FUND FULCRUM

October 2019

Of the total 41 fund houses, 27 have witnessed a decline in their AAUM in July-September 2019. The industry’s total AAUM rose by 0.7% to Rs. 25.68 lakh crore from Rs. 25.51 lakh crore in April-June 2019. On a quarterly basis, this is the slowest increase in MF industry’s overall assets since October-December 2018, the immediate quarter after IL&FS default, according to AMFI data. While 27 fund houses witnessed their AAUM shrink in July-September 2019, most emerging fund houses faced the heat. Among the 20 fund houses at the bottom, only BNP Paribas Mutual Fund, Mahindra MF, PPFAS MF, Quantum MF and Shriram MF were the fund houses that saw an increase in their AAUM. Nevertheless, the decline was not limited to the bottom of the pyramid. The steepest fall was witnessed in the 5th largest fund house Nippon India MF, earlier known as Reliance MF. The fund house’s AAUM declined by nearly Rs.20,000 crore or 9% this quarter. The overall AAUM for the MF industry, however, did not witness a decline. This was largely because of the fact that the top three fund houses - HDFC MF, ICICI Prudential MF and SBI MF, continued to increase their assets at a healthy pace. HDFC MF’s AAUM rose by more than Rs 14,000 crore or 4% to Rs. 3.77 lakh crore. ICICI Prudential MF’s AAUM increased by Rs. 10,781 crore to Rs. 3.48 lakh crore. And SBI MF’s average AUM surged by Rs. 13,128 crore or 4% to Rs. 3.21 lakh crore. Among other fund houses that did exceptionally well are IDFC MF and Mirae Asset MF. While Mirae Asset MF’s AAUM rose by more than Rs 4,000 crore or 14% to Rs 33,282 crore; in case of IDFC MF the AAUM surged by more than Rs 11,870 crore or 14% to Rs 94,150 crore.  

The mutual fund industry has added 3.45 lakh investor accounts in September 2019, taking the total tally to 8.56 crore, amid volatile market conditions. In comparison, the industry had added 4.8 lakh new folios in August 2019 and more than 10 lakh folios in July 2019. According to data from Association of Mutual Funds in India, the number of folios with 44 fund houses rose to 8,56,26,244 at the end of September 2019, from 8,52,81,222 at the end of August 2019, registering a gain of 3.45 lakh folios. The total folio count stood at 8.48 lakh in July, 8.38 lakh in June, 8.32 lakh in May and 8.27 lakh in April. The addition of folios suggests that investors were undeterred by the market volatility. Besides, it indicates their understanding of the market risks associated with the mutual fund schemes. Meanwhile, the BSE's benchmark Sensex rose 3.6 percent last month. The number of folios under the equity and equity-linked saving schemes rose by 2 lakh to 6.18 crore at the end of September 2019 as compared to 6.16 crore at the end of the preceding month. The debt oriented scheme folio count went up by more than 92,000 to 67.67 lakh. Within the debt category, liquid funds continued to top the chart in terms of number of folios at 17 lakh, followed by low duration fund at 9.25 lakh. Overall, mutual fund schemes witnessed redemption of Rs 1.52 lakh crore in September 2019 as compared to an inflow of Rs 1.02 lakh crore in August 2019. The massive redemptions could be attributed to debt-oriented schemes, which saw an outflow of Rs 1.58 lakh crore. Besides, equity mutual funds witnessed a net inflow of around Rs 6,489 crore in September 2019, the lowest in the last four months, due to profit-booking by investors after a rally in markets following a reduction in corporate tax.

Retail investors are prefering the SIP option for investing in mutual funds, as the industry garnered more than Rs 49,000 crore through this route in the first six months of the current fiscal, up 11 per cent from the period a year ago. A total of Rs 44,487 crore was collected through such investment plans in April-September 2018, as per the Association of Mutual Funds in India (AMFI). Systematic investment plans or SIPs have been the preferred route for retail investors to invest in mutual funds as it helps them reduce market timing risk. As per the data, SIP contribution in April-September 2019-20 stood at Rs 49,361 crore. Inflows into SIPs have averaged about Rs 8,000 crore for the 12 months till September 2019. Over the past few years, inflows through SIPs have been showing an upward trend. Investments of close to Rs 92,700 crore through the mode were seen in 2018-19, from over Rs 67,000 crore in 2017-18 and more than Rs 43,900 crore in 2016-17. Currently, mutual funds have 2.84 crore SIP accounts through which investors regularly invest in Indian mutual fund schemes. The industry, on an average, added 9.29 lakh SIP accounts each month during the current fiscal (2019-20), with an average ticket size of about Rs 2,900. The 44-player mutual fund industry, which mainly depends on SIPs for inflows, had assets under management of Rs 25.68 lakh crore at the end of September 2019, as compared to Rs 24.31 lakh crore at the end of September 2018.

