FUND FULCRUM

September 2012

The mutual fund industry has, for the second month in a row, seen an increase in its assets under management. At the end of August 2012, the AUM stood at Rs 7.52 lakh crore, up 3%. At the end of July 2012, the industry AUM was Rs 7.3 lakh crore. Between June and August 2012, the industry AUM has grown by about 10% from Rs 6.88 lakh crore in June 2012 to Rs 7.52 lakh crore in August 2012.

The industry has about 4.6 crore folios of which less than two crore are unique investors. This includes both retail and institutional participants. In the last one year (August 2011-2012), the equity AUM has fallen by 1.5% while that of the income schemes has increased by 9.8%. During the same period, liquid and money market schemes have seen a rise of about 14%. In August 2012, in one of the sharpest declines in the number of equity folios, the industry lost 460,000 folios (including those of equity-linked saving schemes).

SEBI data shows that despite a dip in equity folios and decline in markets, retail investors’ share in mutual funds has seen a rise from 23% in FY11 to 48% in FY12. Unit holding pattern data of mutual funds for 2011-12 shows considerable improvement in the share of retail investors in the net assets of mutual funds. Individual investors accounted for 95% of the total number of investors’ accounts and contributed 48% to total net assets compared to 23% of total net assets a year ago. Corporates constituted 3% of the total number of investor’s accounts, contributing 45% of the total net assets in the industry. Corporates predominantly invest in debt schemes. Debt funds constitute 71% of the total assets in the industry. Equity folios dipped to 3.76 crore in March 2012 from 3.92 crore the previous year. Retail assets have moved from equity to fixed income due to risk aversion. Investors have not made money in equity funds over the last two-three years. A lot of money is chasing debt investments.

SEBI’s report shows that private sector mutual funds hold 66% of folios as compared to public sector AMCs, which hold 34% folios. The private sector mutual funds managed 82.4% of the net assets as against 17.6% of net assets managed by public sector mutual funds. While individual investors held 51.2% of the net assets in public sector mutual funds, their share in private sector mutual funds was 47.4% as on March 30, 2012. SEBI report shows that mutual fund assets constitute 6.6% of GDP, relatively low compared to other emerging market economies.

Piquant Parade

With the SEBI regulations emphasising on higher participation from rural areas, mutual fund houses are further strengthening bank partnerships. In the last month, fund houses have been tying up with banks in a bid to increase their rural reach. SEBI, in August 2012, had issued regulations asking fund houses to ensure 30% of the inflows from beyond the top 15 cities.

SBI Mutual Fund and Ratnakar Bank have entered into an alliance to offer the entire bouquet of SBI Mutual Fund's schemes through the branches of Ratnakar Bank. This tie up will facilitate distribution of various products of SBI Mutual Fund across asset classes such as equity, debt, and gold to customers of Ratnakar Bank. 

Reliance Mutual Fund has entered into a distribution tie-up with Indian Overseas Bank(IOB). As per the agreement, IOB will sell Reliance Mutual Fund products through its 2,689 branches. This agreement would help Reliance expand its customer base, especially in tier II and III cities, leveraging on the wide network of the bank. This would enable the bank to operate as a financial super market and help in strengthening the relationship of the existing and potential customer base, providing an opportunity to cross-sell.

HDFC Mutual Fund, IDBI, Birla, UTI, and Reliance will now be using the Syndicate Bank platform for the distribution of their products. Syndicate Bank, with a network of more than 2,700 branches, is known for its good presence in the tier-II and tier-III cities.

The most recent tie-up announced was that of Peerless Mutual fund with Allahabad Bank.

SEBI is planning to offer its website in as many as 13 Indian languages, besides the existing one in English, to spread awareness among investors and to help resolve their grievances. While a decision to this effect was taken long ago by SEBI's board, along with plans to offer investor help line services in 13 Indian languages along with English, the Securities and Exchange Board of India has now begun the search for an agency to translate its website into local languages. The 13 languages, in which SEBI wants its English language investor website to be translated and dynamically updated into, include Hindi, Assamese, Bengali, Gujarati, Kannada, Kashmiri, Malayalam, Marathi, Oriya, Punjabi, Tamil, Telugu, and Urdu.

ICICI Prudential Mutual Fund, in association with My Financial Advisor, has taken an innovative initiative to spread awareness on the importance of investments and financial literacy through an indoor cricket board game -Financial Premier League (FPL).

Regulatory Rigmarole

The Finance Ministry has decided to allow niche mutual funds into Rajiv Gandhi Equity Savings Scheme, which was announced in the budget to attract first-time investors into equities. Exchange-traded funds and mutual funds listed on an exchange and invested only in BSE 100, CNX 100, and blue chip public sector stocks would be allowed tax rebate under the scheme. The scheme allows 50% tax rebate to new retail investors who invest up to Rs 50,000 directly in equities and whose annual income is below Rs 10 lakh. Investments in the scheme will be locked-in for three years, but investors may be allowed to churn their portfolio after completion of one year.

Existing KYC compliant mutual fund investors who wish to invest in schemes of an AMC where they have not invested so far will have to provide additional details including in-person verification (IPV) by November 30, 2012. SEBI, through its circular dated April 13, 2012 had asked AMCs to update KYC details of new investors by November 30, 2012. Existing retail investors are not required to provide any additional information if they are already KYC compliant. However, if they want to invest in any other scheme of another AMC, they need to provide additional details like father’s/spouse name, marital status, nationality, annual income, and in-person verification (IPV) details. Investors can update this information through a ‘KYC detail change form’ available on AMC’s websites. Non-individual customers have to do their fresh KYC again. They are required to provide their balance sheets for the last two fnancial years, copy of the latest share holding pattern, among other details.

