Mutual Funds
Content
Mutual Funds
Key Highlights • During FY05 to FY12, the Indian mutual fund industry grew at a CAGR of more than 20% in terms of assets under management (AUM). • During FY11 and FY12, household’s gross financial assets held in the form of mutual funds noted a negative y-o-y change by 1.2% and 1.1% respectively. • During 2012, retail investors favored debt oriented schemes over equity, as revealed by ~2% y-o-y increase in its contribution as on Sep 2012 and decrease in investments in equity oriented funds by 2% y-o-y during the same period. • The demand for gold ETFs in India has been growing at a robust CAGR of ~137% during FY09 to FY12. • The number of retail folios in gold ETFs increased from 63,422 in FY09 to 4,59,996 in FY12. • The total number of MF folios stood at around 46.5 mn as on Mar 2012 as compared to 47.2 mn as on Mar 2011, revealing a loss of around 0.8 mn folios during FY12. • As on Dec 2012, the top five metros - Mumbai, Delhi, Bangalore, Kolkata and Chennai together accounted for more than 70% share of the industry’s AUM.
Introduction Over the years, the Indian mutual fund industry has evolved from a single player market in 1963, with the formation of Unit Trust of India (UTI), to a highly competitive market comprising domestic and foreign players, supported by favorable regulatory reforms. The mutual fund industry in India has grown at a significant pace, registering CAGR of more than 20% in terms of assets under management (AUM) between FY05 to FY12. This growth is driven by several factors such as rising income levels, favorable demographics structure, low penetration levels, favorable policies, increasing investor awareness and booming economy among others. Uncertain economic outlook and profit-booking by investors led to decline in industry’s AUM The mutual fund industry’s performance is largely dependent on the macroeconomic environment. When the Indian economy was growing at an average of 9% during FY05 to FY08, the mutual fund industry registered an average growth of 50% in terms of AUM during the same period. In FY08, the industry’s AUM stood at Rs. 5,051.5 bn compared with Rs. 1,495.5 bn of FY05. However, after witnessing several years of persistent growth, the industry recorded ~17% fall in AUM during FY09 to Rs. 4,173.0 bn, led by the impact of the global financial crisis when Indian economic growth moderated to 6.7%. With the sings of economic recovery, the AUM grew by around 47% y-o-y in FY10 to Rs. 6,139.8 bn. However, the industry is again witnessing a negative growth since FY11 due to the recurrence of fresh global economic and European sovereign debt concerns, affecting investor sentiments. This led to fall in AUM by 3.5% y-o-y to Rs. 5,922.5 bn in FY11 and a 0.8% y-o-y fall during FY12 to Rs. 5872.2 bn. Thus, led by the macro-economic factors, MF investors preferred to book profits and exit from the schemes during FY11 and FY12. The chart below highlights the five-year trend in industry’s AUM and number of schemes:AUM and Number of Schemes
L
Source: RBI
It can be seen from the above chart that, although the AUM of the MF industry has fallen from Rs. 6,139.8 bn in FY10 to Rs. 5,872.2 bn in FY12, the number of schemes has increased from 882 to 1,309 during the same period. The decline in AUM can be attributed due to net redemptions seen by the industry during this period and increase in number of schemes could be accredited to the launch of new schemes to attract investors. Weak equity market led to decline of mutual funds share of household savings Majority of the Indian households invest ~50% of their savings in bank deposits, followed by insurance (~20%) and pension funds (~15%). Rest (~15%) is shared by various market-linked instruments like shares, debentures, mutual funds and others. One of the major challenges in channelizing their household savings to mutual funds is the lack of awareness about such financial products. The chart below highlights the trend in household’s gross financial savings during FY10 to FY12:% Change in household’s gross financial assets in India
Source: RBI Note: R* - Revised Estimates, P^ - Preliminary Estimates
The above chart reveals a declining trend in the change in household’s gross financial assets held in the form of mutual funds during FY11 and FY12 by 1.2% and 1.1% respectively. This was largely due to the impact of uncertain economic situation, volatile equity market, slowdown in job market and slower income growth. Furthermore, the prevailing high inflation alongwith higher interest rates, led to household’s investing more in fixed deposits, insurance, and pension funds as reflected by its change in share in gross financial assets from 41.3%, 22.3% and 14% in FY11 to 48.5%, 23.1% and 15.6% respectively in FY12. Debt funds preferred during increased volatility in equity markets During 2012, retail investors invested more in debt oriented schemes, as reflected by ~2% increase in its contribution y-o-y as on Sep 2012, and reduced their investments in equity funds, as revealed from the 2% fall y-o-y in contribution during the same period. In total debt oriented schemes, retail investors accounted for ~7% in terms of AUM as on Sep 2012, up from 6.5% as on Sep 2011 and 5.4% as on Sep 2010.
