FUND
FULCRUM
October
2020
Mutual
fund industry's asset base rose by 12 percent to Rs 27.6 lakh crore during the September
2020 quarter, primarily on account of rebound in markets. The average asset
under management (AAUM) of the industry, comprising 45 players, was at Rs 24.63
lakh crore in April-June 2020 quarter, according to data by Association of
Mutual Funds in India (AMFI). All top 10 fund houses -- SBI MF, HDFC MF, ICICI
Prudential MF, Aditya Birla Sunlife MF, Nippon India MF, Kotak MF, Axis
MF, UTI MF, IDFC MF and DSP MF -- witnessed an increase in their
respective average AUMs during the September 2020 quarter. Notably, Axis MF,
UTI MF, SBI MF and Kotak MF have witnessed an increase in the range of 14-16
percent in their assets base beating the average industry's growth of 12
percent. Steady outflows from equity funds is a sign of lack of confidence in
funds by retail investors. The uncertainty caused by COVID-19 has also prompted
investors to redeem and keep assets in cash. SBI Mutual Fund, which continues
to be the largest fund house in the country, saw its asset base growing 15.6
percent to Rs 4,21,364 crore. It had an average AUM of Rs 3,64,363 crore in the
preceding quarter. HDFC MF saw its asset base rising by 5.4 percent to Rs
3,75,516 crore during the period under review, from Rs 3,56,183 crore in the
June 2020 quarter. ICICI Prudential MF posted an average AUM of Rs 3,60,049
crore in the September 2020 quarter, against Rs 3,26,291 crore in the June 2020
quarter, indicating an increase of 10.3 percent. Aditya Birla Sunlife MF and
Nippon India MF have seen their average AUM growing by 11 percent each to Rs
2,38,674 crore and a little over Rs 2 lakh crore respectively. Kotak MF’s
average AUM spiked by 14.5 percent to Rs 1,91,598 crore in three months ended
September 30, 2020 from Rs 1,67,326 crore in the preceding quarter. The asset
base of Axis MF climbed by 16.3 percent to Rs 1,56,255 crore in the September 2020
quarter while that of UTI MF accelerated by 16.1 percent to Rs 1,55,190 crore. UTI
MF, which has recently concluded its initial public offering, had an AAUM of Rs
1,33,631 crore in the June 2020 quarter. The average AAUM of IDFC MF and
DSP MF went up by 12.3 percent and 12 percent to Rs 1,14,335 crore and Rs
82,286 crore respectively. In the June 2020 quarter, the industry had
registered an 8 percent decline in AUM on account of outflow pressure both in
debt and equity.
Net outflows in
MF industry continued in September 2020 because of some profit booking in
equity schemes during the quarter ending. This was the third consequent month
to see a net outflow. Further, investors are taking a cautious approach by
investing in safer funds while keeping adequate cash in hand to survive
the crisis. Overall, equity schemes witnessed net outflows of over Rs.734 crore
in September 2020. However, net outflows reduced from Rs.4,000 crore in August
2020. Multi cap schemes saw highest net outflows of Rs.1,143 crore followed by
large cap schemes with net outflows of Rs.576 crore. Net outflows were also
seen in mid cap funds, value funds and ELSS. Interestingly, the industry saw
net inflows in small cap funds and large and mid-cap funds, focused funds and
thematic funds. Overall, debt category witnessed net outflows of
Rs.51,962 crore due to huge redemption in liquid funds. As in every quarter
end, liquid funds witnessed net outflows of Rs.65,951 crore. It was followed by
Rs.4,867 crore of net outflow from ultra-short duration fund. Net outflows were
also seen in money market funds, credit risk funds, long duration funds and
gilt funds. Banking and PSU funds, gilt funds, and short duration funds
witnessed good inflows from investors. Overall, hybrid funds witnessed net
outflows over Rs.4,200 crore. Balanced hybrid funds, dynamic asset allocation,
arbitrage funds and equity savings also saw outflows. Only conservative hybrid
funds and multi asset allocation funds saw inflows of Rs.53 crore and Rs.37
crore, respectively. SIP inflows in September 2020 were almost the same as last
month - Rs.7,788 crore vs Rs.7,791 crore in August 2020. Meanwhile, SIP folios
witnessed a marginal jump to 3.33 crore from 3.30 crore. Overall, SIP AUM fell
by Rs.726 crore to Rs 3.35 lakh crore. Overall, the Mutual Fund industry
witnessed net outflow of over Rs.52,090 crore. The total AAUM for September 2020
fell to Rs.27.74 lakh crore from Rs.27.78 lakh crore in August 2020.
Piquant Parade
Choice Wealth Management has acquired the
mutual fund distribution arm of Bank Bazaar. Bank Bazaar had forayed into
online mutual fund distribution space in 2016. Choice Wealth Management runs an
online MF distribution platform Investica since 2017.
