FUND FULCRUM

November 2016

Mutual fund managers have pumped in over Rs 1.78 lakh crore in the debt market during the April-October period of the current financial year, primarily on account of strong participation from retail investors. Besides, they invested a net amount of Rs 21,000 crore in equity markets during the period under review. The inflows can be attributed to increased participation from retail investors and positive sentiment that was boosted after the long-stalled GST Constitution Amendment Bill was passed in Parliament in August 2016. Monthly net contributions through SIP (Systematic Investment Plan) led to higher positive net inflows in equity markets. As per the data released by the capital markets regulator Securities and Exchange Board of India (SEBI), mutual fund managers invested a net sum of Rs 1.78 lakh crore in April-October period of 2016-17. They had pumped in Rs 2.03 lakh crore between April and October in 2015-16. For the entire 2015-16 fiscal, fund managers had put in a net amount of Rs 2.73 lakh crore in the debt market. This inflow has helped the mutual fund industry to reach the over Rs 16 lakh crore mark in assets under management (AUM) at the end of September 2016, as per the latest data. In comparison, Foreign Portfolio Investors made a net investment of just Rs 3,000 crore into debt markets during the first seven months of the current fiscal (2016-17). Balanced funds saw net inflow of Rs 3,385 crore. However, liquid or money market segment saw an outflow of over Rs 34,800 crore. Overall, the asset under management of the country's 42 active fund houses increased to a historic high of Rs 16.3 lakh crore at the end of October 2016 from Rs 15.8 lakh crore at the end of September 2016.

Driven by addition in equity fund folios, mutual fund houses have registered a surge of more than 36 lakh investor accounts in the first seven months of the current fiscal, taking the total tally to 5.13 crore. This is on top of an additional 59 lakh folios in 2015-16 and 22 lakh in 2014-15. In the last two years, investor accounts increased mainly due to robust contribution from smaller towns. According to the data from the Association of Mutual Funds in India (AMFI) on total investor accounts with 43 fund houses, the number of folios rose to a record 5,1,287,934 at the end of October 2016 from 4,76,63,024 in March 2016, a gain of 36.25 lakh. Growing participation from retail investors, especially from smaller towns, and huge inflows in equity schemes have helped in increasing the overall folio counts. The equity category witnessed an addition of close to 15 lakh investor folios to 3.8 crore in April-October period of the current fiscal. Mutual funds have reported a net inflow of over Rs 31,000 crore in equity schemes in the first half of the current fiscal. Overall, funds have seen an infusion of Rs 2.67 lakh crore. The inflow is in line with the Sensex surging 10% during the period under review.

Piquant Parade

FundsIndia.co, an investment platform, has launched a first-of-its-kind innovative tool - ‘Gamification in Mutual Fund Investing’ for its investors. This feature will encourage good investing behavior and ensure that investors stay on the right path to investing successfully. Gamification is a concept of applying game mechanics and game design techniques to engage and motivate people to achieve their investment goals. FundsIndia.com’s approach towards gamification is to engage with existing investors and provide a seamless blend of fun and real investing. Keeping with its mission of creating and providing the friendliest investment platform to their customers, FundsIndia.com has developed a new feature - ‘Gamification’. It is a feature that ranks investors among their peers, so that they know where they stand among other investors similar to them. It is like an instant financial health check up for them. It is called gamification because it introduces game thinking and game elements into investing. It encourages good investment choices and discourages bad ones. Investors will be able to see this on their dashboard in the form of their ‘Peer Ranking. It is the percentile rank that tells investors where they stand among their peers. Apart from the score, the exciting new feature allows investors to earn badges. Positive investing behavior, which FundsIndia believes will make people better investors, will earn investors badges, recognizing their efforts toward disciplined investing. 

Regulatory Rigmarole

Market regulator SEBI has come out with detailed guidelines relating to rating criteria, process, and disclosures for credit rating agencies (CRAs). The regulator has asked rating agencies to disclose the criteria used for rating instruments, rating process and policies, all rating history, press releases and rating reports assigned by the CRAs including ratings withdrawn on their websites. Rating agencies have to implement these guidelines within 60 days. SEBI’s move comes in the wake of sharp downgrade in ratings of Amtek Auto which forced JP Morgan AMC to restrict redemptions in two of its funds.

SEBI has asked entities regulated by it, including registered investment advisers (RIAs), to upload the KYC data of all individual accounts opened on or after August 1, 2016 by March 31, 2017 on Central KYC Registry (CKYCR) platform. In this regard, SEBI has drawn a timeline for the AMCs to upload these documents. According to the timeline, AMCs have to ensure 30% completion of uploading existing KYC documents by November 30, 2016, another 30% by January 31, 2017 and the rest 40% by March 31, 2017. The government’s ambitious central KYC (CKYC) has gone live from July 15 in a phased manner. This paves way for a single bank KYC which will suffice to invest in all financial products, including mutual funds. This was announced in the Union Budget 2012-13. A month back, all the financial regulators - SEBI, PFRDA, RBI, and IRDAI have issued circulars instructing their respective regulated entities to upload KYC data of their customers on the CKYCR platform. Over a period of time, all investor data will be stored at a single place which can be accessed by all financial institutions to verify the KYC. All investors need to do is obtain a central KYC number from Central KYC Registry through the financial institutions and use it to invest in any financial product.  There will be no need to do multiple KYC.