LI
Investor and Product Mix as per AUM
Source: AMFI
This was largely due to a volatile market and bleak economic outlook. Further, the RBI increased repo and reverse repo rates 13 times from 4.75% and 3.25% in April 2009 to 8.5% and 7.5% respectively in Oct 2011. This also pushed retail investors towards debt oriented schemes as they preferred to invest in fixed maturity plan (FMP) funds. Demand for gold ETFs is rapidly rising, driven by retail investors Traditionally, Indian investors have favored investing in the physical form of gold. As the awareness about the benefits of ETFs such as convenience, purity, and safety has been increasing, this asset class is rapidly drawing investor attention. The demand for gold ETFs in India has been growing at a robust ~137% CAGR during FY09 to FY12. After the global financial crisis in FY09, the global economy was on a gradual recovery path. However, fresh concerns emanating from the eurozone sovereign debt crisis, domestic high inflation-interest rate regime, rupee depreciation and delays in policy reforms dented investor sentiments. As a result, the Indian equity market declined in FY12. On a point-to-point basis, the Sensex noted a 10.5% decline in FY12 compared with the 10.9% growth during FY11 and a whopping 80.5% growth achieved in FY10. The chart below highlights the Sensex movement during FY07 to FY12:BSE Sensex index movement trend: FY07 to FY12
Source: BSE
As investors shied away from equities due to its lackluster performance, they turned towards gold as a safer bet. Coupled with other factors, gold prices reported a surge of more than 30% y-o-y in FY12. The chart below highlights the trend in standard gold price movement since FY06 to FY12:-
LII
Gold Price Trend
Source: Business Beacon
As illustrated above, in an environment of weak equity markets and uncertain economic situation, the demand for gold increased. In line with this investor’s interest in gold ETFs has increased. Retail investors are emerging to be primary drivers, registering a huge 146% CAGR between FY09 to FY12 in terms of AUM. The number of retail folios in gold ETFs increased from 63,422 in FY09 to 4,59,996 in FY12. This is closely followed by corporate investors, recording ~145% CAGR during the same period. The chart below depicts the trend in gold ETFs AUM from FY09 to FY12:Gold AUM Trend
Sourec: AMFI
During FY12, gold ETFs reported a ~125% growth y-o-y to Rs. 98.9 bn. The overall gold ETFs AUM has further increased to Rs. 112 bn as on Sep 2012, registering more than 120% CAGR since Sep 2009. As per a recent proposal, SEBI plans to link gold ETFs with gold deposit schemes. This move is expected to curb gold imports and channelize investment of retail investors from physical gold to gold-linked instruments such as ETFs. As per the proposal, AMCs may be allowed to park up to 20% of their gold holdings in gold ETFs schemes with commercial banks. Under this scheme, banks will loan the gold collected from ETFs to retail jewelers and will pass on the share in returns earned from lending to ETFs, who in turn, will share the earnings with their unit holders.
