It's raining dividends at MFs

Equity mutual funds are handing out dividends to investors like never before. Fund houses such as Franklin Templeton, SBI Mutual, HDFC MF, Reliance MF, Tata MF and UTI have announced dividends of 20-60% in their bid to encourage investors to retain money in existing schemes.
More than anything else, the near-80% market rise over the past four months has helped mutual funds to distribute surplus profits. Fund houses have seen a phenomenal AUM growth over the past six months. Even smaller fund houses, including Baroda Pioneer AMC, DBS Chola, Taurus Mutual Fund, Canara Robecco, DBS Chola and Religare MF, have seen a decent appreciation in their assets under management during this period.
“One of the reasons for handing out large dividends is to keep retail investors in good spirits,” said the fund manager of a joint venture (between Indian and foreign entities) mutual fund house. “A good dividend payout, especially in times of uncertain markets, will prompt them to stay invested in schemes.
Huge dividend payout will also help distributors sell the product more efficiently and bring in more money,” the fund manager added.
Adds Saurabh Nanavati, CEO, Religare Mutual Fund, “Retail investors — especially elderly investors — expect dividend payouts periodically. Fund houses could not pay dividends last year as a result of the market downturn. The market rise, this year, has yielded surplus profits that are now being distributed to the investors,” he said. Conventional fund management wisdom makes it imperative for fund managers to declare dividends as this is one of the few ways to take profits off the table.
This is more so in the case of overheated markets where there are not many good investment opportunities. Mutual funds pay dividends out of the surpluses (gains) they generate over a fixed period, say six months to one year.

“Dividend is only one of the evaluation parameters to be considered when investing in equity funds — focus being on consistency in dividend payout rather than the quantum of payout.
Typically, equity funds, which have a long-established track record and have built up strong surpluses are able to give consistent dividends through market cycles,” said Sukumar Rajah, CIO-equity, Franklin Templeton Investments.
The effect of dividend payout is that the fund size reduces by the amount of money distributed. This is also reflected in the decline in net asset value.

Source: http://economictimes.indiatimes.com/Personal-Finance/Its-raining-dividends-at-MFs/articleshow/4717853.cms

Investors’ gain is distributors’ loss

With commissions likely to head down, independent distributors will have to diversify revenue streams by selling other financial products such as insurance, postal schemes and fixed deposits to offset the revenue losses.

The suspense over the issue of entry loads on mutual funds was finally resolved last week with the Securities and Exchange Board of India (SEBI) conveying its decision to scrap entry load for mutual fund schemes. The distributors, the backbone of the industry, are disappointed by the decision of the regulator with some even considering boycotting sale of mutual fund products as a mark of protest.

What distributors perceive
Under the new scheme, distributors and investors have to agree mutually to a fee structure for the service to be provided. Distributors fear that once investors know the service rendered, they may bargain hard and try to pitch one distributor against another to get a better deal.
It is also possible that investors, after taking advice from the distributor may proceed to invest directly in the funds recommended, to save the commission. Yet, distributors should also understand that in a free, competitive market, the quality of service offered by them is the best insurance against this eventuality.
With commissions likely to head down, the distributor will need to increase the volume of business drastically, to make up. Larger distributors may cut down costs by closing down offices, reducing marketing expenses and variable commissions paid to employees.
Independent distributors may have to look out for more diversified revenue streams by selling other financial products such as insurance, postal schemes and fixed deposits to offset the revenue losses. Independent financial advisors in tier 2 and tier 3 towns fear that they will find it very difficult to convince investors for a fee. Advisors in tier 3 cities have to travel 20-30 km at times, to procure business and the ticket size of such a business will not be remunerative if the fee is negotiated.
This will lead to a situation where the distributors may not provide service to small investors.
Unlike the insurance industry, mutual funds have neither the branch connectivity nor employee strength to entertain investors directly. Even if the investor goes directly to the fund house, one will not be sure of unbiased recommendation on the products based on the investor’s risk appetite.
Incidentally, last year SEBI has abolished entry load for direct applications yet only 10 per cent of fund investors since then have actually chosen to go directly to the funds. Distributors point to this saying that investors need the support of advisors to decide on the investment.

Existing system
In the current system, AMCs charge 2.25 per cent as entry load to investors. Smaller funds charge an entry load of 2.25 per cent for an investment value up to Rs 2 crore while the bigger ones charge load up to Rs 5 crore. Out of the 2.25 per cent entry load, AMCs usually part with a 2 percentage point commission to distributors, retaining the rest for other expenses.
Apart from the entry load commission, distributors also receive trail fee, an annual fee that is much smaller, pegged to the asset size they bring in. If the distributor is able to market Rs 2 crore worth of funds, he may earn commission of Rs 4 lakh less service tax of 10.3 per cent.
For an investment of Rs 25,000 he may earn commission of Rs 500 less service tax. In addition to this, is the trail feesof 0.40-0.50 per cent per annum. Managing the business on trail fees alone will not be viable unless the distributor manages a fairly large asset portfolio.
One option that funds have is to increase the trail fees to encourage distributors in the new milieu. This has to come from the recurring expense (2.5 per cent for load-based schemes currently) that funds charge, while computing the NAV. The recurring expenses now include investment management advisory fee charged by the AMC, registrar and transfer agents’ fee, marketing and selling costs, and so on.
There is a possibility that AMCs will approach SEBI to enhance this recurring charge; allowing them to pay distributors an extra trail fee to encourage them to bring in fresh business and try to expand the penetration in tier 2 and tier 3 cities.
Funds may well be forced to do this because their profitability is slipping already and they cannot bear the additional expense of a higher trail fee. According to the recent report published by KPMG, though the AUM of mutual funds has grown by CAGR of 35 per cent in the past five years, the profitability of the AMCs has slipped from 24 bps in FY04 to 14 bps in FY08.
Penetration level of mutual fund products is low in smaller towns and cities with the top 10 cities accounting for close to 80 per cent of assets under management. With the abolition of the incentive of entry loads that rewards distributors, achieving better spread may well turn out to be a tall order.

Source: http://www.thehindubusinessline.com/2009/06/30/stories/2009063050640900.htm

Fund houses target the bottom of the pyramid

UTI, SBI, Reliance MF promote SIPs with low threshold.

Savita Devi, a daily wage earner in Gujarat, is saving for her future through a mutual fund. And she has company. Around 150,000 small investors are putting Rs 50-200 per month in UTI Asset Management Company’s (AMC’s) Micro Pension Plan.
UTI AMC is not the only fund house targeting the bottom-of-the-pyramid investors to extend its presence. SBI Mutual Fund, an affiliate of State Bank of India (SBI), also launched a ‘Chota Systematic Investment Plan (SIP)’ in April.
Even Reliance Mutual Fund has ‘Reliance Common Man SIP’, in which one can invest a minimum of Rs 100 per month. Sahara Mutual Fund is awaiting approval from the market regulator, the Securities and Exchange Board of India (Sebi), for a scheme that will allow the investor to put in as little as Rs 10 per day.
‘Chota SIP’ is an equity-based SIP that offers long-term investment benefits to low-income households residing in rural and semi-urban areas. This product is being marketed by SBI. All these players have definite plans to promote these schemes. SBI, for example, is not only depending on its huge network of over 15,000 branches, but is also tapping self-help groups (SHGs), NGOs and micro credit/finance institutions.
Invest India Micro Pension Services (IIMPS) and UTI’s pension plan, a government notified plan jointly promoted by Sewa Bank, UTI AMC and some private individuals, is promoting these products through puppet shows and plays. It has already tied up with thousands of rickshaw pullers and the National Association of Street Vendors. It is in talks with panchayats to promote these products.
This plan will cover members who come under the Basix group’s programme for the poor. Basix is a livelihood promotion institution that works with over 1.5 million poor, 90 per cent of whom are from rural households. Most of them are women in villages of Andhra Pradesh, Karnataka, Bihar, Orissa, Jharkhand, Maharashtra, Madhya Pradesh, Tamil Nadu, Rajasthan, Chhattisgarh, West Bengal, Delhi, Uttarakhand, Sikkim and Assam.
Basix also works with over 100 non-government organisations (NGOs) and community-based microfinance institutions (MFIs) across the country. This network would help UTI tap the rural segment significantly.
“In Bihar, we collect money from doodhwalas (milkmen) at the state cooperative federation,” said Ashish Agarwal, chief executive officer and director, IIMPS.
As far as investing strategy goes, fund managers at UTI and SBI have decided to take the call themselves. Collections from the UTI Micro Pension Scheme would be invested in UTI Retirement Benefit Pension Fund. The mandate, initially, would be to invest 60 per cent of the corpus in fixed income securities and the remaining in equities. This could later change.
In case of SBI Mutual Fund, the fund manager will have the option of investing in Magnum Balanced Fund, MMPS 93, MSFU Contra Fund and SBI Blue Chip Fund. Collections from such schemes, however, have been reasonable. UTI has collected Rs 50 crore. “Collections from Gujarat have been just Rs 48,000,” said Agarwal.
SBI said that it has 30,000 customers. In an emailed reply, Reliance Mutual Fund said that on an average, they added up to 25,000-30,0000 SIP (count) per month. Out of this, micro SIPs make a substantial contribution.
Not roses all the wayHowever, there are several hurdles as well. For one, mutual fund investments require the investor to have a Permanent Account Number (PAN) – a big deterrent when it comes to tapping small and marginal investors. SBI Mutual Fund’s national head (sales & distribution), D P Singh, said, “We are not getting a good response at this stage. The absence of PAN cards with rural investors is the biggest hurdle.”
The problem can be resolved if Sebi agrees to do away with the PAN card requirement for investments up to Rs 50,000.
Then, marketing and promoting these products is also costly as not everybody has the distribution and financial muscle of SBI or UTI. No wonder, players do not expect to make money soon. “Promotion of these products is quite costly. But at this point of time, we are not looking to make any profit. It will take around four years to break even. Initially, the promotional cost is borne by the promoters,” IIMPS Director Gautam Bhardwaj said.
The chief executive officer (CEO) of one of the largest fund houses, which has so far avoided the micro SIP route, said that the business was not commercially viable because transaction costs were too high. He felt that the numbers were not in favour of fund houses. “Just for a Rs 10 SIP, the fund house has to convince a large number of people. As a result, this business will take a long time to generate profit,” he added. Also, fund houses will have to compete with the Life Insurance Corporation of India (LIC), which is a strong player in semi-urban and rural areas.
One of the main fears is that given the fickle nature of the stock market, rural investors might easily get scared when there is a downturn in the market. Fund houses also understand this. As a result, they are making early exits prohibitive. For instance, SBI charges an investor an exit load of 3 per cent for redemptions within three years and 2 per cent for redemptions between three and five years. UTI charges 1 per cent for exits before five years.

