Mutual Fund NEWS Group: April 2012

Monday, April 30, 2012

Volatility, uncertainty will dominate markets in near term: Vijai Mantri, Pramerica Mutual Fund

In an interview with ET Now, Vijai Mantri, MD & CEO, Pramerica Mutual Fund, speaks on the markets and the GAAR issue. Excerpts:

ET Now: Last two or three weeks have been tough and rough for money managers. Do you think uncertainty and indecision will continue to dominate the Indian markets in the near term?

Vijai Mantri: Volatility and uncertainty will continue to dominate the Indian markets in the near term. The budget is going to get passed in May. The key would be that in what format and with what addition or deletion the budget is passed. Another key issue is how the government handles GAAR. That will decide the future FII inflows because if you look at the ownership of the Indian equity market, there is a very little retail ownership. Actually retail investors are taking money out from the Indian equity market. So, whether we like or dislike we are continuing to depend on FII inflows and right now FIIs are not putting in money because of uncertainty on GAAR. One could also look at how the government is going to look at the fuel price hikes.

ET Now: What gives you the confidence that if the GAAR issue is resolved, foreign institutional investors will come back?

Vijai Mantri: There is no certainty of outcome in the business of investing, but you look at improving your odds. In spite of all the challenges India continues to grow at 7%. All global economies are facing some headwind, so does India. But a 7% growth in my opinion is not a bad growth. You look at what valuation are you buying this company. Then you look at the historical cyclicality of the Indian equity market. In our opinion, the worst as far as the corporate results are concernned is over in Q3. You look at the combination of all these factors and then you also look at the currency play. All these thing favour a little bit of allocation of foreign investors. We do speak to people and we just had a conference and the view is that people are more positive in FY13 than they were in FY11 or FY12. We believe that at the moment there is some clarity on GAAR. More money from FIIs would come and it is not that the people do not want to pay taxes, it is a question of uncertainty.

ET Now: Why are banking stocks underperforming despite the rate cut? Most of the fund managers were of the view that if the rate cut is announced, banking stocks will get derated.

Vijai Mantri: In our opinion Q3 was the worst quarter for the banking sector. The Q4 numbers or whatever results we are seeing in the private sector banks are pretty much above expectation. The effect of the rate cut will start bearing result not immediately, but over a period of time. The general sentiment about the fiscal condition of the Indian government is that there is a lot of uncertainty about the NPAs in the banking sector. That is the reason the banking sector has not reacted and the market is completely neglecting the numbers. But we are overweight on the banking sector because we believe this is a proxy to economy and with reduction in interest rates, the banking sector is going to benefit immensely and many banks are available at historical low valuations. If one has to look at making money over a couple of years, then one has to be in the banking industry. Right now it is a classical case of the bear market where all good news is being completely ignored and all bad news is priced in and the banking sector is witnessing that phenomena.

ET Now: Besides banks, do you think the market stance is going to be tilted more towards defensives given the kind of macro environment that we are currently in?

Vijai Mantri: People may do technical allocation to defensives, but defensives are not coming with cheaper valuations. Defensives are available at valuations which are much higher than they were in 2008. What kind of money you are going to make when you are buying stocks at 32-35 PE multiple? Right now there is uncertainty in the markets. People are looking at buying these kinds of stocks. But if you are a money manager, if you are not looking at protecting your NAV, you are looking at growing your NAV and you are looking at where are the odds of making or doubling or tripling your money, then beyond banking there are many sectors whose stocks are available at attractive valuations. There is a lot of uncertainty and that is the reason these stocks are available at lower valuations. We are underweight on the consumer staple, but we are more overweight on capital goods and industrial. We believe that capital goods are available at the lower end of the valuation.

ET Now: Stock performance is also a function of opinion. Defensives tend to do bad when risk is back. Similarly, rate sensitive and investment-oriented businesses or stocks tend to do well when growth is back. So globally what kind of scenario you think we could be staring at for the next six months because that scenario will tell us which are the group of stocks you need to buy and which are the group of stocks you need to sell?

