FUND FULCRUM

May 2019

The mutual fund industry has started FY 2019-20 on a positive note. In April 2019, it added 2.80 lakh folios raising the aggregate count to 8.27 crore from 8.25 crore in March 2019. The rise in the number of folios for the 59^th consecutive month in April 2019 also helped AAUM of the mutual fund industry soar past Rs. 25 lakh crore in April 2019. The mutual fund average AUM now stands tall at Rs. 25.28 lakh crore. Since April 2019, SEBI started disclosing folios of individual debt and equity categories such as overnight funds, long duration funds, low duration funds, corporate bond funds, multi-cap funds, small-cap, and large-cap schemes among others. SEBI had disclosed consolidated folio numbers under equity, balanced, ELSS, liquid, income and gilt categories, earlier. ELSS has the highest number of folios at 1.15 crore, nearly 14% of the total folios in the mutual fund industry. AAUM in the ELSS category stood at Rs. 91,930 crore or 3.6% of the industry’s AAUM.   Next in the list of highest folio count is multicap funds category with 87.18 lakh folios or 10.5% of industry’s total folios. AAUM in multicap funds stood at Rs.1.52 lakh crore or 6% of industry share. Both ELSS and multicap funds account for 25% of the total industry folios. Large cap funds followed the two with a folio count of 81.79 lakh or 9.9% of industry’s folio share. AAUM in the large cap funds stood at Rs.1.26 lakh crore or 5% of industry’s AAUM as on April 2019. Among debt funds, the highest number of folios existed in liquid funds. Ultra short duration fund and low duration fund followed the list. In liquid funds, there were 14.51 lakh folios, which accounted for 1.8% of all the folios in the mutual fund industry. AAUM of liquid funds stood at Rs.5.11 lakh crore or 20% of industry’s AAUM. This category has the highest AAUM as institutional investors park their money in bulk. In ultra-short duration funds, there were 5.91 lakh folios or 0.7% of industry’s folio share, the second highest among income/debt oriented funds. AAUM in the ultra-short duration funds stood at Rs. 86,200 crore or 3.4% of industry’s share. In low duration funds, there were 9.22 lakh folios or 1.1% of industry’s folio share. AAUM in this category of funds stood at Rs.90,670 crore or 3.6% of industry’s AAUM.

Equity funds accounted for 42.5% of the total mutual fund industry AUM last fiscal. AMFI’s latest data shows that while the proportionate share of equity and liquid funds grew last fiscal, the share of income funds and gilt funds declined in FY 2018-19. Equity funds include pure equity funds, arbitrage funds, ELSS and balanced funds. At the end of FY 2018-19, the Indian mutual fund industry managed average AUM of Rs. 24.60 lakh crore, up 8% from Rs. 22.70 lakh crore a year ago. The proportionate share of equity funds stood at Rs.10.50 lakh crore or 42.5% of the mutual fund industry’s assets, up from 9.30 lakh crore or 41%, a year ago. Similarly, the proportionate share of liquid funds increased to Rs.5.70 lakh crore or 23.2% as against Rs.4.60 lakh crore or 20.3% a year ago. However, the proportionate share of debt funds declined to Rs.7.2 lakh crore or 29.1% of the mutual fund industry assets from Rs.8 lakh crore or 35.3% a year ago. The decline in the proportionate share of debt funds was due to credit downgrades and series of defaults post IL&FS crisis.

