FUND FULCRUM

January 2020

Mutual funds have added a whopping Rs 3.15 lakh crore to their asset base in 2019 on the back of robust inflows in debt schemes and measures taken by regulator SEBI for boosting investor confidence. The asset under management (AUM) of the industry rose by over 13 percent (Rs 3.15 lakh crore) to Rs 26.77 lakh crore at the end of November 2019, up from Rs 23.62 lakh crore at the end of December 2018, as per the latest data available with the Association of Mutual Funds in India (AMFI). The AUM growth seen by the 44-member mutual fund industry in 2019 is significantly higher than 7.5 percent witnessed in 2018. However, the growth was much higher at 32 percent in 2017, when the asset base expanded by over Rs 5.4 lakh crore. The double-digit growth is a positive sign given the negative sentiment about equity and fixed income securities. This growth should be primarily credited to inflows in debt-oriented schemes, steps taken by SEBI that boosted investor confidence, and to distributors for helping take the message of "mutual fund sahi hai" (mutual funds are right) to every nook and corner of the country. While SIP (Systematic Investment Plan) inflows were impressive with around Rs 8,000-crore-plus, the overall equity excitement was missing. The positive side to this is that investors have not lost their complete faith in equity investments and trust the process of SIP. The year 2019 marks the seventh consecutive yearly rise in the industry AUM after a drop during the two preceding years. The AUM of the industry has grown from Rs 8.22 lakh crore in November 2009 to Rs 27 lakh crore in November 2019, indicating an over three-fold jump in 10 years. The year has also seen repayment issues and downgrades with certain companies, which affected investor sentiment. However, this has also resulted in investors becoming more aware about the overall risk involved with different categories of mutual funds and they now choose funds based on their risk appetite.

India's mutual fund space witnessed a strong inflow in December 2019. Data released by AMFI shows the net equity inflow stood at Rs 4,432.2 crore for December 2019 against Rs 933 crore in November 2019. The balanced fund outflow stood at Rs 2,040 crore against Rs 4,932 crore month-on-month (MoM). On the other hand, liquid funds witnessed an outflow in December 2019 against an inflow in November 2019. Liquid fund outflow was at Rs 71,158.5 crore against an inflow of Rs 6,938 crore MoM, according to AMFI data. Equity ETF inflow came at Rs 12,673.5 crore in December 2019 against Rs 2,954.5 crore in November 2019. Retail investors continue to repose trust in mutual funds as reflected by continued flows through SIPs, despite challenging domestic economic scenario and global trade issues and conflicts. Largecap funds witnessed an inflow of Rs 1,134.80 crore while the mid and smallcap funds saw an inflow of Rs 796.08 crore and Rs 421.63 crore, respectively, in December 2019. Index funds saw an inflow of Rs 142.30 crore and inflow in Gold ETF stood at Rs 26.85 crore in December 2019, according to AMFI data.

The MF industry has added 26 lakh new investors in just one and a half years. 2019 ended on a positive note for the Rs.27 lakh crore mutual fund industry. The latest AMFI data shows that the mutual fund industry has 2.03 crore unique investors as on December 2019. 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 December 2019, the MF industry has 1.98 crore unique investors with PAN permanent account number) and 4.67 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 PAN. AMFI data shows that the MF industry has 8.71 crore folio as on December 2019.  This indicates that the average MF investor holds close to 4 folios in mutual funds. The Mutual Funds Sahi Hai campaign, growing popularity of SIPs and ease of investment through digital technology has contributed to the industry’s growth story. This could slow down the mutual fund industry’s growth. In September 2019, a report by AMFI-BCG had noted that adding 4 lakh new distributors in next five years will be crucial for the industry to achieve Rs.100 lakh crore AUM.