Source: http://www.business-standard.com/india/news/fund-houses-targetbottomthe-pyramid/362451/

The new approach to mutual funds investing

The manner of investing in mutual funds has changed over a period of time for individuals. This is likely to shift even more dramatically in the coming days.

The decision of the Securities and Exchange Board of India (SEBI) to abolish the entry load on schemes has been a big surprise for everyone. For investors this signals a possible change in theway they take their investment decisions.

There will be some benefit available, but at the same time there also has to be some element of care taken in the process so that it is completed properly.

Entry load
The entry load is the additional expense that has to be paid by the investor when they make an investment in the mutual fund. The entry load usually was in the range of 2-2.5 per cent of the investment and this was an extra burden for the investor.
The load is usually used to cover various selling expenses of the scheme like payment of distributors commission, miscellaneous expenses and so on. Till some time ago, there was an option for the investor to actually save the entry load by making their own investments directly and this ensured that the burden did not fall on them.
Now according to the new guidelines, the schemes should not charge any entry load at all so the investor would not have to pay anything extra. When an entry load is charged, the investor ends up getting a lesser number of units for the same investment.
So, if for example, the net asset value of the scheme is Rs 15 and the entry load is 2 per cent the investor will actually get the units at Rs 15.30 which means that for the same investment there will be a lesser number of units allotted to them.

Selection of scheme
Now with the abolition of the entry load, the investor has to concentrate on the process of selecting the right scheme. There are such a large number of options that need to be considered and this will require some element of work.
Investors will need to consider its performance more closely while making decisions. With no entry load present, the final returns that are coming in for the investor will be influenced largely by the performance or the returns that are generated by the scheme. In such a situation, the investor would do well to concentrate more on the potential returns that can be generated, so that this will help them in their decision-making.
The investor should also look at the fund manager, because this is an important factor that will play a role for their selection.

Exit load
The important point that investors will have to consider is that there could be an exit load that might make a strong re-appearance in the entire investment consideration. Mutual funds are likely to tighten the situation on the exit load front to ensure that the investor does not move in and out of the scheme very quickly.
The percentage figure of the exit load can also rise in the days to come and this can mean a bigger hit in case this has to be paid. The individual investor has to ensure that the exit load is considered while making their decision because this will reduce their returns. This factor has to be taken into consideration in the coming days.

Payment to distributor
The condition about how the investor goes about the entire investment process is important because this can give rise to another element of negotiation.
Under the new conditions, if you use the service of the distributor then there is no fixed fee for the distributor that will be paid by the mutual fund. Rather than this, you will have to pay the distributor, but this will have to be done after discussion and mutual agreement.
The figure will thus vary from person to person and hence there has to be a very clear idea about the manner in which this part of the transaction will actually take place.
The amount that you are willing to pay and how you actually make the decision and the points to consider will vary from person to person, so the right balance needs to be struck in deciding this issue.

Own efforts
There could be a lot of efforts that have to be done on their own by investors because of the entire change due to the fact that there could be a very low interest from the distributor to actually serve the customer.
With the financial incentive gone, there could be a reduction in the services and the only option for the investor is to ensure that they complete a lot of work on their own.
This will require some more time and effort along with the knowledge about the process. The effort could involve the issue of doing some amount of follow up or even communicating directly with the mutual fund, but this can vary depending upon the exact situation for the investor.
This factor has to be brought into the consideration, as it will impact the way in which the overall investment is done.

Source: http://sify.com/finance/fullstory.php?a=jgzn8scdehj&title=The_new_approach_to_mutual_funds_investing&?vsv=TopHP2

Entry Fee Removal May Slow Indian Mutual Fund Spread

Indian capital market regulators' move to scrap an entry fee on mutual funds is expected to bring more transparency in the growing industry even though it may temporarily hurt mutual fund penetration as distributors will lose the incentive to sell funds.
In the long run, the move should bring down the cost of investing in mutual funds, attracting more investors and helping the industry grow, experts said.
"The idea behind the SEBI move is to make mutual fund schemes available to the investor at the lowest cost possible," said Anil Chopra, group chief executive and director, Bajaj Capital Ltd.
The so-called entry load is a fee that asset management companies, or AMCs, deduct from the amount of money an investor puts in a scheme to pay for marketing and distribution expenses, most of which is an upfront payment to distributors as commission.
Last week, C.B. Bhave, chairman of the Securities & Exchange Board of India, said the upfront commission shall now be paid by the investor to the distributor directly, adding that distributors will have to disclose the commission received for their services.
The benefit for investors would be that they now get to negotiate the amount of commission payable.
Also, the removal of the entry load can actually increase the compounded return for investors as the entire amount they wish to put in a fund would get invested.
For example, earlier, if an investor paid 100,000 rupees for a fund investment, he was allotted units only worth 97,750 rupees-97,500 rupees after deducting the entry load.
At present, equity funds typically impose an entry load of 2.25% to 2.50% on their schemes.
Also, distributors will now be more accountable to investors.
"This is a path-breaking change, and one which would check mis-selling of mutual fund schemes by distributors," said Jagannadham Thunuguntla, head of equity at Nexgen Capitals Ltd.
Mr. Thunuguntla said distributors could now look at turning into advisers who educate investors on the prospects of a fund and its potential performance by demanding an advisory fee in return.
"The taste of easy money (by just selling a scheme) would be gone...the distributors will have to make sure they give the best advice to the investors in order to ensure regular income," he said.
The SEBI move comes at a time when fund managers are looking to make the most of the revival in Indian markets.
Total assets under management for fund houses in India rose 16% in May to a record 6.39 trillion rupees ($135.90 billion), compared with 5.51 trillion rupees in April, as the benchmark Sensex has soared over 50% since the start of 2009.
Mutual fund penetration in India is still a low 3% of total household savings, and the industry is banking on tapping investors in tier II and tier III cities for growth.
But the SEBI move may limit these efforts in the short-term as the industry may see a fall in the number of distributors, and consequently a fall in business volumes, say analysts.
Experts say distributors might look at other business opportunities as they would now cease to receive the fixed commission from the AMCs for selling mutual funds.
"Selling mutual funds will become much less attractive," said Dhirendra Kumar, chief executive, Value Research - an independent provider of investment information on mutual funds.
Manish Sonthalia, a fund manager at Motilal Oswal Securities Ltd. said, "(Fund) mobilization would tend to slow down and, even if profitability does not get impacted directly, volumes at AMCs would be hit."
In the short term, distributors may opt to sell other investment products like unit-linked insurance plans, or ULIPs, pension schemes and post-office savings certificates, which could hurt the asset management industry.
An option out for fund houses is to distribute their products directly, Mr. Kumar of Value Research said.
However, analysts say this is unlikely as setting up distribution centers at several locations across the vast Indian subcontinent would be costly and time-consuming for AMCs.

