Did You Know | Returns must be compared with that of a benchmark to get the real picture

Returns earned from investing in any asset class or product can be looked at in two ways—absolute and relative returns

 

What is a benchmark?

A benchmark is a performance standard against which the returns from a security, mutual fund or portfolio manager can be assessed. For example, mutual fund products are required to showcase performance versus a suitable benchmark; a diversified equity fund uses a broad index such as BSE 500 or S&P CNX 500 as a benchmark. In fixed income, an income fund uses Crisil Composite Bond Fund index as a benchmark.

 

Why is a benchmark important?

Returns earned from investing in any asset class or product can be looked at in two ways—absolute and relative returns. Absolute returns are simply a return objective. This is like a minimum rate of return identified by an investor and their adviser. It is easy to understand and monitor, but not enough to evaluate performance.

 

As an investor you must also know how the asset class has performed and how other products within that asset class have performed. That's why the need for a benchmark. So if your fund has given a 15% return over five years, but the benchmark to which it belongs has given 25% over the same period and the category average is also around that number, then you know your fund has underperformed and it's better to exit.

 

Which benchmark is appropriate?

To be able to make a correct decision, ensure that you use the appropriate benchmark. A benchmark should ideally be in line with the risk-return profile of the product you invest in. For example, if you invest in a large-cap fund, the performance benchmark should ideally be a large-cap index such as S&P Nifty or BSE Sensex​. Crisil Liquid Fund index can be an appropriate benchmark for liquid and ultra short-term funds, which have a portfolio of certificates of deposit and commercial papers.

 

Compare performance only against a benchmark that is investible. This means you can't compare the performance of listed bonds with returns offered on unlisted bonds even if you own both types of securities. Also, the benchmark should have precise and published (for investors to see) guidelines and rules. Given these, you will know the methodology of adding and deleting holdings form a benchmark and you will have historical values and holdings available for performance comparison.

 

Can you create a benchmark?

Where a suitable benchmark is not available, you can create your own benchmark. For example, for a fund investing in Chinese and Indian stock markets, you can take representative indices (a Chinese equity index and an Indian equity index) and combine them by taking proportionate investment weightage. Similarly, you can create other benchmarks based on the asset class you are investing in and your overall portfolio allocation.

 

Whichever way you do it, it is essentially to compare returns from an asset or a product with peers to understand whether it is under performing or outperforming.

 

Source: http://www.livemint.com/2011/11/28213737/Did-You-Know--Returns-must-be.html?h=B

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Equities may see more selling pressure

Equities are likely to suffer further this week due to lack of confidence from market participants, particularly from mutual funds, and weak rupee.

 

According to Street experts, mutual funds are not willing to commit themselves now despite several stocks ruling at multi-year lows, as the funds fear a further fall.

 

The market is now completely dominated by foreign institutional investors. They will persist with selling on the back of weakening rupee.

 

Foreign funds pulled out about Rs 7,300 crore in nine straight trading days since November 15, according to exchange data. On the other hand, domestic institutions' net buying stood at about Rs 5,900 crore.

 

"We have taken a cautious stance on the Indian rupee in recent months and while the currency has weakened sharply, we do not yet see light at the end of the tunnel," said a note from HSBC. "In an environment of moderating global growth expectations and broad de-risking, current account deficit currencies such as the Indian rupee will struggle. In our view, the INR has room to fall further if global growth expectations continue to decline and the US dollar liquidity pressures are intensifying."

 

Domestic cues continued to be negative — be it policy gridlock; or elevated levels of inflation; or the likelihood of fiscal slippage. The global situation is also adding to the pressure as there are no signs of a resolution to the debt crisis in the Euro-zone.

 

Investors will continue to watch the developments in Europe, and overseas equities will determine the direction domestic indices will take early during Monday's session.

 

The cautious stance of market participants was well captured by the movement of the derivative market.

 

Nifty futures witnessed a rollover of 64 per cent (to December series from November), which is much lower than the three month-average of about 71 per cent. This indicates that traders who went long preferred to book losses as they fear further value erosion in the coming month.

 

Bank Nifty saw high rollovers but on the short side, indicating that traders expect further fall.

 

On the options front, 4500 and 4700 December puts have seen significant rise in open interest pointing that Nifty is likely to move in the range during the short term. Trading in Call options points a limited upside due to the strong emergence of call writers at 4800, 4900 and 5000 level.

 

Despite the market being oversold, there are little triggers to turnaround the Street mood. Even the clearance of foreign direct investment by Union Cabinet on in multi-brand retail failed to cheer market participants, as they expect several roadblocks, given the reservation within the Government and the Opposition.

 

Under such a situation, selling pressure on equities is likely to continue.

 

Source: http://www.thehindubusinessline.com/markets/article2665789.ece

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'I made my money by selling too soon.'

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About 75% of equity funds beat benchmarks

Despite equity markets remaining volatile for the year till date, over 75% of the equity schemes have managed to outperform their respective benchmark indices by huge margins. According to data provided by Value Research, out of over 340 equity schemes in the country, around 246 schemes managed to outperform the benchmark indices.

 

Interestingly, many mid and smallcap equity funds have managed to give better return then large-cap and thematic schemes. Some of the mid-small cap fund like Magnum Emerging Business, Mirae Emerging Bluechip, HDFC Mid-cap opportunities, Reliance Small Cap and DSP BlackRock Micro Cap have given negative returns in the range of 5-15% till year to date. During the same period their benchmark indices have fallen by about 25-35% while largecap index Sensex was down by 22%. According to fund managers, conservative investing coupled with aggressive cash calls taken during the market fall helped give better returns than that of their respective benchmarks.

 

Neelesh Surana, head of equity, at Mirae MF, says, "Last one year overall environment was very challenging following high inflation and surging interest rate scenario. In such a situation, we had stayed away from sectors such as real estate, infrastructure and construction, which helped us."

 

Soumendra Nath Lahiri, head equities, at Canara Robeco MF, says, "The construction of our portfolio was defensive as equity markets were volatile. In the past few months we had remained underweight on interest rates sensitive sectors, while hiking exposure to consumption and cement sector which helped us to generate better returns." "It was not only stocks picking that helped get better returns, but investing in companies which have low gearing and good cash flows" added Surana.

 

Also many equity funds were seen investment in non cyclical sectors such as pharma and consumer goods which helped arrest the fall in NAV values in the downturn. According to market participants, some schemes were seen sitting on cash of over 15-20% at one point in time which was gradually reduced at lower market values.

 

Some fund managers changed asset allocation in favour of high interest yield debt which helped generate better returns. However some of the funds like JM Core 11 (-33.99%), JM Basic (-36.25%), Reliance Infrastructure Retail (-40.80) and HSBC Mid-cap Equity (-37.52%) saw major erosion of their NAVs in the current calendar year.

 

Source: http://www.financialexpress.com/news/about-75-of-equity-funds-beat-benchmarks/879657/0

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'I made my money by selling too soon.'

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Focus on providing pension to the poor

Gautam Bhardwaj, Director, Invest India Micro Pension Services

Retirement benefits in a defined contribution system with individual accounts such as National Pension System (NPS) will depend principally on contributions and the accumulated investment earnings on them. Efficient management of NPS assets can generate larger benefits for subscribers.

This, in turn, could be a powerful tool to motivate potential subscribers to open NPS accounts and for existing customers to continue their contributions. High real returns on NPS savings are critical for India as this could play a key role in converting the tiny savings values of millions of low-income workers into an above-poverty annuity.

