Wednesday, July 29, 2009

Walk path of corporate governance, win investor trust

The Reserve Bank of India (RBI) in its credit policy has mentioned that a big thrust on governance reforms is needed to inspire trust and confidence in potential investors. 

“The medium-term challenge is to improve the investment climate and expand the absorptive capacity of the economy... the second big task is a big thrust on governance reforms that should inspire the trust and confidence of potential investors,” the central bank said in its policy statement. 

Most fund managers are unanimous in their view that corporate governance standards are far better than those in most emerging markets. 

For instance, despite China’s economy growing at a faster rate than that of India, the latter is a preferred destination for global portfolio investors, because of better disclosure norms and governance standards. 

“On a relative basis, India fares much better than most other emerging markets when it comes to corporate governance. I don’t think there is much dispute about that,” says Navneet Munot, chief investment officer, SBI Mutual Fund. 

“True, there may have been a few instances of rules having been violated. But then, those are one-off issues, and that is the case even with developed markets, ” he says. 

Agrees another fund manager at a private insurance firm. “Corporate governance issues are not what are holding investors back at this point.... they are more worried about other things like the economic slowdown and high fiscal deficit,” said the fund manager, who did not wish to be named. 

“Corporate governance is a combination of structural features and qualitative aspects,” says Pawan Agrawal, director, corporate and government ratings, Crisil. “The structural features are driven by regulatory requirements, such as the frequency and extent of disclosures to be made to the stock exchanges, regulations on independent directors on a company’s board, etc. On this front, India is much better placed compared with most of its peers in the emerging markets space. 

“The other aspect is a qualitative assessment of how governance is followed in practice. It is hard to generalise on the qualitative aspect of governance, as it differs in varying degrees across companies. So, a (Indian) company can adhere to most of the regulatory requirements, but we need to assess the spirit with which governance process is adhered,” he adds.


Source: http://economictimes.indiatimes.com/News/Economy/Policy/Walk-path-of-corporate-governance-win-investor-trust/articleshow/4832150.cms

Mutual funds offer flexibility

Mutual funds in India are financial instruments, handled by fund managers, also referred as the portfolio managers. The Securities Exchange Board of India regulates the mutual funds in India. The share value of the mutual funds in India is known as net asset value per share (NAV), which is calculated on the total amount of the mutual funds in India, by dividing it with the number of shares issued and outstanding shares on daily basis. 

Mutual funds in India offer flexibility by means of dividend reinvestment, systematic investment plans and systematic withdrawal plans. As these funds are available in small units, they are also affordable to the small investors. The fees charged for to the custodial, brokerage and others services is very low in case of mutual funds. These funds have the option of redeeming or withdrawing money at any point of time. The mutual funds in India have low risk as it is managed professionally. 

What are mutual funds? 

Understanding mutual funds is easy as it's such a straightforward concept. A mutual fund is a company that pools the money of many investors, its shareholders to invest in a variety of different securities. Investments may be in stocks, bonds, money market securities or some combination of these. 

Those securities are professionally and efficiently managed on behalf of the shareholders, and each investor holds a pro rata share of the portfolio - entitled to any profits when the securities are sold, but subject to any losses in value as well. 

For the individual investor, mutual funds propose the benefit of having someone else manage your investments and diversify your money over many different securities that may not be available or affordable to you otherwise. Today, minimum investment requirements on many funds are low enough that even the smallest investor can get started in mutual funds. 

In general mutual funds fall into three general categories: Equity funds are those that invest in shares or equity of companies; Fixed income funds invest in government or corporate securities that offer fixed rates of return are; While funds that invest in a combination of both stocks and bonds are called balanced funds. 

The first thing that has to be kept in mind is that when you invest in mutual funds, there is no guarantee that you will end up with more money when you withdraw your investment than what you started out with. 

That is the potential of loss is always there. The loss of value in your investment is what is considered risk in investing. At the cornerstone of investing is the basic principal that the greater the risk you take, the greater the potential reward. Or stated in another way, you get what you pay for and you get paid a higher return only when you're willing to accept more volatility. 

Risk then, refers to the volatility - the up and down activity in the markets and individual issues that occurs constantly over time. This volatility can be caused by a number of factors - interest rate changes, inflation or general economic conditions. But it is this very volatility that is the exact reason that you can expect to earn a higher long-term return from these investments than from a savings account.

Source: http://economictimes.indiatimes.com/Personal-Finance/Mutual-Funds/Mutual-funds-offer-flexibility/articleshow/4832218.cms

Tuesday, July 28, 2009

Entry fee ban unsettles money managers

India's fiercely competitive fund industry is set to become even tougher for fund managers as a ban on entry fees slows growth, adds to distribution costs, cuts profitability and delays the path to breakeven for newcomers.
The country's stock market regulator said earlier this month it would abolish front-end or entry fees charged by mutual funds from August 1, a move aimed at cutting costs for investors and to discourage aggressive selling.
The ban threatens the incomes of over 87,000 distributors, agents who sell funds for a fee, and bring more than 90 percent of the business to money managers. It is expected to be particularly hostile to small and new players who depend on agent networks.
Beyond a handful of firms such as Reliance Capital Asset Management and UTI, Indian money managers have limited reach and rely heavily on distributors to build up their client base.
The move will also make it harder for the more than 20 would-be entrants into the market, which is forecast by Boston Consulting Group (BCG) to manage $520 billion by 2015, compared with $120 billion now.
Allianz, UBS and Credit Agricole are among foreign firms looking to set up shop in India.
"It's bit of a blow ... a lot of the AMCs will have to look back at their strategy," said Sanjeev Gupta, chief executive of the emerging market investment unit of South Africa's second-biggest insurer, Sanlam.
"It's not just something that affects newcomers," said Gupta, whose firm is looking to enter the Indian market and had anticipated a ban on entry fees.
For existing players, it would mean taking a hit on revenues to pay agents at a time when sales have dropped and operating expenses have nearly tripled to 113 basis points since 2004 due to higher marketing, distribution and administrative expenses.
The upcoming rule change has led to a scramble to launch funds before it takes effect. Units of Religare, Canara Robeco, JPMorgan, BlackRock and Franklin Templeton are among 10 firms who have launched funds in July.
LONGER PROFITABILITY PATH
Domestic money managers typically charge about 2.25 percent as entry fee on equity mutual funds, their most profitable assets, and pay the entire amount as fees to distributors.
By comparison, funds charge three to five percent in Singapore and about one percent in Europe and the United States.
Funds also offer 30-100 basis points in yearly recurring fees to agents which comes out of their annual expenses capped at 2.5 percent of the assets. Funds now fear they will have to sweeten the other commissions and pay entry fees from their revenues.
While the industry is busy figuring out a new compensation model, many expect a hit of about 5 to 20 basis points on annual investment management fees of about 55-58 basis points, depending on how aggressive the large players become to sustain growth.
"The entry barriers have been raised," said Rajnish Narula, chief executive of the Indian fund unit of Robeco.
"For the new player, the break-even gets delayed a little bit more. You need to have the sustaining power which means you need to have capital to be able to delay your break-even," he added.
BCG estimates a firm would need at least 100 billion rupees ($2.1 billion) under management to break even.
Of India's 36 fund firms, only 15 managed assets in excess of $2.1 billion in June, according to data from the Association of Mutual Funds in India.

DISTRIBUTION HEADACHE
With investors in the top 20 cities accounting for 90 percent of industry assets, according to KPMG, funds are worried that lower payments will cut the incentive to distributors to expand into smaller markets in order to fuel growth.
Instead, distributors might opt to sell other investment products, such as those offered by insurance firms that could earn them up to 30 percent of the first premium as upfront fees.
Distributors have already threatened to stop selling funds and said they might go to courts over the fee ban.
"That's the fear. If you increase regulation of one financial product, people would move to a different financial product which is not necessarily better," said Ed Moisson, director of fiduciary operations for Europe at global fund tracker Lipper.
While the next couple of years will be tough for fund houses and distributors adapting to the new compensation model, longer-term prospects remain bright.
PRESENT TENSE, FUTURE PERFECT
India had just 0.3 percent of the $18.97 trillion global asset management industry in 2008, and only 7.7 per cent of its household savings went into mutual funds as compared to 26 percent in the UK, according to data compiled by KPMG.
With one in every six human beings on earth an Indian and rising income levels of its middle class, already larger than the population of the United States, the country presents a powerful long-term lure for money managers.
In the last two years the Indian fund industry has attracted the likes of JPMorgan, Italian bank UniCredit's Pioneer Global arm and France's Axa.

