FUND FULCRUM

March 2019

Overall assets under management (AUM) of the mutual fund industry stood at Rs 23.16 lakh crore at the end of February 2019, almost flat compared to the previous month according to the data released by the Association of Mutual Funds in India (AMFI). The industry witnessed a total outflow of Rs 20,083 crore in February 2019 compared to an inflow of Rs 65,439 crore in January 2019 on the back of a moderation in flows into equity funds and redemptions in liquid funds. Inflows into equity funds declined 17% on a month-on-month (MoM) basis to Rs 5,122 crore in February 2019. The decline can be attributed to fading equity outlook, market volatility and weak global cues. While the overall equity flows have been weakening, investment in equity funds through systematic investment plans (SIPs), which is relatively sticky, continued to hold its sway with Rs 8,095 crore of SIP funds mobilised in February 2019. The high share of SIP contribution has been the key success story of the mutual fund industry in the past couple of years. Systematic investment plans (SIPs) have been the saving grace for the mutual fund industry amid market volatility. According to the data provided by AMFI, the 43-member-strong mutual fund industry has managed to garner Rs 8095 crore through SIPs in February 2019, slightly higher than the Rs 8,064 crore collected in January 2019. Over the last five months, AMFI and players from the industry have launched campaigns such as 'mutual funds sahi hai' and Jan Nivesh, which is helping garner interest for a push product like mutual funds. Generally, SIPs are the preferred route for retail investors to deploy money in mutual funds as it helps them reduce market timing risk.

Fund flows into mutual funds reversed in February 2019, with outflows at Rs 20,083 crore, after the 43-player industry witnessed net inflows of Rs 65,439 crore in January 2019, according to data from AMFI. Cash plans, or liquid schemes, reported the highest outflows across all mutual fund categories. This category registered outflows of over Rs 24,509 crore in February 2019 as against an inflow of Rs 58,637 crore in January 2019. Companies normally park their money in liquid schemes to meet their short-term needs instead of keeping their money idle in a non-interest bearing current account. Since liquid plans do not levy any entry or exit fee, they facilitate easy cash management. Income funds too saw outflows of Rs 4,214 crore in February 2019. Debt fund investors are still shying away from making investments after the recent crisis at IL&FS affected these schemes. The trouble, which began after multiple defaults by Infrastructure Leasing & Financial Services (IL&FS) came to light a few months back, impacted debt funds that held securities issued by it, worth Rs 2,800 crore. For the second consecutive month, balanced funds saw net outflows of Rs 1,077 crore in February 2019, after outflows of Rs 952 crore in January 2019. Equity funds continued their downward journey for the fourth straight month, with the quantum of inflows declining 16.9% month-on-month to Rs 5,122 crore in February 2019.

    

Equity mutual funds account for 5.9% of India’s stock market capitalisation as on February 2019. It has grown by 0.6% in the last one year, shows a recent Motilal Oswal Report titled ‘Fund Folio – Indian Mutual Fund Tracker’.  India’s equity market capitalisation stood at Rs. 140 lakh crore while the mutual fund industry’s equity AUM was at Rs.8.29 lakh crore at the end of February 2019. Equity AUM includes pure equity, ELSS and arbitrage funds. Strong retail participation in equity markets has helped the growth in equity AUM. The industry saw net inflows of Rs. 1 lakh crore in equity funds in April-February 2018-19. According to the report, while the street exercised caution amid a flurry of unsupportive domestic and global cues, mutual fund investors appeared to be undeterred by market volatility as reflected by the record SIP flows. Monthly inflow in SIPs was at an all-time high of 8,095 crore in February 2019, growing by 26% year-on-year or 2 times in last two years, shared the report. The healthy mutual fund inflows in equity markets act as a counterbalancing force against selling pressures. Overall, mutual fund equity AUM grew by 7% in the last one year (from Rs. 7.76 lakh crore in February 2018 to Rs. 8.29 lakh crore in February 2019).    

