FUND FULCRUM (contd.)

November 2020

 

The contribution of small towns or B30 cities to mutual fund industry's average assets under management of over Rs 28 lakh crore stood at 16 per cent and the balance was contributed by T30 cities, or the top 30 locations in India as at the end of October 2020, according to AMFI. Since the last few years, market regulator SEBI has been pushing asset management companies to reach out to small towns for increasing their assets base. Assets from B30 locations increased to Rs 4.61 lakh crore as at the end of October 2020 from Rs 4.47 lakh crore at the end of September 2020, a 3 per cent growth. B-30 locations tend towards equity schemes as 65 per cent of assets are from equity schemes, while the same is 35 per cent for 'Top 30' cities. About 15 per cent of the retail investors chose to invest directly, while 24 per cent of HNI assets were invested directly. Besides, 47 per cent of the assets of the mutual fund industry came directly. A large proportion of direct investments was in non-equity oriented schemes where institutional investors dominate. The mutual fund industry's total AAUM shot up to Rs 28.34 lakh crore at the end of October 2020 from Rs 27.74 lakh crore at the end of September 2020.

 

According to AMFI data, in terms of state-wise contribution, Maharashtra continued to be the biggest contributor (43.8 per cent) of the industry's AAUM in October 2020, followed by 8.4 per cent by New Delhi, 6.9 per cent each by Gujarat and Karnataka, and 5.2 per cent by West Bengal. Individual investors primarily hold equity-oriented schemes while institutions hold liquid and debt-oriented schemes. About 68 per cent of individual investor assets are held in equity oriented schemes, on the other hand, 75 per cent of institutions assets are held in liquid, money market and other debt-oriented schemes.

Piquant Parade

 

RBI has rejected Muthoot Finance's proposal to acquire IDBI AMC. Muthoot Finance informed the exchanges that its request for a no-objection certificate was not acceded to by the RBI on the ground that, “The activity of sponsoring a mutual fund or owning an AMC was not in consonance with the activity of operating a non-banking financial company (NBFC).” In November 2019, Muthoot Finance had signed a share purchase agreement to acquire 100% equity shares of IDBI AMC and IDBI MF Trustee Company for Rs 215 crore. This acquisition was to be the vehicle for Muthoot’s entry into the mutual fund industry.

Regulatory Rigmarole

SEBI has raised the overseas investment limit of individual fund houses to 600 million USD from 300 million USD. The overall limit for the industry remained unchanged at 7 billion USD. The move comes after fund houses sent a representation to SEBI to increase the limits wherever possible. Further, SEBI said in a circular that mutual funds can make investments in overseas ETFs subject to a maximum of 200 million USD per fund house, within the overall industry limit of 1 billion USD. Earlier, the overall ceiling for investment in overseas ETFs that invest in securities was 1 billion USD subject to a maximum of 50 million USD per mutual fund. Mutual funds launching new schemes intending to invest in overseas securities / ETFs have to ensure that the scheme documents disclose the intended amount that they plan to invest. Such limits disclosed in scheme documents are valid for a period of six months from the date of closure of the NFO. Thereafter the unutilized limit, if any, will not be available to the fund house for investment in overseas securities or ETFs and will be available towards the unutilized industry wide limits. Mutual funds need to report the utilisation of overseas investment limits on a monthly basis, within 10 days from the end of each month. The circular comes into force with immediate effect.

 

SEBI has asked fund houses to invest at least 10% of the total assets of all open ended debt schemes except overnight, liquid and gilt funds in liquid assets like cash, government securities, t-bills and repo on g-sec. Fund houses will be responsible for compliance with the requirement. This will come into effect from February 1, 2021. Further, the market regulator has asked fund houses to undertake stress test of all open ended debt funds. So far, such a test is applicable for liquid and money market funds. This is to come into effect from December 1, 2020. SEBI has asked AMCs to stipulate necessary guidelines to carry out stress testing of their debt schemes. Stress testing is evaluating impact of various risk parameters like interest rate risk, credit risk and liquidity risk on the scheme and its NAV under various scenarios. AMCs adopt predetermined methodology, which is approved by the board of AMC to carry out such a testing.

