FUND FULCRUM

September 2019

The mutual fund industry's asset base rose to Rs 25.47 lakh crore in August 2019 from Rs 24.53 lakh crore in July 2019. The mutual fund industry has added around 5 lakh investors' account in August 2019, taking the total tally to 8.53 crore, amid volatile market conditions. In comparison, the industry had added 10.29 lakh new folios in July 2019. According to data from Association of Mutual Funds in India, the number of folios with 44 fund houses rose to 8,52,81,222 at the end of August 2019, from 8,48,00,409 at the end of July 2019, registering a gain of 4.81 lakh folios. The total folio count stood at 8.38 lakh in June 2019, 8.32 lakh in May 2019 and 8.27 lakh in April 2019. So far in FY 2019-20, the MF industry has added around 5.05 lakh folios in April, 5.05 lakh folios in May, 5.30 lakh folios in June and 10.29 lakh folios in July. Addition of folios suggests that investors were undeterred by the market volatility. Besides, it indicates their understanding of the market risks associated with the mutual fund schemes. Number of folios under the equity and equity-linked saving schemes rose by 4.11 lakh to 6.16 crore in August 2019 as compared to 6.12 crore at the end of the preceding month. The addition of folios was largely driven by open-ended equity funds. With 1.23 lakh new folios in August 2019, large cap funds saw the highest addition among all equity schemes with its total folio count touching 92 lakh folios. The next in the list was multi cap funds that added 87,896 folios to reach 87 lakh folios. Another notable category of equity funds was ELSS. This category added 61,931 folios in August 2019, as against 72,923 new folios in July 2019. At the end of August 2019, the total number of folios in this category stood at 1.17 crore folios. For hybrid schemes, it was a mixed bag. Dynamic asset allocation/balanced advantage and arbitrage funds saw addition of 18,917 and 10,084 folios respectively. However, categories such as conservative hybrid fund, balanced hybrid fund/aggressive hybrid fund and equity savings fund witnessed a decline in their number of folios.The debt oriented scheme folio count went up by 1.15 lakh to 66.75 lakh. Within the debt category, liquid funds continued to top the chart in terms of number of folios at 16.42 lakh, followed by low duration fund at 9.15 lakh. Most debt fund categories witnessed an increase in August 2019. With over 34,000 new folios, liquid funds witnessed highest number of folio addition in August 2019. The total folio of the category went up to 16.42 lakh.  

The 44-player mutual fund industry witnessed a net outflow of Rs 2,270 crore from credit risk funds in August 2019, the highest among all categories. It was also its fifth consecutive month of outflows. But the data provided a silver lining. Outflows fell from July 2019, when the segment saw investors pull out Rs 3,411 crore, according to data released by the Association of Mutual Funds in India (AMFI). The back-to-back downgrade of debt instruments from Infrastructure Leasing & Financial Services (IL&FS), Dewan Housing Finance (DHFL) and Reliance Home Finance by rating agencies has hurt the performance of credit risk funds. Since April 2019, AMFI has followed a new format to release data, as mandated by market regulator SEBI. The format requires categorisation of schemes into various segments: open-ended, close-ended and equity-oriented schemes. Under income/debt-oriented schemes, another category that saw a significant drop was medium-duration funds, which registered outflows of Rs 561 crore last month as against outflows of Rs 956 crore in July 2019. In the same category, liquid funds, which are used by companies to park surplus cash, saw robust inflows of Rs 79,428 crore in August 2019 as against inflows of Rs 45,441 lakh crore in July 2019. Inflows in balanced funds category reversed in August 2019, with outflows of Rs 879 crore as against inflows of Rs 674 crore in July 2019. On the equity front, despite volatility in the equity markets, funds saw inflows of Rs 9,090 crore in August 2019, up 12.3 percent month-on-month. Net inflows, largely in all categories of equity funds, especially in small and mid-cap funds, as also in ELSS segment, signify heightened confidence and interest in emerging businesses and disciplined tax planning.

SIP continued to be the preferred route for retail investors to invest in mutual fund as it helps them reduce market timing risk. The mutual fund industry managed to garner Rs 8,231 crore through systematic investment plans (SIPs) in August 2019, 7.5 per cent higher than Rs 7,658 crore clocked in the same month last year. In July 2019, the industry had collected Rs 8,324 crore. It had garnered Rs 8,122 crore in June 2019, Rs 8,183 crore in May 2019 and Rs 8,238 crore in April 2019. Inflows into SIPs have averaged about Rs 8,000 crore for the 12 months till August 2019. The total SIP contribution in the first five months of the current fiscal rose to Rs 41,098 crore as compared to Rs 36,760 crore in April-August 2018, according to AMFI. Going ahead, SIPs would witness robust flows on equity side in September 2019, while on the debt side liquid funds may see volatility owing to quarter-end phenomenon. Over the past few years, investment through SIPs has been rising as investments of close to Rs 92,700 crore through the mode were seen in 2018-19, over Rs 67,000 crore in 2017-18 and more than Rs 43,900 crore in 2016-17. Currently, mutual funds have 2.81 crore SIP accounts through which investors regularly invest in Indian mutual fund schemes. The industry, on an average, added 9.39 lakh SIP accounts each month during the current fiscal (2019-20), with an average ticket size of about Rs 2,900.

