FUND FULCRUM

December 2018

The asset base of the Indian mutual fund industry rose to a little over Rs 24 lakh crore in November 2018, an increase of 8% from a month ago led by strong inflows into liquid schemes. According to Association of Mutual Funds of India (AMFI) data, the asset under management (AUM) of the 42-player mutual fund industry jumped from Rs 22.23 lakh crore in October 2018, to Rs 24.03 lakh crore in November 2018. Amid intermittent bouts of volatility, Sensex and Nifty rose slightly over 4% in November 2018. The industry received Rs 7,985 crore through the SIP route in November 2018, a rise of 35.44% compared to the previous year. SIP flows continue to hold their position at Rs. 7,985 crore during November 2018, indicating resilience on part of retail investors to continue to invest in the India growth story. Though there was no increase in SIP flows when compared to the previous month, 3 lakh new SIP accounts were added during the month indicating that new investors are entering the SIP fold. The total number of SIP accounts stand at 2.52 crore at the end of November 2018.

Mutual fund inflows grew more than four times to touch Rs. 1.42 lakh crore compared to Rs. 35,529 crore during October 2018, shows AMFI data. A key contributor to this increase is the sharp rise in liquid fund flows which grew from Rs. 55,296 crore in October 2018 to Rs.1.36 lakh crore in November 2018. Liquid funds that witnessed significant redemption in the last two months due to liquidity crisis are back in action. The liquid or money-market category inflows rose for the second consecutive month to Rs 1.36 lakh crore, up by nearly two-and-half times. With the latest inflow, the total infusion in mutual fund schemes reached about Rs 2.23 crore in the first eight months (April-November) of the current fiscal, latest data with AMFI showed. The latest inflow has been mainly driven by contributions to liquid funds and equity-linked saving schemes. Liquid funds attracted Rs 1.36 lakh crore, while Rs 8,400 crore was invested in equity-linked saving schemes and Rs 215 crore in balanced funds. Interestingly, gold exchange-traded funds (ETFs) saw a net inflow of Rs 10 crore after witnessing pull-out in the past several months. In contrast, income funds saw a pull-out of Rs 6,518 crore. While AUM of the mutual fund industry and the total inflows went up, inflows in equity schemes, fell by nearly 33% compared to the previous month to Rs 8,414 crore in November 2018, according to data released by the Association of Mutual Funds in India. This is due to increased market volatility, global trade war tensions and uncertainty over the state elections.

The latest SEBI data on mutual fund industry folios shows that the industry added 7.05 lakh folios in November 2018. The number of folios added during the month was 4.32 lakh lower than what the industry added in October 2018. In line with the lower inflows in equity funds, the folio growth in the category dampened too. Compared to October 2018, which recorded healthy folio creation in equities to the tune of 10.6 lakh, the industry added 6.6 lakh new folios in November 2018. The lower growth numbers can be attributed to lump sum investors taking the wait and watch approach in the face of higher volatility. Mirroring previous month's trend, liquid funds recorded the highest growth in folios in percentage terms. Folios in liquid funds grew at a robust 3.4% during the month. However, owing to smaller base effect the actual increase in liquid folios is 49,631 folios. The growing interest in liquid funds can be attributed to investors leaning towards safety in the aftermath of the NBFC credit event. Moreover, advisors recommending staggered investments in equities through STP in liquid funds (instead of lump sum) may have also helped shore up their popularity. Gold ETF, which saw folio erosion to the tune of 2,628 folios in October 2018, added 6,009 folios during November 2018. Dhanteras, a festival when investors typically purchase gold, fell in November this year.  This may have led to the increased interest in gold ETFs.  Overall, all categories of funds reported a growth in their folios except income funds, which saw a decline in their folio count. 

Retail investors have been the key drivers of mutual fund industry in the last few years. Retail AUM grew at 31% on an annual basis since 2014, according to the latest CII and McKinsey report titled ‘India Asset Management: Coming of Age’. A major portion of the retail AUM growth (84%) came from inflows while the rest came from mark to market gains.  The trend reversed in the institutional segment. Here, only 37% of the growth came from inflows. The institutional AUM grew at 23% per annum during the period. Overall, the industry grew by 27% per annum to reach Rs. 21 lakh crore in March 2018. Over 65% of this growth was contributed by increased inflows while the balance 35% came from performance of the funds. Analysing the data further, the report found that 45% of the inflows came from equity funds. The impact was even more pronounced in retail segment where 65% of the retail flows were in equity funds. The AUM growth has been complemented by growth in profitability. The profit margins grew by 47% of in the last four years (covers around 80% of the industry AUM with 18 participants in annual McKinsey India asset management benchmarking). In absolute terms, there has been a massive growth in profit pools by around 3.5X compared to the FY 2014 levels according to the report. Around 80% of overall cost reduction was contributed by better efficiencies in middle back office sub function due to economies of scale.

