FUND FULCRUM

June 2015

Indian mutual fund industry's assets under management (AUM) rose by 1.4% in May 2015 to reclaim the Rs 12 lakh crore mark and close at its record high in accordance with the latest numbers declared by AMFI. The increase was primarily propelled by inflows in equity and income funds. Outflows in liquid funds, though, capped further gains. Equity funds category logged inflows for the thirteenth consecutive month in May 2015, with Rs 10,076 crore flowing in. Cumulatively, the category has seen inflows of Rs 91,849 crore over the thirteen-month period. Equity funds' AUM rose 5.8% or Rs 20,037 crore, to a record-high of Rs 3.65 lakh crore in May 2015, buoyed by higher inflows and mark to market (MTM) gains. A lot of this extra money has not gone to the top -10 fund houses, as one would normally expect it to go. So, the share of these 10 mutual funds fell from 52% as of April 2014, to 44.60% as of April 2015. However, the leading fund houses have definitely benefited from the increased inflow of funds. According to Prime Database, HDFC AMC remains at the top in terms of retail money in equity, but its AUMs rose just 45% over the period. This is considerably lower than Reliance Mutual Fund, which, though at Number-4 in terms of total AUMs, saw a jump of 119%. The other players -- UTI, ICICI Prudential, and State Bank of India have also seen a healthy rise in AUMs. 

With the 30% stock market rally in 2014, coupled with strong inflow in the equity segment from retail investors, the number of mutual fund houses with at least one equity scheme having a corpus of over $1 billion (Rs 6,300 crore) has increased from two to nine schemes. Last year, HDFC Mutual Fund was the only house in this club. The country's largest fund house had two of its schemes here, HDFC Equity and HDFC Top 200, both managed by Prashant Jain. Currently, ICICI Prudential AMC, Franklin Templeton, Reliance MF, Birla Sunlife Mutual Fund, and IDFC AMC also have at least one equity scheme with assets under management (AUM) of over $1 billion to brag about. Beside the two schemes managed by HDFC Mutual Fund, others in this club include Reliance Equity Opportunities Fund, HDFC Mid-Cap Opportunities Fund, ICICI Prudential Value Discovery Fund, Birla Sun Life Frontline Equity Fund, IDFC Premier Equity Fund, and Franklin India Bluechip Fund. Put together, overall assets managed by these nine equity schemes are nearly Rs 1 lakh crore. This is a little over a fourth of the mutual fund sector's total equity AUM. Since the beginning of the previous financial year (2014-15), net inflows in equity-oriented schemes have been a record Rs 90,000 crore.

Although ridden with volatility, the market as represented by the CNX Nifty gained 3.15% in May 2015, after the benchmark fell 3.7% and 4.6%, in April and March 2015, respectively. Positive sentiment for equity funds rubbed off onto balanced funds, which attracted net inflows of Rs 12.02 crore in May 2015, marking the twelfth consecutive month of gains. The category's AUM went up 6.4%, or Rs 1734 crore, to a new high of Rs 28,749 crore. Inflows of Rs 875 crores helped gilt funds' AUM boast a new high of Rs 15,652 crores. Income funds' AUM rose 1.5% to Rs 5.22 lakh crore, led by inflows of Rs 42.05 lakh crores. Net outflows of Rs 15,657 crores in liquid funds capped gains in the industry's overall AUM. The category's AUM dropped 4.8% to Rs 2.54 lakh crores. Gold exchange traded funds' AUM fell 1.9% to Rs 6,688 crores due to net outflows of Rs 86 crores and MTM losses. The price of gold, represented by the CRISIL Gold Index, fell 0.3% in May 2015. 

What is also interesting is that Southern and North-Eastern states have seen more investors choosing to invest in Mutual Funds. Maharashtra still leads among the states by accounting for 35% of the total equity AUM corpus. This, incidentally, is more than the next 5 states put together, i.e., Delhi, Karnataka, Gujarat, West Bengal, and Uttar Pradesh. But the four southern states, i.e. Andhra Pradesh including Telangana, Tamil Nadu, Kerala, and Karnataka put together account for nearly 18% of the total retail AUM, an average growth of 79.43% from levels seen 12 months ago. This is significant, if accounted for the fact that these states make up less than 5% of the trading volumes in the equity markets. Likewise, the seven sister states in North-East India have seen retail AUMs surge 70% in the last 12 months, taking their overall share of total AUMs to 6%. But Prime Database says that nearly 7% of the AUM in equity schemes does not meet KYC norms. That is over Rs 23,118 crore. This has been classified under 'Others' category, with fund houses saying that they are unable to even determine which city or state these investments originated from. More alarming is the fact that this number is 80% higher than it was a year ago. These equity schemes only account for 26% of the mutual fund industry's corpus of Rs 11 lakh crore. In addition, the number of retail accounts has fallen to Rs 4.1 crore from the Rs 4.8 crore seen in September 2009. So the mutual fund industry has miles to go before it can rest on its laurels.

