FUND
FULCRUM
October
2019
Of the total 41
fund houses, 27 have witnessed a decline in their AAUM in July-September 2019.
The industry’s total AAUM rose by 0.7% to Rs. 25.68 lakh crore from Rs. 25.51
lakh crore in April-June 2019. On a quarterly basis, this is the slowest
increase in MF industry’s overall assets since October-December 2018, the
immediate quarter after IL&FS default, according to AMFI data. While
27 fund houses witnessed their AAUM shrink in July-September 2019, most
emerging fund houses faced the heat. Among the 20 fund houses at the bottom,
only BNP Paribas Mutual Fund, Mahindra MF, PPFAS MF, Quantum MF and Shriram MF
were the fund houses that saw an increase in their AAUM. Nevertheless, the
decline was not limited to the bottom of the pyramid. The steepest fall was
witnessed in the 5th largest fund house Nippon India MF, earlier known as
Reliance MF. The fund house’s AAUM declined by nearly Rs.20,000 crore or 9%
this quarter. The overall AAUM for the MF industry, however, did not witness a
decline. This was largely because of the fact that the top three fund houses - HDFC
MF, ICICI Prudential MF and SBI MF, continued to increase their assets at a
healthy pace. HDFC MF’s AAUM rose by more than Rs 14,000 crore or 4% to Rs.
3.77 lakh crore. ICICI Prudential MF’s AAUM increased by Rs. 10,781 crore to
Rs. 3.48 lakh crore. And SBI MF’s average AUM surged by Rs. 13,128 crore or 4%
to Rs. 3.21 lakh crore. Among other fund houses that did exceptionally well are
IDFC MF and Mirae Asset MF. While Mirae Asset MF’s AAUM rose by more than Rs
4,000 crore or 14% to Rs 33,282 crore; in case of IDFC MF the AAUM surged by
more than Rs 11,870 crore or 14% to Rs 94,150 crore.
The
mutual fund industry has added 3.45 lakh investor accounts in September 2019,
taking the total tally to 8.56 crore, amid volatile market conditions. In
comparison, the industry had added 4.8 lakh new folios in August 2019 and more
than 10 lakh folios in July 2019. According to data from Association of Mutual
Funds in India, the number of folios with 44 fund houses rose to 8,56,26,244 at
the end of September 2019, from 8,52,81,222 at the end of August 2019,
registering a gain of 3.45 lakh folios. The total folio count stood at 8.48
lakh in July, 8.38 lakh in June, 8.32 lakh in May and 8.27 lakh in April. The
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. Meanwhile, the BSE's benchmark Sensex
rose 3.6 percent last month. The number of folios under the equity and
equity-linked saving schemes rose by 2 lakh to 6.18 crore at the end of September
2019 as compared to 6.16 crore at the end of the preceding month. The debt
oriented scheme folio count went up by more than 92,000 to 67.67 lakh. Within
the debt category, liquid funds continued to top the chart in terms of number
of folios at 17 lakh, followed by low duration fund at 9.25 lakh. Overall,
mutual fund schemes witnessed redemption of Rs 1.52 lakh crore in September
2019 as compared to an inflow of Rs 1.02 lakh crore in August 2019. The massive
redemptions could be attributed to debt-oriented schemes, which saw an outflow
of Rs 1.58 lakh crore. Besides, equity mutual funds witnessed a net inflow of
around Rs 6,489 crore in September 2019, the lowest in the last four months,
due to profit-booking by investors after a rally in markets following a
reduction in corporate tax.
Retail
investors are prefering the SIP option for investing in mutual funds, as the
industry garnered more than Rs 49,000 crore through this route in the first six
months of the current fiscal, up 11 per cent from the period a year ago. A
total of Rs 44,487 crore was collected through such investment plans in
April-September 2018, as per the Association of Mutual Funds in India (AMFI). Systematic
investment plans or SIPs have been the preferred route for retail investors to
invest in mutual funds as it helps them reduce market timing risk. As per the
data, SIP contribution in April-September 2019-20 stood at Rs 49,361 crore. Inflows
into SIPs have averaged about Rs 8,000 crore for the 12 months till September 2019.
Over the past few years, inflows through SIPs have been showing an upward
trend. Investments of close to Rs 92,700 crore through the mode were seen in
2018-19, from over Rs 67,000 crore in 2017-18 and more than Rs 43,900 crore in
2016-17. Currently, mutual funds have 2.84 crore SIP accounts through which
investors regularly invest in Indian mutual fund schemes. The industry, on an
average, added 9.29 lakh SIP accounts each month during the current fiscal
(2019-20), with an average ticket size of about Rs 2,900. The 44-player mutual
fund industry, which mainly depends on SIPs for inflows, had assets under
management of Rs 25.68 lakh crore at the end of September 2019, as compared to
Rs 24.31 lakh crore at the end of September 2018.
Piquant Parade
Bank of Baroda-owned Baroda Asset Management
and BNP Paribas AMC announced merger to form an asset management joint venture.
