FUND
FULCRUM
March
2019
Overall
assets under management (AUM) of the mutual fund industry stood at Rs
23.16 lakh crore at the end of February 2019, almost flat compared to the
previous month according to the data released by the Association of Mutual Funds in India (AMFI). The industry witnessed a total outflow of Rs 20,083 crore in February 2019 compared
to an inflow of Rs 65,439 crore in January 2019 on the back of a
moderation in flows into equity funds and redemptions in liquid funds. Inflows
into equity funds declined 17% on a month-on-month (MoM) basis to Rs 5,122
crore in February 2019. The decline can be attributed to fading equity outlook,
market volatility and weak global cues. While the overall equity flows have
been weakening, investment in equity funds through systematic investment plans
(SIPs), which is relatively sticky, continued to hold its sway with Rs 8,095
crore of SIP funds mobilised in February 2019. The high share of SIP
contribution has been the key success story of the mutual fund industry in the
past couple of years. Systematic
investment plans (SIPs) have been the saving grace for the mutual fund industry
amid market volatility. According to the data provided by AMFI, the
43-member-strong mutual fund industry has managed to garner Rs 8095 crore through SIPs in February 2019, slightly higher than the Rs 8,064
crore collected in January 2019. Over the last five months, AMFI and players
from the industry have launched campaigns such as 'mutual funds sahi hai'
and Jan Nivesh, which is helping garner interest for a push product like mutual
funds. Generally, SIPs are the preferred route for retail investors to deploy
money in mutual funds as it helps them reduce market timing risk.
Fund
flows into mutual funds reversed in February 2019, with outflows
at Rs 20,083 crore, after the 43-player industry
witnessed net inflows of Rs 65,439 crore in January 2019, according
to data from AMFI. Cash plans, or liquid schemes, reported the highest
outflows across all mutual fund categories. This category registered outflows
of over Rs 24,509 crore in February 2019 as against an inflow of Rs 58,637
crore in January 2019. Companies normally park their money in liquid schemes to
meet their short-term needs instead of keeping their money idle in a
non-interest bearing current account. Since liquid plans do not levy any entry
or exit fee, they facilitate easy cash management. Income funds too saw
outflows of Rs 4,214 crore in February 2019. Debt fund investors are still
shying away from making investments after the recent crisis at IL&FS
affected these schemes. The trouble, which began after multiple defaults by
Infrastructure Leasing & Financial Services (IL&FS) came to light
a few months back, impacted debt funds that held securities issued by
it, worth Rs 2,800 crore. For the second consecutive month, balanced
funds saw net outflows of Rs 1,077 crore in February 2019, after
outflows of Rs 952 crore in January 2019. Equity funds continued their
downward journey for the fourth straight month, with the quantum of inflows
declining 16.9% month-on-month to Rs 5,122 crore in February 2019.
Equity mutual
funds account for 5.9% of India’s stock market capitalisation as on February
2019. It has grown by 0.6% in the last one year, shows a recent Motilal Oswal
Report titled ‘Fund Folio – Indian Mutual Fund Tracker’. India’s equity market capitalisation stood at
Rs. 140 lakh crore while the mutual fund industry’s equity AUM was at Rs.8.29
lakh crore at the end of February 2019. Equity AUM includes pure equity, ELSS
and arbitrage funds. Strong retail participation in equity markets has helped
the growth in equity AUM. The industry saw net inflows of Rs. 1 lakh crore in
equity funds in April-February 2018-19. According to the report, while the
street exercised caution amid a flurry of unsupportive domestic and global
cues, mutual fund investors appeared to be undeterred by market volatility as
reflected by the record SIP flows. Monthly inflow in SIPs was at an all-time
high of 8,095 crore in February 2019, growing by 26% year-on-year or 2 times in
last two years, shared the report. The healthy mutual fund inflows in equity
markets act as a counterbalancing force against selling pressures. Overall,
mutual fund equity AUM grew by 7% in the last one year (from Rs. 7.76 lakh
crore in February 2018 to Rs. 8.29 lakh crore in February 2019).
