FUND FULCRUM (contd.)

April 2019

AMFI’s latest data shows that B30 cities account for 15% of the total Rs.24.6 lakh crore mutual fund industry assets. AUM from B30 cities touched Rs.3.80 lakh crore in March 2019.  A large proportion of the B30 assets (65%) come in equity funds. This is because of increasing popularity of equity among retail investors in these cities. Analysis of data shows that assets from B30 cities increased by Rs. 42,368 crore, a growth of 13%, between April 2018 and March 2019. AMFI’s investor education campaign has increased awareness about mutual funds among investors in non-metros. In addition, easy access to internet and growth in online transaction platforms, have also allowed investors, who do not have easy access to physical distribution networks, to invest in mutual funds. Distributors and IFAs have been instrumental in spreading the message of mutual funds among investors in B30 cities, be it through physical or online channels. Of the Rs.3.80 lakh crore B30 AUM, Rs.3.10 lakh crore (82%) have come through regular plans. Associate distributors or sponsors of AMCs have channelized Rs.73,390 crore through bank branches in B30 locations while the rest have been brought by non-associate distributors. Investor-wise analysis of the data shows that B30 cities account for 23% of individual assets of the industry. Individual assets include retail and HNI assets. B30 cities, however, account for only 6% of institutional assets as on March 2019.

Regulatory Rigmarole

The Securities and Exchange Board of India issued a circular to mutual funds on how to value their debt schemes when a security in the portfolio got downgraded to below investment grade. SEBI announced two measures that will make the net asset value of debt funds more realistic. Whenever any security that your debt funds hold gets downgraded to below investment grade, the designated rating agencies will now have to provide the value based on which your debt fund will have to value it. Earlier, credit rating agencies did not provide values of securities that get downgraded to below investment grade. In such cases, fund houses used to value them as per their internal guidelines. Mutual fund’s net asset value is a reflection of its underlying portfolio. If the prices of the underlying securities rise, the NAV goes up and vice versa. Since the debt market is illiquid, not all securities get traded on a given day. Hence, two rating agencies, CRISIL and ICRA are given the task of giving out valuations of all the debt securities where the debt funds have invested. They collate these prices daily and send the list to all mutual funds, as per the AMFI mandate. Debt funds refer to these prices and then compile their NAVs. But rating agencies provide prices of only those securities whose credit rating are up to the investment grade (‘BBB’). Now, SEBI has said rating agencies to provide the new values of securities also where the rating has been downgraded to below investment grade. Hence, there will now be uniformity in the way such securities will be marked.

Mutual fund houses in India were so far not permitted to invest in commodities other than gold. At most, a few fund houses had thematic funds investing in the equity of companies engaged in the commodities business. But that is set to change with the Securities and Exchange Board of India circular on March 1, 2019, permitting mutual funds to invest in commodity derivatives, with an aim to deepen the nascent commodity market. Mutual funds could either launch dedicated commodity funds or use it for hedging purpose. There is also a possibility of fund houses launching hybrid products of equity and commodities. Since SEBI started regulating commodity markets after the Forward Markets Commission (FMC) got merged into it in September 2015, the capital market watchdog had been working towards developing the commodities market by bringing in more products and participants like FPIs, insurance and mutual funds. SEBI was concerned about low participation of producers and hedgers in the commodity market. Since 2017, SEBI planned to change commodity market rules to introduce transparency, reduce risks and include new participants such as banks, mutual funds, foreign portfolio investors (FPIs) and alternative investment funds, in an effort to improve liquidity. This move will give retail investors indirect exposure to the commodities market for the first time. Commodity funds will be able to invest in a broader spectrum of commodity derivatives agricultural, metal and mining commodities such as food crops, spices, fibres, copper, aluminium, oil, gold, silver, and platinum.

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, the market regulator said, “The AUM of all schemes except liquid schemes has to be disclosed on daily basis on AMFI website.” AMFI had earlier requested SEBI to do away with the requirement of publishing the daily AUM of mutual fund 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. 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.

SEBI 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.

Fund houses have incorporated changes to their TER slabs to comply with the SEBI new norms. Earlier, SEBI announced fresh AUM slabs and gave a roadmap to fund houses on how they can make changes to their TER based on asset size of the scheme. While the market regulator has capped TER at 2.25% in equity funds and 2% in other than equity funds, SEBI has followed economies of scale to reduce TER. Similarly, fund houses cannot charge more than 1.25% in close end equity funds and 1% in close end debt funds. SEBI has also asked fund houses to charge a maximum TER of 1% on passive funds such as index funds and ETFs. On fund of funds (FOFs), SEBI has said that FOFs investing in liquid, index and ETFs cannot charge over 1%. On the other hand, FOFs investing primarily in actively managed funds can charge up to 2.25% in equity funds and 2% in other than equity funds.

