FUND FULCRUM

July 2020

The latest AMFI data shows a huge decline in pure equity funds’ net inflows due to outflows in large cap funds and multi cap funds. The Rs.5,000 crore negative net change reverses the trend of the last few months. Both the categories saw sudden outflows in June 2020 compared to the previous month. Multi cap funds saw an outflow of Rs.777 crore as against an inflow of Rs.758 crore in May 2020. Similarly, large cap funds witnessed an outflow of Rs.212 crore as against inflow of 1,555 crore in May 2020. Outflow is due to a sharp bounce back in the equity market in the last one month which led to profit booking by investors. Due to the whole pandemic impact and the market gains recently, investors have redeemed their investments to manage their cash flow requirements. However, the continuing outflow trend in hybrid funds should be a matter of worry. Among hybrid funds, only arbitrage funds continued to get positive inflows. Further, monthly SIP inflows came down below Rs.8,000 crore mark at Rs.7,927 crore in June 2020. Overall, debt funds also saw a fall in net inflows in June 2020 to Rs.2,861 crore from Rs.63,665 crore. This indicates a net decrease of Rs.60,803 crore driven primarily by the outflows in liquid funds. Corporate bond funds saw a hike in net inflows to Rs.10,737 crore from Rs.3,831 crore. Categories like ultra-short duration funds, low duration funds, money market funds and short duration funds also saw considerate inflows in June 2020. Overall, the MF industry AUM reached the Rs.25 lakh crore AUM mark in June 2020. Reducing interest rates, gradual unlocking of economic activity with expected return to normalcy has seen renewed buoyancy in markets leading to mutual fund AUM crossing Rs.25 lakh crore mark for the first time in the last three months.

Amid the nationwide lockdown and volatile equity markets, the MF industry has added over 2.55 lakh new investors between April 2020 and June 2020. In April 2020, the MF industry added 1.04 lakh unique investors, 53,964 new unique investors in May 2020 and 97,597 new investors in June 2020. As a result, the overall unique investors count has risen to 2.10 crore as on June 30, 2020. If compared with the Jan-Mar 2020 numbers, addition of new investors has fallen by nearly 50%. The industry had added 5.08 lakh unique investors in the March 2020 quarter. Nevertheless, this number is encouraging given the fact that Apr-Jun 2020 has always been a leaner quarter as against Jan-Mar 2020. Moreover, many distributors and advisors rely heavily on in person meetings and physical transactions to onboard clients. Most of the new investors have come via tech platforms where the onboarding is completely digital. Falling FD rates has prompted many investors to invest in liquid funds through these platforms.

