Mutual Fund NEWS Group: August 2011

Wednesday, August 31, 2011

L&T Mutual Fund CEO Sinha quits

The chief executive officer (CEO) of India's L&T Mutual Fund, Sanjay Sinha, has resigned from the firm, according to two people with direct knowledge of the matter.

Sinha's exit follows other recent top level exits from the asset management company.

Earlier this year, Chief Marketing Officer Mohit Sachdev, currently CEO at SREI MF Asset Management, had quit.

Anish Shah, who was vice president for finance and operations, had also left L&T Mutual Fund last year to join Deutsche Bank.

Sinha, who is widely quoted in Indian media, and L&T Mutual Fund, both declined to comment.

Sinha previously headed DBS Cholamandalam AMC, which was acquired by L&T Finance in September 2009 and renamed L&T Mutual Fund.

L&T Mutual Fund managed assets of 52.14 billion rupee($1.13 billion) as of June 30, 2011, as per industry data.

Source: http://www.financialexpress.com/news/l&t-mutual-fund-ceo-sinha-quits-sources/839288/

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'I made my money by selling too soon.'

Website: http://indianmutualfund.co.cc/

Blog:http://indianmutualfund.wordpress.com/
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Tuesday, August 30, 2011

CRISIL launches Gold Index

CRISIL Research today announced the launch of the CRISIL Gold Index. The index will track the performance of gold prices in the domestic market. The objective of CRISIL Gold index is to provide an independent and relevant benchmark for performance evaluation of investment products with gold as underlying investment. This is the first index introduced by CRISIL in the commodities space and the ninth overall.

Since the global credit crisis of 2008, gold has been consistently outperforming the equity market and eliciting enhanced investor interest. Between August 2008 and July 2011, gold has given an annualized return of 22.91% compared to 9.3% by S&P CNX Nifty. According to Mukesh Agarwal, Senior Director - CRISIL Research, "Gold is considered to be one of the safest havens for investments. Typically, during uncertain times, gold acts as an effective hedge." The strong performance by gold has also coincided with the introduction of Gold Exchange Traded Funds (Gold ETFs) and Gold Fund of Funds (Gold FoFs) in India. The objective of these funds is to provide returns that closely correspond to the returns delivered by gold as an asset class. While the first Gold ETF in the country was launched in March 2007, the product has gained momentum only over the past two years. The average assets under management (AUM) under this category have grown exponentially from Rs. 0.96 billion in March 2007 to Rs. 60 billion as on June 2011. Currently 11 asset management companies offer 11 Gold ETFs and three Gold FoFs in India. "When compared with holding physical gold, gold ETFs provide investors with various benefits like affordability, guaranteed purity, high liquidity, transparent pricing and low holding cost. These benefits along with the tax advantage make gold ETFs a more efficient way of owning gold," added Mr. Agarwal. Globally, AUM of Gold ETFs has grown over USD 100 bn as on June 2011 as against USD 14 bn in April 2007.

Gold ETFs in India benchmark their performance to the price of gold on the domestic commodity exchanges or the local bullion market. However, use of different sources for performance comparison results in inconsistency and makes it difficult for investors to compare one ETF with the other. With the growing interest in Gold ETFs, it is important for investors to have a consistent benchmark index that can be used for performance comparison. According to Tarun Bhatia, Director - Capital Markets, "CRISIL Gold Index is an attempt to address this inconsistency and will serve as an independent and common benchmark for evaluating the performance of gold ETFs. The index construction methodology adopted by CRISIL is in line with the valuation guideline prescribed by Securities Exchange Board of India (SEBI) for Gold ETFs." The CRISIL Gold index has a base date of 02 January, 2007 and is based on the landed price of 10 grams of gold in Mumbai.

Source: http://www.adityabirlamoney.com/news/503231/10/22,24/Mutual-Funds-Reports/CRISIL-launches-Gold-Index

Time to look at longterm bond funds

With equity markets and equity mutual fund (MF) schemes taking a breather from the global turmoil that impacted India in the past month, the action is slowly turning to the debt market. Long-term bond funds are gearing up for falling interest rates in India. Debt funds do well when interest rates fall as there is an inverse relationship between the two.

Long-term bond funds have increased their duration (ex- pressed in years; the duration tells you how much your debt fund would get affected if in- terest rates--your bond fund's yield--were to move up or down by 1%) and their average maturity or the number of years left for your debt fund's existing scrips to mature (see graph). Already, fund houses are offering potentially-attrac- tive fixed maturity plans (FMPs), while six-month short-term bond fund returns have shot up to about 7-8% per annum during the past six months.

We suggest you take a look at long-term bond funds, even if selectively. Here's why.
Falling interest rates Many fund managers believe that interest rates will soon start falling largely because in- flation is expected to stabilize.
At present, inflation is at 9.22% (as on 31 July). Though it has marginally dropped this year (9.47% at the start of 2011), in- flation is still up from where it was at the start of 2010 (8.68%).

One of the main reasons why fund managers claim inflation will fall is a potential drop in global oil prices. Market esti- mates suggest that almost 70% of India's oil requirements are met through imports. Rising oil prices globally have affected In- dia's imports; in simple words, petrol for our cars and other ve- hicles has become costlier by the day. Higher oil prices also lead to higher food prices be- cause it increases the cost of transportation of food items. To combat rising inflation, the Re- serve Bank of India (RBI) has increased the key interest rate (repo rate or the rate at which banks borrow from RBI) 10 times since April 2010.

But that is largely expected to change. "Crude oil prices globally are expected to cor- rect, especially since the crisis in Libya is expected to be re- solved sooner than later. Once Libya starts to manufacture oil, the supply of oil will increase that is supposed to bring down global oil prices," says Sandip Sabharwal, head of portfolio management services, Prabhu- das Lilladher Pvt. Ltd. Add a normal monsoon to that and Sabharwal feels that food infla- tion (food prices) should also come down slightly.

A slowing growth can also be another reason why interest rates could soon start falling.
The growth in credit offtake of companies from the banking system have been moving down over the past one year.
In simple words, companies have been borrowing less. As per data available from RBI, growth in credit (year-on-year) has dropped to 18.5% as on 29 July compared with 20.7% as on 17 June and 24% at the start of the year.

On the contrary, deposits have grown by 17.3% as on 29 July compared with 16.46% at the turn of the year. "A signifi- cant chunk of credit offtake could be because companies are borrowing for their work- ing capital (daily requirement) needs and not long-term ex- pansion or growth. There is a lot of concern about a lot of developed countries, especial- ly after the recent downgrade of the US and the continued turbulence in the euro zone, which could put downward pressure on commodity prices.
Growth is expected to slow down globally which could positively impact the domestic inflation trajectory," says Ra- jeev Radhakrishnan, head (debt funds), SBI Funds Man- agement Ltd. Radhakrishnan feels that although RBI may not cut interest rates in the "immediate future", it may go for "an elongated pause".

"If companies go slow in their activities and there is lit- tle demand for long-term money for growth and expan- sion, then the banks would in- vest their surplus money, which would otherwise be lent, in long-term bonds and gov- ernment securities, thus bring- ing down interest rates," says Ganti N. Murthy, head (fixed income), Peerless Funds Man- agement Co. Ltd.