SEBI has asked AMCs to set up technology committee to review their cyber security and cyber resilience framework among other things. The committee should comprise experts in technology and have at least one independent expert with relevant experience in BFSI. In a circular, SEBI said, “The role of technology related aspects has become even more critical in managing risks related to asset management business. In order to deal with various technology-related issues, AMCs are advised to constitute a technology committee comprising experts proficient in technology.” SEBI further said that forming such a committee is the need of the hour, as rapid technological advancement in securities market is having a major impact on various functions of AMCs. 

SEBI has revised the system audit guidelines for mutual funds. System audit includes both front and back office processes such as fund accounting, calculation of NAV, financial accounting and so on. SEBI has advised fund houses to implement these guidelines from the current financial year. In addition, AMCs will have to conduct their audit annually through an independent Certified Information Systems Auditor (CISA)/Certified Information Security Manager (CISM) qualified or equivalent auditor.

AMFI has asked AMCs and mutual fund distributors to update the email ids and mobile numbers of their clients to comply with its code of conduct. The trade body has asked its members and distributors to finish this task by June 1, 2019. In a recent circular, AMFI said distributors must ensure that the addresses and contact details filled in the mutual fund application form are of the investor and not of any third party. “Distributors should refrain from filling information of their own or of their employees as the investor’s contact details in the application form, even if requested to do so by investors.”AMFI further said, “It has been brought to AMFI’s attention by one of the RTAs that despite such clear guidelines, several distributors have provided their own email id and mobile numbers instead of their clients’ contact details. This is not only in violation of the AMFI guidelines, but also deprives the clients from receiving important communication sent by the AMCs. Also, the AMCs will not be able to contact the investors directly, in case of any urgent requirements.”

SEBI has asked AMCs not to spend IAP corpus on mutual fund distributors to create awareness about mutual funds among their clients. In a letter to AMFI, SEBI has pointed out instances where AMCs have used IAP corpus to create awareness among distributors’ clients through the distributor websites or magazines. SEBI said, “It has been observed that AMCs are conducting IAPs on distributor’s platforms viz. web banner, distributors sending e-mailers to investors, publishing education advertisement in monthly magazine of distributors etc.” The market regulator has clarified that such IAPs create awareness only among clients of distributors or RIAs instead of direct plan investors and new investors. SEBI said, “The cost incurred on IAP initiatives through distributors or investment advisors shall not be charged to IAP corpus i.e. 1 bps earmarked by the AMC.” AMCs cannot fund IAP conferences of IFA associations if such events are restricted to their clients. However, if they hold such events for investors at large, AMCs can use IAP corpus to fund such events. SEBI has also asked AMCs to use other modes to reach out to people at large.

SEBI has issued a consultation paper to appoint Self Regulatory Organisation (SRO) for mutual fund distributors and registered investment advisors (RIAs). Sharing the rationale for SRO, SEBI said that mutual fund distributors and RIAs are becoming important players and growing in numbers. “There are approximately 1.24 lakh distributors as on February 28, 2019 and 1136 RIAs as on March 19, 2019. Therefore, their direct supervision by SEBI would be challenging. Hence, some form of a first level regulator is required to have an oversight on them. In this view, it is proposed to have SRO(s) to regulate the mutual fund distributors and RIAs.” Further, SEBI has acknowledged the role of mutual fund distributors and RIAs and said, “To sustain this growth and to ensure deeper penetration of mutual fund products into all areas of the country, the distributors are expected to play an important role.”

Despite a growth in the number of women mutual fund managers in the past one year, they represent an abysmal 8% of the total fund managers in India, as per a report by Morningstar. Out of a total of 345 fund managers across mutual fund houses in the country, there are just 29 women fund managers who are managing funds either as primary/secondary managers or have oversight as heads of equity/debt. Last year, the number was 24. These 29 women managers handle 15% of the total AUM amounting to approximately Rs 3.41 lakh crore, up approximately 11% from last year. Interestingly, out of the total funds managed by women, three-fourths are debt funds and remaining funds are equity. Though the growth in the women manager presence is pleasing, it is still considerably below global standards with many Asian countries showing amongst the highest representation of women in the mutual fund industry.