FUND FULCRUM

April 2015

Mutual fund industry's asset base has surged by nearly Rs 3 lakh crore in 2014-15 to become a Rs 12 lakh crore market, mainly driven by a smart rally in the equity market and the industry targets to reach an asset size of Rs 20 lakh crore by 2020. In fact, the mutual fund industry’s assets under management (AUM) hit a record Rs 12.02 lakh crore in February 2015 itself. Fund houses are upbeat about the industry's performance for the current fiscal (2015-16) as equity markets are expected to continue their momentum, making the segment attractive. In 2014-15, the country's 44 fund houses together saw a growth of 31% in their asset base to Rs 11.88 lakh crore at the end of March 31, 2015, according to data released by the Association of Mutual Funds in India. The AUM stood at Rs 9.05 lakh crore in the preceding fiscal and has been on the rise since 2011-12. The growth in asset base comes on the back of the BSE Sensex surging around 25% in the past financial year. The number of investors has also grown substantially in the past fiscal and a rally in markets and improving economic indicators are expected to result in a much more broad-based participation in 2015-16, especially among retail investors. However, AMFI's decision to put one per cent cap on upfront commission paid to distributors may impact the sector. Individually, HDFC Mutual Fund continued to retain its top spot with an AUM of Rs 1.62 lakh crore, followed by ICICI Prudential Mutual Fund (Rs 1.48 lakh crore), Reliance Mutual Fund (Rs 1.37 lakh crore), Birla Sun Life Mutual Fund (Rs 1.2 lakh crore), and UTI Mutual Fund (Rs 92,751 crore). The fiscal year, however, saw some exits in the mutual fund space. Those which have exited include Daiwa, ING, Morgan Stanley, Pramerica, Fidelity, and Pinebridge. 

Equity mutual funds saw 25 lakh investor accounts or folios added in 2014-15, mainly on account of a sharp stock market rally and strong retail participation. According to SEBI data on investor accounts with 44 fund houses, the number of equity folios jumped to 3.17 crore last month from 2.92 crore a year earlier. April 2015 saw the first rise in more than four years. Prior to 2014-15, the equity mutual fund sector had seen a continuous closure of folios since March 2009 after the global financial crisis hit the market in late 2008. Since March 2009, as many as 1.5 crore folios have been wound up. The investor base reached its peak of 4.11 crore in March 2009 while it was 3.77 crore in March 2008. Before 2014-15, there was a complete lull in equity inflows as well as generation of new folios, but in the past one year, equity markets have come back to life and yielded solid returns. A strong rally in the equity markets and the heightened investor interest led to a sharp increase in retail folios. The addition in equity folios is in line with the BSE Sensex surging 25% in 2013-14. Moreover, mutual funds reported net inflows of over Rs 68,000 crore in equity funds in the last fiscal year, helping the industry grow its folio count.

Debt funds saw huge outflows in March 2015 since it was the financial year end. Income funds saw net outflows of Rs.8,927 crore in March 2015 while liquid funds saw net outflows of Rs.1.13 lakh crore. Typically, corporate investors pull out money in the last week of the end of the quarter and put it back in the first two weeks of the subsequent month. Investors backed gilt funds on expectations of a rate cut by RBI. Gilt funds, which have seen continuous outflows in the recent past, saw net inflows of over Rs1,439 crore in March 2015. Lackluster performance of gold has led investors away from gold ETFs. The category saw net outflows of Rs.111 crore in March 2015. However, other ETFs, which track the equity indices, received inflows of Rs.623 crore in March 2015. Overseas fund of funds saw net outflows of Rs.83 crore in March 2015. Last month, overseas FOFs witnessed net outflow of Rs.78 crore. There are 31 international funds in the industry which manage Rs. 2,526 crore. All in all, the industry saw net outflows of Rs. 1.10 lakh crore largely on account of outflows from liquid funds. As a result, the industry’s AUM dipped to Rs.10.82 lakh crore in March 2015 from Rs.12.02 lakh crore in February 2015.

Piquant Parade

The Rs 12 lakh-crore Indian mutual fund sector is likely to witness a key trend reversal. After a spate of exits by foreign fund houses in recent years, Fidelity Investments, a global asset manager, is looking to re-enter the segment in India. The US-based fund house had exited India three years earlier, selling its mutual fund business to L&T Finance. Fidelity had assets under management (AUM) of Rs 8,800 crore, mostly equity, at that time.

Top fund house Reliance Capital Asset Management Company roped in the largest Korean asset management firm Samsung AMC for a strategic alliance, which will allow the two companies to manage, market, and distribute each other's investment products in India and South Korea. Samsung AMC, which manages assets worth over USD 165.8 billion and is part of the Samsung Group, is also looking to explore opportunities in the ETF market in India through this partnership. RCAM, which runs Reliance Mutual Fund, is part of Anil Ambani-led conglomerate Reliance Group's financial services arm Reliance Capital, which already has strategic tie-ups with financial services giants, including Nippon Life from Japan for its insurance and mutual fund businesses, among others. The two firms will also seek to develop and explore business opportunities in active and passive strategies, leveraging upon their specific investment and distribution reach, in India and Korea. 