BNP Paribas Asset Management is a subsidiary of BNP Paribas Asset Management
Asia. The merger will allow both the companies to leverage each other's
strengths and offer products for retail and institutional clients. This
strategic partnership reinforces both local footprint and global outreach in
Asia Pacific.
Former cofounder of Flipkart Sachin Bansal
has acquired Essel Finance Mutual Fund subject to SEBI approval. His
company ‘BAC Acquisitions Private Limited’ has received a go ahead from the
Competition Commission of India (CCI). The fund house was valued at Rs.30
crore. Essel Mutual Fund manages AUM of Rs.901 crore as on September 2019. Angel
investor Ankit Agarwal who works with Sachin Bansal had reportedly initiated
this deal. Agarwal was a director at Bank of America. Earlier, SREI
Infrastructure called off the deal with Essel Finance Mutual Fund due to
valuation concerns. SEBI data shows that SREI Infrastructure has applied for MF
license on June 6, 2019.
Reliance Mutual Fund is now Nippon India
Mutual Fund. With this, names of all the existing schemes have changed; instead
of the prefix ‘Reliance’, each scheme will have ‘Nippon India’ with immediate
effect. For instance, the name of “Reliance Growth Fund” is changed to “Nippon
India Growth Fund”. Also, the name of “Reliance ETF” is changed to “Nippon
India ETF”. Earlier, Nippon Life Insurance of Japan has increased its stake in
Reliance Nippon Life AMC to 75%. Nippon has become the largest fund house
backed by a foreign promoter. The 30-year-old Nippon Life Insurance manages
assets of over USD 700 billion. Currently, Nippon India Mutual Fund is the
fifth largest fund house and manages AUM of Rs.2.03 lakh crore as on September
2019. The company will focus on regaining its market share and profitability
using risk management strategies of Nippon Life Insurance.
Regulatory Rigmarole
In a letter sent to AMFI, SEBI has
confirmed that fund houses can levy graded exit load on investors of liquid
funds, who exit the scheme within 7 days. This essentially means fund
houses can impose exit loads in liquid funds to the extent of 7 days. However,
such loads will be reduced with the increase in days. Simply put, investors
redeeming after a day will have to pay more exit load than the investors
redeeming it on seventh day. While fund houses can impose exit load of 0.007%
if an investor redeems his money in 1 day, The load reduces to 0.0065 percent
on day two; 0.006 percent on day three, 0.0055 percent on day four; 0.005
percent on day five; 0.0045 percent on day six and 0 percent from the seventh
day onwards. For instance, if an investor redeems Rs 1 crore, the applicable
exit load will be Rs 700 after the first day, Rs 650 after the second
day and so on. SEBI said the industry body Association of Mutual Funds in India
must review the exit load structure on an annual basis. Around 30 percent of
the money stored under liquid funds is redeemed within the first seven days. However,
SEBI’s move to impose exit load is expected to reduce volatility in the AUM of
liquid schemes. The exit load appears as a deterrent factor. For example: When
Rs 10 lakh invested by corporates in liquid funds at 6 percent annual return
would mean 60,000 rupees. This works out to approximately Rs 170 per day over a
year, before tax (Return of Rs 60,000 a year before tax divided for daily
returns by 365 yields comes to Rs 170). As per the new load structure, deduct
Rs 70 for exit load. So the return would come down to only Rs 100. This has
come into effect from October 19, 2019. SEBI has also set the cut off timing in
liquid funds 1.30 pm instead of 2 pm with effect from October 21, 2019.
SEBI has come up with a slew of measures to
make debt funds safer. The list of measures include, fund houses reducing
dependency on credit rating agencies and having an in-house system to assess
credit risk. SEBI, in a circular, said that the internal policy of a fund house
should have adequate provisions to generate early warning signals including
yield-based alerts on deterioration of credit profile of the issuer. Based on
the alerts, the AMCs should respond appropriately and report it to their
respective trustees. Moreover, the market regulator has asked fund houses to
reduce their holding in not so safe debt instruments. The investment of mutual
fund schemes in the following instruments cannot exceed 10% of the debt
portfolio of the schemes and the fund house exposure in such instruments should
not exceed 5% of the debt portfolio of all its schemes:
·
Unsupported
rating of debt instruments (i.e. without factoring-in credit enhancements) is
below investment grade
·
Supported
rating of debt instruments (i.e. after factoring-in credit enhancement) is
above investment grade
The objective is
to curb a debt scheme’s exposure to credit risk and discourage fund houses from
chasing higher returns. AMCs need to ensure that the investment in debt
instruments having credit enhancements have a minimum cover of 4 times. “AMCs
may ensure that the investment in debt instruments having credit enhancements is
sufficiently covered to address the market volatility and reduce the
inefficiencies of invoking of the pledge or cover,” the circular noted. Moreover,
to make portfolio of MF schemes more transparent, SEBI has asked fund houses to
provide details of investments in debt instruments having structured
obligations or credit enhancement features in the monthly portfolio statement
of MF schemes. MF scheme should not invest in unlisted debt instruments
including commercial papers (CPs). They can only invest in listed and to be
listed debt instruments. One should not consider all the listed securities to
be liquid.
