FUND FULCRUM

February 2020

The latest AMFI data shows that the average assets under management (AAUM) of the MF industry touched Rs 28.19 lakh crore in January 2020, thanks to improved sentiment amid hopes of a broad-based market recovery. Meanwhile, AUM as on January 31, 2020 stood at Rs 27.86 lakh crore. The 43-player mutual fund industry witnessed inflows of Rs 7,548 crore in equity schemes in January 2020, up 70 percent from December 2020. According to the data on the Association of Mutual Funds in India (AMFI), equity schemes had reported inflows of Rs 4,432 crore in December 2019. Barring, contra fund category and dividend yield in the equity schemes category, all categories witnessed inflows in the month of January 2020. In January 2020, the contra fund saw outflows of Rs 735 crore, while dividend yields reported outflows worth Rs 63 crore. Within the equity schemes, mid-cap funds category witnessed the highest inflows worth Rs 1,798 crore. Fund managers attributed the inflows in the mid-cap space to attractive valuations and bottoming concerns in the mid-cap category. Mid-caps and smallcaps have seen significant price correction in the last 2 years and we are seeing attractive valuations and bottoming of growth concerns in the mid-cap space. On the debt funds, credit risk funds continued to suffer with outflows of Rs 1,215 crore in January 2020 as against outflows of Rs 1,191 crore in December 2019. On the other hand, in the same category, liquid funds that are used by companies to park surplus cash witnessed inflows of Rs 59,682 in January 2020 compared to outflows of Rs 71,158 crore in December 2019. Overall, the AUM of the industry rose to 27.85 lakh crore in January 2020 as against 26.54 lakh crore a month ago.

Mutual fund industry added 68 lakh folios in 2019 taking the total tally to 8.7 crore, which suggests investors' understanding about market risks associated with such schemes. However, the pace of growth in folio numbers dropped in 2019 as compared to preceding three years. The trend can be attributed to decline in investors account in debt oriented schemes as they were spooked by credit events in fixed income market. According to the data, the number of folios with 44 fund houses rose to 8.71 crore at the end of December 2019 from 8.03 crore at the end of December 2018, registering a gain of 68 lakh folios. In comparison, over 1.38 crore investor accounts were added in 2018, more than 1.36 crore in 2017, nearly 70 lakh in 2016 and close to 56 lakh in 2015, data available with markets regulator SEBI showed. The number of folios under equity and equity-linked saving schemes rose by 12.75 lakh to 6.25 crore at the end of December 2019, which is much lower than 1.2 crore added in the preceding year. Debt-oriented scheme folios count dropped by 43 lakh to 71 lakh. The number of investors' account stood at 1.13 crore. Assets under management (AUM) of the industry rose by over 13 per cent (Rs 3.15 lakh crore) to Rs 26.77 lakh crore at the end of December 2019, up from Rs 23.62 lakh crore at the end of December 2018 on the back of measures taken by regulator SEBI for boosting investor confidence. Going ahead, the industry is expected to witness growth in the range of 17-18 per cent in this year and equity funds should see robust inflows as expectations are high about improved equity markets and a revival in economic growth.

The latest AMFI data shows that B30 cities account for 16% of the total Rs.26 lakh crore MF industry assets. AUM from B30 cities touched Rs.4.26 lakh crore in December 2019. A large proportion of the B30 assets (65%) come in equity funds. This is because of the increasing popularity of equity funds among retail investors in these cities. Analysis of data shows that assets from B30 cities increased by Rs.42,600 crore, a growth of 12%, between March 2019 and December 2019. AMFI’s investor education campaign has increased awareness about mutual funds among investors in non-metros. In addition, easy access to internet and growth in online transaction platforms has also allowed investors who do not have easy access to physical distribution networks to invest in mutual funds. Investor wise analysis of the data shows that B30 cities account for 24% of individual assets of the industry. Individual assets include retail and HNI assets. B30 cities, however, account for only 6% of institutional assets as of December 2019.