Regulatory Rigmarole

The recent capping of upfront commissions that fund houses can pay distributors shows online platforms in a better light. They save on costs by keeping client interaction to the minimum while focusing more on client servicing. Presently, there are a handful of such online platforms. Some of the more prominent ones include Next Advisors, NJ India Invest Pvt. Ltd. (one of India’s largest Mutual Fund distributors), stock exchange platforms like BSE StAR MF and NSE–NMFII, and those run by Fundsindia.com and iFast Financial (two online portals where investors can also independently buy and sell mutual funds). MF Utility (MFU)—an online web-based tool by the Association of Mutual Funds of India—is more of an order routing mechanism than a platform as such. The MFU still requires a paper trail, but its next phase will bring about online capabilities. Stock exchange platforms are end-to-end platforms, while others are aggregators that bring together distributors on a technology platform and ride on full-fledged platforms. Typically, online platforms remove the need for physical intervention and form filling. Once the distributor comes on board and opens her own account, she can select schemes on behalf of her client and a web link goes to the client. The client then has to confirm the order (and check if the schemes are the same ones that were agreed upon and other details) and make the payment. Every time the client has to make a payment to buy mutual fund units, she has to log into her Internet banking account. Money goes out of the client’s account and straight to the fund house, and the client gets her units. At the core, that is how most platforms facilitate a paperless transaction. Over and above this, different platforms can have subtle differences. The NJ and Next Advisors platforms, for instance, entail that the investor buys and sells the fund herself. In these platforms, upon onboarding, the distributor gives the client a login name and password. The investor has to log onto the platform, select funds that she wishes to buy and use the Internet banking facility to make the payment. Additionally, NJ’s platform allows the distributor to get a power of attorney (PoA) from the client (subject to an upper limit). Using the PoA, the distributor can move the money from the client’s account using the auto-debit facility. This is in addition to buying and selling units in the offline mode, and filling in forms and visiting the registrar and transfer agent’s office to submit the same. Units are bought on the basis of NJ’s AMFI Registration Number (ARN). This means that although every sub-broker in the NJ network has their individual ARN, only NJ’s ARN gets finally recorded in the fund house’s records. Approximately 25% of NJ’s business comes through its online channel. Next Advisors is purely a technology platform built by a few distributors. It enables a whole network of mutual fund agents to offer schemes online to distributors. Here, the transactions get recorded in the distributor’s own ARN. The other types of platforms are those run by the stock exchanges. On offer since December 2009, stock exchange platforms did not initially take off because, in the early days, they allowed only stock brokers to sell mutual funds to clients. Eventually, in 2013, laws were rewritten to allow independent financial advisers (IFAs) to enter the platform. But there was a common irritant that persisted; units bought and sold could only be in the dematerialized format. That changed in December 2014 when the Securities and Exchange Board of India allowed non-demat transactions on stock exchanges. This could change the way mutual funds are bought or sold in a big way. Those investors who are not inclined to open a demat account can now invest through the exchange platforms, if their distributors are members there. In fact, the NSE-NMFII also has plans to link your Permanent Account Number to its backend database that will pull out all your previous mutual fund transactions, even if you have purchased units outside the NSE. This will enable your distributor to give you a holistic view of your portfolio. While distributors’ income has come down due to regulatory tightening, their need to invest big sums of money to build capabilities has also reduced with such platforms. Most allow them to generate various reports for their clients to give them a better understanding. But the biggest game changer will come when SEBI allows advisors to invest client’s money in direct plans, but under the advisor’s code. Advisors can then use these platforms, offer cheaper direct plans (with lower expense ratios), service them on such investments and charge fees at the same time.

Indian mutual fund houses outpaced foreign peers in asset growth for a third year in a row in 2014-15. A better brand connection with investors, relatively high proportion of equity assets and recent exits of several foreign names have helped domestic players maintain their dominance in the Rs. 12-lakh crore mutual fund industry. In 2014-15, the overall industry's average AUM grew 31.3%, lifting the asset base from Rs. 9.05 lakh crore to Rs. 11.88 lakh crore. Domestic fund houses, put together, put up a better show as their assets rose 31.5%, while foreign peers’ collective assets were up 29.4%. In FY14, domestic players grew 11.7% while foreign AMCs could register a growth of 3.73% and in FY13, the AUM growth rates were 23.5% and 17.5%, respectively. Further, foreign fund houses are continuously losing market share since 2012. During these years, they have lost nearly 1.3% to local players. Currently, they control 10.4% share of the industry's total AUM as against 11.8% in 2012. Exits of fund houses like Morgan Stanley, Fidelity, ING, Daiwa, and Pine Bridge in recent years have contributed to this state of affairs. Ultimately, it is the consistent performance of schemes of fund houses that matter the most.