In this context, FDI in pension funds is really a non-issue. Instead, a primary concern for both policymakers and the PFRDA should be to engage the best pension fund managers available, regardless of their shareholding. This has already served us well in the context of mutual funds.

Between 26% and 100% of several AMCs is owned by overseas institutions. Sebi provides strong regulatory oversight and clear investment regulations to ensure that savings of millions of Indians in mutual funds are protected. So, FDI was not a consideration when Sebi-regulated AMCs were hired by the EPFO to manage the PF assets of over 50 lakh formal sector workers.

Customer protection can be achieved through institutional architecture design, like in mutual funds and the NPS. Both are based on a time-tested 'trust' model where the underlying assets do not sit on the books of the fund manager and individual subscribers remain beneficial owners of the trust assets.

Instead of looking at FDI implementation issues, Parliament could debate strategies to overcome the more fundamental and urgent challenge of bridging India's huge pension coverage gap. And of creating parity and portability across pension verticals through a national pension policy that assures every Indian the right to a dignified old age.

Setting FDI limits could distract future policymakers from more pressing concerns. We could do well to buck the trend with FDI in pensions and leave future decisions in this regard to the executive. And, perhaps, set an important precedent.

 

Source: http://economictimes.indiatimes.com/opinion/et-debate/focus-on-providing-pension-to-the-poor/articleshow/10837036.cms

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'I made my money by selling too soon.'

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India faces fears for retirement

With shrinking families, little state support and inadequate retirement planning, many in Asia's urban middle classes are scared of being broke and alone in their old age. India is no exception.

"We have to look after each other," says Sulbha Jagtap, turning to smile at her husband Nitin. The Mumbai couple, both officer workers, are only in their early 40s but they are already nervous about their retirement.

They have teamed up with siblings to help support their own parents. But they realise changing times mean their only son Soham, now 14, may not be able to support them in the same traditional way. "He will have to go away from us," Sulbha says.

Once upon a time in most parts of Asia "retirement planning" simply meant having large families - ideally several sons to look after you in your dotage. But Sulbha's generation see retirement differently. Because their children may leave home and because they face high projected health costs, their biggest fear is how expensive it will be.

"Like most Indians in my age group, retirement is my big priority," says Hemant Kulkarni, a 37-year-old IT worker and father of two young children. He left a small town to study for his degree and now lives in a fashionable apartment block in Hyderabad, central India's exploding tech hub.

In many ways he is living the new middle class dream in the hi-tech city dubbed Cyberabad, emblematic of a rising Asia. But unlike his more rustic parents, who had state pensions, ancestral land and a large number of children, for him retirement is already a looming fear.

"My parents worked in government organisations and they provided pensions," he says. But despite the glamour of working in a shiny new IT park, his multinational company has no group pension plan - and he is already planning ahead.

In fact only a minority of Indians have formal pensions of any type - a situation replicated across Asia. There is very little public welfare for the elderly.

Employers often pay into payroll-based schemes like Provident Funds, in which employers match their payments. But so many Indians work in the informal sector that this kind of saving only helps a minority of the population.

That leaves the majority to fend for themselves when it comes to planning for retirement - but there are ways to make it easier, according to financial planners.

"Many options are available," says Surya Bhatia, an independent financial adviser in New Delhi. "A lot of insurance companies have now opened shops over here."

Banks and insurers offer a variety of savings options, from annuities to mutual funds, which help build up a pot of savings, or "corpus", for retirement.

"Typically about 10% of my savings goes towards creating a corpus for my retirement," says IT worker Hemant Kulkarni.

There is also a growing list of retirement-specific options, including the Indian government's "New Pension Scheme", which is managed by a range of fund management companies.

It pays out based on contributions and although only government employees get their own contribution "matched" it has also been open to non-state workers since 2009.

The bewildering new range of products and plans has brought with it another fear: how can you be sure what fund managers are doing with your money?

Rising health costs

"Transparency is still one thing which I think needs to come up over here," cautions financial adviser Surya Bhatia. "As an investor, be slightly wary about that, and choose the right thing for you."

But there is one financial product that he says everyone should get long before they retire. "Everyone needs to get health insurance done," he says.

He cautions that health policies often come with fine print - which needs to be checked. But he says that should not put people off getting insurance.

Health insurance is a relatively cheap way to solve one of the most frightening aspects of retirement - the high costs of deteriorating health, in a country where state-funded healthcare provision is thin.

Insurance is a much better and less stressful way to save for health costs than, say, extra money spent on property or shares because it will cover unexpectedly high costs or emergencies too.

The experts say that every Indian should buy a policy even if they get insurance from work. If you lose a job or retire, you may lose health cover - but it will be more expensive to get covered from scratch at a later stage in life.

Sulbha Jagtap and her husband have dealt with their fears. They have an insurance policy and they are already investing for their old age through mutual funds.

"Whatever is planned, we don't know if it will go through in that way or not," says Sulbha philosophically, while her nephew plays beside her, blissfully unaware of the plans being made by the generation above him.

"Until then, with whatever possible, we try and secure our future."

Source: http://www.bbc.co.uk/news/business-15640444

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'I made my money by selling too soon.'

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Retail investors change tack to buy on every dip

It is believed that retail investors sell stocks in a falling market and buy them when prices peak. However, lately, they have done the opposite; probably having learnt lessons from the bull market of 2009-10. Data from the stock exchanges show that retail investors have been buyers in the market every time the Sensex declined, since January.

 

Over the last eleven months, there have been ten occasions when the Sensex has tanked more than 300 points in a single session. Retail investors put in fresh money on a net basis on all those ten occasions. FIIs predictably sold. A few recent instances: On October 3, when the Sensex dropped 300 points following Moody's downgrade of State Bank of India, FIIs pulled out Rs 826 crore (net), but retail investors were net buyers with purchases of Rs 55 crore on the BSE and Rs 368 crore on NSE. Again, last Thursday, the Sensex lost 314 points on a sharp correction in European stock markets after European Central Bank intervention, individual investors put in Rs 56 crore into stocks on the BSE and Rs 108 crore on the NSE.

 

Mature behaviour

What has driven this change in attitude of Indian retail investors? Retail investors are more mature now, says Mr Sandip Sabharwal, CEO Portfolio Management Services- Prabhudas Lilladhar. "Today, there is a higher level of maturity among Indian investors with regards to their investments in equities. After looking at the last few cycles investors have realised that over a longer term time frame there is a low probability of losing money in the equity markets."

 

Low inflation-adjusted returns from debt options may have also led individual investors to conclude that equities may be a better bet for the long term. Data from the two leading depositories — National Securities Depository Ltd and Central Depository Services (India) Ltd show that new investors have continued to come into the equity market over the last year. Even with no big IPOs (it is IPOs that usually trigger new account openings), close to ten lakh demat accounts were opened between January and September, not much lower than the 12 lakh accounts added in the same period last year. Mr Sabharwal adds, "A large number of investors have not invested in equities in a big way over the last four years even as their incomes and savings have grown. Corrections in the market are thus being used to increase exposure to equities."

 

There may also be a trend of existing investors averaging their holdings at lower levels, say some brokers. Mr Vishal Gulechha, Head of Online Broking, ICICI Securities, said, "There could be many investors who were already invested in the market. Because of severe correction in prices, they are averaging their cost by buying more of the same stock now."

