FUND
FULCRUM
May
2020
Equity
funds across multi-cap and large funds registered the highest inflows in March
2020, at a time when outflows from liquid funds more than doubled. Liquid
fund outflows stood at Rs 110,037 crore in March 2020, way higher than Rs
43,825 crore outflow in February 2020, according to data from the Association
of Mutual Funds in India (AMFI). Corporates normally park their money in liquid
schemes to meet their short-term needs instead of leaving it idling in bank
current accounts. Outflows from liquid funds in March 2020 were on account of
corporate advance tax payment and meeting capital adequacy. Within the debt
category, credit risk funds continued to witness outflows. However, outflows
have increased to Rs 5,568 crore as compared to a lower outflow of Rs 637 crore
a month ago. Continuing downgrades of debt instruments from IL&FS, Dewan
Housing Finance (DHFL) and Reliance Home Finance by rating agencies have hurt
credit risk funds since the troubles first surfaced in June 2018. Defaults by
non-banking financial companies (NBFCs) have continued to impact credit risk
funds. The saving grace was overnight funds that saw an inflow of Rs 26,653
crore in March 2020 compared to outflows of Rs 1,473 crore in February 2020. On
the equity side, all categories registered inflows reposing retail investors’
continued faith in equities despite Nifty registering five-year low in March
2020. Sensex and Nifty indices each fell 23 percent in March 2020. Multi-cap
and large-cap funds saw the highest inflows of Rs 2,268 crore and Rs 2,060
crores, respectively. In comparison, multi-cap funds had to register inflows of
Rs 1,624 crore and large-cap funds have reported inflows worth Rs 1,606 crore. Fund
managers attributed inflows across capitalization categories to attractive
valuations, which is lowest since 2015. Focussed funds brought in net inflows
of Rs 2,000 crore, Midcap funds saw an inflow of Rs 1,233 crore. Further, March
being financial ending and also tax investment month, ELSS added another net
inflow of Rs 1,554 crore to MF Industry AUM. Exchange-traded funds saw inflows
worth Rs 2,076 crores in March 2020 on back of Rs 16,344 crore in February 2020.
The suffering category was hybrid schemes category. Within this category, balanced
fund category registered outflows of Rs 1,515 crore and Arbitrage Funds saw a
huge unprecedented outflow of Rs 33,767 crores in March 2020. Overall, the
industry witnessed outflows of Rs 212,737 crores on back of outflows of Rs
1,985.52 crore in February 2020. As a consequence,AUM fell marginally to Rs
22.26 lakh crore, a recent low compared to Rs 27 lakh crore levels noticed
during January 2020 when Index was at its peak.
Mutual
fund industry has added more than 72 lakh folios in 2019-20 taking the total
tally to nearly 9 crore mark. However, the pace of growth in folio numbers
dropped in the just concluded financial year 2019-20 as compared to preceding
two fiscal, which suggests investors' understanding about market risks
associated with such schemes. 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. In comparison, the industry had added 1.13 crore
investors account in 2018-19 and 1.6 crore accounts in 2017-18, according to
data from Association of Mutual Funds in India. The mutual fund space saw an
addition of over 67 lakh folios in 2016-17 and 59 lakh in 2015-16. According to
the data, the number of folios with 44 fund houses rose to 8.97 crore at the end
of March 2020 from 8.24 crore in March 2019, registering a gain of 72.89 lakh
folios. The addition of folios indicates investors' understanding about market
risks associated with the mutual fund schemes. Investor account in equity oriented
schemes surged by over 15 lakh to 6.44 crore at the end of past fiscal from
6.29 crore in March 2019. However, debt-oriented scheme folios count dropped by
45 lakh to 71.78 lakh. Within the debt category, liquid funds continued to top
the chart in terms of number of folios at 18.15 lakh, followed by low duration
fund at 9.64 lakh fund houses. The 44-player mutual fund industry has AUM of Rs
22.26 lakh crore at the end of March 2020, as compared to Rs 23.8 lakh crore in
March 2019. Overall, AUM grew to Rs 27.02 lakh crore in January-March 2020 from
Rs 24.4 lakh crore in October-December 2019.
