Inflows in Equity plummet in July 11; Industry AUM levitates

Indian Mutual Fund industry continues to be tumultuous with no good signs on net inflows in equity. Although the industry assets have grown by 8.17 per cent to Rs. 7.28 lakh crore, a net addition of Rs. 55,011 crore mainly contributed by the new inflows in Liquid/Money Market and Income Funds, the inflows in equity continue to show the muted performance after two quarters of positive inflows. Investors redeemed investment worth Rs. 729 crore in July 2011 in comparison to net buying of Rs. 20 crore and Rs. 1,546 crore in the months of June and May 2011. Net outflow for the year to date in Equity is Rs. 239 crore.

The bleak investment scenario in India and global headwinds especially US Political circle at loggerheads over the increase in debt ceiling and Euro’s issue of default scathed through the globe. Meanwhile the absence of spark and direction in Equity also forced the investors to shift to alternate products including fixed income funds. Investors preferred investing in accrual products as shown by Income Fund category which saw an inflow of Rs. 15,429 crore with a good chunk of money (about Rs. 5,080 crore) moving into FMPs. Also, the Liquid/Money Market category saw a net inflow of Rs. 35,699 crore as banks put back investments into it. In an earlier circular, the RBI had asked to trim the investments in Mutual Funds up to 10 per cent of their net worth as on Mar 31, 2011 by Oct 2011 which it further extended it to Mar 31, 2012. The banks’ total net worth is estimated as Rs. 3.5 lakh crore; it is expected that funds would flow out of Mutual Funds by Rs. 40,000 – Rs. 50,000 crore from the current level of Rs. 74,749 crore in July 2011.

Net Outflows in June 2011

In totality, the net inflows to the Mutual Fund industry are estimated at Rs. 51,010 crore. Interestingly, all categories saw net inflows except Gilt which lost Rs. 85 crore followed by Equity and ELSS which lost by Rs. 729 crore and Rs. 140 crore respectively.  For the year till date in 2011, the net inflow is Rs. 1,24,049 crore; in same period in the previous year, the net inflow had been at Rs. 35,201 crore.

On the positive side, the categories which saw net inflows are Balanced (Rs. 77 crore), Gold ETFs (Rs. 234 crore), Other ETFs (Rs. 384 crore) and FoF Investing Abroad (Rs. 141 crore).

Gold ETF continues to see inflow and increase in AUM too. In last 27 months, it did not see any outflow except at one occasion when it saw a marginal outflow of Rs. 6 crore. In totality, it saw a total inflow of Rs. 4,234 crore in last 27 months. In June 2011, it saw a total inflow of Rs. 234 crore; also its net assets increased to Rs. 6,119 crore in July 2011 from Rs. 5,568 crore in June 2011.  The subdued equity performance and weak dollar globally has prompted investors to invest in Gold which provides hedge against inflation.

FMPs still rule the inflows; Equity NFOs dried

We continue seeing new FMPs in the street. A total of 43 FMPs has been launched collecting a total AUM of Rs. 5,080 crore. Birla Sunlife Mutual Fund launched Birla Sunlife Nifty ETF which collected a total amount of Rs. 12 crore. Around ten fund houses launched FMPs in tenures ranging from 3 months to 2 years.

- Happy Investing!

- Amar Ranu                                                                                                                                      Source: MOSL

New Mutual Fund regulations to benefit investors

The Mutual Fund Industry has a happy ending in 2009 with assets growing to a fabulous high. The industry also saw some investors’ friendly regulations turning to be unfriendly for distributors and IFAs. Starting from No-Load scenario post Aug 01, 2009 to host of other regulations, SEBI threw another set of regulations to all fund houses in the month of March 2010 signaling another round of reforms in world’s fastest growing Mutual Fund industry.

 

Reduction of NFO’s Period

Starting with the list, SEBI reduced the New Fund Offers (NFOs) duration to a maximum of 15 days from 30 days for open-ended funds and 45 days for close-ended funds. On completion of NFO period, the units’ allocation and dispatch of Statement of Accounts (SoAs) are required to be done within five business days after the closure of NFO period. The rule also says that Mutual Funds shall make investments out of NFO proceeds only on or after the closure of the NFO period. The new rule is effective from July 01, 2010.

 

Introduction of ASBA for MF Investors

SEBI introduced ASBA or Applications Supported by Blocked Amount in July 2008 for all equity investors investing in IPOs or Right Issues to make effective use of money put into it. Under this, the application money you put for subscribing to IPOs/Right Issues does not leave your bank account unless the allotment is done. So, there is no need for refund of money, thus, reducing the operational issues and you also earn interest even on blocked amount. Now, this facility is extended to Mutual Fund investors putting money in NFOs. Nevertheless ASBA means little for investors as most investors put money only on the last day of NFO period. Moreover, SEBI has mandated that the fund house has to allot units five days after the closing of NFOs.

 

Dividend distribution from realized profits

SEBI also mandated that the dividends to be paid to investors have to be out of realized profits only. Currently, some Mutual Fund houses pay dividends from their Unit Premium Reserve instead of booked profits. E.g. A fund XYZ has an initial NAV of Rs. 10. The amount Rs. 10 goes to an account called as Unit Capital or Face Value. Let us say the NAV grows to Rs. 15. The appreciation amount of Rs. 5 goes into a separate account called as Unit Premium Reserve (UPR). This ruling might affect many fund houses which used to declare dividends as a marketing gimmick to attract inflows. After this ruling, many fund houses have cancelled the dividends declared.

 

FoFs commission to decline

In case of FoFs, AMCs have been entering into revenue sharing agreements with offshore funds in respect of investments made. Typically they get around 50-100 bps from Offshore Funds along with 75 bps which they charge from investors. Out of 75 bps, they used to take care of marketing expense and other expenses. The Fund Houses used to pocket the sharing revenue (50-100 bps) from Offshore or Local Funds where they have invested. Post this ruling, an FoF may not be a profitable avenue for Mutual Funds in India.

 

Adherence to Corporate Governance

Since Mutual Funds invest in companies on behalf of investors, SEBI wants them to be more participating in company affairs and voice their opinions. SEBI has mandated that Mutual Funds must disclose participation in company’ annual or other affairs such as exercising voting rights in mergers, AGMs, changes to capital structure, appointment or removal of Directors, stock option plans and other management compensation issues and many more in their website and Annual Reports.

Following Satyam scam, SEBI wanted the companies to be more accountable for their acts and business rules and Mutual Funds which represent a group of investors will be the best fitted for this role.

 

Conclusion

 Time to time, SEBI comes out with different regulations which ultimately helps retail investors. Thanks to our robust financial system which surpassed the economic crisis of 2008 post Lehman collapse, SEBI wants to ensure that India remains decoupled with financial breakdown which galloped major big names. Moreover, SEBI wants to make MF and its fund managers more transparent and accountable for investors’ money. However, the challenges lie ahead how the fund houses implement these changes. Happy Investing!