The latest AMFI data shows that New Delhi, Goa, and Maharashtra were the top three states in terms of highest per capita AUM and AUM to GDP ratio as on December 2019. While New Delhi ranked first with highest per capital AUM of Rs.1.53 lakh, Goa and Maharashtra followed New Delhi with per capital AUM of Rs.1.16 lakh and Rs.99, 760 respectively. Other states that have high per capital AUM were Chandigarh, Haryana, Karnataka, Gujarat, Tamil Nadu, Sikkim, and West Bengal.  Per capita AAUM in mutual funds is the total AUM of the state divided by the total number of folios. In terms of AAUM as a percentage of GDP, these three states topped the chart. While Maharashtra occupied the top spot with 66.5% AAUM as proportion of GDP, New Delhi and Goa followed Maharashtra with 56.7% and 35.8%, respectively. On the other hand, north-eastern states like Arunachal Pradesh, Tripura, Manipur, Mizoram and Nagaland were among the bottom 10 in terms of both AAUM as a percentage of GDP and per capita AAUM.

Piquant Parade

One of the largest distributors of direct plans in mutual funds, Zerodha Broking has applied for the mutual fund license. The SEBI website shows that Zerodha Broking has applied for MF license on February 5, 2020. The other two companies who had shown their interest in MF business were SREI and Frontline Capital Services. While SREI applied for license on December 04, 2019, Frontline Capital Services submitted its application on August 03, 2017. Last year, Karvy Stock Broking applied with SEBI for MF license but the market regulator has kept it on hold due to pending regulatory action. Earlier this year, SEBI has given in-principle approval to NJ India to set up its AMC business. Last year, it gave a go ahead to Samco Securities. Both the companies will come out with their MF schemes this year.

Regulatory Rigmarole

The Finance Ministry notified that mutual funds (MFs) will no longer be categorised as foreign investors. The gazetted notification issued in December 2019 exempts fund houses from sectoral caps for foreign direct investment (FDI) and various filings under the Foreign Exchange Management Act (FEMA). This reverses the October circular which categorised MFs with over 50 percent foreign shareholding as investment vehicles, a change which would have forced several equity asset managers to freeze investment activity and even sell their holdings. There was much pushback as the October circular would ironically have counted retail domestic money invested in the schemes of foreign-owned mutual funds as “foreign money”. For instance, if a company is allowed 74 percent foreign shareholding under FDI rules, any investment in it by an Indian mutual fund with more than 50 percent foreign shareholding would have been considered part of the 74 percent cap. Major fund houses such as Nippon, Franklin Templeton, Mirae Asset, Invesco, BNP Paribas, HDFC and ICICI Prudential were likely to be impacted. Listed companies with sectoral caps in industries such as private banking, broadcasting, telecom, single brand retail, brownfield pharma, insurance and infrastructure would have faced serious selling pressure too. The reversal comes after representations from various fund managers and SEBI.

While presenting Union Biudget 2020, Finance Minister Nirmala Sitharaman announced that the government would abolish the dividend distribution tax (DDT). The Union Budget also introduced a deduction of tax on dividends paid by mutual funds. Though the dividend received through mutual funds is not getting taxed anymore, the same will be added to the income of the investor and taxed at the marginal rate of tax. Not only this, the Finance Bill 2020 contains a provision that the mutual funds need to deduct tax at source (TDS) at 10 percent if the dividend payout is more than Rs 5,000. So, mutual funds investors particularly high-networth individuals (HNIs) or Ultra HNIs that have opted for dividend option of a scheme have to take huge hit as they will have to pay a tax on the dividend included in their income. With an aim to improve retail participation and broaden the G-sec market, debt ETF consisting of government securities has been proposed. Investors will now be able to use original date of acquisition and proportionate cost to pay taxes. This was among AMFI’s Budget 2020-21 proposals. These amendments will take effect from April 1, 2020, subject to Parliament approval.

Distributors are no longer required to request for asset transfer if they plan to float a proprietorship firm. In a note sent to AMCs, AMFI said that it has received requests from distributors to ease the process of changing status from individual to sole proprietorship. However, the new norms will be applicable to distributors having same PAN number for individual and sole proprietorship firm.