20 fund houses
have witnessed their AUM increase in the March 2020 quarter. Overall, the MF
industry comprising 41 fund houses has added over Rs 25,500 crore in its AUM
kitty between January and March 2020. Among the gainers, SBI MF tops the
league. The largest fund house’s AUM grew by Rs 20,900 crore or 6% to reach Rs
3.73 lakh crore in the March quarter. Next in the list is Axis MF. The fund
house has added over Rs 15,530 crore to its total AUM, which took its total AUM
to Rs 1.38 lakh crore. The next two fund houses in this list are Edelweiss MF
and Kotak MF. While Edelweiss MF added over Rs 12,000 crore, Kotak MF
accumulated over Rs 9,120 crore during the quarter. Mirae Asset MF and DSP MF
added over Rs 3,000 crore each and emerged as the 5th and 6th top gainers in the
same quarter. AUM of HDFC MF declined by more than Rs 12,730 crore to Rs. 3.70
lakh crore. In AUM terms, SBI MF, HDFC MF and ICICI Prudential MF are the top 3
fund houses, respectively. Aditya Birla Sun Life MF and Nippon India MF are the
4th and 5th largest players in the MF industry. HDFC MF has emerged as the top
fund house in T30 cities with an average AUM of Rs 3.33 lakh crore in January
2020. The AAUM in T30 cities is nearly 86% of HDFC MF’s total assets. Next in
the list is ICICI Prudential MF with an average AUM of Rs.3.19 lakh crore. This
amounts to over 86% AAUM of its total assets. The third largest fund house
in this list is SBI MF, which is the leader in B30 cities. The fund house’s
average AUM in January stood at Rs 2.96 lakh crore, around 77% of its total
assets. Next in the list are Aditya Birla Sun Life MF with Rs 2.21 lakh
crore AAUM and Kotak MF with Rs 1.75 lakh crore AAUM. Among the top 20 fund
houses, IDFC MF relies the most on T30 cities with over 93% of its assets
coming from these cities. Next in this list is Edelweiss MF which gets close to
93% of its total AAUM from T30 cities followed by Kotak MF that gets 91%. Among
the top 20 fund houses, 15 fund houses have over 80% of their AAUM in T30
cities. Five fund houses - SBI, UTI, Sundaram, Canara Robeco and LIC - have
less than 80% assets in T30 cities.
The top 20 fund
houses that manage industry’s 96% assets have garnered around 44% of their
assets through the direct route. Data available on the website of these top 20
fund houses show that AAUM of these MFs stood at Rs 27.21 lakh crore in January
2020. Of this, Rs 12.18 lakh crore or 44% came via the direct route. SBI
MF’s AAUM through the direct route stood at Rs 2.14 lakh crore, a major chunk
of which came because of the flows from the government-run EPFO to its ETFs. Next
in the list is HDFC MF with Rs 1.66 lakh crore of direct AAUM followed by ICICI
Prudential MF with Rs 1.64 lakh crore of direct AAUM. Aditya Birla Sun Life MF
has occupied the 4th spot with Rs.1.25 lakh crore of direct AAUM and Kotak MF
at the 5th spot with Rs 1.03 lakh crore of direct AAUM. In percentage terms,
SBI MF has topped the table with 56% of its assets coming via direct route.
There were three other fund houses that have accumulated more than 50% of their
assets through the direct route. IDFC MF, Kotak MF and Invesco MF have fetched
54%, 53% and 51% of their assets from direct plan, respectively.
Distributors
continue to command a significant portion of the total MF industry’s assets.
AMFI latest data shows that the proportion of direct versus regular in the MF
industry was 45:55 i.e. 45% of industry’s assets has come from direct plan
while 55% of assets were invested through regular plans. The higher affinity
towards regular plans is largely due to contribution from individual investors.
AMFI data shows that 86% of retail investors AUM have been invested through
regular plans while 78% of HNIs’ assets have come to the industry through
regular plans. Many investors be it HNIs or retail prefer investing in mutual
funds through regular plans as they recognize the value added by distributors.
The trust factor also comes into play. In fact, the recent market turmoil has
made the case for expert advice stronger. In terms of scheme category, 81%
of equity assets has come from regular plan while 47% of debt AUM was in
regular plan as on March 2020. Meanwhile direct plan was seen as the most preferred
option for investment in ETFs and FOFs as nearly 80% assets in these fund
categories came through direct plan. Similarly, liquid/money market funds
were dominated by institutional investors with 72% of assets through direct
plan.
