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What should investors of international mutual funds do?

The Securities and Exchange Board of India has advised fund houses to cease accepting new inflows into international funds and diversified funds that invest in foreign securities.

SEBI, the market regulator, recently issued a warning to mutual fund houses that the investment limits on overseas assets are nearing exhaustion. Each fund house can invest a maximum of $1 billion, and the overall industry can invest $7 billion in international securities. Besides the $7 billion, mutual funds can invest a maximum of $1 billion in exchange-traded funds or ETFs listed in other countries. These limits are determined indirectly by the Reserve Bank of India rather than by SEBI.

The Association of Mutual Funds of India (AMFI) has ordered mutual fund houses to not invest in international stocks until the limitations are amended. As a result, all fund houses have suspended accepting new inflows into any funds that invest in overseas securities (whether lump sum or Systematic Investment Plan/Systematic Transfer Plan). Depending on the fund house, existing SIPs and STPs might continue.

Because of the rising number of overseas funds and ETFs issued by fund houses, the AUM of international funds has increased. The overseas fund category’s AUM has increased from Rs 3,688 crore in December 2019 to Rs 39,658 crore in December 2021. These funds currently invest not only in the US market but also in Japan, Brazil, emerging economies, and Europe, among other places.

What should Investors do?

Investors with existing SIP or STP may not be hampered. Individuals cannot make a fresh lumpsum or SIP investment in the affected funds.

Because there is no opportunity for investors to migrate to another fund to gain foreign exposure, mutual fund experts say they should do nothing for the time being and stay put. The majority of fund managers and advisors believe the ban is just temporary. Many fund houses have sent letters urging their investors to stay put. You have no choice but to wait if you are a new investor looking to invest in overseas funds.

Investors can also postpone new investments in funds with restrictions or weigh the benefits and drawbacks of funds that allow international investments (like those investing in overseas ETFs).

As of December 31, 2021, 39 diversified equity funds (allocating at least 65% to Indian stocks) have an allocation to international equities, with a total investment of Rs 20,236 crore. These mutual fund schemes give investors geographic variety while keeping the taxation of equity money the same. The Parag Parikh Flexi Cap Fund is one that has invested roughly 30% of its total assets in US equities. It has a larger corpus committed to international equities than most specialised international funds.

June 2021 witnesses 4th straight month of equity MF inflows

Net inflows into equity and equity-linked schemes stood at Rs 5,988.2 crore in June, according to data released by the Association of Mutual Funds in India. This is the fourth straight month of inflows into the category. The inflows are in step with the stock market’s 1 per cent rise in June.

Large-cap (Rs 547 crore), Mid-cap (Rs 1729 crore) and Small-cap (Rs 705 crore) funds witnessed net inflows for the fourth straight month in June. Multi-cap funds saw Rs 209 crore inflows. Interestingly, contributions to Systematic Investment Plans (SIP) rose for the second straight month to Rs 9,155 crore in June.

“Investors continue to invest in pure equity schemes resulting in positive net sales of almost Rs 6,000 crore, this is slightly lower than last month due to higher redemptions. For now, the trend surely is in favour of Indian Equities by domestic investors,” says Akhil Chaturvedi, Associate Director, Head of Sales & Distribution, Motilal Oswal AMC.

For the industry as a whole, MFs saw a net inflow of Rs 15,320 crore in June, with average assets under management at Rs 34.1 lakh crore. Do note the net inflows number for equity fell 40 per cent month on month. On the debt side, liquid funds saw a net inflow of Rs 2,078 crore against an outflow of Rs 45,447 crore in May. Overnight funds saw a net inflow of Rs 4,459 crore in June compared with an outflow of Rs 11,573 crore a month earlier. However, credit risk funds saw a net inflow for the second straight month in June.

After witnessing net outflows to the tune of Rs 44,512.04 crore in May, Debt-oriented mutual funds received net inflows of Rs 3,566.39 crore in June. “It was a mixed bag for the segment with categories such as Money Market Fund, Ultra Short Duration Fund, Short Duration Fund and Gilt Fund witnessing significant net outflows; whereas categories such as Floater Fund, Low Duration Fund, Overnight Fund and Liquid Fund received good net inflows,” says Himanshu Srivastava, Associate Director â€“ Manager Research, Morningstar India.

After witnessing significant outflows on the back of new guidelines around valuations and fund exposure norms for AT1 bonds, the scenario appears to be stabilising for Banking & PSU funds. In June, investors invested net assets worth Rs 1,357.55 crore, which could be because of the safety that these funds offer.