Mutual fund managers comment on RBI's policy

The RBI left key rates unchanged at its first-quarter policy review on Tuesday. The bank said it expects the economy to grow 6 percent this fiscal and inflation at 5 percent by end-March 2010. The Reserve Bank of India also said it will maintain the accomodative stance of monetary policy until robust signs of recovery are visible, adding that its exit strategy will be modulated in line with macro-conomic developments.
Following are comments from mutual fund managers on the policy review:
RAMANATHAN K, HEAD-FIXED INCOME, ING INVESTMENT MANAGEMENT: "The status quo on key rates were in line with expectations. The policy maintains a balance between the nascent recovery and the need to nurture the recovery and the necessity to moderate the accommodative stance when inflationary trends emerge. "The RBI has also upped the inflation expectation to 5 per cent from 4 per cent by March 2010, again something which was expected by the market. With no surprises in the policy we expect the market to shift focus to the government borrowing program. "With front loading of the borrowing program, the supply is expected to reduce as we go along which would be positive for the markets in the short term. However with growth picking up and inflation rearing its head towards the end of the year we expect yields to head higher in the medium term."
LAKSHMI IYER, HEAD-FIXED INCOME, KOTAK MAHINDRA MUTUAL FUND: "Accomodation in stance to continue for now but not for eternity as macro economic situation may warrant change in stance in future. "Shorter end of the curve to remain supported. Longer end to trade range bound in response to OMO purchase and auction supplies."
MAHHENDRA JAJOO, HEAD-FIXED INCOME, TATA ASSET MANAGEMENT: "It's pretty much in line with expectations. People were expecting rates not to change and RBI to reassure about the credit policy till economic growth pick-up happenes. "I don't think there is any significant move in the bonds.

Entry load ban: MFs may pay more trail commission to distributors

Distributors and fund houses are looking at different ways to counter the Securities and Exchange Board of India’s (Sebi’s) ban on entry load from August 1. The ban announcement came on June 18.
Industry sources said fund houses could increase the trail commission for equity funds to compensate distributors. At present, fund houses pay 0.25 to 0.75 per cent as trail commission to distributors for equity schemes. This number, according to some distributors, could rise up to 1.25 per cent. Trail commission, which is paid to distributors on a quarterly basis, for debt funds is slightly lower at 0.1-0.5 per cent at present.
Sources said any increase in trail commission for debt funds was unlikely as there was minor or no entry load in a majority of these funds.
“It depends on the asset management company’s (AMC’s) strategy whether it wishes to increase trail commission, or upfront commission, or go for a combination of both,” said a distributor. Some distributors said if an AMC was well-established, it would increase only trail commission. This could come from the fund management fees it collected from investors annually. However, smaller fund houses might have to pay both higher upfront and trail commission to promote their products. Some fund houses felt that there could be other ways in which they could help distributors garner more business instead of hiking trail commission.
Amit Gupta, vice-president & country head (retail sales), Taurus Mutual Fund, said, “We will not increase trail commission. We believe in helping intermediaries through marketing support, such as organising joint meetings, which will help them get clients. We are trying to educate distributors as much as possible to make them financial advisors.”

‘Asset management is a low-margin business globally’

I find it difficult to envisage funds in India taking their products directly to clients. The awareness of funds is not very high, and the average retail client is not very comfortable deciding from the vast array of choices. That’s why we have to rely on third party distributors.
Mr. HARSHENDU BINDAL, PRESIDENT, FRANKLIN TEMPLETON INVESTMENTS INDIA
He would like to see the Indian mutual fund industry evolve to manage assets for different classes of clients — retail, high net worth and institutional, says Mr Harshendu Bindal, President, Franklin Templeton Investments India. Explaining h ow the Indian MF model is very different from the West, he also talks of why the industry may find the transition to a zero-entry load regime challenging in the short term.
Excerpts from the interview:
You have overseen Franklin Templeton’s operations in several regions before taking up this India stint. Would you say a fund-house focussed wholly on retail investors is not viable in India?
It is not a question of being viable; there are certain fund houses globally which do focus on retail clients alone. But my question is: why restrict to one segment alone?
I would like to see the mutual fund industry in India grow into an asset management industry which manages assets for different classes of clients — retail, high net worth and institutional investors. If you look at the way the Indian industry has grown, you will see that almost half the money managed is invested in liquid and liquid-plus segments that reflect corporate flows, and only half is in the retail segment.
Given that we have over 38 different fund houses managing just $120 billion; that limits the scale advantages to players. Globally, asset management is emerging as a low-margin, high-volume business. At one point in time, in the global context, $500 billion was considered a large asset size. Today, there are funds managing even $1-2 trillion.
The other point is that if you look at the developed markets such as the US, the bulk of the money comes into the industry through 401K benefit plans and pension plans. That the fund industry cannot meaningfully participate in either of these segments in India is a big constraint.
Even in the US, the proportion of funds sold directly is not high.
Is that because expanding distribution requires massive investments?
Unlike insurance or banking, the mutual fund business is a low margin one. In fact, the asset management industry does not invest directly in building a large sales force in any part of the world. Clearly third party distributors are very important.
Currently there are only 75,000 AMFI certified agents in the country which is very low for a country India’s size. That entails a lot of education and investment; the low margins of the industry are not allowing it to make that investment.
Seen in that context, how will Franklin Templeton react to the entry load waiver on mutual fund schemes proposed by SEBI?
The objective of the move is clearly to benefit clients through reduced fees — that is largely a good goal. However, operational challenges over the short term need to be addressed, as distributors/fund houses evolve suitable business models. Also, as we have been saying, there needs to be parity amongst different financial service providers in terms of regulations and transparency.
The challenge is that if funds cannot compensate distributors, they will have to seek it from clients, who might not be amenable to paying over the short to medium term. As distributors have the choice of selling other products, there may be pressure on AMCs to compensate distributors out of their revenues relatively more, compared to current levels.
As fund houses do operate under fee structures that are controlled, there may not be steep price differentials among fund houses. Even when we talk about increased trail fees (recurring fee paid to the distributor), there isn’t much room. Therefore, I don’t see us returning to the old revenue streams for distributors or manufacturers. We have also seen similar moves in countries like Australia and UK, but the effective dates are 2010/2011, giving room for seamless transition.
Franklin Templeton will continue to focus on selling products through its distribution partners. I find it difficult to envisage funds taking their products directly to clients. The awareness of funds is not very high, and the average retail client is not very comfortable deciding from the vast array of choices.
But is it really so difficult to get investors to pay a separate fee? Retail investors do pay separate brokerage on equity market transactions.
When you compare mutual funds to equity, it is important to know that the fee on equity investments is based on transactions which are quite frequent. With funds, the investments are expected to be of a longer duration, with the fee being collected mainly for advice. When you have a longer duration in mind, you cannot operate on a transaction-fee equivalent.
Can an online platform where investors buy funds directly, replace the traditional distribution channels?
An online platform would be suitable for clients who are well-informed and are only looking for convenience. But we feel that Indian investors, by and large, are not that well aware and do need advice from distributors on choosing between products. The second disadvantage that I see with online platforms is that clients have tendency to get into a trading kind of mindset.
With funds, it would be better if clients took a long term approach and tailored their investments to a proper financial plan based on their needs and risk profile.
Investors in India do tend to chase returns. So have you seen inflows into your equity funds pick up after the post-election rally?
We are beginning to see a lot more interest and activity from investors. Call volumes to our call-centres have actually tripled and we are witnessing flows into our equity funds.
We believe that timing becomes less of an issue with a longer investment horizon and that’s what we tell our investors.
We have consistently held that timing the market is difficult. When this rally happened, for instance, not only retail investors, but many investment professionals were caught off guard!
How is your new theme fund- Franklin Build India Fund differentiated from the host of other infrastructure funds?
Through this fund, we are looking to offer investors access to a wide range of themes in one single offering, representing opportunities in the key building blocks of the Indian economy.
The way we look at it is - there are three main constituents of the economy, investment, consumption and exports. FBIF focuses on the investment side. We at FT are launching a new fund after a long time. We try to launch products that are sustainable over the long term. When we look at new products, we see if the product is different from our existing products and if it presents a sustainable idea.
Isn’t the investment theme overheated, with much of the stock market action happening around the public spending theme in recent months?
We don’t look to timing the market when we launch our funds. We looked at valuations for these sectors and they were either at or below long term averages. That suggests that, from a valuation perspective this isn’t a bad time to invest in these stocks. The question is whether we find enough value for the medium to long term — which we are finding at this juncture.
Typically we have found theme funds holding large cash positions and underperforming diversified peers over the last one year. What is your stance on this?
One, we tend to be fully invested in our equity funds and as a fund house, we do not take cash calls. We think that has to be taken care of by the advisor and the investor when the asset allocation is decided on.
That’s the reason why we also looked at a more diversified theme and not just physical infrastructure. Through this, we hope to have more opportunities across market cycles.

Monday, July 27, 2009

India rushes to beat ban on entry fees

Indian mutual funds have been working against the clock to push new products on to the market before a ban on entry fees that asset managers charge investors becomes effective on August 1. 

Since the investor-friendly move was announced on June 18 by the Securities and Exchange Board of India, the country’s market regulator, nine new funds have been put on offer by asset management companies. 