SEBI has released the actual notification that sets in motion the recommendations that its board made in its meeting on August 16, 2012. The actual notification has by and large followed the recommendations albeit with a few significant differences. SEBI is silent on important issues such as charging additional total expense ratio (TER) to the extent of 20 basis points and fungibility of expenses. The incentive system for encouraging AMCs to expand their investor base to beyond the top-tier cities has been made tougher. The new rules are effective October 1, 2012.

Funds can charge an extra expense of 0.30% if 30% of their fresh inflows or 15% of their average AUM, whichever is higher, comes from locations outside the top 15 cities. Additional TER can be charged up to 30 basis points on daily net assets of the scheme if the new inflows from beyond top 15 cities are at least (a) 30% of gross new inflows in the scheme or (b) 15% of the average assets under management (year to date) of the scheme, whichever is higher. In case inflows from beyond top 15 cities is less than the higher of (a) or (b) above, additional TER on daily net assets of the scheme shall be charged as follows: Daily net assets X 30 basis points X New inflows from beyond top 15 cities / 365 X Higher of (a) or (b) above. The top 15 cities would be decided on the basis of data compiled by the Association of Mutual Funds in India (AMFI) data for 'AUM by Geography - Consolidated Data for Mutual Fund Industry' as at the end of the previous financial year.

Mutual Funds would need to make complete disclosures in their half yearly report to SEBI regarding the efforts to increase geographical penetration and the details of opening of new branches, especially those beyond top 15 cities.

Service tax can be charged from investors on investment and advisory fees, over and above the maximum permitted expenses. Service tax on any other service will have to be borne by the AMC.

Starting January 1, 2013, all funds shall have a direct plan, which will be meant for investors who do not go through a distributor or other intermediary. This plan will have a lower expense ratio excluding distribution expenses and commissions. It will have a separate NAV. There will be no plans that are based on investment size (institutional, super institutional, retail etc.). In all existing funds, fresh investments will be accepted only in one normal plan and one direct plan.

A new cadre of distributors, such as postal agents, retired government and semi-government officials, teachers and bank officers with a service of at least 10 years, and other similar persons (such as Bank correspondents) may be allowed to sell units of simple and performing mutual fund schemes. These will include diversified funds, FMPs and index funds, which have a three-year track record of beating their benchmark index. According to SEBI, this new cadre of distributors would require a simplified form of NISM certification and AMFI registration.

AMFI should create a unique identity number of the employee/relationship manager/ sales person of the distributor interacting with the investor for the sale of mutual fund products, in addition to the AMFI Registration Number.

SEBI has asked mutual funds to annually set apart at least two percentage points on daily net assets within the maximum limit of TER for investor education and awareness initiatives.

Besides, mutual funds have been asked to make monthly portfolio disclosures for all their schemes "in a user-friendly and downloadable format (preferably in a spreadsheet)" and in the same format as that of half-yearly portfolio disclosures.

Mutual funds may have to disclose certain additional information such as charges and fees as well, subject to compliance with the Advertisement Code.

In order to help enhance the reach of mutual fund products amongst small investors, who may not have PAN/bank accounts, such as farmers, small traders/businessmen/workers, SEBI has allowed cash transactions of up to Rs 20,000 per investor in a mutual fund every year. However, any repayment like redemptions and dividend with respect to such investments would be paid only through banking channel. SEBI has also set certain prudential limits and disclosure norms for portfolio concentration risk in debt-oriented mutual fund schemes. It has asked mutual funds to ensure that total exposure of debt schemes of mutual funds in a particular sector, barring a few exceptions, shall not exceed 30% of the net assets of the scheme.

For transaction charges, distributors shall have the option to either opt in or opt out of levying transaction charge based on type of the product.

Mutual funds would need to make half yearly disclosures of their unaudited financial results, along with additional details like total commission and expenses paid to distributors, distributor-wise gross inflows, net inflows, and average assets under management. In case the data suggests that a distributor has an excessive portfolio turnover ratio, say more than two times the industry average, AMCs shall conduct additional due-diligence of such distributors.

For harmonising the applicability of NAV across schemes, SEBI has said that in respect of purchase of units of mutual fund schemes, the closing NAV of the day on which the funds are available for utilisation shall be applicable for application amount equal to or more than two lakh, irrespective of the time of receipt of such application.

Taking note of retail mutual fund assets accounting for as high as 74% of GDP in the US and 42% in the UK, the Mutual Fund Advisory Committee (MFAC) of SEBI has pitched for a need to undertake various long-term and short-term measures to boost mutual fund investment flow. It has been recommended by MFAC that long-term measures will be required to channelise the retail savings in a major way into investments in mutual fund schemes. SEBI is of the view that further focused deliberations need to be undertaken by the MFAC for this purpose. Consequently, SEBI has proposed that MFAC undertakes study of regulatory provisions prevalent in the international jurisdictions and submit its recommendations by way of a report within a time frame of three-to-four months. MFAC, which comprises of members from the industry and other experts, is mandated to advise SEBI in matters relating to regulation and development of the mutual fund industry, their disclosure requirements, and investor protection measures. Besides, it also advises SEBI on measures that are required to be taken, for change in the legal framework to introduce simplification and transparency in the mutual fund regulations.