SEBI has introduced a new fund category in the mutual fund industry - flexi cap funds. Flexi cap funds will be in line with erstwhile multi cap funds where fund manager can take equity exposure of at least 65% across market capitalisation. SEBI’s decision has come after Mutual Fund Advisory Committee (MFAC) recommended the market regulator to give more flexibility to fund managers to maneuver across market capitalisation. Earlier, SEBI had asked fund houses to invest at least 75% of the total corpus across market capitalisation with at least 25% exposure each to large cap, mid cap and small cap stocks. Under the new category, the scheme should have a minimum investment of 65 percent of total assets in equity and equity-related instruments, while it is an open-ended dynamic equity scheme investing across large-cap, mid-cap, small-cap stocks. The AMC shall ensure that a suitable benchmark is adopted for the Flexi-Cap Fund. The market regulator has given an option to fund houses to convert existing schemes into a flexi cap fund. However, fund houses will have to use flexi cap nomenclature in their scheme.

The mutual fund industry celebrated investor awareness week between November 23 and November 29 in line with the World Investor Week organized by International Organization of Securities Commissions (IOSCO). Under this initiative, AMFI and fund houses held close to 240 webinars to spread awareness about mutual funds. In addition, AMFI has launched a ‘Mutual Funds Sahi Hai’ campaign on radio. The participation of retail investors is encouraging in terms of growth in the number of demat accounts and also mutual fund portfolios. There is a need for new investors to make informed investment decisions. Thus, investor awareness and education play an important role in educating the investor.

 It is time now for a brief ...break ...from blogging. I shall be back with a bang shortly.

 

FUND FULCRUM

November 2020

The last quarter was eventful for the mutual fund industry. While the average AUM of the industry is at an all-time high at Rs.28 lakh crore, the mutual fund industry has been witnessing redemptions from equity funds. Overall, the July-September quarter ended on a good note for the industry compared to the April-June quarter in terms of gross redemption. Average AUM of the industry was at Rs.27.74 lakh crore in September 2020 compared to Rs.26.07 lakh crore in June 2020. Overall, redemptions came down from the previous quarter as September 2020 saw redemptions of Rs.7.18 lakh crore compared to Rs.9.54 lakh crore in June 2020.

The industry’s average AUM has reached its peak at Rs.28.34 lakh crore in October 2020 compared to Rs.27.74 lakh crore in September 2020. This is largely due to increasing net inflows in fixed income funds. The mutual fund industry has added 52,674 new investors in October 2020 taking the total count of unique investors to 2.13 crore. The industry’s total number of folios has risen to 9.37 crore in October 2020 from 9.33 crore in September 2020, an increase of 4.12 lakh new folios. Overall, gross redemptions have come down significantly to Rs.5.45 lakh crore in October 2020 from Rs.7.18 lakh crore in September 2020. However, equity funds have witnessed net outflows for four consecutive months. Net outflows in equity funds were Rs.2,700 crore compared to Rs.730 crore in September 2020. On the contrary, debt funds have recorded net inflows of Rs.1.10 lakh crore in October 2020 compared to net outflows of Rs.51,900 crore in September 2020. T30 cities account for Rs.23.54 lakh crore (83%) of industry’s total AUM while B30 cities have AUM of Rs.4.69 lakh crore, which comprises 17% of the total industry AUM. AUM in T30 cities has grown by 5% to Rs.23.54 lakh crore in October 2020 from Rs.22.34 lakh crore in September 2020. Similarly, AUM in B30 cities has risen by 4% to Rs.4.69 lakh crore in October 2020 as against Rs.4.52 lakh crore in September 2020. Folio count in both T30 and B30 cities grew marginally last month. Average AUM per retail folio has increased by 2% to Rs.1.58 lakh in October 2020 from Rs.1.55 lakh in September 2020. Average AUM per folio of retail investors in both B30 and T30 cities has risen by 2% each to Rs.92,700 and Rs.2.06 lakh, respectively.

