FUND FULCRUM
February 2012

The assets of equity mutual funds went up 11% from Rs. 1.40 lakh crore in December 2011 to Rs. 1.56 lakh crore in January 2012 as the BSE Sensex gained 11% in January 2012 despite Rs. 456 crore of net outflows. A combination of redemptions in SIPs and low gross sales has resulted in the outflow from equity funds. The equity AUM went up due to the rebound in markets. The industry’s AUM gained 8% from Rs. 6.11 lakh crore to Rs. 6.59 lakh crore due to inflows of Rs. 26,950 crore in liquid and gilt funds. In December 2011, the industry saw heavy redemptions in liquid funds to the tune of Rs. 48,839 crore.

According to the Securities and Exchange Board of India, close to 100,000 folios were closed in January 2012 alone. This brings the total number of folio closure in the current financial year, to around 900,000. In 2011, when Indian equities were among the worst performing of markets, folios were consistently being closed. Equity folios, both pure equity schemes and equity linked savings schemes, are being closed mainly on account of profit booking by investors and better alternate assets and avenues offering assured returns of as high as 10%. There is an emerging trend of investors shifting to debt.

Of the 39 asset management companies that declared their earnings in 2011, 16 recorded a collective profit of around Rs. 1,100 crore and 23 booked around Rs. 550 crore loss. Reliance Mutual Fund saw its profit rise almost 30% to Rs. 236 crore and HDFC Asset Management Co. Ltd, the largest fund house by assets, saw its profit increase 16% to Rs. 242 crore in fiscal year 2011.

In a clean-up exercise, mutual fund houses have eliminated one-tenth of the equity schemes in operation in 2011. As many as 33 equity funds were merged with other schemes this year, even as fund houses made fewer new fund launches. Fund houses have resorted to merger of their schemes in three situations. Some have merged narrowly defined sector funds with diversified equity funds, because the latter may deliver steadier long-term returns. Some fund houses have also used mergers as a way to migrate investors in underperforming products within the fund house. Some of these mergers also seem to be prompted by regulatory pressure.

Piquant Parade

Fidelity Investments is in talks to sell its Indian mutual fund business. Fidelity is seeking a valuation of Rs 100 crore for the asset management arm and the assets may attract interest from a large number of fund houses including Goldman Sachs Asset Management Company. Fidelity Mutual Fund may retain the equity fund management team headed by Alexander Treves after taking into account the overall valuation of the deal. To add to the confusion, there is even a talk about the possibility of a joint venture with an Indian bank with sections within the Fidelity management feeling that it may be a wrong time to exit India with the local market just stepping into a bullish phase.

In sharp contrast to moves made by asset management firm Fidelity Mutual Fund to exit India, the Chennai-based conglomerate Shriram Group has decided to revive its defunct mutual fund business. Shriram AMC had four mutual fund products way back in the 90s, which the company decided to eventually wind up due to lack of interest. However, the company soon came under pressure from market regulator SEBI either to render the licence or restart operations. Shriram AMC, the only listed asset management company in India, will launch new products in the next six months targeting the retail investor. The AMC business is planning to launch products, which would offer gold and balanced funds.

Public sector Bank of India (BoI) is hopeful of starting its asset management business next fiscal and is currently waiting for regulatory approvals. BoI recently bought 51% stake in the mutual fund business of Bharti Axa Mutual Fund, a joint venture between the telecom company Bharti Enterprises and Axa Investment Managers of France. BoI had started its mutual fund business in 1990. Of the six schemes launched by the BoI Mutual Fund, four had been redeemed and two schemes transferred to Taurus Mutual Fund after giving exit option to investors in 2004. With the likely approval from the regulator, the bank will re-enter this space and join 41 other players in the domestic market.

State-run United Bank of India has signed an agreement with DSP BlackRock Investment Managers to distribute DSP’s mutual fund products. This agreement will help DSP BlackRock to expand retail distribution of its mutual fund products while it will give a boost to the non-interest income of United Bank of India.

Pramerica Mutual Fund is close to buying a 39% stake in Ahmedabad-based retail distribution outfit Prudent Corporate Advisory Services for about Rs 20 crore. The stake acquisition will help Pramerica, which manages over Rs 2,100 crore worth of assets, widen its distribution base significantly as Prudent ranks among the top five retail fund distribution companies.

SEBI will launch an investor education programme through short films, TV and radio commercials in English and regional languages. The objective is to create general awareness on securities market, products and facilitate participation of retail investors in the securities market. The awareness campaign will be done through five 25-30 minutes short films, ten 30 seconds TV commercials, ten 30 seconds Radio spots and ten print advertisements.

The ICRA Mutual Fund Awards 2012 saw HDFC win the Fund house of the year – Equity award and UTI win the Fund house of the year – Debt award. HDFC Mutual Fund bagged the Best Equity Fund House Award and the Best Multi-asset Fund House Award, while ICICI Prudential Mutual Fund won the Best Debt Fund House Award at the Morningstar 2012 Awards.

Regulatory Rigmarole

Sebi plans a slew of measures for market operations. The three critical changes being planned are: allowing interoperability of clearing corporations, imposing pre-trade order limits on exchanges and segregating brokers’ accounts from those of clients. India’s capital market regulator has in the pipeline plans to reduce transaction costs for investors, limit liabilities of clearing corporations and protect the market from unwarranted risks and manipulation.

SEBI has expressed displeasure over some investors getting the same day’s net asset value (NAV) by splitting their purchases in income or debt schemes to ensure the Rs 1-crore limit is not crossed. On purchase of units in income or debt-oriented schemes, other than liquid schemes, with an amount equal to or more than Rs 1 crore, irrespective of the time of receipt of application, the closing NAV of the day on which the fund house receives the money is applicable. If the investment is under Rs 1 crore, investors get the NAV of the day on which the application was made.

AMFI has asked R&Ts and AMCs to consolidate folios based on matching PAN with investor names to smoothen consolidated account statement (CAS) issuance process by February 29, 2012. However AMFI has observed that many investors have provided different names, sometimes full names and sometimes only initials or surname. Thus a large number of investors got excluded from getting CAS, which resulted in duplication of costs. AMFI has now instructed R&Ts to drop the validating folios on the basis of exact name match for statements to be dispatched from March 2012. AMFI has also directed R&Ts to send CAS electronically to valid email ids from May 2012 onwards. CAS is issued every month if there are any transactions done by investors.

AMFI will shortlist four out of the eleven audit firms for carrying out due diligence on 220 big distributors. Among the eleven firms are KPMG, PWC, Deloitte, M. P. Chitale & Co. AMFI is waiting to receive the terms and conditions and charges from audit firms to make the final list. AMFI will start the due diligence audit by March 2012 as the regulator wants to see the implementation of the regulation before the end of the current financial year. After appointing the audit firms, the distributors will be segregated and allocated to the four auditors.

The ICRA report on the mutual fund industry says that with the equity markets on an upswing in 2012, interest among investors may come back. The funds can also benefit from gradual improvement in confidence due to policy actions aimed to mitigate concerns emerging out of the Euro Zone debt crisis. Expected easing of monetary policy in other emerging markets is also expected to add to the positive sentiments. The BSE Sensex has so far risen 13.6% during the calendar year 2012 as against a fall of 24% witnessed in 2011.