FUND FULCRUM

August 2019

Average Assets Under Management (AAUM) of the Indian Mutual Fund industry for the month of July 2019 stood at Rs 25,81,026 crore. Assets Under Management (AUM) as on July 31, 2019 stood at Rs 24,53,626 crore. The AUM of the Indian Mutual Fund industry has grown from Rs 7.22 lakh crore as on July 31, 2009 to Rs 24.54 lakh crore as on July 31, 2019, about three-and a-half fold increase in a span of 10 years. The Mutual Fund industry’s AUM has grown from Rs 10.06 lakh crore as on July 31, 2014 to Rs 24.54 lakh crore as on July 31, 2019, about two-and a-half fold increase in a span of 5 years. The industry’s AUM had crossed the milestone of Rs 10 lakh crore for the first time in May 2014 and in a short span of about three years, the AUM size had increased more than two folds and crossed Rs 20 lakh crore for the first time in August 2017. The industry AUM stood at Rs 24.54 lakh crore as on 31st July, 2019. The mutual fund industry AUM inched closer to a landmark figure of Rs. 26 lakh crore as the industry assets touched Rs. 25.93 lakh crore in May 2019. The total number of accounts (or folios in mutual fund parlance) as on July 31, 2019 stood at 8.48 crore, while the number of folios under equity, hybrid and solution-oriented schemes, wherein the maximum investment is from retail segment stood at 7.62 crore. Analysis of the latest AMFI data shows that around 48% of the industry’s assets are invested in equity schemes and hybrid schemes. This is the 62nd consecutive month witnessing a rise in the number of folios.

Assets under management of the mutual fund industry stood at Rs 24.5 lakh crore at the end of July 2019, up by a percent month-on-month (MoM), according to data from Association of Mutual Funds in India (AMFI). Mutual funds saw a total inflow of Rs 87,087 crore in July 2019, mainly driven by large inflows into equity, liquid and money market funds and exchange-traded-funds (ETFs) while credit risk fund saw capital outflows. While the inflows were healthy, overall AUM growth in July 2019 was almost flat as equity markets saw the worst performance with Nifty falling by 7 percent in July 2019. Despite weak equity markets, inflows into equity schemes increased by 7 percent MoM in July 2019. Equity SIPs continued to steadily inch up, reaching an all-time high. Liquid and money market funds had inflows of around Rs 56,000 crore in July 2019 after an outflow of over Rs 150,000 crore in June 2019. This was on expected lines. Corporates that are active investors in liquid funds tend to redeem their investments to meet advance tax payment ahead of June deadline and return to investing in the subsequent month. Open-ended equity schemes saw inflows of Rs 8,113 crore, while there was a small outflow of Rs 21 crore in close-ended equity plans, taking the total equity inflows to Rs 8,092 crore in July 2019. Investors seem to have opportunistically used the correction in markets to invest into equities. Within the equity universe, large and mid-cap funds saw strong inflows in July 2019. The pattern of equity flows in July 2019 indicates that investors probably are expecting a faster recovery in large and mid-cap stocks while they remain disinterested in small caps. While overall equity flows can be erratic, investment in equity funds through systematic investment plans (SIPs) comes as a silver lining, with a tally of Rs 8,324 crore in July 2019, an all-time high.

Among the top 10 asset management companies by AUM, HDFC MF, ICICI Prudential MF, and SBI MF continued to remain the top three fund houses. HDFC MF, with a 5.92 percent rise in assets, continued to remain the top fund house with an AUM of Rs 3.62 lakh crore. ICICI Prudential MF stood second with average assets rising 5.14 percent QoQ, followed by SBI MF (8.36 percent) and Aditya Birla Sun Life MF (3.04 percent). Of the top 10 fund houses, only two MFs registered a drop in average AUM: Reliance and UTI. This is the second consecutive quarter where Reliance MF posted a drop in AUM. With a fall of 4.73 percent, or by Rs 11,041 crore, the AUM of Reliance MF fell to Rs 2.22 lakh crore. However, the fund house retained its fifth position. Despite a 1.14 percent fall in the average AUM, UTI MF retained the seventh spot. Among the notable trends in terms of AUM growth was PPFAS MF that saw 17 percent growth and Quant MF which witnessed a 10 percent AUM rise during Q1 FY20. JM Financial MF, IDBI MF, DHFL Pramerica MF, BOI AXA MF, Yes MF and Essel MF were among the fund houses that registered a sharp decline in their average AUM. Of the 44 fund houses, as many as 26 MFs grew their asset base in the April-June quarter, while the rest saw a decline in their AUMs.