LIII
Mutual fund investors on a redemption spree As on Mar 2012, the total number of MF folios stood at around 46.5 mn compared with 47.2 mn as on Mar 2011, losing approximately 0.8 mn folios during FY12, led by weak economic outlook. Out of the total number of folios, nearly 80% stood for equity oriented schemes. The number of equity oriented folios stood at around 37.6 mn as on Mar 2012 compared with 39.3 mn as on Mar 2011, revealing a loss of 1.6 mn folios valued (in terms of AUM) at Rs. 151.6 bn during this period. This is predominantly led by loss in retail equity oriented folios, as retail investors dominated the share in equity oriented folios. Even corporate equity oriented portfolios noted a fall during FY12 by 17,390 folios due to tight systemic liquidity. Several retail investors closed their systemic investment plans (SIP) during FY12 due to a bleak market outlook. Retail investors also avoided renewing their matured SIPs or entering into fresh schemes. Conversely, as highlighted above, they preferred to invest their money in high-yielding debt instruments especially, FMPs, short-term funds, and monthly income plans. Increasing role of public sector in distribution of MF products Until now, banks played a limited role in the distribution of mutual fund products, however, gradually, they are enhancing their focus on distribution of such products to boost their fee income and move up the value chain. As banks, especially nationalised banks, have a large customer base, it offers a significant opportunity to AMCs to tap their huge customers base beyond the top 15 major cities. Further, along with the banks, AMCs are also leveraging the extensive reach of the Indian postal services. India post, with a very large customer base and branches spread across urban and rural India, acts as a ready network for mutual fund distribution. Currently however, it is not fully utilized, and it sells MF products through a little over 200 designated post offices. The postal department has kept one AMFI qualified personnel at each of the designated post offices to sell MF products. However, the staff needs to be well qualified and trained in order to sell MF products to avoid mis-selling. Thus, as per SEBI’s recent regulation, it is compulsory for MF sellers or advisors to clear the National Institute of Securities Markets (NISM) fund advisors’ module certificate test. Along with this, they are also required to register themselves with AMFI. Launch of direct investment plans to benefit investors In Sep 2012, SEBI came out with guidelines to offer direct investment plan (DIP) option to investors, effective Jan 2013. The purpose of the regulation is to offer an option to the informed investors to plan their investments on their own. Following the guidelines, AMCs have launched DIPs. Under this plan, investors can invest directly by either submitting the requisite documents personally at the AMC’s office or through the AMCs online platform or through various service centers. This is expected to offer cost benefits to the investors, as they can avoid the advisory fees. Especially, for institutional investors such as banks, financial institutions and FIIs, who have huge investments in such products, the benefits are estimated to be higher compared with retail investors. Consolidation activity picks up Consolidation activity is picking up within the Indian mutual fund industry. Some domestic private asset management companies (AMCs) are selling out stakes to foreign owned companies and some players are undergoing other forms of M&A. For instance, some of the major M&A transactions that took place during 2012 are as under:• In November 2012, L&T Mutual Fund bought out Fidelity’s Indian mutual fund business. • In Sep 2012, Religare Asset Management Company (RAMC) Ltd, an arm of Religare Enterprises Ltd announced its 49% stake sale to one of the leading investment management firm in the US, Invesco Ltd. • In April 2012, Axis AMC, the business arm of Axis Bank Ltd sold its 25% stake to UK’s Schroders Singapore Holdings Pvt Ltd, a wholly owned subsidiary of Schroders plc. • In Jan 2012, Japan’s Nippon Life Insurance company bought a 26% stake in Reliance Capital Asset Management.
LIV
Indian mutual fund industry has vast growth potential As depicted in the chart below, although the increase in ratio of India’s mutual fund (MF) industry’s AUM to GDP has been considerable from 5% in FY05 to 11.3% in FY12, it is still very low compared with other developed nations share such as US, at over 75% (as on 2011). This low penetration levels implies huge growth opportunities.
Mutual fund penetration in India
Source: AMFI, MOSPI
Furthermore, presently the concentration of AMCs is limited to few major cities. They have shown a limited focus in tapping towns beyond the top 15 cities. The AUM from these top 15 cities accounted for more than 85% as on both Dec 2012 and Dec 2011. The chart below exhibits geography-wise distribution of AUM as on Dec 2012:AUM by Geography: As on Dec 2012
Sourec: AMFI
Out of the top 15 cities, Mumbai, Delhi, Bangalore, Kolkata, and Chennai, the top 5 metros, together accounted for more than 70% share during the same period. Even within the top 5 metros, Mumbai alone accounted for nearly 43% share. This is primarily due to limited distribution channels and limited investor awareness beyond these cities. This also underlines the huge untapped market opportunity from the rural India, beyond these major cities. With an aim to expand the reach of MFs to tap beyond the urban landscape of the 15 major cities, in 2012, SEBI allowed MFs to charge a higher expense ratio (as a percentage of AUM). This ruling is expected to boost the AMCs interest in widening their reach.
