FUND FULCRUM (contd.)

June 2020

Mutual Fund industry’s top 20 fund houses have Rs 9.70 lakh crore in equities, according to a report by Motilal Oswal Financial Services. The total equity value of the top 20 fund houses decreased 1.6% (month on month) in May 2020, as against the Nifty’s decline of 2.8%. Among all the fund houses, SBI MF has the highest exposure to equities at Rs 1.70 lakh crore in May 2020. Next in the list is HDFC MF with Rs 1.19 lakh crore, closely followed by ICICI Prudential MF at Rs 1.17 lakh crore, Nippon India MF at Rs 80,500 crore and UTI MF at Rs 66,900 crore. Apart from the top 5 fund houses, 3 other fund houses - Aditya Birla Sun Life, Axis and Kotak - have more than Rs 50,000 crore assets in equities. ABSL MF’s holding in equities stood at Rs 66,400 crore, Axis MF’s at Rs 58,300 crore and Kotak MF’s at 58,200 crore. Among the top 10 funds, the highest decrease was seen in HDFC MF at -3.6%, Nippon India MF at -3.6%, Franklin Templeton MF at -2.4%, SBI MF at -2.2% and Axis MF at -1.9%.

The latest AMFI data shows that the industry has added over 8 lakh new folios in B30 cities during lockdown i.e. April 2020 and May 2020. The total folio count in B30 went up to 3.77 crore in May 2020 from 3.69 crore in March 2020. Similarly, the mutual fund industry has added 5 lakh new folios during lockdown in T30 cities i.e. from 5.28 crore to 5.33 crore. This indicates that new folio addition in B30 cities is higher than T30 cities. This can be attributed to significant contribution from banks and national distributors in B30 cities. Lockdown norms were not so strict in most B30 cities. In addition, banks and national distributors were allowed to remain operational with less capacity. Also, many distributors continued their office in less affected cities. Many distributors in B30 cities relying on physical transactions have started using online platforms to execute mutual fund transactions during the lockdown. To top it all, the recent market correction has also encouraged many investors to invest in equity funds.

Piquant Parade

UTI AMC has received approval from SEBI to launch an initial public offer (IPO). The public offer is expected to raise over Rs 3,000 crore. UTI AMC will be the third fund house to get listed on BSE and NSE after HDFC AMC and Nippon India MF. The AMC’s IPO comprises sale of 3.90 crore equity shares by existing shareholders, which includes SBI, LIC, Bank of Baroda (BoB), Punjab National Bank (PNB) and T Rowe Price International. SBI, LIC, PNB and BoB hold 18.5% stake each in UTI AMC. The US-based T Rowe Price holds 26% stake in the AMC. SBI, LIC and BoB are planning to sell 1.04 crore shares each. PNB and T Rowe Price International are planning to offload 38.03 lakh shares each. In December 2019, SEBI had asked SBI, LIC and PNB to reduce their stakes to below 10% in UTI AMC by December 2020. According to SEBI's regulations, a shareholder or a sponsor owning at least 10% in an AMC is not allowed to have 10% or more stake in another mutual fund house in India.

Regulatory Rigmarole

In a move to provide exit option to investors of wound up schemes, SEBI has asked fund houses to list units of wound up schemes on stock exchange platforms in line with units of close end schemes and segregated portfolio. With this, Franklin Templeton will have to list units of wound up schemes on stock exchanges. In a circular, SEBI said, “As per MF regulations, there are several steps envisaged with respect to winding up of mutual fund schemes before the scheme ceases to exist. During this process, such units can be listed and traded on a recognized stock exchange, which may provide an exit to investors. Accordingly, the units of mutual fund schemes which are in the process of winding-up in terms of Regulation 39(2) (a) of MF Regulations shall be listed on recognized stock exchange, subject to compliance with listing formalities as stipulated by the stock exchange. However, pursuant to listing, trading on stock exchange mechanism will not be mandatory for investors, rather, if they so desire, may avail an optional channel to exit provided to them.” SEBI has asked fund houses, RTAs and exchange platforms to put in place mechanism for order placement, execution, payment and settlement. In addition, the market regulator has clarified that AMC sponsors, trustees and employees cannot transact in the units of wound up schemes. This exit option would not make any difference as investors may not find buyers for units of wound up schemes in stock exchange platforms. There is hardly any transaction on stock exchanges for MF units. Even units of close ended schemes are available at a discount due to demand and supply gap. In addition, the requirement of having demat account to buy such units makes it even more unattractive.

SEBI has said mutual funds can invest additional 15 percent of AUM in G-Secs & T-Bills in corporate bond, banking & PSU and credit risk funds. G-Secs & T-Bills are considered to be safer and most liquid form of instrument. The regulator has said that such additional investment in G-secs or T-Bills is optional for asset management companies. SEBI aims to make the portfolio of these three categories of funds liquid given that the fund houses witnessed tremendous redemption pressure particularly after Franklin Templeton Mutual Fund shut its six schemes creating panic. Fund managers said the credit risk funds and corporate funds categories was reeling under the stress of redemptions as most of the fund houses had their underlying assets deployed in highly illiquid corporate bonds. SEBI has also revised the scheme characteristic for all three schemes. For Corporate Bond Funds, SEBI said minimum 65 percent of total assets must be in AA+ rated papers and above rated papers. Earlier, the minimum limit was 80 percent. Similarly, for credit Risk funds minimum 50 percent of total assets should be in AA & below rated corporate bonds. Earlier, credit risk funds were allowed minimum investment of 65 percent in AA-rated and below-rated papers. The objective of the credit risk fund is to generate income investing predominantly in AA and below rated corporate bonds while maintaining the optimum balance of, safety and liquidity. In case of Banking & PSU debt funds, the minimum investment in debt instruments of banks, public sector undertakings, public financial institutions, and municipal bonds has been reduced to 65 percent, from 80 percent, earlier. Mutual funds are only allowed these changes for a period of three months starting from May 18, 2020. However, fund houses want these changes to be allowed permanently. It is difficult to sell corporate bonds and create cash in case of large redemptions even in normal times. And in situations like this it becomes even more challenging to find liquidity in corporate bonds. Thus it makes sense to have larger exposure to government securities. Liquidity problem with lower rated corporate debt has been ignored for very long time. This is now haunting the entire debt mutual fund space. SEBI should re look the categorisation of debt funds. In the current structure funds are categorised based on duration and credit risk separately. There should be more holistic approach towards both the risk factors along with their liquidity profile.

