FUND FULCRUM

July 2021

SBI Mutual Fund has maintained its top position in the mutual fund rankings with 4% growth in AUM in the first quarter of FY 2022. The fund house managed Rs.5.23 lakh crore assets at the end of June 2021 compared to Rs.5.04 lakh crore at the end of March 2021, according to the latest AMFI data. In absolute terms, the AUM of the fund house rose by Rs 18,743 crore. The rankings of the top 10 fund houses also remained unchanged in the first quarter of the current financial year. In the top 10 list, DSP Mutual Fund registered the highest growth in AUM at 7% followed by Axis Mutual Fund at 6%. The AUM of the two fund houses zoomed by Rs 6,639 crore and Rs 11,593 crore, respectively. The impressive growth in AUM has helped both the fund houses reach new milestones. While DSP Mutual Fund's assets has crossed the Rs 1-lakh-crore mark, Axis Mutual Fund joined the 2-lakh-crore AUM club during the June 2021 quarter. Among the top 20 fund houses, Mirae Asset Mutual Fund was the biggest gainer in terms of rankings. With 12% growth in AUM, the fund house has climbed two positions to occupy the 11th rank in the list of mutual funds. The AUM of the fund house increased by Rs 8,076 crore to Rs 77,647 crore during the period. Tata Mutual Fund and Canara Robeco Mutual Fund rose one position each with 8% and 15% growth in AUM, respectively. Franklin Templeton Mutual Fund slipped three spots to the 14th rank as its AUM declined 27%. Quant Mutual Fund, ITI Mutual Fund, PPFAS Mutual Fund and PGIM India Mutual Fund were the biggest gainers in terms of AUM. In fact, Quant Mutual Fund more than doubled its AUM from Rs 722 crore to Rs 1,642 crore during the period. The fund house now occupies the 34th spot, up two positions from the previous quarter. According to the quarterly data, overall AUM of mutual funds rose 3% to 33 lakh crore from 32 lakh crore during the first quarter of FY 2022.

 

The mutual fund industry saw the number of investors doubling in a matter of 4 years and 3 months. As of June 30, 2021, there were 2.39 crore mutual fund investors as compared to 1.19 crore at the end of March 2017. The data captures the total number of unique PANs which includes both individual and corporate investors. The industry saw 12 lakh new investors joining the mutual fund bandwagon in the first quarter of FY 2022. The number is considerably higher when compared with the total investor addition of 20 lakh during the whole of FY 2021. This can be attributed to the continuous investor awareness campaigns and ease of investment due to digitization for the surge in investor count. Investors now recognize that in addition to providing steady investment performance, mutual funds are well-regulated, transparent and convenient. The stellar role played by distributors and advisors in making funds more accessible and the ‘Mutual Fund Sahi Hai’ campaign by AMFI have aided this momentum. The lockdown could have dampened the momentum last year, however, digital tools including steps such as facilitating e-KYC for registering new investors have made it easier to become a mutual fund investor. Fund houses have also played a significant role through various investor awareness efforts; for instance, the timely #DateyRaho campaign by IDFC MF encouraged many investors to stay the course. The investor awareness campaigns being run by distributors and fund houses have delivered results. AMFI's decision to rope in top cricketers like Sachin Tendulkar and MS Dhoni for its 'Mutual Fund Sahi Hai' campaign also played a major role in igniting interest of tier-II and tier-III investors in mutual funds. However, despite the surge, the total number of mutual fund investors remains low. Comparing the investor count with the total number of PAN cards (51 crore as of June 2020) shows that there is only one mutual fund investor for every 21 PAN card holders in India. 