One of India’s largest financial services
companies, Bajaj Finserv has decided to foray into the mutual fund business. Currently,
Bajaj Finserv is into lending, wealth management and insurance businesses. The
subsidiary of Bajaj Finserv are Bajaj Allianz Life, Bajaj Allianz General and
Bajaj Finance. Bajaj Finserv has applied for a MF license on September 28, 2020.
Last year, NJ India Invest and Samco Securities received
in-principle approval from SEBI to start their MF business. Applications from
Zerodha Broking, Karvy Stock Broking and Frontline Capital Services are also
being reviewed by SEBI.
Regulatory Rigmarole
Markets regulator SEBI decided to make
mutual fund managers more accountable by introducing a code of conduct for them
and tightened disclosure norms with regard to forensic audit of listed
entities. The watchdog also decided to strengthen the role of debenture
trustees and amend insider trading norms. The board of SEBI approved setting up
of a limited purpose repo-clearing corporation, a move aimed at boosting repo
trading in corporate bonds. Such clearing corporation would help in guaranteed
settlement of tri-party repo trades in all investment grade corporate bonds,
including those below 'AAA' rated. The chief executive officer (CEO) will be
responsible to ensure that the code of conduct is followed by all such
officers. Currently, mutual fund norms require AMCs and trustees to follow a
code of conduct. This increases the accountability of the CEO on the conduct of
fund management team and processes. SEBI also permitted AMCs to become a
self-clearing member of the recognised clearing corporations to clear and
settle trades in the debt segment of recognised stock exchanges, on behalf of
its mutual fund scheme. In order to address the gaps in availability of
information, SEBI said that listed entities will have to make disclosures about
initiation of forensic audit. The listed entities will make disclosures about
the fact of initiation of forensic audit along-with name of entity initiating
such audit and reasons for the same if available to stock exchanges. Further,
the companies will be required to disclose about final forensic audit report,
other than for forensic audit initiated by regulatory or enforcement agencies,
on receipt by the listed entity, along with comments of the management, if any.
The disclosure need to be made "without any application of materiality.
Under the informant mechanism, SEBI has allowed informants a time period of
three years to report any violation of insider trading rules. SEBI also
strengthened the role of debenture trustees by ensuring that they carry out
independent due diligence of the assets on which charge is being created. Also,
they would convene the meeting of debenture holders for enforcement of
security, joining the inter-creditor agreement under the framework specified by
RBI. In addition, they would carry out continuous monitoring of the asset cover
including obtaining mandatory certificate from the statutory auditor on a half
yearly basis. In respect of delisting, SEBI has decided to grant exemption from
the reverse book building process for delisting of listed subsidiary, when it
becomes the wholly-owned subsidiary of the listed parent pursuant to a scheme
of arrangement. To be eligible to take this route, the listed holding company
and the listed subsidiary should be in the same line of business. The board
also approved amendment to norms pertaining to alternative investment fund,
which includes definition of "relevant professional qualification"
and provides that the qualification and experience criteria of the investment
team, may be fulfilled individually or collectively by personnel of key
investment team of the manager.
Family members of RIAs – spouse, brother
and parents are no longer required to surrender their ARN. In its recently
released regulations on RIAs, SEBI has done away with the proposal that the
immediate relatives and family members of RIAs had to surrender their ARN. However,
clients of individuals RIAs cannot avail execution services offered by a family
member having ARN. SEBI has clarified that existing clients cannot avail
distribution services offered by the corporate RIAs and family members of
individual RIAs and vice versa. New clients can decide if they want advisory
services from individual RIAs or execution services from family member. This
holds true for corporate RIAs as well. This essentially means the clients of
RIAs can avail execution services from other individuals having ARN. Further,
individual RIAs are allowed to offer execution services to their clients;
however, only in direct plans wherever applicable. This means, even if a
product class does not offer direct plan, RIAs will have to ensure that they do
not make any money out of it. Selecting a business model is a fundamental right
of an individual. By doing away with the requirement of surrendering ARN of
family members of RIAs, the market regulator has done the right thing. Now,
individual RIAs will have an option to work like corporate RIAs to some extent.
SEBI has renamed dividend payout option in
mutual funds as payout of income distribution cum capital withdrawal option. In
addition, the market regulator has also renamed dividend reinvestment option as
reinvestment of income distribution cum capital withdrawal option and dividend
transfer plan to transfer of income distribution cum capital withdrawal plan. Sharing
the rationale, SEBI said that there is a need to clearly communicate to the
investor that certain portion of his capital (equalization reserve or
distributable reserve) can be distributed as dividend under such option of a
mutual fund scheme. Currently, fund houses are allowed to distribute realized
gains as dividend. SEBI further said that fund houses will have to disclose the
amounts that can be distributed from equalization reserve which is part of sale
price that represents realized gains. These changes come into effect from April
1, 2021.
