FUND FULCRUM - NOVEMBER 2008

FUND FULCRUM
(November 2008)

The Indian mutual fund industry shrank sharply in October 2008. The combined assets of the 35 fund houses declined from Rs.5.3 lakh crore in September to nearly 4.3 lakh crore (June 2007 levels), a fall of Rs.97,196 crore or 18.4%. While equity component of the AUMs have shrunk by around 18-25%, their debt assets have dwindled by as high as 60%. Mutual funds faced unprecedented redemptions in liquid schemes and FMPs.

Mirae AMC and AIG saw the sharpest decline in AUMs at 55% and 44% respectively. In fact, no fund house has come out unscathed - all of them have declared a dip in their AUM. The AUM of Reliance fell by Rs.15,400 cr to Rs.71,093 crore. ICICI Prudential and HDFC saw a decline by Rs. 10,594 cr and Rs. 6,519 crore to Rs.39,209 cr and Rs. 45,479 cr respectively. Despite the fall, the major fund houses maintained their respective positions. Among the top 10 fund houses (in terms of asset size), Franklin Templeton has witnessed the highest loss in assets (-22.4%), followed by ICICI Prudential (-21.3%) and Kotak AMC (-20.7%). As expected, the new funds bore the brunt of the widespread decline in AUMs.

Piquant Parade

India Infoline has received the in principle approval from SEBI for sponsoring a mutual fund.

Union Bank of India and KBC Asset Management, the globally active asset manager of the Belgium-based KBC group, have agreed to set up a 51-49 joint venture AMC in India.

DLF Pramerica Mutual Fund, a joint venture between U.S. life insurance major, Prudential Financial and the real estate company, DLF, has received an in principle approval from SEBI to sponsor a mutual fund.

DSP Merrill Lynch Investment Manager has changed its name to DSP Black Rock Investment Manager to reflect the change in ownership of the AMC.

Dutch financial services major Aegon and Religare Enterprises have decided to call off their joint venture. The AMC had recently got SEBI approval for setting up a mutual fund. It had also acquired Lotus India Mutual Fund to strengthen its operation. Sources say that Religare would still go ahead with the Lotus acquisition as it had struck the deal at an attractive valuation and it would help Religare expand its presence in the market.

According to industry sources, Indian asset management arm of the crisis-ridden American International Group, which saw a fall of over Rs.1000 cr in assets in October, is up for sale.

In a cost-cutting drive, UTI Mutual Fund has drastically reduced its advertisment budget by appointing 'Dabbawalas' as relationship managers and using the mobile phone screens to communicate information to investors.

Lipper FMI, a Thompson Reuters company, announces the launch of its Asian Fund Market Almanac 2008, an essential resource for fund strategists to get up to date with the latest development in the fund management industry across nine key Asian markets.

Regulatory Rigmarole

In order to end the liquidity crisis faced by mutual funds, Public Sector Banks have now relaxed norms for accepting CDs of some private and foreign banks as collateral, which have not been previously accepted by them and have agreed to lower the interest rate they charge to fund houses.

The government, which had allowed navratna and miniratna companies to invest 30% of the surplus in Public Sector Mutual Funds last year, now plans to review the situation every 3 months due to current volatility in the market.

At present, investors can exit FMPs by paying 2% exit load on NAV at any point of time. SEBI now plans to make exit from FMP schemes harder so as to keep investors invested in schemes for the entire duration of the scheme.

The minimum capital an AMC has to maintain to manage the assets is expected to go up. This measure is being contemplated by SEBI to combat the bitter experiences of the turbulent market. Currently mutual funds are operating on a thin capital base of Rs.10 cr. It is also planned to introduce the concept of capital adequacy, due to which the quantum of funds managed by AMCs would be linked to their capital base.

SEBI is planning a proposal to remove the short-term tax benefits on dividends paid by mutual funds. According to current norms, there is no tax on short-term dividend payout and for debt funds the tax is 22.66% for companies and 14.16% for individuals. This is in contrast to the short-term Capital Gains tax of 15% on equities and 33% on debt. Using this loophole, many firms and High Networth Individuals exit funds after they get interim dividend. These early redemptions mean loss in the NAV of long term investors.

The raw deal...the ray of hope

The RBI data reveals the rapid fall in the bank exposure in mutual funds from Rs.21,699 cr in September to Rs.13,630 cr in October, 2008 (Rs. 60,000 in early May, 2008). The timely RBI rescue (the mutual fund industry had borrowed Rs.22,000 cr out of which Rs.9000 cr has been paid back) has put the mutual funds on the road to recovery and staved off a plausible bankruptcy of a few mutual funds.