FUND FULCRUM

May 2019

The mutual fund industry has started FY 2019-20 on a positive note. In April 2019, it added 2.80 lakh folios raising the aggregate count to 8.27 crore from 8.25 crore in March 2019. The rise in the number of folios for the 59^th consecutive month in April 2019 also helped AAUM of the mutual fund industry soar past Rs. 25 lakh crore in April 2019. The mutual fund average AUM now stands tall at Rs. 25.28 lakh crore. Since April 2019, SEBI started disclosing folios of individual debt and equity categories such as overnight funds, long duration funds, low duration funds, corporate bond funds, multi-cap funds, small-cap, and large-cap schemes among others. SEBI had disclosed consolidated folio numbers under equity, balanced, ELSS, liquid, income and gilt categories, earlier. ELSS has the highest number of folios at 1.15 crore, nearly 14% of the total folios in the mutual fund industry. AAUM in the ELSS category stood at Rs. 91,930 crore or 3.6% of the industry’s AAUM.   Next in the list of highest folio count is multicap funds category with 87.18 lakh folios or 10.5% of industry’s total folios. AAUM in multicap funds stood at Rs.1.52 lakh crore or 6% of industry share. Both ELSS and multicap funds account for 25% of the total industry folios. Large cap funds followed the two with a folio count of 81.79 lakh or 9.9% of industry’s folio share. AAUM in the large cap funds stood at Rs.1.26 lakh crore or 5% of industry’s AAUM as on April 2019. Among debt funds, the highest number of folios existed in liquid funds. Ultra short duration fund and low duration fund followed the list. In liquid funds, there were 14.51 lakh folios, which accounted for 1.8% of all the folios in the mutual fund industry. AAUM of liquid funds stood at Rs.5.11 lakh crore or 20% of industry’s AAUM. This category has the highest AAUM as institutional investors park their money in bulk. In ultra-short duration funds, there were 5.91 lakh folios or 0.7% of industry’s folio share, the second highest among income/debt oriented funds. AAUM in the ultra-short duration funds stood at Rs. 86,200 crore or 3.4% of industry’s share. In low duration funds, there were 9.22 lakh folios or 1.1% of industry’s folio share. AAUM in this category of funds stood at Rs.90,670 crore or 3.6% of industry’s AAUM.

Equity funds accounted for 42.5% of the total mutual fund industry AUM last fiscal. AMFI’s latest data shows that while the proportionate share of equity and liquid funds grew last fiscal, the share of income funds and gilt funds declined in FY 2018-19. Equity funds include pure equity funds, arbitrage funds, ELSS and balanced funds. At the end of FY 2018-19, the Indian mutual fund industry managed average AUM of Rs. 24.60 lakh crore, up 8% from Rs. 22.70 lakh crore a year ago. The proportionate share of equity funds stood at Rs.10.50 lakh crore or 42.5% of the mutual fund industry’s assets, up from 9.30 lakh crore or 41%, a year ago. Similarly, the proportionate share of liquid funds increased to Rs.5.70 lakh crore or 23.2% as against Rs.4.60 lakh crore or 20.3% a year ago. However, the proportionate share of debt funds declined to Rs.7.2 lakh crore or 29.1% of the mutual fund industry assets from Rs.8 lakh crore or 35.3% a year ago. The decline in the proportionate share of debt funds was due to credit downgrades and series of defaults post IL&FS crisis.

