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.

Source: http://www.livemint.com/2009/07/22000123/Mutual-fund-firms-prepare-for.html

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.

Source: http://timesofindia.indiatimes.com/NEWS/Business/India-Business/Index-schemes-the-best-way-to-secure-the-future/articleshow/4809544.cms

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.”

Source: http://www.mydigitalfc.com/insurance/ulips-cannot-charge-more-3-fee-oct-1-895

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

Seamless MF Trading On Its Way

Trading in funds involves a lot of paperwork. But, it is set to become as simple as trading in shares

New vs Old

• Only agents and distributors can use the present systems. The new one could allow retail investors to circumvent one level and log in directly into the system to transact
• At present, investors get integrated statements from their agents and also individual statements from fund houses. This is a duplication of sorts. The new system will probably aim towards one statement only
• As of now, paperwork is still required—forms and cheques for each transaction. The new platform may reduce this by keeping most things online
• With more transactions online, the reduced paperwork could lead to lower costs
  As of now, advisors spend a lot of time on transactions and data management. With things going online, focus will be more on advisory

Isn’t it ironical that when you need to invest in, say, five different mutual fund (MF) schemes, you need to submit five forms and five cheques, but when you want to invest in equity shares of five companies, you either phone your broker or log on to the Internet and complete your transaction? You get a consolidated account statement of all your equity holdings from your depository participant (DP), but get statements from as many MFs as you have invested in.
Wouldn’t it be easier if MF transactions could happen as they take place for equity shares? Thanks to the Securities and Exchange Board of India’s (Sebi) chairman Chandrasekhar Bhaskar Bhave, the Association of Mutual Funds of India (Amfi) has appointed a committee of six MF officials to devise a platform for trading in MF units. The objective is three-fold: to make buying and selling of MF units less cumbersome, to increase penetration of the product by encouraging participants across India, and, subsequently, to reduce costs.
MF platforms are not entirely new in India. Three platforms already exist, one of which was launched recently. MF distribution and transacting through dedicated platforms promises to be the next big wave in the industry.

What is an MF platform?
Ideally, MF platforms are a common meeting point for MF houses, agents and investors. What you get to see on a website has a whole machinery working at the backstage that integrates your data and investments and channelises it to appropriate partners. Typically, agents have to open accounts on such platforms to be able to trade MF units on behalf of their investors. These platforms also double as an agent’s back office. So, he need not invest in sophisticated software or spend time manually preparing complex reports for clients. He can just use the ample tools available on the platform (like in a website), cull out statements of holdings with the latest net asset values (NAV) and other information about the portfolios, and send you newsletters or statements, or even answer any queries.

In countries like the US and Canada, platforms also enable investors to open accounts and trade in MF units directly, bypassing agents. Advanced platforms enable you to trade in MF units electronically and help eliminate, or, at least, minimise the paperwork.
MF platforms in India, however, are as yet not open directly to investors; only agents can access them. They are simply a link between agents and MF houses. NJ Fundz Network, launched in July 2003, is by NJ Invest, one of India’s largest MF distribution houses. FUNDSNet, launched in 2006, is by Computer Age Management Services (Cams), India’s largest registrar and transfer (R&T) agent. iFast (launched in May) is run by iFast Financial India, a Singapore-based entity that already has a successful platform in Singapore, managing assets of around $1.8 billion.

How does it work?
There are differences in the way the three existing platforms work.

FUNDSNet. When agents join the FUNDSNet network, they get a username and a password. With these they can store their data and information. All that the agent needs is a computer, a printer, a scanner and a good Internet connection. When he gets a form and a cheque, he scans both and the images, as they are being scanned, reach FUNDSNet. Since FUNDSNet is a subsidiary of Cams, it can, therefore, also accept MF applications and attest a time stamp on the application.
The advantage with this facility is that if the distributor sends in an application at 2.59 p.m., he can still get the same day’s NAV. (The cut-off time for accepting MF applications is 3 p.m., after which the next day’s NAV is applicable). So, with FUNDSNet, the agent doesn’t have to go to the local R&T’s or MF’s offices before the cut-off time to submit the application. For collecting cheques, FUNDSNet has a tie-up with HDFC Bank.
All records of an agent’s clients, subsequent transactions, additional purchases, switches and redemptions are stored on the FUNDSNet servers and are accessible by agents. Data maintained on this platform is password-protected.
There are several online tools and calculators also available, using which agents can bring out complex reports for their clients. So, the agent doesn’t need to invest in software to handle client information.

