FUND FULCRUM
August 2011
The mutual fund industry is passing through one of its worst phases ever with over 7 lakh investor folios closing in a span of three months between March and June 2011. As per data collated from registrars, CAMS and Karvy, investor folios have fallen from 4.72 crore in March 2011 to 4.65 crore as on June 30, 2011. Contrast this against closure of only 7 lakh folios during the 13-month period between March 2010 and March 2011. Almost 98% of these are equity folios and the lower number of NFOs has also deepened the impact of the fall. In July, a whopping 333,000 equity folios were closed. Lack of distributor support is one of the major reasons for the drop in investor folios. Out of the 90,000 AMFI-registered fund sellers, only 45,000 have completed 'know-your-distributor' requirements, as per numbers available with the industry body.
Total AUM of the mutual fund industry that fell 8% in June 2011, climbed up 8.2% (by Rs. 55,011 crore) to Rs. 7.28 lakh crore in July 2011. Liquid and Income Funds that faced huge outflow of funds during June 2011, witnessed net inflows to the tune of Rs. 35,699 crore and Rs. 15,429 crore respectively in July 2011. The inflows into this category lifted the AUM of the industry in July 2011. On the flipside, there was a net outflow of Rs. 729 crore from equity funds and Rs. 140 crore from ELSS category. The current cash holding among industry players is piling up again.
Piquant Parade
HDFC Mutual Fund, one of the leading mutual fund houses in India, and Shamrao Vithal Bank (“SVB”), one of the largest co-operative banks in India have entered into an alliance to offer the entire bouquet of HDFC Mutual Fund's schemes through the bank's 105 branches in 7 states across the country. This tie-up will give HDFC Mutual Fund an opportunity to tap customers across the bank's extensive network in 7 states and further strengthen its position in the market. At the same time, it will provide SVB customers an easy access to reliable investment products.
The Indian Institute of Management-Ahmedabad (IIMA) has launched the Indian Fund for Sustainable Energy (INFUSE) with an estimated fund size of Rs 1 billion in collaboration with the Union Ministry of New and Renewable Energy (MNRE), Technology Development Board (TDB) and British Petroleum(BP). INFUSE is the first of its kind private-public-academia partnership which the IIMA will support to incubate, build and support sustainable energy enterprises across the country. INFUSE will be managed by the IIMA`s Centre for Innovation, Incubation and Entrepreneurship (CIIE) and aims at bringing together other like-minded corporates and organisations to work collaboratively to bridge India`s energy demand-supply gap through development of sustainable entrepreneurial solutions.
UTI Mutual Fund (UTI MF) launched a new online payment facility for its investors for purchasing units using their Debit Cards. For implementing this facility, UTI MF has partnered with Visa Cards. UTI MF currently offers its investors an online investment facility which enables them to purchase, redeem, switch units and register for Systematic Investment Plans using the internet banking platform. The facility of investing through debit cards will further ease the process of transacting in mutual fund units.
UTI Mutual Fund and CNBC–TV18, India’s No. 1 Business medium, will present the fifth edition of the ‘Financial Advisor Awards 2011’, a unique platform that will felicitate India’s best Financial Advisors across the country. The aim of the awards is to recognize the contribution of these financial experts in creating and preserving sustainable wealth of the masses and also help them make informed financial decisions for both, short term and long term financial planning. The awards ceremony is going to be organized in December 2011. The nominations of these prestigious awards have begun and will close on September 20, 2011.
Regulatory Rigmarole
According to SEBI, first time mutual fund investors will now have to pay an additional Rs.150 as transaction charges and existing investors in mutual funds will have to pay an additional Rs.100 as transaction charge. The extra Rs.50, which will be charged for new investors, will help meet KYC and other incidental expenses. Transaction charges are in addition to the existing eligible commissions permissible to the distributors. In order to enable people with small saving potential and to increase the reach of mutual fund products in urban areas and smaller towns, it has been decided that a transaction charge per subscription of 10,000/- and above be allowed to be paid to the distributors of the mutual fund products. However, there shall be no transaction charges on direct investments. The terms and conditions relating to transaction charge shall be part of the application form in bold print. The transaction charge, if any, shall be deducted by the AMC from the subscription amount and paid to the distributor; and the balance shall be invested. The statement of account shall clearly state that the net investment as gross subscription less transaction charge and give the number of units allotted against the net investment. Distributors shall be able to choose to opt out of charging the transaction charge. However, the ‘opt-out’ shall be at distributor level and not investor level i.e. a distributor shall not charge one investor and choose not to charge another investor. For systematic investment plans (SIPs), the transaction charges can be recovered in three or four installments.
