FUND FULCRUM

April 2021

Year 2021 started on a positive note for the mutual fund industry. In line with the equity markets rally, the total AUM of the mutual fund industry has reached Rs.31.84 lakh crore in January 2021 from Rs.30.96 lakh crore in December 2020, a growth of 3%. However, equity funds continue to witness outflows for the seventh consecutive month with a net outflow of Rs. 9,253 crores in January 2021. January 2021 saw measured maturity-driven redemptions led by smart, goal-based investing and the desire to book profits with equity indices reaching an all-time high. Inflows continued through the SIP route, as seen from rising number of new SIP registrations coupled with robust monthly SIP contribution. On the debt side, owing to regulatory measures to ease liquidity, and also the stance to hold on to the policy rates, some of the debt categories like corporate bond fund, banking & PSU fund, short duration funds have seen positive flows. Even the credit risk funds are now moving into positive flows, given that the risk-return dynamics is working in favour of retail investors. All this has resulted in the mutual fund industry AAUMs breaching all time high at Rs.31.84 lakh crore.

Overall, equity schemes have witnessed net outflows of Rs 9,253 crore in January 2021. However, net outflows have reduced from Rs 10,147 crore in December 2020. All equity funds except sectoral/thematic and dividend yield funds have registered net outflows due to profit booking. Flexi cap funds saw highest net outflows of Rs 5,933 crore followed by multi cap fund with net outflows of Rs 2,857 crore. Large cap funds have witnessed net outflows of Rs 2,853 crore. Mid and small cap funds have seen net outflows of Rs 1,206 crore and Rs 1,572 crore respectively. Number of folios in equity funds has risen by 6.69 lakh to 6.44 crore in January 2021. Debt funds have witnessed net outflows of Rs 33,408 crore led by huge outflows in liquid funds of Rs 45,315 crore followed by low duration funds with net outflows of Rs 8,000 crore. The industry has also recorded net outflows in money market funds, medium to long duration funds, long duration funds and gilt funds. On the other hand, short duration funds, corporate bond fund, floater funds and medium duration funds and banking and PSU funds have seen net inflows. Hybrid funds have witnessed net inflows led by arbitrage funds with net inflows of Rs 5,234 crore. Balanced advantage fund and conservative hybrid fund have also witnessed net inflows. On the other hand, aggressive hybrid fund, multi asset allocation fund and equity savings fund have recorded net outflows. SIP inflows have witnessed a marginal decline as SIP inflows decreased to Rs 8,023 crore in January 2021 from Rs 8,418 crore in December 2020. In addition, SIP folios grew to 3.56 crore in January 2021 from 3.47 crore in December 2020. Overall, SIP AUM has declined to Rs.3.90 lakh crore in January 2021 from Rs. 3.98 lakh crore in December 2020. Overall, the mutual fund industry has witnessed net outflow of over Rs 35,586 crore.

 

SBI, Axis, Kotak, Edelweiss and Mirae Asset have emerged as the top five fund houses to log the highest growth in assets during 2020. SBI MF topped the table as its AAUM rose by 29% or Rs 1.03 lakh crore during 2020. It was largely because of the contribution from actively managed equity funds along with the consistent inflows to ETFs where Employees' Provident Fund Organisation (EPFO) is a major contributor. Next in the list is Axis MF with 44% or Rs 54,606 crore rise in its AUM over the last year. Kotak MF, Edelweiss MF and Mirae Asset MF follow in the list at 3rd, 4th and 5th spots respectively. Kotak MF witnessed Rs 39,267 crore increase in AAUM, Edelweiss MF Rs 29,009 crore and Mirae Asset MF Rs 18,721 crore. Asset growth of Kotak MF and Mirae Asset MF was also driven by inflows to their equity funds and their performance, while Edelweiss saw considerable inflows to the Bharat Bonds ETF. In percentage terms, ITI MF witnessed the highest growth in AAUM at 396% followed by Edelweiss MF at 234% and PPFAS MF at 139%. SBI MF, HDFC MF and ICICI Prudential MF are the top three fund houses in terms of AUM. Overall, 27 fund houses witnessed an increase in the assets during 2020 while 14 fund houses saw a decline in their AAUM. 

 

The data released by AMFI shows that direct plan in equity funds account for 19% of the industry assets while direct plans in debt funds and liquid/money market funds constitute 57% and 76% of the total assets respectively. The proportion of direct plan in the total equity AUM will go up in future considering the growing awareness of mutual funds in India. However, majority of retail investors still prefer MFDs (Mutual Fund distributors)/advisors to invest in equity funds as they find it difficult to select funds, review portfolio and evaluate risk. Overall, the proportion of direct versus regular AUM in the mutual fund industry stands at 47:53 as on November, 2020. This is due to the higher participation of institutional investors in debt funds through direct plans. AMFI data shows that individual investors continue to invest in regular plans with the help of MFDs. While 15% of the retail assets is direct, 24% of HNI assets is direct.