In other words, falling inter- est rates will be beneficial to bond funds, especially long- term bond funds.
The concerns Apart from inflation that may take its time to come down, fund managers are watching India's fiscal deficit situation. Put it in simple terms, a fiscal deficit is the gap between the government's in- come and expenditure.

"Since the government in- curs a bill in food and fertilizer subsidies, we need to keep a watch on how much it spends and earns this year. Disinvest- ment has not happened to a large extent, so the govern- ment is not going to earn much here as was previously expec- ted," says Alok Singh, head (fixed income), BNP Paribas Asset Management (India) Ltd.
What Singh means is that if the government spends more than it earns through its usual means, it will issue govern- ment bonds to raise money.
The additional supply of gov- ernment securities in the mar- ket will bring down the bond prices and push the yields up.

Though inflation is expected to come down, there is no one answer on how soon it will drop. "The non-food manufac- turing inflation is above the comfort zone of RBI and hence we feel that the central bank may wait for this number to come down before pausing," says Vikrant Mehta, head (fixed income), AIG Global As- set Management Co. (India) Pvt. Ltd. Same is the case for oil prices, Mehta adds, and it will eventually come down.
Why long-term bond funds make sense?

Although it is anybody's guess when interest rates will actually begin to fall, it makes sense to take a partial expo- sure to long-term bond funds now. Debt funds managers have started advising investors to put money in them already.

With a large chunk of fund managers and bond market ex- perts expecting that interest rates may not go much higher than the present levels, long- term bond funds have started taking exposure to debt scrips with longer tenors.

Dynamic debt schemes that have the flexibility to invest in scrips across maturity periods depending on the fund manag- er's perception of where the in- terest rates can go have in- creased their average maturity periods. For instance, dynamic debt schemes schemes of fund houses, including Reliance Capital AMC, SBI Funds Man- agement and BNP Paribas AMC, have increased their average maturity periods to three to sev- en years, up from just about 10 months to a year of maturity, prevalent in May 2011.

Remember that though long-term bond funds have a duration up to three to even four years, that doesn't mean you should stay invested in them for long. Take strategic positions in them, instead. "In- vestors should avoid staying invested in them for a longer horizon. We are not expecting our economy to slow down very substantially. Bond yields will come down substantially or stay there for very long. In- vest for a time period of one year," says Sabharwal.

After the 10-year government security yield touched 8.463%, it has moved within a range.
Short-term funds and FMPs still look good On an average, short-term bond funds have returned 6.50% in the past six months and 5.39% in the past one year. These schemes too have increased their duration slightly--from 267 days on an average as of their April 2011-end portfolio to 350 days as per their July 2011-end portfolio. Says Mahen- dra Jajoo, chief investment offi- cer (fixed income), Pramerica Asset Managers Ltd: "Short-term interest rates are expected to re- main more stable than the long- term interest rates and hence they have made good returns in the past six months. They look good going ahead too." What to do If you wish to take a bit of risk for the chance of getting higher returns, go for long- term bond funds. Since these funds are marked to market and are open-ended, any fall in interest rates will benefit them (the prices of the underlying securities will rise; the inverse relationship of interest rates and scrip prices at play here).

Apply the same logic for short-term funds. Adds Rad- hakrishnan: "Short-term funds are marked to market but are subject to lower volatility be- cause their duration is limited (lower than those of long-term bond funds). But if you do not have a risk appetite and do not wish to risk your capital, go for FMPs."

Watch out for exit loads: If you invest in an FMP, your money gets locked till the scheme matures. If you think you may need your money ear- lier, go for short-term bond funds. Apart from being open- ended, they also give more re- turns if interest rates start to fall. But most short-term bond funds impose an exit load for withdrawals before 180 days.

Long-term bond funds too, impose exit loads for early withdrawals before 90 days, going up to 365 days.

Source: http://epaper.livemint.com/ArticleImage.aspx?article=30_08_2011_020_001&mode=1

Short-term funds can give better returns than FDs

Most investors associate mutual funds with longterm investing, which is true for most cases. However, various fund schemes also provide lucrative short-term investment options. Some of these include liquid funds, ultra short-term funds and income funds, which invest in call money market and debt instruments, such as government securities, treasury bills, certificates of deposit, commercial papers and corporate debt papers.

"Currently, investments in short-term debt funds are lucrative as the interest rates on short-term government issues are higher than long-term rates," says Yadnesh Chavan, fund manager, fixed income, Mirae Asset Global Investments. According to Bloomberg, the spread between 10-year (8.2%) and one-year (8.17%) gilt papers shrunk to around .03% on 10 August against a 1.41% difference a year ago. This is due to the steady increase in prime lending rates by the RBI (11 times in the past 16 months) and the resulting tight liquidity as well as strained government finances.

BETTER THAN FDS:

If you want to invest for periods ranging from one month to two years, short-term mutual funds are a better investment choice than bank fixed deposits (FDs). "Usually, FDs don't offer a very high return for a short tenure. Top funds, on the other hand, can give returns of 8-9% a year for a short period of 1-6 months," says Ashwinder Singh, head, wealth management, Fullerton Securities & Wealth Advisors. The funds provide better returns as they can churn their portfolios and invest in different types of financial securities that have varying maturity periods.

Such funds are also more liquid as their exit load is usually nil or lower than the penalty imposed on premature withdrawal for FDs, which is 1-2%. Besides, short-term mutual funds are also more tax-efficient than FDs, at least till the Direct Taxes Code (DTC) comes into effect from 1 April 2012. While proceeds from FDs are added to one's salary and taxed according to the income tax slabs, in the growth option of debt funds, only short-term capital gains are taxed as per the tax slab. Long-term capital gains are taxed either at 10% (with indexation) or 20% (without indexation). "The dividend option yields even better returns," says Jayant Pai, vice-president, Parag Parikh Financial Advisory Services.

However, if you invest in a mutual fund now, it will probably mature after 1 April 2012. Under the DTC, there will be no distinction between long-term and short-term capital gains of non-equity mutual funds. The capital gain will be added to the income of the investor and taxed according to the applicable tax slabs.

HOW TO SELECT A FUND

While choosing a fund, the most important factor you must look for is the credit rating of the debt instruments in which these funds are parking their corpus. This is even more important in case of fund types that have a relatively long-term focus as these tend to invest in instruments which are more risky. Another fundamental to be considered is the expense ratio of the fund, which should be below the category average.

"The nominal returns from such funds are usually in single digits, so any saving on the expense front is welcome," says Pai. Financial advisers also recommend choosing a scheme where the assets under management are in line with or higher than the category average. "It will ensure that sudden redemptions don't have a huge impact on the cost of the scheme," says Pai.

Investors must also take into account the interest rate risks of the fund. The interest rate risk of a bond portfolio largely depends on the maturity profile of the fund. The longer the maturity, the higher is the rate risk. The overall interest rate environment is a good guidance to the way bond prices will move. "If interest rates are expected to go up, it's better to invest in funds with the shortest maturity tenure," says Chavan.

TYPES OF FUNDS

Here's a look at the different types of short-term funds that you can pick depending on your investment horizon and risk profile.

Liquid funds:

Investors with a time horizon of 3-6 months can consider liquid funds as these invest in debt instruments with a maximum maturity of 91 days. "The funds are also good to initiate systematic transfer plans as the exit loads are usually nil," says Pai. So, liquid funds can be used to deal with equity market volatility and augment one's returns.