CAMS data that covers 65% of the industry’s AUM shows that the MF industry has added 5.41 lakh net SIP accounts between April-July 2019. Of these net SIP accounts, 53% or 2.85 lakh net SIP accounts came from regular plans. The remaining 47% or 2.55 lakh accounts were from direct plans.The number of net SIP accounts is calculated by deducting SIPs ceased and SIPs expired from the number of new SIP accounts. Interestingly, the growth in net number of SIP accounts in regular schemes has witnessed an upward trajectory compared to direct schemes that saw a downfall. In case of direct schemes, the highest number of SIP accounts has come in April 2019 and the lowest in July 2019. On the other hand, in regular schemes, the highest number of SIP accounts has come in June 2019 and the lowest in April 2019. Direct plan investors pull out quickly in the absence of guidance and handholding by advisors in volatile markets. If we segregate the number of SIP accounts based on its geographical location, around 3.24 lakh accounts or 60% came from T30 cities. The remaining 40% or 2.16 lakh accounts came from B30 cities. 

While the top five states (based on AUM) still dominate the MF industry, their total AUM share declined from 72% to 70% in the past five years. This is due to faster growth in other regions. Back in March 2014, Gujarat, Karnataka, Maharashtra, New Delhi and West Bengal were among the top five states in terms of AUM. Among these states, Gujarat had the highest allocation of 30% to equities. Karnataka, Maharashtra, New Delhi and West Bengal had 23%, 16%, 14% and 24% respectively, allocated to equity. Between 2014 and 2019, share of equity-oriented funds in these five states increased significantly. As on June 2019, Gujarat’s asset allocation to equities rose to 42%. For Karnataka the number rose from 23% to 40%, for Maharashtra from 16% to 39%, for New Delhi from 14% to 38% and for West Bengal 24% to 41%. In terms of the total AUM, while these top five states still dominate the mutual fund industry with around 70% share of the industry’s AUM, their share have declined slightly from 72% as of March 2014. This is due to faster growth in other states and union territories over the past five years. While the AUM of these top five states grew at a healthy pace of 21.5% CAGR between March 2014 and June 2019, assets of the remaining states and union territories grew at a faster rate of 24.4%. Maharashtra remained at the top of the table even as its AUM share came down to 42% in June 2019 from 47% in March 2014. On the other hand, New Delhi, which is placed at the second spot, saw its AUM share rise from 8% to 9% during this time. Karnataka, Gujarat and West Bengal followed the list of being the top state in terms of total AUM. While Karnataka’s AUM share remained flat at 7%, for Gujarat and West Bengal the number remained unchanged at 5% each over the past five years.

According to an industry report by CRISIL and AMFI, individual investors put nearly 83% of their total assets in regular plans, an indication that they prefer handholding by distributors. The remaining 17% AUM of individual investors comes through direct plan. A lion’s share of individual investors’ assets coming via regular plan is understandable. This is because IFAs not only guide the average investor in scheme selection; they also handle operational works such as updating KYC as per latest norms, facilitating minor to major transfer, inheritance transfer and transaction processes. Moreover, with the recent revision in expense ratios, the difference between regular and direct plans is likely to reduce. Highlighting other trends among individual investors, the report says that AUM of individual investors has surpassed AUM of institutional players in the past 5 years. AUM of individual investors grew from Rs.4 lakh crore in March 2014 to Rs.14 lakh crore in June 2019, logging a 27% CAGR. Consequently, its share in the total AUM increased from 48% to 58%. AUM of institutional investors, on the other hand, logged a slower 18.1% CAGR from Rs 4.3 lakh crore to Rs 10.2 lakh crore. On the preference of asset class, the report said that individual investors deploy assets mainly in equity funds. As of June this year, 57.4% of individual investors’ AUM was in equity-oriented funds. Around 11.7% of individual investors’ AUM was in aggressive hybrid funds and 24.3% in debt funds and 6.4% in liquid/money market funds. Institutional players, however, preferred the fixed-income segment, which constituted 77.2% of their assets. Around 21.4% of institutional investors’ AUM was in equity funds.

Piquant Parade

SEBI has recently given in-principle approval to Samco Securities to set up its AMC business, shows the latest data on ‘Status of Mutual Fund Applications’. Earlier, SEBI had given in-principle approval to Muthoot Finance and Trust Investment. While Muthoot Finance is reportedly in talks with a few fund houses to acquire a stake, there is no update on Trust Investment. Samco Securities approached SEBI in June 2018. Samco Securities founded by Jimeet Modi is an online discount brokerage firm like Zerodha. The Mumbai based company has also online mutual fund distribution arm called Rank MF. Meanwhile, SEBI data shows that Frontline Capital, Karvy Stock Broking and NJ India are awaiting approval from SEBI to launch mutual fund business in India. SEBI rules say that the sponsor applying for a mutual fund licence is required to 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.

to be continued…