MFs: No entry loads could mean lesser cost for investors

Capital market regulator Sebi has stopped allowing mutual funds (MFs) to charge an entry load, or a commission, from investors starting August 1. Before Sebi came up with the rule, MFs were charging an entry load of 2-2 .5% and paying a commission of around 3% to their distributors. This meant that asset management companies (AMC) had to pay between 50 and 100 basis points (bps) to distributors. 

This fixed entry load structure had an embedded conflict of interest for distributors. As distributors made a fixed sum on mutual funds notwithstanding their performance, they had an incentive to push MF schemes, even if the investor did not require it. This led to constant churning across schemes and hindered long-term asset creation. Therefore, it is appropriate that Sebi is putting an end to this practice. In the new scheme of things, the investor will pay a fee to distributors and has the option to negotiate it based on the quality of the service provided. 

It is important for investors to know about the distribution part of the business because the ball is now in their court as they have to negotiate with the distributors on commission . What will be the fallout of Sebi’s announcement in short and long term? For starters, distributors will have to play the role of financial advisors to investors and not simply push products. This is the basic philosophy behind the announcement. 

The business should be based on investment needs and not the distributor’s ability to merely sell. For investors, their costs will be lower if we simply go by the announcement. But is it so simple? The regulation says that the investors are supposed to negotiate the commission with distributors, giving them more leeway now. They can choose from among several distributors based on their quality of service and price. 

But, will retail investors have the bargaining power to argue with distributors? Many experts are of the view that retail investors will not be willing to pay distributors out of their own pocket. In such a situation, AMCs will have to step in to subsidise distributors for the services they provide investors. 

While earlier AMCs were paying 50-100 bps, now they may be required to increase it. All in all, it looks like that AMCs’ bottom line will definitely take a hit. Most of them are already in the red and they may have to bear the brunt in the short term. However, the intent of the guideline is to bring about increased inflows in the long term, so the assets under management will increase manifold in future. And then AMCs will turn around. 

“In short term, this move can have negative impact on AMCs, but in long term, it will definitely help the industry to expand its reach. More people will invest as the cost of acquisition comes down,” says Kanwar Vivek, CEO, Birla Sun Life Distribution. 

Those distributors who are pushing products will find the going tough. Basically, it’s going to be smoother for “advisors” but harder for “sellers” . In fact, industry players feel that even now business is more need-based . Rajiv Deep Bajaj, Vice Chairman & Managing Director Bajaj Capital says that in July, inflows have been higher in debt schemes than equity schemes. The commission on debt funds is just 0.5-0 .7%—much lower than equity schemes.
insurance products, however, continues to be higher 

than for MFs. Experts agree that at least in short term 
distributors will tend to push unit-
linked insurance plans. Here the investors have to be very cautious as insurance distribution will become more prone to misselling by distributors. Insurance is not a substitute for MFs. While the objective of the former is to protect against foreseeable risk, the objective of the latter is to optimise return on investments. Moreover, ULIP come with much higher upfront charges. 

CONCLUSION: 

In a nutshell, the new regulation will lead to longterm asset creation. However, there is no clarity on whether investors or AMCs will be paying commission to distributors. A majority of retail investors do not have the tools to find appropriate information about financial products. Therefore, it seems that they are not on an equal footing with distributors. The latest move might complicate matters, as it expects the investor to negotiate with distributors on their own. Investors should be really cautious, especially if the distributor seems overeager to sell ULIP products. 

WHO WINS WHO LOSES 

Mutual fund distribution set to become more demand based rather than sales push 

Time for investors to be more careful, as distributors might push ULIP more, at least in short term 

Asset management companies might have to bear the brunt

Source: http://economictimes.indiatimes.com/Features/Investors-Guide/MFs-No-entry-loads-could-mean-lesser-cost-for-investors/articleshow/4850325.cms?curpg=2

Infrastructure-based funds back in vogue due to govt’s big push

The infrastructure theme in mutual funds industry is like festivals in India. It 

recurs with predictable regularity to garner mixed 
response. This year funds that play 
on infrastructure theme are back in vogue, because of the Budget’s emphasis on infrastructure. The government has earmarked Rs 12,887 crore for urban infrastructure, an increase of 87% over the previous year. 