Investors prefer
SIP option for investing in mutual funds, as the industry garnered over Rs
1 lakh crore through this route in 2019-20, up 8 per cent from the preceding
fiscal, even as the broader market witnessed extreme volatility amid
concerns over the impact of coronavirus pandemic. Systematic investment plan
or SIP has been the preferred route for retail investors to
invest in mutual funds as it helps them reduce market timing risk. According
to the Association of Mutual Funds in India (AMFI),
SIP contribution in the just concluded fiscal 2019-20 rose to Rs 1,00,084
crore from Rs 92,693 crore in 2018-19. Inflows into SIPs have
averaged about Rs 8,200 crore in the past 12 months. Over the past few years,
inflows through SIPs have been showing an upward
trend. Investments of over Rs 67,000 crore through the mode were seen in
2017-18 and more than Rs 43,900 crore in 2016-17. Currently, mutual funds have
3.12 crore SIP accounts through which investors regularly invest in Indian
mutual fund schemes. The industry, on an average, added 9.95 lakh SIP accounts
each month during the last financial year, with an average ticket size of Rs
2,750. Mutual funds focussed on investing in fixed-income securities saw a
massive outflow of Rs 1.95 lakh crore in March 2020, after pulling out Rs
28,000 crore in the preceding month, mainly on account of withdrawal from
liquid funds. Most individual categories that invest in fixed-income securities
or debt funds saw outflows. However, overnight category managed to see positive
inflow. According to AMFI, mutual funds that invest in fixed-income securities
saw an outflow to the tune of Rs 1.95 lakh crore last month as compared to a
withdrawal of nearly Rs 28,000 crore in February 2020. In January, the segment
had witnessed a fund infusion of Rs 1.09 lakh crore. A total of Rs 1.10 lakh
crore was taken out from liquid funds, which invest in cash assets such as
treasury bills, certificates of deposit and commercial paper for shorter
horizon. Apart from liquid funds, a net withdrawal of over Rs 29,000 crore was
seen from ultra-short duration funds and nearly Rs 20,000 crore from low
duration funds. In addition, banking and PSU funds saw an outflow to the tune
of over Rs 6,300 crore, while the same for credit risk fund was over Rs 5,500
crore and corporate bond category close to Rs 3,800 crore. However, inflow in
overnight schemes, which invest in securities with a maturity of one day, stood
at Rs 26,654 crore. On the other hand, investors pumped Rs 11,485 crore in
equity mutual funds, making it the highest level in one year. This comes amid
the broader market witnessing heavy volatility on concerns over the impact of
coronavirus. Overall, the mutual fund industry witnessed a net outflow of Rs
2.13 lakh crore across all segments. This comes following an outflow of Rs
1,985 crore in February 2020.
Recent AMFI data shows that MF
industry has witnessed discontinuation of 5.40 lakh SIP accounts in April 2020
compared to 6.02 lakh in March, 5.74 in February, 5.95 lakh in January and 5.91
lakh in December. This can be attributed to recent recovery in markets,
handholding by advisors and distributors and increasing awareness about mutual
funds and growing maturity of investors. Many people have realised that the
recent volatility in the market is due to the shock of the covid 19 pandemic. The
decline in discontinuation is due to SIP pause facility. Many investors who
have paused their SIPs in March 2020 due to financial constraint have restarted
their SIPs in April 2020.
Piquant Parade
Manulife, Canada based global financial
services group has completed acquisition of 49% stake in Mahindra AMC. With
this, the fund house will be called Mahindra Manulife Investment Management,
subject to approval from ROC and SEBI. Manulife has invested US$ 35 million
(around Rs 265 crore) in this joint venture. This indicates that Mahindra AMC
is valued at 10% of its assets. The fund house manages AUM of Rs.5400 crore as
on March 2020. Mahindra AMC and Manulife had announced that they would enter
into a 51:49 joint venture (JV) in June 2019. The JV aims to expand its fund
offerings, drive fund penetration and achieve long term wealth creation in
India. Manulife is a leading international financial services group, providing
asset management and life insurance solutions. AUM of the entity stands over
US$ 915 billion as of December 31, 2019. Manulife Investment Management
naturally fits as the right strategic partner for Mahindra Mutual Fund, as they
bring over 150 years of fund products experience across all types of economic
cycles and scenarios. Besides, their global best practices and processes will
help Indian investors manage risk more sensibly.
Many fund houses and KFintech have
introduced SIP pause facility through which distributors can discontinue SIP of
their clients for 1-6 months. Of the 23 AMCs working with KFintech, 17 fund
houses – Axis MF, Baroda MF, BNP Paribas MF, Essel MF, Edelweiss MF, Invesco
MF, LIC MF, Mirae Asset MF, Motilal Oswal, Nippon India MF, PGIM MF, Principal
MF, Quant MF, Quantum MF, Taurus MF, Sundaram MF and UTI MF have introduced SIP
pause facility on their websites. The pause facility introduced by AMCs will be
helpful for many individual MFDs in these challenging times.
