FUND FULCRUM

November 2019

The asset base of the mutual fund industry increased to Rs 26.33 lakh crore in October 2019, a rise of 7.4 percent as compared with the preceding month, on the back of robust inflows in equity and liquid schemes. The 44-player industry logged an AUM of Rs 24.5 lakh crore in September 2019, according to data from the Association of Mutual Funds in India (AMFI). An analysis of quarterly average AUM of all fund houses shows that HDFC MF, ICICI Prudential MF and Aditya Birla Sun Life MF are the top three fund houses in terms of equity AAUM. Equity AAUM includes pure equity schemes and ELSS. HDFC MF’s equity AAUM for Jul-Sep stood at Rs 89,260 crore, ICICI Prudential MF’s AAUM at Rs 73, 566 crore and Aditya Birla Sun Life MF’s AAUM at Rs 68,499 crore. Next in this list was Nippon India MF with an AAUM of Rs 63,673 crore followed by SBI MF with an AAUM of Rs 61,318 crore. Apart from these five fund houses, Franklin Templeton, Axis, Kotak, UTI and DSP were among the top 10 MFs based on AAUM of equity schemes.  The total AAUM of pure equity schemes and ELSS stood at Rs 7.33 lakh crore. In terms of total assets in equity and hybrid funds, the top five fund houses remained the same. HDFC MF, ICICI Prudential MF and SBI MF hold the top three spots, respectively. Next in the list was Aditya Birla Sun Life MF followed by Nippon India MF. As many as nine fund houses have more than Rs 50,000 crore AAUM in equity and hybrid funds. 

Mutual fund houses witnessed an overall inflow of Rs 1.33 lakh crore in October 2019 after witnessing redemptions of Rs 1.52 lakh crore in September 2019. Of these, liquid funds alone witnessed an impressive over Rs 93,200 crore in October 2019. Fund managers attributed growth in the asset base to higher retail participation and robust inflows in equity schemes and liquid funds. The open-ended equity schemes witnessed an infusion of Rs 6,026 crore, while there was a small outflow of Rs 11 crore in close-ended equity plans, taking total equity inflows to Rs 6,015 crore in October 2019. In comparison, net inflows in equity and equity-linked saving schemes stood at Rs 6,489 crore in September 2019. Such inflows stood at Rs 9,090 crore in August 2019, Rs 8,092 crore in July 2019, Rs 7,585 crore in June 2019 and Rs 4,968 crore in May 2019. Net inflows continue to pour into the equity-oriented mutual fund schemes tracking the surge in the domestic markets. In October 2019, the category received slightly lower inflow compared to September 2019. The inflow indicates building up of a positive investment trend. Series of steps taken by the government in the recent times to boost domestic economy had improved sentiments and helped the markets to surge. This has helped investors slowly gain confidence and get back to investing. Additionally, the steady flow through SIP (Systematic Investors Plan) is also keeping the momentum going. Among debt-oriented schemes, liquid funds with investments in cash assets such as treasury bills, certificates of deposit and commercial paper for shorter horizon saw an infusion of Rs 93,203 crore in October 2019 as compared to an outflow of Rs 1.4 lakh crore in September 2019. Overall, debt funds saw an inflow of Rs 1.2 lakh crore. Besides, gold exchange-traded funds saw an outflow of Rs 31.45 crore after witnessing inflow in the preceding two months. The safe-haven asset saw an infusion of Rs 44 crore in September 2019 and Rs 145 crore in August 2019.

Despite the volatility in the equity market and worries over the economic slowdown, the mutual fund industry in October 2019 added the highest number of folios in three months. The mutual fund industry added 6 lakh investor accounts in October 2019, taking the total tally to 8.62 crore, according to the data released by Association of Mutual Funds in India. In comparison, the industry had added 3.45 lakh new folios in September 2019 and 4.8 lakh folios in August 2019. Overall, mutual fund schemes witnessed a net inflow of Rs 1.33 lakh crore last month as compared to an outflow of Rs 1.51 lakh crore in September 2019. The addition of folios suggests that investors were undeterred by the market volatility. Besides, it indicates their understanding of the market risks associated with mutual fund schemes. Meanwhile, amid intermittent bouts of volatility, BSE's benchmark Sensex rose 3.6 percent last month. The number of folios under the income/debt category went up to 57.89 lakh folios in October 2019 from to 56.79 lakh in September 2019. The folios in equity and equity-linked saving schemes rose by 3 lakh to 6.03 crore in October 2019 as compared to 6 crore at the end of September 2019.