Piquant Parade

Bank of Baroda-owned Baroda Asset Management and BNP Paribas AMC announced merger to form an asset management joint venture. BNP Paribas Asset Management is a subsidiary of BNP Paribas Asset Management Asia. The merger will allow both the companies to leverage each other's strengths and offer products for retail and institutional clients. This strategic partnership reinforces both local footprint and global outreach in Asia Pacific.

Former cofounder of Flipkart Sachin Bansal has acquired Essel Finance Mutual Fund subject to SEBI approval. His company ‘BAC Acquisitions Private Limited’ has received a go ahead from the Competition Commission of India (CCI). The fund house was valued at Rs.30 crore. Essel Mutual Fund manages AUM of Rs.901 crore as on September 2019. Angel investor Ankit Agarwal who works with Sachin Bansal had reportedly initiated this deal. Agarwal was a director at Bank of America. Earlier, SREI Infrastructure called off the deal with Essel Finance Mutual Fund due to valuation concerns. SEBI data shows that SREI Infrastructure has applied for MF license on June 6, 2019.

Reliance Mutual Fund is now Nippon India Mutual Fund. With this, names of all the existing schemes have changed; instead of the prefix ‘Reliance’, each scheme will have ‘Nippon India’ with immediate effect. For instance, the name of “Reliance Growth Fund” is changed to “Nippon India Growth Fund”. Also, the name of “Reliance ETF” is changed to “Nippon India ETF”. Earlier, Nippon Life Insurance of Japan has increased its stake in Reliance Nippon Life AMC to 75%. Nippon has become the largest fund house backed by a foreign promoter. The 30-year-old Nippon Life Insurance manages assets of over USD 700 billion. Currently, Nippon India Mutual Fund is the fifth largest fund house and manages AUM of Rs.2.03 lakh crore as on September 2019. The company will focus on regaining its market share and profitability using risk management strategies of Nippon Life Insurance.

Regulatory Rigmarole

In a letter sent to AMFI, SEBI has confirmed that fund houses can levy graded exit load on investors of liquid funds, who exit the scheme within 7 days. This essentially means fund houses can impose exit loads in liquid funds to the extent of 7 days. However, such loads will be reduced with the increase in days. Simply put, investors redeeming after a day will have to pay more exit load than the investors redeeming it on seventh day. While fund houses can impose exit load of 0.007% if an investor redeems his money in 1 day, The load reduces to 0.0065 percent on day two; 0.006 percent on day three, 0.0055 percent on day four; 0.005 percent on day five; 0.0045 percent on day six and 0 percent from the seventh day onwards. For instance, if an investor redeems Rs 1 crore, the applicable exit load will be Rs 700 after the first day, Rs 650 after the second day and so on. SEBI said the industry body Association of Mutual Funds in India must review the exit load structure on an annual basis. Around 30 percent of the money stored under liquid funds is redeemed within the first seven days. However, SEBI’s move to impose exit load is expected to reduce volatility in the AUM of liquid schemes. The exit load appears as a deterrent factor. For example: When Rs 10 lakh invested by corporates in liquid funds at 6 percent annual return would mean 60,000 rupees. This works out to approximately Rs 170 per day over a year, before tax (Return of Rs 60,000 a year before tax divided for daily returns by 365 yields comes to Rs 170). As per the new load structure, deduct Rs 70 for exit load. So the return would come down to only Rs 100. This has come into effect from October 19, 2019. SEBI has also set the cut off timing in liquid funds 1.30 pm instead of 2 pm with effect from October 21, 2019.

SEBI has come up with a slew of measures to make debt funds safer. The list of measures include, fund houses reducing dependency on credit rating agencies and having an in-house system to assess credit risk. SEBI, in a circular, said that the internal policy of a fund house should have adequate provisions to generate early warning signals including yield-based alerts on deterioration of credit profile of the issuer. Based on the alerts, the AMCs should respond appropriately and report it to their respective trustees. Moreover, the market regulator has asked fund houses to reduce their holding in not so safe debt instruments. The investment of mutual fund schemes in the following instruments cannot exceed 10% of the debt portfolio of the schemes and the fund house exposure in such instruments should not exceed 5% of the debt portfolio of all its schemes:

·         Unsupported rating of debt instruments (i.e. without factoring-in credit enhancements) is below investment grade

·         Supported rating of debt instruments (i.e. after factoring-in credit enhancement) is above investment grade

The objective is to curb a debt scheme’s exposure to credit risk and discourage fund houses from chasing higher returns. AMCs need to ensure that the investment in debt instruments having credit enhancements have a minimum cover of 4 times. “AMCs may ensure that the investment in debt instruments having credit enhancements is sufficiently covered to address the market volatility and reduce the inefficiencies of invoking of the pledge or cover,” the circular noted. Moreover, to make portfolio of MF schemes more transparent, SEBI has asked fund houses to provide details of investments in debt instruments having structured obligations or credit enhancement features in the monthly portfolio statement of MF schemes. MF scheme should not invest in unlisted debt instruments including commercial papers (CPs). They can only invest in listed and to be listed debt instruments. One should not consider all the listed securities to be liquid.   