AMFI data shows that the Rs 25 lakh crore mutual fund industry is concentrated in favour of the large fund houses. Most bank-promoted fund houses have a robust presence in B-30 cities through their sponsors and associates because they are able to attract more customers through their branches. The top 15 AMCs (based on AUM) constitute 94% of the industry’s total folio count in FY 18-19. The number was similar in FY 2017-18 as well. The total folio count of these top 15 fund houses grew 14% from 6.62 crore in FY 2017-18 to 7.54 crore in FY2018-19, an increase of over 92.16 lakh folios in a year. Axis MF, SBI MF and ICICI Prudential MF added the highest number of folios last fiscal, according to AMFI data. While Axis MF added 11.66 lakh folios last fiscal, SBI MF added 11.21 lakh folios and ICICI Prudential MF 10.52 lakh new folios. Aditya Birla Sun Life MF and HDFC MF follow at 4th and 5th position with 10.38 lakh and 9.85 lakh new folios, respectively. These fund houses have strong presence. In percentage terms, Mirae Asset Mutual Fund recorded 50% growth in new folio creation last fiscal among the top 15 fund houses. Overall, PPFAS MF saw 321% growth in terms of new folio addition. However, not all the fund houses saw an increase in new folios. Two fund houses – DHFL Pramerica MF and Sahara MF – witnessed a decline in their number of folios. Kotak MF and Quant MF have been excluded as their folio data was not available on the AMFI website.

Piquant Parade

Mahindra & Mahindra Financial Services subsidiary, Mahindra Asset Management Company, has entered into 51:49 joint venture with global financial services group, Manulife. The joint venture with Manulife will be signed by Manulife Asset Management (Singapore) Pte Ltd. With 49 percent stake Manulife will bring in $35 million into the business. Toronto-headquartered Manulife, operates as John Hancock in the US, providing wealth and asset management, and life insurance services. As of March 31, 2019 the assets of Manulife stood at $849 billion (Rs 58.98 lakh crore). It largely has operations in Asia, Canada and the US. Manulife is a leader in Hong Kong and second largest player in Indonesia. Anand Mahindra-promoted M&M Finance is the parent of Mahindra AMC, which is among the smaller asset management companies in India, with assets under management of a little under Rs 5,000 crore.

KKR-backed Avendus is in the fray to acquire IDBI Asset Management Company months after talks fell through in its attempt to buy IDFC Asset Mutual Fund. Along with Avendus, four other fund houses—Mahindra, IIFL, Edelweiss and Motilal Oswal are said to be in the fray to acquire IDBI AMC. LIC is seeking a valuation of Rs 350-400 crore for IDBI AMC, which is four percent of its total AUM of Rs 9,297 crore as at the end of March 2019. Generally, fund houses are valued at 4-5 percent of their total AUM. IDBI Bank had floated a request for proposal (RFP) to divest complete stake in the AMC. IDBI Bank has appointed ICICI Securities to advise it on the sale of its mutual fund business. Ballooning losses at IDBI Bank may have prompted LIC to sell-off the bank’s MF arm IDBI AMC. In FY19, IDBI Bank reported a net loss of Rs 15,116 crore as against a net loss of Rs 8,238 crore in FY18.