This gives an indication for infrastructure funds and investors to align their strategies towards the theme. If reports are to be believed, Reliance MF new infrastructure fund offer has managed to mop up around Rs 2,500 crore. So would these do well to offer good returns ? Would it be prudent to invest in these funds? We at ETIG analyse the performance of existing schemes in bullish and bearish phases in the light recent development in the power sector. 

STRUCTURE AND PERFORMANCE 

A confusion investors face while investing in infrastructure funds is how different those are from diversified equity funds. They are among the most diversified funds. The confusion has, however, been compounded by the marketing strategy employed by fund houses. 

Last two years’ performance record suggests that around 10 diversified equity funds beat most of the infrastructure funds on returnsparameter . However, in the last oneyear Taurus Infrastructure Fund has been the best performer in the entire gamut of such funds. This is a critical period to gauge a fund’s performance considering market volatility. The fund has given a reasonable 21% returns in the last one year and for last six months it has given a whopping 119%. 

Sahara Infrastructure Variable Pricing is the second best performing fund, which has given around 20.9% returns in the last one-year and 78.23% in the last six months.

Reliance Diversified Power and ICICI Pru Infrastructure are two formidable players in the industry. Sectors such as Oil & Gas, Petroleum & Refinery, Power Generation, Transmission & Equipment, Engineering & Industrial Machinery, and Electricals & Electrical Equipments are the main composition of both Taurus Infrastructure Fund and Sahara Infrastructure Variable Pricing. Investors who invested in infrastructure theme funds and held on from January 2006 to December 2007, would have made returns of anywhere between 50% and 100% in this period. 

THE DISTINCTION 

As an investor you should lay immense stress on the track record of an infrastructure fund before investing with it. Though the objective of diversification to varied sectors remains the same for both diversified and infrastructure funds, it makes sense that as an investor you should regularly book profits on the theme you see in vogue irrespective of the long term. The reason being infrastructure funds, on an average, have declined more than 40 % yearto-date , higher than the declines seen in most diversified funds.


infrastructure funds have track record of less than five 
years. Hence, it would be too 
early to form a confirmed opinion on the performance of infrastructure funds considering the projects and plans of an infrastructure are long-timed . Those investors who hope to gain for the short-term diversified equity funds, however, those believe in longer we-stay-and-higher-wegain norm are set to benefit from prudent investing in infrastructure funds. 

Also given the recession phase, the government’s stimulus is obvious. And considering the government’s intervention, it would inadvertently focus on infrastructure projects and hence funds investing in infrastructure companies are set to gain. Investors intending to play Indian equity, infrastructure funds are must.

Source: http://economictimes.indiatimes.com/Features/Investors-Guide/Infrastructure-based-funds-back-in-vogue-due-to-govts-big-push/articleshow/4850287.cms?curpg=2

Insurance regulator makes Ulips more attractive

For several years now, insurance products, particularly Unit Linked Insurance Plans (Ulips) have occupied an important place in the financial portfolios of non-resident Indians. A recent decision by India’s insurance regulator to cap charges and the steady growth of stock indices promise better returns now. 

Huge gains have been reaped when the Indian stock indices were soaring. When markets were on a bull run, Ulips registered an astronomical growth of 95 percent until September 2007. In 2007-08, of the money earned in first premiums by life insurers, around 70 percent came from Ulips. In these policies, the entire corpus of the premium can be invested in equities. This makes these schemes runaway winners in booming markets and equally a nightmare in meltdowns. 