Of the top 20 fund houses, 19 saw an increase in their assets. Last quarter ended on a good note for most fund houses with the MF industry witnessing 4% growth to reach AUM of close to Rs.27 lakh crore. AMFI data shows that the MF industry average AUM has increased from Rs. 25.69 lakh crore in July-Sept 2019 to Rs.26.77 lakh crore in Oct-Dec 2019. Among fund houses, SBI MF, Axis MF and ICICI Prudential MF witnessed the highest growth in their AAUM, respectively. While SBI MF’s AAUM increased by nearly Rs 32,000 crore to Rs 3.53 lakh crore in October-December, 2019 Axis MF’s AAUM rose by more than Rs 17,000 crore to Rs 1.23 lakh crore. Similarly, ICICI Prudential MF’s AAUM increased by over Rs 13,000 crore to Rs 3.62 lakh crore. Next in the list were IDFC MF and Kotak Mahindra MF. Both these fund houses witnessed an increase of around Rs 10,500 crore and Rs 8,500 crore in their quarterly assets, respectively. In percentage terms, Mirae and Axis were the top gainers at 18% and 16% respectively among the large fund houses. Among the emerging fund houses, ITI MF registered a growth of 179% while PPFAS MF grew by 16%. In October-December, 2019 most of the top fund houses did well with 19 of the 20 top fund houses witnessing an increase in their AAUM. Only Aditya Birla Sun Life MF saw a decline of nearly Rs 4,000 crore in its AAUM in the quarter ended December 2019. Meanwhile, emerging fund houses had a tough time in October-December 2019. Of the 21 fund houses at the bottom, 11 witnessed a decline in their AAUM.

In terms of equity AUM, HDFC MF and ICICI Prudential MF continue to retain the top two spots. The December quarter ended on a positive note for the MF industry with average AUM of pure equity funds and ELSS witnessing over 6% growth to rise past the Rs.8 lakh crore mark, according to AMFI data. An analysis of quarterly average AUM of 36 fund houses shows that SBI MF marked the highest growth in its equity average AUM. The fund house’s equity average AUM rose by Rs 12,822 crore to Rs.74,141 crore, an increase of 21% in just three months. Here equity AUM includes pure equity schemes and ELSS. Axis MF followed the two by registering a growth of 16% or Rs 7,676 crore in its equity AAUM to Rs.54,226 crore. Next in the list were Kotak MF and Mirae Asset MF. These two fund houses witnessed an increase of Rs 5,309 crore and Rs 5,139 crore in their equity average AUM, respectively. Meanwhile, HDFC MF and ICICI Prudential MF retained the first and second spot, respectively in terms of equity AAUM. While HDFC MF’s equity AAUM for Oct-Dec grew to Rs 93,410 crore in December 2019, ICICI Prudential MF’s AAUM stood at Rs 77, 505 crore. Apart from these fund houses, Aditya Birla Sun Life, Nippon India, Franklin Templeton and UTI were among the top 10 MFs in terms of equity AUM. Overall, 16 fund houses saw their equity AAUM rise by more than Rs 1000 crore last quarter.

As on December 2019, SIP AUM was Rs 3.2 lakh crore, around 12% of the overall MF Industry AUM. Inflows through SIP have risen considerably from last fiscal, even as the net addition in SIP accounts has witnessed a slowdown. Net addition in SIP accounts is the difference between number of new registered SIPs and discontinued/matured SIPs. AMFI data shows that between April and December of 2019, the amount collected through SIPs has risen to Rs 74,398 crore, as against Rs 68,479 crore in the corresponding period last fiscal. Meanwhile, the MF industry added 35.5 lakh net SIP accounts during April-December 2019, as against 42.5 lakh accounts in the corresponding period of 2018. This was due to an increase in discontinued or matured SIPs. During April-December 2019, the MF industry added 86 lakh new SIP accounts, while 50.5 lakh SIP accounts matured or were discontinued. In the corresponding period of 2018, the industry added 85.2 lakh SIP accounts while 42.7 lakh SIP accounts matured or were discontinued. The rise in SIP inflows is heartening and it outweighs the slightly lower addition in number of net SIP accounts this year. SIP’s success should be measured on the basis of constantly rising inflows, especially amid concerns over growth and market volatility. This underlines a sharp sustained retail investor interest in equity funds. Moreover, popularity of features such as SIP top-up has led to rise in SIP inflows, even as the net addition in SIP accounts has slowed down. SIP top-up ensures an investor has the option to increase the amount of SIP by a fixed amount at pre-defined intervals. This enhances the flexibility of the investor to invest higher amounts during the tenure of the SIP. As on December 2019, SIP AUM was Rs 3.2 lakh crore, around 12% of the overall MF Industry AUM.

