FUND FULCRUM

October 2020

 

Mutual fund industry's asset base rose by 12 percent to Rs 27.6 lakh crore during the September 2020 quarter, primarily on account of rebound in markets. The average asset under management (AAUM) of the industry, comprising 45 players, was at Rs 24.63 lakh crore in April-June 2020 quarter, according to data by Association of Mutual Funds in India (AMFI). All top 10 fund houses -- SBI MF, HDFC MF, ICICI Prudential MF, Aditya Birla Sunlife MF, Nippon India MF, Kotak MF, Axis MF, UTI MF, IDFC MF and DSP MF -- witnessed an increase in their respective average AUMs during the September 2020 quarter. Notably, Axis MF, UTI MF, SBI MF and Kotak MF have witnessed an increase in the range of 14-16 percent in their assets base beating the average industry's growth of 12 percent. Steady outflows from equity funds is a sign of lack of confidence in funds by retail investors. The uncertainty caused by COVID-19 has also prompted investors to redeem and keep assets in cash. SBI Mutual Fund, which continues to be the largest fund house in the country, saw its asset base growing 15.6 percent to Rs 4,21,364 crore. It had an average AUM of Rs 3,64,363 crore in the preceding quarter. HDFC MF saw its asset base rising by 5.4 percent to Rs 3,75,516 crore during the period under review, from Rs 3,56,183 crore in the June 2020 quarter. ICICI Prudential MF posted an average AUM of Rs 3,60,049 crore in the September 2020 quarter, against Rs 3,26,291 crore in the June 2020 quarter, indicating an increase of 10.3 percent. Aditya Birla Sunlife MF and Nippon India MF have seen their average AUM growing by 11 percent each to Rs 2,38,674 crore and a little over Rs 2 lakh crore respectively. Kotak MF’s average AUM spiked by 14.5 percent to Rs 1,91,598 crore in three months ended September 30, 2020 from Rs 1,67,326 crore in the preceding quarter. The asset base of Axis MF climbed by 16.3 percent to Rs 1,56,255 crore in the September 2020 quarter while that of UTI MF accelerated by 16.1 percent to Rs 1,55,190 crore. UTI MF, which has recently concluded its initial public offering, had an AAUM of Rs 1,33,631 crore in the June 2020 quarter. The average AAUM of IDFC MF and DSP MF went up by 12.3 percent and 12 percent to Rs 1,14,335 crore and Rs 82,286 crore respectively. In the June 2020 quarter, the industry had registered an 8 percent decline in AUM on account of outflow pressure both in debt and equity.

 

Net outflows in MF industry continued in September 2020 because of some profit booking in equity schemes during the quarter ending. This was the third consequent month to see a net outflow. Further, investors are taking a cautious approach by investing in safer funds while keeping adequate cash in hand to survive the crisis. Overall, equity schemes witnessed net outflows of over Rs.734 crore in September 2020. However, net outflows reduced from Rs.4,000 crore in August 2020. Multi cap schemes saw highest net outflows of Rs.1,143 crore followed by large cap schemes with net outflows of Rs.576 crore. Net outflows were also seen in mid cap funds, value funds and ELSS. Interestingly, the industry saw net inflows in small cap funds and large and mid-cap funds, focused funds and thematic funds. Overall, debt category witnessed   net outflows of Rs.51,962 crore due to huge redemption in liquid funds. As in every quarter end, liquid funds witnessed net outflows of Rs.65,951 crore. It was followed by Rs.4,867 crore of net outflow from ultra-short duration fund. Net outflows were also seen in money market funds, credit risk funds, long duration funds and gilt funds. Banking and PSU funds, gilt funds, and short duration funds witnessed good inflows from investors. Overall, hybrid funds witnessed net outflows over Rs.4,200 crore. Balanced hybrid funds, dynamic asset allocation, arbitrage funds and equity savings also saw outflows. Only conservative hybrid funds and multi asset allocation funds saw inflows of Rs.53 crore and Rs.37 crore, respectively. SIP inflows in September 2020 were almost the same as last month - Rs.7,788 crore vs Rs.7,791 crore in August 2020. Meanwhile, SIP folios witnessed a marginal jump to 3.33 crore from 3.30 crore. Overall, SIP AUM fell by Rs.726 crore to Rs 3.35 lakh crore. Overall, the Mutual Fund industry witnessed net outflow of over Rs.52,090 crore. The total AAUM for September 2020 fell to Rs.27.74 lakh crore from Rs.27.78 lakh crore in August 2020.

Piquant Parade

Choice Wealth Management has acquired the mutual fund distribution arm of Bank Bazaar. Bank Bazaar had forayed into online mutual fund distribution space in 2016. Choice Wealth Management runs an online MF distribution platform Investica since 2017.