Piquant Parade

Reliance Nippon Life AMC may soon see a change of ownership. Reliance Capital, which owns 42.88% stake in the fund house, has invited Nippon Life its joint venture (JV) partner to acquire its stake in the business. Currently both partners hold equal ownership in the JV. Reliance Capital expects to sell it shares to Nippon Life at a premium. The business group is reportedly planning to divest its share in various businesses as it is under pressure from lenders to pay off its huge outstanding debt. Reliance Nippon Life AMC is the fifth largest fund house by AUM having assets of Rs. 2.43 lakh crore in January 2019. If Nippon acquires Reliance Capital’s stake, it will become the largest foreign owned fund house in India. 

According to SEBI’s website, two new players Geojit Financial Services and SREI Infrastructure Finance have applied to launch their mutual fund business. Altogether, six players including Frontline Capital Services, Equity Intelligence India, Samco Securities and Karvy Stock Broking are awaiting approval from SEBI to launch their mutual fund business in India. While Geojit Financial Securities is in financial distribution business, SREI Infrastructure is already into Infrastructure Debt Fund (IDF) business and has AIF, insurance broking and infrastructure financing business. Geojit Financial Services approached SEBI in August 2018. Similarly, SREI Infrastructure Finance has applied for AMC license in February 2019. Last year, Trust Investment Advisors and Muthoot Finance got SEBI in-principle approval to float asset management business. SEBI rules say that the sponsor applying for a mutual fund licence must be in the financial services business for five years and needs to have a positive net worth for five years. The sponsor should have earned profits in three of the previous five years, including the latest year. SEBI conducts an on-site due diligence of sponsors before granting approval.

Regulatory Rigmarole

SEBI has said that mutual funds will have to disclose assets under management of their schemes on a daily basis, coupled with an additional benchmark and product labelling. In a clarification letter to AMFI on March 7, 2019 the market regulator said, “The AUM of all schemes except liquid schemes has to be disclosed on a daily basis on the AMFI website.” AMFI had earlier requested SEBI to do away with the requirement of publishing the daily AUM of mutual schemes. SEBI said that in case of liquid schemes the closing AUM, and the AUM of the previous month has to be disclosed on the AMFI website on a daily basis. However, if the AUM movement of the schemes is over 10% from the previously disclosed AUM, fund houses will have to disclose the AUM of that day. AMFI had asked to do away with the requirement to prevent unhealthy competition. Fund managers said that the disclosure of AUM on a daily basis may lead to unhealthy competition among fund houses for the shoring up of assets. Also, the extensive media glare on AUM figures may result in unnecessary pressure on funds. At the same time, SEBI accepted AMFI’s request on the performance disclosure of short term schemes such as overnight fund, liquid fund, ultra-short duration fund, low duration fund, and money market funds. SEBI said that mutual fund houses will have to disclose the performance for a period of seven days, 15 days, one month, three months and six months. SEBI also clarified that AMCs can disclose AUM of growth option of both regular and direct plans. In the same letter, SEBI said it has modified the formula of calculating the total expense ratio (TER) for beyond 30 (B30) cities. TER is a percentage of a scheme's corpus that a mutual fund house charges towards expenses which include administrative and management expenses. Earlier, only 'retail' assets were included in calculating the ratio. With the new formula, SEBI has allowed fund houses to consider both, retail and HNI assets while calculating the ratio. The ratio at present is 30 bps of the total assets garnered.

SEBI has clarified that AMCs can no longer use AMC account to compensate their distributors even if they have made a commitment. AMCs can no longer pay upfront commission even on assets that you have brought before October 22, 2018. In a recent clarification, SEBI has asked fund houses not to honour their commercial commitment that they have made to distributors before the implementation of ban on upfront commission.

