FUND FULCRUM

September 2020

 

August 2020 turned out to be a better month for the Mutual Fund industry compared to June 2020 and July 2020. The month has witnessed an addition of 5 lakh new investors. Gross redemptions in the industry came down to Rs.5.71 lakh crore in August 2020 compared to Rs.9.54 lakh crore in June 2020 and Rs. 6.21 lakh crore in July 2020. The industry’s average AUM reached Rs.27.78 lakh crore in August 2020 compared to Rs.25.46 lakh crore in August 2019.

 

In August 2020, the mutual fund industry has added 4.65 lakh new investors. However, addition in new investors fell marginally from last month as the industry had added 5.64 lakh in July 2020. Mutual Fund industry has witnessed 17% growth in debt fund folios during April – August 2020 to reach 72 lakh in five months. Currently, the Mutual Fund industry has 9.26 crore folios and 2.12 crore unique investors. Total folio count has increased marginally in both T30 and B30 cities since March 2020. Overall, the total folio count in T30 and B30 has increased by 2% and 5% to 5.40 crore and 3.86 crore, respectively. B30 and T30 cities have seen healthy growth in direct plan folios. While the MF industry has added 60 lakh new folios under direct plan in B30 cities, it added 51 lakh direct plan folios in March 2020. Similarly, the industry has added 80 lakh folios in August 2020 compared to 72 lakh in March 2020 under direct plans. Industry has seen a marginal rise in regular plan folios in both T30 and B30 cities.

 

Overall, the MF industry manages Rs.22.91 lakh crore (83%) in T30 cities and Rs.4.58 lakh (17%) crore in B30 cities. AUM in B30 cities has risen by 29% to Rs.4.58 crore in August 2020 from Rs.3.55 crore in March 2020. Similarly, AUM in T30 cities has grown by 22% to Rs.22.91 crore from Rs.18.71 lakh crore in March 2020. Average AUM per folio of retail investors has increased 19% to Rs.1.58 lakh in August 2020. While average AUM per folio of retail investors in B30 cities has increased 20% from March 2020 to Rs.92,300 in August 2020, it has grown by 18% to Rs.2.04 lakh in T30 cities.

 

Recent AMFI data shows SIP inflows in debt funds has gone up. However, declining SIP inflows in equity schemes dragged down the overall numbers. The MF industry has witnessed an increase in the number of SIP accounts even as the inflows through SIPs has dried up over the past two months i.e. July 2020 and August 2020. Total number of active SIP accounts increased to 3.31 crore in August 2020 as against 3.27 crore in July 2020 and 3.23 crore in June 2020. Meanwhile, SIP inflows have slowed down to Rs 7,792 crore in August 2020 as against Rs 7,831 crore in July 2020 and Rs 7,917 crore in June 2020, according to AMFI data. This can be attributed to the rise in the number of accounts to online digital platforms that have cashed in on retail interest in mutual funds. As a result, many accounts with smaller ticket size have entered the Mutual Fund industry. On the other hand, many investors who were facing financial constraint due to coronavirus pandemic have paused their SIP contribution. Many salaried and small-scale businessmen have paused their SIPs because they are facing financial constraint during the pandemic and the slowdown. Most of the SIPs paused were in equity schemes. AMFI data shows that SIP inflows through equity schemes have gradually slowed down to Rs 6,656 crore in August 2020 from Rs 6,710 crore in July 2020 and Rs 6,798 crore in June 2020. Meanwhile, SIP inflows in debt schemes have increased recently but not enough to push the overall SIP inflows. SIP inflows in debt schemes have risen to Rs 214 crore in August 2020 from Rs 208 crore in July 2020 and Rs 193 crore in June 2020. This can be attributed to the ‘flight to safety’ trend, which has encouraged many investors to pull out money from their equity schemes and route it to safer short duration debt funds. Overall, SIP AUM increased to Rs3.36 lakh crore as at the end of August 2020 from Rs 3.01 lakh crore at the end of June 2020. The rise in SIP AUM was largely due to the mark to market gains following the recent rally.