While the industry has witnessed net inflows of Rs.98,575 crore, equity funds continue to see net outflows for the fourth consecutive month. Due to rise in SIP contribution and net inflows in debt funds, the MF industry’s AUM has reached Rs.28.22 lakh crore as on October 2020, according to the latest AMFI data. Overall, equity schemes have witnessed net outflows of Rs.2,724 crore in October 2020 compared to Rs.734 crore outflow in September 2020. Most outflows in equity funds were due to net outflows from multi cap funds of Rs.1,902 crore followed by Rs.1,201 crore in value funds. Net outflows in multi cap funds were also due to confusion around SEBI’s new norms for multi cap funds. Net outflows were also seen in large cap funds, mid cap funds, small cap funds, dividend yield fund, focused fund and ELSS. Interestingly, the industry has witnessed net inflows in sectoral funds and large and midcap funds. Overall, debt schemes have seen net inflow of Rs.1.10 lakh crore led by liquid funds and short duration funds. Barring credit risk fund and long duration fund, all other debt oriented funds have witnessed robust inflows. Short duration categories such as ultra-short duration, low duration and money market funds have received good traction. Each category has recorded net inflow of over Rs.10,000 crore. Hybrid schemes have witnessed net outflow of Rs.1,600 crore due to  redemptions from balanced advantage funds. While balanced advantage fund has seen a net outflow of Rs.2,300 crore, arbitrage fund saw an inflow  of Rs.1,700 crore. All other hybrid funds like conservative hybrid fund, balanced advantage, multi asset allocation and equity savings have recorded net outflows. SIP folios grew marginally to 3.37 crore in October 2020 from 3.33 crore in September 2020. This led to a rise in monthly SIP contribution to Rs.7,800 crore compared to Rs.7,788 crore in September 2020. All in all, SIP AUM rose to Rs.3.42 lakh crore in October 2020 from Rs.3.35 lakh crore in September 2020. 

HDFC MF, ICICI Prudential MF and SBI MF have emerged as the top three fund houses in terms of equity AAUM in the July-September quarter. Equity AAUM includes pure equity schemes and ELSS. HDFC MF’s equity AAUM for July-September stood at Rs 95,405 crore, ICICI Prudential MF’s at Rs 77, 860 crore and SBI MF’s at Rs 72,545 crore. Next in this list is Axis MF with an equity AAUM of Rs 71,601 crore followed by Aditya Birla Sun Life MF with Rs 66,690 crore equity AAUM. An analysis of top 20 fund houses’ assets shows that there have been a couple of changes in the position of top five players in terms of equity assets this quarter. This includes SBI MF emerging as the third largest player in the equity AAUM league and Axis MF emerging as the fourth largest player. In the January-March quarter of FY2020, HDFC, ICICI Prudential, Aditya Birla Sun Life, SBI and Nippon were the top 5 players in terms of equity AAUM.  In terms of total assets in hybrid funds, ICICI Prudential MF has emerged as the top player. In the January- March quarter, HDFC MF was at the top of the table. The July-September data shows that ICICI Prudential, HDFC, SBI, Kotak and Nippon India MF are now the top 5 fund houses in terms of total AUM in hybrid schemes. 

The latest AMFI data shows that individual investors hold assets of Rs.14 lakh crore as on September 2020, which is 52% of the total MF industry’s AUM. The assets of individual investors have grown by 4% compared to the corresponding period last year. Individual investors include retail investors and HNIs. Meanwhile, institutional investors have seen their assets grow 13% to Rs.13.32 lakh in September 2020 from Rs.11.76 lakh crore in September 2019. Usually, institutional investors hold debt schemes whereas individual investors are more inclined towards equity schemes. Further, data shows that 88% of   assets of equity oriented schemes come from individual investors.  Similarly, institutional players account for majority of the assets of debt oriented schemes (59%), liquid funds (84%), FoFs (91%). Overall, individual investors allocate 68% of their total investment in equity oriented schemes while institutional investors allocate 75% of their assets to liquid and debt oriented schemes.

 

Despite the covid-19 pandemic, the consequent lockdown, a couple of market meltdowns and a sea change in regulations in the recent past, more than 50 lakh news investors have joined the industry since March 2018, nearly 30 months. To put the number in context, the MF industry has a total of 2.13 crore unique investors at the end of September 2020. So, the industry has added nearly 25% of its total investors in the last 30 months. The MF industry is likely to reach 4 crore unique investors very soon in the near-term.

Piquant Parade

The number of individuals and distribution firms applying for RIA license with SEBI has gone up substantially over the last three months. SEBI data shows that 44 individuals and entities have approached SEBI to seek RIA license during July-September this year as against 38 applications in the entire year last financial year. In fact, as many as 20 individuals and entities have approached SEBI to register as RIA in September 2020.

 

To be continued…

 

 

NFONEST

November 2020

After a lone New Fund Offer (NFO) made its appearance in June 2020 and July 2020, two, five and six NFOs were open in August 2020, September 2020 and October 2020 respectively with no NFOs open at present in view of the COVID-19 pandemic.