 

SIPs play a role

Market observers say the concept of systematic investing that has been marketed by mutual funds has also brought about a change in the retail investor mindset. Small investors now seem to invest in equities irrespective of how markets move. Data from the mutual funds body- AMFI show net inflows into equity funds picking up whenever markets have declined sharply.

 

In January, when Sensex had corrected 10 per cent, equity funds registered net inflows of Rs 881 crore. In August again, when Sensex fell eight per cent, the net inflow into equity schemes was Rs 1,942 crore. Mr Sabharwal says, "Mutual fund houses have sold the concept of systematic investments into equities very well and as such there are a large number of investors today who are investing in equities on a regular basis without bothering about short term market movements. " Overall, about 25 per cent of the total investments into equity funds today come from monthly systematic investments.

 

Source: http://www.thehindubusinessline.com/markets/article2647641.ece

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'I made my money by selling too soon.'

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

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Changes in SBI Magnum TaxGain Schemes

SBI Mutual fund has announced changes under Magnum TaxGain Scheme. Accordingly, the provision of compulsory re-investment of dividend amount of less than Rs 250 under a folio has been withdrawn with immediate effect. Henceforth, unitholders who have opted for payout of dividend under the said scheme shall be paid the dividend, irrespective of the amount.

 

All other terms and conditions of the scheme remain unchanged.

 

Source: http://www.moneycontrol.com/news/mf-news/changessbi-magnum-taxgain-schemes_621314.html

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'I made my money by selling too soon.'

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

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7 Golden rules of retirement

Experts contend that retirement planning should start from the day you start earning. Sound advice indeed, but one that is seldom followed. So ET Wealth decided to bring to you seven rules of retirement planning that have been advocated by experts for decades. Follow them and you can be sure to retire in comfort

 

1. Save 10% of your income for retirement

The first rule of retirement planning is also the easiest to follow. If you have a regular job, then 12% of your basic salary and an equal contribution by your employer that flows into your Provident Fund account is a good way to build a nest egg. The best thing about this option is that you cannot avoid it. EPF rules require all employees to contribute 12% of their basic income to retiral savings, which include the Employee Provident Fund and the Family Pension Fund. It is a forced saving that becomes the default retirement plan for many individuals.

 

The amount of contribution to the EPF does not matter. Given the power of compounding, even a small contribution can bloat into a big sum over the long term. Don't underestimate the significance of the savings in the first few years. Assuming that a 25-year-old investor puts away a fixed amount every month, his savings in the first five years will account for 44% of his total corpus when he is 60 years old. The later you start, the more you will need to save. If you have started late, say in your 40s or 50s, you will have to invest up to 20-25 % of your income if you want a comfortable retirement.

 

The 10% rule is crucial for self-employed professionals and others who are not covered by the EPF umbrella. They can opt for mutual funds, choosing the ones that suit their risk appetite and age profile. However, you need to have the discipline to put away the given sum on a regular basis.

SMART TIP:

Start an SIP in a mutual fund and automate the process by giving an ECS mandate to your bank. In this way, your retirement planning will stay on track.

2. Increase investment as your income grows

According to recruitment firm ABC Consultants , India Inc hiked salaries by 12-15 % in 2011. By how much did your income go up? More importantly , did you step up the quantum of your investments accordingly? Not many people do that. Sure, inflation has been on the rise and most of this year's increment would have been nullified by the increase in the cost of living. But even when there is a marked increase in the investible surplus, people don't match their investments with the increase in income.

 

This is understandable since it is human nature to put things off, especially ones that require sacrifices in return for future rewards. This can severely undermine your retirement planning. If a 30-year-old with a monthly salary of 50,000 starts saving 10% ( 5,000) for his retirement every month in an option that earn 9% per year, he would have accumulated 92 lakh by the time he is 60. Now, assuming his salary increases by 10% every year and he raises his investment accordingly, he would have a gargantuan retirement corpus of 2.76 crore. If he does waits five years to raise it by 50%, he will have 1.93 crore.

 

It is important to maintain the retirement savings rate at 10% so that your nest egg doesn't fall short of your requirements. The icing on the cake can be periodic boosters whenever you get a windfall, such as a tax refund or a lump-sum payment in the form of, say, an annual bonus. The trick is to commit yourself to save more in the future.

SMART TIP:

Whenever you get a raise, allocate half of it to savings. You might not notice the change since you will be enjoying the other half of the raise.

3. Don't dip into corpus before you retire

This might sound weird, but every time you change jobs, your retirement planning is at a grave risk. This is because you have the option to withdraw your PF balance at that time or transfer it to the account with the new employer. Besides, there is the option to withdraw your PF amount if you need the money for specific purposes, including your child's marriage, buying or building a house, or in medical emergencies . Dipping into the corpus before you retire prevents your money to gain from the power of compounding. Don't underestimate what this can do to your retirement savings over the long term. A person with a basic salary of 25,000 a month at the age of 25 can accumulate 1.65 crore in the PF over a period of 35 years. This is based on the assumption that his income will rise by 10% every year.

 

Yet, many people are unable to reach the 1 crore milestone in their PF accounts. Although the paperwork is minimal, a lot of people prefer to withdraw their PF money when they change jobs or for other purposes. This, despite the fact that the government discourages you from withdrawing the money. The withdrawals from the EPF within five years of joining are taxable.
The sudden flush of liquidity can trigger a spending spree and ill-planned decisions that can cripple your financial planning. Often, the money goes into discretionary spending, which means your retirement planning is back at square one. A late start means a smaller corpus even if you start investing more.

SMART TIP:

Instead of withdrawing your EPF balance when you change jobs, transfer it to the new account by filling 'Form 13' and submitting it to the new employer. This should be at the top in your list of priorities at the new workplace.

4. Withdraw 5% a year initially, then step up

One of the biggest challenges for tomorrow's retirees is to ensure that they don't outlive their savings. This is a distinct possibility because of two major factors: rising cost of living and an increase in life expectancy. High inflation, in fact, is enemy no. 1 for the retired investor. Sure, the inflation rate will not remain as high as it is right now. However, over 20 years, even a nominal inflation of 6% will reduce the value of 1 crore to 29 lakh. Besides, Indians are living longer. Life expectancy rose from 61.3 years in 2000 to 66.46 years in 2010. By 2020, the average Indian can expect to live till 72 years. In urban areas, where people have better access to healthcare, and in higher income groups, the life expectancy could extend beyond 80 years.

 

To ensure that you don't run out of money in your old age, you must have a drawdown plan in place. The thumb rule is not to withdraw more than 5% of the corpus in the first five years of retirement. This can be progressively increased to 10% by the time the retiree is 70. This essentially means that the retiree should draw down less than the appreciation in the initial decade, but in the next 10 years, he can withdraw more than the accretion to the corpus. At 80, even a 20% annual drawdown rate would be considered safe.
The problem arises because most Indians are not comfortable with the idea of drawing down from their corpus. There is an overarching desire to leave something behind for their heirs and dependents. Given the inability of a corpus to beat inflation in the long run, the retirees should be prepared for a depletion of their corpus.

SMART TIP:

You can safely draw down half the inflation-adjusted appreciation every year. If the portfolio has earned 12%, you can easily withdraw 6%.

5. 100 - age = Your allocation to stocks

An investment portfolio's performance is determined more by its asset allocation than by the returns from individual investments or market timing. How much you have when you attend your last day at work will depend on how you divided your retirement savings between stocks, fixed income and other asset classes. Experts recommend that you should have an equity exposure of 100 minus your age. So, at 30, you should have about 70% of your portfolio in equities. At 55, the exposure to this volatile asset class should have been pared down to 45%. After you retire, your exposure to stocks should not be more than 25-30 % of your portfolio.