AMFI has sought clarification from the government on stamp duty tax to be levied on financial products including mutual funds. Earlier, in interim budget 2019, the Union Finance Ministry has announced that the government would levy stamp duty on financial securities transactions, which includes financial instruments like direct stocks and mutual funds. “Currently, TER does not include stamp duty tax. Hence, we have requested finance ministry and SEBI to make necessary changes to the TER structure. Ideally, investors should bear stamp duty tax on mutual funds.” Since mutual funds deal with shares, every time a fund manager executes transaction, the fund has to pay stamp duty along with securities transaction tax. “Currently, the mutual fund industry executes transaction of Rs.5 lakh crore each month in equity and debt markets. Hence, the impact of stamp duty would be large. Also, the impact would be more on funds with high turnover ratio,” he said. He further said that while government is yet to announce the rate at which stamp duty will be levied on demat transactions, it is understood that it would be 0.005%. This would be implemented from April 1, 2019, he said. 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.

After the introduction of side-pocketing in mutual funds, SEBI has now tightened norms for liquid funds following a series of credit episodes. SEBI has decided to introduce mark-to-market valuation for debt securities having maturity of 30 days and more. Simply put, liquid funds may become more volatile going forward. SEBI said, “The residual maturity limit for amortization based valuation by mutual funds shall be reduced from existing 60 days to 30 days.” Currently, SEBI rules say that fund houses have to do mark-to-market valuations of securities having maturity of 60 days and more. Debt market experts believe that fund managers will reduce average maturity on their portfolio to less than 30 days to avoid doing mark-to-market valuation. Hence, they would sell debt instruments having maturity between 31 days and 60 days. Liquid funds have been holding debt instruments with less than 60 day residual maturity so that they do not have to mark-to-market it which helps in reducing volatility in liquid funds. As per the new rule, the market to market (amortisation) limit has been reduced to 30 days which means liquid funds will have to do mark-to-market for debt having residual maturity between 31 and 60 days. To avoid this, liquid funds will want to move to papers with residual maturity of less than 30 days. This will lead to increase in yield for papers with residual maturity between 31 and 60 days and fund turnover will increase. With stamp duty coming into picture, we can expect a marginal decrease in liquid fund returns. SEBI further said that the difference between traded price and price quoted by rating agencies of a security should not exceed 0.025%. This was reduced from 0.1%. SEBI has asked AMFI to appoint valuation agencies to provide valuation of money market and debt securities rated below investment grade. Currently, most fund houses rely on ratings by agencies to derive NAV. However, AMCs can deviate from valuation provided by agencies by giving rationale for such deviations.

SEBI has asked fund houses to fund investor awareness programs (IAPs) from their scheme accounts. As per SEBI norms, mutual funds/ AMCs should annually set apart at least 2 bps on daily net assets within the maximum limit of TER for investor education and awareness initiatives. However, AMFI asked SEBI if fund houses could fund IAPs from AMC books. AMFI asked, “It may be clarified that expenditure in connection with investor education may be borne by both AMC and schemes, i.e., the expenditure towards investor education and awareness initiative need not mandatorily be charged to the schemes.” However, SEBI in its response to AMFI clarified that fund houses can fund IAPs from AMC books only if such expenses exceed 2bps from schemes. SEBI said, “The request of AMFI in this regard is not acceded to. Any expenses towards investor education and awareness initiatives in excess of the amount set apart through 2 bps shall be borne by the AMC.” AMFI data shows that 35 AMCs have conducted 8,203 programmes in 211 cities covering over 4.03 lakh participants across the country in FY 2016-17. So far, 40 AMCs have conducted 72,257 programmes in 485 cities, covering over 25 lakh participants between May 2010 and May 2017.

SEBI has allowed fund houses to charge up to 2bps of the scheme AUM or actual cost whichever is lower from AMC book for operational expenses such as registration of SIPs, payment gateway charges, transaction platform charges, annual custody fees, call centre fees, RTA NFO charges, CKYC charges, KRA charges and so on. However, SEBI has clarified that these charges have to be small in value and high in volume. In fact, SEBI has asked AMFI to make a list of these expenses in consultation with the market regulator through best practices circular. AMFI is expected to submit its recommendation soon. Further, SEBI has cautioned that if they found AMCs misusing this facility, they will take necessary action against such AMCs. SEBI said, “Misuse of the carve-out, if any, shall be viewed very seriously and necessary action against AMCs including withdrawal of the said carve-out facility may also be considered.”