 

One of India’s largest financial services companies, Bajaj Finserv has decided to foray into the mutual fund business. Currently, Bajaj Finserv is into lending, wealth management and insurance businesses. The subsidiary of Bajaj Finserv are Bajaj Allianz Life, Bajaj Allianz General and Bajaj Finance. Bajaj Finserv has applied for a MF license on September 28, 2020. Last year, NJ India Invest and Samco Securities   received in-principle approval from SEBI to start their MF business. Applications from Zerodha Broking, Karvy Stock Broking and Frontline Capital Services are also being reviewed by SEBI.

Regulatory Rigmarole

Markets regulator SEBI decided to make mutual fund managers more accountable by introducing a code of conduct for them and tightened disclosure norms with regard to forensic audit of listed entities. The watchdog also decided to strengthen the role of debenture trustees and amend insider trading norms. The board of SEBI approved setting up of a limited purpose repo-clearing corporation, a move aimed at boosting repo trading in corporate bonds. Such clearing corporation would help in guaranteed settlement of tri-party repo trades in all investment grade corporate bonds, including those below 'AAA' rated. The chief executive officer (CEO) will be responsible to ensure that the code of conduct is followed by all such officers. Currently, mutual fund norms require AMCs and trustees to follow a code of conduct. This increases the accountability of the CEO on the conduct of fund management team and processes. SEBI also permitted AMCs to become a self-clearing member of the recognised clearing corporations to clear and settle trades in the debt segment of recognised stock exchanges, on behalf of its mutual fund scheme. In order to address the gaps in availability of information, SEBI said that listed entities will have to make disclosures about initiation of forensic audit. The listed entities will make disclosures about the fact of initiation of forensic audit along-with name of entity initiating such audit and reasons for the same if available to stock exchanges. Further, the companies will be required to disclose about final forensic audit report, other than for forensic audit initiated by regulatory or enforcement agencies, on receipt by the listed entity, along with comments of the management, if any. The disclosure need to be made "without any application of materiality. Under the informant mechanism, SEBI has allowed informants a time period of three years to report any violation of insider trading rules. SEBI also strengthened the role of debenture trustees by ensuring that they carry out independent due diligence of the assets on which charge is being created. Also, they would convene the meeting of debenture holders for enforcement of security, joining the inter-creditor agreement under the framework specified by RBI. In addition, they would carry out continuous monitoring of the asset cover including obtaining mandatory certificate from the statutory auditor on a half yearly basis. In respect of delisting, SEBI has decided to grant exemption from the reverse book building process for delisting of listed subsidiary, when it becomes the wholly-owned subsidiary of the listed parent pursuant to a scheme of arrangement. To be eligible to take this route, the listed holding company and the listed subsidiary should be in the same line of business. The board also approved amendment to norms pertaining to alternative investment fund, which includes definition of "relevant professional qualification" and provides that the qualification and experience criteria of the investment team, may be fulfilled individually or collectively by personnel of key investment team of the manager.

 

Family members of RIAs – spouse, brother and parents are no longer required to surrender their ARN. In its recently released regulations on RIAs, SEBI has done away with the proposal that the immediate relatives and family members of RIAs had to surrender their ARN. However, clients of individuals RIAs cannot avail execution services offered by a family member having ARN. SEBI has clarified that existing clients cannot avail distribution services offered by the corporate RIAs and family members of individual RIAs and vice versa. New clients can decide if they want advisory services from individual RIAs or execution services from family member. This holds true for corporate RIAs as well. This essentially means the clients of RIAs can avail execution services from other individuals having ARN. Further, individual RIAs are allowed to offer execution services to their clients; however, only in direct plans wherever applicable. 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. Selecting a business model is a fundamental right of an individual. By doing away with the requirement of surrendering ARN of family members of RIAs, the market regulator has done the right thing. Now, individual RIAs will have an option to work like corporate RIAs to some extent.

 

SEBI has renamed dividend payout option in mutual funds as payout of income distribution cum capital withdrawal option. In addition, the market regulator has also renamed dividend reinvestment option as reinvestment of income distribution cum capital withdrawal option and dividend transfer plan to transfer of income distribution cum capital withdrawal plan. Sharing the rationale, SEBI said that there is a need to clearly communicate to the investor that certain portion of his capital (equalization reserve or distributable reserve) can be distributed as dividend under such option of a mutual fund scheme. Currently, fund houses are allowed to distribute realized gains as dividend. SEBI further said that fund houses will have to disclose the amounts that can be distributed from equalization reserve which is part of sale price that represents realized gains. These changes come into effect from April 1, 2021.

