FUND FULCRUM - FEBRUARY 2009

FUND FULCRUM
(February 2009)

The year 2009 started on a brighter note for the mutual fund industry as their assets continued to grow in January 2009. The month saw the assets under management of the fund industry rise by 9.43 per cent, witnessing an overall increase in its AUM of Rs 39,793 crore. The total AUM of the industry stood at Rs 4.62 lakh crore as against the December AUM of Rs 4.21 lakh crore. This is the highest jump since October 2007 when the assets had risen by 15 percent and the highest growth since the start of the market fall 12 months ago. The inflows are mainly happening in the fixed income schemes due to large surpluses in the banking sector, coupled with a softened interest rate scenario.

Of the 37 fund houses, 13 have reported a decline in asset base while 22 have reported a rise in AUMs. The older fund houses are the ones that have contributed the most in the upsurge of the AUM. The top mutual fund house by asset size, Reliance Mutual Fund reported an increase in asset base of more than eight per cent. The second largest – HDFC Mutual Fund – logged an almost 10 per cent rise, maintaining its second position. Last month saw ICICI Prudential MF replacing UTI MF in the third position in terms of asset size. ICICI Prudential’s asset base has gone up by more than 13 per cent and stands at Rs 47,515 crore, while UTI, which managed to log gains of over eight per cent, now manages close to Rs 46,161 crore of assets. While there were some fund houses such as LIC MF (30 per cent growth) and IDFC MF (28 per cent) that registered substantial increases in AUMs, a few reported steep dips in AUMs. These include Edelweiss Mutual Fund, which reported an AUM fall of more than 58 per cent; Benchmark Mutual Fund (16 per cent fall) and Mirae Asset Management (14 per cent fall).

Equity mutual funds are choosing to hold sizeable cash positions in view of the current market uncertainties. The proportion of cash to total equity assets has gone up from 10.1 to 20.5 per cent between January 2008 and January 2009. Though the actual cash holdings have only increased from Rs 18,000 crore to Rs 20,000 crore, the contraction in equity fund assets (due to NAV declines and some outflows) has resulted in a larger proportion of cash. Cash includes cash and cash equivalents such as money market instruments and short-term debt instruments. Among the larger AMCs Reliance Mutual Fund and UTI Mutual Fund hold cash positions amounting to about 30 per cent of the equity assets while SBI and HSBC Mutual hold about 20-22 per cent.

Piquant Parade

With increasing investor faith on branding in a market hit by recession, top mutual fund houses like Reliance, ICICI Prudential, UTI, Tata are going all out to claim their share of the pie. Some mutual funds are concentrating on branch expansions and strengthening channel partners, while others are enhancing investment knowledge for investors, distributors and financial advisors who influence investors. All efforts are aimed at getting fresh investments. While UTI is intensifying its core focus on financial advisors, Reliance Mutual and ICICI Prudential are going in for aggressive marketing strategies supported by knowledge dissemination programmes. Tata Mutual, which plans to add 25 branches by March 2009, is taking various initiatives under knowledge management. Buoyed by the success of its strategy to use 'dabbawallas' for promoting sales of its mutual funds, UTI MF now plans to use the SMS service in mobile phones to deepen and widen its penetration, especially in rural areas.

UTI Retirement Solutions, UTI Mutual Fund’s fully owned subsidiary, has emerged as the best bidder for the government’s proposed scheme for those not covered by its pension system. At a fee of Rs 9 for every Rs 10 lakh of pension money it would manage, the UTIMF arm’s bid was half its nearest competitor Reliance MF. Pension Fund Regulatory and Development Authority (PFRDA) selected six asset management companies to manage pension of citizens other than government employees. Besides UTIMF and Reliance MF, ICICI Prudential Life Insurance, IDFC MF, SBI and Kotak MF also qualified. All the five fund managers now have to agree at UTI Retirement Solution’s rate of Rs 9 for every Rs 10 lakh of funds managed.

Goldman Sachs Asset Management Company India, the Indian asset management arm of US based Goldman Sachs has deferred its plans to set up mutual fund operations in India as market conditions are not favourable. The plan to launch the mutual fund has been delayed by a year or more.

UTI asset management company, the manager of the fourth largest mutual fund in the country has put its plans on hold for sale of 26% stake due to poor valuation. The company had earlier called off an IPO due to adverse market conditions.

Bharti AXA investment managers announced a new corporate identity, the logo is in line with the Bharti Group unveiling its vision 2020 of building Bharti into India’s finest conglomerate by 2020. The Bharti brand reflects a multi-dimensional character that seeks out new avenues to grow.

Credence Capital, a mutual fund set up by students of the Indian Institute of Management-Lucknow (IIM-L) for fellow students, has seen its corpus double in less than two years - from an investment of Rs.300,000 in August 2007 to Rs.600,000 at present.

Regulatory Rigmarole

To support the Non Banking Finance Companies (NBFCs) and Mutual Funds to meet their liquidity requirements, Reserve Bank Of India has extended its special repo window till 30th September, 2009. The banks could use this window to borrow funds at the repo-rate and lend the same to credit hit Mutual Funds and NBFCs. The extension of the window would help the mutual funds to face the asset-liability mismatches, address the fund raising problem and stabilize the business.

The internal compliance teams of some mutual fund houses have asked their fund managers to curb inter scheme asset transfers, which is often adopted as a recourse to meet short term liquidity constraints. The move comes in the wake of several fund houses cutting questionable asset transfer deals during October and November 2008, when debt schemes (particularly fixed maturity plans - FMPs) witnessed unprecedented redemption pressures. While it is not illegal for mutual fund houses to transfer assets (or to put it plainly, sell papers to another schemes) to other schemes of longer maturity terms or higher liquidity, the transfers have to be done at fair market yields. Industry sources claim there have been instances where the schemes which received the assets, were short changed or saddled with dud paper.

In a move that will ensure greater transparency in the way mutual fund schemes are sold to investors, SEBI is proposing to make it mandatory for distributors to disclose the commission they are paid by mutual fund houses. The regulator is also proposing a variable load structure, wherein investors can decide on the commission they are willing to pay to the distributor. At present, the AMC is free to pay the distributors any commission they feel is appropriate. Investors are at a disadvantage as they have no control over what they pay for the advice rendered to them. The Advisory Committee of Mutual Funds has suggested for a separate section in the application form, wherein investors can indicate the commission payable to the distributor. This would be jointly signed by the investor and the distributor. The AMC would then deduct the amount payable and pay the distributor. Alternately, investors could issue a separate cheque to the distributor towards commission. In the second option, the investor would issue two cheques — one for the investment in the mutual fund scheme and the second in favour of the distributor for the agreed commission. In both the above options, the process for making the investment application remains the same, except for the entry load being decided in terms of the agreement between the investor and the distributor. Market participants have been asked to submit suggestions before March 6, 2009.

Despite the volatility in the stock markets, the mutual fund industry has started showing signs of revival thanks to the softening of interest rates. Long term bond funds are poised to deliver good returns in 2009. The positive outlook for debt funds notwithstanding, it is important for debt fund investors to be aware of other risks such as the credit quality of the bond fund portfolio while making their choice. The extent of time an investor stays invested in a debt fund and timing of investment would also have a bearing on returns. Well diversified equity funds with a tilt towards large caps should still form the core of an investor’s portfolio. Cautious optimism is what is called for in an investor to ride safely on the road to recovery.