The mutual funds that have rushed to launch products in the past five weeks include big enterprises such as JPMorgan, Franklin Templeton, DSP BlackRock, Religare Asset Management as well as other, smaller operators. 

The ban on entry loads – the 2.25-2.5 per cent fee mutual funds charge investors on schemes, which is used by money managers to pay distribution commissions – is seen by insiders as being a paradigm-shifting reform for the Indian market.

“This is one of the most significant changes that the mutual funds industry has seen in recent times,” says Sanjoy Banerjee, executive vice-president of ICRA-MutualFundsIndia.com, a local rating agency.

“It is a positive move for the benefit of the investor community, for the benefit of regulation and for the transparency of the mutual funds industry.” 

However, the ban is also likely to have a negative impact on India’s $137bn (€96.4bn, £86.2bn) mutual fund market, because distributors will have less of an incentive to promote new products offered by mutual funds.

“In the short term there will be disruption to business, as distributors will try to find other products that reward them better,” says Naval Bir Kumar, chief executive of IDFC Asset Management, which has about $5bn under management. 

“Clearly there will be a reduction in business and activity will slow down. The ban will change the intermediation that currently exists, because the revenue pool that fund managers and distributors today work on and which they share between themselves will be reduced from August 1 onwards.” 

Fund managers also fear that, in the short term, they may face growing competition from insurance and pension funds, since distributors are likely to market more products similar to mutual funds that have not been hit by the entry load ban. 

Mr Kumar says: “In the future you could see a shift away of sales to other investment products . . . you could have insurance companies trying to create products that look very similar to mutual funds products but without the pricing restrictions which are being imposed on us.”

However, over the medium to long term, fund houses and distributors are expected to revamp their business models and will look for new pay-out structures, according to Sukumar Rajah, chief information officer at Franklin Templeton India.

“Distributors will evolve an advisory fee model and will also get remuneration from fund houses for distributing products either in terms of upfront or increased trail,” he says. 

The ban is expected to have a big impact on the way distributors take care of their clients, according to market analysts.

“Distributors have not evolved in India. They don’t give specific services to investors,” says Mr Banarjee of ICRA-MutualFunds . 

“What has been happening until now is that once a distributor sold a fund he forgot about the investor. Now he will have to continue to be in touch with the investor, providing real services, so that the investor feels obliged to pay the distributor.”

The consensus among fund managers and analysts is that investors will benefit substantially from the new market changes, as products will become cheaper to buy. 

This, coupled with the return of strong market sentiment – the Bombay Stock Exchange’s benchmark Sensex index has risen 32 per cent so far this year and has almost doubled since March – is likely to spur a new wave of investments in mutual funds.

“We have witnessed a sharp increase in foreign institutional investors’ interest in the local markets – $6.6bn in the quarter ending June 2009,” says Mr Rajah of Templeton. “Hence, [in spite of the ban] the medium- to long-term prospects continue to be positive for the industry.”

Mr Kumar of IDFC also believes that the short-term fall in product launches from August 1 onwards could be compensated for by a strong market performance and more active mutual fund investors. “Most investors believe the rule change is a good move; it will make investors a bit more proactive. So when I talk to my team I tell them that if the end consumer is happy, then this can’t be really that bad for us,” says Mr Kumar.


Source: http://www.ft.com/cms/s/0/aeefc570-787d-11de-bb06-00144feabdc0.html

Mutual fund distributors waive commission for small investors

Firms want to avoid handling the low-value cheques they would
have to collect if they charge small investors
Some mutual fund distribution companies, which predominantly cater to low-value retail investors, have decided not to charge for their services from customers beginning August. Even larger distributors, which handle a broader variety of clients including high net-worth investors and companies, have decided to keep a no-commission model open for smaller investors.

A July rule from capital markets regulator Securities and Exchange Board of India, or Sebi, does away with entry loads of up to 2.25% for investors and caps at 1% the portion of exit loads used for marketing expenses.
However, the new regulation, effective 1 August, has created a logistical logjam for distributors.
Earlier, the invested amount would go directly to the asset management company, which would deduct the commission and pass it on to the agent. Under the new regulation, if a person invests Rs1,000, distributors will need to collect a cheque of Rs25 as commission separately.
Rather than increase overhead costs by investing in technology, staff and other back-end services, and hoping for the customer to pay for it, some companies have decided to entirely do away with commissions for small, retail investors.
J. Rajagopalan, managing director, Bluechip Corporate Investment Centre Ltd, 90% of whose clientele is retail investors, says, “For a multi-location distribution house like us with 240 locations, managing back-office operations becomes a huge issue. We do not have the infrastructure to manage the flood of low-value cheques that will hit us if we implement the twin-cheque system. Internally, we have decided we will not charge investors from 1 August.”
Also, charging investors under the new environment is not going to be an easy task, said K. Venkitesh, national head (distribution), Geojit BNP Paribas Financial Services Ltd.
“Imagine buying a shirt for Rs600 and giving two cheques, one for the manufacturer for Rs450 and one for the shopkeeper for the remaining amount. This is the same thing. It is not going to be easy to convince the consumer what he is paying for,” he said.
New Delhi-based Bajaj Capital Ltd had also decided to forego a commission for low-value customers. “We don’t like charging the customer. If a person really wants only the transaction services and does not want any advisory or support services, we will not charge,” said joint managing director Sanjiv Bajaj.
However, he added that if a customer wanted services such as consolidated statements, portfolio advice, etc., he would have to pay for it.
Rajagopalan of Bluechip said the trail commission, which agents get from fund houses at the end of the year based on the assets they helped bring in, would help them cover costs of providing services to retail investors.
New distribution companies, however, have already started offering the no-commission model, saying that the new model will, in the long term, work to everyone’s benefit.
Chennai-based Wealth India Financial Services, has launched a free website where investors can buy and sell funds without paying any upfront charges.
“We decided to start a company that would be positioned to take advantage of this development,” said Srikanth Meenakshi, director, Wealth India Financial Services. “We launched FundsIndia.com, where retail investors could come (and) register, become investors and buy or sell mutual funds with no loads, no transaction fees for any amount.”
FundIndia has empanelled with 16 mutual funds and is in talks with more. It plans to have a country-wide online-only network without any regional sales points, a low-cost, scalable model that can be sustained with just the trail commission.
S. Raghunathan, head of Computer Age Management Services Pvt. Ltd, an industry veteran who has been associated with the mutual fund industry for at least three decades, said the new regulation would work out to be a “win-win” situation. “As we reduce distribution costs, more and more people will start gaining confidence and volumes will grow. As volumes grow, everybody can make enough money through the trail commissions.” He cites the example of the demat revolution that changed the face of the brokerage industry 15 years ago.
“When demat was first introduced, people had similar apprehensions. They thought life would become difficult for the brokers. But look at what has happened. Volumes have grown exponentially. I expect a similar result here also,” he said.
However, the no-commission model will not be the only model in operation. Distribution comes at a cost and someone will have to bear the cost if not the consumer, say some distributors.
While there is some expectation that fund houses will fray some of the costs, say experts, there is also the hope that this will lead to innovation in distribution models such as deep discount brokers, discount brokers, premium brokers and full advisories.

Mid-cap funds a rollercoaster ride

Equity markets are quoting strong and, given the 60-63% return delivered by the key mid- and small-cap indices, attention is moving towards this space. Since mid- and small-cap-oriented mutual funds suffered the most in the recent downturn, the opportunities to bounce back are significant. We undertake a review of these mid- and small-cap focused funds that are reaping the maximum benefits of the uptake in markets.


Performance: As the name suggests mid- and small-cap funds predominantly invest in companies that are relatively smaller by way of market capitalisation. However, the definition of such companies is difficult to describe and varies from fund to fund. Nevertheless, the stocks these funds invest in usually constitute the smaller companies of the BSE 500 and CNX 500 indices. 

Since the US subprime crisis and its effects, corporate earnings suffered tremendously. Domestic markets dropped sharply from January 8, 2008 onwards and hit their lowest levels on March 9, 2009. While there was an improvement in sentiment in January-February of 2009, it has been since March that a clear uptrend is visible.

From the universe of equity mutual funds, we have confined ourselves to the funds that have either been described as mid-cap funds as per their offer documents or whose major investments have remained in small- and mid-cap stocks dominantly for a long time. 

We managed to zero in on 29 schemes and charted their performance between March 9, 2009 and July 21, 2009.

Some mid- and small-cap funds spiked considerably after a sharp correction in the markets. Eight funds out of the 29 managed to beat the BSE Mid Cap index over the last four-and-half months. At the same time, the average diversified equity fund managed to deliver much smaller return of 77.36%, while smaller cap funds, on an average, delivered 95.27%. Principal Junior Cap Fund has so far emerged as the best performer, generating an impressive 126.95% returns over the past four-and-half months. Fund houses such as JM Financial, Sundaram BNP Paribas and SBI Mutual Fund have managed two schemes each in this space and delivered high returns on both schemes managed.

