FUND FULCRUM

June 2021

The Association of Mutual Funds of India (AMFI) released its monthly data for May 2021, which gave some interesting insights about the Mutual Fund industry’s performance amidst the ongoing COVID-19 pandemic. Liquid funds have particularly been gaining traction, with the masses waking up to the significance of emergency funds during these times, along with the massive redemptions from these funds in the face of increased hospitalizations, medical emergencies, and more. The industry, at large, however, registered a robust growth. The value of assets under management (AUM) in terms of retail investors grew by around 39.28 percent on a Y-O-Y basis, from Rs 12.25 lakh crore in April 2020 to Rs 17.06 lakh crore in April 2021, according to AMFI data. While the number of liquid fund schemes remained unchanged at 39 for both April 2021 and May 2021, there was a marginal drop in the number of folios, which suggests a cumulative outflow of funds. What was noteworthy, however, was the steep fall in the total amount amassed by liquid funds between April 2021 and May 2021. Around Rs 1,98,000 crore was pumped into liquid funds in May 2021, as compared to almost Rs 2,50,000 crore in April 2021. The net outflows were also higher in May 2021, standing at Rs 45,000 crore as compared to an inflow of Rs 41,000 crore in April 2021. 

 

Axis MF, ICICI Prudential MF and Nippon India MF have added highest number of folios in the last one year, according to AMFI data. Axis MF and ICICI Prudential MF have both added over 20 lakh new folios in FY 2021 while Nippon India MF saw an addition of close to 11 lakh folios. Mirae Asset MF and Canara Robeco MF ranked fourth and fifth in terms of addition of new folios with 8.26 lakh and 5.68 lakh folios, respectively. In percentage terms, PPFAS MF and PGIM India MF have witnessed highest growth in folios with 255% and 199%, respectively among all fund houses. Meanwhile, 11 fund houses witnessed decline in folio count. Franklin Templeton MF, HDFC MF, L&T MF and Aditya Birla MF were among the fund houses that saw the highest decline in the number of folios last financial year. Overall, the industry has added 79.95 lakh new folios in FY 2021 as against 68 lakh folios in FY 2020. Scheme categories like international funds, balanced advantage fund and bond ETFs have gained traction in the past one year leading to addition of new folios. Passive fund was another category that brought in new folios to the industry. Growth in folio count can be attributed to the ease of investment through digital channels