These funds can provide you with better returns compared with those from savings account and also offer the benefit of averaging. They have low interest rate and credit risk as the funds invest in securities with shorter maturity periods that are highly rated.

Ultra short-term funds:

These invest in debt securities that mature within a year. "You may suffer a loss if you want to exit these funds within a month or so," says Pai. However, Singh believes that if an investor can tolerate volatility, these funds can turn out to be good options for parking surplus cash even for a day or up to three months.

Ultra short-term funds give higher returns and are more risky compared with liquid funds as they invest in instruments with longer maturity periods. They also have an advantage over liquid funds due to the differential dividend tax treatment. The dividend declared by an ultra short-term scheme is taxed at 12.87%, while that by a liquid fund is taxed at 25.75%. "In terms of tax benefit, it is definitely better for investors, whose incomes fall in the higher tax slabs, to invest in the dividend option," says Chavan.

Short-term funds:

These funds invest in debt securities with over one year maturity and their interest rate risk is low to moderate, depending on the maturity profile of the fund. Experts recommend these funds for an investment horizon of 18 months or up to two years. Exiting the fund at an early stage may lead to losses as these impose loads for longer periods. Such funds also choose debt instruments that have a maturity of less than a year, but financial advisers warn against such schemes. "If a fund is overweight in such short-term instruments, its average residual maturity falls below one year and the purpose of investing in a short-term fund is defeated," says Pai.

Income funds:

These are good for investors who want regular and steady income. "They help to diversify your portfolio and modulate the ups and downs of equity investments," says Singh. Income funds offer relatively high returns compared to the above three categories but are also prone to higher interest rate risk. "Invest in these funds if your horizon is beyond two years as it will help in moderating the volatility," says Pai. "These funds provide superior returns when the interest rate cycle reverses and the rates start coming down," says Chavan.

Gilt short-term funds:

These funds invest in different medium- and long-term government securities. "These are most suitable for people who want to invest in safe instruments that have zero default risk," says Singh. "Their net asset values (NAVs) rise sharply (double-digit returns are common) in a falling rate regime," says Pai. However, capital loss can occur in a rising rate regime as bond prices share an inverse relationship with interest rates and these funds usually have one of the highest residual maturities. "These funds deliver flat to negative NAV returns in a rising interest rate environment," says Chavan.

http://articles.economictimes.indiatimes.com/2011-08-29/news/29941456_1_debt-funds-mutual-funds-mirae-asset-global-investments/3

Monday, August 29, 2011

With markets falling, it’s a good time to invest

(Rajan Ghotgalkar is Managing Director of Principal Pnb Asset Management Company. The views expressed in this column are his own and do not represent those of either Principal Pnb or Reuters)

The Sensex tested the 16,000 mark last week after 15 months.

I believe the following three quotes which made headlines on different days, tell us a lot when we put them together.

World Bank chief Robert Zoellick said "what we have seen is that confidence is a fragile element of how the market economy works. The convergence of events in the U.S. & Europe had rattled investors in countries already struggling to cap sovereign debt issues and unemployment".

Sir Martin Sorrell, head of WPP (global leader in advertising) said "Brand India is far stronger than Brand UK and Brand US".

Lastly, the Indian finance minister said "FII flows will eventually lead into Indian markets which look comparatively better".

It is therefore, surprising that India's Sensex lost 16 pct since Jan 2011 and about 7 pct since S&P's U.S. downgrade, less than Germany's DAX ( fall of 22 pct and 12 pct respectively) which is into the thick of the danger zone.

Attributing the fall even in part to the current political situation is merely a canard because the Hazare movement is more an indication of how strongly rooted India's democracy is. After all, not many emerging countries can take credit for such movements conducted in a peaceful manner with the government attempting to resolve it within the framework of our Constitution.

Surely this cannot be worse than the riot-torn streets of the UK and political brinkmanship indulged in the U.S. with complete disregard for national reputation and credit standing.

While the Indian economy cannot remain unaffected, it is certainly not as exposed.

Firstly, exports are only about 20 pct of GDP. FDI in the first half of 2011 at $18 bln was robustly up about 60 pct year on year. The RBI has been very proactive with policy rates which should cool the economy and help in achieving a more stable growth rate thereby giving time for infrastructure to catch up and provide the structural changes required to tackle the supply side inflationary aggravations.

The Indian government is well seized of the need to promote investment to take it back to the 35 pct plus of GDP levels by thawing the policy freeze. This could be supported by the expectation that the RBI may well be near the end of its interest hiking cycle, especially considering the sobering impact of declining oil prices on inflation.

The global scenario may take a while to stabilise while U.S. politicians reach a consensus which I fear may get increasingly difficult as they inch closer to elections. On the other hand, it may be very difficult for the Germans and French to accept paying the bill for the fiscal profligacy of their poorer Euro partners.

Will Germany exit the Euro or will the PIGS opt out? How will the recent electricity crises in Cyprus play out for its over exposure to Greek banks? Is Italy with a $250 bln debt coming up for rollover soon, the first G8 disaster waiting to happen?

It's not as though concerns around the euro debt crisis and U.S. economy have newly surfaced to push the global markets off a cliff which is why one would reasonably expect global markets to have by now discounted for the worst, due to the evident cracks in their economies. But a momentary shock on the finale may not be unavoidable.

While India does have its own share of challenges, this time around I strongly believe that the cause for so large a Sensex slide is therefore more the deteriorating economic environment outside India and particularly in the euro zone and the U.S.

Therefore, more than the S&P downgrade, it was the political squabbling in the U.S. and the inability of Germany and France to conclude a concrete action plan to resolve the euro debt issues which led to this lack of confidence making the world's investing community scamper for cover.

Ironically, money which left the emerging markets in hordes went into U.S. Treasuries which once again were looked upon as a safe haven. It is this sense of helplessness which seems to have resulted in the prevailing gloom and confusion leading to market volatility.

In the meanwhile, the meetings of U.S. senators and euro zone premiers will continue to be closely watched with market expectations raised and dashed many times resulting in continuing volatility over the next 3 to 6 months.

India's markets which have of late been driven by FIIs have obviously suffered the most and have ended up mirroring the worst between U.S. and euro indices.

The situation is very different from 2008 simply because the global economy has enough liquidity. The U.S. may well come up with a QE3. Having learned from the last crisis, the RBI is prepared to keep both liquidity and credit flowing to keep the wheels of trade from any abrupt seizure.

Finally, investment flows will depend on the comparative strength of the alternatives presented before those making allocations and investment decisions.

I believe India even with a 7 pct GDP real growth will continue to remain one of the better macroeconomic stories in the global investment scenario and irrespective of what happens in the short-term, FII inflows can be reasonably expected to revive sooner than later leading the Sensex to a recovery in Q4 2011.

What happens in the immediate term is for anyone to guess.

However, at 16,142 the Sensex is about PE13 a year forward and if the past was to serve as any indication, it seems a very good time to invest. Retail investors in mutual funds should remain invested and diligently continue their SIPs.

Source: http://blogs.reuters.com/india-expertzone/2011/08/22/with-markets-falling-its-a-good-time-to-invest/

All about tax implications of overseas investments

When the RBI liberalised global investment norms, it literally opened up a world of choices for wealthy Indians. They could invest in immoveable property, shares, bonds, debentures, mutual funds, listed and unlisted debt securities, and other financial instruments outside India. The new norms and the urge for geographical diversification have led many Indians to invest in foreign markets.

