FUND FULCRUM - OCTOBER 2008

FUND FULCRUM
(October 2008)

Tight times

The global financial crisis, particularly the turmoil seen in the US financial circles, has had its impact on the Indian capital markets as well. The Indian stocks markets witnessed a significant fall in September, the Sensex shedding nearly 12 per cent. The unpredictable markets, that seem to shake at the slightest provocation, have hurt the investors' sentiments and predictably the fortunes of the fund houses as well. In addition, September is the period when inflows into equity are generally tight as the banking sector has to redeem its funds on account of balance sheet concerns at quarter end. Most corporations also redeem their money to meet their advance tax liabilities.

In September, the combined assets under management of fund houses fell by 2.76 per cent. The assets under management of the mutual fund industry now stand at Rs 5,29,121.75 crore against Rs 5,44,173.95 crore at end of August. 20 of the 36 fund houses witnessed a dip in their AUM. All the top 10 fund houses have seen a steep decline in their assets. Reliance Mutual Fund retained the top slot in terms of assets under management even though its assets declined by two per cent to Rs 86,494 crore. HDFC Mutual Fund was the second largest fund house with assets worth Rs 51,998 crore, which was down by Rs 1,860 crore from the previous month. ICICI Prudential Mutual Fund, held the third position with assets worth Rs 49,772 crore even though it was a whopping Rs 3,320 crore less than the previous month. UTI Mutual Fund which held Rs 44,623 crore, after losing Rs 2,324 crore was the fourth largest in terms of assets under management.

Silver lining in the dark sky…

On a brighter note, some fund houses also saw a surge in their assets. Canara Robeco Mutual Fund saw its assets surge by nearly Rs 1,090 crore to Rs 6,006 crore. Sundaram BNP Paribas Mutual Fund added Rs 642 crore while Franklin Templeton Mutual Fund added Rs 632 crore to their respective AUMs. Apart from these, ABN AMRO Mutual Fund (Rs. 591 crore), Kotak Mahindra Mutual Fund (Rs. 389 crore) and Deutsche Mutual Fund (Rs. 228 crore) also saw a significant surge in their assets. Another notable development this month was that the new fund house, Edelweiss Mutual Fund declared its AUM for the first time which stood at Rs 301 crore.

Piquant Parade

At the annual Outlook Money NDTV Profit Awards, Principal Asset Management Company was declared the Best Mutual Fund House as well as the best debt fund house in India.

ABN AMRO Asset Management Company has been acquired by Fortis Investment Management and would be renamed Fortis Investment Management (India). This change comes after a consortium comprising of The Royal Bank Of Scotland, Fortis and Banco Santander acquired the entire share capital of ABN AMRO Holding in October 2007 and each member of the consortium acquired parts of ABN AMRO that best synergized with their business.

Tata Mutual Fund has entered into a strategic tie-up for the distribution of its funds with State Bank of Hyderabad. Under this new arrangement SBH will distribute the entire product range of Tata Mutual Fund schemes across 1,001 branches and 45 extension counters of the bank.

Regulatory Rigmarole

In what seems to be a victory for the Mutual Fund industry, mutual fund houses can now sell insurance cover bundled with mutual funds. The finance ministry has intervened in the dispute between insurers and fund houses to end a ban by life insurance industry providers on providing group life insurance covers to mutual funds. Insurance companies had planned to discontinue the offer of group life insurance cover on mutual fund products starting from Oct. 1, 2008.

Domestic mutual funds need to make more disclosures about the portfolios of their fixed-maturity plans (FMPs) to enhance investor confidence in such schemes, according to Crisil FundServices. This observation comes at a time when there has been a huge redemption from many FMPs because of concerns over the creditworthiness of many of the securities in them. If the credit quality of FMPs’ investments is strong, then investors have much to gain by holding these investments to maturity. In this situation, it is actually premature redemption, which could lead to sub-optimal returns.

The Securities and Exchange Board of India has widened the band for valuation of bonds, which is used to calculate NAVs of mutual funds. Funds could value a rated debt security with duration of up to 2 years between 150 basis points (bps) below and 500 bps above its value, up from a band of 50 bps below and 100 bps above. For securities with a maturity of more than two years, the range has been fixed at 100 bps below and 400 bps above its value, up from 25 bps below and 75 bps above the value.

This will not only bring in more efficiency while calculating net asset values of funds, but also help fund managers get a better price while exiting their investments in times of redemptions. Money market schemes, which invest in debt paper of a duration — generally less than one year — were facing large-scale redemptions by corporates and other institutional investors. The market turmoil had made it very difficult for fund managers to ascribe a value to bonds. So, in times of such redemptions, bonds often had to be sold at a loss. Fund managers can now hope for better prices while selling units of schemes, when investors seek their money back. Arriving at the NAV of these funds — the price at which investors exit or enter the scheme — has always been a challenge for fund managers, since there is no active market for most of these instruments.


The Reserve Bank of India cut CRR by 250 basis points (in tranches) and announced a scheme to provide liquidity to mutual funds. According to RBI’s scheme, banks are allowed to lend money to Mutual Funds against Certificate of Deposits (CDs) for a period of 15 days from October 14. Banks have also been permitted to buy back their own CDs from Mutual Funds. It is estimated that Mutual Funds hold Certificate of Deposits worth more than Rs one lakh crore. According to bankers, the problem is that most banks do not have excess SLR securities against which they can borrow in the repo market. And many banks are still on the borrowing side, as is evident from the RBI’s daily repo and reverse repo auctions.

Since the scheme was launched, banks have so far availed themselves of a total of Rs 8550 crore from RBI for lending to Mutual Funds. Two leading public sector banks have lent over Rs 3,500 crore to Mutual Funds so far, which includes the special repo window, other direct lending and by buying CDs from Mutual Funds. To further ease pressure, RBI will extend the liquidity window for mutual funds till further notice.

We are living in extraordinary times. The events that have unfolded globally have been far worse than anything the best risk managers could ever plan for. The deviation from the mean — in terms of change in human behaviour, widening of credit spreads, tendency to hoard cash and the scale of panic — has been of such magnitude that even the synchronised effort of multiple governments, central banks and policymakers have had little palliative effect. The tremors of the events in the US and Europe were felt as far as Singapore and Hong Kong where sovereign guarantees had to be issued to prevent flight of bank deposits. It is common wisdom that if all depositors withdraw their money in a bank together, leave aside the liquidity issues, the solvency of the institution will be at risk.Thankfully, for mutual funds the risk is one of liquidity alone.