Piquant Parade

Pramerica Mutual Fund is likely to acquire the Indian assets of Deutsche Asset Management ompany for Rs 400 crore. Pramerica Mutual Fund is nearly one-tenth the size of Deutsche Mutual Fund in terms of quantum of assets managed in India. However, post this transaction, Pramerica will jump from being one of the smallest fund houses to being the thirteenth largest fund house. This will be the fifth exit of a foreign fund house over the last two years. Prior to this, SBI Mutual Fund bought Daiwa, HDFC Mutual Fund acquired Morgan Stanley, Birla Sun Life Mutual Fund went for ING Mutual Fund, and Kotak Mutual Fund took over PineBridge Investments.

Wealth India Financial Services, which runs online investment platform, FundsIndia.com has raised Rs. 70 crore in the third round of funding from Faering Capital and its existing investors, Foundation Capital and Inventus Capital.  FundsIndia will use the fresh capital to widen the reach of its online platform and enhance its service offerings. In its first round funding in 2010, the company had raised Rs. 3 crore from Inventus Capital. In the second round in April 2012, FundsIndia raised Rs. 20 crore from Foundation Capital and Inventus Capital. The convenience of online transactions makes FundsIndia a liberating and empowering experience for investors. Around 800 IFAs are currently using FundsIndia platform to service their clients. The company operates on a commission sharing model with IFAs. IFAs having AUA of up to Rs. 10 crore on the platform get 65% of the commission received from AMCs while those who have AUA of more than Rs. 10 crore get 75% of the commission share. The company manages total assets under advisory of nearly Rs. 1,200 crore. Around Rs. 350 crore is under its B2B sub-broker vertical while the remaining is under its B2C vertical. The platform provides a host of products and services like mutual funds, insurance, corporate deposits, NCDs, bonds, direct equity, e-insurance repository, and personal loans comparison tools.

In order to maximize the distribution reach of its products and services and to make it easy for retail investors and distributors to submit the fund application forms, BNP Paribas Mutual Fund has launched investor friendly “Fill it, Click it and Send it” service. BNP Paribas Mutual Fund is the first AMC in India which has launched this service. The “Fill it, Click it and Send it” service will facilitate the investors and distributors to submit the application forms in three easy steps. The three steps are - filling of the application form, clicking photos of the application form and supporting document and emailing of the same to the designate email ids. Traditionally, especially for distributors, collection and submission of application forms from AMCs is a tiring and time consuming process. This service will help the company to reach out to the wider net of distributors and investors across India.

The BSE introduced switch facility and SIP/XSIP registrations on both demat and non-demat modes on its STAR Mutual Fund Platform. In addition, SIP/XSIP registrations with direct pay-out of units will be offered in the demat mode. XSIP or Exchange SIP is a facility offered to member brokers and mutual fund distributors to register their client’s electronic clearing services bank mandates. Until now, only the National Stock Exchange offered the facility to buy and sell mutual fund units without a demat account through MF Simplified, a platform started a few months ago. The BSE is trying to replicate what NSE has done with its MF Simplified platform. In MF Simplified and the upgraded BSE StAR MF platform, transaction is faster than the earlier mode; the transaction is completely paperless and investors can get an aggregate portfolio feed. No demat account means investors no longer have to bear costs associated with maintaining one. Ease of transaction and better facilities will bring more mutual fund investors on the exchange platforms in the next one year. Notably, the number of mutual fund orders on both the exchanges — BSE STAR MF and NSE MFSS — has more than doubled to 19 lakh in 2014-15, compared with 819,000 the previous year. The platforms will offer another alternative to those keen on transacting online. However, a few glitches remain with the exchange platforms. For instance, on MF Simplified, investors have to remember different 10-digit login numbers, depending on the mode of holding. In addition, only 17 fund houses have so far signed up with MF Simplified. Here is how the BSE’s STAR platform will work in the non-demat mode. First-time investors have to do their know-your-customer (KYC) and register with the distributor, who will load and scan the KYC into the system. This will be forwarded by the exchange to the RTA, which will create a folio. The client can then put a purchase order through the client login. He can transfer the funds through the NEFT or IMPS to the exchange/clearing corporation. Accordingly, the units will be issued. For redemption, the investor has to put the redemption order. The exchange will forward the request to the RTA, which will credit the amount to the bank account of the investor, according to the net asset value of the day.

Regulatory Rigmarole

The service tax exemption withdrawn by Budget 2015 has become effective from June 1, 2015. Moreover, the service tax has now gone up from 12.36% to 14%. To provide some relief, some fund houses have paid out the commissions for business done last month in May 2015 itself. Meanwhile, most AMCs have started deducting service tax from commissions from June 1, 2015 till they get clarity on this issue. The service tax hike is also going to impact investors (though marginally), since fund houses charge service tax on management fee. Suppose the total expense ratio (TER) is 2.50% and the scheme is charging 1% management fee, service tax is levied on 1% fee. The TER might go up by 1 to 2 basis points. A longstanding demand of SEBI Registered Investment Advisors to get feeds of direct plans has finally been met, though in a limited way. About 10-11 AMCs are currently providing the feeds of direct plans to SEBI Registered Investment Advisors through iFAST platform. DSP BlackRock and Mirae Asset Mutual Fund are among the AMCs which are providing feeds of direct plans to SEBI RIAs though iFAST platform. However, RIAs are demanding that all AMCs, especially the larger ones, should provide feeds of direct plans as it is in the interest of the client. AMFI board had turned down a request of distributors to allow tagging of ARN in direct applications. It may be recalled that with the introduction of the direct plan, the distributor has been cut out completely. It was argued that tagging would enable the advisor to get access to client records for the investments recommended by him/her so that they could monitor their client portfolios. In other words, distributors wanted their ARNs to be tagged in direct applications so that they could get the feeds of schemes they recommend to their clients. Meanwhile, other AMCs are contemplating whether they should provide feeds of direct plans to RIAs.