 

Even within equities, the type of stocks (or equity funds) in your portfolio should vary with age.
This is not a hard and fast rule and should also take into account the financial situation of the individual. It assumes that all people at a certain age will have the same risk appetite . This is not true. A 45-year-old person with a good income and few dependants will be able to take on more risk than someone who is 30 but has a low and unsteady income.

SMART TIP:

Invest in asset allocation funds that redistribute the corpus depending on the age of the investor. As he grows older, the exposure to equity is progressively reduced.

6. Borrow for education, save for retirement

Indian parents love to save for their children. Whether it is for their education or marriage, or even to provide them with a comfortable life, children are the biggest motivators of savings in the country. But before you pour money into a child plan, make sure your retirement savings target has been met. In an effort to fulfil the needs of the child, Indian parents sometimes sacrifice more than they should. Some even dip into their retirement funds to pay for the child's education. This is risky because your retirement is going to be very different from that of the previous generations . It will be entirely funded by you and won't have the cushion of defined benefits.

 

This doesn't mean you should compromise on your child's education. It can still be done through an education loan. In the past two decades, we have seen how the MRP of a product has been replaced by its EMI in our everyday lives. Home, travel, car, education, gold, consumer durables-you can get a loan for almost anything and everything. What's more, the government encourages you to take loans by offering tax breaks on the interest paid on housing and education loans. No bank, however , is going to lend you for your retirement. Sure, there are reverse mortgage schemes, but those require your house to be kept as collateral .

 

Under Section 80E, income tax deduction is available only if the education loan has been taken for yourself, your spouse or children . Also, the loan should be from a bank or a financial institution notified for the purpose . No tax deduction is available if the loan has been taken from a private source.

SMART TIP:

An education loan helps inculcate financial discipline in the child. If he is responsible for the repayment, he gets into the saving habit early in life.

7. Save 20 times your annual expenses

This rule is different from others because it is based on how much you spend, not on how much your investments earn. Knowing your post-retirement expenses is crucial to retirement planning. Some expenses, such as those on clothing and entertainment, come down. Others, such as transportation, medicine and insurance, go up. Add up all the expenses you are likely to incur after retirement to know how much you will need per month. Then, multiply this amount by 240 to know how much should be your retirement corpus.

However, this calculation is based on a number of assumptions. Firstly, you should not have outstanding loans when you hang up your boots. Secondly, you and your spouse should have sufficient health insurance. A survey conducted by HSBC earlier this year shows that unforeseen expenses and medical costs are the biggest concerns for Indians during retirement.

 

The good news is that Indians are increasingly becoming aware of the need to plan their retirement. In a 2010 survey by Bharti Axa Life Insurance in eight top cities in the country, 74% of the respondents said that they knew how much they would need after retirement . Three years earlier, only 53% had a fix on how much they would require in their sunset years.

SMART TIP:

Buy a health insurance cover that continues till you are 70-75 years old. It is difficult to buy one afresh when you are older and not so healthy.

 

Source: http://timesofindia.indiatimes.com/business/india-business/7-Golden-rules-of-retirement/articleshow/10811264.cms

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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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‘Liquid funds are ideal vehicles for small investors'

It is ironical that retail investors own the riskier equity funds and not the least risky liquid funds.

 

This is not a good starting point for investors to bet aggressively on gilt funds. However, liquid funds, with their post-tax returns of 7-8 per cent, are an attractive option for retail investors, says Suresh Soni, one of the country's most seasoned debt managers and now CEO and Managing Director, Deutsche Asset Management India.

 

Fund managers have taken the call about interest rates peaking out many times in the last two years. But do you believe that we are now at the end of the interest rate increases?

 

I do think that interest rates have peaked out and the fact that the RBI has alluded to an end of the rate hike cycle is an encouraging sign. If you look at the government bond markets, government security yields have moved up recently on concerns over the government borrowing programme. However, if you look at some other segments of the bond market, rates have actually fallen in the last six months or so.

 

In the money market segment, one-year certificate of deposit (CD) yields of PSU banks were trading around 10.25 per cent in March 2011; they have, however, fallen to around 9.75 per cent by June-July and have stayed there since then. This has happened even as policy rates have been rising. Credit offtake has been slower and the aggression in deposit collections by banks has tapered off, leading to a stabilisation in 

Bank CD yields.

 

Can the double-digit returns made by ultra short- term funds in the last one year be sustained?

From the short-term rates perspective, we are at almost the highest level in the last decade. There have been very few instances over the last ten years when banks have offered close to double-digit returns on short term money. Therefore, I don't see these returns sustaining. Returns from liquid/ultra short term funds should decline, maybe from the second or third quarter of next year onwards.

 

Should investors begin to bet on long term gilt or income funds, if you take the view that interest rates have peaked out?

We will wait for sometime before taking an aggressive stance on gilt funds. While policy rates are close to peak, we think it will be sometime before rates start falling. Also, 10-year government bond yields at 8.8 per cent, at a time when overnight rates are close to 8.50-8.75 per cent, do not offer too much comfort.

 

There is a possibility of government borrowing overshooting targets. If divestments targets are not met, there could be further demand there. Since January 2010, ten-year gilt yields have risen by 150 basis points, but one-year bank CD yields have risen by around 450-500 basis points: all this against a policy rate hike of 400 basis points. The ten-year gilts have not responded fully to either short-term rates or policy rate hikes. Inflation too remains at higher levels. Therefore, as a fund house, we would avoid taking a very aggressive position in gilts. We would, however, be looking to take exposure in medium-term corporate bonds, with maturity of, say, two-five years through our income fund.

 

The ceiling for FIIs to invest in Indian debt markets has been increased further. What are the implications of this?

It makes sense to hike the FII debt ceiling. We have a rising deficit on our current account and we need foreign capital to fund it. If we are not getting equity money, then the alternative is to turn to debt, isn't it? Apart from this, we have the possibility of outflows of capital as FCCB redemptions for companies peak next fiscal. We would need capital inflows to compensate the shortfall.

 

Therefore, opening up fixed income markets for FIIs will be a good development. However, the bulk of inflows from FIIs so far has been in the one-year segment. An interesting move here would be the raising of ceiling for FII investments in government securities, as FIIs may be keen to buy gilts. India's interest rate differentials with other markets are quite attractive.

 

Will the savings bank account deregulation, impact liquid fund inflows?

I think the impact of the deregulation has been very limited so far. Even after the hike on saving bank rates, the liquid funds are delivering significantly higher returns.

 

If you look at liquid funds, their penetration level has been very low. Only 3-5 per cent of the about 40 million folios in the mutual fund industry are with liquid funds. I believe there is a large section of the population to whom liquid funds have not been marketed at all. Finally, the major chunks of liquid fund investments are from corporates and high net worth individuals. For this segment, liquid funds are more tax efficient than bank deposits.

 

I think the potential to acquire new investors in liquid funds is very large. Many individual investors are not even aware about liquid funds. They are not aggressively marketed by distributors as well. I think liquid funds are the easiest vehicles to own for small investors. Today, retail investors can make close to 7- 8 per cent post tax on liquid funds, with ' anytime liquidity'. It is ironical that retail investors own the riskier equity funds, while liquid funds, the least risky category, are owned by companies and high net worth individuals.