 

The AUM of SIPs crossed the Rs 4 lakh-crore mark for the first time in February 2021. According to data released by AMFI, the SIP AUM stood at Rs 4.21 lakh crore at the end of February 2021. The figure is 7.97% higher than the January-end AUM of Rs 3.9 lakh crore. The increase was mainly due to a surge in value of underlying assets of mutual funds. The SIP inflow contribution recorded in February 2021 is just Rs 7,528 crore as against a Rs 31,128 crore rise in SIP AUM. At Rs 7,528 crore, SIP inflow contribution in February 2021 was lower than that recorded in the previous month. It was Rs 8,023 crore in January 2021. Of the total monthly contribution, Rs 6,163 crore was under 'Regular' plan and Rs 1,365 crore under 'Direct' plan. Total number of outstanding SIP accounts rose to 3.63 crore in February 2021. It was 3.55 crore at the end of January 2021. Almost 15 lakh new SIPs were registered last month. Over 7.8 lakh accounts either completed their tenure or were discontinued/paused. Scheme-wise data shows that around 85% SIP accounts are in equity-oriented schemes. Out of the total 3.63 crore accounts, about 3.07 crore accounts are in these schemes. Growth in SIP AUM was seen across all categories of schemes except liquid and overnight funds. The AUM of these funds declined by 0.8% to Rs 277.33 crore. For equity oriented schemes, AUM went up 8% to Rs 3.7 lakh crore.

 

According to the monthly numbers released by Association of Mutual Funds in India (AMFI), investors sold equity mutual funds worth Rs 4,534 crore in month ended February 28, 2021. For the previous month, the number stood at Rs 9, 253 crores. Among equity funds, flexi cap funds lost Rs 4,497 crore in February 2021 compared to net redemptions of Rs 5,933 crore in January 2021. This category saw the highest redemptions across equity fund categories. Equity linked savings schemes (ELSS) – popularly known as tax saving funds saw net redemptions of Rs 847 crore as compared to Rs 820 crore in previous months. Systematic investment plans, which are used by many individual investors as preferred means of investments in mutual fund schemes continue to see inflows. However, the contribution dipped to Rs 7,528 crore in February 2021 as compared to Rs 8023 crore in January 2021. Number of SIP accounts outstanding stood at 3.62 crore in February 2021 as compared to 3.54 crore in January 2021. Balanced advantage funds saw net investments of Rs 2005 crore compared to Rs 658 crore in January 2021. This along with other categories, ensured that the hybrid funds which invest in varying mix of equity, debt and gold saw inflows of Rs 4702 crore in February 2021 compared to 2141 crore in January 2021. Bond schemes have seen net inflows of Rs 1,734 crore. Short duration funds and corporate bond funds saw net redemptions of Rs 10,286 crore and Rs 6,751 crore respectively, in February 2021. In the previous months, these categories saw net inflows of Rs 6,892 crore and Rs 5,428 crore, respectively. The redemptions in bond funds are attributed to the rising yields. Rising bond yields lead to fall in bond prices and also pulls down net asset values of bond funds. Gold ETFs continue to see net investments in February 2021, though at a slower pace. Investors invested Rs 491 crore compared to Rs 624 crore in January 2021. Total assets under management for the mutual fund industry stood at Rs 32.29 lakh crore as on February 28, 2021, compared to Rs 31.84 lakh crore as on January 31, 2021.

Piquant Parade

Sundaram Mutual Fund has announced acquisition of Principal Mutual Fund. With this, Sundaram will acquire the schemes managed by Principal Mutual Fund and acquire 100% of the share capital of Principal AMC and Principal Retirement Advisors. The transaction is subject to regulatory approvals. Till then, Principal MF will continue to operate the businesses. Currently, Sundaram MF manages assets of over Rs. 40,000 crores, the majority of which is in equity oriented schemes. Principal MF has AUM of Rs. 7,447 crores as on December 31, 2020 with about 90% of this in equity-oriented schemes. With this, Sundaram Mutual Fund will become the 15th largest AMC in the industry by overtaking Edelweiss AMC and Invesco AMC. This transaction will strengthen their presence in the marketplace with the addition of a range of schemes with a good long term performance track record across the large and mid-cap segments. This will complement their business which has traditionally been weighted towards the mid- and small-cap segment. They will benefit from Sundaram Asset Management’s larger mutual fund platform in this market.