Association of Mutual Funds in India’s (AMFI’s) latest data shows that the mutual fund industry witnessed a massive decline of 56% in equity net inflows last fiscal. The industry saw equity net inflows reduced to Rs.1.1 lakh crore in FY 2018-19 from Rs.2.6 lakh crore in FY 2017-18. All the categories recorded a decline in net inflows due to volatility in equity markets and regulatory changes such as upfront commission ban. Among equity funds, balanced funds saw the sharpest decline in inflows in absolute terms. Net inflows into this category fell to Rs.6,865 crore in FY 2018-19 from a whopping Rs.89,757 crore in FY 2017-18. Similarly, in percentage terms, inflows in arbitrage funds plunged by nearly 120% compared to last year. Arbitrage funds registered an outflow of Rs.3,888 crore in FY 2018-19, against inflow of Rs.20,515 crore in FY 2017-18. Over the past few years, investors flocked to balanced and arbitrage funds on expectations of dividends. However, the introduction of a dividend distribution tax in equity funds has discouraged investors from investing in these categories. Pure equity and ELSS schemes also saw a decline in net inflows. Net inflows in equity funds fell to Rs.12,771 crore in FY 2018-19 from Rs.14,316 crore in FY 2017-18. While for ELSS the number came down to Rs. 99,087 crore from Rs.1,36,238. The move to ban upfront commission affected equity inflows. FY 2018-19 was a tougher year in terms of market volatility. Further, the balanced category took a hit after taxation on dividend came into play. Then the third thing was regulatory changes, especially the decision to do away with upfront commission. A fall in lumpsum investments was also a crucial factor for lower net inflows in FY 2018-19. While the growth of SIP inflows has slowed, lumpsum investments in the industry have reduced quite sharply. The fundamental reason for this was volatility in equity markets across the globe including India.

Analysis of the latest AMFI data shows that over 61% of the SIP accounts have been active for more than five years. Of the 2.62 crore SIP accounts in the industry at the end of March 2019, 1.6 crore SIP accounts have been active for more than five years. This can be attributed to the untiring efforts of advisors and financial planners in promoting goal based investing. Moreover, the perpetual SIP option introduced by fund houses also nudges investors to continue investing for longer periods. Meanwhile, 32 lakh SIP accounts have been active for less than a year. The data also shows that advisors are driving the SIP story; 89% of the industry’s SIP accounts come in regular plans. Of the 2.62 crore SIP accounts only 29.567 lakh came through the direct route. Similarly, 90% of the industry’s SIP AUM (Rs.2.4 lakh crore) comes through regular plans. Considering that direct plan numbers also include RIA activated SIPs it is evident that advisors have played a crucial role in getting investors to take the SIP route.

Piquant Parade

After NJ India applied for the mutual fund licence with SEBI, the former fund manager of Axis Mutual Fund Pankaj Murarka has shown interest in floating a mutual fund business. SEBI’s latest data shows that Pipal Securities, promoted by Murarka, applied for an mutual fund licence on April 12, 2019. With this, four new players (including Pipal Securities) have shown interest in MF business in the first four months of CY 2019. The other three players are SREI, Karvy Stock Broking and NJ India. Apart from these three companies, Geojit Financial Services, Samco Securities and Equity Intelligence India applied in 2018 for SEBI’s nod to get into the mutual fund business. Last year, Trust Investment Advisors and Muthoot Finance got SEBI in-principle approval to start their 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.

Anil Ambani led Reliance Capital has decided to exit the mutual fund business. Nippon Life Insurance of Japan announced that it would increase its stake in Reliance Nippon Life AMC to 75% subject to regulatory approval. Currently, both Reliance and Nippon Life have 42.88% stake in the Reliance Nippon Life AMC. The rest is with public shareholders. Reliance Capital will exit and offer its entire Reliance Nippon Life Asset Management shareholding to Nippon Life Insurance, and Offer For Sale to other financial investors to ensure that the minimum free float requirement of 25% is also met. With this, Nippon Life will hold 75% stake in the AMC and the rest will be with public shareholders. The new fund house may be named as Nippon Life Mutual Fund. It would become the largest fund house backed by the foreign promoter ahead of Franklin Templeton MF. Nippon Life will retain the existing management of the fund house.

