FUND FULCRUM

December 2017

With the latest inflow, total infusion in mutual fund schemes reached Rs 3.8 lakh crore in the first eight months (April-November 2017) of the current fiscal, according to the latest data with Association of Mutual Funds in India (AMFI). Investors have pumped Rs 1.26 lakh crore into mutual funds in November 2017, driving industry assets under management to an all-time high of Rs 21.8 lakh crore. Investors have poured in an investment of over Rs 51,000 crore in October 2017. The latest inflow has been mainly driven by contributions from equity, equity linked saving schemes and liquid funds. Individually, liquid funds or money market category witnessed an inflow of over 77,000 crore. Besides, equity and equity linked schemes attracted over Rs 20,300 crore. In addition, more than Rs 7,600 crore was invested in balanced funds. Further, over Rs 9,300 crore was put in the debt funds. In contrast, gold ETFs continued to see net outflow of Rs 89 crore. Lacklustre performance by real estate and gold and low interest rates on traditional savings instruments have also contributed in pushing investor flows into equities. The high inflows also show the popularity of mutual funds as the preferred vehicle for investment in equity and debt.

SIP inflows continued to pour in the month of November 2017 with investors putting in Rs.5,893 crore, according to AMFI data. The industry has witnessed a growth of 5% in SIP inflows in November 2017 compared to Rs.5,621 crore in October 2017, an increase of Rs.271 crore. The increase in SIP inflows is a result of new investors entering the mutual fund industry through SIP and increase in the SIP amount from existing investors. The popularity of the SIP route as a way to invest can be seen in the increase in SIP accounts.  Mutual fund SIPs accounts stood at 1.80 crore in November 2017. The industry has added 7 lakh SIP folios in just one month. The mutual Fund SIP accounts stood at 1.73 crore as on October 2017. AMFI data shows that the mutual fund industry had added about 9.05 lakh SIP accounts each month on an average during the FY 2017-18. The consistent inflows to the industry have pushed the average assets under management (AAUM) of the mutual fund industry to Rs.22.73 lakh crore in November 2017. The average AUM of the mutual fund industry has increased by 6% from Rs.21.45 lakh crore in September 2017. However, the monthly AUM of industry stood at Rs.22.79 lakh crore in November 2017. While AAUM is the average assets of the entire month and is calculated by factoring in all working days of the month, month end AUM is the assets of the industry as of the last working day of the month.

The mutual fund industry added nearly 18 lakh folios to reach 6.49 crore folios in November 2017, according to SEBI data. Of the 18 lakh new folios in November 2017, 11 lakh folios were in equity funds taking the total number of equity fund folios to 3.85 crore. The increase in folios can be attributed to upbeat market sentiment and increased awareness of mutual funds as an investment tool. AMFI data shows that equity funds have received net inflows of over Rs.19,508 crore last month. In percentage terms, the equity ETFs category recorded the highest jump in folios. The category witnessed a 61% increase in folios to 8.64 lakh folios in November 2017. ELSS category also saw a substantial increase in folios as investors are investing in ELSS as a tax-saving instrument.  The category has witnessed an addition of around 1.18 lakh mutual fund folios in November 2017. The categories that witnessed a fall in folios include gold ETFs, income funds, gilt funds and fund of funds. Income and gilt funds saw a total reduction of almost 20,000 folios.

Piquant Parade

National Stock Exchange of India (NSE) has introduced an E-mandate facility for its mutual fund platform, with immediate effect. The E-mandate facility would help members, or mutual fund distributors, to reduce the SIP registration cycle to just two to three days, as compared to two to three weeks earlier. Currently, members, or mutual fund distributors, register paper-based mandates for their investors, which is time consuming as it involves obtaining signature of an investor on the form and submission of physical form at service centre for processing. Implementation of E-mandates is a very significant step towards digitisation of transactions in mutual funds. The objective is to offer simple and hassle-free alternative to the members/MF distributors in form of e-mandate wherein the members/Mutual Fund distributors can register mandate of an investor online, which will be digitally signed based on Aadhar based OTP validation. Digital platforms will be the game changers for Indian Mutual Fund industry. As per UIDAI website, there are approximately 119 crore Aadhar numbers, which holds a huge potential for mutual fund industry which currently has 6.2 crore folios only. E-Mandate is available for individuals with single mode of holding. Currently, maximum limit for e-mandate is INR 100,000. E-mandate is an Aadhar based functionality. Accordingly, registration of mobile number with UIDAI is mandatory for e-signing of mandate. Updation of Aadhar number in bank account on which mandate is being registered is mandatory for mandate registration. E-mandate can be registered for the banks enabled by NPCI for the same. At present 28 banks are participating for e-mandate service through NPCI. In the current financial year until December 15, 2017 around 48 lakh transactions aggregating to Rs. 23,345 crores have been processed through its MF platform. In last two years NSE has registered a growth of more than 600% in number of transactions, routed through its Mutual Fund platform. Further, the number of SIP accounts on the platform has increased from 0.85 lakhs as on March 31, 2015 to 4.45 lakhs as on December 15, 2017.

