FUND FULCRUM
September 2010

The average asset under management (AAUM) of the mutual fund industry jumped 3.3% to Rs 6,89,542 crore in August 2010 on strong inflows from institutions and banks into ultra-short term funds. The fund houses attributed the rise to better liquidity but cautioned that the outflow was continuing. Though August 2010 brought some relief, the assets are still nowhere close to what they were in May 2010 (Rs 8.03 lakh crore). The drastic fall of close to 16% – the second-largest after the October crisis of 2008 – was in June 2010 due to advance tax numbers, auction of 3G spectrum, and banks pulling out money at the end of the quarter.

Out of the 41 players that operate in the domestic fund market, 10 registered a decline in their AAUM. However, the top five players registered positive inflows. Reliance Mutual Fund continues to be the largest fund house with average asset under management of Rs 1,04,511 crore, up 2.3% in August 2010, followed by HDFC Mutual Fund (Rs 90,178 crore, up 6.6%), ICICI Prudential Mutual Fund (Rs 68,795 crore, up 0.08%), Birla Sun Life Mutual Fund (Rs 64,247 crore, up 4.3%), and UTI Mutual Fund (Rs 64,172 crore, up 3.2%). Meanwhile, average AUM of Franklin Templeton Mutual Fund increased by 13% to Rs 40,908 crore in August 2010 as it surpassed SBI Mutual Fund to become the sixth largest fund house. Among the top 10 fund houses, LIC Mutual Fund witnessed the sharpest drop of 14.5% in average AUM during the month. Among the top losers were Deutsche Mutual Fund (down 22.12%), followed by Edelweiss Mutual Fund (down 21.15%), Fortis Mutual Fund (down 15.56%), and LIC Mutual Fund (down 14.47%).

New entrants into the industry have seen highest surge in assets in absolute terms. AAUM of Motilal Oswal Mutual Fund surged by 763.37%, followed by IDBI Mutual Fund (154.84%), Peerless Mutual Fund (77.85%), Axis Mutual Fund (33.52%), JPMorgan Mutual Fund (22.81%), Baroda Pioneer Mutual Fund (19.49%), JM Financial Mutual Fund (19.43%), and Shinsei Mutual Fund (18.59%) among others. Pramerica Mutual Fund which is a new entrant into the industry recorded AAUM of Rs 101.68 crore in August 2010.

Total monthly redemptions from equity mutual funds continue to be higher than inflows as August 2010 witnessed another net outflow of Rs 2,890 crore from these funds. However, overall the mutual fund industry reported a net inflow of Rs 36,185 crore on account of higher inflows than outflows into debt funds. Many investors, who were stuck in the market for the past two-three years and waiting for net asset values (NAVs) to touch levels at which they can book profit, are redeeming their investments in equity funds. Funds mobilized from 33 newly launched schemes in August stood at Rs 9618 crore, out of which Rs 7981 crore came from 28 income funds.

Piquant Parade

Local fund houses are expanding their fund management and advisory businesses to overseas destinations to boost profits and to expand their asset base. Top fund houses, such as Reliance Mutual Fund, ICICI Prudential Mutual Fund, Birla Sunlife Mutual Fund, HDFC, and UTI have plans to open offices in the UK, the US, Singapore, Japan, and the Gulf. Kotak Mutual Fund already has offices in London, New York, and Dubai, while UTI Mutual Fund has offices in a few capitals in Europe, including London. Kotak and Birla Sunlife are managing a few India-focused funds from these destinations. According to fund managers, HDFC Mutual Fund is also looking to set up offices in the Gulf, after it received the mandate to advise Abu Dhabi Investment Authority (ADIA) on India investments. Managing foreign investors’ money is a high-margin business for most asset management companies. Depending on fund performance, foreign investors are charged anywhere between 2.5% and 4% as asset management charges by domestic fund houses. Investment advisory business yields just about 1-1.5% as advisor fees. Apart from funds, subsidiary (branch) offices also sell private equity and PMS products (after getting regulatory approvals) in foreign markets. About 75 India-dedicated offshore funds beat the Sensex, which gained about 17% in one year. About 37 funds returned more than 25% — the average category returns posted by domestic equity funds.

Union Bank of India’s asset management company will start operations by December 2010 and plans to corner 3% of asset management business in the country within three years of its operations. The bank has got the Reserve Bank of India nod to open a branch in Brussels, for which it has already secured the necessary permission from the Belgian and EU authorities.