Equity funds have witnessed the highest net inflows in the last 14 months. The MF industry has seen net inflows of Rs. 10,083 crore in May 2021. This is the third straight month of net inflows after 8-month outflow streak in equity funds, according to the latest data released by AMFI. However, the MF industry has recorded net outflows of Rs. 38,600 crore due to outflows in liquid and overnight funds. The debt category has recorded net outflows of Rs. 45,500 crore in May 2021. Overall, the industry average AUM has remained unaffected by the net outflows in debt funds as it touched a new all-time-high of Rs. 33 lakh crore. Retail SIP accounts, SIP AUM and SIP contribution which signifies retail activity in the mutual fund industry has seen continued upward trend for the second month this fiscal, leading to overall industry AUM moving to record high of Rs. 33.05 lakh crore and 10 crore folios. Overall, equity schemes have witnessed net inflows of Rs. 10,083 crore in May 2021. The figure is almost thrice the April 2021 net inflows of Rs. 3,437 crore. Barring ELSS, all equity schemes have recorded net inflows. Multi-cap funds garnered highest net inflows in May 2021 at Rs. 1,954 crore. The fund category, which has been on the sideline since the introduction of flexi-cap funds, was able to post such a high number due to NFO success of ABSL's multi-cap fund. The NFO alone contributed Rs. 1,922 crore to the category. Mid-cap funds and focused funds were next in line with net inflows of Rs. 1,368 crore and Rs. 1,169 crore, respectively. Closed-ended equity-oriented schemes have seen net outflows of Rs. 848 crore largely due to maturity of a couple of schemes. Inflows in debt schemes were back in the red after Rs 1 lakh crore net addition in April 2021. The category witnessed net outflow of Rs. 44,512 crore in May 2021. Liquid funds and overnight funds have recorded the biggest outflows. Net outflows in liquid funds and overnight funds were Rs. 45,447 crore and Rs. 11,000 crore, respectively. Low duration and money market funds have seen net inflows of Rs. 7,823 crore and Rs. 4,334 crore, respectively. Inflows in hybrid schemes has declined to Rs. 6,217 crore from Rs. 8,641 crore in April 2021. Inflows were led by arbitrage funds with net addition of Rs. 4,521 crore followed by dynamic asset allocation funds that witnessed net inflows of Rs.1,363 crore. Balanced hybrid funds have seen net outflow of Rs 435 crore. Industry AAUM has gone up by Rs. 56,965 crore to Rs. 32.99 lakh crore. Total folios count has crossed the 10-crore mark. Gross monthly inflows through SIP have risen to Rs. 8,819 crore, a 2.6% rise from April (Rs. 8,596 crore). Number of SIP accounts has increased to 3.9 crore. SIP AUM at the end of the month was Rs 4.67 lakh crore, which is Rs 32,624 crore higher than the AUM on the last day of April 2021. The MF industry has added 3.85 lakh new investors in May 2021 taking the total count of unique investors to 2.34 crore in May 2021 as against 2.30 crore in April 2021. The industry’s total folio count has risen to 10.04 crore in May 2021 from 9.86 crore in April 2021, an increase of 18.67 lakh new folios. Gross redemptions have risen to Rs.6.31 lakh crore in May 2021 from Rs.5.72 lakh crore in April 2021. Overall, the MF industry has seen net inflows in equity funds. Debt funds have recorded net outflows of Rs.44,512 crore on back of redemption from liquid funds and overnight funds.

 

Piquant Parade

 

Mutual fund distributors will soon be able to register SIPs faster as National Automated Clearing House (NACH) is set to become functional 24x7 from August 2021. The NACH system, which is used to register SIPs with banks, currently operates only on those days when banks are open. “NACH is currently available only on the days when banks are functional. In the interest of customer convenience, and to take advantage of the availability of RTGS on all days of the year, it is proposed to make available NACH on all days of the week throughout the year, effective August 1, 2021," according to RBI. The new rules will bring down the turnaround time to register SIPs through NACH. The process currently takes 7-10 working days depending on the investor's bank. Once this gets implemented, the processing time should come down by 30%, with the reduced registration time leading to a higher conversion rate.

 

The latest AMFI data shows that 98% of the total complaints received in the MF industry were resolved quickly. Of the 13,926 total complaints, 13,690 were resolved within 30 days. Meanwhile, only 114 complaints were pending at the industry level at the beginning of the current financial year. An analysis of the data shows that majority of the investor complaints were regarding redemption proceeds, non-debit of SIPs, data updation, discrepancy in account statement and correction in investor details. Among fund houses, HDFC MF has witnessed the highest complaints in FY 2021 (3,159) although the number of complaints has reduced from FY 2020 (5,293). Next in line was ICICI Prudential MF with 2,145 complaints followed by L&T MF with 1,553, Axis MF with 1,530 and SBI MF with 1,069 complaints. Many complaints were on account of SIP transactions.

Regulatory Rigmarole

SEBI has enhanced the overseas investment limit per fund house to $1 billion from the existing $600 million. The overseas investment limit for the industry has been kept unchanged at $7 billion. This implies that though each mutual fund can now invest more in overseas markets, they still have to make sure that the combined industry investment does not exceed $7 billion. The regulator also increased the investment limit in overseas ETFs to $300 million per mutual fund from $200 million earlier. The overall industry limit remains at $7 billion. This is the second such increase in overseas investment limit within a year. In November 2020, SEBI had hiked the limit per fund house to $600 million from $300 million. Interestingly, the industry limit was kept unchanged even then.