Regulatory Rigmarole

Following the recent crisis in debt mutual funds, capital and commodity markets regulator Securities and Exchange Board of India (SEBI) is considering a proposal to make fund managers more accountable—by linking their remuneration to the performance of the schemes managed by them. If SEBI implements such norms, good fund managers may not want to stay in this business. Mutual Fund CEOs get between Rs 7-30 crore in annual remuneration. But SEBI’s proposal is nothing radical. In fact, SEBI merely seems to have taken a leaf out of banking regulator Reserve Bank of India’s (RBI’s) book. A couple of months back, the RBI had framed guidelines linking the compensation of private sector bank CEOs and directors to the performance of their respective banks. Among other things, the guidelines clearly spell out financial penalty and clawback clauses. Also, joining bonuses can be paid in the form of stock options only. Even before these guidelines, bonuses and stock options for private sector bank bosses had to be cleared by the RBI. There is a debate on whether the rules for fund manager remuneration and bank CEOs can be the same, given that financial markets are prone to wild fluctuations, while the banking business is not. The other debate is if the remuneration rules should be applicable to just debt funds or for equity fund managers as well. Industry sources question the need for SEBI to set the rules for fund manager remuneration, as that is not the trend globally. In 2016, SEBI had mandated all mutual fund houses to disclose the salaries of their top officials. The move was aimed at improving disclosure standards in the industry. Globally, bonuses and incentives paid to fund managers are based on parameters like fund performance relative to peer group and benchmark indices.

SEBI intends to tighten norms on issue of debt instruments with promoters’ shares pledged as collateral. The move comes after several mutual funds experienced payment delays from companies over such instruments, commonly called loans against shares (LAS). There have been calls to ban loans against shares, but SEBI is opposed to such a plan at the moment. The understanding within SEBI is that as long as all the risks relating to these instruments (LAS) are adequately covered, they should not be banned since these are a popular source of funds for promoters and entrepreneurs. The RBI has similar rules for banks and non-banking financial companies (NBFCs), where it prescribes a minimum collateral cover for lending against shares.

SEBI might restrict the amount of credit exposure that can be taken by certain debt mutual funds. Modifying existing norms will help mitigate the risk in medium and shorter-tenure debt funds by restricting credit risk. At present, most debt fund categories do not have limits on credit exposure. Ten out of the 16 categories are based on duration. The market regulator had in October 2017 introduced the classification of schemes into various categories. Credit risk funds are currently required to invest 65 percent of their portfolio in papers rated ‘AA’ or below. Corporate bond funds are mandated to maintain 80 percent of their assets in the highest rated papers. Any scheme duplicating the portfolio of a credit risk fund should be labelled as such. The regulator needs to step in to ensure investors do not take on higher risk without their knowledge. SEBI's credit portfolio definition could level the playing field between fund managers of medium and shorter term duration schemes. The move could also make debt MFs less attractive as it would lower returns. One fund house has asked SEBI to divide the categories into sub-divisions – one that take credit risks and the other which invests in the highest-rated papers. But such a move could lead to creation of a large number of sub-categories.

