Mumbai: Indian mutual fund (MF) industry may see further erosion in assets under management (AUM) following recent regulatory changes, according to rating and research firm Icra Ltd.
AUM of the industry declined 3% year-on-year in 2010-11 (FY11) to around Rs5.97 trillion at the end of March. At its peak, the industry’s AUM was Rs7 trillion.
The decline in AUM in FY11 was due to new valuation guidelines and Icra expects the pressure to continue in FY12 due to the increase in the dividend distribution tax (DDT) for corporate investments in liquid and debt funds and the cap on banks’ investments in select debt mutual funds.
Fearing a systemic risk during adverse events, the Reserve Bank of India (RBI) has recently imposed a cap of 10% on banks’ investments in debt-oriented mutual funds. It has given them six months, beginning April, for compliance.
Icra estimates that the excess of banks’ investment over 10% of their net worth stood at least Rs68,000 crore as on 22 April.
In the past two years, banks’ investments in mutual funds have largely exceeded the proposed cap of 10% of net worth, as per Icra.
Funds parked in mutual funds reached a peak of Rs1.69 trillion in October 2009, and moderated up to June 2010 and remained within the 10% limit for a brief period up to August 2010. In the fourth quarter of the previous fiscal, banks continued to park up to Rs1 trillion in debt mutual funds.
“Considering this entire excess investment exiting the system, the estimated decline in the industry debt AUM levels would be nearly 17% and estimated decline in overall AUM levels would be nearly 11% compared to 31 March 2011 levels,” Icra said.
Another significant policy move that may affect the inflows is the budgetary announcement to increase DDT to 30% for corporate investors in debt-oriented mutual fund schemes from 25% in liquid schemes and 20% in debt schemes earlier. This comes into effect from 1 June.
“The proposal to hike DDT would make investments in liquid funds for corporate investors (including banks) less attractive as it would nullify the tax arbitrage and possibly impact the future inflows into debt funds from corporate investors,” Icra said.
With corporate investors, including banks, accounting for a significant portion of the industry’s debt AUM, any reduction in investments will result in a sharp adverse impact on the overall industry’s AUM.
The agency said the ratio of industry debt AUM to overall AUM could fall over the next six months in the wake of regulatory reforms.
To compensate for this, fund houses will have to increase their focus on mobilizing funds from the retail segment.
Icra has ratings outstanding on 89 liquid and debt mutual fund schemes across 24 asset management companies. The AUM of these schemes accounted for nearly 32% of the industry debt AUM as on 31 March.
According to the Association of Mutual Funds in India data, at least 70% of the mutual fund industry’s investments in debt schemes came from corporate and large institutions.