Individual investments in mutual funds are expected to grow at 21.04% CAGR in the next five years to reach Rs. 30.34 lakh crore by FY 2022-23, according to the ninth edition of Karvy Wealth Report. Currently, individual investors have assets of close to Rs.10 lakh crore in mutual funds. Individual investors include HNIs and retail investors. Subsequently, mutual funds will occupy 5.86% wallet share of individual investors’ financial assets. Moreover, as of FY 17-18, 68% of individual wealth invested in mutual funds is in equities. This number is expected to increase in the coming years as more investors will look at mutual funds as one of the easiest ways to participate in the Indian equity markets. The report also mentions that with a sustained bull run expected in equity markets in the coming years, direct equities are likely to remain the favourite of investors. According to Karvy estimates, direct equities will reach Rs. 145.98 lakh crore by FY 22-23 growing at 24.41% CAGR. Direct equities include promoters’ shares as well. Following direct equities, fixed deposits and insurance will take the next two spots in terms of investor’s allocation to financial assets. The predominance of fixed deposits can be attributed to the fact that many Indians have entered the financial asset space for the first time by opening a bank account in the last few years. Moreover, the safety associated with fixed deposits makes it a safe option for senior citizens and low wage earners.

Piquant Parade

Pramerica Financial (Pramerica), a brand name used by Prudential Financial, Inc. of the United States, is set to acquire the entire 50% stake of DHFL in its joint venture subject to regulatory approval. With this, DHFL Pramerica Mutual Fund will now become Pramerica Mutual Fund. The transaction is subject to signing of definitive documentation, customary closing conditions, and regulatory and other approvals. Pramerica ranks among the top 10 largest investment managers in the world with more than $1 trillion in AUM. Pramerica and DHFL formed the joint venture in 2014 and expanded its business through the acquisition of Deutsche Mutual Fund. In another development, Baroda Mutual Fund is reportedly bringing in a new foreign partner. Last year, Bank of Baroda had purchased the 51% stake held by foreign partner Pioneer Investments in their joint venture asset management company.

To make a mark in the mutual fund ranking space, Samco Securities has introduced RankMF, a platform to help investors select a mutual fund scheme based on several data points. RankMF will not only rate and rank the scheme based on the past performance but also on a slew of other factors such as expense ratios, standard deviation, beta, market valuations, multiples, portfolio holdings and diversification/concentration of portfolio, the cash ratio, size of the fund, and the predicted yields. Mumbai-headquartered, Samco Securities is a fintech start-up in the discount broking industry with over 1 lakh customers. The website, www.rankmf.com will also analyse the quality of actual portfolio holdings since that is going to deliver real returns to investors and not historical returns which are used by other ranking platforms. Among the existing mutual fund ranking platforms are CRISIL, Value Research, and Morningstar. The difference in the performance of the mutual fund can be as high as 50% and therefore, the selection of a mutual fund scheme is critical. Rank MF will also give filters such as whether the time is right for investments or not and also on the strength of mutual fund schemes. The company has also introduced RankMF SmartSIP, which will generate a signal based on the margin of safety as to whether an investor should continue with the SIP in the same scheme or switch to another fund.

After the success of ‘Mutual Funds Sahi Hai’ campaign, AMFI is set to launch its new campaign reportedly called ‘FD Jaisa Lagta Hai’ (debt funds are like bank fixed deposits) that will promote the benefits of investing in debt funds. ‘Mutual Funds Sahi Hai’ debt campaign being an innovative campaign required a lot of time for ideation and conceptualisation. The first ‘Mutual Funds Sahi Hai’ campaign ran across different media channels such as TV, online platforms, print, radio, hoardings in multiple languages. They plan to adopt a similar route to spread awareness about debt. Will the debt campaign capture the imagination of investors (to increase retail participation in debt markets) as the first campaign did? Only time will tell.

to be continued…