With an aim to safeguard mutual fund investors from high-risk assets, regulator SEBI wants fund houses to shift all their investments to listed or to-be-listed equity and debt securities in a phased manner and reduce their exposure to unrated debt instruments from 25 percent to only 5 percent. Further, the existing provision of the single issuer limit of 10 percent for investment in unrated debt instruments has been proposed to be dispensed with. These proposed limits may need to be reviewed periodically by SEBI after taking into account the market dynamics and participation of mutual funds in unrated debt securities from time to time. Among other decisions which have been in-principle already approved by the SEBI board and need to be incorporated in the amended regulations, the valuation of debt and money market instruments based on amortisation would be dispensed with and would shift completely to mark-to-market valuation with effect from April 1, 2020. Also, mutual funds would be permitted to accept upfront fees with disclosure of all such fees to valuation agencies and standard methodology for treatment of such fees would be issued by the industry body AMFI in consultation with SEBI. Under the new proposed prudential framework, mutual funds would invest only in listed or to-be-listed equity shares and debt securities (including commercial papers) and this would be implemented in a phased manner. SEBI would soon issue a circular on operational aspects of the proposal such as timelines, grandfathering of existing investments, exclusion of exposure in debt instruments such as interest rate swaps, etc. The existing regulations allow a mutual fund scheme to invest a maximum of 10 percent of its net asset value in unrated debt instruments issued by a single issuer while the total investment in such instruments is capped at 25 percent. However, pursuant to SEBI's decision to allow mutual funds to invest only in listed securities, very limited number of instruments that are unrated would be eligible for investment by the mutual funds, as all listed debt instruments are mandatorily rated. After excluding debentures, government securities, interest rate swaps, interest rate futures, repo on G-Sec and T-bills, the mutual funds' investments in unrated debt instruments are mostly in fixed deposits, bills re-discounting (BRDS), mutual fund units, repo on corporate bonds, units of REITs/InvITs (Real Estate and Infrastructure Investment Trusts), etc. However, SEBI already has separate investment norms for fixed deposits (FDs), mutual fund units, repo of corporate bonds and REITs/InvITs and the exposure to these instruments does not form part of the existing 25 percent investment cap. Excluding all these instruments, the total exposure of mutual funds in the remaining unrated debt instruments is mostly in BRDS, amounting to about Rs 2,870 crore as on March 31, 2019. Besides, this investment is limited to just four mutual fund schemes and the average value of investments as percentage of the respective scheme's asset under management was just about 3 percent.

SEBI has issued a clarification regarding 'parking of funds in short-term deposits of scheduled commercial banks by mutual funds -- pending deployment'. "Trustees/ asset management companies (AMCs) shall ensure that no funds of a scheme are parked in STD (short-term deposit) of a bank which has invested in that scheme," SEBI said. Further, it said trustees and AMCs should ensure that the banks in which a scheme has STD do not invest in the same scheme until the scheme has STD with such banks.

SEBI reportedly asks mutual funds to put folios carrying withheld commission under direct plan. AMCs have withheld commission due to a number of reasons such as claw back of commission, failed transaction, incomplete KYC and so on. Moreover, a few distributors sell schemes of fund houses without empanelment. In such a scenario, AMCs withhold commission and ask distributors to get empanelled with them to get their commission. It is pertinent to mention here that SEBI had given a three-month window ending on May 21, 2019 to fund houses to pay withheld commission to distributors till May 21, 2019. Although AMFI has reportedly sought SEBI clarification if this three-month window is applicable on assets with incomplete KYC, the circular in the current form states that AMCs cannot pay withheld commission after May 21, 2019.

A long-awaited demand of the mutual fund industry that bank KYC should suffice for mutual fund investments may come true soon. A high level RBI committee on ‘Deepening of Digital Payments’ has pitched for simpler KYC norms in financial services industry that would help mutual funds industry grow. The committee has recommended RBI that there is no need to do multiple KYC for various financial investments; instead, bank KYC should be enough to invest in mutual funds and insurance. The committee said, “In the short term, the committee recommends that for certain use cases, where the first transaction is from a verified KYC’ed account of the same user, a simple KYC process may be used.  For instance, opening a mutual fund account by funding it from a KYC compliant bank account while restricting that the folio continues to be funded from and money refunded into that same account,” the report noted. If the central bank’s recommendation becomes a reality, it would simplify customer onboarding by reducing the turnaround time to acquire a new client. Talks of making bank KYC as a valid proof to invest in mutual funds have picked up pace in the past 2-3 years. Reports had said that the launch of central KYC (CKYC) registry agency could eliminate the need to do fresh KYC for investing in mutual funds, if investors are already KYC compliant with either banks or capital markets. However, banks are yet to share KYC details on CKYC platform. CKYC registry will link different identity proofs like PAN, Aadhaar and passport of an individual to help track all financial transactions.

