FUND FULCRUM
September 2011

Even as equity markets are in the firm grip of a bearish sentiment, retail investors appear to be opting to invest in increased numbers, presumably in anticipation of returns when the scenario improves. The number of retail folios in equity schemes rose by 138,000 in August 2011, a month when the benchmark indices fell by 12%. There was an exodus of investors in July 2011, with 330,000 equity folios being closed. During August 2011, the overall increase in mutual fund folios was 175,000, of which pure equity schemes contributed 138,000. Net inflows into equity funds in August 2011 were close to Rs 2,000 crore. However, the total industry AUM dipped 4% to Rs 6.96 lakh crore mainly due to the market fall and redemptions in income and liquid schemes. The combined net outflows from all types of schemes stood at Rs 14,597 crore.

According to a report by brokerage and investment group CLSA Asia-Pacific Markets, titled, 'Fat Cats in Fast Lanes: Surge in High Net-Worth Individuals', Asia is likely to get richer, with the number of high net-worth individuals in the region pegged to touch the 2.8 million-mark in the next four years, driven by robust economic growth, a high savings ratio and the rise of Asian exchange rates. Millionaires in India are likely to see their wealth grow by a whopping 405% over the next decade -- the fastest in the world, according to a study by global consulting major Deloitte. Among emerging markets in 2020, India is likely to have the highest per capita wealth among millionaires with $4.25 million - placing it ahead of the US.

Piquant Parade

Expanding its partnership with Nippon Life, Reliance Capital signed a deal for exploring stake sale in its mutual fund and other businesses to the Japanese firm, to which it has already sold 26% equity in the life insurance venture. The MoU would entail Nippon Life evaluating various collaboration opportunities, including strategic partnership, across all Reliance Capital-promoted financial businesses, including mutual fund.

Taurus Mutual Fund has signed an agreement with Punjab & Maharashtra Cooperative Bank for distribution of its schemes through the bank’s network of more than 90 branches across the country.

UTI has tied up with Canara Bank Securities to sell UTI Mutual Fund products through their online platform.

India’s two leading online mutual fund distribution platforms - Fundsupermart and FundsIndia have decided not to charge a transaction fee from its investors. SEBI through its circular had said that distributors could either opt in or opt out of transaction charge of Rs 100 and Rs 150.

Union KBC launched two investor centric initiatives: Prabodh, a series of investor awareness programs and ATMfunds@Union Bank, which would allow investors to conduct mutual fund transactions through Union Bank of India ATMs. Prabodh is a commitment to provide 1000 AMFI investor awareness programs for ordinary investors across India over the next 12 months. It is a multi-layered initiative, which not only focuses on education, but also on the practical goal of getting more informed clients to invest in mutual funds.

CRISIL Research launched its first index in the commodities space named “CRISIL Gold Index”. CRISIL expects the index to serve as an independent and common benchmark for evaluating the performance of Gold ETFs and other investment products with gold as underlying investment. This index will be freely accessible in the public domain.

Private sector mutual fund company, ICICI Prudential Mutual Fund is eyeing to increase its retail penetration in Gujarat, where the company has largest presence among other states. ICICI Prudential Mutual Fund has total assets under management worth Rs 78,000 crore, of which Rs 1,443 crore is managed from Gujarat.

Regulatory Rigmarole

Investors will get consolidated account statements from October 1, 2011 every calendar month. In a bid to bring cost effectiveness in printing and despatching scheme annual reports, SEBI has asked AMCs to send these reports to investors via email. Fund houses will have to inform all their unit holders that the scheme annual reports will only be sent through email henceforth. However, investors will have a choice to continue getting these reports physically. SEBI has also directed AMCs to prominently display the link of scheme annual reports or abridged summary on their websites and make sure that physical copies are available at their registered offices at all times.

Mutual fund houses are likely to outsource the due diligence process related to regulation of distributors to a third party agency. The task of compliance may be outsourced to an audit firm or a common agency to the industry. The task is likely to increase the compliance cost for the fund houses. The cost will be borne by all AMCs. Fund houses are mulling the creation of a pool of money for this purpose. The AMFI committee will chalk out the extent of due diligence process which will be outsourced to the audit firm after receiving a formal go ahead from the AMFI board.

AMFI is in talks with rating agencies like CRISIL and ICRA to construct new benchmarks to enable fund houses to comply with the new guideline on performance disclosure in advertisements of debt funds. The recent SEBI circular requires that debt schemes are required to display the returns of 10 year government security and 1 year T-Bill. Fund houses say that the only roadblock is that currently there are no benchmarks which track the 10 year government dated security and 1 year Treasury Bill. G-Sec Funds are currently benchmarked against I-Sec LiBex. Liquid funds will have to be benchmarked against 1 year T-Bill. Currently all liquid funds are benchmarked against CRISIL Liquid Fund Index while open-ended debt schemes are benchmarked against CRISIL Short Term Bond Fund Index.

In a bid to ensure higher volumes, New Pension Scheme (NPS) fund managers have told the Pension Fund Regulatory and Development Authority (PFRDA) that they should be allowed to use their respective distribution networks (mutual fund agents) to sell the pension plan. In a meeting with PFRDA, the managers had mooted the idea of training their existing sales agents on the NPS product. They had also proposed a commission of at least two-three per cent to the agents for selling the product. This follows the pension fund regulator seeking feedback from fund managers on the Bajpai Committee report. The report had recommended pension fund houses float a separate distribution company for marketing the products.

SEBI has asked fund houses to disclose the performance of all schemes managed by a single fund manager. This pressure tactic is one of the attempts by the regulator to bring about a consolidation of current schemes that now number over 3,000.

In a move which could improve the fund flow and provide some stability to the choppy Indian bourses, the finance ministry has relaxed norms for foreign nationals and foreign institutional investors (FIIs) to obtain Permanent Account Numbers (PAN) that could also double as KYC (know your customer) compliance for any investment they make in Indian stocks. Till now, FIIs or foreign nationals had to obtain a PAN and separately meet KYC requirements prescribed by the market regulator before investing in stocks. The tax obligation on any transaction is twice the due amount if they fail to mention PAN. In the revised rules that come into effect from October 1, 2011 a foreign national will have to only produce either his/her citizenship number or taxpayer identification number to obtain a PAN.

The growth of the financial services industry has attracted retail investors in greater numbers. Financial markets are dynamic and it is difficult for anyone to predict the outcome. Financial literacy among investors about mutual funds is quite low. The regulator has rightly built safeguards, ensuring greater transparency and disclosures from industry players, so that the investor has enough awareness to make an informed decision. The primary objective of regulation is to encourage greater retail participation in the capital markets, and channelise household savings via mutual funds. Several regulatory measures have been consistently introduced to protect the interests of the small investor. The need of the hour is constructive dialogue between industry stakeholders and the regulator, so that there is ease of implementation of regulations.