Market regulator SEBI said mutual funds cannot invest in physical goods barring gold through gold exchange traded funds (ETFs). Exchange traded commodity derivatives (ETCDs) having gold as the underlying asset would be considered as 'gold-related instrument' for gold ETFs. "No mutual fund schemes shall invest in physical goods except in 'gold' through Gold ETFs," the Securities and Exchange Board of India (SEBI) said in a circular. However, as mutual fund schemes participating in ETCDs may hold the underlying goods in case of physical settlement of contracts, in that case the mutual funds will have to dispose of such goods from the books of the scheme at the earliest. With regard to physical gold and silver, SEBI said such goods will have to be disposed of not exceeding 180 days from the date of holding of such physical goods. For other goods, funds need to dispose them by the immediate next expiry day of the same contract series of the commodity. "However, if final expiry date of the goods falls before the immediate next expiry day of the same contract series of the said commodity, then within 30 days from the date of holding of physical goods," the regulator noted.

SEBI has asked fund houses and mutual fund distributors to get registered with KYC user agencies (KUAs) to do Aadhaar based eKYC of their clients. With this, AMCs and distributors will be required to become sub-KUA with any of the eight KUAs – BSE, NSE, CDSL India, CDSL Ventures, NSDL Database, NSE Data and Analytics, CAMS Investor Services and Computer Age Management Services. SEBI said, “The SEBI registered intermediaries / mutual fund distributors, who want to undertake Aadhaar authentication services through KUAs, shall enter into an agreement with KUA and get themselves registered with UIDAI as sub-KUAs. The agreement in this regard shall be as prescribed by UIDAI. Further, the KUAs and their Sub-KuAs shall follow the process as detailed in SEBI circular dated Nov 05, 2019 and as may be prescribed by UIDAI from time to time.” Earlier, many fund houses used to offer Aadhaar based eKYC. However, most of them have discontinued Aadhaar based eKYC due to stringent norms by UIDAI to become KUA and sub-KUA. Currently, many fund houses offer virtual IPV based video KYC to on board new clients due to two primary reasons – no limit on investments and easy norms prescribed by SEBI. In fact, two weeks back, SEBI has asked fund houses to ensure that they are ready with necessary infrastructure to verify KYC documents online and facilitate video in person verification. Distributors should rely on virtual IPV through video KYC service offered by AMCs to do KYC of their clients instead of Aadhar based eKYC. Almost all large AMCs offer these services to distributors. In fact, you can tie up with CAMS or Karvy Fintech directly to offer video KYC services. In a video KYC, you need to upload KYC documents of your clients such as photograph, PAN card, address proof and a cancelled cheque on AMC/RTA website. After uploading these documents, investors need to start real-time video recording using the front camera on their smartphone or the computer’s webcam and display the hard copies of all the required documents. Now, to complete the process, investors have to say ‘Hi’ and in some cases their date of birth during the video recording. If this verification fails, most video KYC facilitators will call your clients to do it manually through skype.

In a move to encourage ‘skin in the game’, SEBI has directed fund houses to invest 1% of the total funds raised or Rs.50 lakh, whichever is lesser in growth option of their NFOs. Interestingly, fund houses cannot withdraw this corpus till the closure of their scheme. In a press release, SEBI said, “The sponsor or asset management company is required to invest not less than one percent of the amount which would be raised in the new fund offer or fifty lakh rupees, whichever is less in such option of the scheme as may be specified by the board.” SEBI further said, “In this regard, it has been decided that the referred investment shall be made in growth option of the scheme.  For such schemes where growth option is not available the  investment  shall  be  made  in  the  dividend  reinvestment  option  of  the  scheme.  Further, for such schemes where growth option as well as dividend reinvestment option is not available the investment shall be made in the dividend option of the scheme.” This has come into effect immediately.

Fund houses have discontinued accepting purchase transactions in mutual funds through debit cards. This has come after SEBI has pointed out the issues regarding verification of such transactions. While many fund houses have discontinued facilitating such transactions, a few fund houses which are currently offering this facility will soon stop it. The key reason for discontinuation of this facility is difficulty in verification of third party transactions. We do not have mechanism to find out if the debit card transaction is done by the investor by himself. On the other hand, transaction through net banking requires authentication to execute transaction and hence, all AMCs facilitate transaction through it. As per regulation, mutual fund purchases have to be done through own account of an investor and third party payments are strictly not allowed.