Yesterday's losers, today's toppers: During the phase between January 8, 2008 and March 9, 2009, the average mid- and small-cap fund lost (-) 65.78%, while the equity diversified funds' category contained losses to (-) 57.29%.

A look at the top 10 worst performers reveals some disturbing results. Ideally, the worst performers are expected to emerge as the highest returning funds when the markets pick up. The top 10 performing funds' list should bear close resemblance to the top 10 worst performers. However, only five funds from the worst performers list made it to the best performers list. These are JM Emerging Leaders, JM Small and Mid-Cap Fund, SBI Magnum Midcap and Emerging Businesses and Canara Robeco Emerging Equities fund. One of the top performers, SBI Magnum Sector Umbrella-Emerging Business Fund, lost far more than the category average of (-)72.15%. Again JM Emerging Leaders Fund and JM Small and Midcap fund were the worst performers, losing more than 85.96% and 87.1%, respectively, but have managed to impress in the recent uptake.

We also found that of the least losers in the January 8-March 9 period, three funds made it to the topper's list. The ability to regress the least and then come up on tops is what all funds aim to achieve. The three funds that managed to achieve this rare feat are Sahara Midcap, Sundaram BNP Paribas Select Midcap and SMILE funds.

Sector break-up: The main reason for good performance can be attributed to the sectoral allocation. In terms of sectoral performance, these funds kept a high allocation to the banking sector, which performed very well. The larger BSE Bankex grew by 130.35% since March 2009. Within the banking sector, while Bank of Baroda -- a large-cap scrip -- was the most popular among the 29 fund houses. Among the mid- and small-cap companies, Federal Bank was the preferred choice. During the period under consideration, Federal Bank posted a return of 94.11%. Oriental Bank of Commerce was the other favourite in the banking space. 

In the oil and gas sector, Castrol India Ltd was the top mid-cap stock, followed by Indraprastha Gas Ltd. Castrol posted returns of 32.14% on an absolute basis over the aforementioned period. 

Considerable allocation to the realty sector also paid rich dividends. Among all sectoral indices, BSE Realty has been the top performer as it rose 166.04% since March 2009. However, holdings varied significantly across schemes within this space.

SBI Magnum Sector Umbrella - an Emerging Businesses Fund, which delivered an impressive 120.52% March 2009, maintained a high allocation to the engineering sector. However, some of the funds that played it safe and clung on to the pharmaceuticals sector lagged behind in performance.

Conclusion: While the returns by these funds over a period of four-and-half months look extremely exciting, investor caution is called for. At the end of the day, these mid- and small-cap stocks oscillate widely with severe ups and downs. The average nervy investor might be tempted to dip into this space -- however be prepared for a rollercoaster ride.

Source: http://www.dnaindia.com/money/report_mid-cap-funds-a-rollercoaster-ride_1277301

MFs may face large redemptions from banks

Mutual funds will have to grapple with large redeemptions, with banks, which figure among the big-ticket investors, planning to pull out money amid concerns that returns from liquid schemes could dip further. Fund houses think such redemptions could start from August end. 

As part of the new rules that followed last year’s money market crisis, the capital market regulator Securities and Exchange Board of India (Sebi) had restricted MFs from investing liquid plan funds in instruments with maturities beyond 90 days. Since the new regulation became effective in June, the return on liquid plans have fallen from 5% annually to 3.5%-4% in the first quarter. 

Till now banks often parked their surplus fund in liquid schemes which generated a better return than other comparable short-term instruments. As on June 30, banks had outstanding investments of over Rs 1.20 lakh crore in such schemes. This will change now since most banks feel that the investment restriction will impact MFs ability to generate a better return. “Substantial amount of money being parked in liquid plans is a phenomena that is not going to last for long. Sebi norm will drive banks to find ways to lend more to the manufacturing sector,” said M V Nair, CMD of Union Bank of India. Mr Nair, who is also the chairman of Indian Banks’ Association, said, “We expect credit to pick up in the second half of this year....We are receiving more loan proposals.” 

In absence of a loan offtake from corporates, banks are sitting on a huge surplus, a substantial part of which is being placed with the Reserve Bank of India under the central bank’s reverse repo facility. But given a return of 3.5% which the central bank offers, banks find MFs a better option. 

Fund houses realise the shift in investments that’s about to happen. “There is a good chance that inflows from banks into liquid funds will start tapering off in the coming months, with returns going down dramatically,” said Ritesh Jain, head of fixed income at Canara Robeco Mutual. According to him, fund houses can do little to improve performance of liquid plans given the strict regulations. 

In a move to minimise mismatches and liquidity crunch, Sebi told MFs in May that maturity of securities cannot exceed that of the scheme. While the funds started rejigging their investments from June, the full impact on the scheme returns would be felt only in September by when most of the long dated, high yielding papers would mature. 

Mr Jain thinks that while the possible impact on liquid schemes have been factored in, liquid plus plans — the ultra-short term plans — may also face the heat. Allured by returns higher than liquid plans, banks have been shifting to liquid plus schemes. “Now, if they withdraw from these funds, MFs will face a problem during redemption. This is beacuse securities in these schemes are of longer maturity,” he said. Ultra short term plans have more leeway in investing in structured and longer tenure assets which enable them deliver a better return.


Source: http://economictimes.indiatimes.com/Market-News/MFs-may-face-large-redemptions/articleshow/4823803.cms

Have the markets changed or have funds changed?

To the discerning investor, the ongoing happy hours on the stock markets have shown
mutual funds in a rather unflattering light. Sure, stocks are up and so are equity mutual funds. But relatively few mutual funds are able to beat the equity market indices. Since the market turned upwards after hitting a bottom in early March, the average diversified equity fund is up about 70%, with about 20 of the 268 funds being more than a 100%.
During the same period the Sensex and the Nifty are up about 87 % and the broader indices are also up around 90 %. This isn’t what the deal is supposed to be with mutual funds. The main job of a mutual fund is supposed to be beating the indices. That’s what the investor pays for. Otherwise, the investor would be much better off investing in an index fund or an index-based exchange traded fund (ETF) which have far lower expenses than actively managed funds.
What makes this curious is that that this isn’t the way it has generally been in India. Historically, Indian equity mutual funds have managed to beat the indices quite handily. For example, from 2002 to 2007, the average equity diversified funds routinely beat the major indices. Rs 10 lakh invested in the average equity fund on January 1, 2002 would have become Rs 97 lakh by 31st December 2007. In the Sensex, it would have become Rs 62 lakh.
However, over the last year or so, this hasn’t been true. During last year’s market decline as well as the subsequent rise, relatively fewer funds have beaten the indices. Is this a fundamental shift? Have the markets changed or have funds changed? Or are these just unusual times and eventually one can expect normalcy to be restored? A bit of everything, I suspect.
One major reason has been that over the last year and a half, stocks have been driven first one way and then the other by what could be called extraneous reasons. Historically, investment managers do well in picking out sectors and companies that will do better than others but do poorly in catching trend changes that originate in the broader economy and polity.
I know, that’s not the impression they like to give when they speak in the media but it’s true. The better fund managers are basically good stock pickers on a relative basis. If steel prices edge up, they’ll know which auto companies will hurt more than others. But if you expected them to predict and time the swings and lurches of global economic roller coaster, then that isn’t going to happen. Some of them make the right guesses some of the time, but that’s about it.
Moreover, the huge increase in the number of equity funds that has happened has inevitably led to a decline in fund management standards. There were 62 equity diversified funds in 2002; now there are about 270. On top of that, the product design choices made by fund companies have ensured that a huge number of the newer funds are constrained by some theme or the other which doesn’t quite make it a sector fund butdoesn’t allow the fund manager to exploit all kinds of markets well.
Does this mean that the age of index investing is finally dawning in India? Perhaps it is. Going in for an index funds ensures that you will never underperform the index and nor will you ever outperform it. I find that since equity investors are generally the kind of people who are both optimistic and overconfident, few of them like the idea of limiting their upside relative to the indices. Still, if present trends continue, the day may not be far when many more investors will start looking at index funds seriously.

Saturday, July 25, 2009

MF distributors explore alternative revenue models

Faced by the challenge of revenue losses due to removal of entry load from 

mutual fund schemes, the distributors are contemplating 
alternative revenue models 
wherein the online platform has emerged as the top option. 

From August 1, investors do not have to pay any entry load as per SEBI’s new regulation. However, it will result in revenue losses for distributors who used to get the entry load commission of 2.25 per cent. 

Brokerages are trying to find out measures to compensate such losses. Distributors feel that increase of business volume along with reduction of cost should be the basic objective for such compensation. 

Accordingly, they are concentrating on online trading platform, which saves costs to a large extent as it saves on papers and documentations and employee cost. One need not go to a customer’s residence to get MF forms filled as well. 

Said Hitungshu Debnath, executive director – distribution & wealth management, Angel Broking: “we want to make the online platform popular in smaller cities, primarily targeting tech-savvy young to middle age groups who want to invest to secure their future. Though it is a time-consuming process, it is the only way out.” 