 

AMFI data shows that the share of individual investors' assets in the mutual fund industry has risen to 53.8% in June 2021 from 50.5% in June 2020. The total assets of individual investors were Rs.18.34 lakh crore in June 2021 compared to Rs.13.18 lakh crore in June 2020. Individual investors include retail investors and HNIs. Meanwhile, institutional investors’ assets in the industry have fallen to 46.2% in June 2021 from 49.5% in June 2020. Institutional investors are mainly banks, insurance, pension funds and large corporates. The rise in individual investors’ assets can be attributed to the current boom in the equity market. The growth in individual assets is largely due to their exposure to equity funds and subsequent rally in the market. Moreover, the mutual fund industry has acquired many new investors over the last three months. Further analysis of the data shows equity schemes account for 88% of the total assets from individual investors. Similarly, debt schemes (62%), liquid schemes (85%) and ETFs, FoFs (90%) get majority of their assets from institutional players. Individual investors hold 72% of their assets in equity-oriented schemes while institutions hold 69% of their assets in liquid / money market schemes and debt-oriented schemes. Depleting asset quality in debt papers and instances of trouble in debt funds in the recent time have kept retail investors away from debt funds.

 

AMFI’s latest data shows that 16% of assets in the mutual fund industry has come from B30 cities amounting to Rs.5.56 lakh crore as on June 2021, rising from Rs.4.01 lakh crore in June 2020. Assets in T30 cities stood at Rs.28.54 lakh crore in June 2021. Further analysis of the data shows that a large chunk of the B30 assets is in equity oriented schemes. Of the total B30 AUM, 70% was from equity-oriented schemes while the remaining 30% belonged to debt schemes as on June 2021. Many people in B30 cities prefer equity funds as they have adequate exposure to debt schemes through bank FDs and pension funds. This ratio is reversed in T30 cities due to presence of institutions and corporate houses. Nearly 60% of the total T30 AUM is invested in debt schemes. Over 26% of the assets held by individual investors is from B30 location. Investors in these locations prefer investing in mutual funds through distributors. AMFI data shows that 86% of the total individual assets in B30 location has been in regular plan. SBI, ICICI Prudential and HDFC were the top three fund houses with highest assets in T30 location as on June 2021. SBI Mutual Fund has retained the top rank in T30 market share. The fund house has 79% of its total assets i.e. Rs. 4.24 lakh crore of the total Rs.5.38 lakh crore in top 30 location. ICICI Prudential Mutual Fund and HDFC Mutual Fund occupy the next two spots with assets of Rs. 3.63 lakh crore each. Aditya Birla Sun Life Mutual Fund and Kotak Mahindra Mutual Fund follow the top three fund houses with assets of Rs.2.39 lakh crore and Rs. 2.30 lakh crore, respectively in T30 location. The next five fund houses with the highest T30 market share were Nippon India Mutual Fund (Rs. 2.01 lakh crore), Axis Mutual Fund (Rs.  1.79 lakh crore), UTI Mutual Fund (Rs.  1.45 lakh crore), IDFC Mutual Fund (Rs.  1.18 lakh crore) and DSP Mutual Fund (Rs. 0.90 lakh crore). These findings are based on the review of monthly AAUM data published by fund houses. T30 refers to the top 30 geographical locations. The total assets of the top 25 fund houses was Rs. 33.68 lakh crore of which 84% i.e. 28.21 lakh crore was from T30 locations. Of these T30 assets, 36% was held in equity (Rs. 10.03 lakh crore) and 49% was debt (Rs. 13.72 lakh crore).