Association of Mutual Funds in India’s (AMFI’s) latest data shows that the mutual fund industry witnessed a massive decline of 56% in equity net inflows last fiscal. The industry saw equity net inflows reduced to Rs.1.1 lakh crore in FY 2018-19 from Rs.2.6 lakh crore in FY 2017-18. All the categories recorded a decline in net inflows due to volatility in equity markets and regulatory changes such as upfront commission ban. Among equity funds, balanced funds saw the sharpest decline in inflows in absolute terms. Net inflows into this category fell to Rs.6,865 crore in FY 2018-19 from a whopping Rs.89,757 crore in FY 2017-18. Similarly, in percentage terms, inflows in arbitrage funds plunged by nearly 120% compared to last year. Arbitrage funds registered an outflow of Rs.3,888 crore in FY 2018-19, against inflow of Rs.20,515 crore in FY 2017-18. Over the past few years, investors flocked to balanced and arbitrage funds on expectations of dividends. However, the introduction of a dividend distribution tax in equity funds has discouraged investors from investing in these categories. Pure equity and ELSS schemes also saw a decline in net inflows. Net inflows in equity funds fell to Rs.12,771 crore in FY 2018-19 from Rs.14,316 crore in FY 2017-18. While for ELSS the number came down to Rs. 99,087 crore from Rs.1,36,238. The move to ban upfront commission affected equity inflows. FY 2018-19 was a tougher year in terms of market volatility. Further, the balanced category took a hit after taxation on dividend came into play. Then the third thing was regulatory changes, especially the decision to do away with upfront commission. A fall in lumpsum investments was also a crucial factor for lower net inflows in FY 2018-19. While the growth of SIP inflows has slowed, lumpsum investments in the industry have reduced quite sharply. The fundamental reason for this was volatility in equity markets across the globe including India.

Analysis of the latest AMFI data shows that over 61% of the SIP accounts have been active for more than five years. Of the 2.62 crore SIP accounts in the industry at the end of March 2019, 1.6 crore SIP accounts have been active for more than five years. This can be attributed to the untiring efforts of advisors and financial planners in promoting goal based investing. Moreover, the perpetual SIP option introduced by fund houses also nudges investors to continue investing for longer periods. Meanwhile, 32 lakh SIP accounts have been active for less than a year. The data also shows that advisors are driving the SIP story; 89% of the industry’s SIP accounts come in regular plans. Of the 2.62 crore SIP accounts only 29.567 lakh came through the direct route. Similarly, 90% of the industry’s SIP AUM (Rs.2.4 lakh crore) comes through regular plans. Considering that direct plan numbers also include RIA activated SIPs it is evident that advisors have played a crucial role in getting investors to take the SIP route.

Piquant Parade

After NJ India applied for the mutual fund licence with SEBI, the former fund manager of Axis Mutual Fund Pankaj Murarka has shown interest in floating a mutual fund business. SEBI’s latest data shows that Pipal Securities, promoted by Murarka, applied for an mutual fund licence on April 12, 2019. With this, four new players (including Pipal Securities) have shown interest in MF business in the first four months of CY 2019. The other three players are SREI, Karvy Stock Broking and NJ India. Apart from these three companies, Geojit Financial Services, Samco Securities and Equity Intelligence India applied in 2018 for SEBI’s nod to get into the mutual fund business. Last year, Trust Investment Advisors and Muthoot Finance got SEBI in-principle approval to start their 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.

Anil Ambani led Reliance Capital has decided to exit the mutual fund business. Nippon Life Insurance of Japan announced that it would increase its stake in Reliance Nippon Life AMC to 75% subject to regulatory approval. Currently, both Reliance and Nippon Life have 42.88% stake in the Reliance Nippon Life AMC. The rest is with public shareholders. Reliance Capital will exit and offer its entire Reliance Nippon Life Asset Management shareholding to Nippon Life Insurance, and Offer For Sale to other financial investors to ensure that the minimum free float requirement of 25% is also met. With this, Nippon Life will hold 75% stake in the AMC and the rest will be with public shareholders. The new fund house may be named as Nippon Life Mutual Fund. It would become the largest fund house backed by the foreign promoter ahead of Franklin Templeton MF. Nippon Life will retain the existing management of the fund house.

Regulatory Rigmarole

The market regulator SEBI has asked fund houses to submit reports of their AI and ML activities every quarter starting from the first quarter of FY 2019-20. AMCs will have to submit their report within 10 days of the end of each quarter. The market regulator has entrusted AMFI to submit a consolidated report to SEBI and maintain confidentiality of such activities of AMCs. SEBI signalled that it would review the existing AI and ML solutions offered by AMCs. SEBI is conducting a survey and creating an inventory of the AI/ML landscape in the Indian financial markets to gain an in-depth understanding of the adoption of such technologies in the markets and to ensure preparedness for any AI/ML policies that may arise in the future. The regulator further added that most AI/ML systems are black boxes and their behavior cannot be easily quantified. Therefore, it is imperative to ensure that any advertised financial benefit owing to these technologies in investor facing financial products offered by intermediaries should not constitute misrepresentation.