SEBI has tightened the norms for executing
inter scheme transfers. From January 2021, no inter scheme transfers (ISTs) of a
security shall be allowed, if there is negative news or rumors in the
mainstream media or an alert is generated about the security based on internal
credit risk assessment during the previous four months. Further, if the
security is downgraded following ISTs, within a period of 4 months, fund
managers of buying schemes have to provide detailed justification and rationale
to the trustees for buying such security. Trustees of fund houses will have to
approve an appropriate Liquidity Risk Management (LRM) model at scheme level.
The LRM model should ensure that “reasonable liquidity requirements” are
adequately provided for every scheme. SEBI said that fund houses should look to
execute ISTs for managing liquidity only after they exhaust the following
avenues to raise liquidity - use of scheme cash & cash equivalent, use of
market borrowing, selling of scheme securities in the market and after
attempting all the above, if there is still a scheme level liquidity deficit,
then out of the remaining securities, ISTs should be done with the optimal mix
of low duration papers with highest quality. However, the market regulator has
provided some relaxation in these avenues to raise liquidity. SEBI has said
that the option of market borrowing or selling of security may be used in any
combination and not necessarily in the above order. In case, the option of
market borrowing and/or selling of security is not used, the reason for the
same shall be recorded with evidence. Apart from meeting liquidity requirement
in a scheme in case of unanticipated redemption pressure, fund houses can also
use ISTs for duration or issuer or sector or group rebalancing. Now, ISTs can
be done where any one of duration, issuer, sector and group balancing is
required in both the transferor and transferee schemes. Moreover, different
reasons cannot be cited for transferor and transferee schemes except in case of
transferee schemes being a credit risk scheme. In order to guard against
possible mis-use of ISTs in credit risk schemes, trustees have to put in place
a mechanism to negatively impact the performance incentives of fund managers,
chief investment officers (CIOs) involved in the process of ISTs in credit risk
schemes in case the security becomes default grade after the ISTs within a
period of one year. Further, in case of close ended schemes, IST purchases
would be allowed within 3 business days of NFO. Thereafter, no ISTs can be done
to or from close-ended schemes. All these guidelines will be applicable
from January 1, 2021.
SEBI has given 16-day extension to mutual
fund distributors using nomenclatures like IFA/ adviser/ wealth manager
nomenclature in their company name. With this, distributors using these
nomenclatures in their company name will have to submit their application for
name change to the registrar of the company (ROC) and furnish documentary
evidence before CAMS by October 31, 2020. Earlier, SEBI has asked MFDs using
such nomenclatures to furnish documentary evidence to CAMS before October 15,
2020. The new entity name should not reflect or create an impression that you
perform a role of IFA/adviser/wealth manager. Simply put, you will have to clearly
mention that you are acting as a MFD and dealing with distribution of mutual
funds. MFD’s name and tagline should be placed together in a clear and legible
font size; this has to be followed in all forms of communication i.e. website,
mobile app, business card and so on. In addition, you will have to complete the
change of registered name by December 31, 2020 by incorporating changes to PAN
and updating name in AMFI records. You will have to submit ROC certificate and
PAN card with the new name to AMFI.
SEBI has restored the cut off timings for
both subscription and redemption for all schemes other than debt schemes and
conservative hybrid schemes to the original cut-off timings of 3:00 pm from
October 19, 2020. SEBI informed the restoration of cut off timings through
a letter to all AMFI members. Recently, AMFI has requested SEBI to restore the
cut-off time for mutual fund purchases and redemptions to 3 pm. With this,
clients can get previous day’s NAV in equity funds, arbitrage funds and hybrid
funds if they execute transaction in these funds before 3 pm. For all debt
funds (excluding liquid funds and overnight funds) and conservative hybrid
funds like MIP, the cut off timing will be 1 pm. For liquid funds and overnight
funds, subscription cut off timing is 12.30 p.m. and redemption cut off time is
1 p.m.
AMFI has asked mutual fund distributors to
carry a tagline ‘AMFI registered Mutual Fund Distributor’ along with their name
or company name with immediate effect. The tagline has to be carried
in a clear and legible font of at least font size 12 across all forms of
communication. AMFI said that SEBI has advised that MFDs should display
their name and tagline in a clear and legible font in all forms of
communication i.e. website, mobile app, printed or electronic materials,
business card, sign board and so on. Further, AMFI said that MFDs should
not create an impression that they perform a role of financial advisor for
which they are not registered. Instead, MFDs will have to explicitly mention
that they are acting as an MFD. On nomenclature, AMFI has issued a list of
keywords that can be or cannot be used. According to this list, while you can
use words like wealth and investment on standalone basis, you cannot use
these words in combination like wealth manager and investment management.
Investors under
the age of 36 are steadily increasing and their investment value is also climbing
up. This busts the view that the millennials are not considerate of their
financial lives and like to spend all their income. Interestingly, the ratio of
female investors over the last 4 years has increased to 19% from
9%. Meanwhile, increasing income is not translating into increasing
investments. This indicates that as people start to earn more they spend a
higher proportion of money to upgrade their lifestyle and increase
discretionary spending rather than investing it.
