selection procedure afresh in December 2017.