According to SEBI, infrastructure debt fund (IDF) can be set up by any existing mutual fund or an infrastructure finance company which have been engaged in financing the sector for five years. Mutual funds can float an 'Infrastructure Debt Fund' as a close-ended scheme maturing after five years or an interval scheme with lock-in of five years. The IDF would invest 90% of its assets in the debt securities of infrastructure companies. The minimum investment into IDF would be Rs 1 crore and the minimum size of the unit would be Rs 10 lakh. An IDF may be set up either as a trust or company. While the trust based IDF (Mutual Fund) would be regulated by SEBI, an IDF set up as a company (NBFC) would be regulated by RBI. The units of infrastructure debt fund schemes shall be listed on the stock exchange. An Infrastructure debt fund shall have minimum five investors and no single investor shall hold more than 50% of net assets of the scheme. Mutual funds may also disclose indicative portfolio of the infrastructure debt fund scheme to its potential investors disclosing the type of assets the mutual fund will be investing.
India allowed foreign investors to buy up to a cumulative USD 10 billion in domestic equity funds and USD 3 billion in debt funds, opening the door wider to capital flows into an expanding economy. So far only foreign institutional investors (FIIs) and overseas Indians were allowed to buy units of domestic mutual funds. Foreign retail investors had to rely on emerging market or country specific overseas funds to take an exposure to India. When the cumulative qualified foreign investors (QFI) investment reaches USD 8 billion in equity schemes and USD 2.5 billion in debt schemes, SEBI would auction the remaining limit to foreign investors who can then buy the units from funds of their choice. QFIs cannot avail facilities such as SIPs, withdrawals, transfer of units and switching between schemes.
Currently, Know Your Client (KYC) is done by each SEBI regulated intermediary such as a broker, depository participant (DP), asset management company (AMC), portfolio manager etc. In order to save duplication of work, ensure a more hassle-free system for investors and reduce wastage of record-keeping space, one or more KYC Registration Agency (KRA) will be set up and be regulated by SEBI itself. KRA will now undertake KYC at the stage of account opening for all clients in the securities market through SEBI regulated Points of Service (PoS). The client should not be made to repeatedly fill up forms and submit documents when he wishes to open an account with another intermediary registered with SEBI. The Unique Identification Document (UID) or Aadhaar number will be included in the eligible documents that can be presented as an identification of the customer, as part of the KYC process.
Selected distributors will be regulated through AMCs by putting in place the due diligence process to be conducted by AMCs. The distributor will be selected on the basis of multiple point presence in more than 20 locations; AUM raised over Rs 100 crore across industry in the non-institutional category but including high networth individuals (HNIs); commission received of over Rs 1 crore per annum across the industry and Rs 50 lakh from a single mutual fund. AMCs shall disclose the commissions paid to the distributors meeting one or more of the above criteria and AMFI will disclose the aggregate amount of commissions paid to such distributors by the mutual fund industry.
Mutual funds have to disclose point-to-point returns on a standard investment of Rs 10,000 or have to disclose growth figures and not compounded annual growth rate (CAGR), in advertisements. Mutual Funds have to provide the break-up of AUM in terms of debt/equity/balanced and also geography-wise data. The scheme performance will have to be disclosed against the Sensex or Nifty in case of equity funds and Government of India (GoI) debt paper in case of debt funds, in addition to the scheme benchmark. Performance of the fund manager across all schemes managed by the same fund manager will have to be disclosed.