NS Venkatesh, Chief Executive said: “The Mutual Fund industry is witnessing a sharp rise in the number of new investors, which has doubled in the last four years to 2.39 crore unique investors. Many new investors are seen embracing mutual funds through the SIP route, over other traditional investment avenues….SIP AUM at an all-time high and now forming almost 15 per cent of the total industry AUMs and number of SIP accounts breaching 4 crore mark for the first time, reflects continued retail investor confidence in the mutual fund asset class.”

Gold ETFs continued to add net positive AUMs month on month and witnessed a steady rise in folios too. Hybrid funds saw the highest net sales in June at over Rs 12,000 crore compared to April and May for Q1 of FY 22, according to Lakshmi Iyer, CIO (Debt) & Head Products, Kotak Mahindra AMC.

AMFI: Equity mutual fund inflows touch Rs 10,000 crore in May

Equity mutual funds recorded the third consecutive month of net inflows and touched a new high of â‚¹10,083 crore in May as against â‚¹3,437 crore logged in April. This reflects growing investorsâ€™ confidence in the recent stock market rally.

Except for equity-linked saving schemes which recorded an outflow of â‚¹290 crore, all other categories of equity funds registered a net inflow.Â Multi-cap funds topped the table by attracting investment of â‚¹1,954 crore, as per data released by the Association of Mutual Funds in India.

All other equity funds including mid-cap funds and focussed funds have received investments of â‚¹1,368 crore and â‚¹1,169 crore. Thematic funds and small-cap funds attracted â‚¹1,137 crore and â‚¹1,081 crore inflows.

Redemption in equity schemes in May dipped, compared to April. NS Venkatesh, Chief Executive, AMFI said that the retail equity-oriented contribution continues to be on the upward trend, while smart investors have diversified to Fund of Fund (FOF) schemes which invest in foreign equities.

Investment through systematic investment plan was up at â‚¹8,818 crore as against â‚¹8,596 crore logged in April.

Debt funds recorded a net outflow of â‚¹44,512 crore. This was mainly because of withdrawal of â‚¹45,447 crore and â‚¹11,573 crore from liquid and overnight funds.

Overall mutual funds industry AUM was up at â‚¹33.05-lakh crore last month as against â‚¹32.37-lakh crore logged in April.

Aashish P Somaiyaa, CEO, White Oak Capital said: “â‚¹12,000 crore net inflow in equity and equity oriented hybrid funds is a significant jump and a sign of investor confidence â€“ amongst the highest net inflows in a long time especially if one further adds flows into index funds, ETFs and international equity funds.â€

Industry officials were excited about investor flows remaining strong. Akhil Chaturvedi, Head of Sales & Distribution, Motilal Oswal AMC, said: “This is the third month of net positive flows….DIIs and retail investors have kept the markets buoyant in the last three months when FIIs have been net sellers. Broadly, we understand from the first wave of Covid that these waves will be short-lived and eventually economic activities will revive giving a boost to market sentiments.”

81 lakh mutual fund accounts added in FY21; MF AUM stands at Rs 31.4 lakh crore

In the financial year 2021, over 81 lakh investors opened their mutual fund accounts. It’s nearly 23,000 accounts per day or about 1,000 accounts per hour. With the massive addition of MF accounts, the total number of mutual fund investors in the country now stands at 9.78 crore.

The over 81 lakh accounts added in FY21 is much higher than the mutual fund industry adding 72.89 lakh investor accounts in the financial year 2020, according to the data by the Association of Mutual Funds in India. Experts are now hoping that the healthy growth in the mutual fund industry would continue in the ongoing financial year, as markets and economy stabilise.

Corporate earnings gained momentum in the post Covid unlocking era with the optimism fuelled by higher consumption spends in the festive season. Q3FY21 earnings were ahead of estimates as corporates benefited from lower raw materials cost, higher volume growth and leaner cost structure. Going forward, experts expect Nifty earnings to grow at 24% CAGR in FY21E- 23E. This earnings momentum is likely to provide support at lower levels.

“The recent correction of 7-8% in the headline indices as well as broader markets is a normal healthy correction and should not be construed as negative. Investors should use the current fall as a buying opportunity. Multicap funds are better placed to capitalise on the broader recovery, going ahead,” says ICICIDirect.

Investors are increasingly acknowledging the importance of making investments in mutual funds for meeting financial goals both long term and short term.

The mutual fund industry AUM at the end of March 2021 stood at Rs 31.4 lakh crore. The AUM of open ended equity funds is now at Rs 9.79 lakh crore in March 2021, with flows into equity funds witnessing a turnaround with inflows at Rs 9,115 crore in March 2021. Equity funds had seen outflow for the eight consecutive month till February.

