BackThe year of fine tuning mutual funds
More retail investors, lower commissions, credit rating hits, EPFO money, and much moreit's been a busy year
Premium
The year 2015 can best be described as the one in which the foundation was laid for the way the 13-trillion Indian mutual fund (MF) industry will look like in a few years. From changes in the commission structure that fund houses can pay distributors (and this appears to be just a start) to strengthening online channels of distribution and moving towards an environment where financial technology (fintech) companies have just about started to enter the industry and sell products, the MF industry has gone through some interesting times. Here’s a look at some of the most significant moves.
Small investor on top
Despite equity markets being volatile throughout the year—and, in fact, losing money on a year-to-date basis—retail investors continued to put their money in MFs. So far this year, the S&P BSE Sensex has lost about 7%. But the year marked the first year in the history of MFs in India when each month saw net inflows (more money came in than went out) into equity funds. The December 2015 data, however, will be available only in the first week of January 2016, though indications are that numbers will follow the rest of 2015’s trend.
We examined the monthly data of inflows and outflows since the Association of Mutual Funds of India (Amfi; the MF industry’s trade body) started disclosing this data in 1999.
“This will be marked as the year of return of the Indian retail investor to equity MFs. Also, they have done so in a disciplined fashion. An example being a sharp increase in systematic investment plan (SIP) numbers. The increase in SIP transactions has been about 40%, which combined with increasing ticket sizes and longer duration SIPs, provides the industry with steady and guaranteed inflows," said Saurabh Nanavati, chief executive officer, Religare Invesco Asset Management Co. Ltd.
According to industry estimates, there were 8.1 million SIPs by the end of October 2015, up from 6.9 million at the end of March 2015 and 5.1 million at the end of March 2014. The average ticket size has also gone up marginally to about 2,900 in present times, up from about 2,700 as on the end of March 2015 and about 2,300 as on end-March 2014.
Commissions, NFOs down
On the back of a multitude of new fund offers (NFOs) launched in 2014 that saw commissions that fund houses pay to distributors hit the roof, especially for closed-end funds, the industry got into correction mode this year. This was also partly due to the capital market regulator Securities and Exchange Board of India (Sebi) taking notice of the high commission levels.
In March 2015, Amfi had issued a circular to all fund houses urging them to put a cap of 1% on the upfront commissions to distributors. The industry body further said that fund houses should not pay in advance the trail commission of future years (a practice called upfronting in MF parlance in which future commission are paid today). And finally, trail commission of future years (for as long as the investor stays invested with the fund) was capped at the level of trail commission that a fund house pays in the first year.
Results followed. According to data provided by Value Research, an MF tracking firm, so far this year, 30 closed-end scheme NFOs have been launched and which collected about 5,100 crore. This is down from 55 such schemes launched in 2014 but which had collected about 10,000 crore.
“The new commission norms have made the environment more conducive for investors, fund houses as well as distributors. The interests of all these sets of people are aligned; everybody wants the same thing: long-term investment," said Rajiv Shastri, managing director and chief executive officer, Peerless Asset Management Co. Ltd.
Amfi’s move was just the first step. “Launch of closed-end funds with high upfront commissions has come down. However, the jury is still out on whether the overall long-term impact on the industry will be positive or not if implementation of the guidelines continues as it is now," said G. Pradeepkumar, chief executive officer, Union KBC Asset Management Co. Pvt. Ltd.
“Implementation has been far from perfect. Unless the MF industry collectively implements fully, this move will not have the desired impact. Currently, certain MFs are not following (the rule)—some are openly not following, few others are tacitly not implementing. You can’t have one half of the industry following this norm, and one half not following; 60-70% implementation is no implementation at all," he added.
It must be noted here that Amfi can, however, only issue advisories as best practices guidelines; it does not have the power to enforce them.
A few weeks ago Sebi shot off a letter to all fund houses asking them whether they were abiding with Amfi’s advice, and also what were their rates of commissions. We’ll keep you posted of developments on this front.