Mirae Asset Banking and Financial Services Fund and Union Hybrid Equity Fund are expected to be open in the last week of November 2020, while Kotak Multi Asset Allocator Fund of Fund – Aggressive, Kotak Multi Asset Allocator Fund of Fund – Conservative, Kotak Multi Asset Allocator Fund of Fund – Moderate, Kotak IT ETF, Kotak All Weather Debt FOF, Axis Technology ETF and Axis Consumption ETF are expected to be launched in the coming months.

 

GEMGAZE

November 2020

The consistent performance of two out of four funds in the February 2020 GEMGAZE is reflected in all the funds holding on to their esteemed position of GEM in the November 2020 GEMGAZE. FT India Life Stage Fund of Funds and FT India Dynamic PE Ratio Fund of Funds, in view of their dismal performance, have been shown the exit door.

ICICI Prudential Advisor Series – Debt Management Fund (erstwhile ICICI Prudential Advisor Series – Dynamic Accrual Plan) Gem

ICICI Prudential Advisor Series – Dynamic Accrual Plan was launched in December 2003 as ICICI Prudential Advisor–Very Cautious as part of a five-plan Fund of Funds series: ICICI Prudential Advisor–Very Aggressive, ICICI Prudential Advisor–Aggressive (ICICI Prudential Advisor Series – Long Term Savings Plan w.e.f. December 6, 2013), ICICI Prudential Advisor–Moderate, ICICI Prudential Advisor–Cautious, and ICICI Prudential Advisor–Very Cautious (ICICI Prudential Advisor Series – Dynamic Accrual Plan w.e.f. June 17, 2015). ICICI Prudential Advisor Series – Dynamic Accrual Plan has been renamed as ICICI Prudential Advisor Series – Debt Management Fund w.e.f May 28, 2018. The AUM of the Debt Management Plan is Rs 166 crores. The scheme aims to provide reasonable returns, commensurate with low risk while providing a high level of liquidity, through investments made primarily in the schemes of Prudential ICICI Mutual Fund having asset allocation to money market and debt securities. The top two holdings are ICICI Prudential Floating Interest Fund and ICICI Prudential Short-term Fund. The one-year return of the plan is 9.39% as against the category average of 10.12%. The expense ratio of the fund is 0.84%. The fund is benchmarked against the CRISIL Composite Bond Index. The fund has been managed by Mr. Manish Banthia since June 2017.

Birla Sunlife Active Debt Multi-manager FoF Scheme Gem

Birla Sunlife Active Debt Multi-manager FoF Scheme, which sports an AUM of Rs.8 crores, is an open-ended fund of funds scheme launched in December 2006. The scheme seeks to generate returns from a portfolio of pure debt-oriented funds accessed through the diverse investment styles of underlying schemes selected in accordance with the Birla Sunlife AMC process. The top two holdings are IDFC Banking Debt Fund and Aditya Birla Sunlife Credit Risk Fund. The one-year return of the fund is 8.94% as against the category average of 9.35%. The expense ratio of the fund is 0.68%. The fund is benchmarked against CRISIL Composite Bond Index. The fund has been managed by Mr. Pranay Sinha since August 2018.

FUND FLAVOUR

November 2020

Fund of Funds

A scheme that invests in other mutual fund schemes of the same fund house or another fund house is known as Fund of Funds. Instead of investing directly in equities or bonds, the fund manager holds other mutual funds in his portfolio. The portfolio is designed in such a way that it will suit investors across risk profiles and financial goals. The investors can avail the opportunity to benefit from diversification as investment is spread across numerous fund categories, and risk is reduced. The ultimate objective of the scheme is to create wealth over the long run.

Types of Fund of Funds

1. Fund of Fund Investing Overseas

This type of Fund of Fund (FoF) invests in international funds which are registered in foreign countries. These foreign funds, in turn, hold foreign stocks. This way the FoF enables Indian investors to get exposure to foreign stocks such as Alphabet (Google), Apple, Microsoft, General Motors etc. For example, DSP US Flexible Equity Fund invests in Blackrock Global Funds – US Flexible Equity Fund, an international fund managed by Blackrock.