With relaxation in lockdown norms, RTA agents – CAMS and KFinTech have resumed offices in most locations including large cities like Mumbai, New Delhi, Chennai, Kolkata, Ahmedabad, Bangalore and Hyderabad with safety precautions and minimal staff. In addition, many fund houses have reopened their offices in green and orange zones. With this, distributors relying on physical transactions have resumed their business. However, RTA agents have been witnessing huge surge in footfall by distributors closer to the cut-off time, which increases the risk for distributors and employees of RTA agents. Keeping this in mind, CAMS has requested distributors to submit MF application ahead of cut off time to avoid last minute overcrowding and maintain social distancing norms. Currently, the cut off timing for MF transactions is 1 pm for subscription of all mutual fund schemes.

People associated with mutual funds should not worry about their future growth as this business would emerge much stronger in a post covid-19 era. The mutual fund business is most resilient compared to other businesses like travel, hospitality, manufacturing and automobile industry. For instance, hotels and airlines have seen little or no earnings due to the lockdown. However, the MF industry would continue to get new business as many people have realized importance of financial savings and investments. In its quarterly estimates of household financial assets and liabilities, RBI has found that Indian households have been shifting their financial savings to mutual funds and insurance in the recent quarters. RBI said that while both financial assets and liabilities of household remain bank-centric, there was some shift in favour of mutual funds and insurance in recent quarters. RBI further said that this information on movement in financial assets and liabilities of household can provide a better understanding of the dynamics of growth in the Indian economy.

FUND FULCRUM

June 2020

Mutual Fund industry has witnessed a marginal growth of 2.5% in its AUM i.e. the mutual fund industry’s AUM has moved up to Rs.24.54 lakh crore in May 2020 from Rs.23.93 lakh crore in April 2020 according to AMFI data. In terms of net inflows in pure equity schemes, net inflows in May 2020 declined to Rs.5257 crore from Rs.6212 crore in April 2020. Among equity schemes, the large cap fund category witnessed the highest net inflows at Rs.1556 crore. Multi cap was the second most popular category with Rs.759 crore of inflows in May 2020. However, both the categories witnessed a marginal fall in net inflows compared to the previous month. In April 2020, large cap and multi cap funds received net inflows of Rs.1691 crore and Rs.1240 crore, respectively. Among hybrid funds, arbitrage fund was the only fund with positive net inflows of Rs.10,806 crore in May 2020. Overall, debt funds witnessed a rise with net inflows of Rs.63,666 crore in May 2020 as against Rs.43,432 crore in April 2020. This indicates a net increase of over Rs.20000 crore in one month. However, the flows were primarily driven by liquid funds which saw inflows worth Rs.61,871 crore. Meanwhile, overnight funds saw outflows worth Rs.15,881 crore in May 2020. Categories like ultrashort duration funds, low duration fund, money market fund, and short duration fund received inflows in May 2020 after heavy outflows in the previous month. Further, Monthly SIP flows decline marginally from Rs.8370 crore to Rs.8123 crore, a decline of Rs.247 crore. The total SIP AUM stood at Rs.2.76 lakh crore as on May 2020. Despite economic uncertainty and market volatility, investors show matured investment behaviour and continue to repose confidence in equity mutual funds as is evident from the robust monthly SIP contribution. On the debt side, investors taking advantage of reducing interest rates trend and shift towards high quality AAA rated instruments has resulted in steady rise in the net flows. Credit risk concerns have ebbed, following regulatory support, redemptions have come down and investors have been allocating higher quantum of savings to high quality debt paper.

According to data from Association of Mutual Funds in India, the number of folios with 44 fund houses rose to 9,10,41,392 at the end of May 2020, from 9,04,28,589 at the end of April 2020, registering a gain of 6.12 lakh folios. In comparison, the industry had added 6.82 lakh new folios in April 2020. The total folio count stood at 8.97 crore in March 2020, 8.88 crore in February 2020 and 8.85 crore in January 2020. Addition of folios suggests that investors were undeterred by the market volatility. Besides, it indicates their understanding of the market risks associated in the mutual fund schemes. The number of folios under the equity and equity-linked saving schemes rose by 3.22 lakh to 6.53 crore at the end of May 2020 as compared to 6.49 crore at the end of the preceding month. The folio count of debt oriented schemes went up by more than 30,600 to 71 lakh. Within the debt category, liquid funds continued to top the chart in terms of number of folios at over 19 lakh, followed by low duration fund at 9.3 lakh. Overall, mutual fund schemes witnessed an inflow of over Rs 70,800 crore last month, much higher than Rs 46,000 crore infusion in April 2020.  Recent AMFI data shows that mutual fund industry has witnessed discontinuation of 5.40 lakh SIP accounts in April 2020 compared to 6.02 lakh in March 2020, 5.74 lakh in February 2020, 5.95 lakh in January 2020 and 5.91 lakh in December 2020. This can be attributed to recent recovery in markets, handholding by advisors and distributors and increasing awareness about mutual funds.

In terms of managing equity assets in B30 cities, SBI MF has emerged as the top fund house with an average equity AUM of Rs 35,566 crore in March 2020. The fund house has benefitted from SBI’s strong banking channel in B30 cities. Data shows that nearly Rs 20,000 crore of equity AAUM has come through associate distributors in B30 cities, while Rs 12,502 crore came through non-associate distribution route. Associate distributors are those distributors who share parentage with the AMCs. HDFC MF is the second largest fund house in this space with an equity AAUM of Rs 33,101 crore. Next in the list is ICICI Prudential MF with an equity AAUM of Rs 27,854 crore. Other fund houses in the top five include Aditya Birla Sun Life MF and Nippon India MF. While Aditya Birla Sun Life MF’s equity AAUM in B30 cities stands at Rs 20,644 crore, equity AAUM in B30 cities of Nippon India MF is at Rs 20,475 crore.