LV
Key Highlights • During FY05 to FY12, the Indian mutual fund industry grew at a CAGR of more than 20% in terms of assets under management (AUM). • During FY11 and FY12, household’s gross financial assets held in the form of mutual funds noted a negative y-o-y change by 1.2% and 1.1% respectively. • During 2012, retail investors favored debt oriented schemes over equity, as revealed by ~2% y-o-y increase in its contribution as on Sep 2012 and decrease in investments in equity oriented funds by 2% y-o-y during the same period. • The demand for gold ETFs in India has been growing at a robust CAGR of ~137% during FY09 to FY12. • The number of retail folios in gold ETFs increased from 63,422 in FY09 to 4,59,996 in FY12. • The total number of MF folios stood at around 46.5 mn as on Mar 2012 as compared to 47.2 mn as on Mar 2011, revealing a loss of around 0.8 mn folios during FY12. • As on Dec 2012, the top five metros - Mumbai, Delhi, Bangalore, Kolkata and Chennai together accounted for more than 70% share of the industry’s AUM.
Introduction Over the years, the Indian mutual fund industry has evolved from a single player market in 1963, with the formation of Unit Trust of India (UTI), to a highly competitive market comprising domestic and foreign players, supported by favorable regulatory reforms. The mutual fund industry in India has grown at a significant pace, registering CAGR of more than 20% in terms of assets under management (AUM) between FY05 to FY12. This growth is driven by several factors such as rising income levels, favorable demographics structure, low penetration levels, favorable policies, increasing investor awareness and booming economy among others. Uncertain economic outlook and profit-booking by investors led to decline in industry’s AUM The mutual fund industry’s performance is largely dependent on the macroeconomic environment. When the Indian economy was growing at an average of 9% during FY05 to FY08, the mutual fund industry registered an average growth of 50% in terms of AUM during the same period. In FY08, the industry’s AUM stood at Rs. 5,051.5 bn compared with Rs. 1,495.5 bn of FY05. However, after witnessing several years of persistent growth, the industry recorded ~17% fall in AUM during FY09 to Rs. 4,173.0 bn, led by the impact of the global financial crisis when Indian economic growth moderated to 6.7%. With the sings of economic recovery, the AUM grew by around 47% y-o-y in FY10 to Rs. 6,139.8 bn. However, the industry is again witnessing a negative growth since FY11 due to the recurrence of fresh global economic and European sovereign debt concerns, affecting investor sentiments. This led to fall in AUM by 3.5% y-o-y to Rs. 5,922.5 bn in FY11 and a 0.8% y-o-y fall during FY12 to Rs. 5872.2 bn. Thus, led by the macro-economic factors, MF investors preferred to book profits and exit from the schemes during FY11 and FY12. The chart below highlights the five-year trend in industry’s AUM and number of schemes:AUM and Number of Schemes
L
Source: RBI
It can be seen from the above chart that, although the AUM of the MF industry has fallen from Rs. 6,139.8 bn in FY10 to Rs. 5,872.2 bn in FY12, the number of schemes has increased from 882 to 1,309 during the same period. The decline in AUM can be attributed due to net redemptions seen by the industry during this period and increase in number of schemes could be accredited to the launch of new schemes to attract investors. Weak equity market led to decline of mutual funds share of household savings Majority of the Indian households invest ~50% of their savings in bank deposits, followed by insurance (~20%) and pension funds (~15%). Rest (~15%) is shared by various market-linked instruments like shares, debentures, mutual funds and others. One of the major challenges in channelizing their household savings to mutual funds is the lack of awareness about such financial products. The chart below highlights the trend in household’s gross financial savings during FY10 to FY12:% Change in household’s gross financial assets in India
Source: RBI Note: R* - Revised Estimates, P^ - Preliminary Estimates
The above chart reveals a declining trend in the change in household’s gross financial assets held in the form of mutual funds during FY11 and FY12 by 1.2% and 1.1% respectively. This was largely due to the impact of uncertain economic situation, volatile equity market, slowdown in job market and slower income growth. Furthermore, the prevailing high inflation alongwith higher interest rates, led to household’s investing more in fixed deposits, insurance, and pension funds as reflected by its change in share in gross financial assets from 41.3%, 22.3% and 14% in FY11 to 48.5%, 23.1% and 15.6% respectively in FY12. Debt funds preferred during increased volatility in equity markets During 2012, retail investors invested more in debt oriented schemes, as reflected by ~2% increase in its contribution y-o-y as on Sep 2012, and reduced their investments in equity funds, as revealed from the 2% fall y-o-y in contribution during the same period. In total debt oriented schemes, retail investors accounted for ~7% in terms of AUM as on Sep 2012, up from 6.5% as on Sep 2011 and 5.4% as on Sep 2010.