With the recent downturn in equity markets exposing the downside of the insurance industry’s favourite product in recent years—Ulips—the damage control began. Ulip sales dipped sharply during 2008-09. The industry started working to standardise fee structures to make Ulips more transparent. On their part, investors faced with an erosion of net-worth began demanding that insurance companies make clear the percentage of the premium corralled as administrative and other charges. 

A Ulip is a market-linked life insurance plan, which invests the premium money in various proportions in the equity and debt markets. In effect, this ensures that the returns on such plans are linked to the performances of the markets while also offering the individual an insurance cover at the same time. 

It offers an opportunity to NRIs to earn above-average returns over the long term by investing in Indian stock markets. The expenses incurred by the ULIP ultimately impact its returns- the lower the expenses the higher will be the returns and vice versa. As with expenses, the fund management team and style too hold significance while considering a Ulip. 

Ulips come in a variety of options including child plans and retirement plans. For NRIs these are of particular significance. Most NRIs in the Gulf need to have their children raised or educated in India. A regular child plan comes in various options such as money-back plans, traditional endowment child plans and unit linked plans. While traditional endowment plans and money-back plans offer moderate returns that may even appear disappointing, unit linked child plans offer the NRI an opportunity to earn market-linked returns, which from a 10-15 year perspective can prove very lucrative. 


cosy retirement 

Similarly, NRIs in the Gulf look forward to a cosy retirement back home. Pension/ retirement plans help individuals in building a pool of savings over a period of time and facilitate in meeting post-retirement needs. Again, pension plans offer a variety of options to NRIs. Regular as well as unit linked pension plans are available. Individuals can invest in a pension plan, which suits their risk profile and long-term objectives best. 

Apart from the needs mentioned above, the NRI may also want to build a corpus for buying a second property or may simply want to invest the surplus that he generates on his income. Regular as well as unit linked endowment plans can help NRIs achieve this objective. 

The NRI can also consider buying an insurance plan in the name of his parents or his wife/children to secure their financial future. Therefore, it makes sense for NRIs to consider taking insurance in India for a variety of reasons. 

Ulips have now become considerably more attractive for two reasons. One – the Indian stock indices are looking up, and more importantly, two – the watchdog Insurance Regulatory and Development Authority (Irda) has put a cap on overall charges that insurance companies can charge subscribers of Ulips. 

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 percent, a policyholder has to get a minimum return of 12 percent. The ceilings will come into force from October 1 this year. All existing products that do not meet the requirements are to be withdrawn or modified by December 31, 2009. 

Moreover, IRDA has said that any extra premium due to underwriting rising from extraordinary health conditions, cost of rider benefits, service tax on charges should be excluded in the calculation of the net yield. There should be a mention to the gross and net yield to the customer at the time of sale. 

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. 

Industry experts say this will make ULIPs even more transparent and favourable for customers. With a cap on overall charges, customers stand to benefit in the form of higher returns. Moreover, lower charges on products with terms greater than 10 years will provide impetus to long-term policies. According to one estimate, a subscriber paying an annual premium of Rs60,000 is now likely to get over Rs100,000 more when the policy matures in 15 years from now.

Source:http://www.thepeninsulaqatar.com/Display_news.asp?section=Business_News&subsection=market+news&month=August2009&file=Business_News2009080392723.xml

Mutual Funds and ULIPs have their own merits

“Its success lies in the fact that it is an insurance plan and not an investment or a welfare plan,” said James Franklin Roosevelt 


Sorry Mr Roosevelt, but insurers here would beg to differ. Thanks to an array of ‘insurance cum investment products’ , the idea of a complete insurance product for investors seems to have diluted. 

Yes, you have guessed it right. We are talking about Unit Linked Insurance Plans (ULIPs), which are currently the most popular of all insurance schemes available in the market. But why, as someone would rightly point out, is an ULIP being discussed in an Investor’s Guide edition purely dedicated to the Mutual Funds (MFs)? 