Regulatory Rigmarole

The market regulator SEBI has asked fund houses to submit reports of their AI and ML activities every quarter starting from the first quarter of FY 2019-20. AMCs will have to submit their report within 10 days of the end of each quarter. The market regulator has entrusted AMFI to submit a consolidated report to SEBI and maintain confidentiality of such activities of AMCs. SEBI signalled that it would review the existing AI and ML solutions offered by AMCs. SEBI is conducting a survey and creating an inventory of the AI/ML landscape in the Indian financial markets to gain an in-depth understanding of the adoption of such technologies in the markets and to ensure preparedness for any AI/ML policies that may arise in the future. The regulator further added that most AI/ML systems are black boxes and their behavior cannot be easily quantified. Therefore, it is imperative to ensure that any advertised financial benefit owing to these technologies in investor facing financial products offered by intermediaries should not constitute misrepresentation.

Online mutual fund distributors will soon be able validate customer KYC details online through Aadhaar. A circular issued recently by the Department of Revenue, Ministry of Finance, said that companies other than banks bound under PMLA 2002 can carry out eKYC through Aadhaar based authentication. Online distributors will have to apply to SEBI for permission for eKYC services. Following SEBI’s approval, the application will be sent to UIDAI. The unique identification authority will check if the distributors comply with cyber security norms. UIDAI will then forward the application to the government for final approval. eKYC was discontinued in September 2019 after the Supreme Court directed fintech companies not to use Aadhaar based authentication. 

CAMS KRA has clarified that the Aadhaar document is considered as ‘not in good order’ and ‘liable to rejection’ if clients forget to black out the first 8 digits of their Aadhaar number. Intermediaries are requested to ensure that Aadhaar card copy, whenever attached as the official valid document, the clients black out the Aadhaar number. However, in respect to those Aadhaar documents wherever it is already masked i.e. only last 4 digits are visible, no further action is contemplated. In some cases, even the masked Aadhaar digits are visible. Hence, the most appropriate way out is to insist investors submit a photocopy of the UIDAI issued document with the initial Aadhaar digits masked. Fund houses and R&T agents can accept a copy of physical Aadhaar, e-Aadhaar, masked Aadhaar and offline Aadhaar XML. However, fund houses and R&T agents will have to ensure that the first 8 digits of the Aadhaar number are properly masked. They can only store the last 4 digits of the Aadhaar number on their system. Currently, fund houses can accept Aadhaar as KYC document to verify the address and identity of investors. However, they cannot make Aadhaar mandatory for customers nor can they do Aadhaar based authentication for eKYC.

Mutual fund houses so far were not permitted to invest in commodities other than gold. At most, a few fund houses had thematic funds investing in the equity of companies engaged in the commodities business. But that is set to change with SEBI issuing final guidelines on May 21, 2019, permitting mutual funds to invest in exchange-traded commodity derivatives (ETCD), with an aim to deepen the nascent commodity market. But while the capital market regulator SEBI is gung-ho about fund houses investing in commodity derivatives, mutual fund managers sounded skeptical. Commodity derivatives is a volatile space on a standalone basis. So depending on the kind of appetite in the market for commodity exposure, mutual funds will decide to launch commodity-dedicated schemes. Before trading in ETCDs, SEBI has directed fund houses to appoint a dedicated fund manager with requisite skills and experience in the commodities market (including commodity derivatives market). They have also asked mutual funds to appoint a custodian registered with the board for custody of the underlying goods, arising due to a physical settlement of contracts. If mutual funds are able to find the right fund manager with an investment mindset (not trading/speculative mindset) that would convince investors to participate in this asset class. SEBI said that prior to participating in ETCDs, the unit-holders of the existing scheme would be given at least 30 days to exercise the option to exit at prevailing net asset value (NAV) without exit load charges. Mutual funds can participate in ETCDs of a good, not exceeding 10 percent of NAV of the scheme. Mutual funds can hedge with commodities derivatives against wild swings in metals, oil and gas and other commoditised equities. This move will give retail investors indirect exposure to the commodities market for the first time.

It is vacation time again! Time for a short repose…The next blog that will appear on the last Monday of August 2019, will update you on all the happenings in the Indian mutual fund industry in the intervening period.