Piquant Parade
Reliance Nippon Life AMC may soon see a
change of ownership. Reliance Capital, which owns 42.88% stake in the fund
house, has invited Nippon Life its joint venture (JV) partner to acquire its
stake in the business. Currently both partners hold equal ownership in the
JV. Reliance Capital expects to sell it shares to Nippon Life at a premium. The
business group is reportedly planning to divest its share in various businesses
as it is under pressure from lenders to pay off its huge outstanding debt. Reliance
Nippon Life AMC is the fifth largest fund house by AUM having assets of Rs.
2.43 lakh crore in January 2019. If Nippon acquires Reliance Capital’s stake,
it will become the largest foreign owned fund house in India.
According to SEBI’s website, two new
players Geojit Financial Services and SREI Infrastructure Finance have applied
to launch their mutual fund business. Altogether, six players including
Frontline Capital Services, Equity Intelligence India, Samco Securities and
Karvy Stock Broking are awaiting approval from SEBI to launch their mutual fund
business in India. While Geojit Financial Securities is in financial
distribution business, SREI Infrastructure is already into Infrastructure Debt
Fund (IDF) business and has AIF, insurance broking and infrastructure financing
business. Geojit Financial Services approached SEBI in August 2018. Similarly,
SREI Infrastructure Finance has applied for AMC license in February 2019. Last
year, Trust Investment Advisors and Muthoot Finance got SEBI in-principle
approval to float asset management business. SEBI rules say that the sponsor
applying for a mutual fund licence must be in the financial services business for
five years and needs to have a positive net worth for five years. The sponsor
should have earned profits in three of the previous five years, including the
latest year. SEBI conducts an on-site due diligence of sponsors before granting
approval.
Regulatory Rigmarole
SEBI has said that mutual funds will have
to disclose assets under management of their schemes on a daily basis, coupled
with an additional benchmark and product labelling. In a clarification
letter to AMFI on March 7, 2019 the market regulator said, “The AUM
of all schemes except liquid schemes has to be disclosed on a daily basis on the
AMFI website.” AMFI had earlier requested SEBI to do away with the requirement
of publishing the daily AUM of mutual schemes. SEBI said that in case of liquid
schemes the closing AUM, and the AUM of the previous month has to be disclosed
on the AMFI website on a daily basis. However, if the AUM movement of the
schemes is over 10% from the previously disclosed AUM, fund houses will have to
disclose the AUM of that day. AMFI had asked to do away with the requirement to
prevent unhealthy competition. Fund managers said that the disclosure of AUM on
a daily basis may lead to unhealthy competition among fund houses for the
shoring up of assets. Also, the extensive media glare on AUM figures may result
in unnecessary pressure on funds. At the same time, SEBI accepted AMFI’s
request on the performance disclosure of short term schemes such as overnight
fund, liquid fund, ultra-short duration fund, low duration fund, and money
market funds. SEBI said that mutual fund houses will have to disclose the
performance for a period of seven days, 15 days, one month, three months and
six months. SEBI also clarified that AMCs can disclose AUM of growth option of
both regular and direct plans. In the same letter, SEBI said it has modified
the formula of calculating the total expense ratio (TER) for beyond 30 (B30)
cities. TER is a percentage of a scheme's corpus that a mutual fund house
charges towards expenses which include administrative and management expenses. Earlier,
only 'retail' assets were included in calculating the ratio. With the new
formula, SEBI has allowed fund houses to consider both, retail and HNI assets
while calculating the ratio. The ratio at present is 30 bps of the total assets
garnered.
SEBI has
clarified that AMCs can no longer use AMC account to compensate their
distributors even if they have made a commitment. AMCs can no
longer pay upfront commission even on assets that you have brought before
October 22, 2018. In a recent clarification, SEBI has asked fund houses not to
honour their commercial commitment that they have made to distributors before
the implementation of ban on upfront commission.
AMFI has sought clarification from the
government on stamp duty tax to be levied on financial products including
mutual funds. Earlier, in interim budget 2019, the Union Finance Ministry
has announced that the government would levy stamp duty on financial securities
transactions, which includes financial instruments like direct stocks and
mutual funds. “Currently, TER does not include stamp duty tax. Hence, we have
requested finance ministry and SEBI to make necessary changes to the TER
structure. Ideally, investors should bear stamp duty tax on mutual funds.” Since
mutual funds deal with shares, every time a fund manager executes transaction,
the fund has to pay stamp duty along with securities transaction tax.
