The over-Rs 20,000 crore in cash held by equity mutual funds shows that they are choosing to be on the sidelines in the current market uncertainties.

Data on portfolio churn by funds in January also supports this view, with funds preferring to make only small changes in their sector preferences.

Data from NAV India – a service provider – based on the January-end portfolio shows that out of 12 leading fund houses, six preferred to make no sector additions to their portfolio. The other six added a few sectors to their portfolio.

There were no common sector preferences.

HDFC Mutual Fund added stocks from industrial products, while Fidelity Mutual Fund added metals and pesticides. Brewery was the only new sector that found its way into HSBC Mutual Fund’s portfolio. Stocks from the oil and gas sector were added by Tata Mutual Fund. But one sector viewed cautiously by fund houses and moved out of the portfolio was petroleum. Others that saw pared exposures were automobiles, construction, metals, cement and textile products.

Fidelity added pesticides, but moved out of fertiliser and agriculture stocks. Sundaram BNP Paribas Mutual Fund maintained status quo in the portfolio.

Despite market fluctuations, fund houses seemed to prefer a buy-and-hold strategy. Fund houses may be active in taking trading calls intra-month, which may not reflect in their month-end portfolio disclosures.

India is poised to launch an innovative pension system on an unprecedented scale. After many years of languishing in bureaucratic limbo, the so-called New Pension System (NPS) is now set to go live on April 1, having just completed an eight-week flurry of activity to establish operational procedures and select fund managers.

The NPS is aimed at catering to the nearly 400 million people in India’s ‘unorganised’ sector of small and medium-sized enterprises and cottage industries.

It originated as a scheme for central government employees, with the intention of expanding to the private unorganised sector. Last year, the Pension Fund Regulatory and Development Authority (PFRDA), the system’s regulator, handed out three mandates for this role, to three government-owned fund managers, LIC Mutual Fund, State Bank of India Asset Management and UTI, based on recommendations forwarded by Crisil.

These mandates are mainly fixed income; they allow the managers to invest up to 15% in equities but so far none has come close to that cap.

Because the NPS is only mandatory for newly joining civil servants, the size outsourced to these three managers is modest, and they will be paid 3-5 bps on managed assets.

September saw another opening up in the pensions world, when the Employee Provident Funds Office, which manages around $25 billion on behalf of the organised sector (the larger corporations), for the first time outsourced assets to four fund houses — HSBC Asset Management, ICICI Prudential Asset Management, Reliance Capital and SBI. Collectively these houses will receive $2-3 billion annually to run domestic bond portfolios.

But the biggest, most anticipated move has been the extension of the NPS from just covering new civil servants to the entirety of the unorganised sector. This had been held up for years on opposition from the Marxist parties.

With a general election scheduled, the PFRDA’s chairman D Swarup realised he had a short window of opportunity to get the NPS expansion through Parliament and into action. The PFRDA appointed Mercer to assist it with designing the plan for the unorganised sector in December and unveiled the results this month.

The designers appear to have come up with a truly innovative design that is intended to maximise benefits to members, rather than enrich product providers.

The ‘new’ NPS is structured around three tiers. First is the central recordkeeping agency (CRA), which manages the system and is responsible for collecting contributions and disbursing benefits. Beneath this is a myriad of points of presence (PoPs), in other words, distributors. Although entities such as the post office were considered, the designers for now have opted to stick with commercial banks and life insurance companies. An additional level of independent financial advisors has likewise been scrapped over concerns about their ability to understand or sell the NPS. So for now, the PoPs — mainly state-owned banks — will serve as the front line.

The CRA is now in the process of finalising its choice of external fund managers who will handle all assets for members from the unorganised sector. It has made offers to six providers for three-year contracts, and it is assumed these six will accept, although negotiations are not over. The six include three government-owned entities (ICICI Life Insurance, SBI and UTI) and three private players (IDFC Asset Management, Kotak Asset Management and Reliance Capital). By law, managers to the system cannot have more than 26% foreign ownership, which has automatically excluded foreign players such as Franklin Templeton and HSBC Asset Management, and most joint ventures as well.

These will manage two portfolios of indexed equities, two of fixed income, and two of corporate bonds and other credit instruments — all domestic, for now. These will serve as building blocks to which members can allocate any mix of assets.

One of the most progressive features of the NPS is its default option for anyone who doesn’t want to pick among funds, which is a lifecycle option. The CRA will allocate on a member’s behalf among the six funds, with an equities component ranging from 80%-10%, adjusting accounts each year by the member’s age.

Buoyed by significant growth in debt funds, the mutual fund industry’s total asset under management (AUM) in January rose 9.4 per cent, the highest monthly growth in 15 months.