While Angel Broking is planning to add more MF features to its existing online trading, Centrum is set to introduce online trading by October, primarily aimed at retail customers. 

“We keep getting advisory fees of 1% on an average from our big-ticket clients. We expect to raise retail customer base with low ticket size by promoting online service,” said V Sriram, head – wealth management, Centrum Broking, who feels the need to educate customers of online MF buying and selling. 

The aim is that once it becomes popular bringing big volume of customers, distributors will be able to impose a service charge of around 1 per cent to customers who also will not hesitate to pay seeing the hassle-free operations. 

Besides online trading, distributors are negotiating with asset management companies to increase trail commission or any alternative commission that will bring some financial support. AMCs pay trail commission to distributors, depending on the duration for which an investor stays invested. 

According to sources in touch with AMCs, the latter may increase exit load beyond 1 per cent and the extended part of exit load might go to the distributors. 

“Market volume holds the key for us. That can only be made faster through online trading,” mentioned Rakesh Goyal, head – distribution, Bonanza Portfolio, who feels that removal of entry load has acted in their favour as now they do not face competition from IFAs for whose entry load was the source of income. 

With 1,200 office locations, the brokerage is chalking out plans to multiply the base of retail customers through online trading.

Source:http://economictimes.indiatimes.com/MF-distributors-explore-alternative-revenue-models/articleshow/4815482.cms

FIIs, MFs hike stakes in over 100 cos in Q1

Foreign institutional investors and domestic mutual funds hiked stakes in over 100 different companies in the April-June quarter,CMIE data for nearly 250 companies out of the S&P CNX 500 shows. The stake of FIIs went up in 116 companies while mutual funds increased their holdings in 125 companies in the three-month period which saw the S&P CNX 500 go up by 43%. 

The S&P CNX 500 is the country’s first broadbased benchmark and represents about 95% of total market capitalisation. In comparison, only 38 promoters saw value in their stocks by hiking stake, while 196 promoters maintained holdings at the same level as they were at the end of March. 

The change in strategies was evident as FIIs which lowered stakes in nearly 100 companies shifted away from midcaps and smallcaps in sectors such as real estate, media, FMCG, hospitality, pharma and smaller banks besides others. 

Sectors which saw FII ramping up stakes were auto, finance, hospitals, telecom but most companies fell into largecap category boasting of market cap above Rs 10,000 crore. 

Mutual funds displayed different traits boosting stakes in real estate, shipping and power companies, but reducing exposure to banks, metals, pharma and infra-led themes like metals and cement.
"Valuations have not reached an untenable level even now. Mutual funds are sitting on same cash and inflows into equity funds through new fund offers as well as existing schemes will trickle into equity markets very soon. Some concerns exist on valuations but they are specific to certain select companies,’’ said David Pezarkar, head of Equities at Shinsei Asset Management.
Source: http://economictimes.indiatimes.com/FIIs-MFs-hike-stakes-in-over-100-cos-in-Q1/articleshow/4814142.cms

Positive earnings have surprised mkts: Motilal Oswal AMC

Earnings of individual companies have surprised markets on the positive side, Nitin Rakesh, CEO, Motilal Oswal Asset Management, said. According to Rakesh, there were many investment themes that looked appealing. “If you look at it from purely the ability of corporate to grow, the economic growth, demographic profile, it doesn’t look like we have to worry about the overall trend of the market,” he said. “Overall we are still cautiously optimistic, the idea is not so much a call on the overall market, there are investment themes out there that are so appetizing that one has to make sure that your portfolio does include those things. So it’s not a question of just a top-down call on the market, it’s a question of whether is there an opportunity to create wealth even at these prices and we believe there is.”
Here is a verbatim transcript of Nitin Rakesh’s exclusive interview on CNBC-TV18. Also watch the accompanying video.

Q: I believe you and Raamdeo Agrawal have been touring the foreign seas, what is the mood right now on India are people still as bullish as it seems to look on the good days?
A: One thing is very clear that over the last six-weight weeks especially after the big election news, we are on the radar and a lot of people have watched us with interest, but there is still a sense of apprehension for two counts, one while the feel-good factor is back and we are on the radar, they are expecting a lot to be done by the government as is the anticipation. So, for example, they would like to see some concrete moves on the reforms front, they would like to see some progress being made on the infrastructure front. The second apprehension comes from the fact that because of our short move in the market — 80% plus — suddenly there is a sense that the big move may have been over for now and there is a sense of caution so there might be some people who may have gone underweight over the last few weeks in terms of what their weightage was and what it is today.
The overall appetite seems to be good, it’s for us now to follow through with the actions on the reform front, on the infrastructure front, FDI — insurance is one of the big things that people are watching out for because insurance being such a large part of the global financial markets, there is a fair sense of disappointment over the past few years that we haven’t been able to move the reforms needle upfront. That one regulation on FDI, 26% versus 49% will have a major impact on the way we are perceived on a reforms perspective and also there are a whole host of other things that they would like to see.


Q: Would you concur that the big move is done for the moment and the market needs to consolidate here and catch its breadth or do you think it can run past its intermediate highs and climb a whole lot higher by the end of the year?
A: We have to look at it from an overall perspective; I talked about the same issue a few weeks ago when we said that whether the market is cheap or expensive, that depends on what your earning estimates are. So if you look at it from an earnings estimate perspective, while we were in mid-teens valuations, that seemed fairly valued but given that there are a lot of positive surprises coming out of the earnings both from profitability perspective and even some topline growth numbers. We may have underestimated the impact that earnings will have on the market.
We are probably the only country in the world where the overall aggregate profit number for this quarter the June ending quarter will be higher than the profit number in any quarter ever. Those are obviously things that get hidden behind all the noise. So if you look at it from purely the ability of corporate to grow, the economic growth, demographic profile, it doesn’t look like we have to worry about the overall trend of the market.
If we look at real short-term movements, whether it’s going to go past 4,650 before 4,200, that’s a question of momentum, volatility, capital flows and the tug-of-war between bulls and bears so that’s very hard to call. But overall we are still cautiously optimistic, the idea is not so much a call on the overall market, there are investment themes out there that are so appetizing that one has to make sure that your portfolio does include those things. So it’s not a question of just a top-down call on the market, it’s a question of whether is there an opportunity to create wealth even at these prices and we believe there is.


Q: Do you sense any hesitation in capital commitment because more or less aside from a couple of slip-ups, companies haven’t had any problem raising cash whether via QIPs or GDRs?
A: There is a fair amount of appetite for the right investment themes. For example, infrastructure seems to be one of those themes where before you could talk about the India story, people would ask you about what have you thought about the infrastructure opportunity in India. So for themes and stories that people have accepted as opportunities, I don’t think there is dearth of capital.
If you see the issue form the top down perspective, we are still seen globally as from a global investor’s point if view especially an institutional or a retail investor point of view, we are still seen as a small volatile market and exposure taken almost always is within the emerging markets, and within that BRIC was the buzz word and its now becoming BIC, so there is some money flowing into us in lieu for the markets but that is still very small exposure and that will only change if the stories that are being out there actually turn into reality, but I don’t think there is any dearth of capital and there is a fair amount of liquid money lying in the government treasuries globally and that will move into riskier assets as it has been moving and the level of comfort with the global economy is much better today. If we talk to people on the street in New York for example, everyone has a view that the worst is behind us now things look better, the banking numbers and the consumer numbers are looking better. So there is no dearth of capital or the fact that people are not willing to commit capital. The issue is: can you get the story out of there, can you make sure that there is follow-through on those promises?


Q: There has been a lot of talk this quarter about how best to approach technology post its earnings where do you stand?
A: I am cautiously optimistic because there was so much pessimism in the prices, what we have seen over the last few days after the results is essentially a reversal back to the fair value; technology continues to be a clear play on global recovery, the initial signs are that it is stabilizing, the larger companies held the operating leverage so I would actually be positive on this sector overall.


Q: How would you position yourself in the telecom sector now given valuations and given the kind of earnings that you are seeing?
A: Bharti has continued to demonstrate leadership at every level and there is obviously a big event with the company because of the MTN merger but we have presentation of about 40% at this point in time so 400 million plus subscribers on the base of about 1 billion population, so there is still some steam left, the larger players obviously have a bigger leverage because of the cost and profitability factor. We would continue to stay focused on the leaders in this space but still stay invested in this sector.


Q: How are you approaching commodities as a space right now, not so much with what’s happening with energy but the metals basket?
A: The overall commodity space has continued to move up globally as well, so there is no reason to say that one has to take a cautious view so we have to ride the momentum of the commodity boom. Whether we are going to go back to situations that we saw two-three years ago, we have our doubts but clearly there are cyclical plays out there that we continue to focus on, every commodity almost, globally has been demonstrating a strong upmove so there is momentum and opportunity out there.