The rally in the equity markets has been well diversified with sector rotation in play in last few months. The sectors or segments like infrastructure, PSUs which lagged behind in the early part of the rally, have started to gain traction indicating the healthy trend of sector rotation.

Pharma funds and global funds have underperformed in the last few months after their significant outperformance last year. Midcap and small cap funds remain outperformers as broader markets continue to recover with better growth prospects as economy recovers in the post Covid era.

Equity investors who stuck to their asset allocation plan and those who continued their regular investment through SIP otherwise stand out as winners now as the market recovered from the volatile year of 2020.

The equity market fall in March prompted inflows into equity funds indicating maturity among retail investors. In debt funds, almost all category of funds except liquid/low duration/money market funds witnessed outflow due to financial year-end requirements as rising yields made investors cautious.

The balanced advantage or dynamic asset allocation funds AUM is now above Rs 1 lakh crore. The balanced advantage category is gaining popularity as asset allocation funds at current higher level are attracting higher investor interest.

How SEBI’s new dividend norms will affect your investment in dividend plans

From April 1, SEBI’s new norms require dividend given by fund-houses to be segregated as income distribution (appreciation in net asset value, or NAV) and capital distribution (equalisation reserve) in the consolidated income statement. However, it seems that the MF industry finds it difficult to implement the rules at the investor level, and fears this could lead to taxation issues.

In the past, several hybrid funds were missold to investors with the promise of regular dividends and therefore the regulator is revamping the practice. But to understand the current situation, one needs to know the full picture.

SEBI has introduced labelling norms for the dividend options of mutual funds which came into effect from April 1, 2021. Under the new norms, mutual funds are renaming dividend options as income distribution cum capital withdrawal. Previously, the dividend options available were Dividend payout, Dividend reinvestment and Dividend transfer plan. Now, Dividend Payout will become Payout of Income Distribution cum capital withdrawal option. Dividend Reinvestment will become Reinvestment of Income Distribution cum capital withdrawal option. And, Dividend Transfer Plan will become Transfer of Income Distribution cum capital withdrawal option.

The bone of contention are terms such as capital distribution. This term, for example, may be interpreted differently by tax authorities and could pose challenges to investors. Also, fund-houses can face compliance challenges in deducting tax at source, which may cause disputes with investors.

Fund industry says segregation of income and capital distribution is done at the fund level in developed markets. Micro managing at investor level will lead to more issues.

Fund-houses want the terminology proposed by SEBI to be reviewed. They feel words such as ‘capital’ and ‘income’ should be replaced by something more appropriate so as to ensure that there are no adverse tax implications.

From a tax perspective, income distributed by MFs is taxed in the hands of investors and so TDS comes into play. So, its a Catch-22 situation. If MFs do not deduct TDS from the capital distributed among investors, the overall tax collection could fall. But If MFs choose to deduct tax on the entire quantum of distribution, there may be a TDS mismatch for investors.

There is some ambiguity with respect to the tax treatment of capital returned to investors. Plus, there is also uncertainty on whether investors will be able to adjust the cost of acquisition of the units and avail indexation benefit.

New NAV applicability date comes into effect from Feb. 1

A new framework on net asset value (NAV) applicability across mutual fund schemes upon realization of funds will now take effect from February 1, 2021 instead of January 1, 2021.

SEBI, in its latest circular, has extended the applicability date on new NAV rules to Feb. 1, 2021 from the earlier announced date Jan 1, 2021. The SEBI circular had previously said that investors would get NAV once the money reaches the fund house irrespective of the investment amount from Jan. 1, 2021. Now, mutual fund houses have time till Feb. 1 to follow these rules.

Do note that SEBI had said, except for liquid and overnight MFs, the closing NAV of the day will be applicable on which the funds are available for utilization irrespective of the size and time of receipt of an investment application. Currently, NAV for allocation of mutual fund units is based on the investment amount. For investment below Rs 2 lakh, allotment of units is based on the time of receipt of the application within a stipulated cut-off. In case the amount is above Rs 2 lakh, MF house allots units on the realization of funds from the investor.

But if the new norms took effect from January 1 it would have disrupted investor experience as well as impacted fund-houses’ ability to deliver service. This fear emerged due to the banking arrangements of mutual fund companies. The regulator seems to have taken cognizance of this concern.

In the case of NFO subscriptions, allotment date will be considered, irrespective of credit date & application submission date.

