FUND FULCRUM

FUND FULCRUM
(April 2009)

For the first time in five years, the average assets under management of mutual funds have fallen. The AAUM of fund houses fell by 7 per cent or Rs 36,798 crore to Rs 4.93 lakh crore in the financial year 2008-09, as against Rs 5.30 lakh crore in 2007-08, according to data from the Association of Mutual Funds in India. The mutual fund industry has suffered an erosion of a whopping Rs. 1 lakh crore during the month of March alone due to huge redemptions from banks and institutional investors in liquid and money market funds. However, fund managers believe that 80% of the amount would come back into the system by April 10, 2009.

The average asset under management for the month ended Mar. 31, 2009 were at Rs 4.93 lakh crores a slight decline of 1.53% from Rs 5.01 lakh crores for the month ended Feb. 28, 2009, as per data published by AMFI. The plunge in assets can be attributed to the withdrawal by banks from liquid funds since March marks the end of the financial year. 24 fund houses saw a negative growth in their AUMs while 11 saw a positive growth in their AUM. Reliance Mutual Fund which is the leader of the pack saw a 0.81% decline in its AUM to Rs 80,963 crores in March 2009, HDFC Mutual Fund (the only mutual fund in the top 5 to register an increase in AUM) saw a growth of 1.92% to Rs 57,956 crores to clinch the second position. ICICI Prudential Mutual Fund which held its third place saw AUM fall by 3.88%. Baroda Pioneer Mutual Fund was the highest gainer for the second consecutive month with a 30.90% growth while Religare Mutual Fund was the second biggest gainer with a 11.04% rise in AUM. Benchmark Mutual Fund was the biggest loser with a 22.58% fall in its AUM followed by Edelweiss Mutual Fund which experienced a fall of 27.33% in its AUM.

Piquant Parade

Germany’s Allianz will take a 51% stake in the Indian asset management joint venture firm Bajaj Finserv to start its mutual fund operations in India.

IDBI Bank has received the Board approval for setting up an AMC in India.

DBS Cholamandalam AMC has formalized a tie-up with Bank of Rajastan to offer a one-stop solution to investors and widen the reach of retail participants in the mutual fund industry.

UTI has short-listed three firms in the process of selecting a strategic partner for selling a 26% stake within 3 months.

Bharti Enterprises is planning to exit its mutual fund joint venture Bharti AXA Investment Managers so as to induct a partner from the banking industry to strengthen its distribution capabilities. Bharti AXA Investment Managers, a joint venture between Bharti Group (25%) and AXA, a French investment major, commenced its operations only in July 2008.

iFast India has launched a financial integrated wealth management platform. The online business-to-business platform will offer integrated mutual fund products and services to independent Financial advisors. The platform will act as a link and offer a comprehensive platform to the IFAs, Financial Institutions, including investment management, research, investment training, IT services and back office functions. It has empanelled with 23 AMCs with AUM of about Rs 4.5 lakh crores.

Birla Sun Life Mutual Fund has bagged the most coveted and respected industry award - CNBC TV 18 Crisil – ‘Mutual Fund House of the Year’ award for the second successive year. DSP BlackRock Investment Managers has been recognized as amongst the best performing Mutual Fund Houses in the equity segment during the past 12 to 15 months – the worst period of economic downturn.

Regulatory Rigmarole

SEBI regulations require all funds to have a minimum of 20 investors with no single investor accounting for more than 25 per cent of the corpus of a scheme/plan. Eight open-ended interval schemes were not able to meet these requirements. Consequently, they had to wind up.

SEBI has imposed a ceiling on resources allocation to debt instruments of a single entity by any mutual fund. No mutual fund will invest more than 30% of its net assets in money market instruments of an issuer. However, the schemes could continue to invest upto 15% to 20% of their net aassets in other investment grade net assets of the issuer. This move is expected to lower the risk associated with exposure to a single entity. These limits will, however, not cover investments in Government securities, T Bills and Collateralised Borrowing and Lending Obligations.

The RBI Policy has maintained the extension of refiance facilities to Mutual Funds and other entities to 31 March 2010, thereby, facilitating stability in the short-term interest rates.

SEBI is overhauling the seven-year-old risk management circular for mutual funds. The proposed amendments would focus on improving governance and risk management practices. Sebi is also insisting on separate portfolio and operation functions, proper empowerment for persons supervising risk management, ensuring that investments are carried out as per what is mentioned in offer documents and that investments follow established norms, among others.

AMFI has suggested a two-way load structure for selling mutual fund products to investors comprising variable load and no load. Under Plan A, a variable load or commission could be charged depending upon the service or advice rendered by the distributor, while under Plan B, there would be no load or commission charged to investors but the distributor would be compensated by the AMC. However, in that case, annual expenses charged to the schemes will have to be increased by 0.75%.

Fund houses and AMFI have met to decide treatment of bad assets. The issue is whether a fund house can write it off entirely or make a provisioning against the asset. The fund houses would also seek clarification on whether they should start provisioning immediately when the paper is downgraded or wait for it to slip to the default category or to eventually default. This is the first time fund houses may face possible default on investments. According to the current SEBI rules, an asset is classified as non-performing if the interest and or principal have not been received for one quarter from the day such installment has not been received. Once an asset is classified as bad, provisions should be made in the fund house’s books for all interest accrued till that date. The NAVs of mutual funds will suffer as the bad asset will appear as an expense.

The mutual fund (MF) industry is heading towards a serious asset-liability mismatch problem with almost 75-80% of its assets are short-term while most of its lending is long term. The mutual fund industry had banking money worth Rs 13000 crores and it swelled up to Rs 90000 crores by February, 2009. Though banks have long-term money, they are not lending but mutual funds which have banks short-term money parked with them are lending long-term to corporates. There is serious risk of asset-liability or maturity mismatch, as banks can withdraw money parked with mutual funds within 24 hours. The solution to this problem is in self-control by trustees and mutual fund players themselves.

Small investors seem to have hit the pause button, especially those in the suburbs. According to financial advisory firms in the suburbs, investors are refusing to put their money in debt or equity products due to uncertainties in the economy. However, their affluent downtown counterparts say most of their clients are sticking to their investments, though some have downsized their portfolio. But the recent rally has injected a revival of interest. But the ones who invest through thick and thin are the ones who will be out of the woods at the earliest…