FUND
FULCRUM
February
2020
The
latest AMFI data shows that the average assets under management (AAUM) of the
MF industry touched Rs 28.19 lakh crore in January 2020, thanks to improved
sentiment amid hopes of a broad-based market recovery. Meanwhile, AUM as on
January 31, 2020 stood at Rs 27.86 lakh crore. The 43-player mutual fund
industry witnessed inflows of Rs 7,548 crore in equity schemes in January 2020,
up 70 percent from December 2020. According to the data on the Association of
Mutual Funds in India (AMFI), equity schemes had reported inflows of Rs 4,432
crore in December 2019. Barring, contra fund category and dividend yield in the
equity schemes category, all categories witnessed inflows in the month of
January 2020. In January 2020, the contra fund saw outflows of Rs 735 crore,
while dividend yields reported outflows worth Rs 63 crore. Within the equity
schemes, mid-cap funds category witnessed the highest inflows worth Rs 1,798
crore. Fund managers attributed the inflows in the mid-cap space to attractive
valuations and bottoming concerns in the mid-cap category. Mid-caps and
smallcaps have seen significant price correction in the last 2 years and we are
seeing attractive valuations and bottoming of growth concerns in the mid-cap
space. On the debt funds, credit risk funds continued to suffer with outflows
of Rs 1,215 crore in January 2020 as against outflows of Rs 1,191 crore in
December 2019. On the other hand, in the same category, liquid funds that are
used by companies to park surplus cash witnessed inflows of Rs 59,682 in
January 2020 compared to outflows of Rs 71,158 crore in December 2019. Overall,
the AUM of the industry rose to 27.85 lakh crore in January 2020 as against
26.54 lakh crore a month ago.
Mutual
fund industry added 68 lakh folios in 2019 taking the total tally to 8.7 crore,
which suggests investors' understanding about market risks associated with such
schemes. However, the pace of growth in folio numbers dropped in 2019 as
compared to preceding three years. The trend can be attributed to decline in
investors account in debt oriented schemes as they were spooked by credit
events in fixed income market. According to the data, the number of folios with
44 fund houses rose to 8.71 crore at the end of December 2019 from 8.03 crore
at the end of December 2018, registering a gain of 68 lakh folios. In
comparison, over 1.38 crore investor accounts were added in 2018, more than
1.36 crore in 2017, nearly 70 lakh in 2016 and close to 56 lakh in 2015, data
available with markets regulator SEBI showed. The number of folios under equity
and equity-linked saving schemes rose by 12.75 lakh to 6.25 crore at the end of
December 2019, which is much lower than 1.2 crore added in the preceding year. Debt-oriented
scheme folios count dropped by 43 lakh to 71 lakh. The number of investors'
account stood at 1.13 crore. Assets under management (AUM) of the industry rose
by over 13 per cent (Rs 3.15 lakh crore) to Rs 26.77 lakh crore at the end of
December 2019, up from Rs 23.62 lakh crore at the end of December 2018 on the
back of measures taken by regulator SEBI for boosting investor confidence. Going
ahead, the industry is expected to witness growth in the range of 17-18 per
cent in this year and equity funds should see robust inflows as expectations
are high about improved equity markets and a revival in economic growth.
The latest AMFI
data shows that B30 cities account for 16% of the total Rs.26 lakh crore MF
industry assets. AUM from B30 cities touched Rs.4.26 lakh crore in December
2019. A large proportion of the B30 assets (65%) come in equity funds.
This is because of the increasing popularity of equity funds among retail
investors in these cities. Analysis of data shows that assets from B30 cities
increased by Rs.42,600 crore, a growth of 12%, between March 2019 and December
2019. AMFI’s investor education campaign has increased awareness about mutual
funds among investors in non-metros. In addition, easy access to internet and
growth in online transaction platforms has also allowed investors who do not
have easy access to physical distribution networks to invest in mutual funds. Investor
wise analysis of the data shows that B30 cities account for 24% of individual
assets of the industry. Individual assets include retail and HNI assets. B30
cities, however, account for only 6% of institutional assets as of December
2019.
