MFs to benefit from proposed AIF regulations

Ashish Rukhaiyar & Chandan Kishore Kant
Mumbai, 30 September 2011

Sebi proposal of minimum Rs 1-crore investment to channelise HNI money towards fund houses.

The proposed regulations for alternative investment funds (AIFs) would come as a blessing in disguise for mutual funds. Market participants say the increase in the minimum investment size is bound to channelise a lot of high net worth money towards the fund industry.

Last month, the Securities and Exchange Board of India (Sebi) released a concept paper on proposed AIF norms. These would cover venture capital funds, private equity funds, debt funds, real estate funds and PIPE (private investment in public equity) funds, among others. It has proposed a minimum investment size of Rs 1 crore. The current norms allow a high net worth individual (HNI) to participate in a portfolio management scheme with as little as Rs 5 lakh.

Market participants say MFs would be the biggest beneficiary of the proposed norms, as a lot of HNIs with an investment corpus of less than Rs 1 crore would not be able to invest in PMS or other funds that come under the purview of AIF regulations. This would make MFs their preferred investment vehicle.

Gautam Mehra, executive director, tax and regulatory services, PwC India, feels the listed companies’ universe would benefit from the proposed norms, as MFs typically invest in companies listed on the stock exchanges.

“Investors in the sub-Rs 1 crore segment may explore redeploying the capital in the listed space through the MF route,” says Mehra. “Second, the investments pooled in by portfolio managers offering standardised strategies with a ticket size in the range of Rs 5 lakh to Rs 25 lakh could also get channelised to MFs, given that the offerings of such schemes are also proposed to be covered by AIF Regulations.”

MF companies have welcomed the proposed regulations. They come at a time when the sector has not been successful in attracting significant inflows from investors. Fund managers are hopeful that with the increase in investment size from Rs 5 lakh per individual to Rs 1 crore, considerable funds will get channelised.

“Earlier, an amount of Rs 5 lakh was a reasonably big sum but now it is no more a big investment. I do expect that some of these funds could come to the fund industry,” said G Pradeepkumar, chief executive officer, Union KBC Mutual Fund.

Mehra says venture capital funds invest largely in unlisted companies and in listed companies only by way of preferential allotment. So, investors who may not have an appetite for the listed space may consider increasing their commitments and continue to invest in AIFs.

The fund industry has been trying to source inflows from tier-I and tier-II cities but have failed at a time when stock markets have falen by close to 20 per cent this year. It has been losing folios continuously.

There are currently 45 players in the domestic MF sector, with overall assets under management (AUM) of Rs 6.96 lakh crore as on August 31. In 2010-11, the industry witnessed a net outflow of Rs 49,406 crore, compared with a net inflow of Rs 83,081 crore in the previous year. The highest outflow, of Rs 13,000 crore, was in equity schemes.