The mutual fund industry's trade body, AMFI has asked asset management companies to desist from offering bonus option under schemes, avoid declaring bonus units, and discontinue fresh subscriptions under bonus plans. If mutual funds decide to go ahead with the AMFI recommendations, investors will not be able to avail of the tax benefit known as bonus stripping —a practice that has been frowned upon by the capital markets regulator. In bonus stripping, investors buy units of a mutual fund before the record date of the bonus issue. Then, they sell a portion of the units and book losses, which can be used to set-off against short-term capital gains. While issuance of bonus units does not violate the letter of any regulation, it is certainly against the spirit of regulation, which may come under scrutiny by regulator or by revenue authority sooner or later. Investors can claim tax benefits from bonus stripping in two situations: one, by putting money in the scheme three months before the record date; two, by purchasing the units before the record date and holding them for nine months. Rules require mutual funds to announce the record date five days before the record date. If investors get a whiff of the bonus well before the record date announcement, they can time their investment to avail the tax benefit. AMFI has asked mutual funds to seek their boards' permission on the matter and convey their stand on the issue. Most of the industry may comply with the circular though it is not binding on them as AMFI is not a regulatory body. AMFI is likely to allow ‘upfronting of trail in SIPs and ELSS schemes. In mutual fund parlance, ‘upfronting’ means that the entire trail commission is paid at the beginning. This was a common practice in ELSS and other closed end funds. AMFI may allow ‘upfronting’ of trail for SIPs of up to Rs.10,000 per month. However, such ‘upfronting’ would be applicable for SIPs having a minimum tenure of 36 months. Moreover, it would be paid for a maximum tenure of 36 months even if the tenure of such SIPs exceeds 36 months. Let us assume that a client invests Rs.5,000 per month for 60 months in an equity fund through SIP then distributor will be eligible to get a commission of Rs.1,800 (1% of all SIPs paid till 36 months). Similarly, in ELSS, ‘upfronting’ of trail in ELSS would be applicable to the extent of investment of up to Rs.1.50 lakh per year, per PAN. Moreover, the maximum commission paid under ELSS may be capped at 3%. A rough calculation shows that such commission payouts may go up to Rs.4,500 or 3% of Rs.1.5 lakh. Earlier, AMFI had issued its best practice circular to AMCs in which it had asked fund houses to discontinue ‘upfronting’ of trail across all schemes. In addition, it has put a cap of 1% on upfront commission and given freedom to fund houses to decide trail commission. However, it has to be within the distributable TER. With 928 Ultra High Net worth (UHNW) households, India has the fourth largest population of super-rich individuals in the world in 2014, shows a ‘Global Wealth 2015: Winning the Growth Game’ study published by Boston Consulting Group (BCG). India is behind UK which has 1,019 such billionaires. USA has the highest number of UHNW at 5,201 followed by China (1,037). The report says that these UHNWs own 20% of overall private wealth in India. Similarly, UHNWs having private wealth of $20-100 million and $1-20 million have 5% and 11% of overall financial wealth respectively. As a result, UHNWs having over $1 million own 36% of overall private wealth. It is estimated that such figure may grow up to 38% by 2019. A person with a minimum private wealth of over $100 million is considered to be UHNW. The private wealth includes cash and deposits, money market funds, listed securities, and other onshore and offshore assets. It excludes investors’ own businesses, residences, and luxury goods. The report said that the population of UHNWs in India will grow at 21.5% till 2019, the highest projected growth rate in the world. The report has estimated that the Asia Pacific region excluding Japan is likely to overtake North America (which has the highest number of UHNW population) by 2016. India and China will play a key role in this growth, says the report. Clients are still willing to pay a premium for benefits such as political and financial stability, regional diversification, high-quality service, discretion, and broad expertise across products and asset classes. Top offshore performers are transforming their businesses to make them viable for the future. Overall, the private financial wealth grew by nearly 12% in 2014 to reach a total of $164 trillion. Almost 73% of this wealth has come from capital appreciation from existing financial investments. The report has estimated that the total private wealth is set to grow at 6.2% to reach $ 222 trillion by 2019.

It is vacation time again…time for a brief bout of relaxation…a slowdown in the pace of blogging. The monthly mutual fund round-up, FUND FULCRUM will appear on the last Monday of August 2015, encompassing updates for the months of July 2015 as well as August 2015. From September 2015, the weekly blogs will blossom again…