Monday, August 27, 2012


August 2012

The mutual fund industry’s assets under management rose 6% from Rs 6.88 lakh crore in June 2012 to Rs 7.30 lakh crore in July 2012 helped by inflows of Rs 21,670 crore in income schemes and Rs 17,708 crore in liquid schemes. Equity mutual funds witnessed one of the highest redemptions so far this fiscal at Rs 804 crore in July 2012 after seeing a healthy Rs 506 crore inflow in May 2012. In June 2012, equity funds saw redemptions to the tune of Rs 186 crore. ELSS category also saw Rs 145 crore net outflows in July 2012. After seeing Rs 227 crore net outflows in June 2012, Gold ETFs saw a net inflow of Rs 45 crore in July 2012 while other ETFs also saw Rs 41 crore net inflows. Overseas fund of funds continued to witnesses redemptions in July 2012 at Rs 66 crore. In June 2012, overseas fund of funds saw net outflow of Rs 44 crore.

The industry has seen a whopping 86% spike in debt folios over the last four years. In 2008, there were 29.89 lakh debt folios, which have gone up to 55.63 lakh folios in June 2012. As on March 2012, retail investors’ share in debt folios stood at 89% which was 83% in 2009. Out of the approximately Rs 6 lakh crore managed by the industry as on March 2012, 76% (Rs 4.53 lakh crore) of the assets were held in debt funds. Out of this, in value terms, retail investors constituted 5%, up from 2% in 2009. As per the latest SEBI data, debt funds have seen a 6% rise in folios over the last four months. There were 52.50 lakh folios in debt category as on March 2012, which has increased to 55.63 lakh folios in July 2012, an increase of 3.13 lakh folios. This was due to the robust sales in income funds, particularly FMPs. With the exception of gilt schemes, all other categories of debt funds like FMPs and liquid funds have seen an increase in folios. Liquid funds saw a marginal rise of 4501 folios in the last four months. As per AMFI data, Rs 9042 crore retail money stayed in the non-equity category for more than two years in the industry.

Equity funds, on the other hand, are continuing to lose folios. There were 3.92 crore folios in equity funds in March 2011 which has plunged to 3.76 crore in March 2012 and further down to 3.65 crore folios in July 2012, a closure of 3,27,000 equity accounts in July 2012 alone. Net outflows from equity mutual funds have hit a five-month high of Rs 949 crore in July 2012. Interestingly, during the heydays of the mutual fund sector in 2007-08, when indices were climbing to newer highs, fund houses added as many as 34,000 equity folios a day. However, later, abolition of entry load on equities in August 2009 kept distributors away, leading to a sharp fall. During April-July, 2012, net outflows from the equity category stood at Rs 1,430 crore. Assets under management in the segment were Rs 1.78 lakh crore, making it a fourth of the industry’s overall assets of Rs 7.3 lakh crore.

Piquant Parade

Fundsupermart, an online mutual fund transaction platform run by iFAST Financial India, has launched an Android application called FSM Mobile. It is available for the popular Android Smartphone platform. It is available to all investors who can download the application on his/her phone at absolutely no cost. With the new Android application, investors can browse through the fundsupermart website. FSM Mobile gives them access to webcasts, news and research articles, graphical content, data on net asset values (NAVs) and latest fund performance enabling them to track the funds they want to keep tab on. Another feature is the ‘Idea of the Week, where the team provides fresh investment ideas on a weekly basis.

ICICI Securities Ltd has announced the launch of a new platform for investor education — E-Learn. Programmes of the new platform are hosted on a cloud-based learning management system. This system helps learners to track their progress and do a self-assessment on a regular basis. E-Learn uses animations, real market case studies and simple language to make the learning a lasting experience. E-Learn is aimed at giving an easy access to investing knowledge to all learners interested in the Indian equity markets. ‘Gateway to Stock Investing’ and ‘Gateway to Futures & Options’ are the two programmes currently available under E-Learn. Gateway to Stock Investing program is designed for beginners in the stock markets and deals with basic investing concepts, helps learners understand the process of stock selection and avoid common mistakes made in investing. Gateway to Futures & Options is for investors who want to initiate their trading in derivatives. These programmes are open to even those who are not customers of ICICIdirect.

SEBI has approved a one-stop mutual fund trading platform proposal of trade body Association of Mutual Funds in India (AMFI). The platform will be operational during the first half of 2013. The platform will provide one-stop investment solution to existing and new customers, such as buying different schemes of different fund house at one go, and easy switching of funds, etc. with one account number. Just as people trade in shares by opening one demat account, in MF Utility, people can subscribe to any number of schemes of any number of AMCs by having a Common Account Number (CAN). AMFI has so far shortlisted nine IT vendors to develop the software for it.

Reliance Capital has completed the sale of 26% stake in its asset management and mutual fund unit to Japanese financial services giant Nippon Life for Rs 14.5 billion. All the regulatory approvals have been received for the deal and the entire transaction proceeds of Rs 14.5 billion have been received from Nippon Life Insurance.