Q: Do you track Sun Pharma, it’s lost some of that premium valuations now.
A: The news emanating out of the US subsidiary is not that great and there will be an overhang on the stock, I haven’t tracked the developments of late, there might be some more days before we really see this one out of the woods.


Q: What are your thoughts on cement as a sector?
A: This is one of the sectors that continues to give positive surprises right from Q4 of last year, so we continue to stay positive, we have tracked a lot of the cement companies closely, we still believe there are opportunities across the spectrum in the cement sector including some of the midcap names out there. So the results will ratify this later on in the next few days but there is opportunity in the cement sector.

Friday, July 24, 2009

Fund houses merge schemes to save overhead costs

Simplify choice, offer better clarity for investors.
Fund houses are merging their less successful schemes with the more robust ones, ridding themselves of what werereduced to a clutter in the current market. In the process, they have saved overhead costs.
In July, Kotak Mutual Fund, Principal Pnb Mutual Fund and Fidelity Mutual Fund merged some of their select schemes into their much larger schemes. Some of the other fund houses to have merged schemes in the recent past are UTI Mutual Fund, JM Financial Fund and ING Mutual Fund.
Merging schemes helps the fund houses bring down costs and manage funds better, said Mr Dhirendra Kumar, Chief Executive Officer of Value Research.
Sometimes schemes are so similar that it amounts to duplication, and it makes economic sense for AMCs to merge them and simplify matters.
Both Principal’s JuniorCap and Emerging Bluechip, which were merged, are mid-cap funds and had similar objectives and mandates, said Mr Rajat Jain, Chief Information Officer of Principal Pnb Mutual Fund.
Better choices

The investor either has the choice to exit the scheme which is being closed or opt to accept fresh units of the scheme into which it is being merged. Also, according to a notice of one fund house, the transaction of getting new fresh units would be considered as redemption from the scheme which is being merged and may entail capital gain or capital loss and securities transaction tax.
For the investor this simplifies choice and offers better clarity, said a fund manager.
The recent fund mergers have seen Kotak Technology fund, Kotak MNC and Kotak Global India being merged with Kotak Opportunities; while Principal JuniorCap was merged with Principal Emerging Bluechip fund.
Open plans

In the debt category, two plans of Principal Child Benefit Fund, (an open-ended balanced scheme) were merged; two plans of the Principal Government Securities Fund, (an open-ended dedicated gilt scheme) were merged; while Fidelity Multi Manager Cash was merged with Fidelity Cash Fund. Sometimes mergers happen as there are some schemes whose mandate does not allow them to participate in a diversified range of stocks, said Mr Krishna Sanghvi, Head of Equities at Kotak Mutual Fund.
Some schemes have specific mandates which in the current market environment do not give returns, explained another fund manager. For example, a sector-specific fund will not do well if the respective sectoral stocks are not faring well.
Size that matters

According to some fund managers, the small size of a scheme could also lead to its merger with another.
According to Value Research data, Kotak Tech had a fund size of Rs 18.74 crore, Kotak MNC Rs 26.70 crore, and Kotak Global India, Rs 51.48 crore as at June end, while Kotak Opportunities (into which these were merged) had a fund size of Rs 903.48 crore.
Principal Junior Cap had a fund size of Rs 53 crore, while Principal Emerging Blue Chip Fund stood at Rs 71 crore as on June end. In some cases, the merger of schemes helps asset management companies to gracefully exit from a scheme which is not performing well by extinguishing it through merger with a better performing one.

Sebi cap on investment period hits liquid funds' assets

The Securities and Exchange Board of India’s (Sebi’s) guideline that liquid funds can no longer invest in papers of more than 91 days’ tenure has led to a sharp fall in their assets under management (AUM).
This, coupled with a fall in returns of short-term (three months) securities and bonds, has added to the woes of fund managers. Mahendra Jajoo, head, fixed income and structured product, Tata Mutual Fund, said, “Returns from short-term papers have slipped quite sharply, leading to a fall in returns from liquid funds by 275-300 basis points.”
Annualised returns from liquid funds have slipped from 7-8.5 per cent a year earlier to 4.5-5 per cent now, as per the industry estimates. According to data from the Association of Mutual Funds in India (Amfi), investors withdrew Rs 34,378 crore from liquid funds in June.
Navneet Munot, chief investment officer, SBI Mutual Fund, said, “As per Sebi guidelines, fund managers cannot invest in papers of more than 91 days, which has adversely impacted returns of these schemes.” Earlier, fund managers were able to generate higher returns from this category by investing in a judicious mix of short- and long-term papers.
However, fund houses may find themselves in a serious trouble if there is a run on liquid schemes because longer-term papers have to be sold at a discount. This is likely to hurt existing investors because of a fall in net asset value of these schemes. Liquid funds are short-term debt funds that offer investors the option of withdrawing their money at a very short notice, ranging from overnight to just over a week. Investors, especially companies and banks, prefer these schemes to park their short-term funds because of quick entry and exit options.
Experts said that money from liquid funds had shifted to ultra short-term funds (a reincarnation of liquid-plus funds). In ultra short-term funds, the lock-in period is five days (liquid funds have no lock-in).
Liquid funds face taxation on two fronts. First, there is a dividend distribution tax (DDT) of 28.32 per cent. Second, there is also a short-term capital gains tax of 33.9 per cent for the highest income bracket. For ultra short-term funds, while there is a lower tax incidence of 14.2 per cent of DDT, short term capital gains tax remains the same.
Also, the ability to invest in longer-term papers of say 150 to 180 days helps them generate better returns. For instance, while liquid funds, returns are at 0.33 per cent per month, ultra short-term funds return 0.44 per cent. “Ultra short-term funds were investing in papers of up to one year, which helped them generate better returns,” said Jajoo.

HDFC MF - INTRODUCTION OF NO ENTRY LOAD AND TREATMENT OF EXIT LOAD

No Entry Load for all Schemes with effect from August 1, 2009
The following changes will be effected to the Scheme Information Document(s)/Key Information Memorandum(s), wherever applicable for all the Schemes of HDFC Mutual Fund ("the Fund"). The provisions of the addendum shall be applicable on aprospective basis, effective from August 1, 2009.

Entry Load
In accordance with the requirements specified by the SEBI circular no. SEBI/IMD/CIR No.4/168230/09 dated June 30,2009, no entry load will be charged for purchase / additional purchase / switch-in accepted by the Fund with effectfrom August 1, 2009. Similarly, no entry load will be charged with respect to applications for registrations underSystematic Investment Plan/ Systematic Transfer Plan / HDFC FLEXINDEX Plan accepted by the Fund with effect fromAugust 1, 2009.

Exit Load/Contingent Deferred Sales Charge ("CDSC")
With effect from August 1, 2009, exit load/ CDSC (if any) up to 1% of the redemption value charged to the Unitholderby the Fund on redemption of units shall be retained by each of the Schemes in a separate account and will be utilizedfor payment of commissions to the ARN Holder and to meet other marketing and selling expenses.
To read the addendum, please click here

FUND VIEW-Shinsei sees 15-25 upside for Indian stx in 1 yr

* Correction possible but rules out return to March lows
* Valuations sustainable, sees corporate earning upgrades
* Expects boost in capex, pick-up in inventory levels
Indian shares may gain 15-25 percent in the next 12 months backed by earning upgrades, pick-up in the capex cycle and growing signs the global economy is on the mend, a top fund manager said. While a 10-15 percent correction was a possibility, stocks will not drop to 2009 lows hit in early March as every dip would attract investors sitting on the sidelines, David Pezarkar, head of equity at Shinsei'sIndian mutual fund unit said.
"Small corrections apart, I would say market continues in the upward trajectory," said Pezarkar, whose firm will launch its first equity fund in India next week.
"It doesn't look like we will see some shocking kind of changes happening. Plus, globally I think a lot of economic indicators will turn positive over the next six months and that will surprise a lot of people," he said.
The fund manager recommended investing in sectors such as auto, technology and metals, where he sees a bounce-back in the short-term, but prefers infrastructure as a long-term bet.
Indian shares .BSESN have staged one of the best comebacks in the world this year, rising more than 85 percent from a low hit on March 6. They now trade at nearly 17 times their forward 12 months earnings from close to nine times in March.
While a surge in valuations was making many investors wary, Pezarkar said they were sustainable and would get a boost as economic activity picks up going ahead, and could spark faster earning upgrades, mainly in 2010/11.
Fears companies might apply the brakes on their capex spending because of a fund crunch or lack of demand had subsided.
"Now it seems at least the announced capex, which was under threat of not happening, at least that, will happen," he said.
Pezarkar, who managed about $2 billion for insurer Bajaj Allianz before joining Shinsei in October last year, said the government's thrust on infrastructure and stimulus targeted at raising consumption will boost economic activity.
Output of India's infrastructure sector, which accounts for a little over a fourth of industrial output, grew 6.5 percent in June from a year earlier, higher than an unrevised 2.8 percent in May, government data showed on Thursday.
Stake sales in state-run firms should add strength to the rally in Indian shares, said Pezarkar. He forecast a pick-up in inventory levels, where the drop outstripped the fall in sales on fears the global economic woes would linger for 3-5 years.
"If things stabilise then companies will have to build their inventories," he said, adding production, exports and trade figures should also see a sharp bounce-back.