Online mutual fund distributors will soon be able validate customer KYC details online through Aadhaar. A circular issued recently by the Department of Revenue, Ministry of Finance, said that companies other than banks bound under PMLA 2002 can carry out eKYC through Aadhaar based authentication. Online distributors will have to apply to SEBI for permission for eKYC services. Following SEBI’s approval, the application will be sent to UIDAI. The unique identification authority will check if the distributors comply with cyber security norms. UIDAI will then forward the application to the government for final approval. eKYC was discontinued in September 2019 after the Supreme Court directed fintech companies not to use Aadhaar based authentication. 

CAMS KRA has clarified that the Aadhaar document is considered as ‘not in good order’ and ‘liable to rejection’ if clients forget to black out the first 8 digits of their Aadhaar number. Intermediaries are requested to ensure that Aadhaar card copy, whenever attached as the official valid document, the clients black out the Aadhaar number. However, in respect to those Aadhaar documents wherever it is already masked i.e. only last 4 digits are visible, no further action is contemplated. In some cases, even the masked Aadhaar digits are visible. Hence, the most appropriate way out is to insist investors submit a photocopy of the UIDAI issued document with the initial Aadhaar digits masked. Fund houses and R&T agents can accept a copy of physical Aadhaar, e-Aadhaar, masked Aadhaar and offline Aadhaar XML. However, fund houses and R&T agents will have to ensure that the first 8 digits of the Aadhaar number are properly masked. They can only store the last 4 digits of the Aadhaar number on their system. Currently, fund houses can accept Aadhaar as KYC document to verify the address and identity of investors. However, they cannot make Aadhaar mandatory for customers nor can they do Aadhaar based authentication for eKYC.

Mutual fund houses so far were 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 SEBI issuing final guidelines on May 21, 2019, permitting mutual funds to invest in exchange-traded commodity derivatives (ETCD), with an aim to deepen the nascent commodity market. But while the capital market regulator SEBI is gung-ho about fund houses investing in commodity derivatives, mutual fund managers sounded skeptical. Commodity derivatives is a volatile space on a standalone basis. So depending on the kind of appetite in the market for commodity exposure, mutual funds will decide to launch commodity-dedicated schemes. Before trading in ETCDs, SEBI has directed fund houses to appoint a dedicated fund manager with requisite skills and experience in the commodities market (including commodity derivatives market). They have also asked mutual funds to appoint a custodian registered with the board for custody of the underlying goods, arising due to a physical settlement of contracts. If mutual funds are able to find the right fund manager with an investment mindset (not trading/speculative mindset) that would convince investors to participate in this asset class. SEBI said that prior to participating in ETCDs, the unit-holders of the existing scheme would be given at least 30 days to exercise the option to exit at prevailing net asset value (NAV) without exit load charges. Mutual funds can participate in ETCDs of a good, not exceeding 10 percent of NAV of the scheme. Mutual funds can hedge with commodities derivatives against wild swings in metals, oil and gas and other commoditised equities. This move will give retail investors indirect exposure to the commodities market for the first time.

It is vacation time again! Time for a short repose…The next blog that will appear on the last Monday of August 2019, will update you on all the happenings in the Indian mutual fund industry in the intervening period.

NFONEST

May 2019

An NFO is usually launched by a fund house to complete its product basket, or if there is a demand for a particular investment theme. AMCs tend to launch newer funds and come out with ideas when that theme is hot property in the market. Often, the funds are launched when the underlying theme is at its peak. If you invest at such a time, it may leave you with a sour taste. Try to ascertain the investment rationale for the theme and if it can hold sway over time. When investing in sectoral or thematic funds, investors must be mindful of the timing. NFOs of mid- and small-cap funds may yield varying results depending on the entry point.  During the NFO phase, the investor only has a rough idea about the maximum charges that will be levied by the scheme. The actual total expense ratio is disclosed only later. Newer funds initially charge a higher expense ratio as their corpus is very small. As its asset base expands, the costs start coming down. Investors should be mindful of the higher cost burden. It is advisable to go with existing schemes that come with an established track record than for a totally new offering. Investors should invest in an NFO only if it has something different to offer, which cannot be achieved through an existing fund. Consider the NFO only if it addresses a specific gap in your portfolio. Otherwise investors should wait for the fund to prove its credentials. Avoid setting up a SIP during a fund’s NFO phase. Once you are convinced of the fund’s execution capabilities, you can initiate a long-term SIP in it. The NAV of the fund at the time of investment has no bearing on the return you can expect. Low NAV during NFO does not mean it is cheaper. A quality fund is equally worth the bet whether its NAV is at Rs 10 or Rs 1,000.

