FUND FULCRUM

June 2014

The mutual fund industry’s assets under management crossed the Rs 10 lakh crore mark at the end of May 2014 owing to the strong showing by the equity markets and fresh capital inflows. Though there were fresh inflows, total folios of the mutual fund industry fell by 2.4 lakh or 0.61% to 3.89 crore in May 2014 from 3.92 crore in April 2014.

Small and mid-sized fund houses have managed to grow their investor base last year when the industry saw substantial loss of folios. 12 mid and small sized fund houses have collectively added 2.11 lakh folios in FY13-14 while the top 10 fund houses lost more than 25 lakh folios. The largest folio growth was recorded by Goldman Sachs (28,570) followed by Union KBC (15,067). Some of these fund houses saw a growth in their folios because they are relatively new in the industry and are in their growth phase. These AMCs saw a growth in their folios because of new fund launches. For instance, Motilal Oswal launched three new funds last year. Similarly, Union KBC launched two equity funds and a couple of capital protection funds. Fund houses which saw growth in their investor base believe that they will continue to add folios this year too. While the small players saw their investor base growing, the large AMCs saw their investor base deplete. The largest drop in folios was seen by Reliance Mutual Fund (-8.46 lakh), followed by SBI (-5.20 lakh) and HDFC (-4.79 lakh). Barring, DSP BlackRock, the top 14 fund houses saw folio erosion to the tune of 31.22 lakh folios. DSP BlackRock has shown folios of inactive investors also due to which its folio count shot up by 15 lakh.  Axis was the only player which saw more than one lakh growth in its investor base. UTI had the largest investor base of 95.57 lakh investor accounts, followed by Reliance at 54.63 lakh folios, and HDFC at 45.08 lakh. Each investor tends to hold multiple folios within the same fund house. Thus, one folio may not denote one unique investor. The top 15 AMCs account for 95% of industry’s 3.95 crore folios. Of the total 3.95 crore folios, equity funds account for 74% folios. The industry saw depletion of more than 32 lakh folios, majority of which was due to redemptions from equity funds. Equity funds saw net outflows to the tune of Rs. 9, 268 crore as investors booked profits. With the revival in market sentiments, fund houses feel that the industry’s folio count will only start to grow from here which was evident by four lakh folio growth in equity funds in April 2014.

Leading fund houses have seen a considerable increase in investments in their schemes by group companies in the first two months of the current fiscal. Largest fund house, HDFC Mutual Fund, witnessed 17% rise in investment in its schemes to Rs 6,462 crore by group companies during May 2014. HDFC Mutual Fund was followed by ICICI Prudential Mutual Fund (16%) and Birla Sun Life Mutual Fund (13%) and Reliance Mutual Fund (12%). However, UTI MF saw a drop of 2% in investment in its schemes to Rs 3,069 crore by related companies during the period. Moreover, in April, top five fund houses saw an increase in investments in the range of 13% and 60%. In absolute terms, Birla Sun Life Mutual Fund saw an investment of Rs 8,072 crore from its related entities in May 2014, ICICI Mutual Fund (Rs 5,749 crore) and Reliance Mutual Fund (Rs 4,118 crore). Overall, Birla Sun Life Mutual Fund has over 8% of its Assets Under Management (AUM) from investments by group firms followed by HDFC Mutual Fund (5%), ICICI Prudential Mutual Fund (4.8%), UTI Mutual Fund (3.8%), and Reliance Mutual Fund (3.7%). The fund houses have been disclosing the exact amount of investments by their group companies in their respective schemes following the SEBI to make monthly disclosure of AUM from different categories of schemes, AUM from places beyond top-15 cities, contribution of sponsor and its associates in AUM and contribution from different types of investors (retail, corporate etc. The fund houses also need to make disclosures about state-wise contribution and AUM from sponsor group or non-sponsor group distributors on their websites and share the same with AMFI within seven working days from the end of the month.

Piquant Parade

National Stock Exchange’s new platform called ‘MF Simplified’ is the second platform being designed especially for IFAs. Its old platform ‘Mutual Fund Service System (MFSS)’ will continue to function. Brokers will also have an option to use MF Simplified platform. So far, mutual fund distributors did not have direct access to the stock exchange platforms. They had to become a sub-broker with a broker to use the mutual fund stock exchange platform. The new MFSS platform with enhanced features is being designed specifically for mutual fund distributors. To get membership on NSE’s new platform, distributors have to shell out a onetime processing fee of Rs. 2,500 along with a refundable deposit of Rs.15,000 (for individuals and others) while corporates have to pay Rs. 25,000. In addition, members have to pay an annual renewal fee of Rs. 2,000.

