FUND FULCRUM
October 2010

The Average Assets Under Management (AAUM) of the mutual fund industry grew 3.7% to Rs 7.12 lakh crore in September 2010 as against Rs 6.87 lakh crore in August 2010 according to the data available from AMFI. Of the existing fund houses, 29 players managed to remain in the positive territory of growth in September 2010. Among the top five players, UTI Mutual Fund led the growth and added 5.37% more assets to its kitty, replacing Birla Sun Life Mutual Fund as the fourth largest fund in terms of AAUM. The assets of Birla Sun Life Mutual Fund grew 4.99%, followed by HDFC Mutual Fund and Reliance Mutual Fund which saw their assets increase by 3.25% and 3.1% respectively. ICICI Mutual Fund remained a laggard, with a growth of merely 1.39%.

According to the Association of Mutual Funds in India, the number of folios — including debt, balanced, and exchange-traded funds—declined by over a million during the first half from 4.81 crore to 4.71 crore. The number of folios indicates the number of investors in the fund market. It is a mix of high net worth investors (HNIs) and retail investors, with the latter accounting for a substantially larger portion. The average ticket size of folios, however, went up to Rs 1.51 lakh in September 2010 from Rs 1.44 lakh in August 2010, as assets rose in line with stock gains. The total number of folios in the industry as at April end 2010 was 4.78 crore. Folio numbers rose to touch 4.79 crore in June 2010. However, post-June, the industry saw a drop in folios month after month. July 2010 saw a decline of 1.6 lakh folios, and August 2010 49,723. The biggest drop of 5.8 lakh folios was recorded in September 2010. Primarily, these redemptions are because the stock market levels have consolidated at a high range, to 2007 levels. Secondly, the distribution channels are taking a while to adjust and settle down to the new game-changing regulations. Among the top five fund houses, except HDFC Mutual Fund, all others saw a dip in the number of folios. Reliance Mutual Fund was hit the hardest as it lost 226,000 folios, while ICICI Prudential Mutual Fund lost 106,000 folios. Birla lost half a lakh folios whereas UTI Mutual Fund saw a dip of 36,340. HDFC Mutual Fund added close to 300,000 folios. The loss is certainly a cause for concern. In September 2010, the equity segment saw a record net outflow of over '7,000 crore. However, the debt segment outperformed other categories and saw a rise of 624,000 folios to 43.6 lakh from 37.3 lakh at the beginning of 2010. UTI Asset Management Company holds the highest number of folios in the country, around 99 lakh. It also holds the highest number of debt fund (around 23 lakh) and equity fund (65 lakh) folios.

While high redemptions and net outflows on the equity side continue to be cause for anxiety, there has been good news from the Systematic Investment Plan (SIP) side. According to the data provided by the CAMS (MF registrar), SIP accounts have witnessed a whopping growth of 160% over the last year. In August 2010 alone, there were about 3.24 lakh new registrations (new accounts opened). An interesting sidelight, however, is the surge in SIP accounts in non-metros. The data show that new accounts opened in the non-metros have outpaced the growth reported in the five metros cities by a huge margin. The top 25 cities put together have opened more accounts, growing their count by about 188% to 1,18,113 at the end of August 2010. In comparison, only 95,403 SIP accounts were opened in metros. Not surprisingly, with non-metros adding higher accounts, the market share too is tilted in their favour. The share of non-metro accounts has surged from 33% seen last year to 36.5% now. Notably, that of metros has slid from 33% to 29.5%. Interestingly, there has also been a slight improvement in the average SIP ticket size. From about Rs 2,100 it has now moved to Rs 2,200.The other interesting observation has been the higher growth in the micro SIP segment (below Rs 1,000).The market share of this segment has moved up to 16% from 13% last year. Put together, the data clearly point towards the expanding influence of the equity cult. The higher share at non-metros can be attributed to the Government's decision to exempt investors whose annual investment is Rs 50,000 or less in SIPs from submitting details of PAN at the time of investment. It could also be reflective of the fact that distributors may now have started to look at SIPs as a more stable business model and perhaps may have started to market the same.

Piquant Parade

The board of Association of Mutual Funds in India (AMFI) has appointed Mr.U.K.Sinha as the Chairman and Mr. Milind Barve as the Vice-Chairman. Presently, Sinha is the Chairman and MD of UTI Asset Management Company, while Milind Barve is HDFC Mutual Fund’s Managing Director. Both Sinha and Barve would hold office till the next annual general meeting. Both have vast experience in the financial services sector and mutual fund industry. Sinha takes over the reigns from Mr. A.P. Kurian, who held the post since the formation of AMFI in 1995.