“Currently, the mutual fund industry executes transaction of Rs.5 lakh crore
each month in equity and debt markets. Hence, the impact of stamp duty would be
large. Also, the impact would be more on funds with high turnover ratio,” he
said. He further said that while government is yet to announce the rate at
which stamp duty will be levied on demat transactions, it is understood that it
would be 0.005%. This would be implemented from April 1, 2019, he said. Earlier,
the government had waived off stamp duty in transaction of securities in demat
form. However, the government has proposed to re-introduce this duty. Also,
stock exchanges will have to track origin of investors to distribute stamp duty
among states.
After the introduction of side-pocketing in
mutual funds, SEBI has now tightened norms for liquid funds following a series
of credit episodes. SEBI has decided to introduce mark-to-market valuation
for debt securities having maturity of 30 days and more. Simply put, liquid
funds may become more volatile going forward. SEBI said, “The residual maturity
limit for amortization based valuation by mutual funds shall be reduced from
existing 60 days to 30 days.” Currently, SEBI rules say that fund houses have
to do mark-to-market valuations of securities having maturity of 60 days and
more. Debt market experts believe that fund managers will reduce average
maturity on their portfolio to less than 30 days to avoid doing mark-to-market
valuation. Hence, they would sell debt instruments having maturity between 31
days and 60 days. Liquid funds have been holding debt instruments with less
than 60 day residual maturity so that they do not have to mark-to-market it
which helps in reducing volatility in liquid funds. As per the new rule, the
market to market (amortisation) limit has been reduced to 30 days which means
liquid funds will have to do mark-to-market for debt having residual maturity
between 31 and 60 days. To avoid this, liquid funds will want to move to papers
with residual maturity of less than 30 days. This will lead to increase in
yield for papers with residual maturity between 31 and 60 days and fund
turnover will increase. With stamp duty coming into picture, we can expect a
marginal decrease in liquid fund returns. SEBI further said that the difference
between traded price and price quoted by rating agencies of a security should
not exceed 0.025%. This was reduced from 0.1%. SEBI has asked AMFI to appoint
valuation agencies to provide valuation of money market and debt securities
rated below investment grade. Currently, most fund houses rely on ratings by
agencies to derive NAV. However, AMCs can deviate from valuation provided by
agencies by giving rationale for such deviations.
SEBI has asked fund houses to fund investor awareness
programs (IAPs) from their scheme accounts. As
per SEBI norms, mutual funds/ AMCs should annually set apart at least 2 bps on
daily net assets within the maximum limit of TER for investor education and
awareness initiatives. However, AMFI asked SEBI if fund houses could fund IAPs
from AMC books. AMFI asked, “It may be clarified that expenditure in connection
with investor education may be borne by both AMC and schemes, i.e., the
expenditure towards investor education and awareness initiative need not
mandatorily be charged to the schemes.” However, SEBI in its response to AMFI
clarified that fund houses can fund IAPs from AMC books only if such expenses exceed
2bps from schemes. SEBI said, “The request of AMFI in this regard is not
acceded to. Any expenses towards investor education and awareness initiatives
in excess of the amount set apart through 2 bps shall be borne by the AMC.” AMFI
data shows that 35 AMCs have conducted 8,203 programmes in 211 cities covering
over 4.03 lakh participants across the country in FY 2016-17. So far, 40 AMCs
have conducted 72,257 programmes in 485 cities, covering over 25 lakh
participants between May 2010 and May 2017.
SEBI has allowed fund houses to charge up
to 2bps of the scheme AUM or actual cost whichever is lower from AMC book for
operational expenses such as registration of SIPs, payment gateway charges,
transaction platform charges, annual custody fees, call centre fees, RTA NFO
charges, CKYC charges, KRA charges and so on. However, SEBI has clarified
that these charges have to be small in value and high in volume. In fact, SEBI
has asked AMFI to make a list of these expenses in consultation with the market
regulator through best practices circular. AMFI is expected to submit its
recommendation soon. Further, SEBI has cautioned that if they found AMCs
misusing this facility, they will take necessary action against such AMCs. SEBI
said, “Misuse of the carve-out, if any, shall be viewed very seriously and
necessary action against AMCs including withdrawal of the said carve-out
facility may also be considered.”
