Fund Fulcrum
(April 2008)

Indian mutual fund industry's average assets under management declined by 6.6% to Rs 5.31 trillion in March 2008 (the lowest in the past three months), from Rs 5.69 trillion recorded in February 2008. Falling equity markets, corporate advance tax outflows, and redemption from short term debt plans by institutional investors ahead of the financial year end on March 31, took a toll on mutual funds' assets in the month. To some extent, this was cushioned by inflows through fixed maturity plans offering double indexation benefits. But if past trends are any indication, much of that money should flow back in April. Barring Birla Mutual Fund (average AUM up Rs 12 billion), all fund houses registered a dip in their AUM in March. Reliance Mutual retained its top position in the asset tally, with average assets of Rs 909 billion. It’s AUM dropped by Rs 25.93 billion from Rs 935.32 billion in February. ICICI Prudential saw its assets shrink by almost Rs 50 billion and its assets under management stood at Rs 543.22 billion at the end of March. State-run fund UTI Mutual Fund witnessed a fall of Rs 34.81 billion in its AUM of Rs 489.82 billion at the end of March as compared to Rs 524.65 billion in the previous month. As the market continues to yo-yo, fund managers have decided to play it safe. Mutual Funds are sitting on Rs 23,545 crore of cash, which is waiting to be deployed in the market. Of this, Rs 19,214 crore lies with existing Mutual Funds, while the remaining Rs 4,331 crore has been mobilised through new fund offers.

Piquant Parade

Nearly half a dozen brokerages are awaiting regulatory approval to break into the 33-member Indian funds industry. Edelweiss, ASK Group and Bajaj Financial Services are planning to join the 33-member asset management business, while Bharti AXA gets SEBI nod for Mutual Fund foray.

Tata Mutual Fund ties up with UK’s New Star to advise on India dedicated equity fund to be launched in the second quarter of 2008. New Star, which is a retail fund management company, will garner funds from retail investors in UK and invest in India through the FII route. However, the India-dedicated fund will be managed based upon non-binding discretionary investment advisory inputs provided by Tata Asset Management.

The asset management arm of global banking major Deutsche Bank and iFast Corporation Singapore have entered into an agreement to set up an independent mutual fund distribution platform in India. The distribution platform will be for retail investors and Independent Financial Advisors. The venture's first offering will be the online mutual fund distribution portal Fundsupermart.com, which will allow retail investors to invest in mutual fund products of various asset management companies in India. The portal will offer tools to users to compare mutual fund products, check the value of their holdings and perform calculations.

UTI Mutual Fund opened a new UTI Financial Centre at Patiala. The fund reaches clients through a number of distribution channels, including retail distribution consisting of regional offices, UTI Financial Centres, satellite offices, district representatives and collection centres and independent financial advisors.

Principal PNB AMC strikes alliance with Cosmos Bank and South Indian Bank, Sundaram BNP Paribas Mutual Fund inks pact with Central Bank, ICICI Prudential ties up with dist co-op bank, where the entire bouquet of the AMCs’ products will be offered across the network of branches of the respective banks.

Regulatory Rigmarole

SEBI, vide Notification dated April 16, 2008 has amended SEBI (Mutual Funds) Regulations, 1996 to permit mutual funds to launch REMFs. Existing Mutual Funds are eligible to launch real estate mutual funds if they have adequate number of experienced key personnel / directors. Sponsors seeking to set up new Mutual Funds, for launching only real estate mutual fund schemes, shall be carrying on business in real estate for a period not less than five years. They shall also fulfill all other eligibility criteria applicable for sponsoring a Mutual fund. Every real estate mutual fund scheme shall be close-ended and its units shall be listed on a recognized stock exchange. Net asset value (NAV) of the scheme shall be declared daily. At least 35% of the net assets of the scheme shall be invested directly in real estate assets. Balance may be invested in mortgage backed securities, securities of companies engaged in dealing in real estate assets or in undertaking real estate development projects and other securities. Taken together, investments in real estate assets, real estate related securities (including mortgage backed securities) shall not be less than 75% of the net assets of the scheme. Each asset shall be valued by two valuers, who are accredited by a credit rating agency, every 90 days from date of purchase. Lower of the two values shall be taken for the computation of NAV. Caps will be imposed on investments in a single city, single project, securities issued by sponsor/associate companies etc. No mutual fund shall transfer real estate assets amongst its schemes. No mutual fund shall invest in any real estate asset which was owned by the sponsor or the asset management company or any of its associates during the period of last five years or in which the sponsor or the asset management company or any of its associates hold tenancy or lease rights. A real estate mutual fund scheme shall not undertake lending or housing finance activities.

RBI allows mutual funds to invest USD 7 bn abroad which will enable Mutual Funds to have greater opportunities for investment overseas.

SEBI allows institutional clients to have direct market access (DMA) without brokers’ manual intervention if suitable infrastructure is created by brokers, according to a SEBI circular addressed to the BSE and the NSE. DMA offered clients direct control over orders, faster execution, reduced risk of errors associated with manual orders and better audit trails. Institutional investors (such as FIIs, mutual funds, insurance companies, banks and hedge funds) too, could have a trading terminal similar to that of sub-brokers, in their offices. The move will reduce the cost of transaction besides improving confidentiality of trade. It would lead to further consolidation in the institutional segment of broking business.

SEBI allows Mutual Funds to sell G-Secs without taking delivery, in accordance with the guidelines issued by the RBI. This is subject to the transaction being guaranteed by an approved central counterparty, namely Clearing Corporation of India Ltd. This decision by the SEBI board will put mutual funds on an equal footing with other market participants such as banks, primary dealers and insurance companies as they can now go in for net settlement of government securities transactions. Moreover, it is likely to improve liquidity in the government securities market and reduce the price risk on the part of market participants.

Navratna and miniratna central public sector enterprises (CPSEs) will have the autonomy to invest their surplus funds in mutual funds of their choice. The government has allowed CPSEs to park 30% of their cash surplus either in equity or debt instruments or money market mutual funds.

SEBI has handed out a note of caution to various Art Funds saying that the launching or floating of art funds or schemes without obtaining registration from SEBI would amount to violation of SEBI Act and Regulations.

Take heart if you are losing money in the markets. If you stay invested for a five-year term, it may just pay off. There are reports that 87% of India's oldest mutual funds have outperformed their benchmark indices over a 5-year period. The deluge of funds making a foray into the Indian mutual fund market, regulations rife with life speak volumes of the bright path ahead!