FUND FULCRUM

June 2017

The mutual fund industry's asset base declined marginally by 1.15% to Rs 19.03 lakh crore at the end of May 2017, mainly due to outflow from money market segments. In comparison, the assets under management (AUM) of the MF industry, comprising 42 players, were at an all-time high of Rs 19.26 lakh crore at the end of April 2017, as per the data of Association of Mutual Funds in India (AMFI). The industry's AUM had crossed Rs 10 lakh crore in May 2014, and it is expected to reach Rs 20 lakh crore this year. There is a drop in overall asset base of the industry due to net outflows from the liquid funds, which are susceptible to sharp inflows and outflows as corporates park short term money in these funds. Flows in equity, balanced and debt funds still remain strong. Overall, outflow in MF schemes stood at Rs 40,711 crore in May 2017 as compared to a staggering inflow of Rs 1.51 lakh crore in April 2017. Of this, liquid funds or money market category — with investments in cash assets such as Treasury Bills, certificates of deposit and commercial paper for shorter horizon — witnessed an outflow of Rs 64,692 crore. However, equity and equity-linked saving scheme (ELSS) saw an infusion of Rs 10,790 crore. Besides, balanced and income funds witnessed an inflow of Rs 7,663 crore and Rs 5,124 crore respectively. Investor awareness programme and paperless investing platform for mutual fund investing are the two major factors that have facilitated this growth in net inflows. In addition to these, even the investors' confidence in mutual funds has increased. Now, they are holding their investments in equity oriented schemes for a longer period of time for both lump sum as well as Systematic Investment Plan (SIP) investments.

Mutual fund houses added close to 19 lakh investor accounts in April-May of 2017-18, taking the total tally to a record 5.72 crore, driven by growing interest from retail and HNI investors alike. This is on top of 77 lakh folios added in the entire past fiscal and 59 lakh in the preceding financial year. In the two years, investor accounts went up following robust contribution from smaller towns. Folios are numbers designated to individual investor accounts though an investor can have multiple ones. According to data from the Association of Mutual Funds in India (AMFI) on total investor accounts with 42 active fund houses, the number of folios rose to a record 5,71,90,112 at the end of May 2017 from 5,53,99,631 at the end of March 2017, a gain of 17.90 lakh. Growing participation from retail as well as HNI (high net worth individuals) categories have contributed to higher overall investor accounts. The number of retail investor accounts, which comprise equity, equity-linked saving schemes and balanced categories, surged to 4.60 crore in May 2017 from 4.4 crore at the end of March 2017. A good percentage of investors stay invested in equity oriented schemes for at least 24 months or more than that. Over half of the retail equity AUM remained invested for more than two years in FY 2016-17, shows the latest AMFI data. Of the Rs.3.19 lakh crore retail equity assets as on March 2017, 52% or Rs.1.65 lakh crore has been carried forward since FY 2014-15, i.e, more than 24 months. While as on March 2016, 53% of retail money had been carried forward for more than two years and stood at Rs.1.16 crore. This increase in equity-oriented schemes’ holding period is for applicability of long-term capital gain. Even the investors' confidence in mutual funds has increased. 

Mutual funds' assets under management (AUM) from B15 grew to Rs 3.41 lakh crore in May 2017 from Rs 2.32 lakh crore in May 2016, according to the data available on the Association of Mutual Funds in India website. Contribution of small towns -- known as beyond the top 15 cities (B15) -- to mutual funds' asset base in India surged 47% this year. AMFI data showed that 18 percent of the assets of the mutual fund industry came from B15 locations in May 2017. The growth in the assets can be attributed to a positive sentiment in domestic markets along with well-timed initiatives by SEBI to re-energise the mutual fund industry, particularly higher commission to distributors for going to B-15 cities. To increase penetration and popularise mutual fund products in rural areas, SEBI, in 2012, had mandated fund houses to go to 'B15' cities and for this the regulator had allowed fund houses to charge an additional 30 basis points in the total expense ratio if new inflows from B15 cities are at least 30% of gross new inflows in the scheme or 15% of the average assets under management, whichever is higher. After SEBI's push, many fund houses revised their commission structure for distributors in B15 to incentivise them to get more people to invest in mutual funds. High commission is paid mainly for equity-oriented funds and monthly income plans where the fund houses feel they can earn enough for themselves, before passing on the rest to distributors as commission. A major portion of the products sold within this fast growing pocket of the industry are equity funds unlike the top 15 space, where institutional dominance tilts the balance towards fixed income products. In May 2017, 54% of the assets from B15 locations were in equity schemes, while equity-oriented schemes accounted for 31% of the T15 assets in May 2017 and 27% in May 2016. The higher concentration in debt in T15 locations was due to the presence of institutions in this segment. B15 cities are those which are beyond these top 15 cities New Delhi (including NCR), Mumbai (including Thane & Navi Mumbai), Kolkata, Chennai, Bengaluru, Ahmedabad, Baroda, Chandigarh, Hyderabad, Jaipur, Kanpur, Lucknow, Panjim, Pune and Surat. Meanwhile, as per SEBI, equity mutual funds added over 6.5 lakh folios in the last month. Besides, 26% of assets held by individual investors was from B15 locations and about 10% of institutional assets were from B15 locations. Institutional assets were concentrated in T15 locations, accounting for 90.03% of the total. The shares of B15 assets, individual and institutional categories, increased since May 2016. The share of T15 assets, individual categories, decreased marginally. In April 2017, 17% of the assets of the mutual fund industry came from B15 locations. Assets from B15 locations have increased from Rs 2.24 lakh crore in April 2016 to Rs 3.23 lakh crore in April 2017, an increase of 43.7%, according to AMFI data.