Syndicate Bank has tied-up with IDBI Asset Management Ltd. for distribution of their mutual fund products and to provide customers a wide range of investment options, other than the regular banking products. This would enable the Syndicate Bank branches to operate as a financial super market. Branches can now cater to the needs of its customers by offering various mutual fund schemes and help in strengthening the existing relationship with the Bank's clientele base and provide an opportunity to cross-sell. Syndicate Bank, with its large network of branches pan-India, is a strong partner to help IDBI Mutual Fund achieve the objective of reaching its products to the common man.

Regulatory Rigmarole

SEBI has introduced a host of measures on August 16, 2012 for AMCs, investors, and distributors that are expected to ‘re-energise’ the industry.

SEBI has permitted India’s mutual fund houses to charge an additional 0.5% as total expense ratio (TER), raising the permissible limit to three percentage points. Fund houses can charge an additional 0.2% across the board. However, for assets from cities other than the top 15 ones, they are eligible to charge another 0.3%, provided inflow from these Tier-II & Tier-III cities account for 30% of the overall assets. In case the inflow is less, the proportionate amount would be allowed as additional TER. It means that effectively, AMCs stand to annually earn an amount, i.e., 1% of whatever they collect from the smaller cities. So, if a fund gets Rs 100 crore from the smaller cities, it will get to charge an additional Rs 1 crore from the assets it is managing. Currently, the maximum permissible TER is 2.5% on equity products and 2.25% on debt funds. The industry’s average TER across the board stands at about 1.95%. Further, AMCs will have to report to trustees on the actual efforts put in terms of opening of new branches beyond top 15 cities. The higher charge of 0.3% works out to just Rs 30 on an investment of Rs 30,000. It may not matter in the short term. But in the long term, by investing, say, Rs 10,000 per month in a mutual fund with an expense ratio of 2%, in 25 years you pay roughly Rs 35 lakh. If the expense ratio is raised to 2.3%, you have to pay an additional Rs 4.3 lakh to the mutual fund. Assuming a return of 10% p.a., the corpus at the end of 25 years will be Rs 94.74 lakh if the expense ratio is 2% and Rs 90.44 lakh if the expense ratio is 2.3%.

The expense charged by the mutual fund from investors will now be fungible, i.e., they will be treated as a single pool, which can be used as the fund company wants to. Up till now, the expense had an internal division of actual expenses and the management fee. This will give greater flexibility to the fund company to tailor revenue usage to its business needs.

The service tax (11.36%) on the expense ratio would now have to be borne by investors and not fund houses. This would lead to an additional .03% for customers.

To encourage long-term holding and reduce churn, exit load, if charged, will now be put back into the fund instead of going to the AMC. Currently, up to 1% of the exit load can be held back by the AMC. Now, the entire amount will be put into the fund, i.e., it will enhance the NAV of the fund and thus contribute to investors' returns.

AMCs will have to set apart a portion of the asset management fees which they charge to the scheme annually for investor education campaigns. SEBI did not mention as to how much AMCs have to set aside for this initiative.
SEBI has capped the brokerage and transaction cost charged to the scheme at 0.12% for cash market transactions and 0.05% for future & options transactions.

All categories of investors, retail as well as institutional, will be subjected to a uniform expense structure under a single plan. Currently, AMCs charge higher for retail investors and less for institutional clients. To promote direct investment, SEBI has decided to have a separate plan for direct investments, with a lower expense ratio.

The regulator has asked AMCs to make monthly portfolio disclosures on their website. AMCs will have to disclose their half-yearly financial results on their websites. Additionally, they will have to place an advertisement in at least one national and one regional newspaper. AMCs will need to make additional disclosures like gross inflows, net inflows, average assets under management, ratio of AUM/ gross inflows, distributor-wise. SEBI has also made it mandatory for AMCs to make complete disclosures regarding efforts taken by them to attract investments. They would be required to report details of opening of new branches beyond top 15 cities and other efforts undertaken.
In order to help enhance the reach of mutual fund products amongst small investors, who may not be tax payers and may not have PAN/bank accounts such as farmers, small traders/businessmen/workers, cash transactions in mutual fund schemes to the extent of Rs. 20,000/- will be allowed subject to compliance with the Prevention of Money Laundering Act, 2002 (PMLA) requirements as allowed in case of some other financial products.

It has also decided to harmonize applicability of NAV across various schemes based on the day on which the funds are available for utilization, for an amount equal to or more than Rs 2 lakhs.
SEBI will recommend that equity mutual funds be included in the ambit of the Rajiv Gandhi Equity Savings Scheme.

SEBI has initiated the process of enabling self-regulatory organisation for fund advisors. This step is being taken in co-ordination with other financial regulators like the Reserve Bank, IRDA, and PFRDA. It should eventually result in co-ordinated regulation of financial intermediaries.

In addition, SEBI's Mutual Fund Advisory Committee has been given the task of creating a comprehensive National Mutual Fund Policy, which is likely to be ready in about six months.