However, there are no tax-free luxuries from such investments for these may invite tax both in India and abroad. In fact, the tax implications in some cases can be quite complex. In addition, tax implications in the foreign country where the investment is to be made should also be analysed.

TAX ON CAPITAL GAINS Under the Indian tax laws, a resident and ordinarily resident of India is taxed on his worldwide income. This includes capital gains, rental income and income from other sources. If the transaction involves sale of shares listed on the overseas stock exchanges or other assets (gold, property) outside India, the income is treated as capital gains.

These can be either short-term or long-term gains, depending on the period of holding.
If the asset is held for more than 12 months (in the case of shares or units) or 36 months (in any other case), the income is classified as a long-term capital gain. If the holding period is shorter, the gains are treated as short term.

While most types of incomes from foreign investments are treated in the same way as those from domestic investments, the crucial difference is in the way long-term capital gains from stocks and equity funds are taxed. If an investor holds domestic equities for over a year, there is no tax on the capital gains if the stocks were bought through a recognised stock exchange. However, there is no exemption on profits from foreign equities and an investor will have to pay 20.6% tax on the gains.

CARRYING FORWARD LOSSES The good part is that these long-term capital gains from foreign equities can be adjusted against long-term capital losses. There's a caveat here: long-term capital losses can be set off only against long-term capital gains. In case of short-term losses, they can be set off against both short-term and long-term gains.
If the loss cannot be completely set off, it can be carried forward.

The tax laws allow carrying forward of losses incurred in overseas investments, including long-term losses from equities, for up to eight consecutive years. What's more, the cost of acquisition can also be adjusted for indexation to account for inflation during the period of holding. The same rules of indexation that govern domestic assets are applicable to foreign investments.

SAVING CAPITAL GAINS TAX Global investments can also be a source of saving tax. Under Section 54, one can claim exemption from tax on capital gains earned from the sale of a residential property by reinvesting the proceeds in another house within a specified period. This can be a house in a foreign country as well.

Investors can deposit the proceeds in the capital gains account scheme before the due date of filing the income tax return for that year, provided the money is re-invested in another property within three years of the date of sale of the original property. Any money lying unutilised in the capital gains account at the end of three years would become taxable.

TAX ON RENTAL INCOME The rental income from overseas property gets the same treatment as that from domestic real estate. After a 30% standard deduction and municipal taxes paid for the property, the rental income is added to the income of the owner and taxed at the normal rate. Deduction can also be claimed for interest paid on housing loan during the financial year.

The rules don't change much when it comes to income from other sources as well. The dividends from mutual funds and stocks are also fully taxable, along with the interest income earned on bonds and deposits.

These tax provisions in India are set for a big change with the Direct Taxes Code (DTC) likely to be introduced from 1 April 2012. The DTC proposes to remove the distinction between long-term and short-term assets and change the way the holding period is calculated for indexation benefits. The standard deduction for rental income will also be reduced from the present 30% to 20%.

AVOIDING DOUBLE TAXATION The taxability of foreign investment also depends on the tax laws of that country. There is some relief for the investor if there is a tax agreement between India and the other country. In the case of double taxation, the investor can seek relief under the Double Taxation Avoidance Agreement (DTAA) between India and the country concerned.

However, this could vary and depends on the nature of income, tax laws in the overseas country and the provisions of the agreement between India and that country. India currently has DTAA with more than 80 countries, including the US, the UK, France, Greece, Brazil, Canada, Germany, Israel, Italy, Mauritius, Thailand, Spain, Malaysia, Russia, China, Bangladesh and Australia.

If one satisfies the conditions mentioned in the respective DTAA, credit can be claimed for the taxes paid overseas on such income against the Indian tax liability. The tax credits are calculated as being lower of the actual taxes paid overseas and the Indian tax liability, and should be claimed in the income tax return form under 'Relief under Section 90.'

Overseas investments also have wealth tax implications. There is a 1% wealth tax on the net wealth exceeding Rs 30 lakh. Currently, only a second property, jewellery and other unproductive assets are taken into account while calculating the wealth tax. However, after the DTC comes into force, the foreign shares in one's portfolio will also be included in the ambit of wealth tax.

Source: http://economictimes.indiatimes.com/personal-finance/tax-savers/tax-news/all-about-tax-implications-of-overseas-investments/articleshow/9756753.cms?curpg=2

Decouple your investment decisions from global crisis

Resist the temptation to sell investments and stay away from gold.

Ever since Standard & Poor's downgraded US sovereign debt, all hell seems to have broken loose in the world markets. As investors, we have two options – either succumb to this panic or take a step back and get things in the right perspective. Now, if history is anything to go by, the first lesson we have learnt is not to take what a rating agency says, as gospel truth. Isn't it hardly three years since the sub-prime debacle? Weren't all those mortgage backed securities that almost threatened to take down the global financial system also rated? And in any case, why do markets need a downgrade to be spelt out to start panicking? Isn't $14 trillion of debt, in the first place, enough to get people worried? A 2011 fiscal deficit of $1.65 trillion with $2.46 trillion of the aforementioned mortgage and treasury securities sitting on the balance sheet of a country should have been enough to terrorise even the most optimistic of investors – it didn't necessarily require an S&P endorsement.

Coming to India, it so happens that our stock market comprises two distinct sets of investors — the first set is the Foreign Institutional Investors (FIIs) who over the years have pumped in billions of dollars into our stock market. The second set consists of us, domestic investors. Ironically, it is we domestic investors who have traditionally shown far little conviction and confidence in our own markets than our foreign counterparts. When the foreigners invest their billions thereby driving prices up, we tend to jump on the bandwagon and enjoy the joyride. And when the foreigners liquidate their holdings (as they are doing now) thereby driving down stock prices, we stampede out trying to beat them to the exit.

This, in spite of the fact that India continues to grow between 7.5-8.5 per cent, depending upon whom you are listening to. Yes, there will be collateral damage in terms of tighter capital and trade flows and of course a significantly lower participation by FIIs in our stock market. However, why are FIIs selling in India when the problem lies elsewhere? One reason could be, that investors are booking profits here to cover up for their losses elsewhere.

Then there are those institutions that are healthy and remain relatively unaffected. However, looking at the carnage all around, these global money managers prefer holding on to their purse as tightly as they can. Compared to their developed counterparts, as an asset class, emerging markets are considered to be riskier. In the current situation, this is nothing but an irony. Despite ample evidence to the contrary, India exposure at this point is considered unsafe — another example of how common sense goes out the door when the fear psychosis hits

However, it's not as if this is the end of the world. Right now, the wounds are being licked and in the course of time, these very investors will consolidate and regroup. And once that happens where do you think they will turn to? Of course, to the very markets that offered them a profit in the first place! It's logical, almost intuitive. So it should not matter if the market falls to 15000 or sinks to 12000. But to be sure, once this storm blows over, things will be back to normal trot.

There is yet another reason for such faith – and that is the cold fact that the US has a symbiotic relationship with the rest of the world. Both thrive off each other. In other words, the Chinese manufacturer, the Indian service provider as indeed the Brazilian miner, all, require the American consumer to survive. The US, is simply too big to fail. Metaphorically and literally!