The first quarter of FY 2020-21 was not so encouraging for the MF industry. Of the 41 fund houses in the MF industry, 39 have witnessed a decline in their AAUM in April-June 2020, shows latest AMFI data. During this lockdown quarter, industry’s AAUM dropped by 9% to Rs 24 lakh crore from Rs 27 lakh crore in the preceding quarter. However, PPFAS MF and ITI MF are the two fund houses that bucked the trend. While AAUM of PPFAS MF grew by Rs 463 crore or 15% to Rs 3,600 crore in April-June 2020, ITI MF's AAUM grew by Rs.54 crore to Rs.581 crore. PPFAS believes their AMC’s consistent philosophy of value-investing and transparent communication has helped them grow their business even in such uncertain times. Adding to it, their consistent exposure to international funds in the last seven years has finally paid off. Franklin Templeton MF was the fund house with the highest decline in AAUM. Its AAUM fell by Rs 36,514 crore to Rs 79,808 crore. Aditya Birla Sun Life MF, Nippon India MF and ICICI Prudential MF were the next three fund houses that saw the highest drop in AAUM in absolute terms. In percentage terms, Sahara MF, YES MF and Baroda MF witnessed the highest decline in AAUM with 99%, 77% and 38%, respectively. Overall, the industry’s assets came down by Rs.2.40 lakh crore to reach average AUM of Rs.24.60 lakh crore in April-June 2020. SBI MF and HDFC MF continue to hold the top two positions of highest AAUM. SBI MF’s AAUM stood at Rs.3.6 lakh crore, down by merely 2% or Rs.9,000 crore from last quarter. HDFC MF’s AAUM was at Rs.3.5 lakh crore, down by 4% or Rs.13,000 crore. The lockdown quarter has been good for Axis MF as it became the seventh largest fund house, overtaking UTI MF. While both the fund houses witnessed a decline in AAUM, Axis MF fell by 3% or Rs.4,000 crore at Rs.1.34 lakh crore. UTI MF lost 12% or Rs.17,000 crore at Rs.1.33 lakh crore. ICICI Prudential, Aditya Birla Sun Life, Nippon India and Kotak MF remained in the top 10 list. AAUM of these fund houses stood at Rs.3.26 lakh crore, Rs.2.14 lakh crore, Rs.1.80 lakh crore and Rs.1.67 lakh crore, respectively. Both ICICI Prudential and Nippon India saw an erosion of assets of over Rs.24,000 crore compared to last quarter. Aditya Birla Sun Life MF saw a fall of over Rs.32,000 crore from its average AUM. In terms of percentage, SBI, HDFC, and Axis MF saw the smallest drop in AAUM with 2%, 4% and 3% respectively. 

Axis MF, ICICI Prudential MF and Mirae Asset MF added the highest number of folios last financial year, according to AMFI data. While Axis MF added 21.21 lakh folios in FY 2019-20, ICICI Prudential MF added 16.77 lakh folios and Mirae MF 11.73 lakh new folios. SBI MF and DSP MF follow at 4th and 5th position with 7.35 lakh and 3.35 lakh new folios, respectively. In percentage terms, Mirae Asset MF and Axis MF registered highest growth in new folio creation with 84% and 55%, respectively among the top 15 fund houses. These fund houses have delivered good performance over the last few years. The exemplary performance of schemes of these fund houses, especially Axis and Mirae is the reason for their highest addition in new folios. Overall, Yes MF and PPFAS MF saw 180% and 130% growth in terms of new folio addition, respectively. However, not all fund houses saw an increase in new folios. AMFI data shows that 11 fund houses - Nippon India MF, L&T MF, UTI MF, Franklin Templeton MF, IDBI MF, Principal MF, Essel MF, Sahara MF, HSBC MF, BOI AXA MF, and BNP Paribas MF witnessed a decline in their number of folios. Overall, UTI MF remains the largest fund houses in terms of number of folios. The fund house has over 1 crore folios as on March 2020 followed by HDFC MF (94.22 lakh) and ICICI Prudential MF (93.84 lakh). ITI MF, Kotak MF and JM Financial MF have been excluded as their data was not available on the AMFI website.

The nationwide lockdown has affected new SIP registration in the Rs.25 lakh crore MF industry. The latest quarterly AMFI data shows that new SIP registrations have declined by 7.24 lakh to 24.71 lakh in April-June 2020 compared to 31.95 lakh in January-March 2020. In addition, the industry has seen marginal increase in SIP discontinuation. Discontinuation of SIPs increased to 18.50 lakh in June quarter as against 17.71 lakh in March quarter. Decline in number of new SIP registration and marginal increase in discontinuation of SIPs is largely due to financial constraints and weak economic sentiments. The actual number of new SIPs in June is higher than the previous two months. In fact, at gross level, the industry added around 9 lakh new accounts. And the total number of accounts went up to 3.23 crores, higher than April 2020 or May 2020. Overall, over 6 lakh net new SIPs were added in April-June 2020. So, while it might be called a slowdown, it is pretty normal for SIP investors to delay their commitment to long term plans in the face of short term adversity. We hope that these investors will come back again to the industry after a while. Financial constraint due to job loss or salary cuts is the key reason for increase in SIP discontinuation and decline in new SIP registrations. Further, volatile market conditions and slowdown in the economy are discouraging many investors to enter the market. Many investors could not digest heightened volatility which is currently happening in the market. Meanwhile, many investors have booked profit in June 2020 and discontinued their existing SIPs till things settle down.

