Monday, August 27, 2018


FUND FULCRUM
August 2018

With equity markets reaching an all-time high in July 2018, the average assets under management (AAUM) of the mutual fund industry reached close to Rs.24 lakh crore in July 2018. AMFI’s latest data shows that AAUM of the Mutual Fund industry has reached Rs.23.96 lakh crore in June 2018. However, the monthly AUM of industry stood at Rs.23.06 lakh crore in July 2018. While AAUM is the average assets of the entire month and is calculated by factoring in all working days of the month, month end AUM is the assets of the industry as of the last working day of the month. The growth has come largely because of higher inflows in equity funds through SIPs. AMFI data shows that the monthly inflows in mutual funds through SIP reached an all-time high of Rs.7554 crore. Data shows that the industry mopped up close to Rs.29,100 crore in the last four months through SIPs. Moreover, the Mutual Fund industry had added close to 10 lakh SIP accounts each month on an average during the FY 2018-19, with an average SIP ticket size of about Rs.3,250. Currently, the industry has 2.33 crore active SIP accounts.

HDFC AMC holds the top spot in terms of monthly average equity AUM with equity assets of Rs. 1.53 lakh crore as on July 2018. Of the total assets, the fund house has Rs. 91,839 crore in pure equity and ELSS funds and Rs.61378 crore in balanced funds, shows the latest AMFI data. Equity AUM includes pure equity, balanced and ELSS funds. In the second place comes ICICI Prudential MF with total equity AUM of Rs.1.43 lakh crore as on July 2018. In the third place is Aditya Birla Sun Life MF with equity assets of Rs. 89,727 crore. Following them are Reliance MF and SBI MF with equity assets of Rs. 88,583 crore and Rs. 82,474 crore respectively.  Of the Rs. 9.78 lakh crore equity AUM, Rs. 5.57 lakh crore comes from the top five AMCs. This means 57% of the industry’s equity AUM comes from the top five AMCs. In terms of absolute growth, HDFC MF has added Rs.33505 crore of equity assets, which is the highest in the industry. Closely following on its heels was ICICI Prudential MF and SBI MF with assets of Rs.31795 crore and Rs.24419 crore, respectively. If we calculate the growth in percentage terms over last year, among the top 10 AMCs L&T MF and Axis MF have reported the highest growth in equity assets of 82% and 69% respectively. If we consider all fund houses then Essel MF (153%), Mahindra MF (142%) and BOI AXA MF (125%) have grown phenomenally largely due to low base effect. Overall, majority of the fund houses reported growth in equity AUM. However, a few small fund houses Taurus MF, Sahara MF and Indiabulls MF saw their equity AUM declining last quarter.

An analysis of AMFI data on folio count shows that top 10 AMCs (in AUM terms) account for 84% of the total industry folios. The total folio count of these fund houses grew 23%, from 4.85 crore in FY 2016-17 to 5.98 crore in FY2017-18, an increase of over 1.13 crore folios in a year. In 2016-17, the top 10 AMCs constituted 85% of the total industry folios. The total folio count of the MF industry stood at 7.14 crore, as on March 2018. UTI MF retained the top spot with 1.07 crore folios with 15% market share. However, compared to last year its total number of folios decreased marginally by 1%.  Reliance MF and HDFC MF followed UTI  MF with 81.72 lakh folios (11% market share) and 81.23 lakh folios (11% market share) respectively. In absolute terms, Aditya Birla Sun Life MF leads the pack with 20.92 lakh new folios that is a 53% increase in folio count. Amongst other mutual funds, L&T MF and Kotak Mahindra MF have substantially increased their investor base with L&T MF, more than doubling its folio count by recording a 131% increase in folios compared to last year.

Piquant Parade

DSP BlackRock Mutual Fund has become DSP Mutual Fund with effect from August 16, 2018. In May, DSP Group had bought BlackRock’s 40% stake in their joint venture DSP BlackRock Investment Managers. While the DSP Group has a track record of over 152 years, BlackRock Inc. is the largest asset management company in the world. Currently, DSP Mutual Fund manages assets of over Rs. 89,400 crore as on June 2018.

Bank of Baroda has started looking out for buyers for selling part of its stake in the AMC venture, Baroda Pioneer Asset Management Company. BOB Capital Markets has been hired as the investment banker to manage the stake sale and the bank has already started the bidding process for selling stake in the AMC. In December 2017, Bank of Baroda purchased 51 percent stake held by foreign partner Pioneer Investments in their joint venture asset management company, raising its shareholding to 100 percent, subject to regulatory approvals. Both the partners are still awaiting the regulator’s consent. Pioneer Global Asset Management S.p.A. had acquired 51 percent of Bank of Baroda Asset Management in 2008 and will now exit the venture.

