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.