Here is the new procedure to change status for distributors who wish to float proprietorship firm

• ·         Open a separate bank account in the name of sole proprietorship
• ·         A new application form has to be submitted to AMFI in the name of sole proprietorship along with EUIN form
• ·         The application form has to accompany a demand draft of Rs.2360 in favour of Association of Mutual Funds in India
• ·         Submit a self-declaration on the letterhead of the firm. The format can be downloaded from AMFI website
• ·         Surrender original ARN card issued in your name (individual license)
• ·         The validity of the new ARN will commence from the date of submission of documents and fees. It will expire with the expiry of current validity of the individual ARN (i.e. according to the existing ARN, which you have surrendered)
• ·         Remember to share this change in status with RTAs
• Distributors who have separate PAN for sole proprietorship firm, will continue to surrender existing ARN and apply for fresh ARN for the new firm. Once you get ARN of your proprietorship firm, you will have to make a transfer of assets request within six months of cancellation of your previous ARN.

Mutual fund distributors are no longer allowed to use nomenclature like ‘independent financial advisers’ (IFAs) and ‘wealth managers’ without registering with SEBI as RIA. SEBI has amended SEBI Investment Adviser Regulations after considering issues in all four consultation papers and public comments. Here are the other key changes

• ·         Individual RIAs cannot offer distribution services to their clients
• ·         RIAs can offer execution services through direct plans in mutual funds
• ·         SEBI will bring more clarity on fee payment and put a cap on upper limit of fees charged to clients
• ·         The regulator will clarify net worth, qualification and experience and so on

SEBI has asked AMCs, AMFI, RIAs and other SEBI regulated intermediaries to freeze accounts of those named by United Nations as terrorists. SEBI has directed fund houses and AMFI to refer to the list issued by the United Nations Security Council Resolutions (UNSCRs). The list includes name of individuals and entities linked to terrorist organisations like ISIL (Da’esh), Al-Qaida and Taliban. Further, the market regulator has asked AMCs, AMFI and RIAs to scan all existing accounts to ensure that no entity or individual in the list hold mutual fund folios. In addition, SEBI has asked intermediaries to bar these entities and individuals from investing in mutual funds, stocks and other SEBI regulated products and services.

SEBI has revised PMS regulations in which it has asked PMS players not to charge upfront fees from their clients. In a circular, SEBI said, “No upfront fees shall be charged by the Portfolio Managers, either directly or indirectly, to the clients.”

Here are the other key changes to PMS regulations:

• ·         PMSs have to charge brokerage at actual from clients
• ·         Operating expenses cannot exceed 0.50% per annum on daily average AUM
• ·         Introduces graded exit load structure i.e. PMSs can charge exit load of 3% of the amount redeemed in first year, 2% in second year and 1% in third year. There will be no exit load after three years
• ·         Facilitate direct on boarding of clients
• ·         Uniform reporting standards across the industry. This includes investment objective, description of types of securities, investment approach, allocation across types of securities, basis of selection of securities, indicative tenure and horizon, risks associated and other salient features
• ·         Disclose performance net of all fees and expenses, material change and change in investment approach
• ·         Follow all trail model to compensate distributors and disclose such fees to their clients
• ·         Put in mechanism to ensure that distributors adhere to a code of conduct

These changes will come into effect from May 1, 2020.

Year 2020 has started on a positive note for the MF industry. Data available on SIP also shows an encouraging trend. The monthly inflows through SIP reached an all-time high of Rs 8,532 crore in January 2020. Moreover, AMFI data shows that on an average, the MF industry has added close to 9.80 lakh SIP accounts each month during the FY 2019-20, with an average SIP ticket size of about Rs 2,800 per SIP account. Net SIPs in the MF industry has risen to a 20-month high of 6.12 lakh in January 2020. Net SIPs is new SIP registered minus ceased SIPs. The increase in net SIPs was due to a sharp rise in new registered SIPs, which outdid the marginal increase in ceased SIPs. In January 2020, the number of new SIPs registered surged to 12.07 lakh, a record high for the MF industry. Meanwhile number of SIPs ceased, which includes discontinued and completed SIP accounts, touched 5.95 lakh. This rise in net SIPs can be attributed to improved sentiments amid hopes of broad-based market recovery, rising popularity of SIPs and increase in the number of online MF platforms. . Overall, the MF industry has 3.04 crore active SIP accounts.