FUND FULCRUM
March 2013
Assets under management (AUM) of the mutual fund industry fell
1.5% to Rs 8.14 lakh crore in February 2013 from the record high in January
2013 due to mark-to-market fall in equity-oriented mutual funds following the
6% decline in the CNX Nifty during
February 2013, according to a report by CRISIL Research. The AUM of
equity funds declined to Rs 1.76 lakh crore, which was down over 7% or Rs
13,800 crore, marking the largest decline in the past 15 months. In addition,
the inflows saw sharp drop in net inflows of Rs 3,600 crore in February 2013 as
compared to Rs 60,700 crore in January 2013. However, net outflows from the
category slowed to Rs 160 crore in February 2013, which was the lowest in the
past nine months. On income funds front, the AUM in this category fell by 1.4%
to Rs 3.93 lakh crore in February 2013, primarily due to outflows of Rs 5,300
crore from the category. Tight liquidity conditions towards the end of the
financial year saw redemptions from short maturity debt funds. While FMPs
(fixed maturity plans) have seen redemptions of Rs 1,600 crore, these have been
balanced by inflows of Rs 2,100 crore into interval funds. The major share of
inflows of Rs 8,600 crore came into the liquid or money market funds. Gilt
funds continued to see inflows for the sixth consecutive month in February 2013
despite being lower than the previous month. Inflows were lower at over Rs 400
crore in February 2013 compared with Rs 1,100 crore inflow in January 2013.
Interestingly, gold ETFs saw
outflows for the first time since June 2012 with the AUM falling by 4% to Rs
11,600 crore in February 2013 due to mark to market losses and outflows.
Despite
declining gross sales in the equity segment, the country’s mutual fund sector
has something to cheer about. Its largest client base, the retail investors,
did not shrink as fast in February 2013 as was the case so far in the financial
year 2012-13. At a time when equity schemes came into the limelight due to the
sharpest decline in asset under management in 15 months, the near-halving of
equity account closures is some respite. Data from the Securities and Exchange
Board of India show a closure of 230,000 equity folios in February 2013, far
less than the average monthly loss of a little over 400,000 till the immediate previous
month. Till June 2012, the number of accounts closures ranged between 180,000
and 300,000 a month. In the second half of the calendar year, the pace
accelerated, with some months seeing 500,000 folios getting closed. February
2013 saw less of cancellations of systematic investment plans but fresh
purchases also declined. Overall net outflow from the equity segment was the
lowest in many months at Rs 163 crore. Gross sales of equity schemes dipped 33%
to Rs 3,713 crore though, against Rs 5,600 crore in January 2013.
Investors have
put in more than Rs 1.2 lakh crore in various mutual funds during the first nine months of the
ongoing financial year compared to cumulative net outflow of nearly Rs 80,000
crore in the last two financial years. There
was a net inflow of Rs 1,20,269 crore between April and December 2012, against
outflows of Rs 28,602 crore in the entire fiscal 2011-12 and Rs 49,406 crore
during 2010-11, according to the Economic Survey. Prior to that, mutual funds had mobilised Rs 83,000
crore in 2009-10. This significant level of fund mobilisation from the market
in 2012-13 has also helped the total assets under management of mutual funds to
grow to Rs 7.59 lakh crore as on December 31, 2012 compared to Rs 5.87 lakh
crore as on March 31 2012, an increase of 29.4%. Equity mutual fund redemptions decelerated in February 2013 as S&P
BSE Sensex dipped more than 1000 points. Equity mutual fund net
outflows slowed down to Rs 128 crore in February 2013 as against Rs 2501 crore
in January 2013 as the S&P BSE Sensex declined 5% during the same period,
according to the latest AMFI data.
Piquant Parade
AMFI has initiated the process of forming a company to run MF Utility. AMFI’s MF Utility committee has shortlisted
Chennai based software company Polaris from a list of nine players for
developing the much-awaited online investment portal. Each AMC is likely to contribute
Rs 5 lakh each for this project. The
proposed company, which will oversee the day-to-day operations of MF Utility,
is to be run on a no-profit no-loss basis. At this juncture, the committee has
not envisaged recovering any transaction fee from users. The portal will
connect with RTAs, AMCs, stock exchanges, DPs, banks, and centralized KYC
repository. The portal will facilitate industry MIS, common account statement
(CAS), capital gains statements, complaint module/feedback module, dashboard,
manage profile/settings, call centre access and technical helpdesk, client
level alerts for investors and distributors (email /mobile), downloads, etc.
Investors have to first get their KYC done after which they have to fill up a
common account opening form and submit them to centralized account opening
repository. The system will then generate a unique account number, which could
be used across AMCs.