·
However,
no such rule applies to investment in unlisted government securities, other
money market instruments and derivative products such as Interest Rate Swaps
(IRS), Interest Rate Futures (IRF), which are used by mutual funds for hedging.
·
Mutual
fund schemes can also continue to invest in unlisted NCDs. However, such
investments is capped at 10% of the debt portfolio of the scheme
·
Investment
in unlisted NCDs is subject to the condition that such unlisted NCDs have a
simple structure (i.e. with fixed and uniform coupon, fixed maturity period,
without any options, fully paid up upfront, without any credit enhancements or
structured obligations) and are rated and secured with coupon payment frequency
on monthly basis
·
Debt
schemes having more than 10% exposure to unlisted NCDs have to bring down their
holding to 15% by March 31, 2020 and to 10% by June 20, 2020
·
The
existing investments of mutual fund schemes in unlisted debt instruments,
including NCDs, may be grandfathered till maturity date of such instruments
i.e. can be held till maturity
Unrated
debt instruments
·
MFs
cannot invest in unrated debt and money market instruments other than
instruments such as bills rediscounting that are generally not rated and for
which separate investment norms or limits are not provided in SEBI regulations
·
Investment
in such instruments cannot exceed 5%. Currently, if a scheme exceeds the 5%
limit then investments of the scheme will be grandfathered until maturity of
such instruments
·
However,
fund houses can invest in unrated government securities, treasury bills, and
derivative products such as Interest Rate Swaps (IRS), Interest Rate Futures
(IRF)
Sector
level exposure limits
Investment limit
in a particular sector has been reduced to 20% as against 25%.
The additional
exposure limits provided for HFCs in financial services sector has been capped
at 10% as against 15%. Further, an additional exposure of 5% of the net assets
of the scheme has been allowed for investments in securitized debt instruments
based on retail housing loan portfolio and/or affordable housing loan
portfolio. However the overall exposure in HFCs shall not exceed the sector
exposure limit of 20% of the net assets of the scheme
Group
level exposure limits
The investments
by debt mutual fund schemes in debt and money market instruments of group
companies of both the sponsor and the asset management company is restricted to
10% of the net assets of the scheme. Such investment limit can touch 15% of the
net assets of the scheme with the prior approval of the board of trustees.
AMFI has clarified that distributors will
have to submit their declaration of self-certifications (DSCs) by December 31,
2019 to avoid forfeiture of commission. That means fund houses cannot pay
commission withheld due to non-submission of DSCs from January 1, 2020 onwards.
While distributors are required to submit DSC within three months of the end of
financial year i.e. June 30, 2019 AMFI has given them six-month grace period to
comply with the SEBI norms i.e. until December 31, 2019. So far, there was no
stipulated timeframe for AMCs to pay withheld commission because of
non-submission of DSCs. Distributors used to get their withheld commission as
and when they submitted their DSC. In a communication, AMFI said, “The matter
was reviewed by AMFl's Standing Committee on Mutual Fund Distributors (ARN
Committee) and the committee also endorsed the above view. Since a grace period
of 6 months is allowed for renewal of ARN, the committee proposed that on the
same logic, a maximum period of 6 months from June 30 (being the due date for
submission of annual DSC) may be allowed for submission of the annual DSC,
i.e., up to Dec. 31, failing which, the commission withheld due to
non-submission of DSC shall be forfeited.” “Accordingly, effective from the
year ended March 31, 2019 onwards, each mutual fund agent/distributor shall
submit an annual DSC in the prescribed format within 3 months after the end of
each Financial Year, i.e., by June 30, failing which, payment of all accrued
commission shall be withheld by the AMCs, till the time the DSC is submitted.
Further, a grace period of 6 months from June 30 (being the due date for
submission of annual DSC), i.e., up to Dec. 31 shall be allowed for submission
of the DSC. If the annual DSC is not submitted by Dec. 31, the commission
withheld for non-submission of DSC shall stand forfeited.”
The latest AMFI data shows that the mutual
fund industry has close to 2 crore unique investors. The data has identified
the number of unique investors by taking into account PANs/PEKRNs (PAN Exempted
KYC Registration Number) of all unit holders or their guardians in case of
minor unit holders. As on September 2019, the MF industry has 1.95 crore unique
investors with PAN and 4.72 lakh investors without PAN. In 2012, SEBI allowed
investors to invest up to Rs 50,000 annually in a single mutual fund per year
without a permanent account number (PAN). AMFI data shows that the MF industry
has 8.56 crore folio as on September 2019. This indicates that average MF
investor holds close to 4 folios in mutual funds. Also, the MF industry had
1.76 crore unique investors as on June 2018 indicating that the industry has
added close to 24 lakh investors in just little over 1 year. The Mutual Funds
Sahi Hai campaign, growing popularity of SIPs and ease of investment through
digital technology have contributed to the industry’s growth story.
