Crisil Budget analysis: Mutual fund

MF industry assets at an all-time high, post a successful bounceback from October 2008

Liquidity crisis

The Indian mutual fund industry's average assets under management (AAUM) have grown by 19 per cent since June 2008 to touch Rs 6.72 trillion (including fund of funds) in June 2009. AAUM growth followed a key stress point witnessed by the industry during the year in October 2008, largely on account of the contagion effect of the global liquidity and credit crisis. Timely measures to provide liquidity and stimulus by the government and market regulators, coupled with the up-tick in equity markets following the May 2009 elections results played a significant role in helping the industry continue on its growth trajectory.

The share of debt-oriented funds in industry assets increased to 73 per cent in May 2009 from 66 per cent a year ago. In contrast, the share of equity-oriented funds has reduced to 26 per cent in May 2009 from 33 per cent a year ago, largely owing to mark to market losses in equity funds as the equity markets had been performing weakly for a large part of this period. Fixed income funds, on the other hand, have seen net cash inflows of close to Rs 750 billion, accounting for around 95 per cent of net cash inflows, for year ending May 2009. The fixed income AAUM for the industry stood at Rs 4.84 trillion in May 2009. Bank investment in mutual funds, as per RBI data, toppedRs 1.23 trillion as on June 19, 2009, as compared to less than Rs 100 billion in October 2008.

Reliance Mutual Fund dominated the assets chart throughout the year and became the first fund house to cross the Rs 1 trillion AAUM mark in May 2009. The largest ten fund houses held 78 per cent of the assets, with the top five constituting 57 per cent. The trend of increasing polarization in mutual fund assets to the top 10 fund houses (35 fund houses in all) is clearly evident from the share of the bottom 10 fund houses, which constitute less than 1 per cent of the assets today.

Retail investor penetration was a topic of great interest during the year with views and initiatives from both the regulators and the market body, Association of Mutual Funds of India (AMFI). The latest Economic Survey for 2008-09 highlighted the scope for expansion of the mutual fund industry since only 7.7 per cent of the total financial savings were allocated to mutual funds in 2007-08. In a recent release, AMFI too had stated that retail investors constituted only 21 per cent (majorly in equity funds) of the mutual fund industry AUM as of March 2009.

CRISIL FundServices expects increasing investor awareness and proactive steps from the regulator and AMFI towards instilling transparency and good governance practices to enhance investor confidence, thereby aiding increased participation from the retail segment over the medium term.

Snapshot of Mutual fund performance

Budgetary measures to boost infrastructure investments

Measures:

India Infrastructure Finance Company Ltd (IIFCL) is expected to play a pivotal role in infrastructure funding. IIFCL is expected to re-finance 60 per cent of the commercial bank loans for PPP projects in critical sectors involving a total investment of Rs 1 trillion.

Allocation to National Highways Authority of India (NHAI) has been increased by 23 per cent over the Budget 2008-09. Allocation for the Indian Railways has also increased by Rs 50 billion over the Interim Budget 2009-10.

Allocation under Jawaharlal Nehru National Urban Renewal Mission (JNNURM) has been stepped up by 87 per cent over the Budget 2008-09 to Rs 129 billion

Allocation for housing and provision of basic amenities to the urban poor has been enhanced to Rs 40 billion.

Allocation under the Accelerated Power Development and Reform Programme (APDRP) has been increased by 160 per cent over the Budget 2008-09 to Rs 21 billion

A blueprint on a National Gas Grid to facilitate transportation of gas across the country is expected to be developed.

Impact:

The increased thrust on infrastructure funding is expected to result in an increasing appetite for infrastructureoriented funds. In the light of the recent SEBI circular on entry loads, AMCs may market existing funds within this category, rather than come out with New Fund Offers (NFOs), exhibiting a marked deviation from the past precedents.

The focus on infrastructure projects is expected to result in an increasing number of corporate bond and equity issuances for fund raising by infrastructure companies and institutions. This would provide an expanding avenue for mutual funds to invest in.

Debt-fund durations to drop due to high government borrowings

Measures

Total additional Plan expenditure by the Centre and the States put together would be Rs 610 billion over the Interim Budget.

State governments would be permitted to borrow an additional 0.5 per cent of their Gross State Domestic Product (GSDP) by relaxing the fiscal deficit target under Fiscal Responsibility and Budget Management (FRBM).

Impact:

News of the increased government borrowings and high fiscal deficit (of 6.8 per cent of 2009-10 GDP) are expected to lead to a rise in bond yields, at least in the short run. This could result in mark to market losses for high duration mutual funds. As a mitigant, we could see fund managers pruning durations on their income and gilt funds to limit losses.

Increasing issuances of State Development Loans is expected to result in sustenance of the attractive yields for these securities, thus maintaining investor interest.

EET status quo over NPS continues despite tax concessions

Measures

The New Pension System (NPS) would continue to be subject to the Exempt-Exempt-Taxed (EET) method of tax treatment of savings.

The NPS Trust has been exempted from income tax, dividend distribution tax and securities transaction tax for income, dividend paid and purchase and sale of equity shares and derivatives, respectively.

Impact

While the tax concessions given to the NPS trust is a move in the right direction, the EET method of tax treatment for contributions to the NPS will hinder its potential success in the short term

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