In a move to enable investors to take more informed decisions, SEBI further tightened disclosure norms for close-ended debt-oriented mutual fund schemes. The regulator had barred communication pertaining to indicative portfolio and indicative yields by fund houses and distributors on products. According to the new rules, fund houses are now required to disclose their credit evaluation policy for investments in debt securities and also the list of sectors they would not be investing in. Further, fund managers need to disclose the type of instruments their schemes propose to invest in, including commercial papers, certificates of deposits (CDs) and treasury bills. Mutual Funds shall disclose the floors and ceilings within a range of five per cent of the intended allocation against each sub asset class/credit rating. For instance, if fund houses are investing 2-3 per cent in an AAA-rate bank CD, the same has to be disclosed. Once the new fund offer closes, asset management companies will report the publicised percentage allocation and the final portfolio. Variations between indicative portfolio allocation and final portfolio will not be permissible.
The Securities and Exchange Board of India has sought powers to seek e-mail and call records from telecom service providers. This move will help it prevent black money entering the market as well as insider trading. Though getting call records from the phone service providers may not be difficult, tracking e-mail records could be. Most e-mail service providers such as Google, Yahoo, Hotmail have their servers based outside India. Even security agencies have been trying to get access to these services in vain.
Fidelity Mutual Fund may be forced to shift its trading desk from Hong Kong to India with SEBI deciding that operations of all local fund houses be based within the country. Local regulators may run into jurisdiction hurdles if they try to actively track trades that happen abroad.
The Direct Taxes Code (DTC) Bill, introduced in Parliament on August 30 2010, proposes to replace the 50-year-old Income Tax Act. Initially proposed to come into force from April 2011, the code’s deadline had been extended to April 2012 as the draft Bill was referred to a Parliamentary standing committee. The implementation of the Direct Taxes Code appears set to miss its deadline once again.
The Securities and Exchange Board of India, now under the leadership of U K Sinha, has brought about numerous changes that will impact the mutual fund industry. These epoch-making changes will provide the much-needed fillip to the mutual fund industry currently in doldrums.
August 2011
The mutual fund industry is passing through one of its worst phases ever with over 7 lakh investor folios closing in a span of three months between March and June 2011. As per data collated from registrars, CAMS and Karvy, investor folios have fallen from 4.72 crore in March 2011 to 4.65 crore as on June 30, 2011. Contrast this against closure of only 7 lakh folios during the 13-month period between March 2010 and March 2011. Almost 98% of these are equity folios and the lower number of NFOs has also deepened the impact of the fall. In July, a whopping 333,000 equity folios were closed. Lack of distributor support is one of the major reasons for the drop in investor folios. Out of the 90,000 AMFI-registered fund sellers, only 45,000 have completed 'know-your-distributor' requirements, as per numbers available with the industry body.
Total AUM of the mutual fund industry that fell 8% in June 2011, climbed up 8.2% (by Rs. 55,011 crore) to Rs. 7.28 lakh crore in July 2011. Liquid and Income Funds that faced huge outflow of funds during June 2011, witnessed net inflows to the tune of Rs. 35,699 crore and Rs. 15,429 crore respectively in July 2011. The inflows into this category lifted the AUM of the industry in July 2011. On the flipside, there was a net outflow of Rs. 729 crore from equity funds and Rs. 140 crore from ELSS category. The current cash holding among industry players is piling up again.
Piquant Parade
HDFC Mutual Fund, one of the leading mutual fund houses in India, and Shamrao Vithal Bank (“SVB”), one of the largest co-operative banks in India have entered into an alliance to offer the entire bouquet of HDFC Mutual Fund's schemes through the bank's 105 branches in 7 states across the country. This tie-up will give HDFC Mutual Fund an opportunity to tap customers across the bank's extensive network in 7 states and further strengthen its position in the market. At the same time, it will provide SVB customers an easy access to reliable investment products.