UTI Mutual Fund has roped in more than 500 new cadre of distributors
after SEBI opened up a new channel of distributors like postal agents, retired
government and semi-government officials, retired teachers, retired bank
officers, and bank correspondents. UTI Mutual Fund has also sponsored the certification for new cadre of
distributors. UTI is also imparting training on preparing a financial plan and
on operational procedures like KYC, bank account requirements, etc. Other AMCs
like HDFC and ICICI Prudential too are in the process of enrolling new
distributors. Enrolling these distributors has not been an easy task for
AMCs. Firstly, NISM verifies the experience of new cadre of distributors after
which they are given training. After this training, AMCs approach CAMS for
registering and procuring ARNs. CAMS also conducts a second layer of due
diligence by verifying the original documents of distributors. People
qualifying as new cadre of distributors can either pass the
existing NISM-Series-V-B: Mutual Fund Foundation Certification Examination
or complete a one day NISM Mutual Fund Foundation CPE Program. The
new cadre of distributors will not be required to shell out any ARN
registration fee till June 30, 2013. SEBI’s efforts to add a new layer of
distributors comes in the wake of declining distribution force in the industry.
Out of the 80,000 registered ARNs with AMFI, today, there are about 50,000 odd
KYD compliant distributors. Out of these 50,000 distributors, unofficial
reports peg the active distributors number at a much lower 10,000.
AMFI is once again running its advertisement
campaign ‘Savings Ka Naya Tareeka’ to spread awareness about the benefits of
investing in mutual funds. It is a 360 degree campaign. There are also
plans to do some on-ground events. The response on these commercials has been
positive. The first campaign went on air in
September 2011 with a budget of around Rs 10 crore. The campaign had received
over 30,000 sms from people. AMFI had also sent mutual fund booklets to those
people who had sent an SMS to 56070. It had also set up a call
center to answer people’s queries. Parallely, AMCs have been running ground
level events to create a higher grass roots level awareness. According to AMFI,
36 AMCs had conducted 11402 programs in 405 cities covering 318,991
participants in 2011-2012.
UTI Equity Fund has won the best equity fund award while Birla Sun Life
MNC Fund has won the best small/mid-cap fund award. HDFC Mutual Fund walked away with the best
equity fund house for fourth year in a row and best multi-asset fund house for
the third year in a row at the Morningstar Fund Awards 2013. Birla Sun Life
Mutual Fund bagged the best debt fund house award. The other two contenders in
the best debt fund house category were ICICI Prudential and UTI. In the best
equity fund house category, the other two contenders were Franklin Templeton
and Reliance. Winners for seven fund categories were selected by applying a
quantitative methodology, along with a qualitative overlay, which emphasized
one-year performance but also considered the three- and five-year performance
history of all eligible funds.
Regulatory Rigmarole
Complicated KYC norms are deterring first time investors to invest in
mutual funds. Mutual funds
distributors are seeking uniform and standardized Know Your Customer (KYC)
norms as the existing norms have been creating complications and inconveniencies
for them as well as investors. At present, a separate KYC is needed for
different financial products. The recent announcement of Finance Minister P
Chidambaram to consider bank KYC as good enough for insurance products, has
raised expectations among mutual fund distributors too. A single KYC for all
the financial transaction would boost investments in the mutual fund industry.
India’s capital market regulator wants under
performing asset management companies to stop charging fees from investors, in
a controversial move aimed at protecting the interests of mutual fund buyers. The
fund managers must justify their performance and fees for schemes that have
consistently failed to perform. SEBI
has also asked AMCs to explain why they do not wind up non-performing schemes
before they launch a new one and has refused to clear applications for
launching new funds by asset managers that have non-performing schemes.
Many AMCs
are planning their next series of Rajiv Gandhi Equity Savings Scheme (RGESS)
but this time in an open-ended avatar so that the product could be available to
investors right through the year. AMCs like LIC, UTI etc. have approached
SEBI to give them the go ahead for launching open-ended variants of RGESS.
Currently, as per RGESS notification only closed end or FTFs structures are
possible. The listing and demat requirements stipulated in the notification are
deterrents to the launch of open-ended RGESS. The open-ended structure allows
them to market the fund more effectively.
Distributors
wanting to either opt in or opt out of transaction charge (TC) have to inform
CAMS. The first window of changing
the status on transaction charge for distributors ends on March 25, 2013. The next
window starts after six months from September 1 to September 25, 2013. The
transaction charge was initially allowed to be levied on all types of products
and later in September 2012, SEBI allowed distributors to charge TC based on
the type of the product. Many distributors faced operational difficulties in
charging for debt funds. Now distributors have a choice to opt in or opt out of
TC from 11 scheme categories. The option exercised for a particular category of
scheme is applicable across all fund houses. AMFI shares the status of
distributors regarding TC with all fund houses. In order to prevent unfair
practice, AMFI has warned distributors against splitting applications to earn
more transaction charge. In 2011, around 6000 distributors were estimated to
have opted in for TC.