The lone NFO from DSP Mutual Fund adorns the May 2019 NFONEST.

DSP Quant Fund

Opens: May 20, 2019

Closes: June 3, 2019

DSP Mutual Fund has launched the DSP Quant Fund. The name ‘quant fund’ indicates that the use of quantitative factors will decide the course of the investment. The DSP Quant Fund is an open-ended equity scheme that will systematically follow investment rules tested over market cycles with minimum human biases. A quant model with minimum human bias will drive the fund's stock selection and allocation. For portfolio creation, the fund will follow a three-step process – elimination, selection and assigning weights. The scheme’s investment universe will consist of stocks in the BSE 200 index. The elimination process will screen out companies that have very high debt, excessive price volatility and inefficient capital allocation. The remaining companies will be ranked based on multiple factors that gauge quality, growth and value. Consequently, about 50 companies will be shortlisted. These companies will be assigned appropriate quantitative weights.  The scheme’s portfolio will be rebalanced bi-annually. The DSP Quant Fund is a mix of converting good investment principles, of having good companies at good prices held for long periods of time, into rules and then following these rules consistently without our personal biases. These rules have been tested for their effectiveness in generating better-than-benchmark returns. The fund is benchmarked against the S&P BSE 200 TRI Index. Mr. Anil Ghelani will manage the fund.

Aditya Birla Sunlife Mutual Fund Pharma and Healthcare Fund, Aditya Birla Sunlife Mutual Fund Banking ETF, LIC Mutual Fund Overnight Fund, Axis Nifty 100 Equity Fund, Aditya Birla Sunlife PSU Equity Fund, Sundaram Equity Fund, Motilal Oswal Nifty Bank Fund, Motilal Oswal Nifty 500 Fund, ICICI Prudential Bank ETF, Motilal Oswal Nifty Midcap 150 Fund and Motilal Oswal Nifty Smallcap 250 Fund are expected to be launched in the coming months.

GEMGAZE

May 2019

All the GEMs from the 2018 GEMGAZE have performed reasonably well through thick and thin and figure prominently in the 2019 GEMGAZE too. 

Reliance ETF Nifty BeES Gem

Incorporated in December 2001, Reliance ETF Nifty BeES (formerly known as Goldman Sacs Nifty ETF Fund) has an AUM of Rs 1261 crore. The one-year return of the fund is 6.62% as against the category average return of 3.34%. The top five stocks constitute 39.79% of the assets of the fund. The top three sectors finance, energy, and technology constitute 68.54% of the assets of the fund. The expense ratio of the fund is 0.11% and the turnover ratio is 149%. The fund is benchmarked against the Nifty 50 Total Return Index. The fund is efficiently managed by Mr. Vishal Jain since November 2018.

ICICI Prudential Nifty Index Fund Gem

The Rs 372 crore ICICI Prudential Nifty Index Fund incorporated in February 2002, has earned a one-year return of 5.57% slightly ahead of the category average return of 3.34%. Top five holdings constitute 39.28% of the portfolio. 68.77% of the assets are invested in finance, energy and technology, the top three sectors. While the portfolio turnover ratio is 41%, the expense ratio is 0.75%. The fund is benchmarked against the Nifty 50 Total Return Index. The fund is managed byMr. Kayzad Eghlim since August 2009.