Source: http://online.wsj.com/article/SB124584142778546881.html?mod=googlenews_wsj

Sahara MF launches Sahara Super 20 Fund

Sahara Mutual Fund launched of its new equity scheme christened as "Sahara Super 20 Fund", an open ended growth fund with the objective to provide long term capital appreciation by investing in pre-dominantly equity and equity related securities of around 20 potentially attractive companies selected out of the top 100 largest market capitalization companies, at the point of investment.
The new fund offer opens for subscription on June 25, 2009. During the NFO period, the units of Sahara Super 20 Fund can be subscribed at Rs 10 per unit (plus applicable load). The NFO would close for initial subscription on July 23, 2009.
"The Indian economy is showing signs of revival and is returning to a potential growth path. The political stability has further improved the outlook. and the economy is expected to show a better growth on the back of improvement in consumer sentiment, policy reforms and projected growth in agriculture, and services sector, said Naresh Kumar Garg, CEO, Sahara Mutual Fund.
"Under such a scenario, it is the large cap companies, which would reflect this growth first and the fund aims to capture the benefits by investing in such companies."
The new scheme, which is benchmarked to CNX Nifty does not guarantee any assured returns. At least 65% of the total assets will be invested in equity and equity related securities and upto a maximum 35% of the total assets may be invested in debt and money market instruments.
Under the scheme one can opt for dividend option, (including dividend re-investment option) or growth option. Minimum application amount is Rs 5,000. Systematic investment plan (SIP) is also available with the scheme.

Source: http://economictimes.indiatimes.com/Personal-Finance/Sahara-MF-launches-Super-20-Fund/articleshow/4700892.cms

Retail investors stay longer than biggies in equity funds

Business Line Research Bureau Retail investors take a longer-term view of mutual fund schemes than high net worth individuals (HNIs), FIIs, banks or financial institutions, according to the Association of Mutual Funds in India (AMFI).The findings of the first numbers released by the AMFI on holding periods of investors for March indicate that 46 per cent of retail investors – by assets – held their equity funds beyond 24 months; 36.4 per cent of HNIs also had a two-year-plus holding period. However, only about 18 per cent of the banks, financial institutions and FIIs who invested in equity funds held on beyond 24 months.
More HNIs than retail investors held for one to two years. Overall, about 82 per cent of retail assets stayed on for more than a year in equity funds.
The report also indicates that equity funds made up 26 per cent of the total assets managed by the fund industry. Retail investors were the major investors in equity funds, making up 64.8 per cent of equity assets. They accounted for an even higher 68.2 per cent of the balanced funds.
HNIs were the next largest category of investors with a 20.6 per cent share of equity and 22.2 per cent in balanced funds (according to AMFI, HNIs are those who invest more than Rs 5 lakh).
Debt funds, as expected, are dominated by companies, with corporates accounting for 64.7 per cent of debt assets. HNIs were also big debt investors with a 28.6 per cent share.
Retail investors made up only 4 per cent of the asset base of debt funds. According to a report, AMFI is planning to publish this report every six months.

Source: http://www.thehindubusinessline.com/2009/06/25/stories/2009062551921300.htm

LIC to invest Rs 50,000 cr in stocks in FY'10

Life Insurance Corporation of India (LIC) on Wednesday said it will invest nearly Rs 50,000 crore in the equity market this fiscal.
"We expect to invest nearly Rs 50,000 crore in equities this year against Rs 40,800 crore last year," LIC Managing Director Thomas Mathew told reporters here.
So far in this fiscal, the largest life insurer has invested about Rs 8,000 crore in the equities.
As per exposure norms, LIC is also investing in government papers and corporate debt.
Yesterday, LIC Chairman T S Vijayan said during the current fiscal, the life insurance company is eyeing a premium income growth rate of 20 per cent.
As regard new premium income, which declined by nearly 10 per cent in 2008-09, he said the company is expecting a growth rate of 25 per cent during the current financial year.
LIC collected a premium income of Rs 1,55,000 crore in 2008-09, which included first premium income of Rs 52,000 crore.

Source: http://economictimes.indiatimes.com/LIC-to-invest-Rs-50000-crore-in-equity-market/articleshow/4696158.cms

Infrastructure shares are hot commodities for MFs in India

Infrastructure shares are hot commodities for funds in India after the recent elections, and their attraction is only set to grow as theMutual FundsPaperwork for MF investments!MF InvestmentsWhen do you jump a mutual fund?new government lays out plans to improve the country’s overburdened roads and bridges in next month’s budget.
Fund managers are hoping the new government will bolster spending on infrastructure, remove policy bottlenecks by easing land acquisition rules and environmental clearances, amend labour laws and simplify procedures for project approvals.
While such expectations have helped infrastructure shares surge twice as fast as India’s benchmark index since mid-May, a clear roadmap in the budget would further improve visibility and could convince the funds to pay even higher valuations.
Fund managers are also betting on a pick-up in earnings for such firms later this year, helped by lower interest rates and commodity prices and a revival in economic growth.
“Basically the opportunity is very big,” said Sankaran Naren, equity chief investment officer at ICICI Prudential. All that is required is for everything to be lubricated properly. I am interested in clarity,” Naren, who manages about $780 million in India’s biggest infrastructure mutual fund, added.
Engineering firms Bharat Heavy Electricals, Larsen & Toubro, Crompton Greaves and Reliance Infrastructure, were among the 20 most popular stocks for domestic fund managers in May.
The shopping list also included construction firms Jaiprakash Associates and Punj Lloyd, as funds sought exposure to sectors such as power and construction.
India’s biggest fund firm, Reliance Capital, is raising money for a new infrastructure offering, while rival Tata Mutual Fund sought approval this month to launch its fourth such fund.
SBI Funds Management, French insurer AXA, Sundaram BNP Paribas, Franklin Templeton and Deutsche Bank have also sought approval for infrastructure funds in June.
Fund managers are excited by the prospects for reforms after India gave the Congress-led coalition the most decisive election mandate in two decades, freeing it from the support of the Left and communist parties, which had stalled planned reforms.
India estimates it needs $500 billion over the five years to 2012 to upgrade its overwhelmed airports, potholed roads and inadequate utilities but has lagged in making critical reforms needed to do so, holding back potential gains for investors.
The sector suffered a blow last year as the economy slowed from 9 per cent in 2007/08 to less than 7 per cent and a global credit crunch starved infrastructure firms of funds.
But the gloom seems to be diminishing.
India is expected to expand at 8 per cent in 2010, the fastest among major economies in the world, and 8.5 per cent the year after, matching China’s growth rate, according to a World Bank report released on Monday.
An improvement in growth prospects is likely to boost fund flows, especially to the high-beta infrastructure sector.
The sector could also get a lift later this week when the S&P CNX Nifty index shifts to a free-float market cap methodology, giving higher weight to some infrastructure stocks.
However, India faces plenty of execution risk.
“While there is always a fear of disappointment when expectations are very high, in our view, the government could focus on low hanging fruit and still deliver a lot,” JPMorgan’s domestic fund unit said in its latest fact sheet.
HUGE POTENTIAL
Few would doubt the opportunity in domestic infrastructure.
India’s peak power capacity is nearly 14 per cent short of demand, while its transmission and distribution losses are a staggering 40 per cent, according to Planning Commission data.
Only 2 per cent, or 65,590 kilometres, of roads are national highways but carry 40 per cent of traffic, while less than half of agricultural land is irrigated, it said.
Ports are running at 95 per cent of capacity with demand rising at 10 per cent annually, Tata Asset Management data showed.
But to grow at 9 per cent India needs to invest 9 per cent of its GDP to boost infrastructure from less than 6 per cent now.
For a graphic on planned investment by sector, click here
“Achievements in the past five years will pale in comparison with what we will see in the next five years because of the scale at which these activities are going to be happening,” said Sanjay Sinha, chief executive of DBS Cholamandalam Asset Management.
Infrastructure funds are the most popular in India by sector, with 18 of them managing nearly Rs 16000 crore ($3.3 billion) at the end of May, according to fund tracker ICRA Online.
“This is a 10 to 20-year catch-up story, years of servicing and supplying, and then another cycle of upgrading and replacing,” said Seth R. Freeman, chief investment officer of US money manager EM Capital Management.

Source: http://nseguide.com/stock-views/infrastructure-shares-are-hot-commodities-for-mfs-in-india/

Mutual funds in buying mode

Mutual funds (MFs) bought shares worth a net Rs 81.90 crore on Tuesday, 23 June 2009, lower than Rs 120.80 crore on Monday, 22 June 2009.
MFs' net inflow of Rs 81.90 crore on 23 June 2009 was a result of gross purchases Rs 1,032.60 crore and gross sales Rs 950.70 crore. The BSE Sensex fell 2.21 points or 0.02% to 14,324.01 on that day.
MFs were net sellers of shares worth Rs 506.50 crore in June 2009 (till 23 June 2009). The selling by mutual funds was despite fresh inflows into equity schemes. Net inflows into domestic equity mutual funds rose to Rs 1,930 crore in May 2009, the highest in 14 months, and more than twice the amount in the first four months of 2009, according to data from the Association of Mutual Funds in India.