The latest AMFI
data shows that New Delhi, Goa, and Maharashtra were the top three states in
terms of highest per capita AUM and AUM to GDP ratio as on December 2019. While
New Delhi ranked first with highest per capital AUM of Rs.1.53 lakh, Goa and
Maharashtra followed New Delhi with per capital AUM of Rs.1.16 lakh and Rs.99,
760 respectively. Other states that have high per capital AUM were
Chandigarh, Haryana, Karnataka, Gujarat, Tamil Nadu, Sikkim, and West
Bengal. Per capita AAUM in mutual funds is the total AUM of the state
divided by the total number of folios. In terms of AAUM as a percentage of GDP,
these three states topped the chart. While Maharashtra occupied the top spot
with 66.5% AAUM as proportion of GDP, New Delhi and Goa followed Maharashtra
with 56.7% and 35.8%, respectively. On the other hand, north-eastern states
like Arunachal Pradesh, Tripura, Manipur, Mizoram and Nagaland were among the
bottom 10 in terms of both AAUM as a percentage of GDP and per capita AAUM.
Piquant Parade
One of the largest distributors of direct plans in mutual
funds, Zerodha Broking has applied for the mutual fund license. The SEBI website shows that Zerodha Broking has applied for
MF license on February 5, 2020. The other two companies who had shown
their interest in MF business were SREI and Frontline Capital Services. While
SREI applied for license on December 04, 2019, Frontline Capital Services
submitted its application on August 03, 2017. Last year, Karvy Stock Broking
applied with SEBI for MF license but the market regulator has kept it on hold
due to pending regulatory action. Earlier this year, SEBI has given
in-principle approval to NJ India to set up its AMC business. Last year, it
gave a go ahead to Samco Securities. Both the companies will come out with
their MF schemes this year.
Regulatory Rigmarole
The Finance Ministry notified that mutual
funds (MFs) will no longer be categorised as foreign investors. The
gazetted notification issued in December 2019 exempts fund houses from sectoral
caps for foreign direct investment (FDI) and various filings under the Foreign
Exchange Management Act (FEMA). This reverses the October circular which
categorised MFs with over 50 percent foreign shareholding as investment
vehicles, a change which would have forced several equity asset managers to freeze investment activity and even sell their holdings. There was much pushback as the
October circular would ironically have counted retail domestic money invested
in the schemes of foreign-owned mutual funds as “foreign money”. For instance,
if a company is allowed 74 percent foreign shareholding under FDI rules, any
investment in it by an Indian mutual fund with more than 50 percent foreign
shareholding would have been considered part of the 74 percent cap. Major fund
houses such as Nippon, Franklin Templeton, Mirae Asset, Invesco, BNP Paribas,
HDFC and ICICI Prudential were likely to be impacted. Listed companies with
sectoral caps in industries such as private banking, broadcasting, telecom,
single brand retail, brownfield pharma, insurance and infrastructure would have
faced serious selling pressure too. The reversal comes after representations
from various fund managers and SEBI.
While presenting Union Biudget 2020,
Finance Minister Nirmala Sitharaman announced that the government would abolish
the dividend distribution tax (DDT). The Union Budget also
introduced a deduction of tax on dividends paid by mutual funds. Though the dividend
received through mutual funds is not getting taxed anymore, the same will be
added to the income of the investor and taxed at the marginal rate of tax. Not
only this, the Finance Bill 2020 contains a provision that the mutual funds
need to deduct tax at source (TDS) at 10 percent if the dividend payout is more
than Rs 5,000. So, mutual funds investors particularly high-networth
individuals (HNIs) or Ultra HNIs that have opted for dividend option of a
scheme have to take huge hit as they will have to pay a tax on the dividend
included in their income. With an aim to improve retail participation and
broaden the G-sec market, debt ETF consisting of government securities has been
proposed. Investors will now be able to use original date of acquisition and
proportionate cost to pay taxes. This was among AMFI’s Budget 2020-21
proposals. These amendments will take effect from April 1, 2020, subject to
Parliament approval.
Distributors are no longer required to
request for asset transfer if they plan to float a proprietorship firm. In
a note sent to AMCs, AMFI said that it has received requests from distributors
to ease the process of changing status from individual to sole proprietorship. However,
the new norms will be applicable to distributors having same PAN number for
individual and sole proprietorship firm.