·         In percentage terms, at nearly 42%, UTI MF has the highest equity AAUM from B30 locations among the top 10 fund houses

·         In percentage terms among the top 20 fund houses, Baroda MF has the highest equity AAUM at around 47%from B30 cities

·         LIC MF is another fund house that relies considerably on B30 cities.  Nearly 41% of its total equity assets comes from B30 cities

·         Of the top 21, five fund houses - Baroda, UTI, LIC, SBI and Sundaram - have more than 30% of their total AAUM in B30 cities

·         As many as 20 fund houses have more than Rs 1,000 crore of equity AAUM in B30 cities

HDFC MF leads in managing equity assets in T30 cities. HDFC MF’s total average equity AUM in T30 cities stood at Rs 1.08 lakh crore in March 2020. Of this, nearly Rs 73,858 crore of equity AUM has come via non associate distributors, Rs 10,366 crore through associate distributors and the remaining Rs 24,414 lakh crore via the direct route. ICICI Prudential MF is the second largest fund house in this list. The fund house has missed the top spot by a whisker with an equity AAUM of Rs 1.04 lakh crore in T30 cities. Like HDFC MF, ICICI Prudential MF also relies considerably on non-associate distributors. The fund house has garnered Rs 63,292 via non-associate distributors, Rs 15,940 through associate distributors and Rs 25,426 from the direct route. India’s largest fund house SBI MF is in the third position with Rs 60,006 crore of equity assets in B30 cities. Other top fund houses in this list include Aditya Birla Sun Life MF, Kotak MF and Nippon India MF. While ABSL MF’s equity AAUM in T30 stood at Rs 55,128 crore, Kotak MF’s at Rs 53,488 crore and Nippon India MF’s at Rs 52,082 crore.

·         JM Financial MF, HSBC MF, IIFL MF and Edelweiss MF are among the fund houses whose equity assets are highly concentrated in T30 cities

·         JM Financial MF’s 94% equity assets come from T30 cities. For HSBC MF, the number stands at 92%,  IIFL MF at 91% and Edelweiss MF at 90%

·         Overall, there are 17 fund houses which accumulate more than 80% of their equity assets from T30 cities  

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 investor AUM has been invested through regular plans while 78% of HNIs’ assets have come to the industry through regular plans. Individual investors continue to prefer distributors over direct 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 have 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. 

AMFI data shows that the share of individual investors in the mutual fund industry AUM fell to 52.2% in March 2020 from 55.1% in March 2019. The total assets of individual investors stood at Rs.12.90 lakh crore as on March 2020 compared to Rs.13.62 lakh crore in March 2019. Individual investors include retail investors and HNIs. In the last one year, equity and debt markets have witnessed many challenges. In addition, underperformance of equity funds especially in mid and small cap space and series of credit events have shifted individual investors focus to traditional investments like bank FDs and gold. On the contrary, institutional investors' share in the industry increased to 47.8% in March 2020 from 44.9% March 2019. About 93% of such investors are corporates while the rest are FIIs and banks. Further, data shows that equity oriented schemes derive 87% of their assets from individual investors.  Similarly, debt oriented schemes (56%), liquid funds (84%), ETFs, FoFs (92%) derive majority of their assets from institutional players. Overall, individual investors allocate 66% of their total investment in equity oriented schemes while institutional investors allocate 76% of their assets to liquid and debt oriented schemes. Usually, individual investors hold equity funds while institutional investors are inclined towards debt funds. 

Of the total Rs.3.70 lakh crore of retail equity assets, Rs.1.80 lakh crore of retail equity assets stayed put for more than two years as on March 2020, shows the age-wise analysis of MF assets. The proportion of retail equity AUM that stayed invested for more than two years increased in the last one year from 41.7% to 48.7%, an increase of 7%. Half of retail equity assets have remained invested for over two years indicating that investors have understood equity funds and can beat other asset classes in the long run. In fact, they have seen how so many investors have achieved their financial goals by remaining invested in equity funds for long term. Most asset classes have not performed well for quite some time. In such a scenario, many investors see equity funds as a better alternative to other asset classes. AMFI data further shows that 24% of total retail equity assets remained invested between 1 and 2 year period. In FY 2018-19, 23% of retail equity assets stayed put for 1-2 year.

The nationwide lockdown and volatile equity markets did not deter investors from participating in India’s growth story through mutual funds. The latest AMFI data shows that the MF industry has added close to 1.60 lakh unique investors with PAN, taking the overall investors count in mutual funds to 2.10 crore in May 2020 from 2.08 crore in March 2020. While the industry has added close to 54,000 new investors in May 2020, the MF industry added 1.04 lakh unique investors with PAN in April 2020 equity AAUM in B30 cities. However, if we dig deeper, the MF industry has witnessed a 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, these numbers are no less heartening given the fact that many distributors, advisors and bank RMs rely heavily on in person meetings and physical transactions to onboard clients.