Vijai Mantri: You made a very interesting point and let me link it with the previous question you asked. The banking sector has not done too well because of a lot of uncertainty on the global inflow. In our opinion Europe is going to do much better than it did last year. There is a clear realisation that there is a problem and one needs to tackle the problem. We would not see any significant bad news coming from Europe, but it will take many years to revive the European economy and the leadership is realising that.

We have been consistently bullish on the US economy and the US market for the last couple of years. We believe that the US will surprise us on the economic as well as the market front because of inherent strength of the economy. The growth will come back. It will not be a big growth, but will be muted. Also, more money will start floating into the market over a period of time.

ET Now: What about autos? Do you think the volume story is going to take the likes of Tata Motors and Maruti given the valuations that they are already sitting on even higher?

Vijai Mantri: If you look at the auto sector, you have to look at specific companies. There will be challenges in the two wheeler sector because the volume growth will not be that high. Companies which are completely domestic demand driven will face challenges and companies which have some export exposure will do well. One also needs to keep in mind that implementation of metro across 10-12 cities in this country will have some impact on the auto demand in the long term. So, we are not overweight on the auto sector and we believe that with interest rate, inflation numbers and muted salary growth, the sector will face some challenges in the next 18 to 24 months.

ET Now: At a time when you are generally bullish on the GDP growth and you expect that Indian economy will grow at 7% plus, what makes you bearish on consumption? Yes, you are bullish on banks because you like consumption, but you do not like autos because you expect consumption to slow down?

Vijai Mantri: We need to look at the penetration of the auto industry. In smaller towns and some metros, penetration has been pretty decent and we do not see the kind of historical growth we have seen in auto companies going forward. It is not that we do not like these companies, but when you look at the valuations these companies are available and the expectations built in for the growth, the equation does not tally. We do not have any bad opinion about the auto industry, but at the sheer valuation they are available and the expectation of growth, we do not believe that the auto industry is going to go through those kind of growth except a few companies which are in different segment of the market. Companies which are more towards agri, in the rural economy will continue to do well. Even if you look at the growth which is going to come by, then you need to look at the sectors which give you high delta. Then you look at the valuation of various sectors and find that capital goods industrial and banking are available at much lower valuations and the growth expectation in these sectors is pretty muted compared to the auto industry. We always look at juggling all the balls which we have to play around and in our opinion as on date the odds are much more in favour of capital goods, banking and industrial, than the auto industry.

ET Now: What about telecom? Given the recent news flow on the 2G recommendations, do you think it is time to go underweight?

Vijai Mantri: We are already underweight on telecommunication because of two-three factors. One of them being the policy uncertainty. The second reason is that there is too much competitiveness. However, the numbers are looking little okay. The per usage number shows an upside trend after the downside trend for many months and quarters, but still we would remain little underweight on the telecommunication sector.

Source: http://economictimes.indiatimes.com/opinion/interviews/volatility-uncertainty-will-dominate-markets-in-near-term-vijai-mantri-pramerica-mutual-fund/articleshow/12933927.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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SEBI to meet mutual fund distributor associations on 3rd May.

Regulator will seek suggestions to overcome the constraints relating to distribution and reach of mutual funds.

Distributor associations like Chennai-based IFA Galaxy and Mumbai-based Foundation of Independent Financial Advisors (FIFA) are set to meet SEBI on 3rd May to discuss issues relating to reach and distribution of mutual funds. The meeting will be chaired by Prashant Saran, Whole-Time Member of SEBI.

The regulator will discuss the following issues in the proposed meeting:

Issues relating to distribution of mutual funds

Perceived constraints to enhance the reach of mutual funds beyond the top cities

Suggestions to overcome these constraints.