Sundaram Finance has bought out BNP Paribas' 49.9% stake in their joint venture Sundaram BNP Paribas Mutual. BNP Paribas recently acquired the financial services activities of the Fortis group. Since Securities Exchange Board of India regulations mandate that an entity cannot have a stake in more than one Asset Management Company (AMC), BNP Paribas was compelled to move out of its joint venture with Sundaram. Internationally, there will be no change in the equity platform. There might be some effect on the investments that are coming directly through BNP Paribas. Currently, the total business coming through BNP Paribas is to the tune of Rs 1,320 crore annually. The assets under management of Sundaram Mutual as on September 30, 2010 was Rs. 14,240 crore and the total number of folios is around 22 lakh.

Bharti Enterprises is in talks with Bank of India, the fifth-largest state-owned bank, to sell its 25% stake in the domestic asset management joint venture with AXA Investment Managers, paving the way for the bank’s re-entry into the 41-member local mutual fund industry, after it shut the business in 2004. Talks between the parties are in an advanced stage, but Bank of India wants a higher stake because of the network it would bring in. Bank of India, which has a strong presence in states such as Maharashtra and Gujarat, has about 3,200 branches across the country.

UTI Mutual Fund announced the launch of SIP investments (Systematic Investment Plans) through NSE's-the Mutual Fund Service System (MFSS) platform. Terminals of NSE brokers will be the official point of acceptance and hence the date of acceptance of the transaction will be the date of entering the request on the terminal. Investors will also have the added advantage of obtaining the same day's NAV (before 3 p.m.) at a large number of outlets in more than 1500 towns and cities, including remote locations. The investors will also have an advantage of getting their units allotted in demat mode in addition to the existing physical mode in accordance with their choice.

Regulatory Rigmarole

UTI Mutual Fund has permitted investment by Foreign National Individuals resident in India as per the provisions of the Foreign Exchange Management Act, 1999 and the Income Tax Act, 1961 of India, on a prospective basis, with effect from 18 October 2010.

The Securities and Exchange Board of India (SEBI) had directed portfolio managers to charge fees on profit calculated on the basis of the high water mark principle. For new client agreements, the above norms will be applicable from November 1, 2010 while for existing clients, the revised norms will be effective January 1, 2011. The regulator had on July 27, 2010 issued a consultative paper in this regard. The market regulator has also prescribed a standardised format of declaring fees and charges. Providers of portfolio management services are now expected to provide details of fees and charges under three scenarios — 20 per cent profit, no profit/no loss and 20 per cent loss — to all clients. This format enables a client to compute the indicative gain or loss on the funds he would be investing for a year. Portfolio managers should send a letter on the applicability of the ‘high-water mark' principle to clients and get their signature on the new fees and charges structure. New clients are required to sign a document declaring that they have understood the fee structure.

In the face of alleged violations in sale of universal life policies (ULPs), insurers would stop selling ULPs from October 23, 2010 till November 4, 2010 in accordance with a stiff direction by regulator IRDA. ULPs are basically hybrid products, having the flexibility of unit-linked products and traditional plans. At present, four companies Max New York Life, Aviva Life, Bharti Axa Life, and Reliance Life offer these plans. For protecting policyholders' interest, IRDA came up with guidelines for ULPs and sought life insurers’ views on the same till October 31, 2010. As per the draft guideline, IRDA has proposed a minimum life cover of Rs 50,000 or 10 times the annual premium for a customer below 45 years of age. For customers above 45 years, a minimum cover seven times the annual premium has been proposed. According to IRDA, the minimum policy term for such products should be five years and the lock-in period of three years. These products are to be linked to the savings bank account of a customer. The draft guideline says that a variable insurance policy would lapse if the customer does not pay premium for 12 months from the due date.

The asset management business in India is not as unprofitable as the mutual fund industry has sought to project, with fund houses nearly tripling their profits in fiscal 2010 - a year in which fund flows were impacted after distributors stopped selling some schemes. Total earnings of the 41 fund houses in India rose 284% to a record high of Rs 935.6 crore in the fiscal year ended March 2010, according to data from the Securities & Exchange Board of India (SEBI). Indian fund houses managed to boost their earnings by focusing more on a good mix of equity and debt assets and limiting costs, in a period that was marked by major regulatory changes. The securities market regulator had, last year, eliminated some marketing practices, including a ban on entry load which it believed was inimical to investor interest. In some cases, the regulatory hurdle on commissions has turned out to be a boon, as it brought down costs. In fiscal 2009, Indian asset management companies reported a profit of Rs 243.5 crore. The list of the most-profitable fund houses was led by Reliance Asset Management Company, followed by HDFC AMC, UTI AMC, ICICI Prudential AMC, and Birla Sunlife AMC in that order. But not all mutual funds are earning profits. Nearly 85% of the industry profits are accounted for by the top-10 players. Though many fund houses are still bleeding, their sponsors, including some of the biggest names in the global fund management business, have not wound up operations since India is one of the fastest-growing markets. India's 8.5% economic growth, which is the second-highest among major developing nations behind China, is expected to throw up many millionaires, according to a recent Capgemini-Bank of America Merrill Lynch report.