Despite the volatility in the equity market, investors prefer to stay put in the equity mutual fund schemes. Data from the Association of Mutual Funds in India revealed that 35 percent of the mutual fund industry’s equity assets had remained invested for more than two years. Equity assets have a longer average holding period as compared to non-equity assets. In comparison, 28.4 percent industry’s equity assets in 2018 remained invested for more than two years in equity schemes. Not only this, equity assets that have stayed for 12-24 months rose to 31.7 percent, compared with 22 percent a year ago. This sticky money can be attributed to matured investor behavior and investor education. The investor education initiatives executed by all stakeholders in the mutual fund industry are showing positive results. During 2008-09, most retail investors did not stick to equity funds for long. In the last 10 years, mutual fund investors have experienced the importance of long-term equity investments for wealth creation. In the debt space, there was no significant change in the trend. As of September 2019, 23.1 percent of the industry’s debt assets stayed invested for more than two years as compared to 24.5 percent a year ago. Non-equity funds include liquid funds. People invest in liquid funds for short term goals and also to set up a systematic transfer plan (STP) into equity funds. We see a lot of investors taking the STP route to invest in equities. As such, the investors holding period for liquid funds tends to be very low and will affect the holding period for non-equity funds.

Piquant Parade

In the last six months, the equity AUM has decreased marginally to Rs 7.58 lakh crore in September 2019 from Rs 7.56 lakh crore in May 2019. The slowdown in most sectors or in the overall economy does not seem to have affected the mutual fund industry. This is evident from the fact that the mutual fund industry has witnessed more exits and entries in the fund management space. While there is a slew of fund manager movement in the equity fund management space, debt has not seen any major exits. Recently, Anand Shah exited BNP Paribas MF. In August 2019, Lalit Nambiar, Vice President and Fund Manager exited UTI MF, and he was replaced by Ankit Agarwal from Centrum Broking. In July 2019, Ravi Gopalakrishnan of Canara Robeco Mutual Fund joined Principal MF as head of equity, replacing PVK Mohan who quit in June 2019. In May 2019, HDFC Mutual Fund’s Senior Equity Fund Manager Srinivas Rao Ravuri quit to join PGIM India Mutual Fund (erstwhile DHFL Pramerica Mutual Fund). In November, 2019 Krishna Sanghavi joined Mahindra MF as CIO after quitting from Canara Robeco MF where he was the head of equities. It is good for the growth of the fund industry as it shows that the days of star fund manager culture of the early 2000s are now passe, wherein the departure of an X fund manager used to create investor exits from the mutual fund house. Being pooled investments, mutual fund investors are more secure in established investment processes and risk managing systems, rather than being subject to the whims and fancy of a particular star fund manager.

 Acquisition of IDBI Asset Management Company from IDBI Bank will offer many advantages to the gold loan lender, Muthoot Finance, which will be able to cross-sell mutual fund schemes to their gold loan borrowers. As on March 31, IDBI Bank’s stake in IDBI Asset Management stood at 66.67 percent, while IDBI Capital Markets & Securities owns 33.33 percent. Gold investors are for the long haul so MF as a class will naturally appeal to Muthoot Finance's gold loan clients. It is a win-win for Muthoot Finance. Muthoot Finance can also capitalise on its wide network of branches for selling mutual fund schemes. At present, Muthoot Finance has a mutual fund distribution arm: Muthoot Securities. Muthoot Finance is listed on BSE and NSE as a gold financing NBFC. In FY19, Muthoot Finance registered an 11 percent year-on-year growth in net profit at Rs 1,972 crore. Loan assets for the year stood at Rs 34,246 crore, a rise of 18 percent rise YoY. Conservative gold loan customers may not be comfortable subscribing to the more aggressive sectoral equity funds in the midcap and smallcap space of IDBI MF that Muthoot Finance will take over. Sectoral funds show wide volatility, which the stable value minded gold loan customers may shy away from. In that light, Muthoot group would be sourcing new investors to scale up the MF business.

