Written as on June 13, 2012
Highlights
• Budget measures to bode well for Mutual Fund Industry
• Mutual funds AUM up by 4% MoM in May-12 to stand at Rs390bn
• Equity funds avg. returns improved, outperforming the benchmarks
In today's Value Seeker, we present FY13 budget measures’ impact on Mutual Fund Industry along with recent performance for the month of May-12 as well as 11MFY12 period.
Budget measures to bode well for Mutual Fund Industry
In order to discourage the practice of tax arbitrage by banks through dividend income form subsidiaries, the Gov't has proposed to enhance tax rate on dividend received by banks from income and money market funds to 25% in 2013 and 35% from 2014 onward in Budget FY13. We expect this development will result in withdrawal of investments from AMCs due to which the AUM of the AMCs may shrink. However the banks can opt for bonus option (instead of cash dividends) thus avoiding proposed measure. While, in FY13 budget, the limit of investment for tax credit is being enhanced from 15% to 20% of the taxable income. The limit of maximum tax credit is also enhanced to Rs1mn of yearly taxable income. This would be favorable for mutual funds investors to claim higher tax shield. On the other hand, the holding period of investments in funds is reduced to 24 months from 36 months earlier. Furthermore, tax relief has been proposed in this year budget for provident funds if investments are made through pension and retirement funds scheme.
Mutual funds AUM up by 4% MoM in May-12 to stand at Rs390bn
Mutual funds industry posted the growth of ~4% in May-12 to reach at Rs390bn compared to Rs377bn last month. With lackluster activity witnessed in bourses during the month amid uncertainties regarding FY13 budget, investments of mutual funds remained skewed towards money markets funds as AUM for money market funds increased by 10%MoM to Rs161bn. Meanwhile, activity in other segments of the mutual funds industry remained glum. On category-wise basis, open-ended funds grew by 3.6% MoM while closed end funds declined by a meager 0.7% during same period to reach at Rs367bn and Rs24bn respectively. During 11MFY12 (Jul-May), the mutual funds appreciated by 63% compared to an appreciation of 33% witnessed during same period last year.
MM funds remain front runner in fixed income category
In fixed income category, income funds category remained subdued as just 0.3%MoM appreciation to Rs88bn was witnessed in AUM compared to performance of Money market funds discussed earlier. The income funds category posted average annualized return of 11.6%MoM in May-12, 690bps more than previous month's return of 4.7%MoM. However, money market funds category posted average annualized return of 10.6%MoM in May-12, 20bps less than previous month's return of 10.8%MoM.
Equity funds avg. returns improved, outperforming the benchmarks
The equity funds category decreased by 2.1%, to reach at Rs50bn. However, during 11MFY12, the equity funds category remained in negative trajectory and declined by 3.6%. Against the KSE100 index decline of 1.5%MoM, the equity funds category posted average loss of 0.1%MoM in May-12 returns, while during 11MFY12; equity funds category outperformed the benchmark KSE100 Index and KSE30 index by 410bps and 1120bps respectively generating returns of 14.4%, as against the KSE100 index return of 10.3% and KSE30 Index of 3.2%.
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