NJ Fundz Network. Agents who join the NJ platform become NJ Invest’s sub-brokers. This platform does not allow scanning and electronic dispatch of application forms. The rest of the process is similar to FUNDSNet’s although the tools offered by the two platforms may differ.
The advantage with NJ is that it provides schemes from all MFs, unlike FUNDSNet, which offers schemes only from the 17 MF houses that are serviced by Cams.
NJ also has a training program for new recruits and assists them in getting the mandatory Amfi certification.
NJ’s platform also offers sophisticated tools that absolve the agent of the need to maintain a full-fledged back-office replete with systems and staff. “We help develop an advisor’s business and train him to handle clients. It is more of a business development platform,” says Jignesh Desai, joint managing director, NJ India Invest.

Reducing costs
The existing platforms are more attuned to agents’ needs. A more inclusive platform would be able to cut down paperwork, make transacting easier, and reduce costs. India’s latest MF platform, iFast, is a step in this direction. It offers schemes in the form of a Portfolio Management Service (PMS). Whenever you wish to invest, your agent will collect your money and invest the entire amount in Deutsche Asset Management’s PMS (DeAM Wrap Portfolio), a division of Deutsche MF which is partnering iFast.
As against a discretionary PMS, where one common portfolio caters to several PMS investors, this is a non-discretionary portfolio, where each investor would be able to invest in a unique bunch of schemes across MFs. You need to give only one cheque to DeAM PMS and fill only one form. Depending on the advisor’s choice, DeAM will invest across schemes.
Apart from the modalities, iFast also differs from the other two platforms in its cost structure, which hinges on advisory rather than on sales. So, with iFast, if you want to invest in, say, five schemes, you will not have to pay entry loads on all of them. You can pay a consolidated amount (0.15-2.50 per cent) as the entry load. No entry load is charged on switches though the exit load is applicable. Apart from this, there is the agent’s annual fee of 0.5-1.5 per cent of your prevailing portfolio value. This would include a charge to your agent for using the iFast platform.
iFast discourages frequent churning since switches are free and ensures that your money grows. Thus, with Sebi having abolished entry loads, advisory platforms such as iFast could get an edge over the rest, eventually.
In terms of solutions and tools offered, iFast is somewhat similar to NJFundz Network. The disadvantage is with iFast’s PMS structure. The minimum investment required is Rs 5 lakh, which could be a deterrent, and, being a PMS, it also attracts a higher dividend distribution tax for all its investors (22.44 per cent, including surcharge and cess). Besides, if your agent gets logged on to iFast, he won’t be able to integrate your current portfolio, at present, with the schemes that you would be buying from iFast.

The next level
The mother of all platforms, the Amfi MF trading platform, aims to remove most of your troubles of investing in funds. Although the Amfi committee refused to comment on how the platform and its modalities would work, sources close to the development say it would be Internet-based, where agents would be able to buy and sell units on an investor’s behalf without leaving their offices.
Sources also say that a tie-up with National Stock Exchange terminals (78,000 at present), is being contemplated. This way brokers would double as MF agents. Ultimately, the Amfi trading platform aims to switch to a system where investors would have to fill just one form and give one cheque, and would receive one account statement, much like a demat account, irrespective of the number of schemes they invest in. This platform has Sebi’s blessings and is currently being developed by Amfi, an industry body. Sources claim that on account of this, Amfi would hold some ground in convincing Sebi to bring in sweeping changes in its MF guidelines to ensure that the platform does not result in duplication.
Take, for instance, a common account statement. Although all three existing platforms allow agents to get a common account statement for their investors, the latter still continue to get another set of account statements from all their MFs. The present guidelines require all MFs to send statements to their investors.
Although with iFast, you need to fill just one form and submit one cheque for multiple MF investments, the PMS structure and lack of integration of new and existing portfolios are not user-friendly since it leads to increased paperwork, among other things. Further, though FUNDSNet allows your agent to scan and transmit your forms and cheques, you still have to hand over the physical forms and write out cheques.
Things would change once Amfi’s platform goes live. Paperwork, and, therefore, cost, are expected to go down. Also, online transactions would help advisors focus more on giving advice and less on transacting and data maintenance. To an extent, the changes are already starting to happen for small-time advisors who are unable to set up their own infrastructure. But, once the Amfi platform gets launched, transacting in MFs would become much easier and penetration would get a further boost.

Source: http://www.outlookmoney.com/article.aspx?250505

No Longer Mutual for the Middleman

SEBI’s ruling on mutual funds will bring in new models of distribution and
eventually make the industry stronger

From August 2009, the Indian mutual fund industry will change its distribution model under an order from the Securities and Exchange Board of India. The regulator has done away with entry load for schemes. This will cause a lot of turmoil for all three parties involved: Mutual fund companies, investors and the distributors who handle 90 percent of the transactions.

How will the industry change?

