As we get ready to see off 2014, let's see how the mutual fund industry changed during the year.
The industry, which saw flat growth in 2013, got a big boost in 2014 as equity markets zoomed following parliamentary elections in which Narendra Modi-led National Democratic Alliance (NDA) won a thumping majority. The victory of Modi, who is considered pro-business, triggered a bull run in equity markets.
This resulted in a sharp rise in inflows into equity schemes. The total asset under management (AUM) of the industry rose 25% from Rs 8.57 lakh in December 2013 to Rs 11.4 lakh crore in November 2014. The AUM of equity schemes rose 70% from Rs 1.89 lakh crore to Rs 3.22 lakh crore during the period.
This was a big relief for the industry, which since the ban on entry load in 2009 had been seeing slow AUM growth. Most industry players blamed the ban for this. However, the fact is that equity markets had not moved much since the 2008 financial crisis and so sluggishness in AUM growth was not unexpected.
Leo Puri, chairman, UTI Mutual Fund, the fifth-largest in terms of AUM, says the industry has adjusted to the entry load ban and slow growth in AUM after 2008 was largely due to poor market sentiment.
LAUNCH OF CLOSE-ENDED EQUITY FUNDS
As market sentiment improved, fund houses were quick to grab the opportunity and launched a number of close-ended equity funds with fixed tenure (mostly three years). Between January and November-end, 40 close-ended equity funds were launched, which collected Rs 7,459 crore.
The rationale, as fund houses would say, was huge short- and medium-term potential in the market. They said the close-ended feature helped fund managers take bets without worrying too much about redemptions.
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HIGH UPFRONT COMMISSIONS ARE BACK
There was another reason for launch of such a large number of close-ended equity funds. As a fund manager 'candidly' said, "We also have to think about our distributors". Close-ended equity funds offered high upfront commission, and that got distributors excited.
As equity markets rose, mutual funds needed to way to reward distributors, which they did in the form of high upfront commissions ranging from 4-6%. After the entry load ban, distributors used to make money only through trail commission, an annual commission paid to them till the investor remained invested. It ranges from 0.5-1.5%. In close-ended funds, the trail commission is paid upfront at the time of investing.
The practice of paying high upfront commission has came in for criticism within the industry as smaller fund houses are not able to pay so much to their distributors. Others said distributors were unfairly pitching close-ended schemes due to the high commissions they earn on them.
"While there is no problem in paying the trail commission upfront, the problem is that distributors may persuade clients to invest in close-ended funds even when open-ended funds may be better for them," says Kalpen Parekh, chief executive officer, IDFC Mutual Fund.
The Securities and Exchange Board of India (Sebi) has taken note of the practice and asked the mutual fund body - the Association of Mutual Funds in India (AMFI) - to look into it. Last heard, the issue was unresolved.
"There is no consensus on upfront commission and industry players have left it to Sebi to take a decision on it. Going by Sebi's earlier record, we think it will one day come out with a two-line circular banning all upfront commissions," says Nilesh Sathe, CEO, LIC Nomura Mutual Fund.
NET WORTH REQUIRED FOR MUTUAL FUNDS INCREASED
Sebi in February increased the minimum net worth for running a fund house from Rs 10 crore to Rs 50 crore.
The move, according to market players, was to ensure that only serious players remained in the market. "Given that the focus of the regulator and the industry is to increase the presence of funds beyond Tier-I cities, it is necessary to have fund houses with enough resources and, therefore, the increase was a right move," says Puri of UTI Mutual Fund.
However, smaller fund houses said the move was unfair.
BUDGET 'SHOCK' FOR DEBT FUNDS
The Union Budget reduced the tax arbitrage that debt funds enjoyed over bank fixed deposits. It increased the period for which one has to remain invested in debt funds for the capital gains to be considered as long-term from 12 months to 36 months.
This removed the advantage short-term debt funds had over bank fixed deposits. Debt funds account for 75% of the industry's AUM. Though most of the money parked in debt funds comes from companies, retail investors have also been hit as there are debt funds-such as fixed maturity plans and monthly income plans that have been designed specifically for retail customers.
RETIREMENT FUND SOP
The Budget extended tax benefits to mutual fund-linked pension plans. Now, investment in any pension plan launched by mutual funds will be eligible for income tax deduction under Section 80C. A fund house has to take approval from the Central Board Direct Tax (CBDT) before launching such a plan.
However, no such plans have been launched in the absence of proper CBDT guidelines. "Companies have lined up pension plans but unless the CBDT comes out with proper guidelines, no company can go ahead," says Sathe of LIC Nomura Mutual Fund.
The industry saw some smaller fund houses sell businesses to bigger players. HDFC Mutual Fund acquired Morgan Stanley's asset management business with AUM of Rs 3,920 crore in June this year.
Earlier, SBI Mutual Fund acquired Japan's Daiwa Asset management company and Birla Sun Life Mutual Fund bought ING Investment Managers.
In another exit of the year, PineBridge Mutual Fund is selling its assets to Kotak Mutual Fund. "The sale has got Sebi approval. The deal will go through soon," says Siddhart Singh, CEO, PineBridge Mutual Fund.
FULL COVERAGE:2014 Year In Review