Regulatory Rigmarole

SEBI has asked mutual fund trustees to monitor and exercise judgement on whether to pay or withhold payment to RTAs, depending on compliance with updating of investor-related documentation. In an attempt to ensure adoption of uniform process by AMCs/trustees on the payment of commission to channel partners, AMFI has recommended that where channel partners have submitted 80% of documents to RTAs, the commission withheld till December 2009 may be released, on case-to-case basis. Where they have submitted 100% of documents to RTAs, 75% of commission withheld between January to March 2010 may be released again on a case-to-case basis. The industry body also said it recognised that transaction verification for MNC banks is an uphill task and in all probability, cannot be completed by November 15, 2010. AMFI will make representation to SEBI to either relax the time limit or to waive the requirements for transactions verification for the period prior to April 01, 2010. Channel partners/distributors will have to submit all pending documents by October 31, 2010, while R&TAs will have to complete the processing by November 15, 2010, in order to enable the Trustees to confirm compliance to SEBI by November 22, 2010.

SEBI has issued a new ruling, whereby, investors will be able to transfer their mutual fund units, held in demat form, to their spouse, parents, children or even near and dear ones directly from one demat account to another by October 1, 2010. AMFI has asked for postponement of this directive.

Shares of companies will be allowed to be traded in the normal segment of stock exchanges only if at least 50% of non-promoter share holding is held in dematerialised form. According to SEBI, this move would moderate sharp and destabilising price movements in shares of companies, encourage better price discovery, and would increase transparency in securities market. The SEBI circular said that companies are expected to satisfy the criteria in the latest shareholding pattern as on September 30, 2010. Those companies, which do not satisfy the criteria will be shifted to trade for trade segment (TFT) after the cut off date i.e. October 31, 2010. Trading in these scrips will then take place in the TFT segment. The TFT segment is one where delivery has to be taken and one cannot square off one's position on the same day. The circular also specified certain conditions under which stocks would be traded in the TFT segment for the first 10 days. These include merger, demerger, capital reduction, corporate debt restructuring, transfer of securities for trading from other stock exchanges, and those scrips whose suspension has been revoked. The stocks will be traded with the applicable price band while keeping the price open on the first day of trading. This means that intra-day trading cannot happen in these shares for the first 10 days. SEBI has asked the exchanges to issue necessary guidelines and to put in place adequate systems.

SEBI has asked the brokers to bar those traders and investors, who do not furnish the adequate proof for the source of their funds, from trading in derivatives market. The direction would be soon extended to the cash market segment also. The illustrative list of documents to be collected from the clients include copies of Income Tax Return (ITR) acknowledgement, annual accounts (for institutional clients), Form 16 for salary income, net worth certificate, salary slips, bank account statements for six months, demat account holding statements, and asset ownership certificates. Besides getting these documents at the time of opening an account for the client, the brokers have also been asked to collect fresh documents every year as part of an annual updation of financial information exercise.

IRDA issued a comprehensive order effecting several changes in the way unit-linked products are structured and sold by life insurance companies. It increased the minimum lock-in period of ULIPs from three years to five years, allowed for all charges to be uniformly distributed over the lock-in period, raised the minimum insurance cover from five times to 10 times the first-year premium, put a cap on surrender charges, and made it mandatory for all ULIP pension plans to guarantee a minimum 4.5% annual return. All these changes have become effective from September 1, 2010.

Tax-free dividends on equity mutual funds would be a thing of the past once the Direct Tax Code (DTC) comes into effect from April 1, 2012. The Direct Tax Code Bill proposes a 5% dividend distribution tax on equity mutual funds and ULIPs. At present, dividends on equity mutual funds are tax-free in the hands of investors. However, the 5% dividend distribution tax would not be a very big blow for investors as they can always opt for growth plans instead of dividend plans of an equity scheme. DTC has linked the short-term capital gains tax to an investor’s annual income. A short-term capital gains tax of 5% would be applicable for an investor in the income group of Rs 2-5 lakh, 10% in the Rs 5-10 lakh bracket and 15% for those with income over Rs 10 lakh. However, DTC has maintained the status quo on securities transaction tax (STT) and long-term capital gains tax, that is, while STT stays, there would be no long-term capital gains tax on equity and equity related instruments. Under the DTC, 80C-type benefits are limited only to term insurance, Provident Fund (PF), Public Provident Fund (PPF), and the New Pension System (NPS). Of these, only the NPS offers some equity exposure -- only up to 50% and with a lock-in to retirement age. The tax saving funds - the so-called equity-linked savings schemes (ELSS) funds - will be history after DTC comes into force.

According to data available with Computer Age Management Services (CAMS), a registrar and transfer agent (RTA), the number of new SIPs has been continuously increasing since August 2009. In August 2009, the number of new SIPs was 91,576, a sharp drop from 159,369 in July 2009. However, since then the number of SIPs has increased on an average by 5% every month barring a drop witnessed in March 2010. In July 2010, the number of new SIPs opened was 231,296 compared with 159,369 a year ago, a sharp jump of 45%. Since the beginning of the current financial year up to July 2010, a total of 781,349 new SIPs have been started. A welcome development in the mutual fund industry.