                                                                                                                                                                                                                                       

Piquant Parade

 

Registrar and transfer agent CAMS issued its initial public offering (IPO) on September 21, 2020 and closed on September 23, with a price band of Rs.1229-1230 per equity share. The company will float 1.82 crore equity shares. Of these shares, the company has reserved 35% of net IPO offerings for retail individual investors. The company has capital sponsorship from Great Terrain (an affiliate of Warburg Pincus), HDFC Limited, HDFC Bank and NSE Investments. Kotak Mahindra Capital, HDFC Bank, ICICI Securities and Nomura Financial Advisory and Securities (India) are the lead managers to the issue.

 

Axis Mutual Fund has enabled mutual fund transactions through WhatsApp for investors. Investors need to save Axis Mutual Fund’s WhatsApp number 7506771113 and send a simple ‘Hi’ from their registered mobile number to start the conversation. Investors can use WhatsApp to invest in any schemes of Axis MF either via SIPs or through lumpsum. Registered investors can find more information about the scheme that they are interested in. The entire process will take just a few minutes. Further, the WhatsApp service will enable investors to check the NAV, portfolio valuations and generate account statement. In addition, investors can use this number to raise a query or file a complaint with the fund house.

 

Tata Mutual Fund has launched video KYC facility through which the distributor can do a completely paperless onboarding of a new client. To avail this facility, the distributor will have to upload KYC documents of his clients like PAN card, address proof, photograph, a cancelled cheque and signatures on AMC website. Once he uploads these documents, his clients are required to start real-time video recording using the front camera on their smartphone or computer and read aloud the dynamic OTP displayed on the screen. On successful completion of this process, the AMC personnel will verify them and the investor will receive an intimation to initiate investments.

 

Regulatory Rigmarole

 

SEBI has asked mutual funds to disclose details of debt and money market securities transactions, including inter-scheme transfers, on a daily basis with a time lag of 15 days. Earlier, fund houses were required to disclose such transactions with a time lag of 30 days. Further, SEBI has prescribed a new format for such disclosures. In this format, fund houses will have to mention the name of the security, type of security, most conservative rating of security at the time of transaction, name of the rating agency and transaction type. Moreover, the listed status of security, scheme name, type of scheme, residual days to final maturity, deemed maturity date, quantity traded, face value per unit and value of such trade are among the details that need to be disclosed by fund houses. The revised disclosure requirements pertaining to debt and money market securities transactions in MFs is another measure by SEBI to further enhance transparency in debt funds. After the Franklin Templeton episode, many fund houses faced redemption pressure in their credit risk funds. In such a situation, some fund houses identified and transferred some of the illiquid debt paper from credit risk funds to other funds within the same asset management company (AMC). With the current disclosure norms, investors will be able to get to know these details in advance and can assess if they are holding higher risk than they desire. The new framework will come into effect from October 1, 2020.

 

Fund houses can now create segregated portfolio through side pocketing in debt funds having exposure to high rated companies opting for debt restructuring due to covid-19. Earlier, fund houses were allowed to create side pocketing in debt schemes only in case of a credit event, which includes downgrade to below investment grade and subsequent downgrades in credit rating by the SEBI registered Credit Rating Agency. However, fund houses can do side pocketing only if one of the higher-rated companies opts for debt restructuring. Segregating such securities that go for restructuring would give fund houses some comfort. Currently, fund managers have to sell these securities at a steep discount. Instead, they can create side pocketing in the troubled scheme and ensure that only those investors who were invested in the fund before the announcement of the debt restructuring plan get the benefit from the recovery. The modification to side pocketing rules comes into effect immediately and will remain in force until December 31, 2020.

 

Nominee or legal heir of a deceased MFD (Mutual Fund Distributor) will have to obtain ARN (AMFI Registration Number) within six months to continue to get trail income. Simply put, AMFI gives six months to nominee or legal heir of a deceased mutual fund distributor to obtain ARN to get trail commission. If a nominee or legal heir decides not to obtain ARN, AMCs will transfer the assets of deceased ARN holder to other distributors or direct plans. There was confusion among industry players about what happens if a nominee or legal heir decides not to obtain ARN. Before August 1, 2020, nominee or legal heir of deceased MFDs used to receive trail commission on assets built before death of an ARN holder for lifetime. In order to transfer AUM of a deceased MF distributor to the ARN of nominee or legal heir, the ARN of deceased distributor has to be valid on the date of demise and his trail commission not suspended. In addition, the nominee or legal heir must have a valid ARN and be KYD compliant as on the date of request of such a transfer. The new distributor will have to submit his annual declaration of self-certification (where applicable) due as on the date of request of transfer of AUM.