 

Source: http://www.thehindubusinessline.com/features/investment-world/mutual-funds/article2642506.ece

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'I made my money by selling too soon.'

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Single statement for all MF transactions

There is good news for mutual fund investors. Now, one no more needs to put multiple requests to fund houses to obtain account statements.

 

More than three years after the idea of a common statement for mutual fund investors having investments with different fund houses was conceived by the industry, the Association of Mutual Funds in India (Amfi), has finally implemented it, effective from October.

 

The industry has implemented issuance of Consolidated Accounts Statement (CAS) to its investors. So, do not be surprised if you get a single statement instead of many, containing all transactions during the month, irrespective of the fund houses you have done transactions with.

 

In a statement issued on Thursday, Amfi said, "Commencing of the transactions from the month of October, 2011, CAS will be issued as a monthly statement to investors, if there are any transactions during the month."

 

H N Sinor, chief executive officer, Amfi, said, "This is an investor-friendly initiative to allow investors a single-window view of all their transactions in mutual funds."

 

The consolidation of folios will be on the basis of the Permanent Account Number (PAN) provided by investors. This is in compliance with the amendment to the Securities and Exchange Board of India's (Sebi) regulations with regard to issuance of monthly CAS.

 

According to fund managers, the move is a step in the right direction and will further simplify things for the investors. They add that it will also have its limited positive impact on the fund houses as single statement reduces the cost to some extent.

 

In recent years, Amfi along with Sebi has been attempting to make mutual funds an easy tool of investment to the customers.

 

Mutual funds continue to have a penetration of as low as three to four per cent, the lowest among all the investment options.

 

Currently, there are 43 players in the fund industry, with an overall asset under management of close to Rs 7,00,000 crore. However, of the country's population of 1.2 billion, the industry's investors' base is less than 50 million.

 

Source: http://www.business-standard.com/india/news/single-statement-for-all-mf-transactions/455854/

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Some big companies indulge in insider trading: UK Sinha, Sebi chairman

In the eight months since taking over as chairman of the Securities and Exchange Board of India, UK Sinha has taken measured steps on some policies relating to the capital market. Sinha, a former civil servant who had earlier worked in the finance ministry as joint secretary in charge of the capital markets and external commercial borrowings division besides a stint as CEO of UTI Mutual Fund before joining Sebi, spoke to ET NOW's George Cherian on a range of issues. Excerpts:

You have undertaken to overhaul various functions within Sebi and also the organisational structure. What led to this thinking and also, how is the plan progressing?

We believe that regulators must also do a serious amount of introspection about the impact they have created. I am reminded of what the Persi Mistry Committee had recommended that there should be a regulatory impact assessment.

Unless any regulator looks at introspection and also at how it performed with regard to its functions and tasks, there may be the view that we are doing very well and we did not look at ourselves. So accountability and impact assessment is what were at the back of our minds.

Sebi is perhaps the first regulator in the country to introspect in this serious a manner by trying to engage an outside consultant. We have also been influenced by the fact that after the global developments, many of the major companies are thinking on similar lines.

We have also set up an international advisory board. We are possibly the first regulator in the country to work in this direction. We have got a group of eminent people - practitioners, regulators and academics- with whom we will interact every six months. We will discuss new developments in the world and how to tackle them.

Investor faith in Indian equity market is possibly the lowest among any country in Asia. What are you doing to address that?

If you look at the Asian market, wherever investor interest has gone up substantially, it has happened primarily on the back of pension money. So, my first case is that it's very difficult for me and you or anybody to reach out to every household in the country to collect savings.

Wherever there is a pool of money, which represents household savings, and if that pool is brought into the market, then the market will pick up. It is also relevant from the point of view of foreign versus domestic institutions. Domestic institutions have to be strengthened to provide a counter balance to the foreign investor.

Foreign investors are welcome but to depend substantially on them and not develop our domestic market is perhaps not a good strategy. If you have noticed the insurance industry has been able to get more money than the mutual fund industry and that has provided a good counter balance.

Regional stock exchanges aren't faring too well with all of them barely seeing any trading. How long will it be before exit guidelines for these exchanges are issued? Also, what's the progress with the Jalan Committee report?

This is something we must have behind our backs very soon. There are historical reasons and some political and social reasons behind creating so many exchanges but now that we have a national system of trading and anonymous trading, many of them find that their existence is seriously challenged. Sebi came out with some policy in 2008 but it has not worked.

We have again come out with an internal discussion paper. So far, 17 of the regional SEs have got recognition and four haven't. These 17 exchanges have very little trading going on. And one out of these 17 has had no trading for the last 10 years. We are trying to look at two important aspects. One is how do we provide an exit to the companies and to the shareholders of the companies that are listed only on that particular exchange.

The second is what happens to the assets and property of the stock exchange once we are sure that they are allowed to completely exit or fade away. We are trying to look at both from the legal aspect and from the point of view of fairness. My feeling is that what we did in 2008 has not worked. We are trying to combine our approach on regional stock exchanges along with the exchanges on Jalan Committee report because instead of having a policy which deals primarily with four out of 21 exchanges, it is better to have a policy for all of them.

On the issue of insider trading, how confident are you about your surveillance systems?

Over the period of the last three years, Sebi has been able to strengthen the surveillance system tremendously. We have invested heavily on technology and systems. We have now moved to a higher area called data warehousing and business intelligence.

So phase one of that has been implemented and next two phases are also in the process of being implemented in the given time frame. That gives Sebi a huge capability to have a look at any pattern about trading in any particular area. I would like to take this opportunity to tell people through you that we are watching very seriously.

Some of the good corporates, without realising that this is something that is not right or on the wrong side of law, have been indulging in this because somebody has advised them that this is alright to do. I would like to tell people that now our capability has enhanced. People should try and keep an eye on compliance and regulatory rules themselves.

All intermediaries and companies should look at their own systems. Once we find somebody on the wrong side, we will have no recourse but to take appropriate measures, a deterrent measure. Those who are not doing it deliberately, my message to them is that you should be ready to face the consequences of deliberate action. It is good for you to look at your compliance and legal systems. Spend some time and energy on that if you are the top management of the company.

Sebi's recent draft regulation on investment advisors has attracted criticism. Some are questioning the rationale behind the proposal of a self-regulatory organisation (SRO) for advisors. Others claim only mutual fund agents have been targeted as the draft exempts insurance brokers and advocates from compulsory registration. What is your response?

Very simple. If somebody's case is that there should not be any SRO, that Sebi should be regulating them directly, on this point my position is that we don't have the capacity. Even if we go down that path, it will take us years to create that capacity and we can't wait till then. The regulation of investment advisors and distributors and the conflict in both businesses is something which needs to be done. We are willing to accept suggestions but I suspect that there are certain segments which do not want any regulation to come in but I'm sorry. I cannot allow that.

What are your views on the consent mechanism that Sebi has been using to settle cases? How has it worked so far?

It has worked. First of all, let me dispel any feeling in anybody's mind that this is something of a negotiation between Sebi and intermediaries. The law provides for it, the Sebi Act provides for the mechanism and it has withstood the test of time or legal scrutiny. We have some guidelines since 2007 on how to go about this. The criticism that you are referring to is the perception in the minds of the people that perhaps we have not been consistent.

Perhaps a person cannot predict if I have committed a crime or an offence like this, where will I end up, so there is lack of consistency. I would like to admit that to some extent this criticism is valid. We conducted an in-house study and we are ourselves of the view that there have been variations for similar cases.