Among other issues, a subject that is bound to come up for discussion is SEBI's recent concept paper which tries to segregate the distributor community into 'advisors' and 'agents'. IFAs want to avoid this segregation, because both models are followed by the trade.

HN Sinor, CEO of AMFI, admitted in a recent interview with the Economic Times that abolishing entry load at one go was not such a good idea. "We need to dispassionately review the (entry load ban) decision once again," he said.

The introduction of transaction charge by SEBI has not done much for the industry so far.

Source: http://www.cafemutual.com/News/InnerNews.aspx?srno=1292&MainType=New&NewsType=Industry&id=21

Saturday, April 28, 2012

UK's largest fund Schroders acquires 25% stake in Axis Mutual Fund

Britain's largest asset management company Schroders has acquired a 25% stake in Axis Bank-promoted Axis Mutual Fund for an undisclosed amount. The deal will help the Indian fund house access Schroders' global distribution network and advise overseas funds invested in Indian securities.

The Economic Times had written on March 14 that Schroders Investment Management was in talks with Axis Bank to acquiring stake in its mutual fund arm. As part of the deal, Schroders will have one board member each on the AMC's board and Axis Mutual Fund trustee company.

Schroders Investment Management is a UK-based firm managing $291 billion worldwide. Schroders had applied to the Securities and Exchange Board of India (Sebi) in April 2008 to start a mutual fund business in India, but did not secure a licence till last year. Axis Mutual, which started operations in 2009, has equity assets worth Rs 640 crore. Axis Mutual Fund's total assets under management (AUM) stood at Rs 8,815 crore as on March 31.

Source: http://timesofindia.indiatimes.com/UKs-largest-fund-Schroders-acquires-25-stake-in-Axis-Mutual-Fund/articleshow/12906267.cms

IDBI Mutual Fund Launches IDBI India Top 100 Equity Fund

IDBI Mutual Fund has launched a new fund named as IDBI India Top 100 Equity Fund, an open ended growth scheme. The New Fund Offer (NFO) price for the scheme is Rs. 10 per unit. The new issue will be open for subscription from 25 April and will close on 9 May 2012. The scheme re-opens on 22 May 2012.

The investment objective for the scheme is to provide investors with opportunities for long-term growth in capital through active management of a diversified basket of equity stocks, debt and money market instruments. The investment universe of the scheme will be restricted to equity stocks and equity related instruments of companies that are constituents of the S&P CNX Nifty Index (Nifty 50) and the CNX Nifty Junior Indices comprising a total of 100 stocks. These two indices are collectively referred to as the CNX 100 Index. The equity portfolio will be well-diversified and actively managed to realize the scheme objective.

The scheme offer dividend option and growth option. Dividend option offers payout, reinvestment and dividend sweep.

The scheme will allocate 70% to 100% of assets in equities and equity related instruments of constituents of the CNX 100 Index with high risk profile. On the other side it would allocate upto 30% of assets in low to medium risk profile. Investment in Derivative instruments will be up to 50% of the net assets of the Scheme. Investment in derivatives shall be for hedging, portfolio balancing and such other purposes as maybe permitted from time to time.

Minimum application amount is Rs. 5000 and in multiples of Rs. 1 thereafter.

The fund seeks to collect a minimum subscription (minimum target) amount of Rs. 10 crore under the scheme during the NFO period.

Entry load is not applicable for the scheme. Exit load charge will be 1% for exit (repurchase/switch-out/SWP) on or before 1 year from the date of allotment for the subscriptions received during the NFO period

Benchmark Index for the scheme is CNX 100 Index and will be managed by V. Balasubramanian.

Source: http://www.indiainfoline.com/Markets/News/IDBI-Mutual-Fund-Launches-IDBI-India-Top-100-Equity-Fund/4267613196

Friday, April 27, 2012

Axis Mutual Fund will announce equity tie-up with global fund house Schroders

Axis Bank's Axis Mutual Fund will announce equity tie-up with global fund house Schroders today, sources from the market said. The board of Axis Bank will be meeting today to consider its annual results and recommend a dividend.