The latest AMFI data shows that individual investors hold 53.4% of total industry assets while institutional investors hold 46.6% as of December 2019. Individual investors include retail investors and high net worth individuals. However, further analysis shows that institutional investors grew at a faster pace than individual investors did as their AUM increased by 13.80% as against 12.64% of individual investors. In terms of weightage, 69% of equity AUM is contributed by individual investors, followed by debt (24%), liquid/money market (6%) and ETFs, FoFs (1%). Contrary to individual investor, institutional investors account for 41% of liquid/money market AUM followed by debt (34%), equity (13%) and ETF, FoFs (12%).  Further analysis of AUM shows that of the total MF AUM, 44% of the assets came through direct plans while the rest came from distributors in December 2019. A large proportion of direct investments were in non-equity oriented schemes where institutional investors dominate. Moreover, 16% of the total industry assets came from B30 cities in December 2019. About 65% of B30 cities assets were equities. 

India's mutual funds industry is yet to see wider participation from the population.  "India remains an extremely underpenetrated country, especially with respect to investing in instruments such as mutual funds," according to a Paytm Money report. "More than 85 percent of investors in mutual funds come from the top 30 Indian cities. This signifies that the rest of India, comprising a majority of the population remains conservative in its choice of investment instrument," the report added. However, Indians from all demographics are fast adopting investments. The report suggests that the trends observed in 2019 will affect the investment patterns in 2020. The report reflected 18,792 out of 19,100 pin codes invested with Paytm Money, within the first year of its operations. Year 2019 saw a massive adoption trend by investors across cities, towns and villages with a substantial share of investors coming from the younger population. The report also suggests that over 65 percent of its investors are between the age group of 18-30 years. Many of these investors are students and first-time employees.

Piquant Parade

SEBI has given in-principle approval to NJ India, India’s largest MF distributor, to set up its AMC business.NJ India would focus on passive funds such as quant funds and smart beta ETFs to grow business. Just like developed markets, passive funds and ETFs have great potential to grow in India. NJ India has hired Anand Shah to set up the AMC business. Anand Shah was Dy. CEO & Chief Investment Officer of BNP Paribas MF before joining NJ Advisory Services as its CEO. Currently, he is responsible for portfolio management services (PMS) business of NJ group. NJ India aims to launch their AMC business in the next six months subject to final approval from SEBI. Earlier, SEBI had given in-principle approval to Samco Securities and Muthoot Finance. While Samco Securities is likely to launch its MF business this year, Muthoot Finance has acquired IDBI Mutual Fund.

Regulatory Rigmarole

SEBI has simplified the process of transmission of units in mutual funds due to absence of nominations or death of unitholders. Among its key measures is bringing uniformity across fund houses in dealing with transfer of assets due to demise of unitholders and spreading awareness about importance of nomination in mutual funds through IAPs. Introduction of image based processing wherever the claimant is a nominee or a joint account holder in the investor folio. AMCs to set up a dedicated central help desk and a webpage carrying relevant instructions to provide assistance on the transmission process. AMCs to introduce a common transmission request form and NOC form. A uniform process across fund houses to deal with unclaimed funds to be transferred to the claimant including the unclaimed dividends. AMCs cannot accept requests for redemption from a claimant until the units are transferred in his favour. Claimant has to pay stamp duty tax. The move will bring uniformity across fund houses in terms of dealing with transfer of assets due to demise of unitholders.

Foreign controlled AMCs (with more than 50% foreign shareholding) have been untagged from the October 17 circular of the Finance Ministry that defined them as overseas investors. The ministry modified the October circular on December 5, 2019. Foreign-owned fund houses would have had to follow certain investment restrictions that are applicable to overseas investors. For instance, if a sector’s stocks have a 74% overseas investment cap, then according to the circular, a foreign-owned AMC could buy these stocks only if the overseas investment in that particular company has not breached the 74% limit. Such restrictions do not apply to domestic investors.  Foreign controlled AMCs had approached SEBI in the first week of November 2019 and the market regulator then discussed the matter with the government. Back in November 2019, SEBI had assured that the October 17 circular would be revised and foreign controlled AMCs would not be treated as overseas investors. Nippon India, Franklin Templeton, Mirae Asset, Invesco and BNP Paribas were among the fund houses that could have been affected the most by the October 17 circular.