SEBI put in place fresh guidelines for participation of mutual fund schemes in interest rate swap, a derivative product. In market parlance, an interest swap is a derivative product used for hedging interest rate risk by mutual funds. It is used between companies to swap their future interest rate payments from fixed to floating or vice-versa. Mutual funds can enter into plain vanilla Interest Rate Swaps (IRS) for hedging purposes. The value of the notional principal in such cases must not exceed the value of respective existing assets being hedged by the scheme. In case participation in IRS is through over the counter transactions, the counterparty has to be an entity recognized as a market maker by RBI and exposure to a single counterparty in such transactions should not exceed 10 per cent of the net assets of the scheme. However, if mutual funds are transacting in IRS through an electronic trading platform offered by the Clearing Corporation of India Ltd (CCIL), the single counterparty limit of 10 per cent will not be applicable.

 

SEBI has introduced a new system that would define the maximum risk that a debt fund manager can take. With this, the market regulator has introduced 9-level matrix titled potential risk class (PRC) which is based on interest rate risk (measured in terms of Macaulay Duration) and credit risk (measured by credit risk value) of the scheme. While Macaulay Duration is the time taken to recover the real cost of a bond measured in terms of years by calculating the present value of future cash flows (interest and principal), credit risk value is the credit rating of a debt instrument. To make things simple, SEBI has introduced weighted average method to measure average interest rate risk of a scheme based on its Macaulay Duration. The regulator has introduced three classes which will be placed on the rows of matrix.

·         Class 1 where Macaulay Duration is less than or equal to 1 year (Can buy individual debt instruments with maturity of up to 3 years)

·         Class 2 represents Macaulay Duration of less or equal to 3 (Can buy individual debt instruments with maturity of up to 7 years)

·         Class 3 can have any Macaulay Duration and can hold papers across maturities

Similarly, SEBI has classified another three classes based on weighted average credit ratings of debt instruments. This will be located on the columns of the matrix.

·         Class A will have credit rating value of more than and equal to 12. G-sec, state development loans, Repo on government securities, cash and AAA rated papers fall under this

·         Class B reflects credit rating value of more than or equal to 10. Funds falling under this will have to hold debt papers having rating of AA+ and AA

·         Class C can hold lower rated papers

Overall, schemes falling under Class I and Class A will be least risky and the scheme falling under Class III and Class C will have highest risk. This additional disclosure along with risk-o-meter will come into effect from December 1, 2021.

 

SEBI has clarified that asset allocation norms on open-ended debt schemes will be applicable on 90% of the total assets. For instance, corporate bond funds will have to invest 80% of total assets in highest rated bonds issued by corporates, according to the SEBI scheme of re-categorization. With all such schemes having to keep 10% of the total assets in liquid assets, corporate bond funds will now have to invest at 72% (80% of the remaining 90% assets) of the total assets in highest rated bonds issued by corporates. Last year, SEBI had 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. This will come into effect from December 1, 2021.

 

RIAs will have to apply for membership of BSE Administration and Supervision (BASL) on or before August 31 2021, according to SEBI. SEBI clarified that the membership of BASL is compulsory for all RIAs to keep the RIA license active. On June 14, the market regulator appointed BASL, a subsidiary of BSE, to oversee activities of RIAs and check if they comply with the regulatory norms. The appointment came into force on June 1, 2021 and is valid for three years. Individual RIAs will have to pay a fee of Rs. 2,000 to get the membership while corporates and LLP will have to shell out Rs.1 lakh as annual membership. BASL has kept renewal fees at Rs. 1,800 for individuals / partnership firms and Rs. 99,000 for corporates and LLP. RIAs can also take three-year membership. The fee is over and above SEBI registration and renewal fees to obtain RIA license.

 

India’s mutual fund industry might be sitting right at the beginning of a massive growth cycle. The penetration of mutual funds in India remains low when compared to global peers, leaving abundant ground for various asset managers to cover. India’s AMCs should deliver healthy 15% AUM/profit growth in the long term, given a large untapped base of savers and high operating leverage – a view reinforced by the performance seen in other countries at a similar point in the industry cycle.