The Economic Times had written on March 14 that Schroders Investment Management is in talks with Axis Bank to acquiring stake in its mutual fund arm.

Schroders Investment Management is a UK-based firm managing $ 291 billion worldwide. Schroders had applied to the Securities and Exchange Board of India (SEBI) in April 2008 to start a mutual fund business in India, but did not secure a license till last year. The Times of India too had reported that Axis Bank will consider this proposal at its board meeting today.

A number of Indian banks like State Bank of India, Bank of Baroda and Bank of India have divested equity stake in their in their mutual fund arm in favour of gloabl mutual funds.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/axis-mutual-fund-will-announce-equity-tie-up-with-global-fund-house-schroders/articleshow/12896293.cms

Mutual funds lose over 7 lakh folios in six months

The past six months were particularly tough for the mutual fund industry as indicated by the number of folio closures witnessed in the period.

Mutual funds lost over 7 lakh folios (1.5%) during the six months ended March 2012 to end with 4.64 crore folios, according to industry body Association of Mutual Funds in India (Amfi). For the year ended March 2012, the industry lost 7.8 lakh folios or 1.7%, indicating that the number of folio closures rose substantially during the last six months.

The retail category was the biggest loser in terms of folios, especially in equity. This was mainly because of the volatile movement of the equity market. Between October and December, the benchmark BSE Sensex declined 5.4%, but rose 6.4% between October and March, thanks to the surge in FII inflows in the early part of 2012.

The domestic banks/financial institutions category also witnessed a decline of 77% in folios during year ending March 2012 mainly due to RBI's recent circular restricting bank investment in mutual funds to 10% of their net-worth from January 2012, according to note by Crisil Research.

However, the good news for the industry is that 61% of retail investors have stayed invested in equity mutual funds for more than two years. Out of the R1.34 lakh crore of retail investment in equity mutual funds, R82,577 crore was not withdrawn for over 24 months, as per Amfi data.

Retail investors increased their presence in debt-oriented mutual funds (including gilt and liquid funds) with the number of retail folios rising by 6.1% and 13.8% in the past six months and one year, respectively. "This could be attributed to investors looking at alternate asset classes post the sharp downfall in the domestic equity markets in 2011. Also, rising interest rates in the country may have pushed many retail investors to debt oriented mutual fund categories, especially fixed maturity plans (FMPs)," stated Crisil.

The year ended March 2012 saw 718 FMP new fund offers (NFOs), amounting to R1.17 lakh crore. In terms of AUM, the retail category accounted for 6.15% of total debt AUM in March 2012, up from 4.8% in September 2011 and 5% in March 2011. As per data from Value Research, for the financial year 2011-12, liquid, ultra short term and short term debt funds gave returns of 9.1%, 9.36% and 9.44%, respectively.

Source: http://www.indianexpress.com/news/mutual-funds-lose-over-7-lakh-folios-in-six-months/942150/0

How NRIs’ India mutual funds are taxed in US

Mutual funds in India maybe a great investment avenue. Dividends are tax free; long term capital gains on equity funds are also tax free. And if you have been a long term investor, chances are, you built a fairly good corpus thanks to the robust Indian equity market. But if you are an Indian American, Uncle Sam is going to want a share of your pie. That's because the US tax code collects tax on the global income of its residents and citizens. What is more peculiar is that tax is levied on global income as per the rules that apply to that kind of income in the US. Foreign mutual funds in particular face this peculiarity.

First let us quickly look at the tax rules that apply for US mutual funds. In the US, a mutual fund's annual gains from sale of its holdings must be distributed to the unit holders and taxed in the hands of the investor as 'capital gains distributions' and these distributions are taxed at par with long term capital gains. Many investors choose to reinvest these distributions in the fund.

