FUND
FULCRUM
January
2020
Mutual
funds have added a whopping Rs 3.15 lakh crore to their asset base in 2019 on
the back of robust inflows in debt schemes and measures taken by regulator SEBI
for boosting investor confidence. The asset under management (AUM) of the
industry rose by over 13 percent (Rs 3.15 lakh crore) to Rs 26.77 lakh crore at
the end of November 2019, up from Rs 23.62 lakh crore at the end of December
2018, as per the latest data available with the Association of Mutual Funds in
India (AMFI). The AUM growth seen by the 44-member mutual fund industry in 2019
is significantly higher than 7.5 percent witnessed in 2018. However, the growth
was much higher at 32 percent in 2017, when the asset base expanded by over Rs
5.4 lakh crore. The double-digit growth is a positive sign given the negative
sentiment about equity and fixed income securities. This growth should be
primarily credited to inflows in debt-oriented schemes, steps taken by SEBI
that boosted investor confidence, and to distributors for helping take the
message of "mutual fund sahi hai" (mutual funds are right) to every
nook and corner of the country. While SIP (Systematic Investment Plan) inflows
were impressive with around Rs 8,000-crore-plus, the overall equity excitement
was missing. The positive side to this is that investors have not lost their
complete faith in equity investments and trust the process of SIP. The year
2019 marks the seventh consecutive yearly rise in the industry AUM after a drop
during the two preceding years. The AUM of the industry has grown from Rs 8.22
lakh crore in November 2009 to Rs 27 lakh crore in November 2019, indicating an
over three-fold jump in 10 years. The year has also seen repayment issues and
downgrades with certain companies, which affected investor sentiment. However,
this has also resulted in investors becoming more aware about the overall risk
involved with different categories of mutual funds and they now choose funds
based on their risk appetite.
India's
mutual fund space witnessed a strong inflow in December 2019. Data released by
AMFI shows the net equity inflow stood at Rs 4,432.2 crore for December 2019
against Rs 933 crore in November 2019. The balanced fund outflow stood at Rs
2,040 crore against Rs 4,932 crore month-on-month (MoM). On the other hand,
liquid funds witnessed an outflow in December 2019 against an inflow in
November 2019. Liquid fund outflow was at Rs 71,158.5 crore against an inflow
of Rs 6,938 crore MoM, according to AMFI data. Equity ETF inflow came at Rs
12,673.5 crore in December 2019 against Rs 2,954.5 crore in November 2019. Retail
investors continue to repose trust in mutual funds as reflected by continued
flows through SIPs, despite challenging domestic economic scenario and global
trade issues and conflicts. Largecap funds witnessed an inflow of Rs 1,134.80
crore while the mid and smallcap funds saw an inflow of Rs 796.08 crore and Rs
421.63 crore, respectively, in December 2019. Index funds saw an inflow of Rs
142.30 crore and inflow in Gold ETF stood at Rs 26.85 crore in December 2019, according
to AMFI data.
The
MF industry has added 26 lakh new investors in just one and a half years. 2019
ended on a positive note for the Rs.27 lakh crore mutual fund industry. The
latest AMFI data shows that the mutual fund industry has 2.03 crore unique
investors as on December 2019. 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 December 2019, the MF industry has 1.98 crore unique investors with PAN permanent
account number) and 4.67 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
PAN. AMFI data shows that the MF industry has 8.71 crore folio as on December
2019. This indicates that the average MF investor holds close to 4 folios
in mutual funds. The Mutual Funds Sahi Hai campaign, growing popularity of SIPs
and ease of investment through digital technology has contributed to the
industry’s growth story. This could slow down the mutual fund industry’s
growth. In September 2019, a report by AMFI-BCG had noted that adding 4 lakh
new distributors in next five years will be crucial for the industry to achieve
Rs.100 lakh crore AUM.