The amounts we have been able to collect or charge people - the consented amount or the terms and conditions we have imposed have had variations, so right now, Sebi is in the process of tightening the consent mechanism and there are various issues.

For example, whatever we prescribe should be in the norms of legal scrutiny and whatever we prescribe has to be fair and equitable. We are looking at that area very seriously and we are consulting some outside experts so the entire consent mechanism is being re-looked. But as a mechanism, consent is good.

 

Source: http://economictimes.indiatimes.com/opinion/interviews/some-big-companies-indulge-in-insider-trading-uk-sinha-sebi-chairman/articleshow/10774020.cms?curpg=3

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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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Fund houses pay fat commissions to sponsors

Mutual Fund (MF) houses are increasingly falling back on their parent companies to sell their own products. This is, especially true in the case of bank-sponsored fund houses or those funds that have sister companies in the financial distribution space. And parents are happily obliging. 

 

As per the fund houses' disclosures of commissions paid to distributors, most bank-sponsored fund houses have paid a large chunk of their commission to their parent bank or company. In other words, a significant chunk of their inflows come through their parent company's branch network.

 

For instance, roughly 66.50% of commissions that Axis Asset Management Co. (AMC) Ltd paid to all major distributors in the fiscal year 2010-11 went to just one entity—Axis Bank Ltd, Axis AMC's sponsor. Of the Rs. 96 crore worth of commission that SBI Funds Management Co. Ltd paid to its major distributors, it paid Rs. 40.62 crore to State Bank of India and its affiliates such as State Bank of Travancore and State Bank of Bikaner and Jaipur.

 

Small wonder then that 11 of the top 20 distributors in the Rs. 6.4 trillion Indian MF industry are banks and they earned a total of Rs. 645.2 crore in the fiscal year 2010-11, as per data provided by the Association of Mutual Funds of India (Amfi); the MF industry's trade body. Combined with the rest of the top 20 that also consists of national distributors, they earned a total of Rs. 1,032.8 crore worth commissions.

 

The new rule

As per a circular that the capital market regulator, Securities and Exchange Board of India (Sebi), issued on 22 August, fund houses are mandated to disclose the commissions they pay to distributors once a year. They will need to disclose this information on their website and Amfi will need to disclose consolidated data on its own website.

 

Sebi rules say that fund houses must disclose commission of all distributors who are present across at least 20 locations and/or has got inflows in excess of Rs. 100 crore from their retail and high networth clients and/or have received commissions of at least Rs. 1 crore per annum across the MF industry and/or received commissions of at least Rs. 50 lakh from a single fund house. A cursory glance across disclosures made by large fund houses reveals that each of them had about 300 to 500 distributors in their fold that satisfied at least one or more of Sebi's criteria.

 

Strong parent network

Bank-sponsored fund houses are only too willing to fall back on their parent bank's branch network to get inflows. Both existing fund houses as well as newly launched fund houses have consistently tapped an in-house customer base. For instance, when Axis AMC launched its operations in 2009 with its first equity scheme, Axis Equity Fund, it collected Rs. 909 crore during its new fund offer period. Of this, Axis Bank mobilized around Rs. 700 crore or 75-80% of the amount. Out of 138,000 investors of Axis Equity Fund, 95,000 came through the bank's network.

 

"After the regulatory changes and market volatility of 2008 and 2009, more and more funds have moved towards their in-house distribution channels to tap their captive investor database to be able to get the best bang for their buck. Earlier, most of your distributors got money for us because commissions were paid out of entry loads. But after Sebi abolished entry loads, life became tough for the MF industry," says Akshay Gupta, managing director, Peerless Funds Management Co. Ltd. "It is very comforting having the support of SBI's 18,000-strong sales force and its elaborate branch network all over the country," said Deepak Kumar Chatterjee, managing director and chief executive officer, SBI Funds Management Pvt. Ltd, in an interview earlier.

 

Though fund houses like Axis AMC appear to have a disproportionately higher level of dependence on Axis Bank, it doesn't bother the fund house. "Yes, Axis Bank does get us a significant pie of our inflows and it's not a bad thing at all. But we do engage with all our distributors. As our asset base grows larger, I am sure that while Axis's contribution will continue to be strong, other distributors' share will also go up in our overall pie positively," says Karan Datta, national sales head, Axis AMC. Axis Bank's 1,500 branches spread across 600 cities are available for Axis AMC.

 

It's not just banks that push their own subsidiary fund houses' MF schemes. Large financial institutions that have their internal distribution network also appear to be pushing their in-house fund houses. For instance, of the Rs. 5.20 crore commission that L&T Asset Management Co. Ltd paid to distributors in the last fiscal year, Rs. 1.77 crore (or 34% of the total amount) went to two of its sister firms, L&T Capital Co. Ltd and L&T Finance Co. Ltd. In their pecking order, these two firms got the highest commission among all of L&T AMC's distributors.

 

"In troubled times, we will depend on our in-house distributors to sell our products; it's logical. Retail inflows hasn't just dropped in India, they have declined globally. Therefore, a fund house's promoter will put immediate pressure on his own distribution force to sell in-house products first," says a chief executive officer of a fund house, who did not want to be named.

 

After Sebi abolished entry loads in August 2009, fund houses have found it tough to convince distributors to sell MF schemes. Volatile markets ever since the global credit crisis that hit in 2008 haven't helped matters either. As per Amfi figures, the MF industry has seen a net outflow (more money went out compared with what came in) of close to Rs. 18,680 crore in equity funds between August 2009 and July 2011. Though since the entry loads got abolished, the amount of new fund offers went down significantly.

 

Leaving the nest and flying away may not be, after all, the best solution for the MF industry as more and more financial institution-sponsored fund houses—armed with an in-house distribution sales firm—aim to set shop.

 

Source: http://www.livemint.com/2011/11/17221422/Fund-houses-pay-fat-commission.html

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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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For old age, pick mutual funds over retirement schemes

It is imperative that one accounts for inflation while building a retirement corpus. And, there are various instruments — slightly riskier than debt — that need to be accomodated in it, to earn good returns.

 

There are various mutual fund schemes to choose from, such as equity-diversified funds, mid- or small-cap funds, debt funds and so on. Alternatively, you can pick retirement-specific funds that some fund houses offer. At the moment, only UTI Mutual Fund, Franklin Templeton and Tata Mutual Fund offer retirement schemes.

 

However, as far as returns go, the retirement-specific schemes have offered lower returns than pure-equity schemes. According to data by Value Research, over a 10-year period, the Templeton India pension scheme has given returns of 13.62 per cent annually. The category average returns of equity-diversified funds, on the other hand, have been 20.84 per cent. Multi-cap equity funds have returned 28.19 per cent.

 

Returns from debt-fund categories such as income and hybrid debt-oriented funds have gone up between six and nine per cent. One should, however, have a judicious mix of both equity and debt in a portfolio and keep rebalancing it with advancing age.

 

Suresh Sadagopan, principal financial planner at Ladder7 FA, says retirement funds have given lesser returns, as they predominantly invest in debt right from the start. "It is important to have a good mix of both equity and debt in your portfolio. With the right combination, one can beat inflation, which is necessary when building a retirement corpus." With mutual fund schemes, one has the flexibility to alter the ratio of debt and equity according to need, unlike in a retirement fund where it is done by the fund house. Financial advisors say an exposure of between 10 and 20 per cent in equity is a necessity, even when planning for retirement.