Mr. N. Sethuram, Chief Investment Officer, Shinsei Investments

Shinsei Investments, a new player in Mutual fund industry plans to launch its first two mutual fund products in the country before end-July. Japan's Shinsei Bank holds a 75 % stake in the mutual fund house, with investor Rakesh Jhunjhunwala and Freedom Financial, 15 % and 10 % respectively.

Mr. N. Sethuram, Chief Investment Officer, Shinsei Investments, prior to his current assignment, he was CIO with SBI Funds Management Pvt. Ltd. He started his career in State Bank of India 1976 and has over 31 years of banking experience in diverse fields like Credit, Forex and Investments. Of his diverse assignments with SBI, he was also posted as Senior Vice President (Credit and Investments) at the Bank's Tokyo Branch.
Speaking with Anil Mascarenhas and Fahima Shaikh of India Infoline, N. Sethuram says, “When market surges, logic is lost and these surges are not supported by fundamentals and valuations tend to get distorted”

What are your expectations from the Union Budget?

We are not expecting any big-bang announcements in the budget that would impact the equity markets. The budget would have to look at avenues for raising revenues. It would also be too early to expect any drastic reforms measures from the upcoming budget.
On the disinvestment front, we don’t expect large scale disinvestments to be announced. The government may opt for some small size divestments initially before looking at some big ticket ones in the next couple of years. Overall, we feel that the government would need to focus more on reining in the fiscal deficit, which is very vital.

Which are the sectors likely to benefit from the budget?

The government is very clear about the role infrastructure will play in order to give a thrust to the economy. Companies related to this sector will obviously be the beneficiaries. Having said that, I believe one need to very specific at picking up stocks as the prices have run up significantly and so have valuations.
The market has surged post the election verdict. Hardly anyone could participate in the first 2000 points rise in the Sensex after the elections results were announced. Typically, when such surges happen, logic is lost. These upswings are not supported by fundamentals and valuations. Valuation re-rating has taken place in a major way. Whether markets can sustain these levels and whether current valuations are justified would be the question in the minds of most investors. The current valuations are to be viewed in the backdrop of poor earnings growth by the corporates last year. Even in the current year, the earnings growth is expected to be subdued. To that extend current market valuation don’t seem to be justified. However, we expect earnings growth to rebound in the next year, with expectations of return to high GDP growth pattern of over 8%. If the current market levels are valued discounting the earnings expectations of the next year, the market valuations would look reasonably attractive.
These are times when most people are keen on investing in the equity markets and to an extent feel that they have missed out on the opportunity to invest at lower levels. While selective buying is taking place, we are also seeing profit booking happening as the markets have run up significantly by almost 80%-90% from its lows. One can expect to see some cooling in the equity markets by around 10-15/% from the recent highs.
We are very positive on the prospects of the equity markets over the medium to long term. Our optimism stems from the fact that the Indian economy would regain 8% plus GDP growth as soon as the conditions in the US starts improving and this growth can be sustained over a long period. One can certainly hope to get good returns on equity investments over the next three to five years.

What is your view on Real Estate as a sector?

We have seen some improvement in the fortunes of the real estate sector. There would be selective opportunities to invest in this sector. This is a market where we have to be stock-specific rather than sector specific.

You mentioned about the launch of Shinsei Industry Leaders Fund. Generally, the leaders in the industry would already have had a good run. How would you be able to outperform by buying these companies?

We are looking to launch the Shinsei Industry Leaders Fund shortly, which would be a diversified equity fund. In our definition of ‘leaders’, apart from companies which have the largest market share in the respective sectors, we have also included companies which have achieved the highest growth in sales as also the companies with the highest profitability. The selection of the companies which are leaders in their respective sectors would be based on their performance in their core business over the last three to five years. There are 43 sectors as classified by AMFI and we would identify 3 to 5 companies as leaders in each sector. We would typically have a universe of around 120 companies to select from. Our portfolio would have around 25 – 35 stocks.
Most mutual fund houses follow a top down policy for selecting sectors to invest in and then a bottom up approach for individual stock selection. In our proposed Shinsei Industry Leaders Fund, we would first identify the leaders among various sectors. Once we identify the leaders we would do a bottom up stock picking from among the leaders in the sectors that we feel would perform well.
Typically, it is the mid-cap companies which have the highest growth rates in sales and profits in their respective sectors, while it is the large market cap companies which tend to have the largest market share. Our portfolio would therefore be a blended portfolio of large and mid-cap companies. We have observed that in most market conditions, it would be the leaders that outperform. An investor in our fund can hope to get a portfolio comprising of leading companies giving good market relative returns.
The Japanese are symbolized by their quality discipline and precision. Considering the fact that we are the first mutual fund in India sponsored by a Japanese financial services group, we would endeavor to imbibe these qualities in our funds.

The debt market has recently seen increased volatility. What is your view on the 10-year-bond?

The proposal in the interim budget has thrown up a large deficit and has put a lot of pressure on the government’s borrowing calendar. We don’t know how much more would be added to the same in the coming regular budget. The supply of papers on account of the large government borrowing has placed an upward pressure on the interest yields in gilts. This is going to be a negative factor until the government is able to address the budget deficit issue. It is our house view that the benchmark 10-yr-bond would move between 6.5% - 7.25% in the short to medium term.
Last year, we witnessed a rally in the debt market when the yield on the 10 year gilts moved from around 9.5% to 4.90%. However, since then the yields have tended to move upwards and are currently at around 6.9%.

So do you see any further rate cuts?

There is a small possibility of one further rate cut announcement by RBI. However, we feel that this can at best be to the extent of 0.25%.

India has grown by 5.8% in the third and fourth quarters of the last fiscal year, which I believe is an excellent growth rate considering the fact that most parts of the developed world were in the grip of a severe recession. We believe that once the recessionary phase is over in the rest of the world, we can regain growth rates of over 8%. While the stimulus announced by the government have been aimed at kick starting the slowing economy, we think that the priority should now shift to tackling the large fiscal deficit. Problems exist in many sectors, especially export-oriented sectors like diamond and textiles. But I believe providing stimulus packages to these export oriented sectors would not benefit these sectors much unless the global economy recovers.
From October 2009, with the base effect wearing out, we are likely to witness higher inflation numbers. We are particularly worried about the period from January to April next year, when the inflation could see a steep rise because of the low base effect of the earlier year. If the inflation climbs to uncomfortable levels then, the RBI may then be forced to reverse their current stance of maintaining high liquidity and low interest rates.

Does the decoupling theory remain just a theory?

I don’t think India would be completely decoupled from the world anymore. Having said that, India has the potential to grow at a much faster pace than the developed world over the next few decades. We have already seen last year India grew by 6.7%, when the US and Euro Zone were at zero or negative growth. So to an extent we were decoupled from the developed countries, but moved in the same direction. As we get increasingly integrated into the global economic system, we would tend to move in the same trend as the global economy. India’s growth story is also based on domestic core sector development and consumption and we believe that these two factors along with our favourable demographic profile would drive growth over the next few decades. India can sustain higher growth rate than the rest of the world.

What impact do you see with the oil prices fluctuating?

We all know oil prices have been going up steadily and reaching uncomfortable levels, especially for India, as it increases our import bill. This in turn adds up to our trade and Current Account deficits. Oil marketing companies have again reached a stage where they would incur losses unless fuel product prices are revised. India would be happy at a price of crude being below $50 per barrel.

What is your advice to equity investors?

Investors have been complaining about missing the recent rally as many expected the Sensex to correct post the election as they were expecting a hung parliament. Most investors would have planned to make an entry once there was clarity on the government formation at the Center. The market charted its own course to touch 14,000 immediately after the election results were announced and moved up further thereafter.
We are very optimistic about India’s future. Investors, who want to invest in equity, need to have a longer term view. If we believe India can sustain high growth rates over the medium to long term, then investing into equity and equity mutual funds can certainly give good returns over a three to five year horizon. Investors could look at making at entry at current levels and invest in a phased manner. Markets have a tendency to run up significantly once the economy recovers and the momentum sets in.

Being a new player, what is your approach to the market?

Apart from the Shinsei Industry Leaders Fund, which will be our first equity fund, our first debt fund launch would be the Shinsei PSU Bond Fund, which would predominantly invest in high quality papers of public sector entities. The fund would also be rated with the highest credit quality rating by a leading rating agency.
Initially, we are establishing our offices in the major metros and will have a presence in six centers viz. Bangalore, Ahmedabad, Mumbai, Delhi, Kolkota and Chennai. At a later stage, we would look at expanding our presence in other centers.

