FUND FULCRUM

August 2020

Equity-oriented mutual funds witnessed their first major monthly net outflow in a long time. In July 2020, except for ETFs and Focused Fund categories, all the other equity categories witnessed net outflow for the month. Multi cap fund category was the worst hit followed by mid cap and value fund categories. According to the data released by Association of Mutual Funds in India, multi cap schemes saw the highest outflows of Rs 1,033.17 crore followed by mid cap funds with outflows of Rs 579 crore. The outflows are largely attributed to investors booking profit given the surge in the equity markets, across market segments in July 2020. Overall, outflows in equity-oriented schemes stood at Rs 2,480.35 crore. Inflows in ETFs saw a rise in July 2020 at Rs 13,125.6 crore against Rs 4,093 crore in June 2020. With equity markets doing well and stable scenario in the fixed income markets, hybrid schemes too witnessed significant net outflows, viewing the scenario as a good opportunity to exit. Balanced Hybrid Fund/Aggressive Hybrid Fund, whose mandate is to invest between 65-80 percent of assets in equities, witnessed a net outflow of Rs 2,196.3 crores in July 2020. Otherwise too, this category has been witnessing consistent net outflow for a long time, given the challenging scenario in both equity and debt markets earlier. In July 2020, hybrid fund outflows were at Rs 7,302 crore compared with Rs 355.8 crore seen in June 2020. The outflows in most debt categories reversed in the month of July 2020. Liquid fund inflows which are used by corporates to park surplus cash witnessed Rs 14,055 crore worth of inflows in July 2020 as against Rs 44,226.2 crore of outflows in June 2020. The rise in debt fund inflows can be attributed to benign interest rate scenario.

 

The mutual fund industry added over 5.6 lakh investor accounts in July 2020, taking the total tally to 9.2 crore, primarily on account of contribution from debt schemes. In comparison, the industry had added 5 lakh new folios in June 2020. According to data from Association of Mutual Funds in India, the number of folios with 45 fund houses rose to 9,21,05,737 at the end of July 2020, from 9,15,42,092 at the end of June 2020, registering a gain of 5.63 lakh folios. Of the total new folios in July 2020, more than 4 lakh were added in debt funds. The addition of folios suggests that investors were undeterred by the market volatility. Besides, it indicates their understanding of the market risks associated with the mutual fund schemes. The sector added 6.13 lakh investor accounts in May 2020, 6.82 lakh in April 2020 and 9.1 lakh in March 2020. The number of folios under the equity and equity-linked saving schemes marginally dropped in July 2020. The investor count slipped to 6.37 crore. The debt oriented schemes folios count went up by 4.25 lakh to 68.85 lakh. Barring overnight funds, all the categories in debt funds witnessed a growth in folios. Corporate bond funds added 60,269 folios in July 2020, followed by liquid funds (58,379), short duration funds (54,002) and banking and PSU Funds (51,626). Overall, investors pumped in Rs 89,813 crore into various mutual fund schemes in July 2020. Fixed income securities or debt funds witnessed an inflow of Rs 91,392 crore, while equity-oriented funds saw its first withdrawal in over four years at Rs 2,480 crore. The inflow has pushed the asset base of the mutual funds industry to Rs 27.12 lakh crore at the end of July 2020 from Rs 25.5 lakh crore as on June 30, 2020.

 

Although the last couple of months have been like a nightmare for most industries, one positive thing that happened to the mutual fund industry is the addition of new investors. As per AMFI’s latest monthly data, the industry added 3.43 lakh unique investors between March and July 2020. The data has identified the number of unique investors by taking into account PANs/PEKRNs (PAN Exempted KYC Registration Number) of all unit holders or their guardians in case of minor unit holders. As on July 2020, the MF industry has 2.11 crore unique investors in total, out of which 2.06 crore unique investors have PAN.  Moreover, the industry added 5.64 lakh new folios in July 2020 taking the total folio count to 9.15 crore. In July 2020 itself, the industry added close to 1 lakh new investors. Many new investors have opened demat and mutual fund accounts during lockdown. Individuals have been saving money incurred on travel, eating out and so on. Also, people have started exploring investment opportunities other than bank FDs like mutual funds for better returns. Mutual fund industry has a long way to go in terms of number of investors. Out of 1.3 billion India’s population, the industry has only 2.1 crore unique investors.

 

Investors continue to prefer SIP option for investing in mutual funds, as the industry garnered over Rs 50,000 crore through this route in the first six months of 2020, up 3 per cent from the same period one year ago. This rising trend is in contrast with the extreme volatility in the broader market amid concerns over the impact of COVID-19. 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 from January to June 2020 rose to Rs 50,102 crore from Rs 48,757 crore in the first half of 2019. Inflows into SIPs have averaged about Rs 8,350 crore in the past 6 months. Indian SIP investors are showing immense resilience amidst the ups and downs in market. Clearly, SIP as a medium has gained immense popularity. However, inflows through SIP have slowed down in the past three months. Investment in the month of June 2020 dropped below Rs 8,000 crore for the first time since November 2018. Net investments through such route stood at Rs 7,927 crore in June 2020 as against Rs 8,123 crore in May 2020, Rs 8,376 crore in April 2020. Prior to this, it was Rs 8,641 crore in March 2020, Rs 8,513 crore in February 2020 and Rs 8,532 crore in January 2020. The slowdown in monthly SIP contribution could be due to strain on cash flows and incomes experienced by several investors on account of the COVID situation. Currently, mutual funds have 3.23 crore SIP accounts through which investors regularly invest in Indian mutual fund schemes. The 45-player mutual fund industry, which mainly depends on SIPs for inflows, witnessed an investment of over Rs 42,400 crore in equity oriented schemes in the first six months of the year.