When an investor wishes to switch into NFO from an existing scheme, the switch-out will be processed on existing schemes. Switch in will be allotted on the day NFO subscriptions are allotted.

For online transactions, there may be a time lag in the transfer of funds from investorsâ€™ account to the AMC account and hence may differ from case to case basis.

Partial modification

Sebi has also partially modified its circular issued in September.

It said a fund manager may authorise an employee of the AMCs for order placement of equity and equity-related instruments of each scheme on his behalf, subject to certain conditions.

AMCs shall use an automated order management system (OMS) wherein the orders for equity and equity-related instruments of each scheme shall be placed by the fund managers of the respective schemes, Sebi had said in its earlier circular.

“Further, the orders in case of arbitrage transactions, stock lending and borrowing transactions, passive schemes (such as Index Funds and ETFs) and schemes investing primarily based on pre-defined rules and models, where the discretion of the fund manager is not required for placement of order, is not mandated to be placed through OMS,” Sebi added.

This is also subject to certain conditions.

Sebi, through its circular in September, had said that all orders of fund managers need to be received by dedicated dealers responsible for order placement and execution.

In its latest circular, Sebi said the requirement of a dedicated dealer shall not be mandatory in case of orders for arbitrage transactions, stock lending and borrowing transactions, passive schemes (such as index funds and ETFs), and schemes investing primarily based on pre-defined rules and models.

“All other conditions specified in Sebi circular dated September 17, 2020, shall remain unchanged,” it said.

As equity MFs saw outflows of Rs 13k cr in Nov, debt funds got inflows worth Rs 45,000 cr

Equity MF investors seem to be in cashing-out mode. As stock markets hit new life-time highs on a regular basis in November 2020, monthly net outflows occurred in all the 10 equity fund categories totalling Rs 12,917 crore. This is the biggest monthly outflow number registered in equity MFs in many months. Though markets swiftly changed mood after hitting lows in March 2020, flows in equity funds have dried up and have been in the red for five consecutive months (July to November), shows data from mutual fund industry lobby AMFI.

November saw largecap funds witnessing the biggest monthly outflows among the 10 equity fund categories, with a net Rs 3,289 crore flowing out. Largecap funds were followed by multicap funds (-Rs 2842 crore), value/contra funds (- Rs 1,323 crore), midcap funds (-Rs 1,317 crore), smallcap funds (-Rs 1,031 crore). Sectoral thematic funds saw net outflows of Rs 987 crore, followed by ELSS/tax-saving funds (-Rs 804 crore), focussed funds (-Rs 637 crore), large & midcap funds (-Rs 615 crore) and dividend yield funds (-Rs 70 crore).

November 2020 has been one of the better months for equity markets with Nifty 50 at all-time high and a very strong recovery in the mid and small cap indices, with mid and small caps after three years of negative returns turned positive for the CY 2020. The markets are clearly pricing in the positives of recovering economic data points, lower interest rates and sign of vaccine coming out very soon and all of this leading to a very positive impact on earnings in coming quarters and more specifically FY 22, says Akhil Chaturvedi, Associate Director & Head of Sales, Motilal Oswal AMC said.

“Now, optically from the lows of March 2020 correction markets have given some stupendous returns and leading to the belief that markets are over-heated and therefore outflow from equity mutual funds to the extent of Rs 35k cr highest ever seen. Adjusted for inflows of 17k cr (50% of which would be SIP flows) the net redemptions have been almost Rs 18k cr,” estimated Chaturvedi speaking on November AMFI data.

In the hybrid funds segment, the net outflows in November 2020 is Rs 5,249 crore. Hybrid funds invest in both debt and equities, but the blend changes as per fund type mandate. Balanced hybrid funds were the worst hit, with outflows touching Rs 3,731 crore, which is even bigger than the worst hit on the equity side i.e. largecap funds. Dynamic asset allocation funds saw Rs 734 crore flowing out, followed by Rs 407 crore in equity savings funds, Rs 338 crore in arbitrage funds, Rs 178 crore in multi asset allocation funds. The only hybrid fund category which saw net inflows in November 2020 was conservative hybrid funds at nearly Rs 140 crore.

Meanwhile, debt funds saw net monthly inflows Rs 44,983 crore led by ultra short duration funds, short duration funds and dynamic bond funds.

N S Venkatesh, Chief Executive, AMFI took a different view of things and said: â€œInvestors are aligning their allocation in Debt schemes more towards duration schemes and corporate bond funds to maximize their debt returns, and on the other hand booking their profits in equity funds owing to surge in equity valuations. It is also significant to note that there has been a healthy addition of 3.39 lakh SIP accounts.

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