According to a SEBI
circular, mutual fund houses are required to label products from July 1,
2013. The regulator
feels that it would provide investors an easy understanding of the kind of
product/scheme they are investing in and its suitability to them. SEBI has taken this move to curb mis-selling.
The AMCs are supposed to mention the level of risk, depicted by colour
code boxes - blue colour coded box would
indicate low risk, yellow would signify a medium risk, while brown would
represent schemes with high risk. The fund houses are also supposed to
mention the nature of scheme, such as short/medium/long term and a singled
sentenced brief on the kind of product – equity/debt. The labeling is supposed
to be printed on the front page of initial offering application forms, KIM, SID
and in common application form along with the information about the
scheme. In the scheme advertisements, the
labeling is to be placed in a manner so that it is prominently visible to
investors. The fund house should also print a disclaimer to the effect that
investors should consult their financial advisers if they are not clear about
the suitability of the product.
Market regulator SEBI has invited applications for those who wish to
become self-regulatory organization (SRO) for mutual fund distributors. According to SEBI rules, any group or
association of intermediaries, which wants to become a SRO has to form a
company registered under section 25 of the Companies Act, 1956. The SRO formed to regulate investment advisors will be
registered under the SEBI (Self-Regulatory Organization) Regulations, 2004. SRO
will have sufficient resources to perform its functions. Its duties would
include registering and setting minimum professional standards, including
certification of investment advisors, laying down rules and regulations and
enforcing those; informing and educating the investing public; setting up and
administering a disputes resolution forum for investors and registered entities
etc. Persons desirous of registration as Investment Advisors shall obtain
registration with the SRO established for the purpose. The SRO will be entitled
to charge a fee for granting registration and an annual fee company
under the Companies Act. Among others, the applicant should have a minimum
net-worth of Rs one crore and have adequate infrastructure to enable it to
discharge its functions as a SRO. Besides, the directors of the applicant
entity would need to have professional competence, financial soundness and
general reputation of fairness and integrity to the satisfaction of SEBI. In addition,
the applicants and their directors must not be involved in legal proceedings
connected with the securities market or have any conviction for an economic
offence. According to the norms, the certificate of recognition as an SRO would
be valid for a period of five years.
The Budget 2012-13 has liberalised the Rajiv
Gandhi Equity Savings Scheme. Investors up to an annual income of Rs 12
lakh (Rs 10 lakh earlier) will be able to invest for 2 more years continuously.
Earlier, they were allowed to invest for one time only.
The Budget has streamlined
inflow from QFIs and different classes of portfolio investors and permitted
Pension Funds (including NPS) and Provident Funds to invest in debt schemes of
Mutual Funds. Pension and provident funds will be able to invest in equity
markets through ETF route.
AMFI registered mutual fund
advisors have been allowed to become brokers on Stock Exchanges for Mutual Fund division.
Securities Transaction Tax
(STT) has been reduced on Exchange Traded Funds (ETFs) to 0.001%.
Reduction in STT helps in the reduction of transaction cost, which in turn
helps the schemes to perform better on the returns front.
Dividend
distribution tax (DDT) paid by non-liquid debt funds has been increased to 25%
from 12.5%. Over and above this, there is
an education cess as well as a surcharge, which has been hiked from 5% to 10%.
These ultra
short-term funds are primarily used by individuals for parking their short-term
funds. Typically what happens here is that one get higher returns compared to
the savings bank account and the returns are also more tax efficient.
The
Budget 2012-13 has brought clarity to the tax provisions relating to
securitisation. This will help mutual funds to enter into securitisation
deals.
Until further clarity, Direct
Tax Code (DTC) is being put on hold. So, Equity Linked Savings Schemes (ELSS) will remain a tax saving
option for the investors.
However there were some expectations from the
budget as far as the mutual fund industry is concerned which were not realized.
It was expected that the government would increase the limit of sec 80 C in
order to accommodate higher investment in tax saving mutual fund schemes. This
would have helped to mobilise household savings and channelize the same. It was also expected that
the capital gain tax on the merged scheme would be done away with. However,
there has been no announcement with regard to this. Investors have to pay tax
on the schemes, which have been merged into one as it resulted in exit from one
i.e. registered as a sale transaction even though it is combined. This
notwithstanding, several path-breaking reforms have been brought about in the
mutual fund arena that have changed the landscape of the mutual fund industry.