Here is the new procedure
to change status for distributors who wish to float proprietorship firm
- ·
Open
a separate bank account in the name of sole proprietorship
- ·
A
new application form has to be submitted to AMFI in the name of sole
proprietorship along with EUIN form
- ·
The
application form has to accompany a demand draft of Rs.2360 in favour of
Association of Mutual Funds in India
- ·
Submit
a self-declaration on the letterhead of the firm. The format can be downloaded
from AMFI website
- ·
Surrender
original ARN card issued in your name (individual license)
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The
validity of the new ARN will commence from the date of submission of documents
and fees. It will expire with the expiry of current validity of the individual
ARN (i.e. according to the existing ARN, which you have surrendered)
- ·
Remember
to share this change in status with RTAs
- Distributors who have separate PAN for sole proprietorship firm, will continue to surrender existing ARN and apply for fresh ARN for the new firm. Once you get ARN of your proprietorship firm, you will have to make a transfer of assets request within six months of cancellation of your previous ARN.
Mutual fund distributors are no longer
allowed to use nomenclature like ‘independent financial advisers’ (IFAs) and
‘wealth managers’ without registering with SEBI as RIA. SEBI has amended
SEBI Investment Adviser Regulations after considering issues in all four
consultation papers and public comments. Here are the other key changes
- ·
Individual
RIAs cannot offer distribution services to their clients
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RIAs
can offer execution services through direct plans in mutual funds
- ·
SEBI
will bring more clarity on fee payment and put a cap on upper limit of fees
charged to clients
- ·
The
regulator will clarify net worth, qualification and experience and so on
SEBI has asked AMCs, AMFI, RIAs and other SEBI regulated
intermediaries to freeze accounts of those named by United Nations as
terrorists. SEBI has directed fund houses and
AMFI to refer to the list issued by the United Nations Security Council
Resolutions (UNSCRs). The list includes name of individuals and entities linked
to terrorist organisations like ISIL (Da’esh), Al-Qaida and Taliban. Further,
the market regulator has asked AMCs, AMFI and RIAs to scan all existing
accounts to ensure that no entity or individual in the list hold mutual fund
folios. In addition, SEBI has asked intermediaries to bar these entities and
individuals from investing in mutual funds, stocks and other SEBI regulated
products and services.
SEBI has revised PMS regulations in which
it has asked PMS players not to charge upfront fees from their clients. In
a circular, SEBI said, “No upfront fees shall be charged by the Portfolio
Managers, either directly or indirectly, to the clients.”
Here are the other key
changes to PMS regulations:
- ·
PMSs
have to charge brokerage at actual from clients
- ·
Operating
expenses cannot exceed 0.50% per annum on daily average AUM
- ·
Introduces
graded exit load structure i.e. PMSs can charge exit load of 3% of the amount
redeemed in first year, 2% in second year and 1% in third year. There will be
no exit load after three years
- ·
Facilitate
direct on boarding of clients
- ·
Uniform
reporting standards across the industry. This includes investment objective,
description of types of securities, investment approach, allocation across
types of securities, basis of selection of securities, indicative tenure and
horizon, risks associated and other salient features
- ·
Disclose
performance net of all fees and expenses, material change and change in
investment approach
- ·
Follow
all trail model to compensate distributors and disclose such fees to their clients
- ·
Put
in mechanism to ensure that distributors adhere to a code of conduct
These changes
will come into effect from May 1, 2020.
Year 2020 has
started on a positive note for the MF industry. Data available on SIP also
shows an encouraging trend. The monthly inflows through SIP reached an all-time
high of Rs 8,532 crore in January 2020. Moreover, AMFI data shows that on an
average, the MF industry has added close to 9.80 lakh SIP accounts each month
during the FY 2019-20, with an average SIP ticket size of about Rs 2,800 per
SIP account. Net SIPs in the MF industry has risen to a 20-month high of 6.12
lakh in January 2020. Net SIPs is new SIP registered minus ceased SIPs. The
increase in net SIPs was due to a sharp rise in new registered SIPs, which
outdid the marginal increase in ceased SIPs. In January 2020, the number of new
SIPs registered surged to 12.07 lakh, a record high for the MF industry.
Meanwhile number of SIPs ceased, which includes discontinued and completed SIP
accounts, touched 5.95 lakh. This rise in net SIPs can be attributed to
improved sentiments amid hopes of broad-based market recovery, rising
popularity of SIPs and increase in the number of online MF platforms. .
Overall, the MF industry has 3.04 crore active SIP accounts.