LI
Investor and Product Mix as per AUM
Source: AMFI
This was largely due to a volatile market and bleak economic outlook. Further, the RBI increased repo and reverse repo rates 13 times from 4.75% and 3.25% in April 2009 to 8.5% and 7.5% respectively in Oct 2011. This also pushed retail investors towards debt oriented schemes as they preferred to invest in fixed maturity plan (FMP) funds. Demand for gold ETFs is rapidly rising, driven by retail investors Traditionally, Indian investors have favored investing in the physical form of gold. As the awareness about the benefits of ETFs such as convenience, purity, and safety has been increasing, this asset class is rapidly drawing investor attention. The demand for gold ETFs in India has been growing at a robust ~137% CAGR during FY09 to FY12. After the global financial crisis in FY09, the global economy was on a gradual recovery path. However, fresh concerns emanating from the eurozone sovereign debt crisis, domestic high inflation-interest rate regime, rupee depreciation and delays in policy reforms dented investor sentiments. As a result, the Indian equity market declined in FY12. On a point-to-point basis, the Sensex noted a 10.5% decline in FY12 compared with the 10.9% growth during FY11 and a whopping 80.5% growth achieved in FY10. The chart below highlights the Sensex movement during FY07 to FY12:BSE Sensex index movement trend: FY07 to FY12
Source: BSE
As investors shied away from equities due to its lackluster performance, they turned towards gold as a safer bet. Coupled with other factors, gold prices reported a surge of more than 30% y-o-y in FY12. The chart below highlights the trend in standard gold price movement since FY06 to FY12:-
LII
Gold Price Trend
Source: Business Beacon
As illustrated above, in an environment of weak equity markets and uncertain economic situation, the demand for gold increased. In line with this investor’s interest in gold ETFs has increased. Retail investors are emerging to be primary drivers, registering a huge 146% CAGR between FY09 to FY12 in terms of AUM. The number of retail folios in gold ETFs increased from 63,422 in FY09 to 4,59,996 in FY12. This is closely followed by corporate investors, recording ~145% CAGR during the same period. The chart below depicts the trend in gold ETFs AUM from FY09 to FY12:Gold AUM Trend
Sourec: AMFI
During FY12, gold ETFs reported a ~125% growth y-o-y to Rs. 98.9 bn. The overall gold ETFs AUM has further increased to Rs. 112 bn as on Sep 2012, registering more than 120% CAGR since Sep 2009. As per a recent proposal, SEBI plans to link gold ETFs with gold deposit schemes. This move is expected to curb gold imports and channelize investment of retail investors from physical gold to gold-linked instruments such as ETFs. As per the proposal, AMCs may be allowed to park up to 20% of their gold holdings in gold ETFs schemes with commercial banks. Under this scheme, banks will loan the gold collected from ETFs to retail jewelers and will pass on the share in returns earned from lending to ETFs, who in turn, will share the earnings with their unit holders.