Also, the problem though complex is identifiable. The components of government spending or the main causes of the debt are of course, interest payments (on account of increasing debt), Medicare (free healthcare for those over 65), Social Security (contributions during the working life do not even come close to the annuity paid by the government upon retirement) and defense spending. The Tea (Taxed Enough Already) Party, if it has its way, will prevent any attempts to increase taxes to bridge the shortfall. So the focus has to be government spending, specially on Medicare and defense. In time, things will have to be worked out, partly curbing the welfare measures and partly by perhaps bringing in a sort of public-private partnership in other areas of expenditure. In the meanwhile, the world has no other option but to be patient and wait.

In the meanwhile, investors would do well to embrace a Buffetism - "Be greedy when others are fearful and be fearful when others are greedy". This is something that Buffet has always maintained. And now, all one sees is fear. A fear that is bordering on terror. And to my mind, this represents a great opportunity for those investors who succeed in correctly analysing the anatomy of this terror.

Try to resist the instinct of selling investments. Let others make this mistake. At every fall, stock up on blue chips and qualify equity mutual funds (MFs). And then sit tight and let the market do its thing. Don't buy gold at this point. Reason being, gold prices have gone through the roof on account of the safe haven syndrome. Yes, there is a tectonic shift taking place in the world order and over the long term the dollar will indeed lose value. It is for this very reason that, over the past four years, money, hitherto parked in dollar denominated securities is gradually moving into gold thereby driving up prices. But the current spike is more of a knee jerk reaction and already prices have started paring down. Its best to wait till the dust settles. Consequently, any portfolio allocations to gold are best done in a staggered gradual manner when things become a bit clearer.

Now, in the midst of all this turmoil, going ahead, one cannot expect our market to post new highs. However, this kind of a fall borders on sheer lunacy. When someone else has been inflicted with a disease, albeit serious, there is no reason why we should be rushing to admit ourselves to the intensive care unit.

The thing to do is to keep your mind when the world around you is losing theirs. Keep your eyes firmly on the fundamentals of the market that you operate in. It is possible that all the negativity around may drag the index down further. However, sentiment can only hold so long — sooner or later, the reality of the health of our economy will kick in. And when that happens, only those who were greedy when others were fearful will be smiling.

Source: http://www.business-standard.com/india/news/decouple-your-investment-decisionsglobal-crisis/447267/

Friday, August 26, 2011

Did You Know | MF transaction charge is not compulsory

Sebi has given the option to distributors to either charge or opt out of charging it to their investors

The transaction charge on mutual funds (MFs) that the capital market regulator, Securities and Exchange Board of India (Sebi), has allowed the agents to impose on their investors is not compulsory. Sebi has given the option to distributors to either charge or opt out of charging it to their investors.

Compensating agent's efforts

After U.K. Sinha took over as Sebi chairman in February, he constituted a committee to suggest measures to "revive the Indian MF industry". Sebi accepted this committee's recommendations and introduced a transaction charge of Rs100 that distributors can charge to investors for every subscription of Rs10,000 and above. If you invest in an MF for the first time, you will be charged Rs150 for every subscription of Rs10,000 and above and then Rs100 for subsequent investments.

However, since Sebi has given the option to agents to charge or not to charge, there's a good chance that your agent may not collect this fee. Market sources say that many agents who work in metros and big cities such as Mumbai, Delhi and Ahmedabad will not collect this fee. For starters, many such large and established agents feel that this fee is too small. Also, after the entry loads were abolished, many large distributors changed the way they do business and started accepting charges directly from investors, as per Sebi's August 2009 advice. Internet transaction portals such as www.fundsindia.com and www.fundsupermart.co.in have categorically stated that they will not impose transaction charge. So you need to ask your agent whether or not he will levy transaction charges at the time of investment.

Braving dual policies

Sebi has clarified that agents will have to follow a uniform practice when dealing with their clients. In simple words, if your agent chooses to levy transaction charge, he will have to collect the same from all his clients. He cannot charge one client, and choose to exempt another.

However, if your agent is a sub-broker and works for more than one broker (main agent at the umbrella level), there could be a problem. If one of his main agents opts for the transaction charge and the other one opts out, he can charge investors who are registered under the first agent and exempt those registered under the second. This is because the decision to charge or not charge—in a broker and sub-broker business model—lies in the hands of the main agent as the main agent's ARN (Association of Mutual Funds in India, or Amfi, registration number) code goes on the MF investment form. Amfi tells us that in this case, the agent (sub-broker) will ultimately need to decide who he wants to align with; the agent (main broker) who charges or doesn't charge the transaction charge.

Source: http://www.livemint.com/2011/08/25205715/Did-You-Know--MF-transaction.html?h=B

Household savings hit 13-year low; dip to 9.7% of GDP

India's household savings, which have fuelled growth over the last few years, have dropped to below 10% of gross domestic product, or national income, for the first time in 13 years, as soaring inflation ate into disposable incomes.

Net financial savings by Indians, which include deposits with banks and non-banking finance companies, cash, investment in stocks, debentures and small savings instruments besides life insurance, provident fund and pension funds, dipped to 9.7% of GDP in FY11 compared with 12.1% a year ago, as per data released by the Reserve Bank of India on Thursday. "This is because household financial liabilities have risen," according to Deepak Mohanty, executive director, RBI.

The central bank has attributed the decline to slower growth in bank deposits and life insurance funds as well as an absolute decline in investment in equities, mainly driven by redemption of mutual fund units.

The last time net financial savings as a percentage of GDP dipped below 10% was in 1997-98 when it fell to 9.6%.

What has really impacted savings by individuals and small businesses is rising prices.

Higher prices have forced them to spend more on daily expenses and also on loan repayments.

Headline inflation was over 8% in FY11, which forced the RBI to raise rates aggressively, but the latest data confirms that rising prices have hurt households, with a higher share of disposable incomes being marked for spending rather than salting it away as has been the trend during the past few years. With negative returns on deposits in real terms because of high inflation and sharp slide in stocks, there could have been reallocation of financial savings to non-productive assets such as gold.

Powered by an annual average growth of over 8% between 2004 and 2008-09, India's savings rate surged to over 30% of GDP, including both physical and financial assets. This fuelled investments in the economy, thus helping reduce dependence on foreign capital.

India, along with China, had seen a secular trend in savings growth over the last decade with consumers saving more as incomes rose in keeping pace with economic growth. However, rising inflation has impacted this with the burden of higher loan repayments after several bouts of rate increases.

The RBI, in its annual report released on Thursday, said households' financial liabilities have risen reflecting higher borrowings from commercial banks. Besides, persistently high inflation, relatively slower adjustment of bank deposit rates, and volatility in Indian equity markets - impacted by global macroeconomic uncertainties - affected the level and composition of net financial savings of the household sector, it said.

Source: http://economictimes.indiatimes.com/news/economy/indicators/household-savings-hit-13-year-low-dip-to-9-7-of-gdp/articleshow/9739157.cms

Thursday, August 25, 2011

N Sethuram Iyer, Chief Investment Officer, Daiwa Asset Management (India) Pvt. Ltd

N Sethuram Iyer, Chief Investment Officer, Daiwa Asset Management (India) Pvt. Ltd has over three decades experience with State Bank of India in the areas of investments, credit and forex. He was deputed to SBI Funds Management Pvt. Ltd. as the Chief Investment Officer from January 2003 to June 2007. During his tenure, SBI Mutual Fund has grown to be one of the leading fund houses in India. He has been instrumental in guiding the whole investment team to deliver good investment performance. Post completion of his deputation as the CIO, Sethuram rejoined SBI as General Manager of the Mumbai Circle in May 2007. He has also been the Senior Vice President (Credit & Investments) of SBI in Tokyo for over 4 years.

