FUND FULCRUM (contd.)

August 2021

 

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. High risk reward in equity mutual funds make it attractive for many young investors to start investing. 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 recent times have kept retail investors away from debt funds.

 

Piquant Parade

 

Markets regulator SEBI has granted an in-principle approval to Bajaj Finserv to set up AMC business. The company would be setting up an Asset Management Company (AMC) and the Trustee Company, directly or indirectly i.e., by itself or through its subsidiary in accordance with applicable SEBI Regulations and other applicable laws. The company had applied for a mutual fund license with SEBI in September 2020. The in-principle approval means that the company can start the process of setting up an AMC business. However, the company will have to wait for final approval to launch its schemes. This year, SEBI has so far granted mutual fund license to two applicants — NJ IndiaInvest and Samco Securities. They received in-principal approvals in 2019.

Regulatory Rigmarole

The Securities and Exchange Board of India (SEBI) announced on July 30, 2021 that instant access facility would now be permitted in overnight schemes along with liquid schemes of mutual funds. The change has been brought into effect by the market regulator by partially modifying its circular related to instant access facility issued in May, 2017. "MFs (All Mutual Funds)/ AMCs (Asset Management Companies) can offer Instant Access Facility (IAF) only in Overnight and Liquid Schemes of the MF," the fresh circular issued by SEBI stated. SEBI also announced that, from December 1, 2021, unclaimed redemption and dividend amounts would be permitted for investment in a separate plan of only overnight scheme. "The unclaimed redemption and dividend amounts, that are currently allowed to be deployed only in call money market or money market instruments, shall also be allowed to be invested in a separate plan of only Overnight scheme / Liquid scheme / Money Market Mutual Fund scheme floated by Mutual Funds specifically for deployment of the unclaimed amounts," it said. "Such schemes where the unclaimed redemption and dividend amounts are deployed shall be only those Overnight scheme/ Liquid scheme / Money Market Mutual Fund schemes which are placed in A-1 cell (Relatively Low Interest Rate Risk and Relatively Low Credit Risk) of Potential Risk Class matrix," SEBI added. Markets regulator SEBI asked mutual funds to maintain current accounts in an appropriate number of banks for receiving subscription amount and payment of redemption and dividend. The move is aimed at facilitating financial inclusion, convenience of investors and ease of doing business, according to a SEBI circular.

 

Now, fund houses can go ahead with change in fundamental attributes, merger of their schemes, rollover of existing close end funds and conversion of close end scheme to open end schemes if they do not hear from SEBI within 21 days. In a circular, SEBI said that the application filed by fund houses for scheme merger, change in fundamental attributes and so on should be considered on record if no modification is suggested or no queries are raised by SEBI within 21 working days. The timeline will also be applicable on applications relating to Regulation 24 (b) of mutual fund rules relating to setting up of new businesses which are not in conflict with existing business by AMCs like offering offshore advisory and PMS business. The regulator said the move will bring uniformity and lead to ease of doing business. However, SEBI said it may fail to adhere to the timeline if it raises a question or suggests modifications to the AMC. Further, the application should be complete in all aspects and approval should not require “wider consultation”.

 

In a series of amendments to regulations related to AIFs and PMS, SEBI has come out with the parameters for qualifying as accredited investors. With this, any individual, HUF, family trust or sole proprietor with annual income of at least Rs.2 crore can become accredited investors. Criteria to become an accredited investor include net worth of at least Rs.7 crore including Rs.3.75 crore of financial assets, annual income of Rs.1 crore and minimum net worth of Rs.5 crore including Rs.2 crore in financial assets, for body corporates and trusts, net worth requirement is Rs.50 crore and each partner has to meet eligibility criteria separately to become accredited investors. Accredited investors are those investors who are assumed to 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.

 

In a recent amendment to the mutual fund regulations, SEBI said that they would ban fund houses from launching new schemes for one year if they do not adhere to skin-in-the-game regulations. SEBI may also forfeit the invested amount by the fund house in any of the schemes for such a violation. However, the market regulator will give a chance to fund houses for hearing before taking such an action. These regulations will come into effect from May 1, 2022. The market regulator 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. 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.

 

In a guidance note to a non-individual RIA, SEBI said that RIAs cannot become sub broker and offer financial products of capital markets with embedded commission. SEBI said even if RIA does not receive commission from such a partnership, they should not offer investment plans with embedded commission. SEBI said the RIAs would have to distribute direct plans of financial products of capital markets to all advisory clients. This means, RIAs cannot become sub broker with a broker who does not offer execution in direct plans. SEBI said that RIAs cannot receive consideration including any commission or referral fees directly or indirectly from advisory clients at group or family level. This has come after Vansh Capital asked SEBI if they could offer execution services through a broker and not take any consideration from the main brokers for such a transaction.

 

Mutual funds that use options strategies will now have to issue justification if they do not exercise a favourable put option. "A justification for not exercising the put option shall be provided by the mutual fund to the valuation agencies, Board of AMC and trustees on or before the last date of the notice period," SEBI said in a circular. The regulator said that a put option will be considered 'in favour of the scheme' if the yield of the valuation price ignoring the put option is more than the coupon rate by 30 basis points. Certain debt securities have put options. This move will put pressure on AMCs and fund managers to effect the put option or provide justification for not exercising the option. If a fund manager does not exercise a favourable put option, valuation agency will have to take ultimate or last maturity as the maturity of the security. Suppose, there is a five-year security with annual put option, if the fund manager decides not to exercise the put option during the first year, they will have to justify the decision. The valuation agency, on their part, will have to consider it as a four-year security and not as a one-year security during valuation. The circular will come into effect from October 1, 2021.

 

Soon the MF industry will have a uniform platform through which clients can execute financial and non-financial transaction. SEBI has asked AMFI, MF trustees, depositories and RTAs to introduce a uniform and user-friendly platform for investors where they can execute transaction like investment, redemption and switch and non-financial transaction such as downloading account statement, updating email id and phone number, changing address and bank details and so on across all fund houses. Both CAMS and KFintech have been entrusted to develop this platform under the guidance of SEBI. To begin with, the platform will offer non-financial transactions and later become fully operational by December 31, 2021, said SEBI. The industry will launch an awareness campaign to promote this platform. This platform aims to offer single window for all services related to mutual funds. There is no need to visit CAMS and KFintech separately to download account statement, make changes to details and so on. Integrated system ensures uniform application form and nomination facility across fund houses. The platform gives investors access to all financial and non-financial services of fund houses. The platform will be made available to MFDs, RIAs and fund houses to offer financial and non-financial transaction to their clients. It will have robust cyber security and resilience framework.

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 expected to continue growing 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 above 65 category 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 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. Women now account for 12% of ultra HHIs, 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.