FUND FULCRUM

February 2019

According to the Association of Mutual Funds in India (AMFI), Assets Under Management (AUM) of the Indian mutual fund industry increased 2.24% mom and 4.28% yoy to Rs 23.37 lakh crore in January 2019. The upside reflects inflows in the liquid/money market and income categories. AUM under the equity (including ELSS), balanced, and other ETFs came in at Rs10.57 lakh crore in the month under review as against Rs10.73 lakh crore in December 2018. The mutual fund industry saw net inflows of Rs 65,439 crore in January 2019 as against net outflows of Rs 136,951 crore in December 2018. Net inflows from the liquid/money market category came in at Rs 58,637 crore as against net outflows of Rs 148,906 crore in December 2018. The upside likely reflects investment by corporates to park short-term cash. Income category’s net inflows stood at Rs 2,080 crore in January 2019 as against net outflows of Rs3,407 crore in December 2018. The category has seen outflows consistently for the past eight months. Inflows in equity funds (including ELSS) fell for the third consecutive month and plunged 6.78% MoM to Rs 6,158 crore amid volatile capital markets and political uncertainty wherein the broader indices remained under pressure. This marked the lowest inflows in almost two years. Meanwhile, net outflows in the balanced category came in Rs 952 crore as against net inflows of Rs 45 crore in December 2018. This is the first net outflow since May 2014 for the category. Inflows in equity funds have been declining since November 2018. Inflows reduced to Rs 5,206 crore in January 2019 as against Rs. 6,651 crore in December 2018 and Rs. 8,629 crore in November 2018. Lower inflows in pure equity funds and net outflow of Rs. 952 crore in balanced funds contributed to this decline. ELSS funds meanwhile saw an increase in their inflows because of the tax season.

Industry added 22.91 lakh retail folios last quarter taking the total folio count to 7.53 crore in December 2018, according to AMFI data. HNI folios too grew by 82,105 to reach 45.43 lakh folios during the period. The industry folios have nearly doubled from 4.03 crore to 8.03 crore in the last four years (ending December 2018). Retail folios saw a steady growth from June 2016 to March 2018 before slowing down in the last few months. The market volatility in the last few months may have contributed to this slowdown. Compared to retail folios, the increase in HNI folios has been more erratic with intermittent spurts and slowdown. Despite both retail and HNI folios growing at a slower rate in the last few months, the total growth continues to be positive. Overall, retail investors account for 94% of the industry’s folios while retail and HNI investors combined account for 99.5% of the industry’s folios. The dominance of individual investors (retail + HNI) in folios is reflected in the asset class wise folio division as well. Retail investors primarily invest in equity schemes. Similarly, majority of the folios are in equity schemes (84%). Meanwhile liquid category, which sees maximum institutional money, accounts for just 1.9% of the folios and debt fund have 12.2% of investor folios. The last quarter saw a marginal increase in equity ticket size from Rs. 1.49 lakh to Rs. 1.51 lakh. However, there was a significant uptick in ETF and fund of fund (FoF) ticket size on account of CPSE NFO. The ETF ticket size grew from Rs. 7.98 lakh to Rs 8.68 lakh during the period. Liquid also saw a slight increase in average ticket size from Rs. 28.16 lakh to Rs. 28.65 lakh. Debt however saw a slight fall in average ticket size from Rs. 7.43 lakh to Rs. 7.16 lakh. The average ticket size, of both institutional (Rs. 78.83 lakh) and retail investors (Rs. 5.01 lakh), is highest in liquid funds and lowest in equity funds with Rs. 5.02 lakh institutional and Rs. 1.32 lakh individual investor average ticket size.

Industry added 6.62 lakh folios in January 2019, an increase of 92,284 compared to the preceding month, according to the latest SEBI data. Demand for ELSS funds increases during the tax season, typically the last quarter (Jan-Mar) of the financial year. The category added 1.74 lakh folios during the month, equaling 26% of the industry’s new folio creation in January 2019. A similar uptick was observed in net inflows in ELSS funds too. Overall, all equity funds added 5.72 lakh folios in January 2019. Balanced funds too added nearly 18,000 folios despite the category recording net outflows of Rs. 952 crore during the month of January 2019. Liquid funds continued to see a consistent increase in their folios. In the last four months the category has added 2.08 lakh folios and has been amongst the fastest growing category in terms of percentage folio growth. In January 2019, liquid fund folios grew by 3.06%. Following liquid funds in the second place were gilt funds which saw a 2.8% increase in folios last month. Expectation of stance change by RBI on account of low inflation led to the increase in folios in the category during the last two months. A likely recovery in debt category was also reflected in income fund numbers which reported an increase of 37,917 folios and inflows of over Rs. 2,000 crore during the month. All categories of funds saw an increase in their folios except gold ETF category which saw its folios contract by 8467 folios during the month. Overall, industry has nearly 8.1 crore folios as at the end of January 2019.