Daiwa Asset Management (India) Pvt. Ltd. is a part of the Daiwa Securities Group, which has a strong 100 years of history and is one of the leaders in the financial services industry in Asia. Daiwa Securities Group Inc. ("DSGI") and Daiwa Asset Management Co. Ltd. ("DAM") own 100% equity share capital of Daiwa Asset Management (India) Pvt. Ltd. DAM, the asset management subsidiary of the Daiwa Securities Group, holds 91% of the equity share capital of Daiwa AMC and the balance 9% is held by DSGI, the parent company of DAM. Daiwa Asset Management (India) Pvt. Ltd. is the investment manager to Daiwa Mutual Fund, which is a mutual fund registered by the Securities and Exchange Board of India.

Replying to Anil Mascarenhas of IIFL, Sethuram Iyer says, "The current low valuations and the expectation that growth would rebound to over 8% in FY 2013, lead us to believe that the equity markets will rerate and deliver handsome returns over the next one year."

Brief us about the investment philosophy of Daiwa. To what extent has it changed over the years?
At Daiwa, we believe additional value can be provided over the medium to long term, through discovery of hidden worth by using balance of fundamental analysis and quantitative techniques with the application of a consistent process and appropriate risk control measures. This investment philosophy will work in all market conditions.

In your interactions with large investors, what are some of the key concerns they have?
The primary concern of most investors is regarding the volatility in the equity markets. The volatility increases as macro-economic news flows from US and Europe tend to impact the market apart from domestic developments. Fall out of political corruption related news tend to increase concerns on corporate governance issues of certain companies.

What factors would increase appetite for investing in mutual funds?
The market volatility calls for taking timely and well researched investment calls. It is not easy for persons who do not understand the markets fully to invest in equity on their own. In such situation, Mutual Funds offer a safe way to invest as they offer well researched and professional investments.

Mutual Funds are now offering a number of innovative product features. These include multiple product classes (funds which invest in Debt, Equity and Gold), dynamic asset allocation to reduce risk (where the investments into riskier asset classes are varied depending on the risk in the markets), Capital protection orientation, etc.

Mutual Funds also offer features like SIP (Systematic Investment Plans) and STP (Systematic Transfer Plans) which allow regular and systematic investments enabling investors to plan and optimize returns.

How do you compare Indian valuations with other emerging markets?
Indian markets trade at a 15-20% premium to emerging markets as a whole, although this premium was contracted over the past 7-8 months. A number of major emerging markets have commodities as large sectors in their benchmark indices. Besides this, the technology sector in many emerging markets consists of hardware manufacturers, which operate at considerably lower margins on a structural basis, whereas Indian technology companies comprise software service providers, which have a completely different business model. In that sense, Indian equities' higher valuations are justified.

Indian valuations are higher, but it also accounts for the potential of higher growth in the market/economy.
One of the positive features in equity investment in India is the long term growth prospect of the economy. Over the last two decades, we have progressively shifted into higher growth path and barring certain exceptional years when the whole of the developed world slipped into recession, Indian Gross Domestic Product (GDP) growth has been strong and among the highest in the world. India is expected to deliver growth rates of over 8% over the current decade. As the Indian corporate sector has become highly professional and competitive, earnings growth in a normal year is comfortably over 10%. This is the primary factor why Indian equity markets trade at a premium valuation to both the developed economies as well as emerging markets.

Which are the sectors are you bullish and bearish on?
In the current uncertain scenario, we feel that domestic consumption oriented sectors, both discretionary as well as staples; will continue to do well on a relative basis. The discretionary sectors will gain traction as the interest cycle is expected to peak out soon, and commodity price pressures are likely to abate, thus helping margins. The domestic pharmaceuticals and fertilizer sectors should also do well in the near term. Valuations for the IT sector have reached attractive levels on an absolute basis, but uncertainties abound in terms of corporate discretionary spending in the developed economies. We would look at the IT sector with a positive view from here on, given that the risk-reward appears to be in favour for the larger companies. We would avoid global cyclicals and other export oriented sectors.

Have corporate earnings been in line with your expectations?
Results were mostly in-line with slightly below expectations. Even as revenue growth remains strong, margin compression continues across eight out of ten sectors. EBIDTA margins were under pressure in view of rising input costs. Among sectors, while capital goods disappointed with weak numbers, the order inflow guidance was also weak. Metals & mining stocks too witnessed disappointing results on the back of low volumes and rising raw material costs. Profitability of electric utility companies suffered due to lower offtakes (by SEBs) & falling merchant tariff rates. Real Estate stocks missed earnings estimates due to muted sales volumes. Cement stocks, on the other hand, recorded strong results aided by higher cement prices. Technology stock results were in line with good volume growth and stable pricing. Telecom results have been good with lower fall in RPM and ARPU as well. Pharma results have been in line with the high base effect dragging sales growth.

Comment on the performance of your funds.
We manage the Daiwa Industry Leaders Fund, which was launched in August 2009 and invests in leading companies across sectors, which are selected based on pre-specified criteria of market share, sales growth and profitability. The investment universe for the fund is around 150 companies, which constitute the cream of the best performing companies, largely in the large and mid-cap space. We have maintained a midcap allocation of around 10-13% in the fund for the past one year, and pick stocks on a bottom-up basis, after analyzing macro-economic conditions and their impact on various sectors. As on July 29, 2011, the Daiwa Industry Leaders Fund has outperformed its benchmark Index (BSE 100) since inception.

Every fund manager would give enough reasons to buy a mutual fund. For investors, when is an ideal time they should look at exiting a mutual fund?
Equity investment should be made with a fairly long term horizon. As such, Investors should consider exiting their investment in equity funds only in the following circumstances. (i) if the performance over a reasonable long period does not match that of the peers or benchmark; (ii) If the investment strategy in the Fund has been changed which alters the risk profile of the Fund to the extent that the fund does not suit the investor's investment requirement and (iii) the investment objective is achieved – i.e the investment has given returns to meet a definite goal of the investor. There is no pre-specified investment time for which an investor should be invested in a particular mutual fund.

Your outlook on the economy, currency, equity market over the next 12 months?
The economy is likely to slowdown compared to earlier estimates, given that higher interest rates and inflation are affecting consumer demand and investment decisions. We expect GDP growth to average between 7.0-8.0% for FY2012. The Rupee could appreciate vis-à-vis the US Dollar to a certain extent, but we feel the appreciation would not be substantial, given India's high current account deficit. Indian equities have had a lackluster performance during the last seven months due to well known concerns relating to inflation, interest rates, government policy and action inertia, and the global credit crisis, which has assumed serious proportions. However, most companies continue to position themselves for a more robust, longer-term outlook despite caution over the next 1-2 quarters. Weak commodity prices will result in inflation peaking over the next 3-4 months, which would indicate that we are close to the peak in terms of tightening of monetary policy. In terms of valuations, forward P/E at ~14x is at a 12-13% discount to long-term averages. These valuations appear attractive given India's structural growth differential vs. the developed world.