The other key points include

·         Only valid assets can be transferred to the legal heir or nominee

·         The new distributor has to submit an application for cancellation of ARN of deceased distributor to CAMS-AMFI unit within 6 months of date of demise. CAMS will send a confirmation to the new distribution on receipt of such requests

·         CAMS will have to cancel the ARN and intimate all AMCs and RTAs

·         The new distributors will have to individually approach all empaneled AMCs and make an application for transfer of assets to his ARN

·         The new distributors will have to intimate all clients of change in ARN through letter or email. He will have to highlight that if the clients have any objection for the change in distributor code, they must write to the respective AMCs directly

·         The transfer application must have reason for transfer supported by evidence and certification that letters/emails have been sent to all existing clients intimating them of change of distributor. You will have to attach a sample of such communication along with a list of clients with PAN and folio numbers

·         There will be no need to accept written consent from clients on such transfers

·         AMCs will have to effect changes to ARN after cooling period of 15 days. In case of any objection, AMCs can hold such a transfer

 

SEBI has tweaked exposure norms in multi cap funds – the second largest category in the equity funds after large cap funds. In a circular, the market regulator has asked fund houses to invest at least 75% of the total corpus across market capitalization with at least 25% exposure each to large cap, mid cap and small cap stocks. SEBI has directed fund houses to align their existing portfolio within one from date of publication of the next list of stocks by AMFI. Since AMFI will be publishing its next list in January 2021, fund houses can rebalance their existing portfolio by February 2021. AMFI in consultation with SEBI and the exchanges (NSE and BSE) publishes a list of stocks on a half-yearly basis. After the release of this list, fund houses have a month’s time to rebalance their portfolio. Currently, many fund houses run a diversified portfolio in multi cap funds with large cap bias or mid and small cap bias. In addition, fund managers frequently rebalance portfolio depending on market situation in multi cap funds.

 

From January 1, 2021, purchases of units in a mutual fund scheme below Rs 2 lakh will get NAV on the day that money reaches the fund house, not on the day investors place the order, according to a SEBI circular. However, the regulation will not be applicable to liquid and overnight funds. "It has been decided that in respect of purchase of units of mutual fund schemes (except liquid and overnight schemes), closing NAV of the day shall be applicable on which the funds are available for utilization irrespective of the size and time of receipt of such application. The existing provision on NAV applicability for liquid and overnight funds and cut-off timings for all schemes shall remain unchanged," SEBI said in the circular. Further, the market regulator said that AMCs will have to put in place a written down policy which among other things detail the specific activities, role and responsibilities of various teams engaged in fund management, dealing, compliance, risk management, back-office, etc., with regard to order placement, execution of order, trade allocation amongst various schemes and other related matters. For orders pertaining to equity and equity related instruments, AMCs will now have to use an automated Order Management System (OMS), wherein the orders for equity and equity related instruments of each scheme will be placed by the fund managers of the respective schemes. In case a fund manager is managing multiple schemes, the fund managers have to necessarily place scheme wise order. All regulatory limits and allocation limits as specified in SID has to be in-built in the OMS to ensure that orders in breach of such limits are not accepted by the OMS. AMCs may further place soft limits for internal control and risk management based on their internal policy. Further, any change in limits specified in OMS shall be subject to the approval of Compliance and Risk Officer. All orders of fund managers will be received by dedicated dealers responsible for order placement and execution. The internal policy of AMC may also provide certain scenarios within the regulatory limits, wherein, prior approval of Compliance or Risk Officer would be required through OMS before the order is received by the dealer.

 

Further, the market regulator has placed certain restrictions on the conduct in the dealing room.

·         All conversations of the dealer will be only through the dedicated recorded telephone lines

·         No mobile phones or any other communication devices other than the recorded telephone lines will be allowed inside the dealing room

·         Restricted access to internet facilities on computers and other devices inside the dealing room. It shall be used for activities related to trade execution only

·         No sharing of information by dealer through any mode, except for trade execution under the approved internal policy".