60% of SIPs in the mutual fund industry have been active for more than 5 years, according to the latest AMFI data. Of the 2.54 crore SIP accounts as on December 2018, nearly 1.53 SIPs are active for more than five years. This indicates that SIP investors focus on financial goals and stay put for long term. This trend can be attributed to increasing awareness about the benefits of long term investments in equity funds through SIPs. In addition, the investment horizon of people has increased due to goal based investment. If we look at absolute terms, the industry manages AUM of Rs.44,000 crore from such SIPs that is 18% of the total SIP AUM. Each of these SIP folios has roughly over Rs.29,000 as on December 2018. AMFI data also shows that the industry mopped up close to Rs.64500 crore in April-December through SIPs. In addition, the mutual fund industry has added 9.31 lakh SIP accounts each month on an average during the first nine months of FY 2018-19. In fact, the total AUM of SIP stood at Rs.2.40 lakh crore as on December, i.e. 10.5% of the overall AUM of the mutual fund industry. Most of these SIPs have come through distributors. AMFI data shows that regular plans constituted 89% or 2.26 crore SIP accounts while 28 lakh SIPs were in direct plans. The AUM of SIPs under regular plan is Rs.2.16 lakh crore whereas the AUM of SIPs through direct plans stood at Rs 23500 crore.

Piquant Parade

Google trends for the search term ‘mutual fund’ reveals a growing interest amongst investors from Andaman and Nicobar Islands and Daman and Diu in mutual funds over the last one year ending January 2, 2019. The two union territories were followed by Maharashtra. Even though around 40% of the industry’s AUM comes from Maharashtra, it ranks third amongst Indian states in terms of web searches for mutual fund. In the fourth place was another union territory Dadra and Nagar Haveli while Jharkhand was in the fifth position. This data reflects the growing popularity of mutual funds beyond top 30 cities. Analysis of AMFI AUM reveals a similar trend too. In the last one year ending November 2018, AUM in all the five regions except Maharashtra grew substantially: Andaman and Nicobar Islands (34%), in Daman and Diu (20%), Dadra and Nagar Haveli (36%) and Jharkhand (26%). But assets in Maharashtra alone contracted marginally by 1%. AMFIs mega campaign ‘Mutual Funds Sahi Hai’ can be credited with spreading awareness about mutual funds in the hinterlands. Good performance of equities in the last few years also attracted investors in small towns to mutual funds.

Regulatory Rigmarole

Soon retail investors may be able to invest in Real Estate Investment Trusts (REIT) and Infrastructure Investment Trusts (InvIT). SEBI recently proposed lowering the minimum investment threshold in these schemes to Rs. 15,000 - Rs. 20,000 as against Rs.2 lakh currently. Despite, the InvIT and REIT regulations coming in to effect from September 2014, there has been limited growth in these products. So far, only three InvITs have been introduced which raised Rs. 10,000 crore while any REIT is yet to be launched (Kotak Mutual Fund had filed the Offer Document. In a recent consultation paper, SEBI has proposed some changes in the InvIT and REIT regulations on the basis of feedback received from market participants. According to the paper, SEBI has proposed lowering the minimum application and transaction amount, increasing the leverage limit for InvIT and changing the structure of privately placed unlisted InvITs. Currently, investors have to invest a minimum of Rs. 10 lakh in the InvIT during the offer period and the minimum lot size for trading is Rs. 5 lakh. In case of REITs, the minimum subscription amount is Rs. 2 lakh while transaction can happen in lots of Rs. 1 lakh. According to industry representatives, REITs and InvITs tend to be stable, income yielding investment vehicles and the current investment requirements are not in line with its risk profile. In the consultation paper, SEBI has proposed to lower the minimum application and trading amount to Rs. 15,000 - Rs. 20,000, which will be a lot of 100 units. Lowering the investment amount will allow retail participation in these products. SEBI has proposed to increase the leverage limit for InvITs from current 49% to 70% with an approval from 75% of unrelated unit holders. However, the InvIT can apply for the increased limit only after three years of continuous distribution post listing. Moreover, the credit rating for the project must be AAA. In addition, the increased debt can be used for purchase of new infrastructure assets and there will be additional disclosure requirements from the InvIT. Earlier, SEBI allowed for listing of privately placed InvITs. However, as listing made them quasi-public in nature, the regulations for both public and private InvITs was similar. In the paper, SEBI has disallowed listing and raised minimum investment limit to Rs. 1 crore. Consequently, such InvITs will have greater flexibility in terms of structure. As per the draft proposal, the issuer of such InvITs can determine the number of investors and single investor investment limit. The amount of leverage will also be decided by the issuer in consultation with the investor. Even current privately placed InvITs can choose to migrate to the new framework with more than 90% investor approval. Consequently, they will be delisted. Conversely, a privately placed unlisted InvIT may choose to list its units on stock exchanges after complying with the necessary requirements.