At times, fund
houses have to borrow money at higher rates i.e. interest rates higher than YTM
of the portfolio to meet redemption pressure. SEBI has allowed
fund houses to use AMC’s book if the borrowing cost exceeds running yield or
yield to maturity (YTM) of the scheme portfolio. In a letter sent to AMFI, the
market regulator has clarified that the cost of borrowings by a mutual fund
scheme would be adjusted against the portfolio yield and if the cost of
borrowings exceeds such a yield, then fund houses can use the AMC book to repay
additional interest on such borrowing. Simply put, if a scheme carries yield to
maturity of 8% and borrows money at 8.5% to meet its redemption pressure, the
fund house managing such a scheme has to pay additional interest of 0.5% from
the AMC book ensuring that the scheme expenses remain intact. Earlier, AMFI had
requested SEBI that the cost of borrowing made to manage redemptions in respect
of liquid funds to the extent of YTM or running yield of the fund as on the
previous day should be charged to the scheme and any excess cost over YTM or
running yield of the previous day should be borne by the AMC. SEBI norms allow
fund houses to borrow up to 20% of the total AUM to meet redemption pressure.
To strengthen its ‘Go Green’ initiative,
SEBI has asked fund houses to submit links of their advertisements by sending
an email to comply with advertisement norms within 7 days from the date of
issue of advertisements. So far, fund houses have filed hard copies of
their advertisement to comply with SEBI Mutual Fund regulations. In a circular,
SEBI said, “In continuation to the various Go Green initiatives in Mutual
Funds, the Mutual Funds are now advised to submit links to access the
advertisements to be filed under the MF Regulations by sending the same through
e-mail to SEBI at mf_advertisement@sebi.gov.in. However, advertisement
materials like pamphlets may be submitted as attachment along with e-mail, if
the size of the attachment does not exceed 250 KB.” In addition, the compliance
head of fund houses will have to ensure that these advertisements are in line
with the advertisement code. SEBI said, “While sending the e-mail, the
compliance officer of respective Mutual Fund shall expressly confirm that the
advertisement is in compliance with the Advertisement code specified in the
sixth schedule of the MF regulations.” The circular has come into effect
immediately.
In a circular, the ministry of finance has
clarified that taxpayers cannot avail benefits of composition scheme under GST
norms if they provide services in other states. Simply put, the composition
scheme does not allow distributors to avail benefits if they provide interstate
services. For instance, if a Chennai based distributor is selling the schemes
of a Mumbai based fund house, he cannot avail the benefits of composition
scheme. Since practically all distributors work with AMCs that are based out of
Maharashtra and Tamil Nadu, they cannot avail the benefits. That means only a
fraction of Maharashtra distributors who do not have business with AMCs out of
Maharashtra and earn between Rs.20 lakh and Rs.50 lakh can avail the benefits
of composition scheme. Earlier, the Union Finance Minister Arun Jaitley had
announced the introduction of composition schemes for services sector. Under
the scheme, service providers earning up to Rs.50 lakh could pay GST rate of 6%
instead of 18% with effect from April 1, 2019. However, these service providers
cannot avail input credits if they opt for the composition scheme. Also, they
will have to pay taxes quarterly but file returns annually.
Ultra HNI
population in India is expected to grow at 39% to reach 2697 by 2023, says the
Knight Frank Wealth report. India is witnessing a rapid growth in personal
wealth, states the report with the country’s ultra HNI population growing by
24% in the last five years ending 2018. Unsurprisingly, Mumbai and New Delhi
are two prominent cities in terms of Ultra HNI population in India. With 797
such individuals residing in Mumbai in 2018, the city is home to 41% of the
country’s UHNWI population. New Delhi meanwhile is home to 211 UHNWIs or 11% of
the country’s wealthy population. While Mumbai leads the country in terms of
personal wealth, Bengaluru will lead the country in terms of wealth creation
over the next five years. The city’s GDP is expected to grow by almost 60% in
the next five years. Consequently, there will be 40% increase in the cities
ultra HNI population in five years, shares the report.