Of
the top 20 fund houses, 19 saw an increase in their assets. Last quarter ended
on a good note for most fund houses with the MF industry witnessing 4% growth
to reach AUM of close to Rs.27 lakh crore. AMFI data shows that the MF industry
average AUM has increased from Rs. 25.69 lakh crore in July-Sept 2019 to
Rs.26.77 lakh crore in Oct-Dec 2019. Among fund houses, SBI MF, Axis MF and
ICICI Prudential MF witnessed the highest growth in their AAUM, respectively. While
SBI MF’s AAUM increased by nearly Rs 32,000 crore to Rs 3.53 lakh crore in
October-December, 2019 Axis MF’s AAUM rose by more than Rs 17,000 crore to Rs
1.23 lakh crore. Similarly, ICICI Prudential MF’s AAUM increased by over Rs
13,000 crore to Rs 3.62 lakh crore. Next in the list were IDFC MF and Kotak
Mahindra MF. Both these fund houses witnessed an increase of around Rs 10,500
crore and Rs 8,500 crore in their quarterly assets, respectively. In percentage
terms, Mirae and Axis were the top gainers at 18% and 16% respectively among
the large fund houses. Among the emerging fund houses, ITI MF registered a
growth of 179% while PPFAS MF grew by 16%. In October-December, 2019 most of
the top fund houses did well with 19 of the 20 top fund houses witnessing an
increase in their AAUM. Only Aditya Birla Sun Life MF saw a decline of nearly
Rs 4,000 crore in its AAUM in the quarter ended December 2019. Meanwhile,
emerging fund houses had a tough time in October-December 2019. Of the 21 fund
houses at the bottom, 11 witnessed a decline in their AAUM.
In
terms of equity AUM, HDFC MF and ICICI Prudential MF continue to retain the top
two spots. The December quarter ended on a positive note for the MF industry
with average AUM of pure equity funds and ELSS witnessing over 6% growth to
rise past the Rs.8 lakh crore mark, according to AMFI data. An analysis of
quarterly average AUM of 36 fund houses shows that SBI MF marked the highest
growth in its equity average AUM. The fund house’s equity average AUM rose by
Rs 12,822 crore to Rs.74,141 crore, an increase of 21% in just three months. Here
equity AUM includes pure equity schemes and ELSS. Axis MF followed the two by
registering a growth of 16% or Rs 7,676 crore in its equity AAUM to Rs.54,226
crore. Next in the list were Kotak MF and Mirae Asset MF. These two fund houses
witnessed an increase of Rs 5,309 crore and Rs 5,139 crore in their equity
average AUM, respectively. Meanwhile, HDFC MF and ICICI Prudential MF retained
the first and second spot, respectively in terms of equity AAUM. While HDFC
MF’s equity AAUM for Oct-Dec grew to Rs 93,410 crore in December 2019, ICICI
Prudential MF’s AAUM stood at Rs 77, 505 crore. Apart from these fund houses,
Aditya Birla Sun Life, Nippon India, Franklin Templeton and UTI were among the
top 10 MFs in terms of equity AUM. Overall, 16 fund houses saw their equity
AAUM rise by more than Rs 1000 crore last quarter.
As
on December 2019, SIP AUM was Rs 3.2 lakh crore, around 12% of the overall MF
Industry AUM. Inflows through SIP have risen considerably from last fiscal,
even as the net addition in SIP accounts has witnessed a slowdown. Net addition
in SIP accounts is the difference between number of new registered SIPs and
discontinued/matured SIPs. AMFI data shows that between April and December of
2019, the amount collected through SIPs has risen to Rs 74,398 crore, as
against Rs 68,479 crore in the corresponding period last fiscal. Meanwhile, the
MF industry added 35.5 lakh net SIP accounts during April-December 2019, as
against 42.5 lakh accounts in the corresponding period of 2018. This was due to
an increase in discontinued or matured SIPs. During April-December 2019, the MF
industry added 86 lakh new SIP accounts, while 50.5 lakh SIP accounts matured
or were discontinued. In the corresponding period of 2018, the industry added
85.2 lakh SIP accounts while 42.7 lakh SIP accounts matured or were discontinued. The
rise in SIP inflows is heartening and it outweighs the slightly lower addition
in number of net SIP accounts this year. SIP’s success should be measured on
the basis of constantly rising inflows, especially amid concerns over growth
and market volatility. This underlines a sharp sustained retail investor
interest in equity funds. Moreover, popularity of features such
as SIP top-up has led to rise in SIP inflows, even as the net addition in SIP
accounts has slowed down. SIP top-up ensures an investor has the option to
increase the amount of SIP by a fixed amount at pre-defined intervals. This
enhances the flexibility of the investor to invest higher amounts during the
tenure of the SIP. As on December 2019, SIP AUM was Rs 3.2 lakh crore, around
12% of the overall MF Industry AUM.
