FUND FULCRUM

November 2014

The mutual fund industry’s assets under management went up by 14% from Rs. 9.59 lakh crore in September 2014 to Rs. 10.95 lakh crore in October 2014 on the back of strong capital inflows and surge in equity markets. With the exception of two categories (overseas fund of funds and Gold ETFs), the industry saw positive inflows across all categories. Since the beginning of FY 2014-15, equity funds have seen positive inflows each consecutive month. So far, the industry has attracted inflows of nearly Rs.40,000 crore in April-October 2014. The BSE Sensex has shot up 24% during the same period. The AAUM of equity funds went up to Rs. 2.62 lakh crore due to mark to market gains and healthy inflows in existing schemes. Reflecting the positive sentiment among investors, equity funds saw an addition of 5.51 lakh folios (excluding ELSS). The total number of equity folios went up from 2.32 crore in April 2014 to 2.38 crore in October 2014. After three months of consecutive outflows, income funds saw net inflows of Rs. 15,446 crore. In September 2014, the category witnessed outflows of Rs. 10,567 crore. This reversal can be attributed to growing expectations of a rate cut in the RBI’s upcoming monetary policy announcement. A few fund houses had come out with gilt funds having maturity of close to 10 years in October 2014. In the debt category, liquid funds received the largest share of inflows in October 2014, receiving net inflows of more than Rs. 1 lakh crore. In September 2014, liquid funds witnessed net outflows of Rs. 67,318 crore. Typically, corporate investors pull out money in the last week of the quarter and invest in the first two weeks of the subsequent quarter. Lackluster performance of gold led investors to pull out money from gold ETFs. The category saw net outflows of Rs.38 crore in October 2014. However, other ETFs, which track the equity indices, received inflows of Rs.429 crore in October 2014. Overseas fund of funds saw net outflows of Rs.49 crore in October 2014. Last month, overseas FOFs witnessed net outflows of Rs.103 crore. There are 31 international funds in the industry which manage Rs. 2,856 crore. All in all, the industry saw net inflows of Rs.1.24 lakh crore on account of robust inflows in liquid funds, income funds, and equity funds.

Equity mutual funds added more than seven lakh investor accounts or folios in the first seven months of the current fiscal (2014-15) in view of the sharp rally in the stock market. Folios are numbers designated to individual investor accounts, though one investor can have multiple folios. According to Securities and Exchange Board of India data on investor accounts with 45 fund houses, number of equity folios rose to 2,99,17,974 in October 2014 from 2,91,80,922 at the end of the last fiscal (March 31, 2014), registering a gain of 7,37,052 folios during April-October period in 2014. The additions came at a time when the market was scaling new highs. The month of April 2014 saw the first rise in more than four years. Prior to that, the equity mutual fund sector had seen a continuous closure of folios since March 2009 after the market crashed due to the global financial crisis in late 2008. Since March 2009, it has seen a closure of 1.5 crore folios. The investor base reached its peak of 4.11 crore in March 2009, while it was 3.77 crore in March 2008. Strong rally in the equity market and the consequent rise in investors' interest led to a sharp increase in retail folios. Moreover, mutual funds industry reported net inflows of nearly Rs 34,000 crore in equity funds in the April-September period of the current fiscal (2014-15), which helped the industry grow its folio count. Overall, the industry retail folios surged to 3.97 crore as on October 31, 2014 from 3.95 crore at the end of March 2014.

Retail folios in the liquid fund category posted a record rise of 42,199 folios to end at 2.41 lakh folios in H1FY15 following an addition of 30,457 folios in the preceding six months. Retail folios in debt funds maintained the uptrend (since March 2009) in H1FY15 as well. The category added 4.29 lakh retail folios over the past six months, the highest since September 2012 and compared with the addition of 2.92 lakh folios in the preceding six months. All investor segments (retail, HNIs and institutions) continued to shy away from gilt funds due to flat interest rates amidst lack of monetary easing by the Reserve Bank of India (RBI). The category's folio base slipped 11% to 50,937 accounts. Gold exchange traded funds (ETFs) posted their third consecutive half-yearly decline in the overall folio count. The retail segment saw closure of 21,557 folios to end at 4.68 lakh folios in the period under review compared with closure of 35,103 folios in the preceding six months. Domestic gold prices (represented by the CRISIL Gold index) fell 5% in the six months ended September 2014.

Tenure-wise analysis of assets under management (AUM) across investor types and categories for the half year ended September 2014 showed that 64% of retail AUM stayed in equity mutual funds for more than two years, higher than 62% seen in the preceding six months, according to CRISIL. Of the Rs 1.72 lakh cr of retail investments in equity-oriented mutual funds, Rs 1.10 lakh cr was held for over 24 months. About 32% of HNIs, by AUM, stayed invested in equity mutual funds for more than two years, sharply lower than 51% seen in the preceding six months. Corporates continued to dominate mutual fund AUM with 47% share in September 2014 (Table1), down from 49% in March 2014. HNIs were the second biggest contributor with 28% share. The retail segment's share in total mutual fund AUM rose to 22% in the latest six months from 19% in the preceding six months.

