FUND FULCRUM
November 2010

After a rise in average assets under management (AAUM) for two straight months, the fund industry saw its assets fall in October 2010. The month was tough for the industry, which recorded a poor performance on all fronts – average assets, net assets, and outflow from equity schemes. According to the Securities and Exchange Board of India (SEBI) data, the industry’s AAUM stood at Rs 6,98,852.71 crore on October 31, 2010 a decline of 2.02% compared with the previous month’s Rs 7,13,281.23 crore. Moreover, net assets slipped for the second consecutive month by 1.66% to Rs 6,46,395.40 crore from Rs 6,57,313 crore in the previous month. The equity segment continued to see net outflows for the fifth month in a row at Rs 2,869 crore, according to data from the Association of Mutual Funds Association (AMFI). The figure crosses the Rs3,000-crore mark if equity-linked saving schemes are counted. This takes the total redemption over the past ten months to a whopping Rs 17,000 crore. The sales of new equity schemes stood at a paltry Rs106 crore (Baroda Pioneer PSU Equity Fund and Reliance Arbitrage Advantage Fund were launched) while sales of existing equity schemes was Rs 4,914 crore in October 2010. But last month, redemptions from existing equity schemes stood at Rs 8,413 crore meaning that equity mutual funds suffered Rs 2,900 crore of net outflow in October 2010. Nevertheless, compared with September 2010, when the equity segment saw a net outflow of over Rs7,000 crore, the redemption pressure eased a bit. October was an uncertain month. There was pressure from investors who had put in money during earlier peaks. Cash for the Coal India offer had to be generated. Overall net outflows were Rs5,742 crore in October 2010, while income funds saw an outgo of Rs5,305 crore. The liquid & money market segment saw net inflows of Rs2,283 crore, while gilt funds and gold exchange-traded funds registered inflows of Rs117 crore and Rs220 crore, respectively.

In the retail investor category, equity funds reported a net outflow (more money went out than came in) of Rs2,552.54 crore between August 1, 2009 and July 31, 2010. In the HNI category, they saw a net inflow of Rs1,096.92 crore (more money came in than went out). In the same period, the Bombay Stock Exchange’s benchmark Sensex index rose 25%. Banks and large national and regional distributors seem to have churned their customers the most. Equity funds reported a net outflow of Rs1,275.93 crore in the bank channel, and Rs1,483.65 crore in the large national and regional distributor channel between August 1, 2009 and July 31, 2010. Curiously, although independent financial advisors constitute a hefty 29% of the total distribution base of the mutual fund industry (banks and national distributors constitute 29% and 36%, respectively), this channel saw a nominal net outflow of just Rs.185.35 crore in the same period

The retail investor exodus from mutual funds continues unabated even in October 2010 as most schemes witness money exiting and drop in folio numbers. Equity funds witnessed folio numbers shrink by 3.52 lakh to 3.91 crore in October 2010. Overall, the number of investors’ account dropped by 3.62 lakh to 4.68 crore in October 2010 compared with 4.71 crore in September 2010. Even balanced funds witnessed a fall in the number of folios by 38,113 to 27.58 lakh during the month. Overall, in October, equity diversified funds (including tax-saving funds) observed a net outflow of Rs 3,063 crore. Units worth Rs 9,227 crore were redeemed during the month, while new sales accounted for Rs 5,164 crore. The redemptions were mainly on account of profit booking by investors. With the market indicators touching the highs of January 2008, many investors who had been stuck in the market since 2007 preferred to exit to recover the notional losses. Gold and other ETFs had an increase in investors where the account rose by 13,000 while the same increased by 24,000 in schemes of debt category.

Piquant Parade

AMFI would declare the average asset under management of the mutual fund industry on a quarterly basis instead of the current practice of declaring it on monthly basis. The AAUM for each quarter (90 days average) will be computed and uploaded on AMFI Website on the first working day of the following month of every quarter, effective from quarter ending December 31, 2010. There has been a demand from a majority of fund houses to stop declaring monthly AAUM as it gave a wrong picture of the industry assets. Around 75% of the mutual fund industry's assets is accounted for by institutions, who park their surplus cash for short periods, often as short as a few days, in debt funds. This combination of large size, and large & frequent investments and redemptions means that the impact of institutional transactions overshadows the trends in retail segment. It has been observed that in quarter-ending months, institutions pull out of mutual funds resulting in sharp drop in average AUM of the industry in those particular months. However, fund houses can upload their monthly AAUM on their websites. This follows a consensus move by the industry, which wants to put an end to this monthly “AUM race. Instead, building long-term, stable, and healthy businesses should be the underlying motive.

Concerned that mutual fund schemes are becoming too complex for average investors, SEBI has asked several asset management companies to rework some proposed new schemes and file offer documents afresh. More than a dozen new fund offer (NFO) prospectuses of leading mutual fund houses such as Reliance Mutual Fund, ICICI Prudential, Birla Sunlife Mutual Fund, Kotak Mutual Fund, Tata Mutual Fund, and Benchmark Asset Management are awaiting approval from the market regulator. The regulator is going slow on approving structured mutual fund schemes where instead of investing in equities and debt in a pre-determined ratio, the fund manager is given the flexibility to adopt complex strategies. Structured funds require investors to take active calls on market direction. SEBI is also discouraging fund houses from launching flexi cap, thematic funds and also schemes similar to the ones they already have.

Birla Sun Life Mutual Fund has launched a mobile platform called 'Mobile Investment Manager' in association with MCHEK India Payment Systems. The service is available to existing investors of Birla Sun Life Mutual Fund with the benefit of managing their investments from the convenience of their mobile phone. On this mobile platform, an investor can seek portfolio information, make additional purchases, register for SIPs and also make switches and redemptions. The launch of 'Mobile Investment Manager' assumes great significance for Birla Sunlife Mutual Fund given the rapidly increasing number of mobile users and the mobile penetration, which is currently above 500-million. It allows users, especially those who are always on the move, the freedom to transact from anywhere and at anytime.

to be continued…