Franklin India Index Fund Gem

Franklin India Index Fund, incorporated in August 2000, has an AUM of Rs 265 crore. Its one-year return is 5.39%, slightly higher than the category average return of 3.34%. Top five holdings constitute 38.68% of the portfolio. 67.81% of the assets are invested in finance, energy and technology, the top three sectors. The expense ratio of the fund is 1.08%. The fund is benchmarked against the Nifty 50 Total Return Index. The fund is managed by Mr. Varun Sharma since November 2015.

HDFC Index Fund – Sensex Plan Gem

HDFC Index Fund - Sensex Plan is a seventeen-year old fund with an AUM of Rs 361 crore. Its one-year return is 7.07%, a tad better than the category average of 3.34%. Top five holdings constitute 46.39% of the portfolio. 68.43% of the assets are invested in finance, energy and technology, the top three sectors. The expense ratio of the fund as well as the turnover ratio is low at 0.3% and 16% respectively. The fund is benchmarked against the S&P BSE Sensex TRI. The fund has been managed by Mr. Krishan Kumar Daga since October 2015.

                   

UTI Nifty Index Fund Gem

Incorporated in March 2000, UTI Nifty Index Fund has an AUM of Rs 1321 crore. The one-year return of the fund is 6.33% ahead of the category average of 3.34%. Top five holdings constitute 39.02% of the portfolio. 63.52% of the assets are invested in finance, energy and technology, the top three sectors. The portfolio turnover ratio is a moderate 16% and the expense ratio is very low at 0.17%. The fund is benchmarked against the Nifty 50 Total Return. The fund is managed by Mr. Sharwan Kumar Goyal since July 2018.

FUND FLAVOUR

May 2019

Passive strategy…

Index funds, as the name suggests, invest in an index. These funds seek to invest in all the underlying securities in the same proportion as that of the index. The objective of an index fund is to replicate the performance of the index. These types of funds are passive funds. They do not require active management. The success of the index fund is determined by how close it is able to replicate the performance of the underlying index it is copying. This is measured by tracking error. An investor should invest in index funds should they have any reservations with respect to the ability of a fund manager in generating alpha over the benchmark returns. Further, if an investor is looking to play a low-cost strategy, index funds are best suited. Furthermore, index funds are also helpful to remain fully invested in equity at all times. For investing in an index fund, an investor has three options generally:

§  A fund that tracks the Sensex – 30 stocks

§  A fund that tracks the Nifty – 50 stocks

§  Index plus fund – Fund invests a portion in an index and the remainder is actively managed

…pays…

There are multiple benefits for investing in Index Funds. Few of them are given below.

Less Influenced by Fund Manager

The influence of the fund manager in these types of funds is very less. It removes the real risk of fund manager error. Funds are passively managed and tracking to specific index is only required by the fund manager.

Lower Expenses

The expense associated with these types of funds is very low. Typically, the range for these funds is around 0.2-0.5%, which is much lower than the 1.3-2.5% often seen for actively managed funds. The main reason is these types of funds eliminate the requirement of a dedicated team of research analysts to carry out stock analysis. The fund has to simply replicate the index, so expense ratio of these funds is very low. The lower expenses lead to a better return.

Diversification and Risk

As the index is made up of multiple funds, these funds are well diversified in nature. Asset allocation is managed automatically. It indirectly reduces the risk associated with these funds.

Tax-efficient

Index funds pay fewer dividends than actively managed mutual funds and they also have a low turnover rate. (Low turnover refers to the amount of funds that have been replaced, or turned over, during a given year, which results in capital gains taxes.) Low turnover equals low taxes, so index funds are a great place to park your money if you are interested in lowering your tax bite.

Suitable for the Efficient Market

As markets become efficient, it gets difficult for fund managers to beat their benchmarks. In this scenario, passive funds become the preferred investment vehicle.

A "set it and forget it" format allows you to invest in the index fund .You do not have to track individual stocks or indices every day.

It is true that over the short term, some mutual funds will outperform the market by significant margins. Picking those high performers from the literally thousands out there is almost as difficult as picking stocks yourself! Whether or not you believe in efficient markets, the costs that come with investing in most mutual funds make it very difficult to outperform an index fund over the long term.

…or does it not?

An investor buying into an index fund gives up the chance of beating the market by picking a good actively managed fund.