Nippon India Mutual Fund has entered into an agreement with Taiwan based asset manager Cathay Site to use their expertise to explore areas for developing, managing, marketing and distributing each other’s products in their respective markets. Both companies will seek to develop and explore business opportunities in active and passive strategies and leveraging upon their distribution reach in India and Taiwan. Cathay’s reach and breadth of product offerings will enable Indian investors to have much needed diversification out of their local market by providing access to a sophisticated, technology heavy market. This exclusive partnership would enable Indian investors to partake of a unique high technology, high growth market and diversify the basket of products available, which they can choose from in accordance with their investment appetite. Cathay SITE manages AUM of $26.76 billion. 

 

Franklin Templeton Mutual Fund has said that its six shut schemes have received Rs 15,272 crore from maturities, coupons and pre-payments since closing down in April 2020. The fund house had shut six debt mutual fund schemes on April 23 2020, citing redemption pressures and lack of liquidity in the bond market. The six schemes are Franklin India Low Duration Fund, Franklin India Dynamic Accrual Fund, Franklin India Credit Risk Fund, Franklin India Short Term Income Plan, Franklin India Ultra Short Bond Fund and Franklin India Income Opportunities Fund. The court-appointed liquidator, SBI Funds Management, is in the process of preparing to liquidate the schemes and distribute proceeds to unitholders at the earliest opportunity. SBI Funds Management, with support from Franklin Templeton, has finalised the standard operating procedure (SOP) to monetise assets of the schemes under winding up and distribute the proceeds and has filed the SOP with the Supreme Court. It anticipates that SBI Funds Management will commence active monetisation very shortly. The fund house said that cash available for distribution in the five cash positive schemes stands at Rs 1,370 crore as of March 15, 2021.

Regulatory Rigmarole

SEBI has clarified that the revised fee structure for registration and renewal of RIA license is applicable from the next financial year 2021-22. In a recent corrigendum to its earlier notification on RIA regulations, SEBI has clarified that the reduced fee structure for registration and renewal of RIA license will be applicable from April 1, 2021. On January 11, SEBI announced the reduction of the registration fee required for RIA license to Rs.3000 and Rs.5000 for individuals and corporates, respectively. With this, individuals and firms (partnership) will have to pay Rs. 3,000 to obtain a new license and Rs. 1,000 to renew existing license as against Rs 10,000. For corporates including limited liability partnerships (LLPs), the registration fee is reduced to Rs 15,000 from Rs 5 lakh. Renewal fees have also come down to Rs 5,000 from Rs 5 lakh. Moreover, applicants who want to know the status of RIA application will have to pay Rs 2,000 (individuals) and Rs 10,000 (corporates). The fee for such a request earlier was Rs 5,000 for individuals and Rs 25,000 for corporates.

SEBI has allowed the MF industry to set up Limited Purpose Clearing Corporation (LPCC) based on recommendation of a working group set up by the Mutual Fund Advisory Committee (MFAC). The working group had members from fund houses, AMFI and Clearing Corporation of India. SEBI said that LPCC would clear and settle repo transactions in corporate debt securities. Industry experts believe that LPCC will help fund houses deal with redemption pressure and settle transaction in corporate bond markets. LPCC will have corpus of Rs.150 crores. Each fund house will have to contribute to this corpus in proportion to their debt assets. Barring liquid and overnight funds, investors will get NAV once the money reaches the fund house irrespective of the investment amount. So far, investors get same day NAV if they invest up to Rs.2 lakhs before the cut off time. Now, NAV allocation will largely depend on efficiency of the financial system.

SEBI has issued a consultation paper to introduce the concept of accredited investors in India. Accredited investors are sophisticated investors with acumen to understand risk associated with financial products. These investors have a higher financial capacity and a greater ability to absorb loss. They can request manufacturers like asset management companies to customize their offerings based on their specific needs. With this, the market regulator aims to provide a relaxed regulatory framework for sophisticated investors and introduce products designed to meet investor-specific risk profile. Among some key benefits of becoming accredited investors are access to customized products and no barriers on entry such as minimum investment size (for instance, these investors can invest less than Rs.50 lakhs in PMS and Rs.1 crore in AIFs). Entering into an arrangement with product manufacturers with specific terms and conditions, reduced compliance costs, less marketing cost, flexibility in designing products and ease of launching innovative products are the benefits to AMCs. Individuals, HUFs and family trusts can become accredited investors if they fulfil any of these three criteria - annual income of at least Rs 2 crore, networth of at least Rs.7.50 crore with minimum of Rs.3.75 crore of financial assets. annual income of at least 1 crore and networth of at least Rs.5 crores with at least Rs.2.50 crore in financial assets. The validity of accredited investor is proposed to be 1 year. In addition, it is believed that investors will have to apply with SEBI to become accredited investors. 