2. Fund of Funds Investing in ETFs

FoFs also give investors access to ETFs. An ETF (Exchange Traded Fund) invests in stocks, bonds or commodities like gold. It is not sold like an ordinary mutual fund but is rather traded continuously on the stock exchange. However, Investors need demat and trading accounts to invest and trade in ETFs. This leaves out a large section of investors from the ETF market. As a result, mutual fund houses have created FoFs to give retail investors access to ETFs. For example, Nippon India Gold Savings Fund is a FoF which invests in India’s largest gold ETF, Nippon India ETF Gold BeES.

The pros...

Diversification

Fund of funds target various best performing Mutual Funds in the market, each specialising in a particular asset or sector of fund. This ensures gains through diversification, as both returns and risks are optimised due to underlying portfolio variety.

§      Professionally trained managers

Fund of funds is managed by highly trained people with years of experience. Proper analysis and calculated market predictions made by such portfolio managers ensure high yields through intricate investment strategies.

§      Low resource requirements

An individual with limited financial resources can easily invest in the top fund of funds available to earn higher profits. Monthly investment schemes can also be availed while choosing fund of funds to invest in.

 ...and the cons

·         FoFs charge double expenses

In addition to the expenses charged by the underlying schemes, FoFs charge an additional fee. Well, it is true that FoFs do charge an additional fee, but it is to defray the fund management costs and other expenses incurred. However, this fee is considerably low. Most FoFs charge an annualised fee of under 1.5% for the regular plan and under 1% for the direct plan. For some schemes, the fee is as low as 0.5%. FoFs cannot charge investors as per their whims and fancies. As per Regulation 52(6) of the Mutual Funds Regulations,1996, the total expenses of a FoF including the weighted average of charges levied by the underlying schemes shall not exceed 2.50% of the daily net assets of the scheme. Hence, the overall costs could be lower than certain equity mutual funds as well.

·         FoFs attract a tax liability

FoFs are classified as non-equity schemes, hence they do not enjoy the tax benefits of equity-oriented schemes. For FoF schemes, STCG for units held for less than 36 months, is added to the total income and taxed accordingly. LTCG attracts a tax of 20% with indexation. Equity schemes on the other hand attract Short-term Capital Gains (STCG) tax of 15%, while Long-term Capital Gains (LTCG) is tax free. The holding period is one year to be considered as LTCG. Clearly, the tax liability will eat into the returns of a FoF scheme. However, investors tend to overlook the fact that a FoF scheme has the potential to deliver far superior returns than most equity schemes. Hence, even if the post-tax returns are considered, FoFs could still outperform, as the scheme selection is backed by a robust research methodology.

·         Biased to in-house schemes

Fund houses may pick schemes that are managed by them for FoFs. However, this may not be the case, unless specified in the investment allocation specified under Section II of the Scheme Information Document (SID). The fund managers are expected to adopt an unbiased approach to pick funds that are not limited to their own fund house or a specific fund company. The scheme selection in most cases is driven by a comprehensive research methodology and market outlook.

Apt for...

The best part of Fund of Funds is the diversification of funds, which helps to reduce the risk. Therefore, it is a good option for small investors who do not wish to take higher risks. Ideally, investors having relatively fewer resources and low liquidity needs and having an investment horizon of five years or more may opt to invest in the top Fund of Funds available in the market. It enables investors to earn maximum returns at minimal risk.

Key criteria...

There are various factors which an investor should have complete information about before deciding to allocate his/her resources to these mutual funds:

·        Top fund of funds operate in the long term, thus locking your investment for a considerable period. You should make sure your liquidity needs are satisfied through other sources before choosing to invest in this type of mutual fund.
·        Even though the risk factor is minimized, thanks to quality management and diversification, they are always subject to volatility due to market fluctuations.
·        Due to high expenses and tax implications of fund of funds, the returns on investment in this scheme might be lower than the expectations of an investor.

FoFs yet to make its mark in India

Fund of Funds (FOFs) is a very popular concept in the West and even across Asian economies. Most institutions use the FOF approach to investing in mutual funds. In performance terms, these FOFs have failed to deliver. Anyway, an FOF focusing on global markets does not exactly add value when the whole world is looking to India for alpha. Secondly, FOFs also get unfavourable tax treatment. Even if an FOF aggregates equity funds, it is treated as a debt fund for tax purposes. That is a key reason why FOFs have not taken off in India.

The bottomline...

The holy grail of sensible investing is figuring out a good asset allocation and then rebalancing your portfolio dispassionately to stick to your asset allocation. With the advent of FoFs, this task could now be made much easier and of course less taxing.