The earnings of top distributors went up by 12% from Rs. 1,897 crore in FY12-13 to Rs. 2,119 crore in FY13-14. Thanks to the 18% rise in industry’s assets under management, distributors earned more commissions in FY13-14. An analysis of commissions paid by top ten fund houses shows that the commission payout to distributors went up 12% in FY13-14. The top ten fund houses paid Rs.1,897 crore in FY12-13 which went up to Rs.  2,119 crore in FY13-14. The rise in commission was due to mark-to-market gains in equity funds, inflows in income funds and due to the overall rise in the total assets under management.  

Standardization of processes, enhanced quality checks and reduction in transaction volumes have resulted in less number of complaints against fund houses. Fund houses seem to have worked hard on improving customer service. An analysis of investor complaints received by top ten fund houses shows that the complaints have dropped by as much as 46% in 2014. The top ten fund houses received 57,321 complaints in FY 2012-13 which fell to 31,006 in FY 2013-14. Reliance saw the largest fall in its complaints. Its complaints fell from 13,679 (the highest in the industry) in FY2012-13 to 3,453, down 75% in FY 2013-14. The second largest drop in investor complaints was recorded by ICICI Prudential which saw its complaints dropping from 13,000 to 4,353, a fall of 67%, during the same period. A large number of complaints received by AMCs pertained to data corrections in investor details, and non-updation of changes viz. address, PAN, bank details, nomination, etc. in case of some fund houses. Large number of complaints is received due to the illegible data provided by investors. Out of the 31,000 complaints received from investors, 52% or 16257 complaints were related to data correction. A vast majority of such manual errors are likely to be minimized with the launch of MF Utility, since data will be keyed in through computers.

Regulatory Rigmarole

The registration fee for corporates and limited liability partnerships has gone up by 400% from Rs. 1 lakh earlier to Rs. 5 lakh now. Individuals and partnership firms have to pay Rs. 5,000 as application fee and Rs. 10,000 as registration fee, which is the same as earlier. However, corporates and limited liability partners have to cough up Rs. 25,000 as application fee and Rs. 5 lakh as registration and renewal fee. Earlier, they had to pay Rs. 5,000 as application fee and Rs. 1 lakh as registration fee. Advisors have to pay the renewal fee every five years to retain their license. Corporates need to have net worth of Rs. 25 lakh and on top of that the registration fee has been hiked to Rs. 5 lakh. So far only 150 have registered but going forward not many would even consider becoming a RIA. Out of the 80,000 ARN holders, only 156 have registered with SEBI as Investment Advisers.

AMCs have to cough up an annual fee of 0.0015% on AAUM of up to Rs. 10,000 crore and 0.0010% for AAUM above it. SEBI has increased its annual fees which it receives from fund houses from the maximum limit of Rs. 7.5 lakh to Rs. 1 crore. Earlier, fund houses were required to pay Rs. 2.5 lakh for net assets of up to Rs. 500 crore, Rs. 3.5 lakh for AUM of Rs. 500 crore to Rs. 1,000 crore, Rs. 4.5 lakh for AUM of Rs. 1,000 crore to Rs. 3,000 crore, Rs.5.5 lakh for AUM of Rs. 3,000 crore to Rs. 5,000 crore, Rs. 6.5 lakh for AUM of Rs. 5,000 crore to Rs. 10,000 crore and Rs. 7.5 lakh for AUM of above Rs. 10,000 crore. The minimum fee which a fund house is supposed to pay SEBI is kept unchanged at Rs. 2.5 lakh. The hike in fee can affect the revenues of AMCs. For instance, a fund house having AAUM of Rs. 25,000 crore will now have to cough up Rs. 30 lakh against Rs. 7.50 lakh earlier. Similarly, large fund houses like HDFC, ICICI Prudential, and Reliance have to pay a maximum limit of Rs. 1 crore to the regulator as fee. In its notification, SEBI stated that the fees would be utilized for creating financial awareness. The revised fee structure is essentially to help in strengthening the investor awareness and education measures, enlarging reach among investors/potential investors through regional and new local offices, enhancing focus on capacity building and raising standards of supervision and enforcement function in the market place such as strengthening market surveillance and investigation function.

A report on investor awareness and protection called ‘Financial Well-Being’ has recommended the setting up of a self-regulatory organization (SRO) to establish a system of common minimum standard for the distributors across all financial products. The report recommended the establishment of Financial Well-Being Board of India (FINWEB) which will have two cells – Financial Literacy Cell (FLC) to create financial awareness and the Self-Regulatory Organisation (SRO) Cell to bring financial advisors under common standard. The report stresses the need to establish single SRO for the distributors of financial products like mutual funds, insurance, pension funds, etc. The organizational structure of Finweb should have representatives from government ministries, department, regulators, industry association, independent entities, experts, and academicians.