 

On the cost front, too, retirement funds are more expensive. While mutual funds charge an annual management fee, retirement schemes charge an exit load, which at UTI is three per cent (withdrawal before the age of 58). Franklin Templeton charges five per cent on withdrawal before one year, three per cent after one year and one per cent after three years. Tata Mutual Fund's Retirement Savings Fund wants to discourage a mid-way exit and has imposed an exit load of five per cent in the first year. Thereafter, it climbs down and becomes one per cent in the fifth.

 

On the tax front, if one invests in a mutual fund scheme, the accumulated amount is tax-free because of zero long-term capital gains tax on equities. Experts advise investing in an equity-diversified fund via a systematic investment plan. They ask investors to shift money to a monthly income plan or a debt fund as they approach retirement.

 

On the other hand, retirement funds get taxed like debt funds (10 per cent with indexation benefits and 20 per cent without). By the time one starts to withdraw after retiring, the investment would be mainly in debt instruments.

 

Rajesh Saluja, CEO and managing partner at ASK Wealth Advisors, says a good mix of equity and debt is enough to build the mutual fund part of one's retirement corpus than going for a retirement fund. He says the latter is nothing but a marketing gimmick.

 

Source: http://www.business-standard.com/india/news/for-old-age-pick-mutual-funds-over-retirement-schemes/455594/

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'I made my money by selling too soon.'

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Fund managers say some small-sized plans needed

They believe there still exists a niche market for thematic and sectoral funds despite their small size and merging such schemes should be avoided

 

Though the capital market regulator, Securities and Exchange Board of India (Sebi), has been nudging mutual funds (MFs) to consolidate their schemes, fund houses don't seem to be rushing for it. Fund managers believe that though some of their schemes have tiny corpuses, they are used by large investors opportunistically.

 

Says Lalit Nambiar, senior fund manager, UTI Asset Management Co. Ltd: "In developed markets, sector funds capture a lot of mind share and fund allocation; especially from institutional investors and high networth individuals. This could be the way forward in India as well, though it will take maybe two-three years for that to happen."

 

Fund managers say that there still exists a niche market for thematic and sector funds despite their small size. The Indian MF industry currently has nearly Rs. 6.4 trillion across around 1,000 schemes. A closer look shows that there are at least 200 schemes with assets under management (AUM) of less than Rs. 250 crore each.

 

The case for mergers

Typically, a small-sized scheme is a good candidate for mergers, especially if it is not much different in terms of its investment philosophy from its larger peer. Says A. Balasubramanian, chief executive officer, Birla Sun Life Asset Management Co. Ltd: "I check whether there is an overlap of objectives between two or more schemes in terms of portfolio construction and stock selection; if the fund manager is doing the same job or not. In this process, some investors lose out, but ultimately, long-term investors benefit."

 

Adds Kalpen Parikh, deputy chief executive officer, IDFC Asset Management Co. Ltd: "Sebi is guiding in the right direction; it talks about clear-cut mandate for one scheme rather than having three-four schemes with the same mandate. So the trend (for rationalization) is rising."

 

Once the board of trustees of an AMC zeroes in on the schemes that need to be merged, they approach the regulator for approval. After Sebi approves, the fund houses send letters to the investors of schemes that are to be merged providing them an exit option in case they disagree with the fund house's decision. After the exit option period gets over, the smaller scheme get merged with the bigger one.

 

The case for tactical investment

However, fund houses largely avoid merging thematic and sectoral funds into other funds such as a diversified fund.

 

Take the case of ICICI Prudential Asset Management Co. Ltd. The fund house launched ICICI Prudential FMCG Fund and ICICI Prudential Technology Fund in years 1999 and 2000, respectively.

 

On average, the corpuses of these funds have been in the range of Rs. 65 crore to Rs. 95 crore for at least the last four years. "These funds are largely used as tactical positions by most investors. But we have an in-house person who looks at these two sectors," says S. Naren, chief investment officer (equity), ICICI Prudential AMC.

 

A dedicated analyst in fund management can double up as a fund manager for a scheme that tracks the analyst's sector.

 

For instance, in 2007 Goldman Sachs Bank BeES'—an exchange-traded fund that tracks the CNX Banking index—corpus size crossed Rs. 7,000 crore at the start of the year and averaged at least Rs. 5,000 crore, pitching it among India's largest equity schemes in those few months. In 2010, its average AUM dropped to about Rs. 64 crore; latest data available at Value Research, an MF tracker, shows its size at Rs. 140 crore.

 

In 2006, foreign institutional investors were big investors in this scheme as many had reportedly reached a ceiling on the direct stock they could own and were looking for alternative means to get exposure to the sector.

 

Hence, investors chase performance and sector funds feed into that need.

 

Different voices: Not all agree though. Says Balasubramanian: "I don't think many people use these funds for strategic purposes. In any case, consolidation is not mandatory, it is only advisable." Within Birla AMC's bouquet of funds, there is Birla MNC Fund, a Rs. 250 crore (the fund house has total assets in excess of Rs. 64,000 crore) scheme which the fund house claims is an unique theme.

 

This fund invests only in multinational companies. Balasubramanian says that there are some investors who prefer to invest in "well-managed multinational companies who have free cash flows or where the international parent is very strong". For its unique theme, the fund house wants to retain this scheme and asserts that demand is there.

 

Clearly, merging schemes is not as simple as it sounds. But as long as duplication doesn't happen and every scheme has a purpose, retaining small-sized schemes is fine.

 

Source: http://www.livemint.com/2011/11/16201910/Fund-managers-say-some-smalls.html

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Headless UTI AMC struggles to retain investors

Fund house sees assets fall by about 7% since U.K. Sinha's departure even as mutual fund industry's assets grow.

UTI Asset Management Co. Ltd (UTI AMC), an offshoot of the now defunct Unit Trust of India, the county's oldest fund house, is seeing a sharp erosion of assets under management (AUM) and investor base as the search continues for a chairman and managing director to replace U.K. Sinha, who took over as chairman of the capital market regulator in mid-February.

 

A successor for Sinha has proved to be elusive. Since his departure, UTI AMC's assets have declined by about 7%, to Rs.62,580 crore from Rs.67,189 crore, pulling it one notch down to fifth place in the pecking order of Indian money managers, after HDFC Asset Management Co. Ltd, Reliance Capital Asset Management Ltd, ICICI Prudential Asset Management Co. Ltd and Birla Sun Life Asset Management Co. Ltd.

 

Between March and October, India's benchmark equity index Sensex dropped 4% and the mutual fund industry's assets grew by at least Rs.12,000 crore to Rs.7.12 trillion. Equities account for roughly 40% of the industry's assets.

 

UTI AMC has been losing investor accounts in the thousands every month. It lost at least 83,350 folios, or investor accounts, since September 2010 with the overall figure dropping from 99,71,036 to 98,87,686 in September 2011.

 

During this period, UTI AMC's peers have significantly augmented their investor base. For instance, HDFC Mutual Fund saw its folio count growing by 4,80,000 to 46,80,610 and Reliance Mutual Fund by 1,80,000 to 74,30,653.

 

While most mutual funds raised money selling fixed maturity products, or FMPs, in a high interest rate scenario, UTI AMC's market share has fallen because it could not launch any new fund since mid-February as the Securities and Exchange Board of India, or Sebi, requires a CMD to be in place for this.

 

In the first 10 months of this year, some 551 schemes have been launched by the industry, garnering Rs.90,212 crore and of these, 503 are FMPs.

