FUND FULCRUM (CONTD.) - SEPTEMBER 2008

FUND FULCRUM (contd.)
(September 2008)

The Indian mutual fund industry is growing at one of the fastest rates in the world, along with those in China and Brazil. Total assets under management have expanded five-and-a-half times since August 2002. The total assets under management of mutual funds represents 12.5 per cent of India's gross domestic product, compared to 60 per cent for the US, indicative of the latent potential.

There were an estimated 123,000 millionaires or High Networth Individuals (HNWIs) in India at the end of 2007, up 22.7% from a year earlier, according to the third annual Asia-Pacific Wealth Report published by Merrill Lynch and Capgemini. HNWIs are individuals with more than US$ 1 million in net assets, excluding their primary residence and consumables. Rapid economic expansion, increased foreign investment and gains on the country's stock markets fueled the jump in India's HNWI population last year. The average net worth of Indian HNWIs rose slightly to US$ 3.6 million, compared with US$ 3.4mn for the Asia Pacific region. The global average was US$ 4 million.

Piquant Parade

Religare AEGON Asset Management Company has received the final regulatory approval from SEBI to launch mutual fund business in India. Religare Enterprises is one of the integrated financial groups of India. Its businesses include three key verticals: the retail, institutional and wealth management. AEGON is one of the world’s largest life insurance and pension groups, and a provider of investment products. The AMC is looking at launching its first product for the Indian retail investor by November-December, 2008.

Amidst highly volatile stock markets, the daily systematic investment plan introduced by Bharti AXA Investment Managers is expected to minimize risk and to generate greater risk adjusted returns while increasing investor participation. The feature, introduced for the first time in India with an equity scheme, allows one to invest on a daily basis a minimum Rs 300 per day. It has a lock-in period of one month, during which an investor has to pay the SIP amount without any default. Beyond this time, an investor can withdraw the money invested with return at any point of time. If one should fail to pay the SIP amount on any particular working day, his investment will not default but his return will be adjusted against the failure of payment for that day. If successful, the fund house plans to bring down the minimum amount to Rs 150 to make it more affordable to retail investors across the country. The fund house will also try to make the daily SIP available with its newer schemes in the days to come.

Principal Mutual Fund has entered into an alliance with United Bank of India, a leading public sector bank, for distribution of its products through the bank’s branch network.

Regulatory Rigmarole

In a move that could revolutionise sale and purchase of mutual fund units by investors across the country, AMFI is working towards setting up an electronic platform. This would not only benefit unitholders, but also distributors and fund houses. The electronic platform will bring paperwork to a bare minimum, improve operational efficiency, provide transaction convenience and reduce cost. The proposed electronic platform will help investors trade even in open ended-mutual fund scheme units, like in the case of shares, switch between schemes of different fund houses, and also enable mutual fund investors to view their entire portfolio on a single portal. The modalities of the platform are being worked upon by an AMFI-appointed committee. The AMFI committee received 15 expressions of interest (EoI) from both international and domestic companies including Canada-based FundSERV, focusing on the data standards and security infrastructure. The new platform is likely to be replicated on the same lines as it is operational in several foreign countries such as in Canada, US and Australia. FundSERV, which is one of the interested parties to offer this service in India, is a leading provider of electronic business services to the Canadian investment fund industry. Indian mutual fund industry has so far about 4.6 crore folios (investors), of which more than 95% is held in the physical format. The electronic platform, which could take two years to implement, will not not only ramp up the present model, but also benefit the next generation of mutual fund applicants, who are expected to grow exponentially.

Sebi chairman CB Bhave, who was instrumental in implementing the demat process for shares, had recently suggested that Mutual Fund investors should also have a common statement for all their mutual fund holdings just like the system for equities through depositories like NSDL and CDSL.

Since February 1, 2008, investors in mutual funds putting in Rs 50,000 and above are required to get a know-your-customer (KYC) compliance certificate. The basic idea behind introducing this was to comply with Prevention of Money Laundering Act guidelines. However, six months later, both investors and asset management companies are struggling with the new norms. The reason: confusion over who qualifies as an attesting authority, besides other requirements.

An investor-friendly measure adopted by AMFI has put distributors in a spot. As prescribed in AMFI's best practices, the rule requiring no-objection certificate (NOC) for shifting to a new financial planner (a mutual fund distributor or agent, in this case) has left a hole in the earnings kitty of large distributors. The new rule is being used as a weapon to poach businesses of other distributors by hiring well-networked relationship managers working with established product distributors.

Customers will no longer get insurance covers bundled with mutual funds and many savings and investment products offered by banks. They may, however, continue to get insurance with credit cards and home loans. Beginning October 1, mutual fund houses will have to withdraw all products which offer mutual funds with an insurance cover. Only a handful of companies like Kotak Mahindra AMC, Birla Sunlife AMC, and Reliance AMC offer these products. These fund houses have been buying group policies from insurance companies, clubbing them with mutual fund products, and offering them as a product. This had created an outrage in the insurance industry with the industry vehemently opposing such products. Earlier this month, the life insurance council held a round table with the heads of all life insurance companies deciding not to sell group policies to mutual fund houses. However, those who have already invested in these products will continue to get benefits.

The Fund managers are manipulating NAVs of floating-rate schemes; market regulator Sebi and industry body AMFI are working together on standardising valuations of the underlying assets of these funds - the floating rate bonds. The Sebi with the help of AMFI and rating agencies will set up a common valuation method of floating rate bonds in the next two -three months. Till date fund managers used their own methods to value these bonds. The coupon rate or bond value is generally updated every six months. During the tenure of the bond, many fund houses used the circular trading route to rig NAVs to push up returns.

The recent market turmoil around the globe notwithstanding, Indian mutual fund investors are showing signs of maturity. Although concerned about the status of their investments in different funds, not many are rushing to get out of the market by redeeming their Mutual Fund units. The gargantuan growth of the mutual fund industry, thanks to the mushrooming of HNWIs, the spreading wings of mutual funds throughout the length and breadth of the country, by virtue of SIPs gaining a strong foothold and the maturity of the investing populace augur well for the future of the mutual fund industry.