Regulatory Rigmarole
Due to practical difficulties in tracking
dividend income at PAN-level, many fund houses have decided to deduct TDS irrespective
of dividend income. As a result, many fund houses have started deducting
10% TDS on dividend income from April 1, 2020 even if it does not exceed
Rs.5000. In an FAQ released recently, HDFC Mutual Fund and ICICI Prudential
MF said that since the threshold limit is applicable for aggregate dividend
paid in a financial year, it has to be computed at the PAN level. However, on
account of practical difficulties involved due to unique nature of mutual fund
investments and different schemes involved, both the fund houses deduct TDS
from each dividend declared i.e. even without reaching Rs.5,000 threshold. In
case of total TDS exceeding the actual tax liability of any investor, he can
claim refund while filing income-tax return. A senior RTA official requesting
anonymity said that many investors end up not paying taxes on their dividend
income if fund houses follow threshold limit. For instance, if an investor
receives Rs.4900 as dividend income from xyz scheme and after a few months,
receives another Rs.101 from the scheme, it will be impossible for fund house
to deduct Rs.500 from Rs.101 i.e. 10% on dividend income. Further, fund houses
clarified that they will deduct 20% TDS on dividend of NRIs and PAN exempted
folios.
SEBI has modified valuation norms for debt
instruments held by fund houses. In a recent circular, the market
regulator has asked valuation agencies to differentiate between a usual default
and default by the issuer due to the nationwide lockdown and the three-month
loan moratorium/deferment on payment permitted by the RBI. “Based
on assessment, if the valuation agencies
appointed by AMFI are of the view that the delay in payment of
interest/principal or extension of maturity of a
security by the issuer has arisen solely due toCOVID-19
pandemic
lockdown and/or in light of the
moratorium permitted by RBI creating temporary operational
challenges in servicing debt, then
valuation agencies may not consider the same
as a default for the purpose of valuation of money
market or debt securities held by MFs,” the circular noted. Further, the
regulator said that if there is any difference in the valuation of securities
provided by two valuation agencies, the conservative valuation shall be
accepted. The relaxation in terms of valuation will be in force till the period
of moratorium by the RBI.
SEBI has directed stock exchange platforms
like BSE Star MF and NSE NMF II to offer direct plans to investors. So far,
exchange platforms used to offer direct plans to those investing through RIAs. The
move has bought parity between MF Utility and exchange platforms. In a
circular, SEBI said, “In order to increase
the reach of this platform, it has
been decided to allow investors to directly
access infrastructure of the recognised stock
exchanges to purchase and redeem
mutual fund units directly from
mutual funds.” Exchange platforms are not mutual fund distribution platforms which
will attract new investors.
With a view to make on boarding process
easier during nationwide lockdown, SEBI has relaxed KYC norms in mutual funds,
PMS and AIF. With this, the market regulator has done with requirement of
physical in person verification (IPV) and video in person verification (VIPV)
if investors undergo KYC using Aadhaar based authentication or he submits
necessary documents through the government backed app ‘digilocker’ or any other
authentic source which enables online verification service. However, SEBI
clarified that there is no relaxation on documents. That means, investors will
have to continue to submit PAN, proof of identity and cancelled cheque. Instead
of submitting self-attested copies of these documents along with wet signature,
investors can submit it digitally through digilocker or eSign scanned copies. In
addition, SEBI has allowed all registered intermediaries like fund houses, PMS
players, AIF players and RIAs to offer app based video KYC facility to onboard
new clients digitally. These intermediaries will have to ensure that they are
ready with necessary infrastructure to verify KYC documents online and
facilitate video in person verification.
SEBI has asked RTAs and fund houses to
continue the reduced cut-off timing for both subscription and redemption in
mutual fund schemes. The move was taken after RBI has extended the time
line for trading hours of various RBI regulated securities. With this, the
reduced cut-off timings for MF transactions are 12:30 p.m for liquid and
overnight funds subscription, 1 pm irrespective of ticket size for equity
funds, hybrid funds and other debt funds and 1 pm for redemption of all schemes.
The cut off timing is applicable irrespective of ticket size.
Markets regulator SEBI has asked stock
brokers, depositories, mutual fund houses and other market intermediaries to
ensure strict compliance with the prevention of unlawful activities law. In
a statement, SEBI advised market intermediaries to ensure compliance with
instructions pertaining to UAPA or The Unlawful Activities (Prevention) Act. In
addition, the regulator has asked market entities to ensure that accounts are
not opened in the name of anyone whose name appears in updated list of
individuals and entities linked to Taliban and Al-Qaida issued by the United
Nation's Security Council. Also, the market intermediaries have been asked to
comply with anti-money laundering guidelines and obligation for combating
terrorism financing. The statement comes after the Ministry of External Affairs
has forwarded a notification issued by United Nations' Security Council
Committee concerning ISIL (Da'esh), Al-Qaida, and associated individuals,
groups, undertakings and entities regarding changes in the list of individuals
and entities.
