FUND FULCRUM

February 2017

The year 2017 started on a positive note for the mutual fund industry. The Assets Under Management (AUM) of the Indian mutual fund industry is nearing the Rs. 20 lakh crore mark and could cross this important milestone in 2017. The AUM of the industry has already reached Rs. 17.4 lakh crore in January 2017, expanding 36.4% from Rs. 12.7 lakh crore at the end of January 2016, according to data from the Association of Mutual Funds in India (AMFI). In December 2016, the industry monthly AAUM crossed the landmark of Rs.17 lakh crore and highest ever quarterly AAUM of Rs.16.93 lakh crore for the quarter ended December 2016. The growth in mutual fund assets is largely due to renewed interest of investors in equity funds. If we take into account inflow in balanced funds (Rs. 3304 crore), ELSS (Rs. 1166 crore), and equity ETFs (Rs. 6748 Rs. crore), the combined inflow in equity category is close to Rs. 15,000 crore in January 2017. In fact, the equity AUM of the industry has now crossed Rs.6 lakh crore (including balanced, ELSS, and equity ETFs). In 2016-17, the overall net inflow into mutual fund schemes has nearly doubled so far to about Rs 3.86 lakh crore at the end of January 2017. Whereas, the net inflows increased more than 5.5 times to around Rs 1.66 lakh crore for income funds, it increased 84.5% to about Rs 1.03 lakh crore for liquid funds.

According to data from the Securities and Exchange Board of India (SEBI), the total folio count at the end of January 2017 stood at 5.4 crore, 1.8% higher than December 2016. Out of the 9.6 lakh folios added in the month of January 2017, 6.3 lakh folios were contributed by the Equity (including ELSS) and Balanced categories. De-growth in folio count was seen in Gold ETFs and fund of funds investing overseas.

In January 2017, the AUM of B15 towns reached 3.0 lakh crore, accounting for 16.7% of the total assets of the mutual fund industry. In the last 12 months, assets from B15 towns have grown 37.3% due to investor-friendly initiatives by regulators and campaigns by AMCs. In January 2017, the B15 assets grew by Rs. 0.1 lakh crore or 4.0% from December 2016. It is noteworthy that B15 locations are proving to be more lucrative for distributors as the share of direct plans in B15 towns is only 24.9% compared with 45.4% in T15 cities.

Piquant Parade

SEBI plans to leverage social and digital media to spread financial awareness and literacy. SEBI has said that enhancing engagement with people in the social and digital media would be among its key priorities in FY 2017-18. Using a digital platform is cheaper, quicker and a hit with young professionals.While SEBI has been strongly pushing the need to harness the digital and social platforms to promote investor awareness, only a combination of all mediums can help reach out to a wider section of investors. Going digital is good, but while many investors might have access to digital media, especially in certain B15 cities, they might not be aware of how they could use it for increasing their knowledge. Till a majority of investors become digital savvy, SEBI will need to mix all the mediums of communication to increase awareness.

Regulatory Rigmarole

The Union Budget 2017-18 has announced that SEBI would enable market intermediaries, which include fund houses and RIAs to apply for registration online. The budget document says, “The process of registration of financial market intermediaries like mutual funds, brokers, portfolio managers, etc. will be made fully online by SEBI. This will improve ease of doing business.” The paperless mechanism is expected to save time and effort of the applicants. Currently, applicants seeking registration are required to submit their application forms either through post or by visiting SEBI office. Since many intermediaries are not comfortable sending their details through post, they prefer to visit the SEBI office and get acknowledgement of receipt of their application forms. Although the proposal will ease the process by doing away with the physical documentation part, it does not claim to reduce the overall time of registration. In addition, there is no clause mentioned with respect to fund approval. Typically, the market regulator takes 2 to 3 months to complete the registration process.

The Union Budget also announced that the deduction available under the Rajiv Gandhi Equity Savings Scheme (RGESS) would be phased out from FY 2018. Individuals who have claimed a deduction under the RGESS in FY2017 will be allowed to avail of the same till FY2018.

With the Budget proposal to change the base year used for calculating indexation benefit from 1981 to 2001, investors in debt mutual funds may stand to benefit. Such funds qualify for long-term capital gains tax of 20% with indexation benefit if held for more than three years. With the base year change, the tax liability is likely to fall.

Scheme mergers are treated as sale of funds or redemption and long term investors are deemed fresh investors the moment a scheme is merged with another one and taxed accordingly. The Budget clarified that from April 1, 2017 scheme mergers will no longer be considered as fresh investments. There will be no tax impact at the time of merger. Only the holding period and the cost of acquisition of the units in erstwhile schemes will be taken into consideration for taxation purposes. The Union Budget 2017-18 clarified that the holding period will include the period held in the former scheme, and the cost of acquisition too, will be that of the former.

The government’s impetus to the affordable housing and infrastructure sectors in Budget 2017 seems to have increased the confidence of the market regulator in housing finance companies (HFCs). SEBI has issued a circular in which it has allowed fund houses to increase exposure in HFCs from 10% to 15% of the net assets of the scheme. The circular is applicable with immediate effect. “Presently, the guidelines for sectoral exposure in debt oriented mutual fund schemes put a limit of 25% at the sector level and an additional exposure not exceeding 10% (over and above the limit of 25%) in financial services sector only to HFCs. In light of the role of HFCs especially in affordable housing space and to further the government’s goal under Pradhan Mantri Aawas Yojana (PMAY), it has now been decided to increase additional exposure limits provided for HFCs in financial services sector from 10% to 5%,” states SEBI circular. In August 2016, the market regulator had increased this limit from 5% to 10%. SEBI has clarified that such securities have to be rated AA and above and these issuer HFCs are registered with National Housing Bank (NHB). However, the total investment in HFCs cannot exceed 25% of the net assets of the scheme.

SEBI has allowed fund houses to invest up to 10% of its corpus in Real Estate Investment Trusts (REITs) and Infrastructure Investment Trust (InvITs). However, the market regulator has clarified that fund houses can invest only up to 5% of its corpus in units of single issuer. In a circular, SEBI has said, “No mutual fund may invest in the units of REITs and InvITs shall not invest more than 10% of its NAV in the units of REIT and InvITs and over 5% of its NAV in the units of REIT and InvITs issued by a single issuer.” However, fund houses cannot invest corpus of index funds and sector specific funds in REITs and InvITs. Just like mutual funds, REITs pool money from various investors and invest in real estate ventures. REITs invest in commercial properties generating rental income.

Earlier, existing mutual fund schemes were required to obtain positive consent from a majority of the unit holders before commencing investment in derivatives. "It has been decided that for introduction of derivative investments in an existing scheme, whose SIDs do not currently envisage such investments, the requirement of obtaining positive consent from majority of unit holders shall no longer be applicable," SEBI said in a circular. All investors of such schemes would be given exit option with no exit load for 30 days as against the current requirement wherein exit option is only given to dissenting unit holders. Existing schemes of mutual funds, whose SIDs do not envisage investments in derivatives, can participate in that segment provided the risks associated with such participation would be disclosed and explained by suitable numerical examples to the unit holders. In addition, the extent and the manner of the proposed participation in derivatives should be disclosed to the unit holders. 

Acknowledging the role of mutual funds as an important savings vehicle for investors, the Union Finance Minister has appreciated the significant growth in the mutual fund industry over the past few years. By the end of 2017, fund houses are eyeing big on SIP investments to reach a mark of Rs 20 lakh crore AUM for the industry. Fund houses see B-15 cities contributing to some of the growth in SIP and few other SIPs are giving good performance, so the industry is confident that they will achieve the Rs 20 lakh crore mark.