MFs give arbitrage funds a break, stop fresh inflows

At a time when domestic mutual funds continue to aggressively scramble for more money to boost their asset base, they have made an exception for one category — arbitrage funds. Several top arbitrage schemes of mutual funds have stopped accepting fresh money from investors, as lack of sufficient arbitrage opportunities between the cash and futures markets have made it tedious for them to generate competitive returns to the existing unitholders itself.
Top schemes in the category, including Kotak Equity Arbitrage, UTI Spread, ICICI Prudential’s Blended Plans and Equity and Derivative Income Optimiser Plans, are no longer taking money, officials at these mutual funds told ET. Mutual fund distributors said HDFC Arbitrage, IDFC Arbitrage Plans and JM Arbitrage Advantage have also been closed to fresh subscriptions, though this could not be independently verified with them.
Sandesh Kirkire, CEO of Kotak Mutual Fund, which manages the biggest arbitrage fund of roughly Rs 1,000 crore, said: “We decided to stop accepting fresh money, keeping in mind the interests of the existing holders because the market is hardly conducive for arbitrage.”
Arbitrage schemes, considered relatively risk-free, aim to profit from the pricing anomalies between shares and equity futures. While they use at least 65% of their fund corpus to take advantage of such pricing anomalies, these hybrid schemes are structured to invest up to 35% of their corpus in money market papers such as certificate of deposits and commercial paper.
Arbitrage opportunities are at its best in a bull market, when futures trade at a premium to the underlying shares or indices. This allows traders to buy the underlying and sell futures. Analysts say nowadays, futures are mostly trading at a discount to the underlying, resulting in fewer opportunities to cash in on the price differentials. The interest rate scenario of late has also not been favourable for these funds, unlike last year when they switched to money market instruments to sustain returns in the absence of arbitrage opportunities. In the bull run, these schemes aimed at returning 9-11%, but in the last year, average returns from this category have been roughly 7%, according to Value Research, a mutual fund tracker.
Funds fear that the returns from this category would shrink further if assets grew more, with these schemes finding favour among the risk-averse investors, amid the existing uncertainty.
“It did not make sense to accept more applications at the expense of the existing unitholders. This is a temporary measure,” said Nilesh Shah, deputy MD and CIO of ICICI Prudential Asset Management.

Thursday, July 23, 2009

Mutual fund firms prepare for life without loads

The capital market regulator’s decision to scrap the entry fee on mutual funds from 1 August is set to alter the way the business is done in India, according to asset management companies and distributors that are now grappling with ways to deal with the looming change.
For one, while the move by the Securities and Exchange Board of India (Sebi) was meant to benefit the investor, the change does not necessarily mean a free lunch.
Distributors are devising ways to provide value-added services so that they can charge a fee for advising clients on financial goals instead of just hawking a product. A corollary to this could be that middlemen would focus only on high net worth individuals and wealthy clients, leaving the smallest consumers with no option to access fund services.
Secondly, the onus of getting the commission now passes from the asset management companies to the distributors themselves. Entry loads, which are capped at 2.25%, are typically passed on to the distributor by the asset managers. When a consumer invests Rs1 lakh, less than Rs98,000 is actually put in the fund. This is about to change now, as Sebi says that distributor fees should be paid in a separate transaction and the entire money that is given for investing should go into the fund.
On 1 July, Sebi said that funds may no longer charge an entry fee for a mutual fund scheme. It also tighetend the rules for exit loads, which are 1-5% of the assets under management. This amount is typically used to fund marketing expenses, a part of which is distributor commissions.
Now Sebi says that only up to 1% of exit fees can be used for marketing expenses.
“The pie is certainly smaller,” said Dhirendra Kumar, CEO of ValueResearch, a New Delhi-based mutual fund tracker. “We might even see distributors ask for more trail commissions.” Trail commissions are paid at the end of every year to distributors, and this is part of the expenses fee of the asset management company.
The Indian mutual fund industry has assets under management of Rs 6.7 trillion and about 87,000 registered agents sell mutual funds in India. These agents earned around Rs75 crore in the last financial year as entry load fees, according to a back-of-the-envelope calculation.
The previous year, one exceptionally good for equity inflows, saw them earning four times this amount. This is the money that Sebi has targeted.Some of the ideas that are floating ahead of the change in regulations include assets under management, or AUM-linked fee structures, where the distributor-turned-financial adviser gets a slice of the profits and bundling of services, especially by banks.
Some technology companies and the mutual funds business grouping, the Association of Mutual Funds in India, or AMFI, are introducing online platforms, which will help these financial agents aggregate data and provide better advisory services.
“It’s a new environment. People will have to move from distribution to advisory model,” said Jaideep Bhattacharya, chief marketing officer of UTI Asset Management Co. Ltd.
For that to happen, however, the army of distributors, most of whom just push mutual funds (as upfront fees make up the majority of their income), have to be trained. They have to have access to data and financial tools which will help them advise the customer on meeting financial goals.
This is where online platforms come in, said Rajesh Krishnamoorthy, managing director of iFast Financial India Pvt. Ltd.
Online platforms such as Fundsnet, iFast and Njfunds allow financial advisers to plug into and avail an array of services. These take care of the entire back office requirements of the distributors such as aggregating details of investments in various schemes and periodic statements besides offering them data and other investment advice, which can be used by financial advisers during their interactions with the clients.
“The writing is on the wall. The onus is on the distributors to create an ownership of customers by improving the quality of services. Platforms can be one way of doing it,” said Avinash Ramnath, national sales head of Canara Robeco Asset Management Ltd.
However, asset management companies cannot completely wash their hands of distributors either, cautions Sanjay Santhanam, who recently quit working as marketing head of Sundaram BNP Paribas Asset Management Co, and is starting a financial services firm.
“Mutual funds are dependent on distributors. And, when insurance agents work at double-digit commissions, and in a society where awareness about funds is low, it’s important not to throw the baby out with the bath water,” he said.
Upsetting equilibrium?
Mutual funds have traditionally griped about competition from unit linked insurance products or Ulips, that provide insurance cover and invest part of the premium in stocks and bonds. Life insurance firms do not have a standard method to calculate charges included in Ulips and as such distributors sometimes earn as much as 50% of the first premium as commission on these products.
Indeed some distributors such as Anagram Stock Broking Ltd say that they are now focusing on insurance.
“We are not going to sell MFs. For any product to be successful, there needs to be an equilibrium between distributor, consumer and the regulator. The latest Sebi ruling has upset this. Distribution cannot happen free,” said Sudeep K. Moitra, the company’s chief distribution officer.
Last financial year, Anagram said sold mutual funds worth Rs100 crore, of which 60% were retail transactions of less than Rs10,000 and Moitra says he couldn’t cover his costs with this.
If distributors turn financial advisers, then there is also a danger that they would marginalize small investors, especially those who are not literate or lack the savvy to log on to direct trading platforms.
“Those who are giving advice and who have been able to grow the investors’ money will continue to enjoy the confidence of investors, ” said N.N. Kamani, vice-president, marketing, Dhruv Mehta Investment Advisors, whose clientele is largely high net worth individuals.
From the asset management companies’ perspective, one way of dealing with the situation is to create an AUM-linked compensation structure with some big distributors. Thus, if a financial adviser-distributor helps a consumer grow assets by astute selection of mutual funds, the customer would pay him a slice of the profits. This is just another way for distributors to collect trail commissions, but directly from the consumers.
Changing investment norms
• What is an entry load?
This is the price an investor pays to buy a mutual fund (MF) unit. It is currently capped at 2.25% of investment. So, if one buys an MF unit for Rs100, only Rs97.75 is invested in the fund.
• Where does the balance Rs2.25 go?
A major part of this amount is paid to the distributor. Some fund houses use part of it to manage the fund, pay salaries of fund managers, meet administrative costs of sending monthly and annual return statements to investors and so on.
• Why is everybody talking about entry loads now?
They will be scrapped next month. Sebi has said investors can pay the distributor whatever they want as commission, but separately. This means that when one buys a mutual fund unit for Rs100, one invests Rs100 (and not Rs97.75).
• Does this mean investors will buy funds for free from August?
Not necessarily, but the agent commission may come down. The agents who normally hound investors to redeem money from existing funds and invest in new funds will not do that any more as they will no longer get upfront commission.From August, financial advisers will guide investors through a range of financial products. Indeed, they will charge fees for these services, but that’s a matter of negotiation between the investor and the adviser.
• What else does Sebi say?
Funds can use only 1% of exit loads for marketing expenses (even if they charge more).
• What is an exit load?
This is the price one pays for prematurely exiting the mutual fund. Asset managers charge 1-5% of investment (valued at current market prices) when one quits the fund. So, if the investment is valued at Rs100, at the time of premature redemption, one may get only Rs95.The penalty varies with the duration. So, the longer one stays invested, the smaller the exit load.
• If a fund is charging Rs5 as exit load but can take only Re1, what happens to the balance Rs4?
According to the new rules, the asset manager has to sink this into the fund. Following this, those who remain invested in the fund get the residual benefit of someone else’s investment.