 

Investors prefer debt instruments in a rising interest scenario as they earn reasonably high returns while the equity market is falling. The Reserve Bank of India has raised its policy rate seven times by 2.25 percentage points since January this year. Sensex has lost about 18% since January.

 

"We have expressed our concerns over UTI AMC due to the absence of a chief," Sinha told Mint last week.

 

Along with the erosion in AUM and profit, the fund house is also grappling with rising labour trouble. Besides this, two of its board members—Prithvi Haldea and Anita Ramachandran—have quit.

UTI AMC's net profit for fiscal 2011 fell by 19.24% to Rs.137.5 crore, from Rs.170.27 crore in fiscal 2010.

 

The company currently does not have an adequate number of independent directors on its board. Following the resignations of Haldea and Ramachandran, its single largest shareholder, US-based asset management firm T. Rowe Price Global Investment Services Ltd, has two representatives on the board.

P.R. Khanna, Sachit Jain and Pradeep Gupta are the other board members.

 

Several newspapers and television channels have reported that two senior executives of the firm, who are part of a panel that is overseeing the fund house in the absence of a helmsman, are in the race for the top post at a rival fund. But UTI AMC denied the report, saying none of its senior management members, including members of the committee of executives that is running the fund, has been looking for a change.

 

A four-member committee of executives, consisting of Jaideep Bhattacharya, chief marketing officer; Imtiyazur Rehman, chief financial officer; Anoop Bhaskar, head of equity; and Amandeep Chopra, head of fixed income business, is running its day-to-day operations.

 

The crux of the issue is: who will become the next chairman and managing director of UTI AMC?

Before Sinha left for Sebi, UTI AMC's five shareholders—Life Insurance Corp. of India (LIC), State Bank of India (SBI), Punjab National Bank, Bank of Baroda and T. Rowe Price—converted the human resource and compensation committee of the board into a search committee.

 

Haldea, Ramchandran and James Sellers Riepe were members of this committee.

 

The board also appointed executive search firm Egon Zehnder to recommend a suitable candidate for the top job to this panel.

 

After screening close to three dozen candidates, the firm zeroed in on two names— the managing director and country head of a US asset management firm, and the country head and chief executive of a US insurer, which runs a bouquet of businesses in India.

 

But the government, which owns the majority stake in the firm indirectly through the three state-owned banks and LIC, backed Jitesh Khosla, an Indian Administrative Service (IAS) officer of the Assam cadre.

Khosla also happens to be the brother of Omita Paul, adviser to finance minister Pranab Mukherjee. Until a few months back, Khosla was an officer on special duty in the Indian Institute of Corporate Affairs.

 

The banks and LIC stepped in as sponsors in 2002 when Unit Trust of India crumbled under the burden of assured return schemes and was split into two separate entities—UTI AMC and the Special Undertaking of UTI. The four new shareholders picked up stakes in equal proportion and UTI AMC came under regulations of Sebi. Now, they hold 18.5% each and T. Rowe Price 26%.

There has been speculation in the media about Khosla's appointment.

 

A person with knowledge of the situation said on condition of anonymity that although the search committee did not find him suitable initially, he will become the next UTI AMC chief as the shareholders have shed their inhibitions about accepting him.

 

There was speculation, too, that the top post would be split into two with Khosla being appointed chairman and another executive as managing director, but the government is not willing to accept that.

 

"Some shareholders wanted a person with adequate experience in the industry and not an IAS officer to be appointed as the chief," said a senior UTI AMC official on condition of anonymity. "T. Rowe Price, too, was concerned about the appointment process, but the government hinted that it could buy out its stake through one of UTI AMC's existing shareholders."

 

In an email response to Mint, T. Rowe Price said: "As we have stated, the process for selecting a new CMD is ongoing, and we continue to have faith in the board of UTI and the board-led search process. We respectfully decline any further comment at this time."

 

People with knowledge of developments in UTI AMC said another contentious issue is Khosla's unwillingness to quit the IAS cadre to take the top job at the fund house. Under the norms, an IAS officer needs to quit the service to join a regulatory entity. But previous UTI chief M. Damodaran, who later headed Sebi, did not quit the IAS. Sinha too quit long after he took over as boss.

 

Dhirendra Kumar, CEO of Value Research Online Ltd, a Delhi-based mutual fund tracker, criticized the idea of appointing an IAS officer as the chief of a fund house where a foreign entity is the single biggest stakeholder.

 

"There are multiple issues. A big loss for the fund house over the past eight-nine months is its inability to launch FMPs which is the flavour of the season," Kumar added.

 

Khosla is likely to be appointed CEO after the company's board meets later this month, said two persons with direct knowledge of the matter.

 

"We have written to the shareholders that having a CMD immediately is most important at the moment. We have conveyed our concerns to the shareholders. We have requested them to reply early and they will do it soon," said one of the directors on the board of UTI AMC who did not want to be named.

 

If the shareholders want to reopen the selection process, there will be further delays, leading to demoralization of UTI employees and loss of business.

 

Three people familiar with UTI AMC's functions—two of them are employees—said the fund house has been plagued by multiple issues since the split of the erstwhile Unit Trust of India.

 

The fund house planned an initial public offering, or IPO, in 2008 but the plan was scrapped. They (the three people mentioned above) also alleged that the firm has violated norms by not mentioning employees stock option, or ESOP, schemes in its audited balance sheets.

 

In the IPO prospectus filed with Sebi, UTI AMC mentioned ESOPs.

 

The scheme was approved by the shareholders in the general meetings in 2007 and the company has since granted stock options to its employees, the prospectus said.

 

But the company's financial statements, auditor's reports and balance sheets do not mention the status of ESOPs.

 

Going by the guidance note on accounting for employee share-based payments of Institute of Chartered Accountants in India, it is mandatory for every company to disclose the status of ESOPs in such reports.

A spokesperson for UTI AMC declined to comment on the issue.

 

The money manager's trade union has been raising uncomfortable questions about its recruitment policies and selective pay hikes and promotions and opaque performance appraisal process. UTI declined comment on these aspects too.

 

In 2009, T. Rowe Price bought a 26% stake in UTI AMC for $140 million (around Rs.652 crore), valuing the fund house at around Rs.2,500 crore. According to UTI AMC officials, SBI wanted to buy the stake and was willing to offer a better price, but management was not willing to hand over the AMC to one of its existing promoters. The officials didn't want to be named.

 

The fall in UTI AMC's AUM and investor folio count will lower its valuation, but the four sponsors will not be hugely affected—they have their own fund houses that stand to gain from UTI AMC's loss. Besides, they have partially recovered their investment in UTI.

 

In 2003-04, the four sponsor-shareholders bought equal stakes in the fund house for nearly Rs.1,300 crore. For selling a 6.25% stake to T. Rowe Price each shareholder received Rs.163 crore, double what they had paid (Rs. 81.25 crore) when they took over as sponsors of UTI AMC in 2003-04.

 

Management has been trying to bolster morale at the fund house and woo new investors through initiatives like Swatantra but the void at the top has for long paralyzed the firm.

 

Swatantra is an initiative for creating awareness about the concepts of financial planning and benefits of investing in mutual funds.

 

All UTI AMC's campaigns have a common punch line— Kisne sikhai India ko investment ki bhasha? (Who taught India the language of investment?).

 

Going by the steady erosion of assets and investor base, UTI AMC's boast doesn't seem to be impressing customers.

 

Source: http://www.livemint.com/2011/11/16220900/Headless-UTI-AMC-struggles-to.html?atype=tp

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