Source: http://www.indiainfoline.com/news/showleader.asp?storyId=780&lmn=1

Advisories to benefit from MF entry load removal

With SEBI removing the entry load from mutual fund unit buying, wealth
advisory firms find reason to rejoice such a decision foreseeing huge market potential for them. Going forward, such a decision is expected to give “big push” to the wealth management services which is still at a nascent stage in India.
Wealth managers believe that this move may lead to a dominant emergence of advisory services considering the virtual end of distribution services in mutual fund schemes. They are of the opinion that investors will not desist from seeking investment advice and portfolio services. If they deliver quality advisory backed by strong independent research, retail investors would not hesitate to accept wealth management services at a nominal cost of 1-2 per cent advisory fees. After all, selection among 300-400 equity schemes is no joke!
Earlier, major distributors were selling MF schemes charging around 2.25 per cent entry load – which was deducted from investors’ money. There were cases of large scale “push selling” in a pass back system wherein an independent financial advisor shares a part of his commission with the investor by pushing a particular mutual fund scheme, which may not be worth buying, according to the wealth managers.
“The mantle of power is going to shift from product pushers into a holistic financial planning model wherein any wealth advisory service with a strong research background is bound to witness triple digit growth, provided MF industry grows by 30 per cent CAGR,” said Kaustav Majumdar, Dy. CEO & Executive Director, SMC Wealth Management Services.
“SEBI’s new regulation has opened a new dimension for all such people who take up financial planning services,” added SMC Wealth’s Majumdar.
The entry load payment also acted as a deterrent for wealth services, which were hesitant to disclose its advisory charges to the investors at the first instance. Earlier, investors who already paid the entry load for mutual fund schemes were averse of paying any advisory fees. Wealth services used to take a beating on account of this.
Expecting to double their business volumes in less than a year, Vikas Agnihotri, CEO Religare Macquarie Wealth Management, said, “We plan to capitalize on Religare’s network to reach out to investors in Tier I and Tier II cities. From being subjected to a product push environment, Indian investors are being introduced by select players to quality advisory services. In our experience, customers are ready to pay for quality and holistic advice backed by qualitative and quantitative research.”
“SEBI’s decision is both in the interest of investors and wealth managers. It leads to transparency with no involvement of hidden cost like load structure. Under this scenario, advisory is the only way forward,” mentioned Rajesh Saluja, CEO and Managing Partner, ASK Wealth Advisors; who feels, wealth advisory firms need to concentrate in educating the customer about the benefits of advisory services.
According to market grape vine, the situation is enticing enough to float new wealth management advisories.

Source: http://economictimes.indiatimes.com/Personal-Finance/Mutual-Funds/Advisories-to-benefit-from-MF-entry-load-removal/articleshow/4691674.cms

Swiss Sarasin group to enter Indian market

The new operation will provide financial advisory, consultancy services and
distribute third-party products such as mutual funds.

Swiss private bank, Bank Sarasin & Co, today announced its entry into the Indian market and said that it would open offices in Mumbai and Delhi on July 1.The group’s first presence in the country is incorporated as Sarasin-Alpen (India) Private Limited, which is a non-fund based non-banking financial company (NF-NBFC), a press release issued here said.The new operation would provide financial advisory and consultancy services to wealthy private clients in India and distribute select prime third-party products such as mutual funds.Various agreements have been established with organisations in India to enable Sarasin-Alpen (India) to distribute its funds and portfolio management services, the release said.“As the sustainable Swiss private bank, we look forward to providing innovative financial advisory solutions matching the requirements of our discerning and growing Indian client base,” Bank Sarasin & Co, Switzerland, CEO, Joachim H Straeble, said.“The Indian markets have shown early signs of recovery and India will become one of the world’s economic engines. Hence, it is a very important market for us and we have strengthened our presence in India through this launch,” the bank’s head of private banking, Fidelis M Goetz, said. The Sarasin group’s majority shareholder is the AAA-rated Dutch Rabo bank.“The Sarasin group has its roots as a boutique bank and is committed to providing its top-quality products and services to a growing number of wealthy private clients,” the release said.The launch of the operations in India and the opening of the new offices in Mumbai and Delhi mark the Sarasin group’s commitment to expanding its presence in south Asia and the next stage in the successful implementation of the group’s international growth strategy, it added.

Source: http://www.livemint.com/2009/06/23151043/Swiss-Sarasin-group-to-enter-I.html?h=B

Our med-term outlook for equity is positive: Madhu Kela

Where do you see equity markets heading from here?
Essentially post the election, our verdict becomes broadly positive on the market. As per general perception, markets have gone up 70 to 90 per cent from their lows. So there is always a possibility that the market could correct by another 10 per cent, may be another 15 per cent from here. But our medium-term outlook for equity is decisively positive for India.

Where is the optimism coming from? Where do you see the market improvement which is leading to the confidence?
Whatever the global situation is, in the short term, India is going to be part of that global system. So, there is going to be another downturn in the globe which may happen for whatever reason. We will also participate in that downturn. But as we are seeing whenever the recovery really takes place, India is one of the few countries where you can assume 6 to 7 per cent GDP growth for 4-5 years. It is the place which the whole world is looking at.
So in the recovery we will obviously be the fastest in the first to participate in the growth. And in the downslide though we will participate, but to that extend on an adjusted basis if you see form April 2009 till now our return is 29 per cent, merging market return is 18 per cent, and US market is 1.1 per cent. Clearly if you look at it in a 6-year timeframe, we are in a sense de-coupled or delinked globally or the inherent bullishness is getting reflected in these numbers. So India’s story remains very, very positive both for a local as well as a global investor.

Let’s understand the importance of liquidity in everything...that in a sense is very important. On an average, you look at about six to seven billion dollars from FIIs, and two to three billion from the mutual fund industry. If you really add up everything on a six monthly... that is the number of QIPs going to hit the markets.
I think this is a very simplistic way of putting these numbers. First of all, I do not believe that all the people who have announced the QIP will get the money. I think there are hundreds of announcements which are made by corporates. But I do not think all these are going to get the money. And these QIP to get subscribed surge should go to 6000 NIFTY, all over again people have to really scramble for shares. Any which way our argument is being fulfilled any which way. Secondly, don’t forget there is too much of insurance money which is coming into the market. As an investor I am very happy to see these corrections in the market. These are our chance and opportunities as Indians to employ our money into equity markets. So, if market goes up parallely in hind side, you see between October and December was a golden period to make investment in the equity market. In fact, these corrections have to be viewed as an opportunity rather than as a threat for a long-term investor. I am not here. I don’t even understand the market. I have tried to understand it, but have failed. I must admit that what can happen in 10 to 15 days, I don’t know. Its traders’ delight and better left to traders. But as an investor, mid and long-term call on India is positive. Every decline of any meaningful size should be used as an opportunity by investors to up their equity weightage.

Keeping in mind the importance of the month of July, the Budget and monsoon, not many people are talking about monsoon despite its importance for the economy. So once we wrap up the month of July, will we get the directional call for the next 6 months?
I think monsoon is, as you rightly mentioned, a big thing. Don’t forget we are only 15 per cent dependant on agriculture. I think a larger portion of our consumption is also linked to how our agriculture output is and ultimately we are 100 cr people and we need water for everything. So I think monsoon is a very important thing and we are relying on god for that. I am not assuming that as a significant threat, but that could turn out to be a threat which could possibly have even a bigger correction in the market what I earlier mentioned. Budget I think I am not too nervous. I think people who are sitting in the chair are reasonably intelligent people. They know what the expectation from them is, and I am sure they will deliver. Good thing is even market is getting nervous before the Budget. So there is not too much expectation in that is being built from the Budget perspective. Earnings, by and large, will be better than what they were in the last quarter, but again from a near-term earning perspective, is there any dispute that markets are reasonably valued? They are, but we are not making a case of markets going up from a next quarter earning perspective. We are optimistic on the next 2, 3 year earning perspective which is a call we have to take.

The growing point...
No I don’t think crude will go up above 150 dollars for us. Crude stays at 60 to 70 dollars, and we are fine. Commodity prices are still half of what they were at the peak. As long as they do not go all the way up, we are still ok. As far as inflation is concerned, you know India can and should afford 4 to 5 per cent inflation. I don’t think there is anything wrong with that number and there is a school of thought which is coming that there is too much liquidity being pumped in the world and the world inflation itself might go up. To some extent, there is merit in that argument but don’t forget that a lot of industries in the world are still operating at 50 to 60 per cent. So the question was not capacity. If prices go up, so the capacity will also get unlocked and that will start to work. So you can make all these arguments as to what will happen 12 and 18 months down the line on inflation front, but I do not think that is a terrible worry as of now.

Last cycle in raising cash, have you followed the same cycle the minute it crosses 4300, 4400 in Nifty? You have raised enough cash. It will plough down when the markets come down.
We have not raised any significant incremental cash because you know I must admit I also realized one thing that you know given that we are not expected to raise significant cash because the flip side is that ultimately you can’t time the markets. So we have not raised any significant cash, but at the same time we have not deployed all the cash which we have. We have continued to reshuffle our portfolio which we have. Whenever we find that this reward has turned against us, we continue to sell those companies and raise cash and look for opportunities where we are deploying cash so net net we are haven’t raised any new cash as compared to what we used to have.