Foreign mutual funds in the US fall under the category of Passive Foreign Investment Company (PFIC). Vinay Navani, CPA and director of tax at New Jersey based firm Wilkin & Guttenplan, P.C, gives a background, "PFIC rules were introduced by the Internal Revenue Service (IRS) in order to discourage the practice by US citizens and residents of parking money in offshore tax havens and deferring the US tax liability. For instance, a US citizen might put his money in an investment company or mutual fund situated in the Cayman Islands. Cayman Islands does not require its funds to make distributions to its investors and therefore there is no tax on annual basis. At the time of sale, while capital appreciation would be tax free in the Cayman Islands, the US citizen/resident would still have to pay tax in the US since he is taxed on his global income. By doing this, he could defer his US tax liability till the time of actual sale. So while the intent of the PFIC rules was to plug such incidents, foreign mutual funds, being of similar structure, also fall under this category. Broadly speaking, according to the PFIC rules, the citizen will face some harsh tax consequences unless he chooses one of the options described below."

While we will get into the details of the options next, it is important to understand that in option 1 and 2, the PFIC rules essentially seek to tax notional gains arising from PFIC investments. These gains are taxed as ordinary income. Option 3 is when the taxpayer chooses to do nothing and pays interest and penalty.

Form 8621

This is the form you would need to fill up if you have mutual fund holdings in an Indian mutual fund company. The form gives you several options to declare the notional appreciation. Let's take a look at the options relevant for a retail mutual fund investor:

Option 1: Election to mark-to-market PFIC

This is the most common option for Indian mutual fund investments. Navani explains, "Broadly speaking, according to this option, you must declare as income the notional gains in the market value of your fund holdings during the year."

Here is what typically happens:

- In the year of purchase, the gains are the difference between market value at the end of the year and cost of purchase.

- In the subsequent years, the gains are the difference between market value at the end of the year and 'adjusted basis'. Adjusted basis is usually the market value in the beginning of the year. In case there is a loss, the loss can be set off against foreign PFIC notional gains of only the previous years. Any loss that is not set off is added back to the adjusted basis of the next year. So for instance, if in year 1 you incurred a notional gain of $100 on your PFIC, $100 would be taxed as ordinary income in year 1. Suppose your loss in year 2 was $150. In year 2, you would be allowed to deduct a loss of $100 from your total income (loss to the extent of gains taxed earlier).

- When the units are actually sold, you will be taxed long term capital gains only on the portion of gains that has not been taxed in previous years as ordinary income

Now there may be a case where you purchased units of the fund before you became a US resident or citizen. In such case, in the first year of your tax returns, the value of your PFIC income will be the appreciation in market value of the fund holdings during the tax year.

Navani illustrates, "X, a nonresident of the US, buys marketable stock in a PFIC for $50 in '95. On Jan. 1, 2005, X becomes a US resident. The fair market value of the stock on Jan. 1, 2005, is $100. The fair market value of the stock on Dec. 31, 2005, is $110. X computes the amount of mark-to- market gain or loss in 2005 using a $100 adjusted basis. Therefore, X includes $10 in gross income as mark- to-market gain and increases its adjusted basis in the stock to $110. X sells the stock in 2006 for $120. X must use its original basis of $50 plus the $10 mark-to-market basis adjustment. Therefore X recognizes $60 of gain, of which $10 would be ordinary income and $50 long-term capital gain."

Maryland based tax attorney and Principal at Kundra & Associates, Chaya Kundra also adds, "For the recent resident, it is often best to elect mark-to-market upon the filing of the first year of their return for the most favorable tax treatment."

Option 2: Election to treat as QEF - Qualified Electing Fund

"This option is commonly used in case of investments by US residents and citizens in offshore private equity funds," Navani says.

A QEF is taxed like a partnership wherein each investor is considered to have a share in the total profits of the fund. You can exercise this option only if the foreign fund agrees to share information with you about your share of profits.

Option 3: Excessive distribution method

"This is a default election. If you opt out of all other options, you will be taxed as per this option, which is also the most taxing," says Navani.