Index schemes the best way to secure the future?

Talk to a bunch of financial advisors about your retirement plans and chances are that some of them
would ask you to start investing immediately in a low cost index scheme to build your corpus. Lately, there has been a surge in number of financial advisors advocating index schemes as the best way to build nest eggs to take care of long term financial needs: be it your child's higher education abroad or your own sunset years. However, most of them concede investors still have a fascination for the actively-managed equity schemes vis-a-vis index schemes, which are a form of passive management. Index schemes don't take call on individual stocks; they simply invest in stocks that form the index-that too, in exactly the same weightage.
"As India becomes a more efficient market, fund managers would find it increasingly difficult to beat the indices consistently over a long period of time," says Gaurav Mashruwala, a certified financial planner (CFP). "If you look at the current trend, there would be schemes which may manage to outperfrom the index for a short while, but it may not do for a long period consistently. That is why you see constant changes in top performing schemes these days."
Mashruwala wants to know why one should pay extra to a fund manager when he is unable to beat the market benchmark on a consistent basis. "The whole idea behind giving a higher fund management fee in a actively managed fund is to get superior returns. But if it is not happening, then there is no point in paying a higher fee," argues Mashruwala. That is why many advisors like him believe investors would be able to make better returns from an index fund where the cost could be lower by 1-1.5%. "When you are speaking about a long term of 15 years, savings could be quite huge," says a wealth manager.
However, don't think the concept is universally accepted. Many investment experts as well as fund managers argue that they can still beat the market. "India is still an emerging market. We are nowhere near the US or other developed market where you have to really struggle to beat the market over a long period," says a fund manager. "If you look at the performance of actively managed schemes like diversified or large cap schemes outperform the indices in a period of 3-5 years." Critics cheekily point out the mutual fund disclaimer in reply: Past record doesn't guarantee future performance.
How does one choose the best index scheme from a plethora of schemes available in the market? "Investing in an index scheme may be a passive form of investment, but choosing one definitely is not something you should do casually," says the wealth manager. Mashruwala wants investors to place emphasis on the cost and the tracking error of these schemes before putting in the hard-earned money. Tracking error happens because the scheme may be keeping aside a part of its corpus in cash to face redemptions. Also, they may be buying shares through the day but the valuation may reflect only the closing prices. So it is important for an investor to review the performance of the index scheme for a medium to long period before putting in the money. If a scheme is trailing the index for a long period, it is best to avoid it.

Ulips cannot charge more than 3% as fee from Oct 1

Insurance Regulatory and Development Authority (Irda) on Wednesday stepped in to discipline life insurers and put an overall cap on all charges levied in unit-linked policies (Ulips) with effect from October 1 for new policies. In the case of existing policies the regulator has given life insurers time till December 31 to modify charges.Irda has capped overall charges at 3 per cent of net yield in case of Ulips with tenure of 10 years or below and fund management charge shall not exceed 1.5 per cent. Net yield is the return that customer gets on maturity minus charges. In case of insurance policies of above 10 years, Irda has capped total charges at 2.25 per cent, of which the fund management charges shall not exceed 1.25 per cent.Financial Chronicle in a front-page report on June 10 highlighted the huge charges levied by insurance companies in Ulips. These charges are much higher than those of mutual funds, where entry load has been brought down to zero per cent.The entire effect of charges will be reflected in net yield, which means a cap has been put on the amount that can be taken from customers under various charges. The insurance companies will have to restructure their products in such a way that they follow the required norm. About 40-50 per cent of the products available in the market will have to be overhauled.However, the companies have the freedom to structure the policies as they want to. Industry players feel that following this order, the companies will have to bring down the commission paid to their agents.“ Ulip products will see a decline in commission paid to agents. Companies will also have to look at expense management,” managing director and chief executive officer of IDBI Fortis Life Insurance G V Nageswara Rao said.Through this order Irda has also tried to encourage long-term investments.At present, the first year charges levied in a Ulip is as high as 60 per cent. While average fund management charge is between 1.5-2 per cent. Out of the total charges in first year about 35-40 per cent goes towards paying agent’s commission.Apart from capping charges, the regulator also mandates insurers to issue the policyholder a certificate at maturity showing year-wise contributions, charges deducted, fund value and final payment made to the policyholder taking into account partial withdrawals, if any.
“Irda through this circular mandates an overall cap on all charges put together. Care has been taken to enable the insurers freedom to distribute charges across the policy term in order to impart flexibility and facilitate product innovation,” said R Kannan, member, actuary, Irda in the order.However, insurers say that there is not enough clarity on the order. “Cap on charges is a step towards policyholder’s protection. But, there are many technical details which are not clear at this point of time", Rao said.“The circular puts expense management in focus. However, it is likely to drive Ulips more as an investment product than protection, thereby restricting the development of the protection industry", Rajesh Relan, managing director of MetLife Insurance Company Rajesh Relan said.TR Ramachandran, CEO & MD, Aviva India said, “With a cap on overall charges, the customers stand to benefit in the form of higher returns on their investment. Moreover, lower charges on products with a term greater than 10 years will provide further impetus to long-term policies.”Nitin Chopra, CEO, Bharti AXA Life Insurance Company said, “The cap on ULIP charges is a significant move for the Indian life insurance industry and its policyholders. This notification is a clear indication of Irda's focus on customer benefit and ensuring that life insurance products are easy to understand and buy. However, it would help if the mortality charges were removed from the overall ambit of charges, as mortality charges are dependent on individual customer profiles and the amount of cover required. ULIPs provide flexibility in choosing the sum assured. Hence, including mortality charges in the overall charge cap may adversely impact, especially the aged customers.”Rajesh Sud, chief executive officer and managing director, Max New York Life said, “Life insurance penetration in the country is low and distributors of life insurance need to be adequately trained and suitably compensated for providing quality of advice and service to the policyholders for the development of the industry. The capital requirement in life insurance business, both due to its large gestation period and due to the reserving and solvency requirements is far larger than other financial products. Hence, life insurance business should not be equated with other financial products and this capping of charges may reduce margins of life insurance companies.”

Ulips may fetch 150 bps more on new fee cap

Retail investors in unit-linked insurance plans (Ulips), arguably one of the hottest investment products, could see a 150-basis-point rise in returns.
The Insurance Regulatory and Development Authority (IRDA) has put a cap on charges that insurance companies, which sell Ulips, collect from investors. A slice of the charge is the commission paid to agents, which is set to drop.
IRDA’s decision is a fallout of a vehement attack on Ulips by mutual funds, which compete with insurers. Since mutual funds have to stick to ceilings on charges laid down by Sebi, fund houses felt they were at a serious disadvantage compared to insurance companies.
Ulip charges have been capped at 300 basis points for insurance contracts up to 10 years and 225 basis points for contracts over 10 years. If a fund earns a yearly return of 15%, a policyholder has to get a minimum return of 12%. The ceilings will come into force from October this year.
“The move will usher in greater transparency, making it a more attractive choice for customers. It will also bring in discipline in expenditure management by insurers,” said R Kannan, member, IRDA.
For contracts up to 10 years, the difference between gross yield and net yield (after netting out all charges) to the customer should not exceed 300 basis points. Of this, the fund management charges should not exceed 150 basis points, said IRDA. For insurance contracts of over 10 years, the difference between gross and net yields should not exceed 225 basis points. Of this, fund management charges will not exceed 125 basis points.
Currently, Ulip charges on an average work out to around 375 basis points. As most products have an average tenure of 13-15 years, the return to the policyholder could go up by 150 basis points.
But reactions were mixed from insurers. V Vaidyanathan, MD & CEO, ICICI Prudential Life, reckoned the move would benefit the industry in the long run. “Lower charges on products with a longer term will provide further impetus to long-term policies,” said TR Ramachandran, CEO & MD, Aviva India.
But the CEO of a private life insurance company deemed the move to fix caps as an exercise in futility. “A cap will not make a material difference as customers do not pay their premiums after the third year,” the CEO said. “We will have to examine the impact on all customer segments since the mortality charges are not uniform and vary with age. We would not like one segment of the customer subsidising the other,” said Rajesh Relan, MD, MetLife India Insurance Company.
Nitin Chopra, CEO, Bharti AXA Life Insurance Company, too said including mortality charges in the overall charge cap may adversely impact customers, especially those who are aged.
Source: http://economictimes.indiatimes.com/Personal-Finance/Insurance/Analysis/Ulips-may-fetch-150-bps-more-on-new-fee-cap/articleshow/4809946.cms