SEBI wants the industry to follow the model practiced by UK, US and other European countries. This means the investor can decide the amount of advisory fees that distributors receive. So, the distributors will not get the 2.25 percent on every transaction that they now put through. This means there is no incentive for distributors to sell mutual fund products, unless the investor agrees to pay them separately. Many distributors say that if the commission is removed, they will switch over to selling insurance products where the commission system is intact. In order to survive, they will have to scale up and become advisors. They will be in direct competition with banks to sell mutual funds. Banks hold an advantage since they know the financial status of customers. “This is a transformative change for the industry in India. Now distributors will have to become a complete finance advisor and help investors in giving financial solutions,” says Sourab Tripathi of the Boston Consulting Group.

Why are tier III towns so important?

Until now the top eight cities accounted for 80 percent of the mutual fund markets. Distributors never tapped tier III cities. But, as the market shifts from a fund-based module to a fee-based module, they will have to re-think their strategy. Distributors will now offer annual plans and charge fees accordingly and to increase their business they will be forced to get more investors under their fold than concentrate on the funds of the same investors. In spite of all the initial problems that will be created by this move, over the longer term, it will only benefit the industry.

What models will emerge in the future?

Mutual funds will be sold through four different channels. There will be a basic discount broker model or a courier boy model. Here, the distributor will simply act as the postman. People with knowledge of mutual funds will use them but pay only a very small fee. A further extension of this model will be a “Do it yourself” model through the Net which could charge around one percent on the total invested amount. The other two models will be slightly at the higher end, offering advisory services. These could be the next door independent financial advisor who could charge the investor around 1-1.5 percent while the top-end model will belong to banks which will charge closer to 2 percent. Even banks will not be able to charge high fees as the banking customer will become savvy.

Source: http://business.in.com/article/briefing/no-longer-mutual-for-the-middleman/2552/1

Mr. Bhanu Katoch, Chief Executive Officer, JM Financial Mutual Fund

JM Financial Asset Management Private Limited, the Asset Management Company of JM Financial Mutual Fund is sponsored by JM Financial Limited. JM Financial Asset Management started operations in December 1994 with a launch of three funds-JM Liquid Fund (now JM Income Fund), JM Equity Fund and JM Balanced Fund. JM Financial Mutual Fund offers a bouquet of funds that caters to the diverse needs of both its institutional and individual investors. Recently, JM Financial Asset Management Pvt. Ltd. divested 8% stake to two global Institutional Investors, i.e 4% to Valiant Mauritius Partners FDI Limited and 4% to Blue Ridge Affiliates (namely BRLP Mauritius Holdings II and BROMLP Mauritius Holdings II respectively) thereby infusing Rs 638.6mn. Prior to this, the AMC’s paid up equity capital was Rs 540mn. These prominent hedge funds understand the asset management business globally and have brought with them a significant value-addition from a global markets' perspective.

Mr. Bhanu Katoch, Chief Executive Officer, JM Financial Mutual Fund, is a B.Com, PGDM (Marketing & Sales), MBA, and has around 12 years of experience in the Telecom & Financial Services industries. He started his career with BPL US West Cellular Ltd. Subsequently, he has worked with various organisations in the financial sector like Pioneer ITI AMC, Alliance Capital AMC, Tata AIG Life Insurance Company, ABN AMRO AMC and Lotus India AMC.
Speaking with Yash Ved of India Infoline, Bhanu Katoch says, "Year 2011 to 2016 will be the golden era for the Indian economy and the stock markets."

What is your reaction to the budget?

The finance minister presented an expansionary budget with a clear focus on growth revival. The revised fiscal deficit for FY 2009-10 (6.8% as compared to RE of 6.00% in FY 2008-09) came as a shock to the market. The higher fiscal deficit spooked both the bond and the currency markets. In a knee jerk reaction yields on government bonds rose across the curve. Market has overacted to the relatively higher gross borrowing programme. I think a lot was expected out of the budget. My expectation was more on the direction side rather than any specific roadmap. Although budget was low key and there would be worries on the fiscal front, what comes across as comforting is that the revenue estimates presented in the budget are quite conservative.

What is your reaction to SEBI’s move to do away with entry load? What are you hearing from your distributors?

Industry will adjust to whatever changes are made. In the short term though, there will be some difficulty. This business will become more capital intensive. In the long term, distributors will grow based on the quality of their advice.

What is your AUM?

Our Assets Under Management is Rs80bn. Out of this, Rs25bn is in equity.

Where do you see inflation and interest rates going ahead?

Three factors to keep in mind which will influence inflation forecasts :

a) Monsoons, which were earlier weak but in the past week has improved significantly. Overall, rainfall is still at 36% below normal;

b) Government borrowing programme of Rs4 trn and

c) Global commodity prices including oil (we have seen a price fuel hike of 10% few weeks back). We believe Headline inflation is expected to remain in the negative territory for a few more months and then should move up from there to reach a level of around 6% at the end of March 2010
Interest rates will also be influenced largely by the governments borrowing program and the credit pick-up in the economy in the second half. We expect interest rates to remain benign for the next 3-6 months. The government borrowing program will result in yields moving up further from here to around 7.5%. However, excess liquidity in the system and the credit growth pressures will prevent headline interest rates in the economy from moving up in the short term atleast. We expect interest rates to remain steady in this fiscal.