SEBI has approved a wide range of comprehensive reforms to revamp the primary markets. To help companies achieve the 25% public shareholding norms before the June 2013 deadline, SEBI has allowed two new routes for companies — bonus and rights issues of shares. Promoters or promoter groups will not be able to participate in such issues. These two avenues will be in addition to the existing four. More avenues will be considered, if sought by companies, on a case to case basis. To allow more flexibility to issuers and bankers, SEBI has allowed up to 20% variation in issue size as against the existing 10%. However, SEBI removed the option of withdrawal or lowering of bids from public issues. In addition, SEBI has said the IPO price band will now have to be disclosed five days before the issue. At present, the pricing is made public just two days before the issue opens. To improve the quality of offerings, SEBI has said that companies willing to do IPOs will need to have a minimum average pre-tax operating profit of Rs 15 crore. However, companies that fail to meet this requirement will have to use either the SME platform or the compulsory book-building route with increased institutional participation of 75% as against the existing 50%. SEBI will now work towards expeditiously clearing offer documents for public issue and will also have the right to reject offer documents. To further reduce the time taken from issue closure to listing, the reach of ASBA would be enhanced by mandating all ASBA banks to provide the facility in all their branches in a phased manner. Suitable incentive structure to issuers/brokers/banks will be put in place to encourage use of ASBA by retail individual investors. The share allotment system will be modified to ensure that every retail applicant, irrespective of his application size, gets allotted a minimum bid lot, subject to availability of shares in aggregate. The system will satisfy more number of smaller applicants in the oversubscribed issues. The minimum application size for all investors is also being increased to Rs 10,000 - Rs15,000, as against the existing Rs 5,000 - Rs 7,000.

SEBI has taken the first step towards regulating distributors by bringing under its purview “all individuals, body corporate and partnership firms engaged in the business of providing investment advice to investors for consideration, financial planners and also any person who holds himself as an investment advisor.” However, AMFI registered distributors providing investment advice incidental to their primary activity are not going to be affected. This means a majority of IFAs will be out of its purview. Initially, SEBI will directly register and regulate the investment advisors though it is expected that the self-regulatory organization announced for distributors will take over this role in future. Such investment advisors will not be able to take any other remuneration from anyone else. Any entity which currently offers a mix of both distribution and advisory will have to form a separate entity or division. The (Investment Advisors) Regulations will prescribe the minimum experience, qualification, certification and net worth/ net assets requirements. It is expected that these investment advisors will be held to higher standards of governance and transparency. The SEBI Board slashed the NISM and AMFI registration fee for selling mutual funds. However, the exact reduction in fees is not yet decided. The regulator has also decided to allow distributors to opt out of transaction charges on the basis of schemes. Earlier, distributors were either allowed to charge all of their clients or not charge at all. This was creating a lot of accounting problems.

To broad base the distribution network, the regulator has proposed that postal agents, retired officials from government, banks, retired teachers etc. should be roped in for distributing simple products. SEBI has also decided to introduce varied levels of certification and registration depending on products and services offered by distributors.

To reduce mis-selling, SEBI has asked AMCs to create a system of identification of actual sales personnel of distributors, evolve a system of 'product labeling' and inclusion of mis-selling as a 'fraudulent and unfair trade practice' in SEBI Regulations.

 The Aadhaar letter issued by Unique Identification Authority of India (UIDAI) could be used for KYC as a proof of both address and photo identity instead of a passport. Initially it was mooted that Aadhaar will replace PAN. However, now it is an additional facility for KYC. This facility will be helpful over a period of time once the connectivity with UIDAI database is in place. PAN will still be required for KYC because it is a SEBI and the Ministry of Finance requirement. PAN works as a common financial market denominator while UIDAI will work as a KYC enabler. The database of all UID holders is stored in the Central Identification Data Repository (CIDR).

From August 2012, investors can invest up to Rs 50,000 annually in a single mutual fund per year without a permanent account number (PAN). Instead of PAN, investors can submit their voter identity card, passport or driving license for photo identification. Earlier investors were allowed to invest up to a maximum of Rs 50,000 per year across all mutual funds and a PAN card was mandatory to comply with KYC. Technically, an investor can invest Rs 22,00,000 across 44 AMCs.

Market regulator SEBI streamlined the Direct Market Access (DMA) facility, which gives the investors a direct access to the stock exchange's trading system without any manual intervention by the broker. DMA facility can be used by a client directly or through a SEBI-registered investment manager. In case the facility is used by the client through an investment manager, the investment manager may execute the necessary documents on behalf of the client. SEBI had allowed DMA facility in April 2008 and made some changes in these guidelines about a year later in February 2009 by allowing institutional investors to use DMA through their investment managers.

The market watchdog SEBI could soon have the powers to eavesdrop on private conversation (after unsuccessful attempts earlier) to strengthen its insider trading investigations, giving it tools to build a strong case against offenders. However, the Indian Telegraph Act will have to be amended to allow such powers to the market regulator, SEBI.

SEBI Board took note of the lack of penetration of mutual fund products, inadequate distribution network, need for greater alignment of the interest of various stakeholders, regulation of distributors and issues concerning investor protection, and has approved some immediate steps as given above and has decided to develop a long term policy including financial inclusion and tax issues for mutual funds to deal with the public policy objectives of achieving sustainable growth of the mutual fund industry and mobilisation of household savings for the growth of the economy.