Keeping in mind the lockdown imposed to
tackle coronavirus, SEBI has given one month extension to AMCs to comply with
disclosure norms and new investment norms on liquid funds. Among the key
relaxations are the requirement to disclose half-yearly unaudited financial
results is now extended to May 31, 2020 from April 30, 2010 and yearly
disclosure of investor complaints to June 30, 2020. Similarly, the deadline to
disclose commission paid to MF distributors has been extended to May 10, 2020. Also,
new investments norms related to liquid funds such as keeping 20% of liquid
fund assets in liquid assets, revision in sectoral level cap and amortization
based on valuation have now been extended to May 1, 2020. Mumbai distributor. SEBI's
move will give relief to debt funds investors and will not add to existing
volatility. In addition, fund houses can now launch their NFOs within a year of
getting SEBI approval. Finally, the market regulator has clarified that AMCs
need not temporarily require maintaining call recording of deals subject to
checks and balances deployed by them. SEBI said, “In light of
difficulties expressed by AMCs, the access control presently exercised in the
AMC’s dealing room including call recording of deals is temporarily relaxed
subject to checks and balances including electronic confirmation by way of
email or other system having audit trail are in place.”
Industry body AMFI said mutual fund houses
have been able to manage day-to-day redemptions through orderly liquidation of
portfolios due to acceptability of underlying securities in the secondary
market and measures taken by regulator SEBI to deepen the debt market. SEBI
in October 2019 in consultation with AMFI and after the deliberation at the
mutual fund advisory committee (MFAC) proposed calibrated reduction in limits
for investment in unlisted securities in mutual fund schemes. Further, listing
guidelines were suitably modified to facilitate listing for instruments like
commercial paper which hitherto were always unlisted. In addition, issuers were
encouraged to seek listing of securities on exchanges for prior issuances. All
these steps were taken to ensure that every market participant had access to
relevant information which will enable fair price discovery and improve
secondary market liquidity. Global experience suggests that listing on
exchanges create better dissemination of information resulting in finer price
discovery and improved liquidity in secondary markets.
Franklin Templeton MF has
borrowed funds to meet the redemption pressure during lockdown 1.0. Currently,
SEBI allows fund houses to borrow funds up to 20% of the AUM to meet redemption
requirements. The fund house borrowed 30% in a few schemes after taking SEBI’s
approval during lockdown 1.0. However, the government has extended the lockdown
adding to the woes of the fund house. The fund house continued to witness
heightened redemption volumes and reduced inflows. Also, high levels of
borrowing could have magnified the effects of any negative credit events in the
portfolio. The fund house had explored the possibility of suspending
redemptions until market conditions stabilize without winding up the schemes.
However, conditions for such a suspension under the current regulatory
framework, such as a maximum suspension period of 10 working days (in 90 days)
and the requirement to honour redemptions up to Rs.2 lakh per day per investor,
rendered this approach unviable to meet the severe and sustained impact of the
current crisis. Also, since the fund house has to honour redemptions under any
circumstances, fund manager could be forced to sell the relatively better
instrument in the portfolio to meet redemption. As a result, the proportion of
relatively inferior securities could have increased in the portfolio affecting
investors who did not exit. The fund house said that they have taken this
decision to protect the value for all investors. The schemes will return the
money to unit holders in a staggered manner based on scheme’s portfolio
maturity. The fund house will either wait for maturity of securities or sell
securities at reasonable amount without raising impact cost. This essentially
means, funds having short term debt securities like short term funds and
ultra-short term funds will return the money more quickly than credit funds.
Even amid the
nationwide lockdown and volatile equity markets, the MF industry has added over
1 lakh new investors in April 2020. In April 2020, the MF industry added 1.11
lakh unique investors with PAN, taking the overall count to 2.04 crore
investors from 2.03 crore investors in March 2020. Besides, there are 4.50 lakh
unique investors without PAN which takes the overall unique investors count to
2.09 crore as of April, 2020. However, if we dig deeper, the MF industry has
witnessed a marginal slowdown in terms of addition of new investors. The
industry had added 1.45 lakh new investors in March 2020, 2.23 lakh in February
2020 and 1.51 lakh in January 2020. Nevertheless, given the circumstances,
April numbers are no less than heartening, especially given the fact that many
distributors, advisors and bank RMs rely heavily on in person meetings and
physical transactions to onboard clients.