You think time has come when you can start looking at large companies where balance sheet damage has been large but when liquidity changes, large caps get the fruit and mid caps get the bread crumbs. Do you think it is time to revise mid-cap stocks which have been tarnished 80 to 90 per cent?
Undoubtedly, let me repeat undoubtedly. I think ultimately market has already given 80 to 90 per cent return. A lot of large cap companies are fairly valued. There is lots of value and portfolio value will come from alpha. Basically what stocks you are able to identify and the time-frame for which you are able to hold them. It is already visible. You see from the bottom and you see from where we are today. You will see there are so many stocks which have given 200, 300, 400 per cent return and there is still debate going on in televison whether it a bull market or a bear market. So I think you know the reality is that on an individual company basis, if our time-frame for 3 to 5 years is bullish, we will continue to follow that model and continue to find the larger mid cap names. Let me emphasize, we are not looking at very very smaller companies, given the size doesn’t make sense, but we are still looking at larger mid cap companies where we could deploy decent amount of money and hope that in 3 to 4 years they will definitely give us much larger return than the appearing groups in the large cap in that segment.

For mutual funds, exit load and entry load are important factors. They are important as far as the chain is concerned....
There is an all around confusion that how distributor has been an overall link in getting the sources to the industry. You know our money or most of the mutual fund money has come through distributors. In the new arrangement, the distributor has to change charge to the investor rather than getting their commission from the industry. I think that in due course of time, the investor will realize what a value and distributor does play a very very important role in this entire value chain. But there is a value proposition which the distributors are putting and they will start to recognise that they need to make their commission for putting this value proposition.

Where do you see earnings or business cycle generally as theme not revival, going forward.
I think there is one area which I am not talking, not from a short-term perspective. In the medium to long term, we think you know currency will appreciate because in India if hypothesis plays off, we are expecting that lot of foreign money will come in. What format that will come in we do not know, but clearly there will be a lot of money which will come in. So companies which are depending on foreign exchange and currency for their earning growth will get impacted in mid and long term.

Source: http://economictimes.indiatimes.com/Madhu-Kela-Head-Equity-Investment-Reliance-Mutual-Fund-talks-to-ET-NOW/articleshow/4691948.cms

Distributors to boycott products sale

General (non-banking) distributors of mutual fund schemes are up in arms against the recent Sebi directive, giving investors the right to negotiate commissions while buying MF products through them. As a mark of protest, some mutual fund agents’ associations have decided to boycott sale of MF products starting July. These associations are also likely to file a writ petition against the Sebi ruling. Prominent among these are MF associations from Aurangabad, Akola, Amaravati, Nagpur, Nasik and Chennai. Industry observers say the move will hurt smaller distributors more, as the larger players will find ways to circumvent the Sebi ruling. “Investors in Tier-II and Tier-III cities are not mature enough to understand the worth of the advice given by a MF distributor, hence it will be difficult to convince him to pay a commission for the same,” according to Mukesh Chothani, president, Nasik ARN Agent Association. “The (Sebi) ruling will make our task of collecting advisory fees almost impossible. We would be better off selling insurance and post office products.”
Till last week, investors buying mutual fund units through a distributor were subject to an entry load of 2.25% — the margin that asset management companies pay distributors for bringing in business.
Last year, Sebi abolished entry load for those investors who purchased mutual fund units directly from fund houses. This, however, evoked a tepid response with 95% of the applications received by AMCs coming through the distribution network.
With Sebi banning entry loads altogether last week, the commission payable to a distributor will now be mutually agreed upon by the investor and the distributor.
This raises another concern for the general distributors that if a scheme recommended by them fails to perform, there is a fair chance that some angry investors may drag them to consumer courts as they would be bound by a contract with the investor who has directly paid them a commission. Also, as the AMCs are liable to pay service tax on commissions to distributors, this ruling raises concern on the loss of revenue to the government. Not all agents can be expected to pay the service tax loyally to the exchequer.
The impact of the Sebi ruling is being felt not only by the MF distributors but also by the MF houses (AMCs) who foresee an adverse impact on their expansion plans. “The MF industry is currently aiming to increase its retail penetration and this involves cost. An entry load does help to partially fund this ambition and thus must be seen as a marginal charge in the context of potential returns from this asset class over the medium- to long-term,” says Ajay Srinivasan, chief executive - financial services, Aditya Birla Group.
“However, the recent Sebi announcement has raised questions on the practicality of these expansion plans. It is also important to note that even products like RBI bonds and fixed deposits have an upfront distribution charge,” he added.
The MF industry is already struggling to keep pace with the ever expanding insurance industry whose products like unit-linked investment plans are similar to MF products, but fetch a much higher commission for distributors. However, Sebi chairman CB Bhave clarified recently that the onus of convincing the investor that an MF product is far more cost effective than an insurance product lies with the MF industry only.

Source: http://economictimes.indiatimes.com/Personal-Finance/Mutual-Funds/Distributors-to-boycott-products-sale/articleshow/4689838.cms

Funds shuffle scrips as Nifty floats

The shift in S&P CNX Nifty, the favourite index of numerous investment schemes both at home and abroad, to a new system of computation is likely to get the fund managers busy this week.
The index, which is a benchmark for at least 73 equity diversified schemes of Indian mutual funds, is going for a major change in its composition.
The National Stock Exchange's flagship index will shift to free-float capitalisation method from June 26.
Under the method, the weightage of each of the 50 component stocks in the index will be proportionate to the amount of free float.
Free float is the number of shares of a company in public hands --- stock that is "floating free", that which is not with the promoters.
Globally, most indices are moving to this system as it is perceived to be more representative of market action.
Experts say, with the new system coming into vogue, funds would need to adjust their portfolios accordingly.
"Managers who are tracking the Nifty closely, may have to make allocation changes. People who are mirroring the index should make bigger changes," said Deepak Mohoni, MD, www.trendwatchindia.com.
Benchmark indices are important to two broad kinds of investment schemes: ones that track market indexes (index funds) and funds whose managers choose securities to buy and sell (actively managed funds).
While index funds mirror the index components, active funds operate on a relative return basis, wherein performance of the fund is judged by comparing it to the performance of the benchmark.
Some of the action is already visible in the prices. Stocks which are bound to lose weightage post this reorganisation, especially the PSUs, are out of favour.
"A significant portion of the adjustment has already played out and one can see the result of that in the fall of NTPC and ONGC and the outperformance of L&T and private banks," said Anand Shah, head of equities at Canara Robeco MF.
While Reliance Industries will retain its position as the top-weighted stock due to its high free-float component (50%), ONGC and NTPC are likely to lose weightage.
Oil and Natural Gas Corporation (ONGC) has the second-highest weightage (8% )in the Nifty under the Total M-cap regime. This is bound to come down to 3.5%.
Similarly, the index weight of National Thermal Power Corporation will drop from 6% to 1.9%.
The reverse will also be true as some stocks such as Infosys will have a high free-float gain at the expense of these.
The weightage of Infosys, currently at 3.77% in the Nifty, will increase to 7%. So an index fund will appropriately double its holding of Infy shares.
ICICI Bank will increase its weightage from 2.96% to 6.45%, while Larsen & Toubro goes from 3.27% to 6.41%.
Some absolute-return products based on the index and long-term players like insurance companies who tend to mirror the index would go for shuffling of portfolios, said fund managers.
"Arbitrage funds and structured products, which track the Nifty, would also see some changes made. The majority of the action would take place on June 26 for index funds," said Gopal Agarwal, head of equity at Mirae Asset Global Investments.
Jayesh Shroff, fund manager at SBI Mutual Fund, said, insurance companies and the funds managed by them are more likely to be affected by such a change.
"As far as they are concerned, it would already have started," said Shroff.
The effect on the broader will be very short-term, feel experts.
A Balasubramanian, CIO of Birla Sun Life Mutual Fund, said there might be some minor changes in the portfolios of schemes. "A fund manager will change his scheme's holdings on the basis of valuation rather than events such as these," Balasubramanian believes.

Source: http://www.dnaindia.com/money/report_funds-shuffle-scrips-as-nifty-floats_1267546

Select the right diversified MF to prosper

Diversified funds are one of the most popular mutual funds around. They are the oldest funds in India, and there is a wide range of funds in the market from various fund houses.
So it comes as no surprise that it is quite confusing for a normal investor to select the right fund for his investment needs. Hence, if you are in a dilemma about how to select the right fund, then read on to get help on the selection criteria.

Check the fund's returns against its peers: When you are choosing the fund for its performance, always compare its returns against those of its peers. E.g. it doesn't make sense to compare the returns of a large-cap fund against a mid-cap fund as mid-cap funds tend to offer higher returns by taking higher risks. Also ensure that the performance is compared against longer time-frames, since the fund can give extraordinary returns for a short period but may fail to deliver over longer periods. It will help you check the performance of the fund during various market cycles.

Check the fund's returns against its benchmark index: Find out how the fund has fared against its benchmark index. Always ensure the fund's performance is consistent with the returns from its benchmark index, if not better. In case of market crash, ensure the fall in the fund's value is not more than its benchmark index.

