FUND FULCRUM

July 2016

The mutual fund industry’s asset base rose 6.5% to an all-time high of Rs.14.41 lakh crore in the April-June quarter helped by strong participation from retail investors and robust inflow in equity schemes. Besides, inflows into systematic investment plans (SIPs) for equity schemes have been rising and mutual funds added nearly 7.85 lakh investor accounts in the first two months of the current fiscal, taking the total number of folios to a record 4.84 crore. Data available with industry body, Association of Mutual Fund Industry, showed that the industry, comprising 42 active players, witnessed increase in average assets under management to Rs.14.41 lakh crore in the three months ended June 30, 2016 from Rs.13.53 lakh crore during the January-March quarter. Among the top five players, ICICI Prudential Mutual Fund led the pack with an asset base of Rs.1,93,296 crore (excluding fund of funds) followed by HDFC Mutual Fund (Rs.1,92,776 crore), Reliance Mutual Fund (Rs.1,67,009 crore), Birla Sun Life Mutual Fund (Rs.1,49,093 crore), and SBI Mutual Fund (Rs.1,19,878 crore).

Investments in mutual fund equity schemes dipped sharply by over 71% year-on-year to Rs.9,400 crore in the first quarter of the current fiscal, largely on market volatility. In comparison, mutual funds had witnessed inflows of Rs.32,933 crore in equities during the April-June period of the previous fiscal, 2015-16. According to the AMFI data, equity funds, which also include equity-linked saving schemes (ELSS), saw net inflow of Rs. 4,438 crore in April 2016, Rs.4,721 crore in May 2016, and just Rs. 320 crore in June 2016, taking the total investment to Rs.9,479 crore in the quarter. The liquid or money market segment witnessed Rs 26,847 crore being pulled out last month while Rs 80 crore was taken out from Gold ETF (Exchange Traded Funds). However, balanced funds and income funds saw inflow of Rs 2,402 crore and Rs 1,697 crore, respectively. Investors pulled out Rs 21,535 crore from various mutual fund schemes in June 2016, making it the second consecutive monthly outflow, primarily due to huge redemption from money market segment. In comparison, mutual funds witnessed an outflow of Rs 58,185 crore in May 2016. Prior to that, Rs 1.71 lakh crore was invested in April 2016. The latest outflow was mainly due to withdrawal of money from liquid or money market funds. Generally, liquid funds witness heavy outflow towards the end of March and the trend gets reversed in April as banks and corporates reinvest the surplus, which they had withdrawn to pay their financial and advance taxes.

Among the top ten mutual funds in India, eight are joint ventures with foreign players, like ICICI-Prudential, Birla-Sunlife, Reliance-Nippon, SBI-Amundi, and UTI-T Rowe Price. Of the total industry assets of Rs.14,41,027 crore, as on June 30, 2016 as much as Rs.9,99,610 crore is being managed by joint ventures with foreign partners, according to the AMFI data. The foreign partnerships with domestic mutual fund houses have more assets under management than Indian sponsor-managed fund houses, their asset growth has been driven by the Indian partner considering that the success of a fund depends on factors like fund performance, distribution channel, and duration in the industry.

Piquant Parade

LIC Mutual Fund Asset Management Company announced its tie-up with Cosmos Co-operative Bank for distribution of its mutual fund products through the bank’s 140 branches spread across India.

The government has approached LIC, proposing to sell a majority of SUUTI’s holdings to LIC, while the balance could be sold either through an offer-for-sale or through any other secondary market route to the public. SUUTI has shares in 43 listed and eight unlisted firms. It holds 11.17% in ITC Ltd, 8.32% in Larsen and Toubro Ltd (L&T) and 11.93% in Axis Bank Ltd. SUUTI also holds shares in other blue-chips such as ICICI Bank Ltd, Bharat Petroleum Corp. Ltd, Hindustan Unilever Ltd, Titan Co. Ltd, Tata Steel Ltd., and Reliance Industries Ltd. The combined value of SUUTI’s holdings in listed firms is estimated at around Rs.60,000 crore. The value of its holdings would be higher if its shareholding in unlisted firms is taken into account. The government will not sell all of SUUTI’s holdings at one go. The sale will be done in two to three tranches. LIC has been asked to pick up at least a third of the overall SUUTI holdings. This primarily includes (its holdings in) ITC, Axis Bank, and L&T. The cost of the deal could be Rs.25,000-30,000 crore for LIC. One challenge that LIC could face is the regulatory restriction on equity holdings in individual firms. The Insurance Regulatory and Development Authority of India allows the insurer to hold maximum equity of 15% in a single company. If the government sells a significant chunk of SUUTI’s holdings to LIC, the state-run insurer, which already owns shares in many blue-chips, the 15% limit could be breached in some companies. LIC’s investment committee will take a final call on the investments.

Regulatory Rigmarole

SEBI has asked entities regulated by it, including investment advisors, to upload the KYC data of all individual accounts opened on or after August 1, 2016 on Central KYC Registry (CKYCR) platform. However, SEBI has clarified that the requirement for PAN would continue to be mandatory for completing the KYC process. The government’s ambitious central KYC (CKYC) has gone live from July 15, 2016 in a phased manner. This paves way for a single bank KYC which will suffice to invest in all financial products, including mutual funds. This was announced in the Union Budget 2012-13. Last week, RBI and IRDAI have issued circulars instructing their respective regulated entities to upload KYC data of their customers on the CKYCR platform. Over a period of time, all investor data will be stored at one place which can be accessed by all financial institutions to verify the KYC. All investors need to do is obtain a central KYC number from Central KYC Registry through the financial institutions and use it to invest in any financial product.  There will be no need to do multiple KYC.

While some distributors may be anxious over SEBI’s plans to facilitate mutual fund sale through e-commerce platforms, top mutual fund CEOs believe that this technology will just be an enabler. Since mutual funds are push products, distributors will continue to play an important role in guiding and handholding investors. Today, 96% of Indian population does not know that they have to invest in mutual funds. We have to nudge them to invest. So we will need advisors to draw the new investors. Technology will help distributors increase their productivity, stressing the need to collaborate with platforms. While people are curious to know about mutual funds and are willing to invest, the KYC process puts them off. To rope in more distributors to expand the pie of mutual funds, people should find mutual fund distribution a lucrative career. Mutual fund distribution is not a lucrative business for huge armies to take up this profession. Less than 10,000 people have taken up mutual fund distribution last year. So we need more distributors to penetrate mutual funds.