SEBI board has approved a proposal for sharing KYC information with entities regulated by other financial regulators, moving a step forward in bringing common KYC across all financial instruments. SEBI has already introduced uniform KYC for all SEBI registered intermediaries. There are five KRAs - CDSL Ventures, NSDL Database Management, DotEx International, CAMS Investor Services and Karvy Data Management Services which share data among each other. Currently, only SEBI registered intermediaries are permitted to share data with each other. This will  not only reduce the paper-work and bring down cost of operations for the investors as well as for the intermediaries, but will also save the investors from the hassle of getting KYC done again by the intermediaries regulated by other financial sector regulators.

SEBI’s new norms for research analysts would require them to have a professional degree as also an NISM or equivalent certification to ensure that investors get the right financial advice. The National Institute of Securities Markets (NISM) has been established by the Securities and Exchange Board of India (SEBI) to conduct academic programmes and certification examinations for financial education. The new regulations would require that any individual seeking registration as a ‘Research Analyst, or those engaged in preparation or publication of research analysis and reports have certain minimum qualifications. These would include a professional qualification, a post-graduate degree or a post-graduate diploma in finance, accountancy, business management, commerce, economics, capital market, financial services, or markets. Such a degree would need to be from a university recognised by the UGC (University Grants Commission) or by an equivalent establishment. Otherwise, the research analyst can have a professional degree or post-graduate diploma from an institution accredited by All Indian Council for Technical Education, National Assessment and Accreditation Council or National Board of Accreditation, or any other equivalent body. Those having a graduate degree would need experience of at least five years in activities relating to financial products, markets, securities, funds, asset or portfolio management. In case of research analysts or research entities already engaged in issuance of research reports, the new regulations require that such individuals obtain a certification within two years from the date of commencement of these regulations.

SEBI has pulled up the mutual fund sector for not complying with the ‘20-25’ minimum exposure norm and for misuse of funds meant for investor awareness programmes. By SEBI norms, any mutual fund scheme is required to have at least 20 investors, with each owning less than 25% of the assets. However, several mutual fund schemes were in violation of this norm, with investor concentration in some schemes as high as 98%. SEBI is said to have written to as many as 30 mutual funds on this breach. Several large institutional investors and wealthy clients, who often park their surplus cash in debt schemes, often end by breaching the single investor cap.

 

Indian investors will soon be able to access complete details of their investments in fixed deposits of banks, mutual funds, stocks, and insurance products in paperless form or in a single dematerialised account with financial sector regulators starting the first phase of the project that aims to capture the financial history of an individual. The sub-committee of the Financial Stability and Development Council, or FSDC, a forum of regulators monitoring financial stability and inter-regulatory co-ordination, headed by the Governor of the Reserve Bank of India, has been working on this initiative after a single demat account for all financial investments was announced in the interim budget. Since then much work has been done on this and to start with investors will have the option to access details of their investments in bank fixed deposits, mutual funds, and insurance products with plans to incorporate details relating to pension and public provident fund later.

In the last decade, the mutual funds industry has seen tremendous growth and successfully faced challenges. Yet, it has still not found mass acceptance because a grassroots investor does not know the place of mutual funds in the hierarchy of his savings. It is time for the industry to consciously brand itself as a different asset management class altogether and as a long-term investment destination to enter the mind of the people by finding a place in the hierarchy of savings. It is time for the industry to change its traditional mindset to that of thought leadership, to rise above narrow perspective and to think of the sector as a whole. The industry structure possibly looks to create and harness core competencies in asset management. Mutual fund penetration in India is low as compared to global and peer benchmarks. The AUM to GDP ratio stands at 7 to 8% as compared to a global average of 37%. The two-pronged approach of increasing awareness of and access to financial products and services has and will go a long way in increasing the penetration of mutual funds in the country. There are several aspects of the mutual fund industry where status quo exists – share of the investment pool, investor mix, alternative products and advisory model distribution. As the industry embarks on its third decade, this presents an opportunity to assess and chart new exciting courses by challenging the status quo with the objective of catapulting the industry into the next level of growth and taking it to the position that it enjoys in other developed economies. Taking a cue from global trends, not only does there lie an opportunity to tap into management of pension and insurance funds, but also to increase the penetration of products such as ETFs. The increased use of technology across multiple aspects will be an important game changer in this journey. There is an opportunity for the mutual fund industry to morph itself into a broader asset management industry. This will bring in additional investors and flows as the product basket will offer a holistic array of products with myriad combinations of risk reward, attracting different classes of investors. An investor then will likely be offered a product that meets his or her needs at every point in life.