Watch out for the past performance of the fund: This is another important comparison, as during the stock market rally, all the funds benefit. But during the market crash, many of these funds show dismal performance. So take care to ensure the fund is not a one-off winner, but a steady performer. It also means avoid new funds, since they do not have any history to prove their performance.

Risks taken by the fund to generate returns: With returns being the prime focus of the investors at the time of choosing the fund for investment, many funds tend to take higher risks to generate high returns. If the fund takes exceptionally high risks, it is very likely to be affected when the market crash comes.
To find out the risks associated with the fund, take a look at Standard Deviation (SD) and Sharpe Ratio (SR), which is the risk-adjusted returns. SD for the fund chosen must be lesser than its peers, while SR should exceed its peers. These values are available at various mutual fund websites that rate the funds based on these two parameters.
When selecting the mutual fund for investment, remember to carry out your research carefully. This is because it is your money at stake. Once you are invested, it is difficult to redeem your investment without paying penalty.
Always avoid new funds and NFOs since they do not have any track record. Also certain funds like mid-cap and small-cap funds will be riskier than large-cap funds due to the inherent volatility of the underlying assets.
Similarly, ETFs and index funds will be less risky than actively managed funds, since they just replicate their benchmark index. But in the process of playing safe, don't give up on earning good returns. Hence ensure you establish a balance between risk-reward ratio, to earn good returns while minimizing your risks.

Source: http://business.rediff.com/report/2009/jun/23/perfin-select-the-right-diversified-mf-to-prosper.htm

Sebi move may boost ULIPs over mutual funds

Investors may be thanking market regulator Sebi for doing away with entry load on mutual fund (MF) investment, but industry players believe the move may adversely affect them, as they fear distributors would push unit linked insurance plans (ULIPs) to earn better commission.
ULIPs offer attractive front-end commissions to agents. However, independent financial advisors believe that though there is a possibility of some distributors favouring ULIPs in the short-term, the new directive would be beneficial for both the industry and investors in the long run.
"This clearly puts the insurance industry in an advantageous position. Why would a distributor sell MF schemes where he earns nothing, when he can sell a ULIP product and get a very high commission," asks an industry player.
In fact, this was the pet theme at a CII-organised MF summit recently, where the Association of MFs in India (AMFI) chairman raised the issue in the presence of Sebi chief C B Bhave. However, the Sebi chief made it clear that the industry should try to convey to the investors that lower commission MF scheme would help them earn more. With no entry load, investors stand to gain more, as the impact of it on long term investments would be huge because of the effect of compounding rate returns, Bhave said.
Independent financial advisors say the MF industry's fears are exaggerated. "If at all there is an adverse impact, it will be only in the short-term. Distributors will not survive selling only ULIP products. It is the business model of banks where they want to earn more front-end commissions by selling insurance products," says Gaurav Mashruwala, a certified financial planner.
Agrees Devendra Nevgi, another financial expert. "It is well known that ULIPs have much higher commission rates than MFs. Some people have been pushing them aggressively already," he says. Both believe the new Sebi directive would improve the quality of distributors in the country.

Source: http://timesofindia.indiatimes.com/Business/India-Business/Sebi-move-may-boost-ULIPs-over-mutual-funds/articleshow/4678340.cms

Entry of global mutual fund cos hit due to low profitability

Rising cost pressure and fall in profitability in the Indian mutual fund industry has hit the entry plans of global players in the country, a CII-KPMG report said.
"Rising cost pressures and decline in profitability have impacted the entry plans of global players eyeing an Indian presence," the report said.
The recently released report pointed out the profitability in the Indian mutual fund industry has not been commensurate with the Assets Under Management (AUM) growth over the last five years.
The report after analysing the financial statements of Asset Management Companies (AMC) pointed out while the AUM grew at 35 per cent in the period from 2005 to 2009, the profitability of AMCs (which is defined as profit before tax as a percentage of the AUM), declined from 0.24 per cent in 2004 to 0.14 per cent in 2008.
The report said another reason that may affect the entry of foreign players is the rising cost structure here.
It said the operating expense as a percentage of AUM rose from 0.41 per cent in 2004 to 1.13 per cent in 2008 due to increased spend on marketing, distribution and administrative expenses which impacted AMCs' margins.

Source: http://economictimes.indiatimes.com/Personal-Finance/Mutual-Funds/Entry-of-global-mutual-fund-cos-hit-due-to-low-profitability/articleshow/4688286.cms

Time to fix insurance — for good

An innocuous, almost obvious piece of regulation that should have been introduced in 1994 when mutual funds were opened up to private asset management companies (AMC) finally saw the light of day last week. It may have taken a decade-and-a-half in coming, but to me, it’s a huge relief to see a regulator serve its first function: to protect the interests of investors.
“There shall be no entry load for the schemes, existing or new, of a mutual fund,” a June 18 decision of Securities and Exchange Board of India (SEBI) board meeting stated. “The upfront commission to distributors shall be paid by the investor to the distributor directly. The distributors shall disclose the commission, trail or otherwise, received by them for different schemes/ mutual funds which they are distributing or advising the investors.”
There’s pandemonium among AMCs — companies that are authorised by SEBI to float mutual funds. The reason is not that distributors who sell the funds to investors will not get the 2.25 per cent commission on every equity fund purchase we make. Compared to the 40 per cent commissions on investment products masquerading as insurance, mutual funds were doomed to begin with in this arena.
The reason is that with no incentive to sell low-cost, high-disclosure and transparently cost-structured mutual funds under an able and investor-friendly SEBI chairman C.B. Bhave, the only investment instrument distributors will now sell will be high-cost, opaque and terribly mis-sold insurance products.
Meanwhile, the leadership of the insurance regulator, the Insurance Regulatory and Development Authority (IRDA) seems to be “serial investor unfriendly.” J. Hari Narayan is the third chairman of IRDA who has done -- and is doing -- nothing to stem the rot that the industry and its distributors have been inflicting on consumers for years. All through, IRDA has, like a bystander, allowed this first product of finance to be mis-sold, through its pious focus on ‘penetration’ and not the first clause of its mission: to protect the interests of policyholders.
The fight in Indian financial services seen from the consumer’s point of view is one of skewed commission structures. When an agent sells an insurance investment he pockets Rs 40,000 for every Rs 1 lakh invested. The same investment gets him Rs 2,250 when he sells an equity mutual fund (it’s lower for debt funds). And when he sells a pension fund, he gets Rs 100. Put yourself in the agent’s shoes and ask yourself this question: which product will you sell?
The answer is clear to consumers in urban areas as well as rural ones. When I was studying farming in four villages of Uttarakhand last month to see what the problem with agriculture is, I noticed that apart from biscuits, tea and mobile connections, the one financial product that many of the “poor” people owned that was like their urban cousins was a high-cost insurance policy-- an investment product in the garb of life insurance.
“While the elaborate sales and distribution model has contributed to the popularity of life insurance, this has come at considerable cost by way of high commissions and a large per cent of lapsed policies,” notes ‘A Hundred Small Steps: Report of the Committee on Financial Sector Reforms,’ a Planning Commission report chaired by Raghuram G. Rajan.
“Policy lapses are low only in the highest income quartile, while in all other segments at least 20 per cent respondents have had a policy lapse. The penetration of non-life insurance products is negligible. For example, only 1 per cent of the population appears to have medical insurance,” it says.
The problem, therefore, is not with the distributor, who will naturally seek higher returns, or with insurance companies, who look for sales.
The problem only partially lies with inept regulators --- tucked away in Hyderabad, with little exposure or interest in the nuances finance or consumer interest, and rendered largely toothless.
To me, the problem is that the political economy of the NDA regime could not prevent Chandrababu Naidu, who acting in the best interest of his state thought he was earning the people’s mandate by getting IRDA to be housed in Hyderabad. This action needs to be reversed. Today, Prime Minister Manmohan Singh has a political mandate that gives him a chance to fix the mess in India’s regulatory space, much in tune with the rest of the world. There are lessons to be learnt from US President Barack Obama’s straight speaking and regulatory overhaul this month.
Here are three ways I think Singh can fix this problem for good.
One, set up an agency like Obama’s Consumer Financial Protection Agency with a mandate to protect consumers of credit, savings, payment, and other consumer financial products and services, and to regulate providers of such products and services, across regulators.
Two, initiate a new legislation for financial intermediaries and bring all distributors, agents, advisors under its single ambit.
And three, move IRDA to Mumbai, the financial centre.

Source:http://www.hindustantimes.com/StoryPage/StoryPage.aspx?sectionName=HomePage&id=ac9704c9-3d32-4059-bff2-027b54249147&Headline=Time+to+fix+insurance+%e2%80%94+for+good

Infra-stocks not cheap but see 'earnings upgrades' - Tata

Indian infrastructure stocks are not cheap after a surge since early March, but could see earnings upgrades later this year, making valuations reasonable, the manager of the country's oldest infrastructure mutual fund said.