YES Bank has received the final regulatory approval (certificate of registration) from the SEBI to commence its mutual fund business. This approval is subsequent to the RBI approval granted to YES Bank to sponsor a mutual fund followed by SEBI’s in-principle approval received subsequently. The AMC has identified senior leadership and technology architecture to commence operations soon. CAMS is the registrar and transfer agent for the fund house. The company will launch its funds over the next 6-12 months. The AMC intends to build a ‘Digital First’ distribution network supported by robust processes and best-in-class human capital to capture the attractive and growing opportunity in the mutual funds space.

Karvy Computershare has introduced a new feature called distributor initiated transaction on their transaction portal KorpConnect for the mutual fund distributors. With this facility, distributors can initiate transaction on behalf of their non-individual clients such as SMEs and corporates. The R&T agent claims that this feature will help Mutual Fund distributors to serve better their corporate and other non-individual clients, who typically like to log in and approve the transaction. KorpConnect is a transaction portal of Karvy Computershare for non-individuals with features such as single sign-in to invest across Karvy serviced fund houses, multi-level access, authorization and approval workflow and portfolio management. This would help distributors reduce paperwork, save time and improve transacting experience of distributors and investors.

Global private equity KKR-backed Avendus Capital is said to be in the final stage of discussions to acquire IDFC Asset Management Company. The deal value is not known as yet, but generally, fund houses are valued at 6-7% of the total asset under management (AUM). IDFC Mutual Fund, the 12th largest in India by size, managed Rs 69,574 crore assets as of June 30, 2018. IDFC Asset Management Company was established in 2008 after IDFC bought Standard Chartered Asset Management Company for Rs 820 crore.

Regulatory Rigmarole

SEBI has asked AMFI to ensure adherence to the best practices circular in letter and spirit. In fact, the market regulator has asked AMFI to chalk out a roadmap to ensure that fund houses adhere to the best practices circular. AMFI will take stringent action against those who violate such norms. SEBI has learnt that a few AMCs are not adhering to AMFI best practices guidelines. In fact, a few fund houses, which are complying with best practices guidelines on upfront commission in spirit, said that even they would back out if other members flout the norms.

In a major relief to mutual fund distributors earning less than Rs.20 lakh, the government has deferred implementation of reverse charge mechanism (RCM) until September 2018. This deferment will benefit distributors earning less than Rs.20 lakh who do not have GST registration. For distributors with GST registration, AMCs continue to follow forward charge mechanism, i.e., AMCs will pay the gross commission to them. These distributors can avail of the benefits of input credit.

In frequently asked questions (FAQs) on the applicability of GST on financial services, the government has clarified that they will levy GST on exit loads in mutual funds. Though there is no clarity on rate at which they levy GST on exit loads, the government might levy 18% on such loads.

SEBI lowered the additional expense charged in lieu of exit loads by mutual fund schemes with effect from 29th May 2018. Only schemes charging an exit load (open-ended schemes without lock-in) can levy the additional 5 basis points charge. In 2012, the regulator had permitted mutual funds to charge up to 20 basis points of scheme AUM as a compensation for exit load. However, the funds were overcharging investors by levying expenses in excess of the expected amount brought in by exit load. As per a PTI report, across all equity and balanced schemes an average exit load of around 5 basis points has been credited to the scheme whereas the additional expense charged to these schemes was between 18-20 basis points. In comparison the additional expense charged was lower than actual exit load credit back in case of open ended debt schemes. The drastic reduction in TER will reduce cost of investing in MFs. However, distributor commissions could be hit by this move.

In addition to slashing TER, the regulator also gave a green signal to sharing all investor related disclosures in electronic format in accordance with its ‘Go Green’ initiative. Thus schemes will no longer need to publish daily net asset value (NAV), sale or repurchase prices in newspaper. Instead investors can view the data on mutual fund site or AMFI portal. Furthermore, mutual funds can now upload statement of scheme portfolios and scheme annual reports or abridged summary on AMFI website or their website instead of mailing them to investors whose email id is not registered with the fund house.

SEBI has asked fund houses to disclose total expense ratio (TER) of each scheme under both regular and direct plans on a daily basis. With this, fund houses will have to introduce a separate tab called ‘Total Expense Ratio of Mutual Fund Schemes’ on their website in a downloadable spreadsheet, directed SEBI. This has come after SEBI observed frequent changes in TER in MF schemes. In addition, SEBI found that a few AMCs do not intimate investors about such changes. “AMCs  shall  prominently  disclose  on  a  daily  basis,  the  TER (scheme-wise, date-wise) of all schemes under a separate head – Total Expense Ratio  of  Mutual  Fund  Schemes  on  their  website  and on  the  website  of AMFI in downloadable spreadsheet format,” said SEBI in a circular. Fund houses will now have to intimate investors by sharing a notice through email or SMS at least three working days prior to making any revision in TER of the scheme. In addition, fund houses are required to put such a notice of change in base TER on their website prominently. So far, fund houses have been disclosing change in TER on their website within two working days of making such changes. Fund houses will have to inform the board of directors of the AMC about the revision in TER along with the rationale for their decision. The circular has come into effect immediately. Another key development is the change in the format of TER disclosure on a scheme information document (SID).