Piquant Parade

After the success of ‘Mutual Fund Sahi Hai’ campaign, the mutual fund industry should focus on inculcating the investing culture through advisors/MFDs by launching ‘Saarthi Zaroori Hai’ campaign, said a 14-point-action document prepared by Boston Consulting Group (BCG) and Confederation of Indian Industry (CII). As the industry has successfully imbibed the notion of ‘Mutual funds sahi hai’ among its investors, it now needs to inculcate the culture of ‘Saarthi zaroori hai’, according to the document. The document has urged the industry to build greater emphasis on role of advisors and expand their productivity and reach by leveraging technology. "The B30 segment offers a wide playfield that is still an untapped territory with low penetration. For expanding this market, all stakeholders – regulators, asset managers, distributors, investors – need to come together to continue with the existing incentive structure and take this business forward by mobilizing increased number of investors," according to the action document. It further stated that the industry needs to attract more people into the business of distribution, which can be done by campaigning within educational institutions and educating people about the profitable aspects of becoming a MFD. Citing a recent Boston Consulting Group (BCG) survey, the release said that 80% of urban consumers who bought mutual fund have digital footprint and 66% of them were influenced digitally during the purchase process. Mutual fund distributors and advisors can leverage this increase in acceptability of digital channels to improve efficiencies in their business model by unlocking significant time earlier spent on physical travel, physical form filling, manual tracking and reporting, etc. Other recommendations for the industry included simplification of offerings, using tech to drive efficiency of fund managers, strengthening internal risk management, communicating risk-return effectively to retail investors and leveraging new strategies to deliver enhanced performance.

 

As Indian investors are warming up to the idea of passive investing, many new and upcoming mutual fund players are planning to offer only passive funds to investors. Among the numerous fintechs and PMS firms in the process of starting mutual fund business, Zerodha and Angel Broking have confirmed that they will sell only passive schemes. While Zerodha is awaiting mutual fund license from SEBI, Angel Broking is in the advanced stage of applying for the regulator's approval. Zerodha said it sees opportunity for a pure passive AMC in India. Very few active managers have consistently added value. Having said that, at the end of the day most investors are not concerned about alpha. They are looking for simple, transparent and easy to understand products that can help them fulfill their long term goals like retirement. Angel Broking will be using the rule-based investment approach to offer smart passive products to investors. A combination of our smart beta funds and passive ETFs (Exchange Traded Funds) would cover the complete investment needs of any investor at far lower costs, enabling new customers to experience equity with ease. Passive investing has gained momentum in India in the last one year or so. There have been a plethora of index fund and ETF launches in recent months. NSE has 100 ETFs listed on its platform and 21 one of them were launched in the last one year alone. The AUM of index funds doubled in the last calendar year from Rs 7,944 crore to Rs 15,359 crore. In addition, the AUM of ETFs (excluding gold) rose 46% from Rs 1.75 lakh crore to Rs 2.57 lakh crore.

Regulatory Rigmarole

The concept of 'Accredited Investor' is now a reality in India. SEBI has approved the proposal to introduce a framework to bring the concept to the Indian securities market. Accredited investors are those investors who have a better understanding of risks and returns associated with financial products. These investors have a higher financial capacity and a greater ability to absorb loss. SEBI said individuals, HUFs, family trusts, sole proprietorships, partnership firms, trusts and corporates can become accredited investors. However, the regulator is yet to announce final parameters for qualifying as accredited investors. According to a consultation paper issued in February 2021, the regulator plans to give accredited investor tag to those investors who have annual income of at least Rs 2 crore. The move opens doors for financial service providers to introduce customized investment products for sophisticated clients. Such products would get relaxation in some of the norms set by SEBI. Among some key benefits to accredited investors are relaxation in minimum ticket size for such investors in AIFs and PMSs, relaxation in investment norms if minimum investment amount in AIF is Rs.70 crore or Rs.10 crores in PMS. Moreover, they can negotiate terms and conditions on fees and services from RIAs. Investors who want to qualify as accredited investors will have to get a license from accreditation agencies, which SEBI is yet to finalize. The regulator said it could allow subsidiaries of depositories and stock exchanges to become accreditation agencies.

 

AMFI has asked fund houses to include SIP and STP along with lump sum contribution to arrive at retail investment for additional TER. With this, the investment from clients will now be consolidated at fund level or PAN level to see if the investment is retail or non-retail to calculate additional TER for fund houses and incentive for MFDs. SEBI rules say that retail investors are those who invest up to Rs.2 lakh per transaction. AMCs can charge additional 30 bps applicable on B30 cities only on assets from retail investors. So far, many fund houses did not consolidate contribution at fund or PAN level to arrive at retail investment. For instance, if an investor has invested Rs.1.50 lakh through lump sum and Rs.1.50 lakh through STP, both the transactions have been treated separately and come under retail account for calculation of additional TER. In its best practices, AMFI said, “It has been brought to AMFI’s attention that some of the AMCs do not club the switch-in transaction for the purpose of determining threshold limit of Rs.2 lakh for additional TER in respect of mobilization from B30 cites, particularly in respect of switch-in transaction received during NFO. Consequently, such AMCs are charging additional B30 TER and paying additional B30 commission to the distributors.”