The environment has turned positive given improved prospects for a push in infrastructure spending after India elected a stable Congress party-led government in April-May polls, said M Venugopal, head of equity at Tata Asset Management.
The fund manager, who oversees about 55 billion rupees ($1.14 billion), including nearly $750 million in three infrastructure funds, said he favoured industrial capital goods, power and construction firms given the opportunity they offered.
"The electoral verdict has given the sector improved visibility and continuity," said Venugopal, whose holdings include engineering firms Bharat Heavy Electrical, Larsen & Toubro and IVRCL Infrastructures & Projects.
"Also, given the uncertain global environment, investors are focused on domestic-led growth and probably infrastructure qualifies the best in this space," he said.
While getting costly and long-term projects finished is the main challenge, the theme will dominate investment in India as infrastructure creation is a key growth driver, said Venugopal.
India estimates it needs about $500 billion to fix its clogged airports, roads and inadequate power supply to continue growing at 9 percent a year to 2012. More than $150 billion of it will have to be funded by the private sector.
The sector suffered a blow last year when the global credit crunch starved Indian infrastructure firms of funds and economic growth slumped.
That led to earnings downgrades, and the BSE capital goods index plummeted 65 percent in 2008, worse than the 52 percent fall in the benchmark index.
Shares have bounced back this year, with Venugopal's Tata Infrastructure Fund gaining 46.9 percent as of June 17, slightly lagging the 50.5 percent rise in the main stock index.

The unexpectedly decisive win by the Congress-led coalition has boosted sentiment towards infrastructure, as government plays a key role in creation of infrastructure and stability gives the government a free hand to implement its policies.
Venugopal's firm is seeking regulatory clearance to offer its fourth infrastructure fund, focusing on small and mid-cap stocks.
He said infrastructure firms could see an upward revision in earnings in the second half of the year to March as the sector benefits from India's rapid urbanisation and rising incomes.
Foreign companies that have set up in India, meanwhile, are demanding better roads and more reliable power supplies.
"Despite all that has been done, there is a significant gap between what is available and what is required," said the fund manager, who also holds shares such as top lender State Bank of India and top cellular firm Bharti Airtel.
"The thrust on infrastructure creation would continue for some time and would require a further boost, which hopefully the government would give," said Venugopal.

Source: http://www.ibtimes.co.in/articles/20090619/indian-infrastructure-stock-mutual-fund-tata-asset_2.htm

Funds to see long-term inflows as loads curbed

* Asset churn by distributors to stop
* New product launches to slow
* Fund investing to turn cheap, transparent

The Indian market regulator's move to ban entry fees for investments into mutual funds will lead to a jump in long-term inflows as distributors adjust their business models to generate more volume and trail fees.
India's stock market regulator said on Thursday mutual funds can not levy any entry charges for investments but allowed distributors to claim a fee for their advise from investors. It also directed them to disclose commissions earned to clients.
"This will certainly help in bringing long-term quality assets to the mutual funds. It will help stop churning," said Chintamani Dagade, a senior research analyst with Morningstar.
More than half of the 1.2 trillion rupees equity assets of the funds industry was less than two years old at the end of March, data compiled by the Association of Mutual Funds in India show, as a result of frequent churning.
This is set to change as distributors, who get an upfront fee from about 2.5 percent entry load that equity funds charge, will now have no interest in making investors switch funds.
Instead, they stand to gain more in the form of trail fees or the money they get from fund houses on continuous basis, if investors kept the money invested longer.
While the changes will hurt distributors revenues in the short-term and limit fund firms ability to gather assets in new funds by paying large upfront commissions out of entry fee, it make investing cheaper and more transparent for investors.
A distributor "would be more interested to keep his trail alive," Abizer Diwanji, head of financial services at consultant KPMG said.
"What it will discourage is unnecessary NFOs (new fund offers) because what was happening is a guy who was earning 2.5 percent commission was interested in churning people from one scheme to the other just to make sure he makes his commission," he added.
FEE STRUCTURE
Some argue it will have no impact as many distributors used to pass bulk of the upfront fees to investors but were paying tax on the entire amount they used to receive from fund houses, effectively negating almost all the gains.
Many distributors were surviving on 30-100 basis points trail fee on the amount of investments they brought for funds.
Now, while they can charge a fee for their service, the onus is on them to add quality to investment advice and persuade investors to pay for it, a task many would find tough.
They may opt to sell products such as insurance which offers many times more commission than mutual funds.
"It is not sure how much they (investors) will be willing to pay," said Krishnan Sitaraman, head of fund services at CRISIL.
"If they are not willing to pay a reasonable level for the services distributors are rendering, then distributors may have second thoughts about continuing to sell mutual funds," he said.
But, in the long-term, mutual fund distribution is more attractive because funds are cheap and easier to sell than insurance and clients would continue to buy them, unlike insurance, which is a one-time investment.
"It is a game changer. The whole distribution is going to change," R S Srinivas Jain, chief marketing officer at SBI Mutual Fund, said.

Source: http://in.reuters.com/article/domesticNews/idINBOM45185320090619?sp=true

A load off investors

Once this proposal comes into force, investors may be prompted to immediately
scout for a no/low commission distributor. But that may not be the best course.

Investments in mutual funds may not suffer deduction of ‘entry load’ for too long. In a move that will empower investors to determine the price they will pay for service received from a distributor, thereby reducing their cost of investing in mutual funds, the Securities and Exchange Board of India (SEBI) has asked fund houses to do away with entry load on all their schemes.
Entry load is the typical 2.25 per cent (maximum of 2.5 per cent) charge levied at the time of investing in mutual funds, mostly equity funds. While this may not seem like a conspicuous charge on paper, the levy goes to reduce the final number of units allotted to you. Such levy is almost entirely utilised by the fund house for paying the commission to the distributors for marketing their fund. In other words, a small portion of the money earmarked for investment — in the name of entry load — is paid to the distributor.
SEBI’s new proposals allow investors to directly make payments to the distributors for their services, instead of mutual fund houses deducting the same from the investment amount.
To provide an example: Had you invested Rs 10,000 in a fund which had an entry load of about 2.25 per cent and an NAV of, say, Rs 10 per unit, then, only 977.9 (10000/10.225) units would have been allotted to you, as the entry load of 2.25 per cent would have increased your cost per unit to Rs.10.225.
Under the new proposal, investors would be able to receive units for the entire amount of Rs 10,000 invested; they may have to draw a separate cheque in favour of the distributor towards a mutually agreed service fee.
This essentially means that an investor may have a choice of paying nil/small commission to an ‘no frills’ agent or go for a distributor who charges slightly higher fee, perhaps for other superior advisory service offered in addition. Viewed differently, investor will now be ‘aware’ of the commission they pay; there would be no hidden marketing charges.

Reason behind the move

While this proposal is clearly aimed at allowing the investor to decide what to pay for the service received by him/her, the move may also eliminate gratuitous churning of the portfolio by investors. In an entry load regime, distributors typically benefit more every time a fresh investment is made. Hence, it was not uncommon for distributors to recommend a switch between funds, causing churning.
Now, under the new proposal, the commission to be received by a distributor may be uncertain; the only other key source of the agent’s income would be the ‘trail commission’ received from the fund house for retaining a customer’s investments. So the motive for recommending fresh transactions may be less.

Act with discretion

Once this proposal comes into force, investors may be prompted to immediately scout for a no/low commission distributor. Beware! For one, you may be sold a fund with a poor track record or one on which the agent receives a higher ‘trail’ commission. That may not be the best fund for your portfolio. Please bear in mind that a consistent long term track record and a risk profile that suits your appetite should be the key factors that determine your investment choice.
As we have always maintained, in the Indian market context, an entry load of 2.5 per cent or a commission paid to the distributor is a small sum, compared to the 12-15 per cent annualised return that a good equity fund can easily yield.
Two, if commissions on MFs go down, products such as ULIPs may look attractive from a distributor’s point of view given their lucrative commission. Ensure that you are not sold an ULIP when you do not want one. ULIPs are long term insurance-cum-investment products. They generally build in expenses upwards of 10 per cent, in the initial years. This sum would be deducted from your investment amount.
So as an investor, what should be your response to this change?
As always, ensure that you choose a fund based on its track record. Expenses or commissions come next.
Do not be diverted into buying ‘other’ products if your objective is to buy a mutual fund
If you are a less-informed investor and need advice, do not hesitate to pay a decent sum to a good financial advisor/distributor. There are no free lunches.
If you are a well-informed investor, making your own investment decisions, you can apply for funds directly through their portals or approach any of the local offices of the fund house you want to invest in. This way there would be no commission. If you wish to make such an investment through your online broking account, you may do so; this would however entail paying a fee.
As a distributor has to now reveal the commission that he receives from the fund house for the product, ask him for the same. That way, you will know whether you are paying too high a commission or otherwise.
Note that there has been no indication so far as to the implementation date of this proposal. There are also other grey areas in implementation of the same, especially on the distribution side, which too may have to be addressed.

Source: http://www.thehindubusinessline.com/iw/2009/06/21/stories/2009062150501000.htm