Surge of mutual fund inflows in 2017, but will the party last in 2018?

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This is the year in which mutual funds found their place on the shelf of retail financial products in India. Hidden behind bank deposits, Public Provident Fund (PPF), insurance plans and gold, mutual fund products were not known or understood by most households. The year 2017 changed that forever. Ten years of regulatory work on making the product hard to mis-sell (it still happens but the menace is much less), a massive investor outreach by mutual funds to educate, the ‘Mutual Funds Sahi Hai’ campaign and the good work done by independent financial advisers (IFAs) over the years all came together and resulted in the systematic investment plan book swelling to a fat pipeline of Rs5,000 crore a month and the assets under management (AUM) of the industry hitting Rs21 trillion, which is now just one-third of bank deposits (Rs65 trillion) and not that far from the Rs31 trillion life insurance industry.

A rising market gave first-time investors a good equity experience, and old investors who had held on despite poor returns, were rewarded as the S&P BSE Sensex returned 27% in 2017 (as on 20 December) as opposed to just 2% last year and a loss of 5% in 2015.

Other than the coming of age, there was plenty of other action in the mutual fund industry in 2017. India’s first fund house got listed, the regulator took steps to make the industry better organized and understood, and instant access to money in mutual funds became a reality.

Here is a look at some of the biggest trends of the Indian mutual fund industry in 2017.

Standardized but ‘true to label’ categories

The big bang announcement of 2017 in the mutual funds industry took place in October when the capital market regulator, Securities and Exchange Board of India (Sebi), standardized the scheme categories and also defined what the schemes in those categories would do. Sebi defined a total of 36 categories. Additionally, it said that all fund houses shall be allowed to launch just one scheme per category.

Definitions of what constitutes a ‘large-cap’ (1st-100th company in terms of market capitalisation), ‘mid-cap’ (101st to 250th) and a ‘small-cap’ (251st company onwards) scrip were also laid down to ensure that two large-cap funds or two mid-cap funds don’t look drastically different because of different definitions. “Good move,” said Sundeep Sikka, chief executive officer, Reliance Nippon Life Asset Management Co. Ltd, adding, “there were too many categories and some were created just for the sake of launching new schemes.”

But many like Leo Puri, managing director, UTI Asset Management Co. Ltd, felt that Sebi ought to have been stricter. Puri said that the circular ought to have specified that fund houses cannot brand their funds using names such as ‘Prudence’ and ‘Opportunities Fund’, as these names tend to glorify the products.

In December, the market regulator relaxed the rules for medium duration funds (MDF) and medium to long duration funds (MLDF); and allowed these two categories to break the boundaries of the sort of securities they’d be otherwise mandated to remain invested in, to now investing in shorter-tenured assets. “Allowing the funds to use brand names that could mean several things could end up confusing investors. Only generic labelling should be allowed to keep things simple as the mutual funds industry can be very creative,” said Puri. “As far as relaxing ‘duration’ of the portfolio is concerned (in two categories), it has diluted matters,” he added.

Instant money

One of the big reasons why many of us opt for mutual funds is easy liquidity, apart from the potential of earning superior and tax-efficient returns. While you can redeem equities within 3 days, you can encash liquid funds within a day. But what if you want your money instantly?

Late last year, fund houses like Reliance Nippon Life Asset Management and DSP BlackRock Investment Managers Ltd started offering instant redemption facilities in some of their schemes.

In May 2017, Sebi formally allowed fund houses to offer the same. Additionally, it also laid down broad guidelines as to how fund houses should offer it. First, it said that only liquid funds can offer this facility. Earlier, many fund houses had offered this facility for ultra short-term bond funds too.

Second, it limited the daily withdrawal through this facility to Rs50,000. Earlier, this limit was Rs2 lakh a day.

Amol Joshi, founder, PlanRupee Investment Services, said he suggests this instant redemption facility to many clients who are frequent travellers. “Some of my clients are pilots. They may need money at very short notice. A lot of such clients have found this facility useful,” he said. “One of my clients once needed money urgently on a late Friday evening. The weekend was upon us and the following Monday was a bank holiday. He would have had to wait till Wednesday (5 days) to get the money. Luckily, we remembered that he had money lying in his liquid fund and we could get the money over the weekend,” said Anup Bhaiya, managing director and chief executive officer, Money Honey Financial Services Pvt. Ltd.

Mutual fund IPOs

You know of mutual funds as unitholders. Now, know them as shareholders. Reliance Nippon Life Asset Management, India’s third-largest fund house, went to the market on 25 October. It was the first fund house to do so. The Rs1,542-crore initial public offer (IPO) comprised of fresh issue of shares worth Rs617 crore and offer for sale. Markets reacted positively, as it was subscribed 81.45 times on the last day of the IPO. Sikka said that after the insurance companies started getting listed, starting 2016, it was now the mutual funds industry’s turn.

In 2016, ICICI Prudential Life Insurance became the country’s first insurance company to get listed on the stock exchange after its Rs6,000 crore public issue. Six insurance companies, so far, have got listed with two more insurance companies having just completed their IPO process and are expected to list soon.

In 2018, HDFC Asset Management Co. Ltd, India’s second-largest mutual fund, is expected to get listed. But Sikka says that not many fund houses would get listed, as to be able to attract shareholders a listed entity—including mutual funds—should be profitable and should demonstrate a sustained profitable growth. “Earlier, the mergers and acquisitions in the mutual funds industry used to be driven by assets under management. But now, the industry has started to focus more on profits. And since many mid- and small-sized fund houses aren’t profitable, listing is an option for only a few fund houses,” he added.

Reliance Nippon Life Asset Management’s share price closed at Rs270 as on 20 December.

Disinvestment continued through ETFs

The Government of India continued to disinvest its stakes in state-owned companies. It started the year with a follow-on offer of Central Public Sector Enterprises (CPSE) exchange-traded fund (ETF) of Rs6,000 crore and another follow-on offer worth Rs2,500 crore in March.

In November, the government disinvested its stake in another set of 22 companies that formed part of a new index, called the S&P BSE Bharat 22, created for the same purpose. ICICI Prudential Asset Management Co. Ltd got the mandate to manage this ETF, whereas Reliance Nippon Life Asset Management continues to manage the CPSE ETF. Although Bharat 22 ETF (B22) collected Rs31,817 crore, the government chose to retain Rs14,500 crore, making it India’s largest ever new fund offer collection.

That’s a good response by any measure but many planners advise caution. Deepak Chhabria, chief executive officer and director, Axiom Financial Services Ltd, a Bengaluru-based distributor of financial products, said, “Investors who are savvy and know when to enter and exit markets, can invest in these ETFs. Retail or first-time investors should stay away. That is because the underlying stocks remain the same in an ETF, even if the markets fall. So the onus of entering and exiting lies with the investor. This is unlike in a diversified equity fund, where if the fund manager doesn’t like a stock, he can sell it and buy something else.”