LIII
Mutual fund investors on a redemption spree As on Mar 2012, the total number of MF folios stood at around 46.5 mn compared with 47.2 mn as on Mar 2011, losing approximately 0.8 mn folios during FY12, led by weak economic outlook. Out of the total number of folios, nearly 80% stood for equity oriented schemes. The number of equity oriented folios stood at around 37.6 mn as on Mar 2012 compared with 39.3 mn as on Mar 2011, revealing a loss of 1.6 mn folios valued (in terms of AUM) at Rs. 151.6 bn during this period. This is predominantly led by loss in retail equity oriented folios, as retail investors dominated the share in equity oriented folios. Even corporate equity oriented portfolios noted a fall during FY12 by 17,390 folios due to tight systemic liquidity. Several retail investors closed their systemic investment plans (SIP) during FY12 due to a bleak market outlook. Retail investors also avoided renewing their matured SIPs or entering into fresh schemes. Conversely, as highlighted above, they preferred to invest their money in high-yielding debt instruments especially, FMPs, short-term funds, and monthly income plans. Increasing role of public sector in distribution of MF products Until now, banks played a limited role in the distribution of mutual fund products, however, gradually, they are enhancing their focus on distribution of such products to boost their fee income and move up the value chain. As banks, especially nationalised banks, have a large customer base, it offers a significant opportunity to AMCs to tap their huge customers base beyond the top 15 major cities. Further, along with the banks, AMCs are also leveraging the extensive reach of the Indian postal services. India post, with a very large customer base and branches spread across urban and rural India, acts as a ready network for mutual fund distribution. Currently however, it is not fully utilized, and it sells MF products through a little over 200 designated post offices. The postal department has kept one AMFI qualified personnel at each of the designated post offices to sell MF products. However, the staff needs to be well qualified and trained in order to sell MF products to avoid mis-selling. Thus, as per SEBI’s recent regulation, it is compulsory for MF sellers or advisors to clear the National Institute of Securities Markets (NISM) fund advisors’ module certificate test. Along with this, they are also required to register themselves with AMFI. Launch of direct investment plans to benefit investors In Sep 2012, SEBI came out with guidelines to offer direct investment plan (DIP) option to investors, effective Jan 2013. The purpose of the regulation is to offer an option to the informed investors to plan their investments on their own. Following the guidelines, AMCs have launched DIPs. Under this plan, investors can invest directly by either submitting the requisite documents personally at the AMC’s office or through the AMCs online platform or through various service centers. This is expected to offer cost benefits to the investors, as they can avoid the advisory fees. Especially, for institutional investors such as banks, financial institutions and FIIs, who have huge investments in such products, the benefits are estimated to be higher compared with retail investors. Consolidation activity picks up Consolidation activity is picking up within the Indian mutual fund industry. Some domestic private asset management companies (AMCs) are selling out stakes to foreign owned companies and some players are undergoing other forms of M&A. For instance, some of the major M&A transactions that took place during 2012 are as under:• In November 2012, L&T Mutual Fund bought out Fidelity’s Indian mutual fund business. • In Sep 2012, Religare Asset Management Company (RAMC) Ltd, an arm of Religare Enterprises Ltd announced its 49% stake sale to one of the leading investment management firm in the US, Invesco Ltd. • In April 2012, Axis AMC, the business arm of Axis Bank Ltd sold its 25% stake to UK’s Schroders Singapore Holdings Pvt Ltd, a wholly owned subsidiary of Schroders plc. • In Jan 2012, Japan’s Nippon Life Insurance company bought a 26% stake in Reliance Capital Asset Management.
LIV
Indian mutual fund industry has vast growth potential As depicted in the chart below, although the increase in ratio of India’s mutual fund (MF) industry’s AUM to GDP has been considerable from 5% in FY05 to 11.3% in FY12, it is still very low compared with other developed nations share such as US, at over 75% (as on 2011). This low penetration levels implies huge growth opportunities.
Mutual fund penetration in India
Source: AMFI, MOSPI
Furthermore, presently the concentration of AMCs is limited to few major cities. They have shown a limited focus in tapping towns beyond the top 15 cities. The AUM from these top 15 cities accounted for more than 85% as on both Dec 2012 and Dec 2011. The chart below exhibits geography-wise distribution of AUM as on Dec 2012:AUM by Geography: As on Dec 2012
Sourec: AMFI
Out of the top 15 cities, Mumbai, Delhi, Bangalore, Kolkata, and Chennai, the top 5 metros, together accounted for more than 70% share during the same period. Even within the top 5 metros, Mumbai alone accounted for nearly 43% share. This is primarily due to limited distribution channels and limited investor awareness beyond these cities. This also underlines the huge untapped market opportunity from the rural India, beyond these major cities. With an aim to expand the reach of MFs to tap beyond the urban landscape of the 15 major cities, in 2012, SEBI allowed MFs to charge a higher expense ratio (as a percentage of AUM). This ruling is expected to boost the AMCs interest in widening their reach.
LV