ULIPs and MFs, have locked horns against each other for quite some time now. The recent debate roots from scrapping of the entry load from the MF schemes, closely followed by Insurance Regulatory & Development Authority (IRDA) capping the ULIP charges. 

But why, after all, are MFs and ULIPs, up against each other? 

The answer, though simple is highly complex to deal with. And the answer lies in the manner in which the ULIPs are sold. Investors here are perceived to believe that they are buying an insurance plan with a built-in add-on feature of mutual fund investments. Thus prima facie this product seems an attractive ‘buy one get one free’ offer. But this perception goes for a toss when the investor realises that the element of insurance is just miniscule. And this revelation pops only after the scheme is bought. 

Most ULIPs available in the market today offer an insurance cover in the range of 5 -10 times the amount of annual premium. Thus, for an investor paying a premium of Rs 20,000 per annum, the embedded value of insurance is simply a lakh to two lakh rupees. In a stark contrast, a traditional pure term insurance plan can fetch an insurance cover of about Rs 50 lakh with the same amount of premium. 

Moreover, unlike a traditional endowment or money-back policy, ULIP does not pay back the amount of sum assured if the holder survives through the policy term. The amount receivable on maturity is purely the fund value whose growth is directly linked to the markets. There is thus a very thin line of distinction between an MF and a ULIP as far as the structure and investment strategies are concerned. 

Another concern surrounding the ULIP is the fact that if at the time of maturity of the policy, the markets are sailing in troubled waters, investors have no option but to accept the returns as determined by the market then. Unlike an MF, they do not have an option to hold on to their investment until the markets recover. 

Thus, though MFs and ULIPs are said to be similar, the similarity is restricted to the product structure and investment strategies. The point where this similarity ends, the dissimilarities begin. 

The starting point of this dissimilarity is the extent of charges levied by both these products. An ULIP is normally loaded with a number of charges ranging from premium allocation charge to fund management fees to policy administration charge, mortality charge, top-up premium charge, switchover charges and so on. Of these, the premium allocation charge, which usually varies from about 10% to 100%, is the prime source of income for insurance distributors and is highly criticized for robbing the investor of his invest-able surplus. 

On the other hand, the prime source of revenue in case of an MF is the fund 

management charge, which is currently capped at 2.5% per annum. 
There is also a 
small percentage of penal charge, ranging from 0.5% - 1% called as exit loads, levied in case of premature withdrawals. Premature withdrawals here generally refer to withdrawals within one year from the date of investment. The net amount invested is thus much higher in case of an MF vis-à-vis a ULIP. However, having said that, it would be wrong to conclude that ULIP is a bad product and that a MF scores over an ULIP at all times. 

ULIPs are known to be tax-friendly since both the investments and the returns are fully exempt from tax. Moreover, ULIPs offer flexibility to switch between the equity and the debt investments, which are currently absent in case of an MF. This switchover, though, attracts some cost. But then ULIP is beaten by an MF when it comes to liquidity, as an early exit from an ULIP is nothing less than suicidal. 

To prove this thesis, ETIG analysed two investment options – one in a ULIP and the other in an MF to analyse the returns from these two competing products over a period of time. And the results are interesting indeed. Under both the options we have assumed the age of the investor to be 30 years and annual amount of investment is Rs 20,000 for 20 years. Under the first investment option, we have assumed a ULIP scheme with a 100% exposure to equity markets. 

Assuming the risk cover to be five times the first premium installment, the sum assured is Rs 1 lakh. As far as charges are concerned, we have assumed a Premium allocation charge (PAC) of 20% for the first two years and 10% for the third year. Thereafter, PAC is uniform at 2% p.a. throughout the policy term. Policy administration charge is fixed at Rs 60 per month throughout the policy term while mortality charge is based on the age of the policyholder and the amount of risk cover. The same thus increases with the age of the policy holder during the policy term. 