The latest AMFI data shows that most AMCs were able to resolve investor complaints within 30 days. Of the 32,206 complaints received during the year, only 570 complaints were unresolved after 30 days. An analysis of AMFI data reveals that investors have generally raised complaints regarding data updation, correction in investor details, or discrepancy in statement of accounts. In line with previous trends, most investor complaints were resolved within 30 days. These complaints were largely regarding investor related data though some were regarding non-receipt of dividend. Among AMCs, SBI MF received the highest number of complaints (7,576), followed by HDFC MF with 5,749 complaints and ICICI Prudential MF with 5,134 complaints. Shriram MF, Mahindra MF and IIFL MF received the lowest number of investor complaints largely due to a smaller number of folios. Among the top 10 fund houses, Axis, DSP, Reliance and UTI also had the lowest numbers in terms of percentage of complaints against folios, which is indicative of the AMC’s customer service efficiency. Compared to last year there has been an 11% increase in the overall complaints. However, not all AMCs saw an increase in complaints.

CAMS introduced a mailback service for distributors through which they can get information on new schemes post scheme consolidation. Mailback services help distributors get their business reports in an email. From gross commission statements across CAMS serviced fund houses to assets under advisory at the fund house level, mailback services take care of all business details. In addition, you can get all your queries on scheme mergers answered in one place. You can view scheme name changes, scheme merger changes along with the respective 'Change type' & 'Effective Date' details across the 15 funds houses serviced by CAMS. You can login to www.camsonline.com and simply click on ‘what’s new’ on the right hand side of the webpage to download the file on scheme consolidation. Earlier, SEBI came out with uniform definitions for fund categories to reduce the number of schemes in mutual funds. Simply put, the market regulator has defined various categories of mutual fund schemes to reduce confusion among investors and expedite scheme consolidation. The new facility by CAMS will help distributors to get complete picture of new schemes after merger.

SEBI has found that fund houses failed to comply with the investment norms under SEBI mutual fund regulations. Earlier, SEBI had carried out an inspection of fund houses to understand the AMC practices between April 01, 2014 and March 31, 2016. After examination, SEBI has sent a letter to AMFI citing 25 irregularities at fund houses. Among these irregularities, SEBI has found instances of non-compliance with the investment norms. Here are some observations of the market regulator.
  • ·         Fund houses invested over 15% of net assets in short term deposits of scheduled commercial banks without taking prior approval of their trustees
  • ·         AMCs failed to comply with requirement of not having exposure of more than 20% of net assets in such deposits at any point of time
  • ·         Fund houses parked over 10% of net assets in short term deposit of one scheduled commercial bank including subsidiary
  • ·         There were instances where AMCs invested in the short term deposits of a bank who have invested in that scheme. AMCs failed to put in place checks and balances to ensure that such banks do not invest in schemes having exposure to their short term deposits
  • ·         AMCs rolled over these deposits on a continuous basis
  • ·         AMCs took blanket approval from their trustees to increase such an investment limit from 15% to 20% in short term deposit
  • ·         Instead of using these short term deposits, fund houses borrowed to meet their cash requirements
  • ·         Establishing unfair valuations of unlisted securities
  • ·         AMCs not following scheme objectives disclosed in SID
  • ·         Close end schemes investing in papers having maturities beyond the maturity of the scheme
  • ·         Not disclosing rationale for inter scheme transactions
  • ·         AMCs having exposure to debt instruments of single issuer higher than the prescribed limits. These AMCs had either taken blanket approval from their trustees or used their power for increasing the investment limits
  • ·         Fund houses not adhered to sectoral limits in debt funds, which led to concentration risk
  • ·         Instances where a scheme used Collateralized Borrowing and Lending Obligation (CBLO) margin of another scheme
  •     SEBI has asked fund houses to take corrective measures to ensure compliance with the SEBI Mutual Fund regulations. 


Over the past few years, the Indian Mutual Fund industry has grown by leaps and bounds. As per AMFI, the AUM has grown from Rs 7.01 lakh crores as on 31st March, 2013 to Rs 21.36 lakh crores as on 31st March 2018, a more than three-fold increase in five years. And in a 10 year span, the industry’s AUM increased from Rs 5.05 lakh crores as on 31st March 2008 to Rs 21.36 lakh crores as on 31st March 2018. By no means the growth is phenomenal for an emerging capital market and would compare favourably with the peer markets. As the industry expanded so have the number of investors. There is increased participation not only from the institutional investors but more importantly by the retail investors. AMFI places the total number of accounts (or folios as per mutual fund parlance) as on March 31, 2018 having crossed the milestone of seven crores, at 7.13 crores. From time to time, the market regulator has introduced several initiatives to protect the interests of the investors in the mutual funds. These announcements are a step further in the same direction. At the same time the new/revised norms are not anti-industry as they are meant to bring more transparency in disclosures and reduce complexity in operations due to duplicity of schemes having similar investment objectives. Whether the new changes will really benefit the concerned, only time will tell and remains to be seen.