Thursday, June 25, 2009

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.

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.

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.

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.

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.

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.