SEBI has asked AMCs to disclose the fund's return in Rupee terms along with CAGR. With this, AMCs will have to disclose returns in absolute terms. Dividends have to be disclosed in Rupee terms. On maturity of close end funds, fund houses will have to advertise about entire distributable dividends. Overnight funds, liquid funds and money market funds will have to disclose returns of 7 days, 15 days and 30 days. Fund houses cannot advertise performance if the fund has not completed six months. Inception date will be date of issuance of mutual fund units and not the date of launch of scheme. Fund houses will have to update SID on half yearly basis.

SEBI issues additional guidelines on voting to ensure MFs use voting rights in best interest of the unitholders. SEBI made it mandatory for mutual funds to exercise voting rights attached to securities held by the funds. The market regulator also issued additional guidelines to ensure mutual funds use voting rights in the best interest of the unitholders. The regulation will come into force on April 1, 2021. The rule applies to all mutual funds including passive funds - index funds and ETFs. Mutual funds are exempted from casting their votes if they do not have any economic interest on the day of voting. Vote has to be cast at the fund house level. In case a fund manager strongly disagrees with managers of other schemes within the fund house, voting at scheme level can also be done. Fund managers have to submit a declaration on quarterly basis to the trustees that the votes cast by them were in the best interest of the unit holders. Trustees have to submit half yearly report to SEBI.

The market regulator has put a cap on exposure to debt instruments having special features like convertible bonds and perpetual bonds. With this, SEBI has put 10% cap on exposure to bonds having special features like convertible bonds, Tier I and Tier 2 bonds. These bonds have special features such as subordination to equity and convertible to equity upon trigger of a pre-specified event for loss absorption, according to SEBI. Currently, there is no limit on exposure to such instruments. Mutual Funds can invest up to 10% of the total scheme corpus in such bonds. They cannot invest more than 5% of the total scheme corpus in such bonds issued by single issuer. At AMC level, they can have total exposure of 10% to such bonds from single issuers. Existing funds will have to reset their scheme to comply with the new norms. However, these funds can hold such securities until maturity. Fund houses will have to incorporate changes in SID if they wish to create segregated portfolio with such securities in future. Fund houses can consider 100 years to calculate valuation of perpetual bonds. The rule came into effect from April 1, 2021.

Trustees, in their half yearly reports, will now have to inform SEBI if their AMC fails to comply with any of the norms prescribed for mutual funds, according to the new reporting norms issued by the regulator. The corrective steps taken by the AMC will also be a part of the report. Trustees will have to submit the half-yearly report within two months from the end of each half year. SEBI has issued changes to other reporting formats as well. AMCs no longer need to submit compliance certificate to trustees on a bi-monthly and half-yearly basis, according to the new guidelines. Since AMCs have been sharing this on quarterly basis, the market regulator has relaxed frequency of such reporting. The new format for quarterly reporting requires AMCs to share details like the number of live schemes, schemes launched during the period including schemes which were launched but could not be constituted for any reason, schemes rolled-over during the quarter, among others. For wound-up schemes, AMCs will have to share details of payout in the quarterly report. These reports will have to be submitted to trustees within 21 days from the end of each quarter. The guidelines for reporting by AMCs to SEBI has been modified as well. Instead of exceptional reporting, AMCs will now have to submit complete compliance certificate test (CTR) to the regulator on a quarterly basis. This submission has to be made by 21st of the succeeding month after the end of a quarter.

 

 Interestingly, 84% of the MFDs feel that active fund managers will continue to beat their benchmark indices and 83% of the MFDs were confident of their ability to pick the winners for their clients. While 43% of MFDs believe that mutual fund industry will reach AUM of Rs.50 lakh crore (i.e. almost double the size in August) by 2025, another 40% feel that the mutual fund industry will become a Rs.75 lakh crore (i.e. almost triple the size in August) industry. Similarly, as many as 26% of the MFDs were confident that their mutual fund business would grow 5 times or more in the next 5 years while 43% of MFDs said that it will double in the next 5 years. 26% said their business would be at the same level and balance 5% were looking to exit the business in the next 5 years. Poor perception, low awareness, and complexity of mutual funds are constraining the growth of the mutual fund industry. However, the silver lining is that once they invest, investors have a positive experience with mutual funds - only 22% of MFDs feel that many investors have had a poor past experience with mutual funds. While the Mutual Funds Sahi Hai campaign has worked for the industry, (these scores are much better than those in our previous studies done 2 and 4 years back), there is still a lot of ground to be covered if the industry has to reach its true potential and reach every household in the country.