Piquant Parade

AMCs are helping their distribution partners cope up with today’s challenging times through training programs. Aditya Birla Sun Life MF has been holding webinars for distributors to keep them motivated through these tough times. Motivational training programs have been scheduled zone-wise to ensure maximum reach. So far, seven sessions have been conducted with more than 1000 distributors taking part in these sessions. Besides, fund managers and sales heads have been continuously engaging with distributors to educate them about current market volatility through conference calls. SBI MF has also been conducting training programs on market dynamics and asset allocation. Further, SBI MF has set up a team to help MFDs shift from physical transactions to digital transactions through webinars. Quantum MF has a digital training platform which offers e-learning courses, advanced tools and calculators. It has started a telegram channel for MFDs to address their queries and concerns on mutual funds. The top management of Mirae Asset MF has been engaging with distributors through video conference on topics such as current market scenario, sales of their products, managing business during lockdown efficiently and so on. The turnout has been much higher on these digital platforms compared to physical meetings. He has been conducting video interviews with top distributors on Facebook Live to keep the distribution community motivated. Similarly, Franklin Templeton Academy has started offering a series of structured programs that touch upon different aspects of the investment advisory business such as practice management, soft skills, macroeconomics, financial markets and investment concepts. The platform offers “Netflix style” user interface. The key feature of this platform is smart and intelligent course recommendations depending on learner(s) behaviour and knowledge levels. With the launch of online learning platform, now Franklin Templeton has omni-channel training delivery formats through classroom sessions, webinar programs and FT Academy Online courses aimed at upskilling distributors. The platform also offers the option to enter into a private classroom (customized content) for distributors with specific needs for their teams and employees. Nippon India AMC has been conducting various activities to ensure that distribution partners adopt the digital route. The fund house has launched Digital@Edge, a face to face training session through Zoom. So far, they have conducted more than 50 sessions and over 2000 MFDs across the country have participated in them. These sessions have been designed as a mix of behavioural finance sessions to handhold distributors while dealing with their clients amidst uncertainty and fear on macroeconomics.  

IDFC Mutual Fund has launched its investor awareness initiative video jingle campaign – ‘Smart Bano, Invest Karo’ in Hindi and ‘Be Smart, Stay Invested’ in English. Both these videos promote the importance of staying invested in volatile times and investing money whenever the market corrects. IDFC MF commissioned the video jingle keeping in mind that the world in lockdown mode is going through a tough phase and the financial markets are in turmoil. People are worried about the state of their current investments and how they will perform in the future. IDFC Mutual Fund addressed this concern through the jingle in a light-hearted manner reminding everyone that even though the markets are down, investment opportunities still exist.

Mahindra Mutual Fund is now Mahindra Manulife Mutual Fund. With this, all schemes of the fund house will have the prefix Mahindra Manulife. The rationale for the acquisition was to look for an alliance that could bring fund management process with proven track record. Manulife is one of the big names in developed markets with focus on asset management business. The alliance will strengthen the fund management process which has proven track record of success across geographies. Manulife brings with it international experience. Manulife group has been active in many countries like US, Canada, Singapore, UK and so on. This alliance would help Mahindra Manulife Mutual Fund to learn from international practices and implement proven business development practices that have worked well in international markets. This fund house would explore opportunities in international funds /offshore funds to leverage the international expertise of Manulife. However, the fund house will wait for opportune time to launch such products. In April 2020, Manulife, Canada based global financial services group completed acquisition of 49% stake in Mahindra AMC. Manulife 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. Manulife is a leading international financial services group, providing asset management and life insurance solutions with AUM of over US$ 915 billion as of December 31, 2019.

Franklin Templeton India Mutual Fund has appointed Kotak Bank to assist them in monetizing assets of the wound up schemes. Kotak Bank through its debt capital markets team will work closely with Franklin Templeton trustees to assist with all portfolio actions in the six schemes to be wound up. The fund house believes that that this appointment will expedite the asset monetization process of the fund house. Franklin Templeton is committed to ensuring an orderly and equitable exit for all investors at the earliest possible time, and the fund house will partner with the Board of Trustees and Kotak Mahindra Bank to ensure an efficient wind-up of these schemes, while preserving maximum value for investors.

…to be continued…

NFONEST

June 2020

A sole NFO adorns the June 2020 NFONEST.

BOI AXA Multi Cap Fund

Opens: June 10, 2020

Closes: June 23, 2020

BOI AXA Mutual Fund has launched an open ended equity scheme - BOI AXA Multi Cap Fund. Following a Multi Cap mandate, the fund aims to invest in stocks across market capitalisation i.e. large cap, mid cap, small cap stocks. Accordingly, the investment objective of the scheme is to generate long term capital appreciation by investing predominantly in equity and equity-related securities across various market capitalization – 65% to 100% in equity and equity related instruments, 0% to 35% in debt, including corporate debt and money market instruments and 0% to 10% in units issued by REITs and InvITs. The scheme’s performance will be benchmarked against S&P BSE 500 – TRI (Total Return Index). It will be managed by Mr. Alok Singh.

DSP ESG Fund, HSBC Focused Equity Fund, Aditya Birla Sunlife Nifty 50 Equal Weight Index Fund, Nippon India ETF 5 Year Gilt, SBI ETF Consumption, SBI ETF Private Bank, Axis Global Disruption Fund of Fund, Axis Global Equity Alpha Fund of Fund, Axis Capital Protection Oriented Fund – Series 7-10, Axis Banking ETF, Mahindra Focused Equity Yojana, Motilal Oswal Multi Asset Fund, Principal Largecap Fund, Mahindra Arbitrage Yojana, HSBC Midcap Equity Fund and ICICI Prudential Alpha Low Vol 30 ETF are expected to be launched in the coming months.