In order to check insider trading, SEBI has come out with a circular to provide clarity on how AMC officials can invest their own money. Among the key changes are cooling period of 15 days for employees to invest in stocks and relaxation in disclosure of certain investments.

Here are the key investment guidelines for the AMC officials

·         Employees need not disclose their investments in fixed deposit instruments like bank FDs, PPF, NSC, and Kisan Vikas Patra, investment in non-financial instruments like gold, and investment in government securities, liquid funds.
·         However, no officials can buy/sell stocks without taking prior approval from compliance officer of the AMC.
·         If an employee wants to buy a particular listed security, he/she has to take prior approval of the compliance officer. The compliance officer has to check with the fund management team if they have executed any trade in that stock for the period of 15 calendar days. If no trade has been executed within 15 calendar days, compliance officer will give approval. The employee has to execute trade within 7 days of receiving such approvals. Moreover, the fund manager cannot execute trade in that particular stock within 15 calendar days if an employee has executed trade. This 15 days is termed as cooling period.
·         Employees can invest in IPOs through public placement route without taking prior approval from the AMCs.
·         Employees will have to intimate the compliance officer if they participate in preference or right issue.
·         Front running is strictly prohibited. Front-running is a practice where a person or a group of persons buy or sell shares in their own account taking advantage of advance information about orders from clients. Front-running is detrimental to the interests of investors and is, therefore, an illegal practice.
·         Employees are expected not to book any profit from the purchase or sale of any security within a period of 30 calendar days. However, in cases where it is done, the employee will have to provide suitable explanation to the compliance officer.
·         Employees will have to disclose their mutual fund investments except liquid fund holding to the compliance officer within 7 calendar days from the date of transaction. However, employees need not disclose their investments with the other fund houses.
·         Employees will have to disclose their SIP investments in mutual funds at the time of making first installment.
·         Employees cannot execute transaction in the scheme if investors have not been communicated about changes in fundamental attributes like change in investment objective, fund manager etc.

AMCs will have to maintain a record of all transactions of their employees made during the financial year and ensure compliance within 30 days from the end of the financial year. The Board of the AMC and the trustees will have to review the compliance of these guidelines. This will come into effect from December 1, 2016.

SEBI is likely to ease investment guidelines for fund houses. The market regulator is looking to allow fund houses to take exposure to derivative instruments by just sending a notice intimating unit holders about this. This was discussed at the meeting of Mutual Fund Advisory Committee (MFAC). If this goes through, fund managers can take exposure to such instruments after 30 days of putting up a public notice. Also, fund houses need not wait for the SEBI approval. Currently, fund houses are required to take approval of at least 75% of unit holders to incorporate such a change in the scheme which is time-consuming. Typically, fund managers take exposure to derivative instruments to hedge their portfolio. This strategy works well in volatile market conditions. SEBI has asked AMFI to work on the modalities and send it to the market regulator soon. AMFI is likely to discuss in the upcoming board meeting scheduled to be held on December 13, 2016.

Financial Planning Standards Board India has welcomed SEBI’s consultative paper on the amendments to the SEBI (Investment Advisers) Regulations, 2013. It has forwarded its suggestions to SEBI on some of the points on the Consultation Paper. “Several recommendations by SEBI are indeed laudable and it will go a long way towards streamlining the financial advisory services in the country thus making it more consumer-centric.” SEBI’s efforts to bring the Financial Planning services, under any garb, within the purview of the IA Regulations are well appreciated. Terms such as Financial Planning, Financial Planner etc. are being used in India indiscriminately and that leads to a lot of confusion amongst the consumers. According to FPSB, the proposed removal of ‘incidental advice’ by the distributors and other professionals is a welcome step and it would protect the investors from getting advice that may not necessarily be in their best interests. Incidental or limited advice is prone to misuse and has been viewed in the context of the prevalence of mis-selling. The Association believes that bringing all investment advice, like medical advice, meted out in popular, public, and social media needs to be discouraged as this is best left to the experts. Thus, differentiating between generic comments and specific financial advice requires some clarity. These ‘investment advisory’ discussions under the ambit of regulations would indeed help towards investor protection. Several of the amendments proposed are commendable and would serve to fast forward the Financial Planning industry, and further help the investor community. At the same time, initiatives towards establishing clarity and initiating steps to enable as well as to facilitate professional growth would be a progressive move. FPSB India opines that risk profiling is an important constituent of financial planning and therefore in the regulations, there is a scope to define the tools and processes for the same to avoid any ambiguities with respect to its fitness and limitations. Additionally, there should be a single point Redressal Mechanism for consumer grievances pertaining to financial products and investment advice. FPSB India says, “SEBI’s Draft Paper is a welcome step and with some modifications it would go a long way in changing the way investors could access personal finance advice from those who are competent to offer.”