 

SEBI has tightened the norms for executing inter scheme transfers. From January 2021, no inter scheme transfers (ISTs) of a security shall be allowed, if there is negative news or rumors in the mainstream media or an alert is generated about the security based on internal credit risk assessment during the previous four months. Further, if the security is downgraded following ISTs, within a period of 4 months, fund managers of buying schemes have to provide detailed justification and rationale to the trustees for buying such security. Trustees of fund houses will have to approve an appropriate Liquidity Risk Management (LRM) model at scheme level. The LRM model should ensure that “reasonable liquidity requirements” are adequately provided for every scheme. SEBI said that fund houses should look to execute ISTs for managing liquidity only after they exhaust the following avenues to raise liquidity - use of scheme cash & cash equivalent, use of market borrowing, selling of scheme securities in the market and after attempting all the above, if there is still a scheme level liquidity deficit, then out of the remaining securities, ISTs should be done with the optimal mix of low duration papers with highest quality. However, the market regulator has provided some relaxation in these avenues to raise liquidity. SEBI has said that the option of market borrowing or selling of security may be used in any combination and not necessarily in the above order. In case, the option of market borrowing and/or selling of security is not used, the reason for the same shall be recorded with evidence. Apart from meeting liquidity requirement in a scheme in case of unanticipated redemption pressure, fund houses can also use ISTs for duration or issuer or sector or group rebalancing. Now, ISTs can be done where any one of duration, issuer, sector and group balancing is required in both the transferor and transferee schemes. Moreover, different reasons cannot be cited for transferor and transferee schemes except in case of transferee schemes being a credit risk scheme. In order to guard against possible mis-use of ISTs in credit risk schemes, trustees have to put in place a mechanism to negatively impact the performance incentives of fund managers, chief investment officers (CIOs) involved in the process of ISTs in credit risk schemes in case the security becomes default grade after the ISTs within a period of one year. Further, in case of close ended schemes, IST purchases would be allowed within 3 business days of NFO. Thereafter, no ISTs can be done to or from close-ended schemes. All these guidelines will be applicable   from January 1, 2021.

 

SEBI has given 16-day extension to mutual fund distributors using nomenclatures like IFA/ adviser/ wealth manager nomenclature in their company name. With this, distributors using these nomenclatures in their company name will have to submit their application for name change to the registrar of the company (ROC) and furnish documentary evidence before CAMS by October 31, 2020. Earlier, SEBI has asked MFDs using such nomenclatures to furnish documentary evidence to CAMS before October 15, 2020. The new entity name should not reflect or create an impression that you perform a role of IFA/adviser/wealth manager. Simply put, you will have to clearly mention that you are acting as a MFD and dealing with distribution of mutual funds. MFD’s name and tagline should be placed together in a clear and legible font size; this has to be followed in all forms of communication i.e. website, mobile app, business card and so on. In addition, you will have to complete the change of registered name by December 31, 2020 by incorporating changes to PAN and updating name in AMFI records. You will have to submit ROC certificate and PAN card with the new name to AMFI.

 

SEBI has restored the cut off timings for both subscription and redemption for all schemes other than debt schemes and conservative hybrid schemes to the original cut-off timings of 3:00 pm from October 19, 2020. SEBI informed the restoration of cut off timings through a letter to all AMFI members. Recently, AMFI has requested SEBI to restore the cut-off time for mutual fund purchases and redemptions to 3 pm. With this, clients can get previous day’s NAV in equity funds, arbitrage funds and hybrid funds if they execute transaction in these funds before 3 pm. For all debt funds (excluding liquid funds and overnight funds) and conservative hybrid funds like MIP, the cut off timing will be 1 pm. For liquid funds and overnight funds, subscription cut off timing is 12.30 p.m. and redemption cut off time is 1 p.m.

 

AMFI has asked mutual fund distributors to carry a tagline ‘AMFI registered Mutual Fund Distributor’ along with their name or company name with immediate effect. The tagline has to be carried in a clear and legible font of at least font size 12 across all forms of communication. AMFI said that SEBI has advised that MFDs should display their name and tagline in a clear and legible font in all forms of communication i.e. website, mobile app, printed or electronic materials, business card, sign board and so on. Further, AMFI said that MFDs should not create an impression that they perform a role of financial advisor for which they are not registered. Instead, MFDs will have to explicitly mention that they are acting as an MFD. On nomenclature, AMFI has issued a list of keywords that can be or cannot be used. According to this list, while you can use words like wealth and investment on standalone basis, you cannot use these words in combination like wealth manager and investment management. 

 

Investors under the age of 36 are steadily increasing and their investment value is also climbing up. This busts the view that the millennials are not considerate of their financial lives and like to spend all their income. Interestingly, the ratio of female investors over the last 4 years has increased to 19% from 9%. Meanwhile, increasing income is not translating into increasing investments. This indicates that as people start to earn more they spend a higher proportion of money to upgrade their lifestyle and increase discretionary spending rather than investing it.