FUND FULCRUM

(June 2009)

While India has one of the fastest growing mutual fund markets with a CAGR of 29% as opposed to a global CAGR of a mere 4%, revenue and profitability have not been commensurate with the growth in AUM. AUM of the Indian mutual fund industry is expected to grow by 15 to 25% (22 to 25% if the economic revival is quick) over the next five years, according to a CII-KPMG study. The AUM is expected to grow to Rs 15 to 18 lakh crore by the year 2015. Increased retail and institutional participation and innovation in distribution would be among the factors that would spur growth. Revenues of AMCs are expected to reduce due to focus on low margin products to attract risk averse investors and also as operating costs escalate due to focus on reaching out to retail investors beyond tier-II cities. Fall in profitability and cost pressure has hit the entry plans of global players in the industry. The report of profitability of mutual funds says that the AUM grew at 35% in the period between 2005 and 2009, while profitability, defined as PBT as a percentage of AUM, declined from 0.24% in 2004 to 0.14% in 2008. Operating expense as a percentage of AUM rose from 0.41% in 2004 to 1.13% in 2008 due to increased spending on marketing, distribution and administrative expenses, which impacted AMC margins.

For the first time since the inception of the mutual fund industry, the combined AUM of mutual funds in May 2009 has reached its highest ever pinnacle - the 6 lakh crore mark. The industry AUM jumped by nearly 16% or Rs 87000 crores to Rs 6.39 lakh crores. The phenomenal rise can be attributed to the steep rise in the stock market by over 50% and fresh inflows into liquid funds. The massive hike in AUM was led by Reliance, HDFC, ICICI Prudential, UTI and Kotak. Together, they have contributed Rs 51000 crore out of the combined increase of Rs 87000 crore. For the past two years, Reliance AMC has been topping the charts, backed by strong inflows into equity and later in debt or money market schemes. In May 2008, Reliance Mutual Fund had crossed the 1 lakh crore mark in terms of total AUM. But in May 2009, the level has been crossed in terms of the average AUM. The top five mutual funds, in terms of AUM, showed a hike in the AUM - Reliance Rs 14,342 crore (16%), HDFC Rs 11,525 crore (18%), ICICI Prudential Rs 9,500 crore, UTI Rs 8,947 crore and Kotak Rs 6,690 crore. The fastest growth in AUM was registered by Baroda Pioneer (85%), Taurus (72%), JP Morgan (42%) and Edelweiss (41%).

Piquant Parade

Sundaram BNP Paribas Mutual Fund and Fortis Mutual Fund are likely to merge following BNP Paribas’ global acquisition of Belgium-based Fortis for €4.5 billion. Experts are valuing the AMC at 3-4 per cent of its assets under management. ABN Amro Mutual Fund was changed to Fortis Mutual Fund in November 2008 after Fortis acquired the investment management business of ABN Amro in a global deal.

Franklin Templeton is likely to buyout AIG’s Asset Management arm at $500 to $600 million, .5 to .6 % of AIG’s assets (the norm has been 2%). AIG is selling its assets to repay the US Government’s bailout package of $182.5 billion.

Union Bank of India is planning to set up an AMC along with its Belgium partner, the KBC group. It has already got RBI approval and SEBI approval is expected in the next two months.

Shinsei Mutual Fund is planning to launch 3 mutual fund schemes - equity (Shinsei Industry Leaders Fund), fixed income (Shinsei PSU Bond Fund) and liquid funds (Shinsei Liquid Fund) by July 2009. It targets a total of 6 to 8 mutual funds in 18 months.

3 global players have evinced interest to buy 26% stake in UTI AMC. The proposal is to dilute 6.5% each by all the four stake holders to offload 26%. LIC and SBI might ultimately exit from UTI AMC since they themselves have mutual fund subsidiaries.

Kotak Mahindra Mutual fund entered into a tie-up with BOB to offer the entire bouquet of mutual fund products through its branches.

HDFC Mutual Fund has found a unique way of helping investors by announcing the introduction of HDFCMFMobile, the first and only facility which enables investors to transact business through their mobile phones at any given time and place. Amongst a host of functions which can be performed through this includes carrying out purchases, redemptions and switches.

Investment in paper gold will no longer require investors to have demat and broking accounts. Reliance Mutual Fund and UTI Mutual Fund are planning to launch schemes (at a slightly higher cost) that will collect money directly from investors and buy units in Gold Exchange Traded Funds.

Birla Sun Life Mutual Fund has launched iSIP or internet based SIP that will enable investors to start their SIP investments online. iSIP will provide multitude of benefits to investors – being faster, more convenient and providing paperless management of SIPs. The service is currently available through Citi, ING and Axis banks and more banks are expected to be added. The company has leveraged technology platforms through its "Anytime Anywhere" initiative to provide its customers enhanced service experience. It offers investors the facility to track their investments through internet based Online Portfolio Management services, through Interactive Voice Response system on Toll free number and through Mobile Investment Manager. All these services are secure, user friendly and more importantly available 24X 7. The endeavour is to provide full range of convenient service solutions to investors.

Regulatory Rigmarole

The entry load charged by the fund houses has been abolished by SEBI. Henceforth, distributors will have to disclose the commission for the schemes. Investors will, therefore, have the independence to decide on the commission payable to the distributor. The absence of the entry load and the introduction of the trail commission structure could lead to a shift of focus from NFOs to existing mutual fund schemes.

This move is likely to have a major impact on the sale of mutual funds in the short term. This decision is expected to instill transparency and prevent churning and mis-selling by the distributors. However, with the upfront commission to investors having been done away with, the marketing of mutual funds in smaller towns will be adversely impacted. AMCs lack the capacity to directly entertain so many investors or to have a wide reach. Brokers may shift to other lines of business, the most noteable being insurance (ULIPs). Collection of service tax could turn out to be an administrative nightmare. Moreover, this measure presupposes financial literacy of investors.

SEBI has decided to rationalise the fees charged by intermediaries. It plans to cut fees for financial intermediaries by 50%. Broker fees for debt deals have been cut to Rs 2.5 per Rs 1 crore of turnover.

AMFI is in the process of upgrading the mutual fund certification programme so as to bring about more competency among mutual fund distributors and advisors.

SEBI has asked for a cut in the mark-up value of rates of securities with less than two years maturity to 100 bps and the mark-up value of rated securities with more than two years maturity to 75 bps. SEBI has asked for a cut in the mark-down value of rated securities of less than two years maturity to 50 bps and the mark-down value of rated securities of more than two years maturity to 25 bps. These norms will be applicable with immediate effect and AMCs will have two months to comply with the norms for existing securities.

SEBI has made Permanent Account Number (PAN) the sole identification number for all participants transacting in the securities market, irrespective of the amount of transaction. PAN has, thus, been made compulsory for transacting in mutual funds. However, KYC norms are applicable only with respect to investors intending to invest an amount of Rs 50,000 or more.

The sweeping reforms blowing across the country, the impending budget and the global financial crisis have contributed their mite in bringing about a sea change in the effervescent landscape of the still evolving Indian mutual fund industry. More on this in the July 2009 blog…