Mutual Fund Industry Update January 2009

REGULATORY REVISIONS

Revised Regulatory Provisions for Closed Ended Schemes

• The units of all closed ended schemes will be listed on the Stock Exchange. This will resolve the liquidity concerns for the fund manager and he will not be required to sell the securities before time to manage the redemption pressure
• Closed ended debt schemes are now mandated to invest only in such securities which mature on or before the maturity of the scheme. This will protect the interest of investors by reduced variation between the actual and indicative yield
• Net Asset Value (NAV) of all the closed ended schemes will be computed and published on daily basis. This will increase the transparency of investment in closed ended schemes

Applicability of Net Asset Value (NAV) for Income/Debt oriented Mutual Fund schemes (other than liquid fund schemes)

As per the new clause:
If the investment amount in debt/income schemes is equal to or more than Rs 1 crore, then the date on which the cheque will be realized (encashed) shall be considered for the applicability of the NAV.

SEBI has taken such steps as an initiative to bring more efficiency in calculation of Net Asset Values (NAVs). This will be done

• By moving away from consideration of the application date as the date for NAV applicability, and
• By considering the cheque encashment date as the date of NAV applicability for the investment amount equal to or greater than Rs 1 crore

MUTUAL FUND INDUSTRY TRENDS

• Increase in Mutual Fund Asset Under Management (AUM) in December 2008:
  The AUM of the Indian mutual fund industry has increased by 4.06% in Dec 08 contrary to the earlier trend of declining AUM during the year. Out of 37 fund houses, 17 AMCs have shown an increase in their AUM in Dec 08 with ICICI leading the pack by 13% increase followed by UTI that has seen an increase of 10%. This AUM increase is mainly contributed by the short term market rally in Dec 08 that led to increase in the market value of securities held in the portfolio. Fresh investment is expected to boost this AUM further in the coming quarter mainly contributed by tax saving Equity Linked Saving Schemes and Debt Schemes
• Increased Entry and Exit Load for Mutual Fund Schemes:
  Mutual Fund houses are increasing their exit load on equity and debt schemes in order to reduce the early redemption pressure. A major change is seen in equity schemes from Kotak that has introduced exit loads for the exit from the schemes before 2 years. Fidelity AMC has taken the lead in increasing entry load in its equity schemes from 2.25% to 3.00% with an objective of controlling the source of inflows in the scheme.
• High returns and increased AUM of Income Funds and Gilt Funds:
  When the average asset under management of mutual funds was moving southwards, few categories such as gilt funds and income funds were enjoying increase in their AUM. The average AUM of gilt fund category has increase 4 times from 500 cr to approx 2050 cr in last quarter. High returns were delivered by income funds (average 13%) and gilt funds (average 15%) in year 2008. This was due to falling bond yields resulting in rising bond prices. Further, fund houses have increased the exit load slabs for some income schemes, thus offering high brokerage to distributors to garner more funds in such schemes
• Mutual Funds increases their cash holdings and reduce equity exposure in December 2008:
  Majority of mutual fund schemes have doubled their cash exposure with the objective of investing at attractive valuations in the near future. Escorts Tax Plan, Sundaram BNP Paribas Select Focus, Reliance Diversified Power Sector Fund and UTI Long Term Infrastructure Advantage Fund are some schemes having approx 40% or more exposure in cash and cash equivalents.