SEBI has revised reporting norms for mutual funds. The new Monthly Cumulative Report (MCR) will capture details such as number of folios in each scheme, gross inflows, net inflows/outflows, net AUM, average AUM and so on. AMCs will have to do such reporting at scheme level. The revised MCR is in line with the categorization and rationalization of mutual fund schemes that aims to eliminate duplication in offerings across schemes within the fund house. The new report directs fund house to put one scheme in each category. The new reporting norms will come into effect from April 1, 2019. AMCs will have to ensure that they share the report within three working days of the month.

AMCs claim that daily disclosure of scheme AUM could trigger unhealthy market competition and unwarranted media hype. In a letter sent to SEBI, AMFI has requested the market regulator to do away with the requirement of publishing daily AUM of scheme. Sharing the rationale for this, AMFI said, “In our view, it is not desirable to publish daily absolute AUM, as the same could trigger unhealthy competition and also unwarranted media scrutiny. We therefore request SEBI to kindly consider dropping the aforesaid requirement of disclosure of scheme AUM on a daily basis.” Currently, AMCs are required to disclose average AUM (AAUM) of their schemes on AMFI website.

It is once again possible to complete the KYC process of clients in minutes, thanks to video KYC feature offered by NSE NMF II. Earlier, advisors could instantaneously on board clients using biometric eKYC. NSE NMF II platform used to offer this facility along with digital IIN creation to make the process seamless. However, after the Supreme Court verdict on Aadhaar, UIDAI had asked KRAs (KYC registration agencies) to stop using Aadhaar based authentication for KYC process making the KYC process lengthy again. To speed up the process, NSE NMF II has collaborated with CAMS to offer a paperless KYC facility for advisors. The exchange platform claims that KYC process will be completed within 72 hours of the submission of documents. However, advisors need not wait to initiate a transaction. Immediately after successful submission of the documents, advisors can help their clients make online transaction. The platform offers both Aadhaar based and non-Aadhaar based KYC. Under Aadhaar based KYC, the client can submit his eAadhaar. The software will scan the QR code on the eAadhaar document to complete the KYC. The non-Aadhaar KYC allows the advisor to submit the client’s proof of identity and proof of address digitally. In addition, the advisor will have to upload scanned copy of the client’s signature on NSE NMF II.

Investment in direct stocks, mutual funds, ULIPs and NPS is likely to become a bit expensive for investors. Hidden in the fine print of the interim Budget document, the government would levy stamp duty on financial securities transactions, which includes financial instruments like direct stocks and mutual funds. Stamp duties would be levied on one instrument relating to one transaction and get collected at one place through the stock exchanges. The duty so collected will be shared with the state governments seamlessly on the basis of domicile of buying client. Initial reading of budget document implies that government would re-introduce stamp duty tax in demat transactions. However, the impact would be marginal due to low rate of the stamp duty tax. Though government is yet to announce the rate at which stamp duty will be levied on demat transactions, it was 0.01% in delivery transactions and 0.002% in intraday, future and option transactions. Since mutual funds, ULIPs and NPS deal with shares, investors investing in these financial instruments will have to bear this tax.  Also, investors having exposure to mutual funds with high turnover ratio will be affected more due to re-introduction of stamp duty. Earlier, the government had waived off stamp duty in transaction of securities in demat form. However, the government has proposed to re-introduce this duty. Also, stock exchanges will have to track origin of investors to distribute stamp duty among states.

Currently, Artificial Intelligence gives an edge when it comes to trading but not long-term investment decisions. Fans of Terminator will remember how machines dominated the earth, replacing humans in the series. With the rapid development in machine learning and big data techniques, one question that needs to be answered is “Will machine replace investment managers?” While high frequency, short-term trading is almost fully automated, machines are not yet capable of taking correct long–term investment decisions independently. Why is it so? These techniques tend to over-fit data, create spurious patterns and correlations. In addition, these algorithms struggle in times of economic turmoil or during changing macroeconomic conditions and they are unable to capture complex human responses. Furthermore, it is difficult to integrate these techniques with the traditional investment management processes. Despite this, acceptance of AI is increasing among asset managers. When Alex polled top hedge fund managers on their plans to include inputs from AI in their investment decisions, most of them responded in the affirmative. In fact, a third of them had already integrated an element of machine learning in their investment process. At the heart of it, machine learning helps asset managers spot patterns that humans cannot easily spot given the sheer amount of data being created in the world today. But what does it mean for alpha generation? Data shows that over the one, three and five year periods, hedge funds using some form of AI inputs have outperformed their peers using traditional investment methods. What this means is that there is huge scope to use big data and AI to augment the decision-making process of fund managers by analysing vast quantities of data to identify patterns. Typically, the first movers will benefit the most. However, the end point that is full automation of the entire life-cycle of investment decision making is still many years away.