No Alpha or Outperformance

Active fund managers seek to outperform the benchmark index. Thus, if you have invested in passive funds, do not expect any outperformance as these funds are not actively managed and are only a replica of the index.

Mature companies only

Index companies tend to be mature companies who have their best growth years behind them. Investors in such funds do not benefit from the growth potential of small companies.

Expensive Valuations

Companies in the index have been discovered by the market. In other words, investors are buying stocks which are already expensive.

Before you leap, look into a few things…

Identify the Index for your portfolio

The first step is identification of index (Sensex, Nifty) suitable as per your risk appetite. You should see the stocks where investment is made by the index.

Tracking Error

You should also look at the tracking error. Lower the tracking error better is the index fund. It is a parameter that reflects an ability of a fund to replicate the performance of the benchmark index.

Performance of Fund

Performance of fund is another important parameter. You should compare the performance of the fund with a benchmark index to get an actual idea. Apart from that peer comparison is also important.

Expense Ratio

Expense ratio is another important factor for the selection. The expense ratio of the index fund should be low. You should avoid the fund which unnecessarily charges higher administration and other expenses. On the other hand, do not select funds only on the basis of expense ratio.

Index investing in India

Most index funds in India track the benchmark indices – Nifty and Sensex. The Nifty Next 50 is another popular index. It is an index of the 50 largest stocks that follow the Nifty 50 stocks. The Nifty Value 20 (NV) Index is another popular index for trackers (through ETFs). The Nifty Value 20 tracks relatively undervalued stocks as measured by parameters like PE or Price to Earnings ratio, PB or Price to Book ratio, Dividend Yield and Return on Capital Employed (ROCE). The NV 20 has 5 year returns of 11.97% and 1 year returns of 8.55%. It is tracked by ETFs like ICICI Prudential NV 20 ETF and Kotak NV 20 ETF. Other indices like the Nifty Low Vol 30 ETF are also being tracked by ETFs like ICICI Nifty Low Vol 30 ETF. The Nifty Low Vol 30 tracks stocks with relatively low volatility. It has 5 year returns of 15.92% and 1 year returns of -0.52%. The largest Index Fund in India with respect to size is the UTI Nifty Index Fund with a corpus of Rs. 936 crore. However, it is the ICICI Prudential Nifty Next 50 Index Fund that has yielded the highest 3-year and 5-year returns of 13.44% and 21.87% respectively. HDFC Index Fund Nifty 50 tops the returns chart with a one-year return of 18.17% closely followed by UTI Nifty Index Fund at 17.98%.

Warren Buffett made a very interesting observation that 60 years ago or so if he had put in money in index funds vis-à-vis gold, the kind of returns he would have made would have been incomparable or phenomenal. Talking about index funds back home, they have a low expense ratio versus other funds. But it does not have a very compelling case for investment in India simply because

a) When Buffett is talking of index or the largest index fund in the world, he is talking of S&P 500. In India, we do not have a broad-based index. Our markets are very narrow and very shallow. 

b) When we talk of S&P 500, they are made up of globally competitive businesses built in a very competitive environment of free market, whereas in India, our markets are not free. All the segments of the economy are not publicly listed and traded.  

c) At a certain level, indexing becomes a self-fulfilling virtuous cycle in a way that if you have a lot of pension funds and if you have a lot of money getting into index funds then index funds themselves become drivers. In that sense, large proportion of money flowing into index fund itself sustains the index and we are beginning to see some of those variables falling in place in India in the last three and a half years. 

We saw the emergence of India’s largest equity fund -- Nifty ETF. This has become a Rs 45,000-crore fund and that can be attributed to Employee Provident Fund making its investments there. We have mandatory savings flowing into equity, because institutional money generally finds index funds attractive as they do not have anybody to blame for underperformance or outperformance and are able to account for it more efficiently. So that way NPF money, EPF money flowing into index funds itself is a driver but the reason why index funds have not taken off in India in the last 20 years is because actively managed funds have delivered superior returns despite high expenses. Expenses might come down and index funds might have a stronger case in the future but the jury is still out. We do not have the index vehicles to invest in the multicap and the smallcap segments, where magic happens in India.