Piquant Parade

The latest AMFI data shows that most AMCs were able to resolve investor complaints within 30 days.

SEBI has reconstituted its mutual fund advisory committee (MFAC). The market regulator has appointed former RBI Deputy Governor Usha Thorat as the new Chairperson of MFAC.

Aditya Birla Sun Life Mutual Fund has introduced a host of services for MF distributors empanelled with them. The services include execution of transactions and generation of account statements on Whatsapp.

Regulatory Rigmarole

From July 1, 2020, the cost of investment in direct stocks, mutual funds, ULIPs and NPS has gone up for investors due to incidence of double stamp duty taxation.

In a move to bring uniformity across fund houses in terms of dealing with transfer of assets due to demise of unitholders, AMFI has introduced a new set of norms for transmission of units in mutual funds due to absence of nominations or death of unitholders.

• ·       Deletion of names of deceased unit holders in joint holding

  ·         Assets need to be transferred to surviving joint holders

  ·         Demise of sole owner or all owners - Nominee is registered

  ·         Demise of sole owner or all owners - Nominee is not registered

  ·         Appointment of new Karta due to demise of existing Karta

  ·         Demise of Karta of an HUF

Capital markets regulator SEBI said valuation of market-linked debentures will be carried out by an agency appointed by mutual fund industry body AMFI.

In a bid to make debt funds more transparent, SEBI has asked fund houses to disclose the portfolio of their debt schemes on a fortnightly basis within 5 days of every fortnight. The market regulator has asked MFs to follow the new disclosure norm from October 1, 2020.

AMFI has allowed distributors working under sub broking model with national distributors to transfer their assets to own ARN. So far, transfer of AUM from national distributor to sub distributor was not allowed as partial transaction of assets is not allowed in mutual funds.

While the world is talking about pre and post COVID era, it is clear that we will have to live with coronavirus at least for a while. Heightened volatility due to coronavirus pandemic has led many investors to review their investments. In fact, many investors have shown their interest in investment products that can protect them from downside risk. Many investors will choose less risky and high quality investment products over return generating volatile products. In addition, many investors will follow a staggered way of investing to reduce risk of timing the markets and benefit from averaging. In such a scenario, a major challenge for the MF industry is to break the assumption that all mutual funds are risky. Awareness should be created that mutual funds also offer products across different time frames depending on the risk appetite of investors. There is huge possibility that MF industry may face difficulty in increasing revenue due to uncertain economy and market conditions. In such a scenario, one of the key trends to watch out for will be how AMCs and mutual fund distributors (MFDs) manage their cost. The MF industry should focus on optimizing cost instead of reducing it. This could be done by embracing digital technology, improving efficiency, cutting down on travel, trimming infrastructural requirements and so on. The objective should be to look at all aspects of cost optimization. Currently, both AMCs and MFDs have been conducting a host of digital events to engage with their target audience on a regular basis. However, these digital meetings lack personal interaction with target audience, which ultimately defeats the very purpose of engagement. Hence, AMCs and MFDs should shift their focus on engaging with their target audience on a more personal level. Another crucial trend will be to understand behavioral aspects to connect with clients emotionally. So far, most of us have focused on delivering numbers. While the performance numbers are important, ultimately when people are investing for goals and their lives, and especially in situations like this when things are challenging, we need to start acknowledging the emotional aspect of investing as well. The move to digital transactions will be one of the key trends going forward. Just as many people are using phone and web based banking, MFs will also see a sharp rise in usage of technology for transactions. The industry is likely to continue the efficiency obtained not only on the transaction front but on the communication front through digitization as well. Virtual meetings which took off during the lockdown could be the norm in future also.