According to the fund evaluation and risk solutions provider Crisil FundServices, the assets of mutual funds increased significantly in debt funds. The various categories including bonds, gilts and liquid funds, collectively witnessed their net inflows surging to Rs 67,000 crore in January from Rs 1,150 crore in December.

“The growth in AUM was despite weak equity markets, and on account of strong inflows in debt funds. The current outlook of declining interest rates makes debt funds a popular investment option,” the report stated.

The total AUM of the country’s 35 mutual fund houses have risen to Rs 4,60,949 crore, following an increase of Rs 39,833 crore, or 9.4 per cent, at the end of January, according to the data of the Association of Mutual Funds in India. “This is the second consecutive month of growth after the industry witnessed steady de-growth from September 2008 to November 2008,” Crisil FundServices said.

Of all the fund categories, the bond funds witnessed the highest inflow of Rs 39,100 crore in January, from Rs 4,500 crore in December. Liquid or money market funds saw net inflows of Rs 27,100 crore against net outflows of Rs 4,300 crore in December.

According to Crisil, on an aggregate while the equity funds witnessed marginal net outflows, the Equity-Linked Savings Schemes (ELSS) saw net inflows owing to increased investments driven by tax planning requirements.

Also net inflows from all categories for the industry as a whole increased to Rs 66,800 crore in January 2009, from negligible levels in December 2008.

Although the overall MF industry saw an increase in AUMs, 22 of the 35 fund houses reported growth in average AUM.

Country’s top house Reliance Mutual Fund saw its AUM rise by Rs 5,960 crore in January to Rs 76,168 core. HDFC MF remained the second big fund house with an addition of Rs 4,663 crore in its AUM at Rs 51,421 crore at January end.

ICICI Prudential Mutual Fund toppled state-run UTI MF as the third largest fund house of the country with an AUM of Rs 47,515.51 crore, after adding Rs 5,638 crore in a month.

The Securities and Exchange Board of India, or SEBI, is drafting new norms that would offer mutual fund investors a band or range of entry loads to pick from while purchasing units of a mutual fund, said a senior official at the market regulator.

An entry load is the commission that an investor has to pay a distributor while purchasing units. Currently, investors pay an average 2.25% of the sum invested as entry load if they buy the units from a distributor, who is a third party, but they pay nothing if they buy directly from the fund house.

The new norms are likely to be announced in a month, the official said requesting anonymity as details of the plan have not yet been finalized.

According to the Association of Mutual Funds in India a 13-year old industry lobby, there were about 47 million mutual fund account holders in India at the end of 2008.

There were some 35 mutual fund houses with net assets under management of about Rs4.6 trillion, at the end of January. The bulk of mutual fund unit sales in the country, however, are conducted through a large, unorganized network of distributors, which also include a few large players that have their own fund offerings.

The largest third party distributors of mutual fund products in India are banks such as ICICI Bank Ltd and HDFC Bank Ltd. Several brokerages and non-banking finance companies also have large mutual fund products distribution businesses.

“This (move) will hugely empower mutual fund investors,” said the Sebi official, adding that it would force “distributors to stay competent to justify their role”.

The move could also help increase the current investor base, this official said.

“Penetration of mutual funds can be much more (but) .. without distributors, it would have been even less,” said Uttam Aggarwal, who heads the mutual fund distribution business of Bajaj Capital Ltd, which is present in 90 towns and manages about one million investors.

“Look at Quantum (Quantum Asset Management Co. Pvt. Ltd), its asset under manage ment is in double digit crore,” said Aggarwal. Quantum does not have a distribution model and does not charge entry load from investors.

At the same time, financial services firms with established distribution capabilities have now expanded to included funds management business to leverage their strength.

“We are in this business to leverage our strong distribution capabilities,” says Nitin Rakesh, chief executive of asset management with domestic retail brokerage Motilal Oswal Financial Services Ltd, one of the latest players in the funds business.

In fact, fund houses recognize the grip that distributors have over access in both directions. The penetration of mutual funds in India, have been “severely limited” by distributors, Ashu Sayash, managing director and country head (India) of Fidelity Advisors International, had said in June last year. He was speaking at the launch of FundsNetwork, an online fund distribution portal that Fidelity International, the world’s largest mutual fund manager, had launched.

“The existing mutual fund business model is also not as profitable as insurance,” said Aggarwal. “Insurance allows you to reach the smallest towns but mutual funds have regulatory issues (such as daily net asset value, or NAV, disclosures and cap on marketing expenses).” Unlike the third party distributors of, say, insurance products, who can only sell policies of one firm, mutual fund distributors are free to sell schemes from any fund house. Not surprisingly, fund houses often fall over each other to woo distributors so they will push their products.

Sebi currently allows mutual funds to spend up to 6% of a scheme as marketing expense, and fund houses typically spend part of this allocation on distributors.