Piquant Parade

Top mutual fund houses received about 17,569 complaints from investors in 2016-17, a surge of 40% from the preceding fiscal, mainly due to increase in folio numbers. These complaints pertain to data corrections in investor details and non-updation of changes about address, PAN (Permanent Account Number) details and nomination, among others. Large number of complaints was received due to increase in folio base or investor accounts. Besides, illegible data provided by investors as well as errors made by investors while filling up application forms helped in raising the number of grievances. As per Association of Mutual Funds of India (AMFI) data, the top five mutual fund houses - ICICI Prudential MF, HDFC MF, Reliance MF, Birla Sunlife MF and SBI MF - together received 17,569 investor grievances last fiscal compared with 12,579 complaints in 2015-16. The folios - numbers designated to individual investor accounts, though one investor can have multiple folios - grew to 2.72 crore from 2.23 crore during the same period. Among the top fund houses, SBI MF saw the biggest rise in investor grievances last fiscal, with complaints growing four-fold to 6,924. It was followed by Birla Sunlife MF, which saw complaints rising by 51% to 1,831 and ICICI Prudential MF witnessed an uptick of 2% to 4,648. However, HDFC MF witnessed 24% decline in the number of complaints at 2,857, while Reliance MF saw a drop of 10% to 1,309. Markets regulator SEBI first took note of the rising investor complaints in mutual funds in 2011 and hauled up fund houses for not taking serious note of the grievances.

Regulatory Rigmarole

To improve ease of doing business, markets regulator SEBI launched an online registration mechanism for mutual funds. The move would help in making it easier for the existing and new fund houses to complete their registration with SEBI much faster and in a cost-effective way. In a circular, the regulator said that it has decided to operationalise 'Sebi Intermediary Portal' for the entities to submit the mutual funds registration applications online. All the applications for registration of mutual funds would be made through this portal only. The applicants will be separately required to submit relevant documents viz declarations/ undertakings required as a part of application form prescribed in relevant regulations, in physical form only for records, without impacting the online processing of applications for registration. Earlier Finance Minister Arun Jaitley in his budget speech for 2017-18 announced that the process of registration of financial market intermediaries will be made fully online by SEBI.

Association of Mutual Funds in India (AMFI) has appointed consultancy PwC to prepare a white paper on the implementation of the goods and services tax (GST) and its impact on the mutual fund sector. Under the GST regime, asset management companies (AMCs) will have to pay service tax of 18% on the investment management fees they earn. Until now, the rate was 15%. This might lead to an additional tax outgo of Rs 300-500 crore annually, assuming sector revenues of Rs 10,000-15,000 crore. Since the tax is ultimately borne by investors, their expenses will go up marginally. Management fees are part of the total expense ratio charged annually by AMCs. These include marketing and selling expenses, fees paid towards registrar and transfer agents, trustees, auditors, etc. Typically, equity funds charge management fees of 1-1.5% of the assets under management, while debt funds charge between 0.05% and 0.5%. The GST Act says the tax is to be paid at a place where it has been consumed. AMCs will have to do detailed revenue and cost allocation for each of their branches and give the inputs to the individual states. AMCs and distributors need clarity on whether the GST needs to be paid state-wise or in a consolidated manner. AMCs will directly deduct the 18% service tax from distributors that do not take a GST registration, under the reverse charge mechanism. Those taking a GST registration will come under the forward charge mechanism, whereby the tax will have to be paid by the distributor directly. Under existing laws, distributors earning less than Rs 10 lakh annually do not need to pay any service tax or register separately. However, post GST implementation, these distributors will have to register under GST and later claim exemption. However, it is not yet clear if distributors earning less than Rs 20 lakh and catering to investors in different states can claim any exemption under the GST regime. Distributors working on a commission model may not have to register separately in each state. However, registered investment advisors working on a fee model and catering to investors in different states may have to register separately in different states leading to higher compliance costs.

The competition in the online mutual fund distribution space is heating up. India’s largest e-commerce giant Flipkart is likely to start distribution of financial products like mutual funds and insurance. The company has already started offering loans to sellers in partnership with banks and NBFCs. Now, apart from loans, Flipkart is also looking at mutual funds and insurance products. To start with, Flipkart would target its seller to distribute financial products. Other e-commerce giants like Amazon already owns stake in online distribution and robo advisory firm, BankBazaar. Similarly, Snapdeal had also invested in financial services startup Rupeepower, which help people compare credit cards and loans across banks. Two years back, SEBI had constituted a committee headed by Nandan Nilekani to recommend measures to reduce cost structure of mutual funds. The committee had recommended SEBI to introduce a new distribution channel through e-commerce websites like FlipKart, Amazon and Snapdeal. In addition, the market regulator has allowed investors to invest up to Rs 50,000 per financial year per mutual fund using one time password (OTP) through eKYC. SEBI is likely to approach the ministry of finance requesting allowing bank KYC and Aadhar as valid KYC and IPV to invest in mutual funds. If implemented, it will help distributors especially online players to on board clients on a real time basis. In addition, payment banks like Airtel Payment bank and Paytm have expressed their interests to launch financial distribution services. Recently, SEBI has allowed fund houses to facilitate transaction in mutual funds of up to Rs50,000 through e-wallets/digital wallets. The online MF distribution space is already getting crowded with many players looking to cash in on the growing e-commerce trend.

It is vacation time again! The next blog will appear on the last Monday of August 2017, where the mutual fund round-up for the months of July and August 2017 will be covered.