Policy action from the Government has started – it has recently cleared 9 coal blocks, raised Foreign Direct Investment (FDI) limits on FM radio, approved e-auction of FM licenses and cleared the FDI in BP-RIL and Vedanta-Cairn deals, and is likely to approve FDI in retail, and has cleared the next set of fertilizer sector reforms. A consensus on adoption of Goods and Service Tax (GST) and the Lok Pal bill are the key reform measures which will improve market sentiment. We expect the equity markets to remain volatile in the immediate near term, as quarterly numbers will result in a few surprises and the uncertainty affecting global equity markets subsides. However, the second half, post September, should be better, provided a decisive solution is found to the Euro-area issues.

The current low valuations and the expectation that growth would rebound to over 8% in FY 2013, lead us to believe that the equity markets will rerate and deliver handsome returns over the next one year. Even over the longer term, equities should deliver better returns compared with other assets, as India's capex cycle is rejuvenated, and our structural demographic advantages attract long term investments into the markets.

Your view on the debt and money market? What kind of balance should investors have in these times?
With a view to combat high inflation the Reserve Bank of India (RBI) has been raising policy interest rates steadily since March 2010 and market liquidity has also been kept tight. While inflation continues to remain at elevated levels, given the signs of slowing in the economy, we feel that we are close to the peak in terms of policy rate hikes. One cannot rule out a further 0.25% rise in REPO rates in the next policy review in September 2011. The interest hikes have largely impacted the shorter end of the interest rate curve, with yields on short term papers climbing higher over the last one year.

At the current yields, investments in short term money market mutual fund schemes have become fairly attractive. Once the interest rates peak, which we expect over the next month or so, investors can look at Short term Plans and longer term debt funds. Investors can then hope to reap the benefit when interest rates climb down which can happen when inflations comes down to acceptable levels and it is no longer required to kept administered rates high.

What advice would you give retail investors in the present situation?
The current equity markets actually give an opportunity for retail investors to invest in equity with a long term view. The current valuations and prospects for a rebound in growth in the next year could result in the markets rerating and giving very handsome returns over the next year. However, over the next three to four months, the markets could remain subdued. Retail investors should start investing in a systematic manner.

Given that returns from Debt investments and Bank deposits are also fairly good, there has to be a balance in the investments in the various asset classes.

Source: http://www.indiainfoline.com/MutualFunds/Fund-Manager-Speak/N-Sethuram-Iyer-Chief-Investment-Officer-Daiwa-Asset-Management-India-Pvt.-Ltd/27989423

There can hardly be a better time than now to start a SIP

I'm not going to write about the obvious topic this week because I don't believe that there's anything new to be said. The shape of things is reasonably clear to every investor and whatever shall be shall be. However, for mutual fund investments, there's an interesting aspect to the current bear cycle that wasn't there earlier. Unlike earlier, Indian mutual funds are receiving significant regular inflows through SIPs ( systematic investment plans). Based on the numbers that I've gleaned by talking to various people in the industry, about 1,500 crore is flowing in through the SIP route into equity funds every month.

I do realise that this not a great level to declare significant - for a potential market of our size, it should be ten times this figure. However, it is at least much larger than it used to be till a short while back. The significance really comes from the experience these new SIP investors are going to have over the next couple of years. Historically, whenever the stock markets are down, Indian investors have never invested in equity. This time it is different.

Over the coming months, a good number of people are going to keep investing steadily in equity every month. This is the core logic of SIP investing - keep investing when prices are down so that you gain when they turn around. This is the buy-low, sell-high action that SIPs deliver automatically. Investors who will continue their monthly investments will eventually realise much higher gains if they stick with it long enough. Each rupee that they put into an equity fund now, at lower NAVs, buys them more units. When the time comes, the cheaper units would have delivered much higher returns, boosting the total returns they get.

Still, what is really important is not the gains themselves but that the impact that I hope this episode will have on the investing culture at large. Maybe I'm being a little optimistic but the experience that the current lot of SIP investors will have could be the seed for a larger change in Indian mutual fund investing.

Think of it this way: 1,500 crore a month could mean 5 lakh investors if each is putting in 30,000 a month. The number could be higher if the investment is lower. 5 lakh investors sounds like a drop in the ocean in a country the size of India, but actually, it's not bad as a seed population. I'm hoping that eventually, the impact on the culture of fund investing (if that's the right word), will be far more significant than the number indicates.

Incidentally, 1,500 crore is also not an insignificant number in terms of the total cash flows into the stock markets. While FIIs may have brought in 5,000 crore or 6,000 crore in one of their better months recently, 1,500 crore is in the same order of magnitude. Everyone connected to the markets keeps complaining that there is no serious retail participation in the stock markets now. However, this 1,500 crore of SIP money flowing into equity is far more important than whatever momentum-driven flows that day-traders used to bring in before 2008.

SIP money is here to stay and will get actually invested in stocks selected on a fundamental basis. By contrast, most day trader money was just flitting in an out of momentum stocks and index F&Os, which may have been better for brokers (hence the moaning) but not for the markets or the investors.

Anyhow, even though the current bear phase will no doubt put a halt to the growth of SIP volumes, it's good to see that the fundamental trend is encouraging. And if you, personally, haven't yet started an equity SIP, then there could hardly be a better time to do that than now.

Source: http://articles.economictimes.indiatimes.com/2011-08-22/news/29915071_1_systematic-investment-plans-sip-investors-monthly-investments/2

Taking an alternative investment route

PE and VC funds, though riskier, could be a good avenue when traditional assets have remained lacklustre.

With equities seeing red and debt being only marginally ahead of inflation, venturing into alternative assets like private equity (PE) and venture capital (VC) funds is worth considering. These funds, on an average, give 15-30 per cent returns, considerably higher than other investment vehicles.

While the world of PE and VC comes under the more sophisticated investment products, meant for those with high risk appetites, the investment philosophies they follow are not as complicated as one imagines. Traditionally, these funds invest in unlisted companies and start-ups. Once the company grows, they sell their stake to either another PE firm or in the public domain.

Rakesh Sony, director, Motilal Oswal Private Equity Advisors, says: "When it comes to PE and VC funds, with different funds being at different stages and having different underlying assets they have invested in, it is difficult to gauge the returns. Most funds claim to give returns of 20-25 per cent but actual returns are not publicly available."

Domestic PE fund houses such as ICICI Ventures and IL&FS have been successfully running funds for some years and generating returns of 20-25 per cent. The Kotak India Real Estate Fund-I, which started in 2005 and had a seven-year maturity period, has already paid investors back their entire principal, as well as given 15 per cent returns. VC funds offer higher returns, in the 25-30 per cent range. These funds are riskier, though, as the investment being made is at a more nascent stage of the company.

In PE and VC funds, investors typically invest in tranches and, in some cases, the payouts made by the funds are also in stages. However, with many of the funds providing returns on maturity, knowing how the funds are doing midway is difficult.

While PE and VC ticket sizes a few years before were in the Rs 5-10 lakh range, the current entry point for most funds is Rs 25 lakh and can go as high as Rs 5 crore. However, if the new takeover code guidelines issued by the Securities and Exchange Board of India get implemented, it could raise the minimum investment threshold to Rs 1 crore.