GEMGAZE

June 2020

The dip in the one-year performance of the Diversified Equity Fund category as a whole has created a dent in the performance of Birla Sunlife Frontline Equity Fund. Hence the fund has been shown the exit door and red carpet welcome has been accorded to Axis Bluechip Fund and Mirae Asset Largecap Fund. All the other GEMs from the 2019 GEMGAZE have performed reasonably well through thick and thin and figure prominently in the 2020 GEMGAZE too. 

HDFC Midcap Opportunities Fund Gem

A silent consistent performer over the years, the Rs. 18,455crore HDFC Mid-Cap Opportunities Fund, launched in June 2007, has made its name among consistent performers in the mutual fund arena. This fund is an open ended scheme managed by star fund manager Chirag Setalvad since inception. HDFC Mid-Cap Opportunities Fund earlier had a mandate to invest in a mix of mid-caps and small-cap stocks (92.35% at present). However, the aim now will be to predominantly build a portfolio of mid-cap companies (67.37% at present) that have reasonable growth prospects, sound financial strength, sustainable business models, and acceptable valuation that offer potential for capital appreciation. HDFC Mid-Cap Opportunities Fund holds a well-diversified equity portfolio with the top three sectors, Finance, Chemicals and Healthcare constituting 40.90% of the portfolio. None of the holdings have an exposure of over 5% in the portfolio. Out of the 74 stocks in the portfolio, the top 5 holdings command an allocation of 19%. Over the past five years, HDFC Midcap Opportunities Fund has taken a lead over the benchmark right from the very beginning. The five-year and ten-year returns of the fund are 4.34% and 12.72% as against the category average of 4.25% and 11.25% respectively. In terms of long-term performance, HDFC Opportunities Fund has generated strong returns in the market rallies of the past and has been able to restrict losses in a bear market. Its return since inception is 12.36%. The fund is benchmarked against the NIFTY Midcap 100 TRI. The expense ratio is 1.85% and the turnover ratio is a meager 3.93%. 

ICICI Prudential Bluechip Fund (erstwhile ICICI Prudential Focused Bluechip Fund) Gem

Among mutual fund schemes that have singular focus on large-sized companies, the Rs. 21,821 crore ICICI Prudential Bluechip Fund has distinguished itself by consistently beating its benchmark and peers by a reasonably good margin. The fund has traditionally had a higher-than-category allocation to large caps (88.92% at present). Its mandate earlier called for a concentrated portfolio, with the stock picks drawn from the top 200 stocks by market cap. Post SEBI reclassification, the fund is repositioned as a pure large-cap fund. This will not materially change its risk or return profile, given that the market-cap range is practically the same. The 'focused' approach has been dropped from the mandate. It holds a well-diversified equity portfolio with the top three sectors, Finance, Energy and Technology constituting 54.84% of the portfolio. Out of the 66 stocks in the portfolio, the top 5 holdings command an allocation of 34.35%. This is in any case a positive, given that the fund's burgeoning size made a very compact portfolio difficult. The only limitation to assessing this fund is that despite its consistent show in the last eleven years, it has not seen a serious bear market since inception. In 2011 and in 2015, it managed to contain downside well relative to the market. The fund has been managed by Rajat Chandak since July 2017 and Anish Tawakley since September 2018. In the past ten- and five-year periods, the scheme has delivered 10.34% and 5.98% returns, while the category average has been 8.1% and 5.16% in the same period, respectively.  The expense ratio is 1.92% and the turnover ratio is 13%. Investors looking to invest in an ‘all-weather’ and ‘true to-its-label’ large cap portfolio can consider investing in this scheme. 

DSP Equity Opportunities Fund (erstwhile DSPBR Equity Opportunities Fund) Gem

A very steady performer in the multi-cap category, this Rs. 4,439 crore fund, incorporated in May 2000, is a flexi-cap fund with no pre-defined market capitalisation limits. The fund had a bias towards large caps. But, in recent times, the fund has maintained a 51.49% plus large-cap exposure, with mid-cap stocks at about 43.41%. It holds a well-diversified equity portfolio with the top three sectors, Finance, Energy and Construction constituting 44.3% of the portfolio. Out of the 63 stocks in the portfolio, the top 5 holdings command an allocation of 26.46%.The expense ratio is 1.96% and the turnover ratio is 126%. The fund has been managed by Rohit Singhania since June 2015. In the past ten- and five-year periods, the scheme has delivered 9.73% and 6.77% returns, while the category average, has been 9.12% and 4.93% in the same period, respectively. The scheme has been a consistent outperformer in recent years.

Axis Bluechip Fund Gem

Axis Bluechip Fund has been one of the most consistent diversified equity funds since its inception in January 2010. This fund has generated significant alpha when compared to the category over a decade with a return of 10.58% as against the category average return of 8.08%. Its five-year return is 8.62% as against the category average return of 5.15%. Good performance resulted in assets expanding to over Rs 12,717 crore. With 83.1% of the portfolio in equities, the fund has a bias for large cap growth oriented stocks. Large cap stocks account for 100% of the portfolio value at present. In terms of sector allocation, the portfolio has a bias towards sectors like Finance, Technology and FMCG which comprise about 52.35% of the portfolio value. In terms of company concentration the fund is fairly well diversified, with the top 5 companies, HDFC Bank, Avenue Supermarts, Kotak Mahindra Bank, Infosys and ICICI Bank accounting for only 33.08% of the portfolio value. The fund has around 23 stocks in the portfolio. The expense ratio of the fund is 1.98% and turnover is 99%. The fund has been managed by Shreyash Devalkar, well-known for his deftly managed investment strategy, since November 2016.