What is your view on the stock market?

Indian economy has shown strong resilience amidst the global turbulence and is likely to show a robust growth of 6.5 to 7.0%. As a result, India and few of the other Asian economies are likely to be the destinations of choice for growth investors across the globe. Risk aversion has reduced and liquidity is now quite robust. India as a growth economy is likely to attract significant capital over the next 2 years through the FDI/FII route. After a massive rally in the previous quarter, the market which was looking for a reason to correct got the same in the form of a low key budget. Although there would be worries on the fiscal front, what comes across as comforting is that the revenue estimates presented in the budget are quite conservative. Deficient monsoon would be an important worry particularly for companies that are dependent on domestic consumer demand. However, in the context of the GDP growth itself, the maximum worst case impact is estimated to be about 1 percent. One can look at this correction as a technical correction in a structural bull market. It is expected that Sensex EPS is likely to grow to Rs 900 in FY10 and Rs 1050 in FY11 v/s Rs 830 in FY09. As this year progresses, we will continue to see systematic upgrades in EPS estimates as the outlook improves. Thus it is anticipated that Sensex may touch a level of 16800 in the next 6 to 9 months period at which the markets would trade at around 16 PE which has been the historic mean for the Indian stock markets.

What is your view on the rupee?

Post the budget the rupee had seen negative sentiment as there was a disappointment over the lack of anticipated measures that would have boosted FDI inflows, including the raising of FDI limits and divestment of state-owned financial institutions. The FDI flows are a key component of the balance of payments and have played an important role in offsetting portfolio outflows, as well as funding the current account deficit, which is now re-widening on rising commodity prices. Besides this, the higher fiscal deficit implies increased pricing of sovereign risk in the medium-term, while the larger than expected fiscal funding requirement implies greater risk to be priced in the short-term. Thus, we expect rupee to weaken gradually and move in the range of 48-51 in the current fiscal. Over the long term however Rupee will only strengthen against the dollar.

Which are the sectors you are bullish?

We are bullish on Infrastructure, Financial Services and commodity sectors. We think infrastructure will be one of the key beneficiaries of government's thrust on this sector and expect investments to accelerate in this sector. This will benefit a large no of companies associated with this sector - either directly or indirectly. In fact we believe infra is a long term sustainable story in Indian context. Technology can also do very well with signs of US recovery.

What is your view on the commodity markets?

Commodity markets will be driven primarily by expectations of a revival in demand from US and Europe and a continuation of growth in Asia including China and India. The current rally seen in past three months in some base metals like copper and oil was primarily driven by these expectations. However, the base demand continues to be low in US and Europe as economic recovery remains elusive. The only drivers for commodity demand has been Asia where China and India's growth rates have kept the outlook slightly positive. We believe that commodity prices could remain range bound for a quarter or so before showing an uptrend on the back of better economic growth forecast. Commodity markets will also be positively influenced to some extent by the excess liquidity that has got created in the world due to the large stimulus packages announced by various countries. The combination of revival in demand and liquidity should keep commodity prices higher over the next 12-18 months.

What is your view on the bond market?

The estimated gross market borrowing for the financial year 2009-10 is pegged at Rs4.51 trillion as against the market expectations of Rs4.00-4.10 trillion. The revised fiscal deficit for FY10 came as a shock to the markets. Higher fiscal deficit clearly spooked the bond and currency markets.
RBI has been actively and efficiently managing the borrowing programme since the start of the financial year and will continue to do so. Although both RBI and Finance Ministry have clearly ruled out the option of private placement of government bonds. Therefore we believe that RBI will continue to support the yields by buying back securities in the open market and simultaneously intervening in the secondary market.
We expect RBI to respond and ease rates by another 25 basis points in the impending policy to support the Governments objective of growth and support the large borrowing programme. Although this may the last round of monetary easing Abundant liquidity (Avg LAF reverse repo amount 1.25 trillion), lower inflation and overall macro economic environment will continue to support the yields. There are no immediate concern on sovereign ratings downgrade, as the proposed budget deficit of 6.8% of the gross domestic product is within the international rating agency expectations and already accounted for in the present rating of India (source: post budget statement by International rating agency S &P).

What is your advice to retail investors?

The two big emotions that play hard on Investment decisions are fear and greed. An extreme of either proves to be equally devastating. The fear of losing your money triggers panic selling at one hand, whereas the fear of missing out induces mindless buying on the other. Hence, it becomes important for Individuals to have a balanced and more informed approach in the long term, an approach that is free of emotions.

Source: http://www.indiainfoline.com/news/showleader.asp?storyId=800&lmn=1