·         However, no such rule applies to investment in unlisted government securities, other money market instruments and derivative products such as Interest Rate Swaps (IRS), Interest Rate Futures (IRF), which are used by mutual funds for hedging.

·         Mutual fund schemes can also continue to invest in unlisted NCDs. However, such investments is capped at 10% of the debt portfolio of the scheme

·         Investment in unlisted NCDs is subject to the condition that such unlisted NCDs have a simple structure (i.e. with fixed and uniform coupon, fixed maturity period, without any options, fully paid up upfront, without any credit enhancements or structured obligations) and are rated and secured with coupon payment frequency on monthly basis

·         Debt schemes having more than 10% exposure to unlisted NCDs have to bring down their holding to 15% by March 31, 2020 and to 10% by June 20, 2020

·         The existing investments of mutual fund schemes in unlisted debt instruments, including NCDs, may be grandfathered till maturity date of such instruments i.e. can be held till maturity

Unrated debt instruments

·         MFs cannot invest in unrated debt and money market instruments other than instruments such as bills rediscounting that are generally not rated and for which separate investment norms or limits are not provided in SEBI regulations

·         Investment in such instruments cannot exceed 5%. Currently, if a scheme exceeds the 5% limit then investments of the scheme will be grandfathered until maturity of such instruments

·         However, fund houses can invest in unrated government securities, treasury bills, and derivative products such as Interest Rate Swaps (IRS), Interest Rate Futures (IRF) 

Sector level exposure limits

Investment limit in a particular sector has been reduced to 20% as against 25%.

The additional exposure limits provided for HFCs in financial services sector has been capped at 10% as against 15%. Further, an additional exposure of 5% of the net assets of the scheme has been allowed for investments in securitized debt instruments based on retail housing loan portfolio and/or affordable housing loan portfolio. However the overall exposure in HFCs shall not exceed the sector exposure limit of 20% of the net assets of the scheme

Group level exposure limits

The investments by debt mutual fund schemes in debt and money market instruments of group companies of both the sponsor and the asset management company is restricted to 10% of the net assets of the scheme. Such investment limit can touch 15% of the net assets of the scheme with the prior approval of the board of trustees.

AMFI has clarified that distributors will have to submit their declaration of self-certifications (DSCs) by December 31, 2019 to avoid forfeiture of commission. That means fund houses cannot pay commission withheld due to non-submission of DSCs from January 1, 2020 onwards. While distributors are required to submit DSC within three months of the end of financial year i.e. June 30, 2019 AMFI has given them six-month grace period to comply with the SEBI norms i.e. until December 31, 2019. So far, there was no stipulated timeframe for AMCs to pay withheld commission because of non-submission of DSCs. Distributors used to get their withheld commission as and when they submitted their DSC. In a communication, AMFI said, “The matter was reviewed by AMFl's Standing Committee on Mutual Fund Distributors (ARN Committee) and the committee also endorsed the above view. Since a grace period of 6 months is allowed for renewal of ARN, the committee proposed that on the same logic, a maximum period of 6 months from June 30 (being the due date for submission of annual DSC) may be allowed for submission of the annual DSC, i.e., up to Dec. 31, failing which, the commission withheld due to non-submission of DSC shall be forfeited.” “Accordingly, effective from the year ended March 31, 2019 onwards, each mutual fund agent/distributor shall submit an annual DSC in the prescribed format within 3 months after the end of each Financial Year, i.e., by June 30, failing which, payment of all accrued commission shall be withheld by the AMCs, till the time the DSC is submitted. Further, a grace period of 6 months from June 30 (being the due date for submission of annual DSC), i.e., up to Dec. 31 shall be allowed for submission of the DSC. If the annual DSC is not submitted by Dec. 31, the commission withheld for non-submission of DSC shall stand forfeited.”

The latest AMFI data shows that the mutual fund industry has close to 2 crore unique investors. The data has identified the number of unique investors by taking into account PANs/PEKRNs (PAN Exempted KYC Registration Number) of all unit holders or their guardians in case of minor unit holders. As on September 2019, the MF industry has 1.95 crore unique investors with PAN and 4.72 lakh investors without PAN. In 2012, SEBI allowed investors to invest up to Rs 50,000 annually in a single mutual fund per year without a permanent account number (PAN). AMFI data shows that the MF industry has 8.56 crore folio as on September 2019. This indicates that average MF investor holds close to 4 folios in mutual funds. Also, the MF industry had 1.76 crore unique investors as on June 2018 indicating that the industry has added close to 24 lakh investors in just little over 1 year. The Mutual Funds Sahi Hai campaign, growing popularity of SIPs and ease of investment through digital technology have contributed to the industry’s growth story.