FUND FULCRUM (contd.)

May 2021

The total assets of mutual funds reached 21% of the total bank deposits in FY21, up from 17.7% in the last fiscal. While the total bank deposits stood at Rs 151.13 lakh crore, the MF AUM was at Rs 32.17 lakh crore at the end of March 2021, according to AMFI data. This is the highest MF AUM to bank deposit ratio at the end of any fiscal year. Annual contribution of household savings in mutual funds is declining every year since 2017. In fact, it has come down drastically from 9.3% in FY 2017 to 1.9% in FY 2020, according to the Research Report published by Aditya Birla Sun Life Mutual Fund in its red herring prospectus. The report shows that the annual contribution of Indian household savings in mutual funds was Rs.1.50 lakh crore in FY 2017 i.e. 9.3% of the total annual contribution of Indian household in financial markets. Since then it has been declining. In FY18, households invested Rs.1.38 lakh crore or 6.7% of their savings in mutual fund schemes. The next year, they slashed it down further to Rs.57,600 or 2.7% of the total household savings. From Rs 1.50 lakh crore in FY17, the yearly inflow of financial household savings in mutual funds declined to Rs 44,400 crore in FY20.

Regulatory Rigmarole

SEBI's latest norms on remuneration of key employees in which it has asked AMCs to pay 20% of the total net salary in the form of MF units and the weighted AUM concept has not gone down well with a few AMC officials and MFDs. While lauding SEBI's intention behind the move, some AMCs questioned the practicality of the decision. The lock-in of 20% income for three years may cause difficulties for key employees who do not earn high salaries. The weighted AUM concept was the other issue, where the fund manager has to invest in all schemes on the basis of weighted AUM. So, if a mutual fund runs an 80-20 debt equity business, it will be forced to maintain this asset allocation irrespective of the risk appetite of the fund. In addition, for a fund manager managing small cap fund, he has to invest either in his schemes or a higher risk grade scheme, say for instance, sectoral fund even if he is not comfortable with it. If a person runs a high-risk scheme it does not mean that he has high risk appetite. Transparency is required but this does not seem to be the right way. A liquid fund manager would not like to lock-in his money in liquid funds for three years and a midcap scheme may not be suitable for a midcap fund manager nearing retirement.

Nominees or legal heirs are entitled to get trail commission on assets built before the demise of an ARN holder without obtaining a fresh ARN. However, if a nominee wants to do fresh business or generate trail income on SIP inflows, he has to obtain the new ARN and transfer assets of deceased distributor. In an email sent to a few distributors, AMFI said, “The guidelines issued earlier dated March 28, 2013 with regard to payment of trail commission to nominee or legal heir of the deceased distributors have not been changed. A nominee or legal heir need not be an ARN holder to claim and receive the upfront and trail commission. However, for transfer of AUM, the nominee or legal heir of the deceased ARN holder must have a valid ARN in his name. The latest circular provides the detailed procedure to be followed for transfer of AUM of a deceased ARN holder to the ARN of the nominee/legal heir of the deceased.” With this, if a nominee or legal heir opts not to obtain ARN, he will continue to get trail commission on assets built before the demise of deceased distributor. Also, such nominees will get commissions even if the ARN gets expired at a future date. In such a scenario, nominees continue to receive commissions till the AUM under the ARN becomes nil i.e. till investors remain invested. On the other hand, if a nominee or legal heir obtains ARN, he can grow business through existing assets, fresh business and SIP inflows. Currently, nominees are allowed to transfer the assets. 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 should not have been 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. AMFI gives six months to nominee or legal heir of a deceased mutual fund distributor to obtain ARN. In both the cases, the nominee or the new distributor has to submit an application for cancellation of ARN of deceased distributor to CAMS-AMFI unit within 6 months of the date of demise.

 

Mutual fund business is buzzing with new entrants even as many firms await SEBI nod to enter the industry. This month, mutual fund industry saw the entry of two new players — Groww and NJ Mutual Fund. While Groww took the M&A path by acquiring Indiabulls, NJ Mutual Fund made its entry by obtaining license from SEBI. Groww’s acquisition of Indiabulls is subject to SEBI’s approval but there is a good chance that the deal will get SEBI’s nod. Another fund house in the offing is White Oak which acquired Yes AMC subject to regulatory approval. And this is just the start. Many firms (almost 10) are waiting for SEBI's go ahead. A large chunk among them are PMS and fintech firms like Zerodha, Helios Capital Management, Capitalmind, Unifi Capital and Rakesh Jhunjhunwala's Alchemy Capital. Paytm Money is also said to be considering the option. There is a combination of factors behind the surge in interest in mutual fund business. Investors are flocking to capital markets as returns from traditional investment avenues dries up. Record opening of demat accounts and high SIP registration numbers are a testimony to the fact. These firms are looking to capture this change in investment pattern. They are also seeing high growth potential as the penetration is low. Technology and internet penetration are now present to reach out to the remaining population. We are already witnessing a shift from regular to direct plans because of low cost — this will intensify further. This solves the distribution challenge for mutual funds. Further, it is a high margin business which is also an opportunity for the new players to innovate from the business perspective.