Regulatory Rigmarole

Markets regulator SEBI's decision to allow Aadhaar as e-KYC for mutual fund investments will be a shot in the arm for the MF industry as it will reduce time for client onboarding and boost mutual fund penetration. On November 5, SEBI issued a detailed circular regarding the process to be followed for Aadhaar-based electronic KYC exercise for domestic investors. The circular mentions about the requirements to be fulfilled by entities registered with the UIDAI as KYC User Agency (KUA) as well as for sub-KUA. This is a step in the right direction as we had noticed lot of investors discontinuing SIPs after Aadhaar was disallowed to be used as e-KYC. SEBI in its last circular had mentioned that Aadhaar-based e-KYC investors can only invest up to Rs 50,000 in a financial year. This time around, SEBI has not made a mention of an upper limit for Aadhar-based KYC investors making investments. In September 2018, Supreme Court banned the use of Aadhaar data for financial transactions. This means a Permanent Account Number (PAN) is mandatory for every investor KYC. As per latest data, till July 2018, 1.22 billion Aadhar cards were existing, equal to 90 percent of population.

SEBI has now completed the circle of transparency by going ahead and issuing an additional circular regarding the segregation of asset provisions for unrated debt papers. SEBI initiated action in the valuation treatment of debt securities in case of credit events of the downgrade of a corporate debt paper by issuing two circulars, one in December 2018 on credit event and the other in November 2019 on unrated securities. Both the circulars were in response to liquidity woes in the NBFC sector and downgrades of multiple debt papers which had raised concerns about mutual fund investment in stressed companies such as Infrastructure Leasing & Financial Services Limited (IL&FS), Essel Group, and Dewan Housing Finance Ltd (DHFL). After the credit crisis in IL&FS, and DHFL, SEBI issued a comprehensive circular in December 2018 to allow mutual funds to segregate their holdings in stressed securities. Known as side-pocketing in mutual fund parlance, this refers to a practice where fund houses isolate risky assets from the rest of their holdings and cap redemption in the segregated assets. SEBI has now completed the circle of transparency by going ahead and issuing an additional circular regarding the segregation of asset provisions for unrated debt papers. SEBI has brought in clarity by issuing two circulars giving cut off points for both rated and unrated papers during credit event and when the debt paper should be considered as a default. For unrated papers, SEBI now mandates that such papers be reported immediately by mutual funds in actual default to AMFI which shall disseminate to the entire fund management industry. The provision of segregating assets in actual default and not on a credit event is understandable for unrated debt papers. This means, until now, the segregation of assets triggered when a bond’s credit rating went down. But, when bonds are not rated, a credit rating downgrade is out of question.

SEBI announced that minimum investment in a PMS scheme will now go up to Rs 50 lakh, up from Rs 25 lakh at present. Also, net worth requirement of portfolio managers will now go up to Rs 5 crore, up from Rs 2 crore. SEBI had constituted a working group to review SEBI (Portfolio Managers) Regulations, 1993 earlier this year. Distributors who have cleared the NISM (National Institute of Securities Management) examination and are registered with the Association of Mutual Funds of India (AMFI) will also now get to sell PMS schemes. PMS schemes will have to report fund performance in a uniform way. Past performance will be after-costs so that investors know that what is being reported is what they will actually get in their hand. SEBI will not cap charges that a PMS levies, the PMS will have to state upfront the range of expenses upfront, in the client-manager agreement. Operating expenses though will now be capped at 0.5 per cent, excluding brokerage charges. Revised guidelines will put restrictions on how much a PMS’ in-house distribution arm can sell such schemes. The revised guidelines will also mandate PMS to state exit loads clearly and upfront in the client-manager agreement. There will not be any SEBI-mandated limit. However, to make matters more transparent, PMS schemes will now have to give an illustration of performance and costs to new investors. The illustration will talk about how an investment of Rs 50 lakh will be subjected to various charges and costs in detail, how each of the deductions will be made before investors get to see the amount they will get in hand. The changes announced would be part of the proposed SEBI (Portfolio Managers) Regulations, 2019, such as the hike in minimum investment limit and net worth. The changes that do not require change in regulations will be done via circulars that SEBI can issue going ahead.