Piquant Parade

The Ministry of Finance has appointed ICICI Prudential Mutual Fund to launch and manage the Specified Undertaking of Unit Trust of India (SUUTI) ETF. The SUUTI constitutes companies like Axis Bank, Larsen & Toubro (L&T), and Indian Tobacco Company (ITC). The government is planning to raise Rs.7000 crore by divesting its stake in these companies. Currently, the government holds stakes of 11.66% in Axis Bank, 8.8% in L&T and 11.27% in ITC worth nearly Rs. 60,000 crore. The Ministry of Finance has considered two parameters - quantitative and qualitative - for the selection of the fund house. While quantitative parameter evaluated the fund houses on the basis of a management fee it quoted, the qualitative parameter gauged ability and experience of fund houses to manage ETFs. The government has appointed ICICI Prudential Mutual Fund on the basis of a few parameters like capability and previous experience to manage ETFs and competitive management fees. Last month, the government floated ‘The Request for Proposal’ in order to appoint a fund house to launch and manage the divestment of SUUTI through the ETF route. Seven fund houses – UTI, SBI, ICICI Prudential, Birla Sun Life, Reliance, Kotak, and a consortium of Sundaram and Edelweiss had put their bids for the SUUTI ETF. Earlier in 2014, the finance ministry had given a mandate to Goldman Sachs AMC to launch and manage the central public sector enterprise (CPSE) ETF through which it had divested its stakes in 10 PSUs. The government had raised Rs. 3000 crore from this ETF.

Scripbox.com, the automated investment platform which helps investors manage their money the right way - announced the availability of a debt fund portfolio to meet short to medium term investing needs. This selection complements the existing scripbox portfolio of equity funds for long term investors. Debt mutual funds have long been considered an alternative to FDs but with over 3400 debt funds across 6 categories, selection of the right funds becomes extremely challenging even for professional investors. To remove this confusion, scripbox has used a scientific rule based method to recommend a portfolio of 2 debt funds which meet the criteria of consistent performance and high safety of capital. With this launch, scripbox is offering Indian investors the most reliable selection of mutual funds to invest in using its easy to use online investment platform. While most investors only compare returns, the scripbox method also assesses credit risk and volatility of returns. This aligns the selected portfolio with an investor's objective of balancing reasonable fixed income returns with safety of capital. With its sharp focus on selection, the scripbox debt fund portfolio is a straightforward, smart, and hassle free solution for investors to get better returns on their short to medium term (1-3 years) money.

Regulatory Rigmarole

AMFI has constituted an advisory committee comprising chief investment officers to form a consensus on taking a stand in company voting. The committee is headed by Chandresh Nigam, MD & CEO, Axis Mutual Fund. However, the final decision to vote in favour or against a company resolution would be the prerogative of the respective fund house. AMFI has formed this committee to discuss voting options before any crucial decision of company in order to protect the interests of minority shareholders. The opinion of the committee is not binding on the AMC. SEBI has tightened its vigilance to make sure that AMCs are exercising their voting rights to protect the interests of mutual fund investors. Earlier in 2014, SEBI had asked fund houses to share the rationale behind casting vote for or against any matter on their websites. In addition, AMCs are required to disclose their general policy of voting and the actual exercise of their proxy votes in the AGMs/EGMs of the investee companies. AMCs are required to obtain a certificate from the auditor on the voting reports annually. This report has to be submitted to the trustees and published in the annual report and website of AMCs. SEBI had also asked the trustees and boards of AMCs to monitor and ensure that the votes cast by AMCs are prudent and adequate. Last year, a InGovern ‘Mutual Funds Pattern 2013 Analysis’ report showed that majority of fund houses had either voted in favour of proposals or had decided to largely abstain from voting in the resolution put forth by the investee companies. The report found that fund houses were passive or indifferent while voting at investee company shareholder meetings. In fact, two AMCs had not made any voting disclosure in FY 2012-13 since they completely abstained from voting exercise.

Following the Interim Budget announcement in 2014 to create one record for all financial assets of every individual, SEBI has instructed mutual fund houses, registrar and transfer agents (RTAs), and depositories to issue a unified consolidated account statement (CAS) for mutual funds and stock holdings from March 2015. The market regulator has asked fund houses, R&T agents and depositories to put in place a system to facilitate generation and dispatch of single CAS for investors having mutual fund investments and those holding demat accounts. Depositories are required to consolidate the details of stock holdings and mutual fund units of investors. The single CAS will be sent to investors within 10 working days from last date of the month. Depositories have been instructed to keep such information confidential. The consolidation will be done on the basis of PAN. While the CAS will be issued to the first account holder in case of multiple holdings, investors who have not made any investments in stocks will continue to receive CAS from fund houses as per the current practice.

SEBI has allowed small fund houses having net worth of less than Rs.50 crore to launch two new schemes a year till the time they meet the mandatory net worth requirement. However, such permission would be considered on a case to case basis, depending on such AMCs demonstrating that serious efforts are being made by them to meet the net worth requirements within the prescribed timelines. Earlier, SEBI had restricted a few fund houses from launching new schemes till they raise their net worth to Rs.50 crore. The regulator had given three years to these fund houses to increase their net worth. According to SEBI data as on February 2014, 19 AMCs have net worth of less than Rs.50 crore. 8 AMCs have net worth between Rs.50 crore to Rs.100 crore while 18 AMCs have net worth of more than Rs.100 crore. The net worth of all AMCs put together is Rs.8399 crore. SEBI had observed that 11 AMCs having net worth less than Rs. 25 crore have consistently remained below 1% of the total mutual fund industry AUM. Recently, Motilal Oswal and Religare Invesco had raised their net worth in order to comply with SEBI’s norm.

Retail participation in mutual funds from beyond the top 15 cities in the country has increased remarkably in the past 18 months, due to joint efforts made by the mutual fund houses and stock market regulator SEBI, according to AMFI. The mutual fund industry's assets under management (AUM) crossed Rs 1,07,000 crore from retail investors living in places beyond the top 15 cities as on October 31, 2014. It was a 33% growth over a 18-month period. As on March 31, 2013 the AUM was Rs 65,000 crore, according the Association of Mutual Funds in India.