 

SEBI has done away with the existing norms on skin in the game in which fund houses have to invest 1% of the amount raised during NFO or Rs.50 lakh, whichever is lower. In fact, it has asked fund houses to invest based on risk level of the scheme. Prima facie, it looks like fund houses will have to invest more in riskier schemes like equity funds compared to less risky schemes like debt funds. However, SEBI is yet to clarify how the new skin in the game norms will be put in practice.

Swing pricing is adjustment of NAV such that if outflow is higher than pre-determined level, the NAV goes down for investors redeeming MF units. Similarly, the NAV price goes up if investors invest more than pre-determined level. Currently, swing pricing has two types – full swing and partial swing. While NAV is adjusted on every calculation day in full swing (applicable during market dislocation), partial swing is applicable only if a scheme witnesses high inflows/outflows on a given day compared to pre-determined level. Partial swing can be applicable on normal market scenario. SEBI hints to implement hybrid model which would be combination of both – full and partial swings. To start with, SEBI may introduce swing pricing mechanism in riskier debt schemes. The market regulator may look to extend such an option in equity funds at a later stage. AMCs can choose to levy higher swing factor and SEBI will determine ‘market dislocation’ after consultation with AMFI. Swing pricing helps fund houses to achieve fairness in treatment of entering and exiting investors. There will be no first move advantage i.e., investors redeeming earlier sensing market dislocation cannot benefit at the cost of other investors. It reduces risk of impact of high redemption pressure on scheme. If large and small investors redeem on a same day, the latter can get lower NAV. Swing pricing can address issue of heightened redemption pressure especially during volatile market conditions, protect investors from underperformance of a scheme due to significant outflows and lower daily NAV volatility.

 

India’s financial wealth has been growing since 2015. In fact, the financial wealth of India has grown by 11% per annum between 2015 and 2020 to reach $3.4 trillion and is to continue to grow by 10% per annum to $5.5 trillion by 2025, according to a report released by the Boston Consulting Group (BCG). The report reveals that India is expected to lead growth in financial assets in terms of percentage. Retirees, one of the world’s fastest-growing demographics, are an appealing market for wealth managers. Globally, individuals over 65 own $29.3 trillion in financial assets accessible to wealth managers. That figure will grow at a CAGR of close to 7% over the next five years. By 2050, 1.5 billion people globally will fall into the category above 65 years of age, representing an enormous source of wealth. Liabilities are expected to grow by 9.4% per annum to $1.3 trillion by 2025. Bond markets are expected to grow the fastest with 15.1% per annum. Life insurance and pensions will be the third largest asset class in the future. North America, Asia (excluding Japan), and Western Europe will be the leading generators of financial wealth globally, accounting for 87% of new financial wealth growth worldwide between now and 2025. China is on track to overtake the US as the country with the largest concentration of ultra HNIs by the end of the decade. The faces of the ultra HNIs are changing too, with the rise of the next-generation segment. These individuals, between 20 and 50 years of age, have longer investment horizons, a greater appetite for risk and often a desire to use their wealth to create positive societal impact as well as earn solid returns. Many wealth managers are not yet ready to serve these new ultra HNIs. High-growth markets represent a massive opportunity but wealth managers must build a genuine understanding of local differences and also key demographic changes. For example, women now account for 12% of ultra HNIs, most of whom are based in the US, Germany and China. The next generation segment is also going to be an influential driver of future growth in the next decade or so. Wealth managers should offer a personalized service in order to effectively capture the next wave of growth.