GETTING IN
Investors usually get into PE and VC funds via their investment banker. Investors directly invest in PE projects as well, often as a group, pooling their money and investing. The advantage here is that investors can leverage the power of multiple investors, getting better deals and attractive valuations. Such investments are riskier than investing in a PE fund, wherein the investor pool is larger and the money collected is diversified amongst various projects and companies.

Another reason these funds make good investments in the current economic scenario is that they get better valuations and deals. In this sense, it is similar to investing in equities or in mutual funds, as a slowdown does provide opportunities as well. Also, with these funds having five to seven-year tenures, the slowdown is less of a concern, as the long investment tenure should ride out the short-term hiccups.

According to Rahul Bhasin, managing partner, Baring Private Equity, "From an investor standpoint, when looking at such a high-risk asset class, going with people who are really good at what they do and understanding their industry and this business well is the key." Here, your banker plays a crucial role, as you would be investing on his recommendation.

Investments in consumer goods, health care and education sectors are on the rise, as these areas have witnessed a lot of asset building. PE investments in India grew 22 per cent last year.

"One has to have patience and a long-term appetite when investing in these funds. In a portfolio, while five to 10 per cent would be set aside for such investments, these days 15-20 per cent is worth investing in this asset class," says Rakesh.

For Indian investors, consumer protection, far lower than that in the West, is an area of concern. A recent World Bank Group report placed India second-last in a list of 170 countries in terms of contract enforcement. "Protection issues for minority shareholders are impacting everyone and the structural bias and lack of protection in terms of payments, returns, inflows and exit clauses has led to investors being weary of such alternate investments," concludes Rahul.

Source: http://www.business-standard.com/india/news/taking-an-alternative-investment-route/446925/

Wednesday, August 24, 2011

Investing via MFs is still thesafe bet: SMC Investments

Even as high value blue chips are seeking newer lows, is it time for retail investors to shift the investment focus from mutual fund to direct equity investment at least for those who have some serious exposure to equity markets?

The reasons for this are many. The returns from mutual fund investments have remained stagnant, and in many cases negative, for the past two years and even dividend payouts from them has come down, partly because of SEBI diktat and partly because of their poor show.

MFs & Value picks

With many market intermediaries such as ICICIdirect.com and SBICapsec.com, introducing Equity SIPs, it is possible for investors to spread their direct stock investment risks and could cast their net wider to pick up a bigger basket of blue chips.

The advantage of such a strategy is that if and when the markets recover, the return from stocks could beat the returns from MF schemes.However, Mr D.K. Aggarwal, CMD, SMC Investments and Advisors Ltd, said that investors should utilise the expertise and experience of the fund managers.

In a falling market, generally investors tend to buy cheaply priced stocks (i.e. stocks which have fallen substantially) than the under-valued stocks and thus they are not able to reap the benefit of buying value stocks in a falling market.

But fund managers of mutual funds have the right acumen in value picks.

Adverting to the risk involved in the two approaches, and how the investors could guard themselves against any steep erosion in investment value, he said that though there was 'extra cost attached in the first approach, where one buys stocks by putting money into equity MFs', the same is more than compensated by the value that a fund manager brings while picking stocks and also timing the entry and exit in stocks.

At the same time, if investors pick the stock, 'there are very high chances of getting wrong in stock selection and any one mistake can erode the money to large extent'.

When pointed out that many market intermediaries have started equity SIPs, he said, under equity SIP, investment into equities were made at regular intervals in instalments which ensured that one can benefit even if market further slides down and the average buying price is normally lower.

New investors could better adopt the SIP route. The main advantage of it was that if the market went down, their next investment will buy more stocks and when the market goes up, investment will increase in value.

PE and investment

On whether the lower market PE was a credible guide for making investments, he said market PE 'no doubt has come down to a level of around 16-17'. However, even now 'these PE levels are higher than the last 5 years' average PE levels'.

Investing at a PE of around 13 with a long-term horizon in the Indian context seems to be a safe bet. However, lower market PE is no guarantee that the performance will be better in near future, he cautioned.

What is his advice to investors to distribute their investments in terms of percentage — directly in stocks and in MF schemes? Mr Aggarwal said, "We advise at this juncture that 25 per cent of investments can be put into equities either directly or through mutual funds."

Source: http://www.thehindubusinessline.com/markets/stock-markets/article2383625.ece

MF chiefs for less micro regulation

Lack of penetration, reduction in distributor base and swift changes in regulations, besides adverse market conditions continue to hurt the mutual fund industry this year.

Speaking at the Business Standard Fund Cafe, top CEOs of the asset management industry were unanimous that the problems they were facing were largely due to the lack of financial literacy. As a result, the industry was paying more attention to increasing the penetration to attract long-term stable fund inflows. "While people keep on talking about high savings rate in India, investment through stocks or mutual funds is not so high," said Sundeep Sikka, CEO of Reliance Mutual Fund.

While all CEOs agreed that regulations set by the Securities and Exchange Board of India (Sebi) had been benefitting investors, the issue was the pace at which those were being changed. "When there are too many changes too quickly, one does not get the desired results. There are around 16 million demat accounts in India. However, investors investing in MFs are more than those investing directly into equities. The cost that a customer pays is a regulated cost," explained Franklin Templeton Investments President Harshendu Bindal.

According to the CEOs, providing more information to investors does not mean that they understand it more. Too much of information, at times, could end up confusing investors. "Today, the industry discloses more than anyone else. I believe too much of information paralyses the mind," added Sikka.

"I am not sure if that is good for the industry," agreed IDFC Mutual Fund MD & CEO Naval Bir Kumar, adding the Indian mutual fund industry was the most micro-regulated industry in the world. "Even the font size of the advertisements has been prescribed," added Kumar.

Though industry players admitted things had settled down considerably after the entry-load ban, the distributor base and, as a result, growth in the investor base, had suffered.

The recent circular from the regulator on allowing distributors to charge transaction fees of Rs 100-150 on a minimum investment of Rs 10,000 has also received a lukewarm response. "It is not that the load regime is coming back. It's a baby step to ensure some costs are recovered," said Birla Sun Life Mutual Fund CEO A Balasubramanian. Sikka felt the fee would help in penetration of mutual fund products in smaller cities and towns.

On top of it, India's poor financial literacy poses the biggest challenge for the growth of the mutual fund industry. According to them, inculcating better investment habits and spreading awareness about mutual funds, among other financial products, hold the key to the growth of funds in the country. "There is no other way by which retail investors can participate in equities but mutual funds," says Kotak Mutual Fund CEO Sandesh Kirkire.

According to him, the issue is how to bring long-term funds and address financial illiteracy. "We are reasonably bullish on the future of the industry," he added. Currently, less than four per cent of India's population invests in MFs.

"There cannot be any short-cut to reach out to the under-penetrated market but to create financial literacy and spread knowledge about what a mutual fund is," added Sikka. For this, the industry is conducting around 500 investor awareness programmes every month across the country.

Fund managers are perturbed by the fact that investors tend to take MF only as investments in equities. The industry sees that in the near term selling debt funds can be a challenge for distributors.

But there is hope. ICICI Prudential Mutual Fund CEO Nimesh Shah said: "Convincing distributors that they should be in all asset classes is now becoming easier."

Source: http://www.business-standard.com/india/news/mf-chiefs-for-less-micro-regulation/446808/