Mirae Asset MF, Canara Robeco MF and Invesco MF are the top 3 fund houses respectively in percentage terms to chart the highest increase in their equity holdings in July 2020, according to a report by Motilal Oswal Financial Services. The report analysed the month on month change in the top 20 fund houses’ equity exposure i.e. equity components of all schemes. Next in the list are Axis MF, Kotak MF and UTI MF. All these fund houses witnessed over 7% rise in their equity exposure. According to the report, the rise in equity exposure is a combination of inflows to the fund and mark to market changes in the fund house’s equity assets. Further, the report shows that the MF industry’s top 20 fund houses have witnessed nearly 5% jump in their equity exposure to Rs.11.07 lakh crore in July 2020 from Rs.10.49 lakh crore in June 2020. This was largely following the continuous recovery in the equity market even as fund houses witnessed outflows from the equity fund category. Among all the fund houses, SBI MF has the highest exposure to equities at over Rs.2 lakh crore. Next in the list are HDFC MF with Rs.1.33 lakh crore, ICICI Prudential MF at Rs.1.26 lakh crore, Nippon India MF at Rs.89,200 crore, UTI MF at Rs.77,900 crore and Aditya Birla Sun Life MF at Rs. 75,000 crore.

 

The latest AMFI data shows that New Delhi, Goa and Maharashtra were the top three states with highest per capita AUM and AUM to GDP ratio as on June 2020. While the per capita AUM of New Delhi was Rs.1.20 lakh, the per capita AUM of Goa and Maharashtra stood at Rs.98,467 and Rs.94,541 respectively. Per capita AUM in mutual funds is the total AUM of the state divided by the total population of the state. Other states that have high per capita AUM were Chandigarh, Haryana, Karnataka, Gujarat, Tamil Nadu, West Bengal and Sikkim. In terms of AUM as a percentage of GDP, Maharashtra secured the top position with 47.9%. New Delhi and Goa followed Maharashtra with 30.6% and 19.7%, respectively. Meanwhile, north eastern states like Manipur, Arunachal Pradesh, Tripura and Nagaland were among the bottom 10 in terms of both AUM as a percentage of GDP and per capita AAUM.

 

Direct plans of equity schemes of top fund houses have become costlier now as many fund houses have increased the TER in these plans. Among such top fund houses are SBI MF, ICICI Prudential MF, Nippon India MF, Axis MF, Franklin Templeton MF, DSP MF and Mirae Asset MF. The TER in the direct plan has increased due to a reduction in marketing and selling costs which include distributor commission. AMCs follow a formula prescribed by SEBI to determine the TER of schemes. According to this formula, TER of a direct plan is arrived after deducting distribution cost and various other marketing and sales costs from the regular plan TER. To simplify, assume that an equity fund’s regular plan TER is 2% of the scheme. And distribution and marketing cost is around 0.6%. Therefore, the direct plan TER of this scheme will stand at 1.4%. If the marketing and selling cost comes down by 20 bps to 0.4%, the direct plan TER will increase by 20 bps to 1.6% from 1.4% earlier. In the recent past, since the marketing and selling cost in these schemes have come down, the direct plan TER has to be increased.

Piquant Parade

Even as the covid-19 pandemic posed a huge challenge for the Mutual Fund industry and SEBI tightened the norms for doing advisory business, SEBI website shows that 32 applicants have sought permission from the regulator to start their Mutual Fund advisory business. Of this, 15 are individual RIAs while the remaining 17 are institutional RIA players. Last financial year i.e. in FY 2018-19, there were 153 applicants to become RIA and 75 of them had applied to become individual RIA. In fact, on a year-on-year basis comparison, more advisors have applied to start their advisory business in April-June this year as against the corresponding period last year. In April-June 2019, only 7 players had applied to get the RIA license. This has come even as the market regulator has tightened compliance norms to practice advisory business. SEBI has said that individual RIAs cannot offer both advisory and execution services to their clients. This is a challenge for many individual RIAs as many have been carrying out both advisory and distribution activities under one roof often through a family member. In addition, it is likely that SEBI will ask RIAs to either charge a fixed or a percentage fee based on the quantum of assets under advice. Now most advisors charge their clients a bit of both. Further, SEBI has said that individual RIAs must have a net-worth of Rs 5 lakh, up from Rs 1 lakh earlier. And if any individual advisor has more than 150 clients, they will have to get registered as ‘non-individual advisors’. This means such advisors will have to have at least Rs 50 lakh net worth to continue advisory business. 

 

Yes Bank has sold 100% of the equity shareholding of Yes AMC and Yes Trustee Limited (YTL) to GPL Finance and Investments Limited (GPLFI). GPLFI is into financing business and is owned by White Oak Investment Management, which is a Mumbai-based boutique investment management and investment advisory firm led by Prashant Khemka. Khemka was chief investment officer and lead portfolio manager for Goldman Sachs India Equity at Goldman Sachs Asset Management. The transaction is subject to requisite regulatory approvals from the regulatory authorities. Upon completion of the transaction, Yes AMC and YTL (both are wholly owned subsidiaries of Yes Bank) will cease to be subsidiaries of Yes Bank and the bank will exit its mutual fund business. Yes Mutual Fund had Rs 56.97 crore of average AUM in the June 2020 quarter, significantly down from Rs 2,000 crore in March 2019. Yes Bank has exited the mutual fund business to concentrate on its core business.

…to be continued…