The latest AMFI
data shows that individual investors hold 53.4% of total industry assets while
institutional investors hold 46.6% as of December 2019. Individual investors
include retail investors and high net worth individuals. However, further
analysis shows that institutional investors grew at a faster pace than
individual investors did as their AUM increased by 13.80% as against 12.64% of
individual investors. In terms of weightage, 69% of equity AUM is contributed
by individual investors, followed by debt (24%), liquid/money market (6%) and
ETFs, FoFs (1%). Contrary to individual investor, institutional investors
account for 41% of liquid/money market AUM followed by debt (34%), equity (13%)
and ETF, FoFs (12%). Further analysis of AUM shows that of the total MF
AUM, 44% of the assets came through direct plans while the rest came from
distributors in December 2019. A large proportion of direct investments were in
non-equity oriented schemes where institutional investors dominate. Moreover,
16% of the total industry assets came from B30 cities in December 2019. About
65% of B30 cities assets were equities.
India's
mutual funds industry is yet to see wider participation from the
population. "India remains an extremely underpenetrated country,
especially with respect to investing in instruments such as mutual funds,"
according to a Paytm Money report. "More than 85 percent of investors in
mutual funds come from the top 30 Indian cities. This signifies that the rest
of India, comprising a majority of the population remains conservative in its
choice of investment instrument," the report added. However, Indians from
all demographics are fast adopting investments. The report suggests that the
trends observed in 2019 will affect the investment patterns in 2020. The report
reflected 18,792 out of 19,100 pin codes invested with Paytm Money, within the
first year of its operations. Year 2019 saw a massive adoption trend by
investors across cities, towns and villages with a substantial share of
investors coming from the younger population. The report also suggests that
over 65 percent of its investors are between the age group of 18-30 years. Many
of these investors are students and first-time employees.
Piquant Parade
SEBI has given
in-principle approval to NJ India, India’s largest MF distributor, to set up
its AMC business.NJ India would focus on passive funds such as quant funds and smart beta ETFs
to grow business. Just like developed markets, passive funds and ETFs have
great potential to grow in India. NJ India has hired Anand Shah to set up the
AMC business. Anand Shah was Dy. CEO & Chief Investment Officer of BNP
Paribas MF before joining NJ Advisory Services as its CEO. Currently, he is
responsible for portfolio management services (PMS) business of NJ group. NJ
India aims to launch their AMC business in the next six months subject to final
approval from SEBI. Earlier, SEBI had given in-principle approval to Samco
Securities and Muthoot Finance. While Samco Securities is likely to launch its
MF business this year, Muthoot Finance has acquired IDBI Mutual Fund.
Regulatory Rigmarole
SEBI has
simplified the process of transmission of units in mutual funds due to absence
of nominations or death of unitholders. Among its key measures is bringing
uniformity across fund houses in dealing with transfer of assets due to demise
of unitholders and spreading awareness about importance of nomination in mutual
funds through IAPs. Introduction of image based processing wherever the
claimant is a nominee or a joint account holder in the investor folio. AMCs to
set up a dedicated central help desk and a webpage carrying relevant
instructions to provide assistance on the transmission process. AMCs to
introduce a common transmission request form and NOC form. A uniform process
across fund houses to deal with unclaimed funds to be transferred to the
claimant including the unclaimed dividends. AMCs cannot accept requests for
redemption from a claimant until the units are transferred in his favour. Claimant
has to pay stamp duty tax. The move will bring uniformity across fund houses in
terms of dealing with transfer of assets due to demise of unitholders.
Foreign
controlled AMCs (with more than 50% foreign shareholding) have been untagged
from the October 17 circular of the Finance Ministry that defined them as
overseas investors. The ministry modified the October circular on December 5,
2019.
Foreign-owned fund houses would have had to follow certain investment restrictions
that are applicable to overseas investors. For instance, if a sector’s stocks
have a 74% overseas investment cap, then according to the circular, a
foreign-owned AMC could buy these stocks only if the overseas investment in
that particular company has not breached the 74% limit. Such restrictions do
not apply to domestic investors. Foreign controlled AMCs had approached
SEBI in the first week of November 2019 and the market regulator then discussed
the matter with the government. Back in November 2019, SEBI had assured that
the October 17 circular would be revised and foreign controlled AMCs would not
be treated as overseas investors. Nippon India, Franklin Templeton, Mirae
Asset, Invesco and BNP Paribas were among the fund houses that could have been
affected the most by the October 17 circular.