The Indian Institute of Management-Ahmedabad (IIMA) has launched the Indian Fund for Sustainable Energy (INFUSE) with an estimated fund size of Rs 1 billion in collaboration with the Union Ministry of New and Renewable Energy (MNRE), Technology Development Board (TDB) and British Petroleum(BP). INFUSE is the first of its kind private-public-academia partnership which the IIMA will support to incubate, build and support sustainable energy enterprises across the country. INFUSE will be managed by the IIMA`s Centre for Innovation, Incubation and Entrepreneurship (CIIE) and aims at bringing together other like-minded corporates and organisations to work collaboratively to bridge India`s energy demand-supply gap through development of sustainable entrepreneurial solutions.
UTI Mutual Fund (UTI MF) launched a new online payment facility for its investors for purchasing units using their Debit Cards. For implementing this facility, UTI MF has partnered with Visa Cards. UTI MF currently offers its investors an online investment facility which enables them to purchase, redeem, switch units and register for Systematic Investment Plans using the internet banking platform. The facility of investing through debit cards will further ease the process of transacting in mutual fund units.
UTI Mutual Fund and CNBC–TV18, India’s No. 1 Business medium, will present the fifth edition of the ‘Financial Advisor Awards 2011’, a unique platform that will felicitate India’s best Financial Advisors across the country. The aim of the awards is to recognize the contribution of these financial experts in creating and preserving sustainable wealth of the masses and also help them make informed financial decisions for both, short term and long term financial planning. The awards ceremony is going to be organized in December 2011. The nominations of these prestigious awards have begun and will close on September 20, 2011.
Regulatory Rigmarole
According to SEBI, first time mutual fund investors will now have to pay an additional Rs.150 as transaction charges and existing investors in mutual funds will have to pay an additional Rs.100 as transaction charge. The extra Rs.50, which will be charged for new investors, will help meet KYC and other incidental expenses. Transaction charges are in addition to the existing eligible commissions permissible to the distributors. In order to enable people with small saving potential and to increase the reach of mutual fund products in urban areas and smaller towns, it has been decided that a transaction charge per subscription of 10,000/- and above be allowed to be paid to the distributors of the mutual fund products. However, there shall be no transaction charges on direct investments. The terms and conditions relating to transaction charge shall be part of the application form in bold print. The transaction charge, if any, shall be deducted by the AMC from the subscription amount and paid to the distributor; and the balance shall be invested. The statement of account shall clearly state that the net investment as gross subscription less transaction charge and give the number of units allotted against the net investment. Distributors shall be able to choose to opt out of charging the transaction charge. However, the ‘opt-out’ shall be at distributor level and not investor level i.e. a distributor shall not charge one investor and choose not to charge another investor. For systematic investment plans (SIPs), the transaction charges can be recovered in three or four installments.
According to SEBI, infrastructure debt fund (IDF) can be set up by any existing mutual fund or an infrastructure finance company which have been engaged in financing the sector for five years. Mutual funds can float an 'Infrastructure Debt Fund' as a close-ended scheme maturing after five years or an interval scheme with lock-in of five years. The IDF would invest 90% of its assets in the debt securities of infrastructure companies. The minimum investment into IDF would be Rs 1 crore and the minimum size of the unit would be Rs 10 lakh. An IDF may be set up either as a trust or company. While the trust based IDF (Mutual Fund) would be regulated by SEBI, an IDF set up as a company (NBFC) would be regulated by RBI. The units of infrastructure debt fund schemes shall be listed on the stock exchange. An Infrastructure debt fund shall have minimum five investors and no single investor shall hold more than 50% of net assets of the scheme. Mutual funds may also disclose indicative portfolio of the infrastructure debt fund scheme to its potential investors disclosing the type of assets the mutual fund will be investing.
India allowed foreign investors to buy up to a cumulative USD 10 billion in domestic equity funds and USD 3 billion in debt funds, opening the door wider to capital flows into an expanding economy. So far only foreign institutional investors (FIIs) and overseas Indians were allowed to buy units of domestic mutual funds. Foreign retail investors had to rely on emerging market or country specific overseas funds to take an exposure to India. When the cumulative qualified foreign investors (QFI) investment reaches USD 8 billion in equity schemes and USD 2.5 billion in debt schemes, SEBI would auction the remaining limit to foreign investors who can then buy the units from funds of their choice. QFIs cannot avail facilities such as SIPs, withdrawals, transfer of units and switching between schemes.