 

SEBI has increased the proposed cap on fixed fee for registered investment advisers (RIAs) from Rs.75,000 to Rs.1.25 lakh per annum per family. The market regulator has also allowed RIAs to follow percentage on AUA model where they can charge up to 2.5% on AUA irrespective of asset class from a family. However, RIAs may have to demonstrate AUM with supporting documents like demat statements, unit statements and so on. In addition, the rate of fees is applicable at family level. This means, RIAs can charge either Rs.1.25 lakh per family or 2.5% of AUA per family. Family includes individual, spouse, dependent children and dependent parents. RIAs can follow any one model on an annual basis. Also, RIAs can charge fee only after 12 months of advisory services. In addition, RIAs can charge advance fee for up to 2 quarters with an option of refund if investment advisory service is discontinued. RIAs can retain fee of up to one quarter from clients in case of termination of contract. 

Here are some other key changes to RIA regulations.

·         Existing clients cannot avail distribution services offered by the corporate RIAs and vice versa

·         New clients will have to decide if they want advisory services or execution services from their RIA

·         Client will be segregated at PAN level

·         Individual RIAs are not allowed to offer execution services to their clients

·         Have to recommend direct plans only to fee based clients wherever available. This means, even if a product class does not offer direct plan, RIAs will have to ensure that they do not make any money out of it

·         Non-individual RIAs i.e. advisory firm/ company can offer both – advisory and distribution depending on their clients

·         RIAs will have to enter into a formal agreement with clients before offering any services

·         Net worth requirement for individual RIAs and non-individual RIAs is Rs.5 lakh and Rs.50 lakh, respectively

·         Individual RIAs or principal officer of advisory firm/company should have minimum qualification of post-graduation in relevant subject and 5 years of experience in relevant field. Existing RIAs will also have to meet this eligibility criteria to continue their advisory business

·         Such criteria are relaxed for RIA employees to having 2 years of relevant experience, post graduate and NISM qualification. Existing RIAs who are 50 years of age and above are exempted from complying with revised rules

·         Individual RIAs having more than 150 clients have to compulsorily re-register as corporate. This means, they will have to increase their net worth from Rs.5 lakh to Rs.50 lakh

·         Existing RIAs will have to apply for corporate RIA license latest by April 01, 2021. In addition, RIAs having over 150 clients will have to report this to SEBI latest by October 15, 2020

·         RIAs will have to maintain records of interactions with clients in physical or electronic form. Such records have to be maintained for at least 5 years

·         RIAs will have to get their business and accounts audited half yearly

·         RIA website should contain complete name of investment advisor, type of registration (individual or non-individual), registration number, complete address with contact details and corresponding SEBI regional office address

·         Mutual fund distributors are no longer allowed to use nomenclature like ‘independent financial advisers’ (IFAs) and ‘wealth managers’ without registering with SEBI as RIA

 

The Securities and Exchange Board of India (SEBI) is planning another set of reforms, where it might revamp the mutual fund (MF) risk-o-meter. The market regulator will expand MF risk-o-meter to include a "Very High" risk category. The five existing categories of MFs are - low, moderately low, moderate, moderately high and high. The proposal comes shortly after SEBI on September 13, 2020 modified norms on asset allocation by multi-cap funds. The risk in equity funds will be assessed on the basis of three parameters - market capitalisation, volatility, and impact cost. Equity funds will be reclassified into the high and high risk categories. All credit risk funds will be moved to the new very high risk category. Credit risk funds will be judged on the basis of quality, duration, and liquidity of bonds. The new risk classification will be scheme-specific, and not category specific. Asset management companies (AMCs) will be required an annual timeline of how the risk has evolved in each fund. Any change in a scheme's underlying assets should reflect in the scheme's risk classification.

 

While the MF industry has grown at an outstanding pace over the last few years reflecting the confidence of investors in mutual funds, there is a need to continue upholding this confidence for the benefit of the industry and the investors. Protecting the interest of investors is the primary duty of mutual funds and thus all decisions that funds take on behalf of investors should be taken keeping in mind the best interest of the investors. Fund houses need to practice prudent risk management. Fund houses should keep their scheme portfolios true to their label. He said if a scheme portfolio is not true to its label, it might be giving very different risk return exposure to the unit holders of the scheme than what they have signed up for. SEBI norms for categorization of mutual fund schemes have two objectives – the scheme portfolio should reflect the name of the scheme; and that the scheme performance can be compared against an appropriate benchmark. Summing up, the three mantras for mutual fund houses are - protect interest of investors, follow prudent risk management process and remain true to label.