Capital markets regulator, SEBI has
proposed to discontinue usage of pool accounts by all platforms in transaction
of schemes. The discussion paper was issued on December 23, 2019. This
proposal comes in the aftermath of the Karvy Stock Broking episode, wherein the
broker allegedly misused clients' securities to the tune of over Rs 2,000
crore. SEBI pointed out that asset management companies lose sight of the
source of funds as they receive funds from pool or escrow accounts. The regulator
noted that the scope of misuse of investments when mutual fund transactions
were executed through intermediaries like stock brokers and clearing members
and digital platforms provided by MF distributors and investment advisors. Some
of the direct mutual fund platforms in India are Kuvera, Goalwise, CAMS &
Karvy Website/Mobile App, AMFI’s Mutual Fund Utility, PaisaBazaar, Zerodha,
PayTM Money, Groww and Clearfunds. Direct MFs mean investors buy directly from
mutual fund companies through their respective portals, which offer such direct
mutual funds online. Whereas regular mutual funds mean investors buy through
middlemen (online or offline) like mutual fund advisers or brokers. For various
MF transaction methods between a stock broker or distributor or investor
advisor and the investor, there are layers that get created before it is
finalised with the concerned mutual fund. For transaction between the Broker
and the investor, it is routed from investor to broker to clearing corporation
to the end-mutual fund. For transaction on stock exchange platform between
investment advisor/distributor and the investor, it is routed to exchange
clearing platform to the end-mutual fund. These layering processes result in
pooling actual funds flow or MF units flow being away from direct purview of
the mutual fund that is responsible for the investor services. SEBI discussion
paper feels this has potential scope of misuse of investor funds or the
investor MF units pool. That has driven SEBI to now look for discounting
pooling practice and make exchanges create a dedicated platform for direct
funds and MF units flow between end-mutual fund and the investor. SEBI’s
efforts are consistently aimed towards mutual funds being held directly
responsible for investor matters even if that means some additional platform
creation or due diligence by market intermediaries and exchanges.
SEBI has
proposed allowing individual RIAs to offer distribution services along with fee
based advisory model.
In its fourth consultation paper on Registered Investment Advisors (RIAs), SEBI
has proposed allowing individual RIAs to offer distribution services to their
clients along with fee based advisory services. This will be in line with
corporate RIAs who currently offer both the services to their clients. However,
individual RIAs will have to obtain a new ARN to offer this service. In
addition, their clients (existing and new) can decide if they want distribution
services or fee based services from an RIA. Simply put, RIAs cannot offer both
the services – advisory and distribution to a client or a family. SEBI defines
family as group of clients. That means, RIAs cannot charge a fee for financial
advice from father and offer execution services to his son. Also, RIAs offering
advisory services will have to recommend direct plans only. So far, many
distributors fear that their existing clients would not prefer paying fee to
them for financial advice if they migrate to fee based model. This new
proposal, if it goes through, resolves this issue as they can charge fee from
new clients and continue to offer distribution services to their existing
clients. The new proposal on client segmentation based on distribution and
advisory and introduction of execution services would create a level playing
field between individual RIAs and corporate RIAs. Another key proposal is
putting a cap on fee. RIAs can charge up to 2.5% on assets under advisory (AUA)
as advisory fee and offer fixed fee of Rs.75000 per annum irrespective of
ticket size. Also, RIAs can charge up to half-yearly fee as advance fee. Flat
fee model is not viable for advisors. A flat fee of Rs.75,000 per annum is not
viable for RIAs. Hence, most RIAs would opt for ‘percentage of AUA’ model. While
a cap of 2.5% on AUA is more than sufficient for RIAs, flat fee option is
clearly not viable. In addition, SEBI has proposed that we can only receive
advance fees of up to 2 quarters. However, the market regulator is silent on
collecting the remaining fee after six months.
SEBI has proposed
net worth requirement of Rs.10 lakh for individual RIAs and Rs.50 lakh for
corporate RIAs.
Existing RIAs have three years to comply with this net worth requirement. In
addition, individual RIAs having Rs.40 crore AUA or more than 150 clients have
to compulsorily re-register as corporate RIA within six months of achieving
this scale of business. This means, they will have to increase their net worth
from Rs.10 lakh to Rs.50 lakh. Maintaining such a high capital adequacy
requirement will be difficult for boutique advisory firms. Clients will have to
enter into an agreement to receive services of RIAs. Such a document should
seek clients’consent on fee structure and mechanism for charging fees, validity
of advice and so on. RIAs will have to appoint a nominee in case of death or
disability. Para planners of RIAs have to be well qualified and experienced. Maintain
records such as physical record written and signed by client, telephone
recording, email from registered email, record of SMS and so on. RIAs will have
to complete the compliance audit within three months from the end of each financial
year.
As we enter
2020, we expect participation of retail investors in mutual funds to continue
to grow, valuations of mid-cap and small-cap stocks to see an uptick and a
gradual recovery in GDP growth. With traditional banking deposits losing sheen
to new financial investments (bank deposit share in household saving has come
down from 68.9% in FY12 to 53.4% in FY18), there is a huge scope for debt MFs
to grow.
