Net inflows dwindled by Rs. 48,850 Cr in May 11; Equity shows a net inflow after a lull

The lull in Equity in the month of May 11 didn’t deter Mutual Fund investors from investing in Equity Mutual Funds which showed an inflow after a brief lull. The broader indices Sensex and Nifty 50 which nosedived by 3.30 per cent approximately affected the diversified Equity AUM too which lost 1.72 per cent to Rs. 1,67,470 crore in May 2011 vis-à-vis Rs. 1,70,406 crore in April 2011. However, there has been a net inflow of Rs. 1,546 crore in Equity category in May 2011, much to the reprieve of Mutual Fund Industry which has been witnessing outflows continuously except for few occasions since the ban of entry loads in Aug 2009. In debt and other categories, net outflows were reported. The recent regulation of RBI to cap the banks’ investment in Mutual Fund up to 10 per cent of total banks’ net worth as on Mar 31 has started affecting the Liquid/Money Market category which saw an outflow of Rs. 39,603 crore in May 2011. Moreover, the Income category also reported an outflow of Rs. 11,141 crore. As on May 20, 2011, the banks’ net investment in Mutual Funds stood at Rs. 106,233 crore. It is estimated that the total net worth of the banking system stands at Rs. 3.13 which essentially means that the current investment of Rs. 1.06 lakh crore will drop to Rs. 30,000 – 35,000 crore in next six months which may impact the net flows in Income/Liquid categories.

Net Outflows in May 2011

In totality, the MF Industry AUM dropped by Rs. 53,926 crore or 6.87 per cent to Rs. 7.31 lakh crore in May 2011 from Rs. 7.85 lakh crore in Apr 2011. The categories which saw major fall are Other ETFs (-25.09 per cent), Liquid/Money Market Instruments (-17.43 per cent), Income Funds (-3.39 per cent), ELSS (-2.86 per cent), Gilt (-2.37 per cent) and Equity (-1.72 per cent). However, Gold ETF and FOF Investing Overseas lapped the AUM with a gain of 13.81 per cent and 10.83 per cent respectively. The trends of gold price continue to head for a bull run which prompts investors to invest in Gold ETFs. The table below shows the comparative flows and AUM of all major categories of Mutual Fund industry.

FMPs still rule the inflows

Perhaps FMP (Close ended Income Fund) is the only category which has been showing continuous inflows. In May 2011, there were 37 NFOs which collected a total of Rs. 7,416 crore. The burgeoning interest rates and tight liquidity in the financial system seem to remain in place; moreover, it is more likely that RBI may go for additional policy rate hike in upcoming mid-quarter review as on June 16, 2011.

New Funds enter into industry

Apart from FMPs, there were four open ended Funds in Income, Equity and Gold ETF category. While ICICI Prudential MIP 5 collected a total AUM of Rs. 27 crore, Sundaram Equity Plus garnered Rs. 134 crore in their NFOs. First of its kind, HSBC Brazil Fund collected a total amount of Rs. 313 crore in May 2011.

Unique Investors

For the first time, AMFI declared the unique investors data which clearly shows that Equity investors rule the industry. There are a total of 3.77 crore unique investors out of which 2.43 crore (65 per cent) investors belong to Equity, 72.65 lakh (19 per cent) to ELSS, 30 lakh (8 per cent) to Income, 22.29 lakh (6 per cent) to Balanced and remaining to other categories. In Gold ETFs, there are 3.87 lakh unique investors.

Dematerialization of Mutual Fund Units – Simplifying the Investment Process

For quite few months, Mutual Funds in India have witnessed investors’ friendly regulatory changes, thanks to SEBI.  Right from the ban of entry loads in Aug 2009 to facilitating transactions in mutual funds schemes through the existing stock exchanges infrastructure in Nov 2009, SEBI now allowed mutual fund investments to be held in dematerialized form. It means that investors will have the option to convert their existing mutual fund investments into dematerialized form and buy/sell units through stock exchanges.

Background

With the removal of entry loads, SEBI intends to bring an advisory model where the intermediary charges a fee directly to the investors for providing advisory services to them. This reduced distribution incentive for distributors who found difficult to serve customers in far-flung areas or tier-3 & 4 cities. With this intent to provide mutual fund services to every nook and corner of India, SEBI decided to utilize the existing stock exchange infrastructure for mutual fund transactions.

Dematerialization of Mutual Fund Units

1.       Process

·        If you are an existing demat account holder, you can submit a Conversion Request Form (CRF) from your DP and submit the fully filled CRF form along with the Statement of Account to your DP. After due verification, the DPs will co-ordinate with the Asset Management Companies (AMC) and their Registrar and Transfer Agents which in turn after due verification
will credit the mutual fund units to your demat account.

·        If you are not a demat account holder, you will require to open a demat account with a DP before you can convert existing mutual fund units in demat form.

2.       Subscription of Units

Investors can subscribe to Mutual Fund units through their Stock Broker using the Stock Exchange platform. Upon subscription, the AMC/RTA will credit the mutual fund units to your demat account.

3.       Redemption of Units

Investors can redeem their dematerialized mutual fund units through two different modes. They can submit Redemption Request Form which in turn will send to the AMC/RTA after due
verification. The AMC/RTA will verify the form and credit the maturity proceeds in the bank account available in the depository system.

Why should you convert Mutual Funds into demat form?

1.      Consolidation – Even you are holding mutual funds investments with a number of AMCs, say 10 or 20, you can view all the transactions in a single statement instead of managing and collection statement of accounts from all AMCs.

2.      Easy Monitoring – Once you have your holdings at one place, you will be able to monitor them effectively and can also analyze its performance in one go.

3.      Fast transactions – Having all Mutual Fund units in a demat account can allow you to buy/sell the units without any inconvenience. It can be done either through a phone call or an online instruction unlike in physical units where you need to sign the repurchase form with each
AMCs and submit it in their point of presence (PoPs).

Drawbacks

The holding of MF units in demat account will necessarily lead an additional cost, a cost charged by stock broker on maintaining the demat account along with transaction charges. Currently, all brokers are offering transactions on MF units at free of cost which they might abandon once the volume picks up.

The impact will be minimal for those who already have a demat account with DPs. The potential of dematerialization of mutual fund units nullifies the cost associated with the demat account. Once powered with the demat units, the convenience and ease of transactions will definitely overrule the process of managing transactions with different AMCs. It provides a single platform to transact across multiple fund houses and their associated schemes. This is one of simplified steps which will help in simplifying investors’ financial life. Moreover, dematerialization of mutual fund units will improve the documentation process.