Sharekhan announced the launch of InstaMF, its online and paperless mode of investing in mutual funds. InstaMF facility is available to investors without the need of opening a demat account with Sharekhan. InstaMF is in line with Sharekhan’s aim of providing digital excellence to investors. A pure online platform, InstaMF will make investing in mutual funds as easy as 1-2-3. Investors can choose any scheme according to their investment horizon and backed by research from Sharekhan. The InstaMF platform allows investors to open an account in just three steps. In the first step itself, investors will know whether they are KYC compliant or not. In case their KYC is not in place, Sharekhan will get in touch with them within 24 hours to complete the KYC process. Additionally, with an InstaMF account investors will also be able to access the ‘flexi invest’ option provided by Sharekhan.  In Flexi Invest, investment amount, date and frequency of SIPs can be altered at any given point of time. With the surge in retail interest in equity markets via mutual funds, InstaMF will help the growing investor base to invest with ease. InstaMF also gives the investors access to Sharekhan’s Robo advisor – NEO, where they get the best investment advice for their unique financial requirements. InstaMF brings the expertise of Sharekhan to investors so that they can take informed decisions. InstaMF will soon introduce Aadhaar based account opening to further facilitate investments in mutual funds.

Regulatory Rigmarole

The Securities and Exchange Board of India has decided to only partially modify the circular on categorization and rationalization of mutual fund schemes despite a detailed representation made by AMFI. The market regulator clarified some norms for mutual fund classification that will make compliance easier for asset managers. The capital markets regulator clarified on market capitalization norms for equity funds and allowed certain other fund categories to invest in a wider range of securities. In a bid to reduce the number of schemes in mutual funds, SEBI had come out with a circular on October 6, 2017 defining various categories of mutual fund schemes to reduce confusion among investors and expedite scheme consolidation. The categories were further divided into sub-categories; for equity funds, the classification was based on market capitalization and for debt funds on investment duration. Following the circular, AMFI had written to SEBI saying some of the provisions were restricting fund houses’ ability to offer products within the suggested classification and are likely to impact risk management. In the revised circular, SEBI stated that for equity funds, the market capitalization for the previous six months would be considered. Market capitalization is the basis for equity fund classification. The mid-cap equity fund needs to deploy at least 65% in mid-cap stocks and the stocks must be between 100-250 crores in terms of market capitalization. In terms of debt funds, SEBI categorized funds on the basis of maturity of the fund. But it has now revised the norms to focus on the maturity of the underlying security. The regulator also stated that for medium and medium-to-long term debt funds, the fund manager can now reduce the fund duration by one year if there are adverse interest rate movements. Fund houses have been asked to specify asset allocation in case of such adverse situations in their offer documents. SEBI has modified the characteristics of a corporate bond fund. Besides, it included municipal bonds as one of the instruments of investment for a banking and investment fund. Each scheme has many sub-categories; and a fund house can have only one scheme in a sub-category, except for index funds/ETFs, fund of funds having different underlying schemes and sectoral or thematic funds. The regulator has long been calling for the rationalisation of mutual fund schemes. At present, there are more than 2,000 schemes.

The Securities and Exchange Board of India is planning to come out with a discussion paper on the total expense ratio or TER on mutual funds. SEBI has been working on measures to bring down the cost on mutual fund investors and a discussion paper will be put out seeking industry and stakeholders view. Expense ratio may not be an issue for an investor who is looking for a higher alpha provided the fund house can deliver it. While for conservative investors, there are exchange traded funds and fixed income schemes which carry low expense ratio.

The government has extended the deadline for mandatory Aadhaar linking bank accounts to March 31, 2018, in its latest notification. This extension of deadline on Aadhaar linkage is applicable for mutual funds too, according to Association of Mutual Funds in India. This means investors will have three more months to link Aadhaar details with the mutual fund folios. Earlier, the government amended Prevention of Money-laundering (Maintenance of Records) Rules, 2005, which was notified in June 2017, requiring you to link your Aadhaar with your various investments such as bank account, insurance and mutual funds by December 31, 2017. Investors can link their Aadhaar number with mutual fund folios through R&T agents such as CAMS, Karvy, Sundaram BNP Paribas Fund Services and Franklin Templeton. NRIs are exempted from Aadhaar linkage. However, fund houses and distributors need to devise a mechanism to ascertain the genuineness of status of such NRIs.

In order to strengthen the governance structure for mutual funds, SEBI has come out with a circular on the tenure of independent trustees and independent directors, and auditors of mutual funds. The circular issued by SEBI said, “An independent trustee and independent director shall hold office for a maximum of 2 terms with each term not exceeding a period of 5 consecutive years. No independent trustee or independent director shall hold office for more than two consecutive terms, however such individuals shall be eligible for re-appointment after a cooling-off period of 3 years. During the cooling-off period, such individuals should not be associated with the concerned mutual fund, AMC and its subsidiaries and /or sponsor of AMC in any manner whatsoever.” It also states that the existing independent trustees and independent directors shall hold office for a maximum of 10 years including all preceding years. Similarly, in case of the auditors of mutual funds, SEBI says that no mutual fund shall appoint an auditor for more than two terms of maximum five consecutive years. Such auditor may be re-appointed after cooling off period of 5 years. “Further, during the cooling-off period of five years, the incoming auditor may not include any firm that has common partner(s) with the outgoing audit firm and any associate / affiliate firm(s) of the outgoing audit firm which are under the same network of audit firms wherein the term “same network” includes the firms operating or functioning, hitherto or in future, under the same brand name, trade name or common control,” states the SEBI circular. The existing auditors may be appointed for a maximum of 10 years including all preceding years.