Capital markets regulator, SEBI has proposed to discontinue usage of pool accounts by all platforms in transaction of schemes. The discussion paper was issued on December 23, 2019. This proposal comes in the aftermath of the Karvy Stock Broking episode, wherein the broker allegedly misused clients' securities to the tune of over Rs 2,000 crore. SEBI pointed out that asset management companies lose sight of the source of funds as they receive funds from pool or escrow accounts. The regulator noted that the scope of misuse of investments when mutual fund transactions were executed through intermediaries like stock brokers and clearing members and digital platforms provided by MF distributors and investment advisors. Some of the direct mutual fund platforms in India are Kuvera, Goalwise, CAMS & Karvy Website/Mobile App, AMFI’s Mutual Fund Utility, PaisaBazaar, Zerodha, PayTM Money, Groww and Clearfunds. Direct MFs mean investors buy directly from mutual fund companies through their respective portals, which offer such direct mutual funds online. Whereas regular mutual funds mean investors buy through middlemen (online or offline) like mutual fund advisers or brokers. For various MF transaction methods between a stock broker or distributor or investor advisor and the investor, there are layers that get created before it is finalised with the concerned mutual fund. For transaction between the Broker and the investor, it is routed from investor to broker to clearing corporation to the end-mutual fund. For transaction on stock exchange platform between investment advisor/distributor and the investor, it is routed to exchange clearing platform to the end-mutual fund. These layering processes result in pooling actual funds flow or MF units flow being away from direct purview of the mutual fund that is responsible for the investor services. SEBI discussion paper feels this has potential scope of misuse of investor funds or the investor MF units pool. That has driven SEBI to now look for discounting pooling practice and make exchanges create a dedicated platform for direct funds and MF units flow between end-mutual fund and the investor. SEBI’s efforts are consistently aimed towards mutual funds being held directly responsible for investor matters even if that means some additional platform creation or due diligence by market intermediaries and exchanges.

SEBI has proposed allowing individual RIAs to offer distribution services along with fee based advisory model. In its fourth consultation paper on Registered Investment Advisors (RIAs), SEBI has proposed allowing individual RIAs to offer distribution services to their clients along with fee based advisory services. This will be in line with corporate RIAs who currently offer both the services to their clients. However, individual RIAs will have to obtain a new ARN to offer this service. In addition, their clients (existing and new) can decide if they want distribution services or fee based services from an RIA. Simply put, RIAs cannot offer both the services – advisory and distribution to a client or a family. SEBI defines family as group of clients. That means, RIAs cannot charge a fee for financial advice from father and offer execution services to his son. Also, RIAs offering advisory services will have to recommend direct plans only. So far, many distributors fear that their existing clients would not prefer paying fee to them for financial advice if they migrate to fee based model. This new proposal, if it goes through, resolves this issue as they can charge fee from new clients and continue to offer distribution services to their existing clients. The new proposal on client segmentation based on distribution and advisory and introduction of execution services would create a level playing field between individual RIAs and corporate RIAs. Another key proposal is putting a cap on fee. RIAs can charge up to 2.5% on assets under advisory (AUA) as advisory fee and offer fixed fee of Rs.75000 per annum irrespective of ticket size. Also, RIAs can charge up to half-yearly fee as advance fee. Flat fee model is not viable for advisors. A flat fee of Rs.75,000 per annum is not viable for RIAs. Hence, most RIAs would opt for ‘percentage of AUA’ model. While a cap of 2.5% on AUA is more than sufficient for RIAs, flat fee option is clearly not viable. In addition, SEBI has proposed that we can only receive advance fees of up to 2 quarters. However, the market regulator is silent on collecting the remaining fee after six months.

SEBI has proposed net worth requirement of Rs.10 lakh for individual RIAs and Rs.50 lakh for corporate RIAs. Existing RIAs have three years to comply with this net worth requirement. In addition, individual RIAs having Rs.40 crore AUA or more than 150 clients have to compulsorily re-register as corporate RIA within six months of achieving this scale of business. This means, they will have to increase their net worth from Rs.10 lakh to Rs.50 lakh. Maintaining such a high capital adequacy requirement will be difficult for boutique advisory firms. Clients will have to enter into an agreement to receive services of RIAs. Such a document should seek clients’consent on fee structure and mechanism for charging fees, validity of advice and so on. RIAs will have to appoint a nominee in case of death or disability. Para planners of RIAs have to be well qualified and experienced. Maintain records such as physical record written and signed by client, telephone recording, email from registered email, record of SMS and so on. RIAs will have to complete the compliance audit within three months from the end of each financial year.

As we enter 2020, we expect participation of retail investors in mutual funds to continue to grow, valuations of mid-cap and small-cap stocks to see an uptick and a gradual recovery in GDP growth. With traditional banking deposits losing sheen to new financial investments (bank deposit share in household saving has come down from 68.9% in FY12 to 53.4% in FY18), there is a huge scope for debt MFs to grow.