Spotlight on credit funds
Credit funds were in focus in 2015, but for the wrong reasons. Everybody knew the risks that came with credit funds, but few really understood the gravity till Amtek Auto Ltd blew up in the face of JP Morgan Asset Management Co. Ltd.
On 27 August, the net asset values (NAV) of two of JP Morgan AMC’s schemes sank sharply on the back of a downgrade in the credit rating of one of their underlying stocks—Amtek Auto. A day after that, the fund house restricted redemptions in these schemes to 1% of the corpus in each.
As per the fund’s August-end portfolio on its website, JP Morgan Short-Term Income Fund and JP Morgan Treasury Fund had 10.78% and 5.87% of their corpuses in Amtek Auto.
For the past few years, many fund houses have been aggressively selling credit funds that invested in low-rated scrips. According to Value Research, the assets under management of credit funds rose from about 46,500, crore in January 2014, all the way up to a little more than 89,000 crore in August 2015.
As per a Mint story in June earlier this year, while debt funds’ investments in AA+ rated securities went down, their investments in lower rated scrips carrying credit ratings like AA, AA-, A+, A and A-, went up considerably.
“This incident (JP Morgan AMC) has been a healthy reminder and a wake-up call for the industry as well as investors. Frankly, most MFs already have fairly robust systems in place and we will continue to strengthen them," said Leo Puri, managing director, UTI Asset Management Co. Ltd.
Puri also believes that in cases where fund houses make losses, the industry must desist from dipping into their sponsors’ balance sheets to make good the losses. “At the end of the day, there is risk in these products and that has to be managed; it’s our job to manage them well. There is no reason for the industry to perpetuate a system where sponsors have to make good the losses. This has been a misconception that both distributors and investors have had. The focus has to shift from reliance on balance sheets to quality of risk management within AMCs," he added.
But funds and investors mustn’t go overboard with the credit scenario, Puri cautioned. “The corporate bond market must be developed and strengthened. Fund houses and investors must not totally shun it. A healthy corporate bond market is an attractive investment opportunity and an asset class where the household must allocate its money," said Puri.
Pension money comes into MFs
Earlier this year, the labour ministry decided to invest 5-15% of Employees’ Provident Fund Organisation’s incremental corpus in exchange-traded funds (ETFs).
Eventually, it shortlisted two ETFs, SBI-ETF Nifty (SEN) and SBI Sensex ETF (SSE), and decided to invest 5% of its incremental corpus (a little over 8,000 crore) in them.
As a result of this inflow, the size of SEN went up to 1,199.61 crore in September 2015, from 305.69 crore a month earlier (it was just 10 crore as of end-July). SSE’s size went up to 376 crore in September 2015, from 83.21 crore a month earlier (at the end of July, its size was 4.39 crore).
“This was definitely a big event in 2015. When large institutional investors—especially like the government, as in this case—start investing in ETFs, it changes the perception of the lay investor about ETFs," said Sundeep Sikka, president and chief executive officer, Reliance Capital Asset Management Co. Ltd.
In October, the fund house acquired Goldman Sachs Asset Management (India) Ltd’s business. Goldman Sachs India AMC itself had acquired Benchmark Asset Management Co. Ltd (India’s first fund house that specialised in managing passive funds and the first to have launched ETFs in India) in 2011.
FMPs go down
When Budget 2014 (the first by the new central government) increased the threshold of claiming long-term capital gains tax in debt funds to three years, up from a year above, fixed maturity plans (FMPs) were bound to get hit.
According to figures provided by Value Research, the number of FMPs launched in 2015 were down to 145, which collected about 17,300 crore, down from 648 and 677 FMPs that were launched in 2014 and 2013, and which collected about 97,000 crore and about 1.06 trillion, in those respective years.
Mint Money take
It’ll be interesting to see if some of these key trends continue in 2016, and in what form, especially those related to revolving commissions and inflows from investors into equity funds.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