Mirae Asset Largecap Fund Gem

Mirae Asset Largecap Fund has been one of the most consistent diversified equity funds since its inception in April 2008. This fund has generated significant alpha when compared to the category over a decade with a return of 11.97% as against the category average return of 8.08%. Its five-year return is 7.64% as against the category average return of 5.15%. Good performance resulted in assets expanding to over Rs 15,347 crore. With 98.2% of the portfolio in equities, the fund has a bias for large cap growth oriented stocks. Large cap stocks account for 83.96% of the portfolio value at present. In terms of sector allocation, the portfolio has a bias towards sectors like Finance, Energy and Technology which comprise about 59.73% of the portfolio value. In terms of company concentration the fund is fairly well diversified, the top 5 companies, HDFC Bank, Reliance Industries, ICICI Bank, Infosys and Tata Consultancy Services account for only 36.19% of the portfolio value. The fund has around 55 stocks in the portfolio. The expense ratio of the fund is 1.67% and turnover is 21%. The fund has been managed by Harshad Borawake since May 2017 and Gaurav Misra since January 2019. But a steady management team manages the fund with style continuity. Mirae Asset Largecap Fund has built a strong reputation as a wealth creator for its investors.

FUND FLAVOUR

June 2020

Multifarious…

The equity market continued to witness higher volatility in 2019 and 2020 with the deepening of liquidity crisis in NBFCs, weak consumption growth, lower industrial and agricultural output, and global factors such as the US-China trade war. If you invest in diversified equity funds, it can provide the much needed stability to tide over turbulent market conditions. So if you are looking to grow your wealth in 2020, but at a lower risk, consider adding diversified equity funds to your portfolio. Diversified equity funds are launched with the specific purpose of giving investors the opportunity to benefit from financial growth of companies of all sizes (across market capitalization) and across industries and sectors. These sectors include Pharmaceuticals, Banking and Financial Services, IT, Engineering, FMCG, Oil and Gas, Power and Utilities, Automobiles, Real Estate, etc. Investments can also include other assets like cash, bonds and even commodities such as gold and other precious metals. This enables investors to control the risk that may be involved in a certain stock or sector. Not just that, it also offers the scope of potential rewards through wider exposure to a varied range of stocks and sectors.

Multi-faceted…

A diversified equity fund, invests in companies regardless of whether they are large caps or midcaps or small caps. There are broadly three market capitalization segments – a company is classified as large cap if it has over Rs 15,000 to 20,000 crores of market capitalization, companies with market capitalizations ranging from Rs 5,000 crores to Rs 15,000 - 20,000 crores are classified as midcap companies and companies with market capitalization of below Rs 5,000 crores can be classified as small cap companies. Each of these market capitalization segments, large cap, mid cap and small cap has their own risk/returns characteristics. For example - large cap companies are perceived as less volatile equity investment options compared to small and mid-cap companies which are perceived as being more risky than large cap companies. In fact small cap companies are the most risky. Diversified equity funds, which invest across market capitalization segments and industry sectors, can have 45 – 75% of their portfolio invested in large cap funds and the balance in small and midcap funds. Different segments of the market outperform each other in different market cycles. For example large cap companies outperform midcap companies in bear market conditions and at the starting phase of the bull market. During bull market rallies, the valuations (P/E multiples) of large cap stocks can run up fast and the valuations can look stretched, making the investors wary. Midcap companies start outperforming large cap companies in the mid and end phases of the bull market cycle. Diversified equity mutual funds have both large cap and midcap companies in their portfolio, and therefore, have the potential to deliver superior return on a more consistent basis in the long term. It diversifies investments across the stock market in a bid to maximize gains for investors. On risk-return parameters, diversified equity funds can offer steady growth with lower risk making it safest among equity funds. Diversified equity funds can provide market-beating returns over the long-term and can arrest the downside risk better compared to their pure mid-cap counterparts and even large and mid-cap peers. Thus, diversified equity funds are suitable if you have a moderately-high risk appetite and investment horizon of at least five years.

Paragon on the Pedestal

 

Suitable for Diverse Market Caps and Sectors

Diversified Equity Mutual Fund is suitable across sectors and market caps. While mid-caps and Large-caps invest in specific market capitalization, multi-cap funds invest across market caps. Investing in different market caps and companies across sectors helps you avert unsystematic risk that may arise from investing in limited sector-specific funds or stocks. These funds are not completely risk-averse. However, if you understand the risks, you can take decisions accordingly.

Professional Management

Fund Managers are experts in portfolio management because they have extensive experience and knowledge about financial research. If you are not a seasoned investor, you can seek the help of a Fund Manager to guide you through unpredictable economic scenarios. Other than the expertise to anticipate market movements, Fund managers are equipped with a team of research analysts who keep a close watch on changing market trends. They abide by an investment procedure and apply risk management strategies that they have improved upon through the years. You can make the most of the years of experience of these professionals in lieu of a small charge, referred to as an Expense Ratio, which is deducted from the Net Asset Value (NAV) of your mutual fund.

Diversity in Prices of Shares

The diversity is applicable to the price of shares as well, starting as low as Rs. 500 and running into a few lakhs. This makes it a much preferred option for new and first-time investors looking for exposure in the investment market. It is also well suited for those with a low risk appetite.

Save on Additional Costs

Investments in diversified equity mutual funds save you from spending on monthly transaction cost that is applicable on non-equity fund investments. Regular portfolio management to overcome booking profits and laggards, and opting for other stocks that show the promise of high capital gains lead to further transaction costs. Purchase or sale of these funds in volumes ensures higher economies of scale, even if you opt for the guidance of a Fund Manager. In addition, you also do not incur short-term capital gain tax, enabling you to avail higher return on investments. The only additional cost that you need to pay is the minimal expense ratio, which is an annual expenditure.