Another charge factored in is the fund management fee, which is 1.5% p.a. and gets deducted from the fund value on a regular basis. Thus, in the first three years of the policy, almost 25% of annual premium is deducted towards these different charges. 

Under the second investment option, the premium paid towards a pure term insurance plan of Rs 1 lakh is mere Rs 417 per annum while investment in equity mutual fund will attract an annual fund management charge of about 2.5% of the fund value. (While we have assumed a pure term cover of Rs 1 lakh, investors would do well to note that a pure term plan with such small cover is currently not available in the market. We have assumed the same to make investments under both the options comparable).

Source: http://economictimes.indiatimes.com/Features/Investors-Guide/Mutual-Funds-and-ULIPs-have-their-own-merits/articleshow/4850357.cms?curpg=2

MFs to face greater obstacles with entry load gone

The mutual fund industry in India, although 15 years old, is still to develop into a 

credible competitor to other segments of the financial 
services industry, especially 
insurance. On the face of it, mutual fund investments (in equity schemes) seem more attractive than insurance products, but on the ground the reverse is true. More Indians trust life insurance companies with their savings than they do with mutual funds. According to figures from the Central Statistical Organisation (CSO), life insurance funds accounted for 12% of total household savings in India. In contrast equity & debentures only attracted 7% of household savings in financial year ending March 2008. 

There are 35 asset management companies (AMCs) in India managing Rs 6,70,012 crore, according to independent investment information provider, Value Research. The industry’s penetration is estimated at 4-5 % as against 10-15 % for insurance. There are around 3 million agents for insurance products and just 80,000 distributors for mutual funds. 

Both industries, which started almost half a century ago in India with a single player, now have several competing companies. Still, low customer awareness levels and poor financial literacy have largely stymied the popularity of financial products in India. 

But in the case of insurance, rampant misselling has made it more popular than mutual funds. While insurance is indeed an investment for covering your life, it is sold more as a tax-saving investment tool. In rural areas, agents mis-sell it as a fixed deposit and the idea has been so well rooted that in many Indian villages, it is still popularly known as ‘Lal FD’ . There is little scope for mis-selling in case of mutual funds - the mis-selling is limited to the extent that the agent assures investors a return that the fund may not able to deliver. 

In terms of selling, both mutual funds and insurance are ‘push’ products. However, a distributor has a higher incentive to sell the latter because of the opportunity to earn a higher commission. An agent selling insurance earns a commission of 30-40 % of the initial premium and a trail commission of around 5%. However, the commission in case of mutual funds is never more than 2-2 .5%. 

Insurance generally is a product that cannot be sold multiple times to one investor. Hence, the agent has to be given a high commission to push the product. In case of mutual funds, the agent gets multiple opportunities to sell more than one product to the same investor. 

As a result, distributors and mutual fund houses exhibit limited interest in continuously engaging with customers post closure of sale as the commissions and incentives are largely in the form of upfront fees from product sales. Limited use of the public sector banks’ network and post offices to distribute mutual funds has also impeded the growth of the industry. The insurance industry, on the other hand, has been able to leverage this to its advantage.

While setting up an AMC is relatively easy, getting business during a downturn and 

withstanding redemption pressures during times of low 
liquidity is the difficult part. 
The insurance business is one with a long gestation period and requiring sufficient capital to cover incremental actuarial liability. The breakeven time for an insurance business in India is at least seven years. In this scenario, the most important challenge for the company is to have a robust agency network. 

Mutual Funds have to face a stricter regulatory environment as the industry is regulated by the conservative capital market regular Sebi. As a result, there is limited flexibility in fixing fees and pricing. Insurance companies have a relatively less stringent environment as the industry is regulated by Irda, which is less conservative in its regulation. This allows more flexibility for companies to structure their products and fees.

Source: http://economictimes.indiatimes.com/Features/Investors-Guide/MFs-to-face-greater-obstacles-with-entry-load-gone/articleshow/4850274.cms?curpg=2