Currently, Know Your Client (KYC) is done by each SEBI regulated intermediary such as a broker, depository participant (DP), asset management company (AMC), portfolio manager etc. In order to save duplication of work, ensure a more hassle-free system for investors and reduce wastage of record-keeping space, one or more KYC Registration Agency (KRA) will be set up and be regulated by SEBI itself. KRA will now undertake KYC at the stage of account opening for all clients in the securities market through SEBI regulated Points of Service (PoS). The client should not be made to repeatedly fill up forms and submit documents when he wishes to open an account with another intermediary registered with SEBI. The Unique Identification Document (UID) or Aadhaar number will be included in the eligible documents that can be presented as an identification of the customer, as part of the KYC process.
Selected distributors will be regulated through AMCs by putting in place the due diligence process to be conducted by AMCs. The distributor will be selected on the basis of multiple point presence in more than 20 locations; AUM raised over Rs 100 crore across industry in the non-institutional category but including high networth individuals (HNIs); commission received of over Rs 1 crore per annum across the industry and Rs 50 lakh from a single mutual fund. AMCs shall disclose the commissions paid to the distributors meeting one or more of the above criteria and AMFI will disclose the aggregate amount of commissions paid to such distributors by the mutual fund industry.
Mutual funds have to disclose point-to-point returns on a standard investment of Rs 10,000 or have to disclose growth figures and not compounded annual growth rate (CAGR), in advertisements. Mutual Funds have to provide the break-up of AUM in terms of debt/equity/balanced and also geography-wise data. The scheme performance will have to be disclosed against the Sensex or Nifty in case of equity funds and Government of India (GoI) debt paper in case of debt funds, in addition to the scheme benchmark. Performance of the fund manager across all schemes managed by the same fund manager will have to be disclosed.
In a move to enable investors to take more informed decisions, SEBI further tightened disclosure norms for close-ended debt-oriented mutual fund schemes. The regulator had barred communication pertaining to indicative portfolio and indicative yields by fund houses and distributors on products. According to the new rules, fund houses are now required to disclose their credit evaluation policy for investments in debt securities and also the list of sectors they would not be investing in. Further, fund managers need to disclose the type of instruments their schemes propose to invest in, including commercial papers, certificates of deposits (CDs) and treasury bills. Mutual Funds shall disclose the floors and ceilings within a range of five per cent of the intended allocation against each sub asset class/credit rating. For instance, if fund houses are investing 2-3 per cent in an AAA-rate bank CD, the same has to be disclosed. Once the new fund offer closes, asset management companies will report the publicised percentage allocation and the final portfolio. Variations between indicative portfolio allocation and final portfolio will not be permissible.
The Securities and Exchange Board of India has sought powers to seek e-mail and call records from telecom service providers. This move will help it prevent black money entering the market as well as insider trading. Though getting call records from the phone service providers may not be difficult, tracking e-mail records could be. Most e-mail service providers such as Google, Yahoo, Hotmail have their servers based outside India. Even security agencies have been trying to get access to these services in vain.
Fidelity Mutual Fund may be forced to shift its trading desk from Hong Kong to India with SEBI deciding that operations of all local fund houses be based within the country. Local regulators may run into jurisdiction hurdles if they try to actively track trades that happen abroad.
The Direct Taxes Code (DTC) Bill, introduced in Parliament on August 30 2010, proposes to replace the 50-year-old Income Tax Act. Initially proposed to come into force from April 2011, the code’s deadline had been extended to April 2012 as the draft Bill was referred to a Parliamentary standing committee. The implementation of the Direct Taxes Code appears set to miss its deadline once again.
The Securities and Exchange Board of India, now under the leadership of U K Sinha, has brought about numerous changes that will impact the mutual fund industry. These epoch-making changes will provide the much-needed fillip to the mutual fund industry currently in doldrums.