At times, fund houses have to borrow money at higher rates i.e. interest rates higher than YTM of the portfolio to meet redemption pressure. SEBI has allowed fund houses to use AMC’s book if the borrowing cost exceeds running yield or yield to maturity (YTM) of the scheme portfolio. In a letter sent to AMFI, the market regulator has clarified that the cost of borrowings by a mutual fund scheme would be adjusted against the portfolio yield and if the cost of borrowings exceeds such a yield, then fund houses can use the AMC book to repay additional interest on such borrowing. Simply put, if a scheme carries yield to maturity of 8% and borrows money at 8.5% to meet its redemption pressure, the fund house managing such a scheme has to pay additional interest of 0.5% from the AMC book ensuring that the scheme expenses remain intact. Earlier, AMFI had requested SEBI that the cost of borrowing made to manage redemptions in respect of liquid funds to the extent of YTM or running yield of the fund as on the previous day should be charged to the scheme and any excess cost over YTM or running yield of the previous day should be borne by the AMC. SEBI norms allow fund houses to borrow up to 20% of the total AUM to meet redemption pressure.

To strengthen its ‘Go Green’ initiative, SEBI has asked fund houses to submit links of their advertisements by sending an email to comply with advertisement norms within 7 days from the date of issue of advertisements. So far, fund houses have filed hard copies of their advertisement to comply with SEBI Mutual Fund regulations. In a circular, SEBI said, “In continuation to the various Go Green initiatives in Mutual Funds, the Mutual Funds are now advised to submit links to access the advertisements to be filed under the MF Regulations by sending the same through e-mail to SEBI at mf_advertisement@sebi.gov.in. However, advertisement materials like pamphlets may be submitted as attachment along with e-mail, if the size of the attachment does not exceed 250 KB.” In addition, the compliance head of fund houses will have to ensure that these advertisements are in line with the advertisement code. SEBI said, “While sending the e-mail, the compliance officer of respective Mutual Fund shall expressly confirm that the advertisement is in compliance with the Advertisement code specified in the sixth schedule of the MF regulations.” The circular has come into effect immediately.

In a circular, the ministry of finance has clarified that taxpayers cannot avail benefits of composition scheme under GST norms if they provide services in other states. Simply put, the composition scheme does not allow distributors to avail benefits if they provide interstate services. For instance, if a Chennai based distributor is selling the schemes of a Mumbai based fund house, he cannot avail the benefits of composition scheme. Since practically all distributors work with AMCs that are based out of Maharashtra and Tamil Nadu, they cannot avail the benefits. That means only a fraction of Maharashtra distributors who do not have business with AMCs out of Maharashtra and earn between Rs.20 lakh and Rs.50 lakh can avail the benefits of composition scheme. Earlier, the Union Finance Minister Arun Jaitley had announced the introduction of composition schemes for services sector. Under the scheme, service providers earning up to Rs.50 lakh could pay GST rate of 6% instead of 18% with effect from April 1, 2019. However, these service providers cannot avail input credits if they opt for the composition scheme. Also, they will have to pay taxes quarterly but file returns annually.

Ultra HNI population in India is expected to grow at 39% to reach 2697 by 2023, says the Knight Frank Wealth report. India is witnessing a rapid growth in personal wealth, states the report with the country’s ultra HNI population growing by 24% in the last five years ending 2018. Unsurprisingly, Mumbai and New Delhi are two prominent cities in terms of Ultra HNI population in India. With 797 such individuals residing in Mumbai in 2018, the city is home to 41% of the country’s UHNWI population. New Delhi meanwhile is home to 211 UHNWIs or 11% of the country’s wealthy population. While Mumbai leads the country in terms of personal wealth, Bengaluru will lead the country in terms of wealth creation over the next five years. The city’s GDP is expected to grow by almost 60% in the next five years. Consequently, there will be 40% increase in the cities ultra HNI population in five years, shares the report.