Acknowledging the crucial role played by whistleblowers in helping SEBI identify and catch entities engaged in insider trading, the regulator has proposed new norms for incentivizing and protecting the informant. Accordingly, the paper recommends norms to help maintain the anonymity of the whistleblower and sets rules in place to prevent him from being penalized. The paper also proposes incentivizing the informant with monetary reward if it leads to recovery of at least Rs. 5 crore by SEBI. As per the proposed amendments to Prohibition of Insider Trading (PIT) regulations, the informant would need to submit the voluntary information disclosure form (VIDF) to SEBI sharing complete details about the insider trading activity to SEBI. The informant can either submit the information anonymously through a practicing advocate or by himself. A separate body (Office of informant protection (‘OIP’)) will act as intermediary between the SEBI board and the informant. The body will verify the authenticity of the information provided by the whistleblower and calculate and disburse the monetary reward to the informant. SEBI will try to maintain the confidentiality of the informant at all costs unless his presence is required during the proceedings. The OIP will also be responsible for maintaining the confidentiality of the informant from both the SEBI board and the accused. The OIP will establish a hotline to facilitate the submission of information to SEBI. The information received by the OIP will be processed by respective SEBI departments. If the information leads to recovery of greater than Rs. 5 crore, then the informant will receive a reward of 10% of the monies collected up to Rs. 1 crore. SEBI may also give an interim reward up to Rs. 10 lakh to the informant at the time of issuing final order. The reward will be paid from the investor protection and education fund (IPEF) as all monies removed from the case, will be deposited in IPEF too. SEBI has also issued guidelines to prevent harassment of the whistleblower. In addition, to dissuade frivolous complaints by informants, SEBI has laid down penalties for such complaints. Moreover, to encourage the guilty parties to confess, the guidelines allow SEBI to show some leniency in terms of prosecuting confessors.

The mutual fund industry failed to get any sops from yet another budget. Mutual fund industry had readied a long list of demands from the finance minister. The most important among them was roll-back of long term capital gains tax, re-introduced in the previous budget, on equity mutual funds. However, it did not find any mention in finance minister’s budget speech. The only move directly impacting the mutual fund industry, announced in this budget was bringing CPSE ETFs in line with the ELSS. ETFs have proved to be an important investment opportunity for retail investors and have turned out to be a good instrument for Government of India’s divestment programme. To expand this further, government will offer an investment option in ETFs on the lines of Equity Linked Savings Scheme (ELSS). This would also encourage long term investment in CPSEs.

The rising clout of SIP has been a standout feature and is the key to the success story of the mutual fund industry as the flows are stickier and lend high visibility and predictability of AUM growth. If the current monthly run rate of SIP at Rs 8,000 crore is maintained, the MF industry is expected to see equity inflows of nearly Rs 100,000 crore in 2019-20, which is sizeable by any standard. Monthly equity inflows have come off significantly from the high of Rs 20,308 crore in November 2017. That said, the underlying trend is very encouraging. Mutual Fund industry was for long considered cyclical with fortunes linked to vagaries of capital markets. The spike in equity flows despite the lackluster union budget and a strong bout of FPI selling in July 2019 indicates that cyclicality in the flows, though inherent to MF industry, has largely reduced. As a matter of fact, structural factors are driving the growth of the AUM. The gradual but steady shift of household savings away from physical to financial assets has been the key catalyst for mutual fund growth. The trend, referred to as “financialisation of savings” received fillip after demonetisation resulting in a sharp uptick in inflows for MF industry which many believed to be a one-off effect. However, the increasing share of mutual funds within financial savings is not a mere chance. MFs have now become a mainstream investment vehicle with households increasingly favouring MFs to bank deposits which hitherto were the most preferred vehicle for parking savings. Consequently, individual investors now hold a higher share of MF assets at around 54.3 percent as at the end of June 2019 according to AMFI. Resilient SIP inflows also point towards buoyancy in retail flows. Retail investors, who traditionally took out money following a year of negative returns, are now a changed lot.