Avail Diverse Modes of Investments

Diversity in Diversified Equity Mutual Funds further extends to the available modes of investing - Systematic Transfer Plans (STPs) and Systematic Investment Plans (SIPs). You can opt for a monthly SIP, where a pre-determined amount is deducted from the selected bank account, encouraging a healthy saving habit. STP enables you to initiate a monthly transfer from a debt fund to an equity fund. There are also Systematic Withdrawal Plans (SWPs) that allow you to withdraw a pre-defined amount at regular intervals. You can also seamlessly enter and exit from these schemes as per your convenience.

Preferred Paradigm

There is an extensive range of over 450 diversified equity mutual funds offered by as many as 44 asset management companies (AMCs). This makes it a challenge for investors to select one that is a perfect fit for their risk appetite and meets their financial goals. 

• ·         Select a category: Select the category (Large-Cap, Mid-Cap, Small-Cap) wisely. Each of the categories has different return limits and also varying risk factors. Whichever category you may select, always have a long-term perspective in your investment.
• ·         Analyze the past performance: Thoroughly study the track record (both qualitative and quantitative) of the diversified equity funds you are planning to invest into. There are a number of companies providing different types of diversified equity funds. Wisely choose from them.
• ·         Consistency in performance in the last three years: Apart from peers and benchmark index evaluation, a diversified equity fund must be judged based on its historical performance. Many diversified equity funds do not stay stable over the years, they take a dip during recessions sometimes even below their benchmark indices and category average. Only a handful of diversified equity funds go strong against all odds and display steady performance. Those warriors who brave rough times and display stability are the ones to add to your portfolio and you should beware of the meek ones. Do not accord importance to the short-term market outlook or depend extensively on the past track-record of a scheme.
• ·         Determine your risk-bearing capabilities: Risk factor is the most prominent one while investing in the capital market. Fix a limit up to which you can bear the risk.
• ·         Cost of investment: In order to plan your investment through diversified mutual fund you also need to analyze the cost that the companies are charging under various schemes. You should choose a scheme fitting your budget.
• ·         Compare different schemes: With the list of options available in diversified equity mutual fund category comparison is of paramount importance.

It is of utmost importance that your investment objective is in tune with the diversified equity fund’s investment objective. For example, if you want to avoid risk, it is advisable for you not to invest in a small-cap diversified equity fund that invests in small size companies and can yield volatile returns. Any investment should be undertaken against the backdrop of your personalized asset allocation.

Finesse…

The front line stock market indices are making their all-time highs or are hovering around their high levels. With this, almost all diversified equity mutual fund categories are back in green and showing positive returns over different periods. Over the shorter term as short as 3 months to over 10 years, the returns are in positive territory across equity fund categories. Whether it is a large-cap, mid-cap or small-cap fund, the absolute returns for periods less than a year and compounded annualised growth rate (CAGR) for returns over one year are positive. As per Valueresearchonline data, as on November 1, 2019 the large-cap category had generated 2.6 per cent, 3.71 per cent, 7.75 per cent and 14.15 per cent over the 1-week, 1-month, 3-month and 1-year tenure. The Sectoral Fund categories such as Pharma and Information Technology are, however, in the red across some time periods. Even though the MF categories are in positive territory, individual MF portfolio may still not have recovered, especially for those who had started investing in the recent past. Several diversified equity MF schemes especially mid-cap schemes are still in the red. But, that should deter investors as an investment in equity schemes are meant for long term. Those investors who already have the SIP in the chosen schemes may continue linking them to a long term goal. It is absolutely impossible to predict the stock market movements and one should refrain from trying to time the market as well. Equities as an asset class hold the potential to generate high inflation-adjusted returns over the long term compared to other asset classes. As a new investor, there is always a conundrum to face - whether to invest through SIP or as a lump sum. The jury is still out as the answer also depends on the situation, but the following factors may help you decide better:

• ·         For a salaried individual and even for a non-salaried individual, SIP is the right approach to keep saving on a regular basis.

• ·         But, if intermittently you have a lump sum to invest for a goal that is away at least 7 years or more, invest the lump sum as and when markets tend to remain tepid.

Choosing the right MF scheme is also important. Even though the category returns may paint a rosy picture, not all MF schemes may perform in a similar manner. Let us look at the large-cap index which has given 14.15 per cent over the 1-year period. As on date, the best MF scheme in the category is Axis Bluechip fund, giving 26.66 per cent while several of the schemes are in lower single digits. However, do not merely look at the short term scheme performance while choosing funds. Look at the scheme’s consistency in generating returns over longer periods. A fund beating its benchmark as well category return may be preferred over others. Also important is that you diversify your MF portfolio across large-cap and mid-cap funds and also across market capitalisation. The small-cap and sector funds are highly volatile and can change the fortunes of your portfolio on either side. Get into them if risk profile allows as frequent tracking is equally necessary for them.

…in a fleeting market

The word diversified means variegated or different. We all have heard the phrase “Strength lies in differences and not in similarities”. The same is conceptualized in the mutual fund industry. Just imagine if you put all your money into a single stock and the share price of that company hits the rock bottom. What would be your reaction? - anxiety, depression, financial loss, moral weakness and in extreme cases nervous breakdown. There is a way to avoid all these problems in one shot. And the answer to this is “Diversified Equity Funds”.