He adds, "According to this option, the distributions in the current year should be at least 125% of the average distributions of last 3 years. The logic being that you are receiving incremental income every year from the fund and therefore not trying to defer taxes. If you do not meet this condition, then the total distributions are allocated over the entire holding period and taxed in each year at the highest tax rate of that year. Not only that, you will also be charged interest on each year's tax liability."

What this means: Suppose you did not make any election on your PFICs and throughout the holding period, did not fill up Form 8621 for your PFIC holdings. You held the PFIC units for say 10 years and did not receive any distributions during these 10 years. In the year of sale, you made a gain of $100. In the year of sale, your gains will be distributed over the past 10 years, that is, $10 per year. It will be treated as though you did not pay tax on $10 per year and hence in year 10, you must pay tax for each of these years plus interest on the delay. You will have to fill up part IV of Form 8621.

A common query then: If you are an NRI and will be in the US on a project for 2-3 years and you know for certain that you will not sell your Indian mutual funds during that time period, does it make sense to go for the default option? This is a tricky one. While this strategy may work for now, a proposed amendment to PFIC rules could prove a dampener.

Kundra explains, "According to this proposed amendment, if a US citizen or resident owning PFIC stock renounces citizenship or abandons US residency, thereby becoming a nonresident alien for US tax purposes, the individual is deemed to sell the PFIC stock on the last day that he or she is a US person."

She adds, "This is a proposal and not yet a law. Having said that, from the IRS website, proposed regulations are often used as precedents by the IRS. It is important to note that this will more than likely become law and when it does, it will apply retroactively."

Form 8938 and Form 8621

From this tax year onward, the IRS has introduced a new Form 8938 for reporting offshore bank and financial accounts. "Be careful with the new Form 8938," Navani advices, "In Form 8938, in Part IV, you must check that you have filled up Form 8621. If you inadvertently declare holdings in Indian mutual funds in your Form 8938, the IRS would automatically check for Form 8621. Consult your CPA or tax advisor."

These are just the broad modalities of how PFICs are taxed. Several adjustments may occur in individual situations. Consult your CPA or tax advisor to choose the best election and arrive at appropriate values.

Source: http://economictimes.indiatimes.com/news/nri/nri-investments/how-nris-india-mutual-funds-are-taxed-in-us/articleshow/12881470.cms?curpg=2

Thursday, April 26, 2012

AMFI lobbies with FM for mandate to run RGES over ELSS

Association of Mutual Funds (AMFI) in India is lobbying with the finance ministry to secure an exclusive mandate to implement the Rajiv Gandhi Equity Scheme (RGES), a tax-efficient investment plan for retail investors that was introduced in the Union Budget.

A permission to allow the domestic mutual funds to handle the proposed equity scheme will help the industry replace its existing tax-saver product - equity-linked savings scheme - which will lose its tax-saver status under the Direct Taxes Code regime. The mutual fund industry body, which represents 44 Indian asset management companies, is making the pitch for executing the RGES as it caters to small retail investors who are investing in the markets for the first time.

Source: http://www.moneycontrol.com/news/mf-news/amfi-lobbiesfm-for-mandate-to-run-rges-over-elss_697174.html

Fidelity MF sees Rs. 805 cr outflow ahead of sale completion

The acquisition valued Fidelity MF at 6.2% of its average assets under management (AUM) of Rs. 8,881 crore for the quarter ended December

Investors are pulling out from Fidelity's Indian mutual fund (MF) schemes. In the March quarter, investors in the equity schemes of FIL Fund Management Pvt. Ltd withdrew at least Rs. 805 crore, while the Fidelity group was conducting a strategic review of its Indian MF business that ultimately led to the sale of the fund.

Fidelity MF announced the sale of its assets to L&T Finance Ltd for an undisclosed sum in the last week of March. A person with direct knowledge of the matter said the deal was clinched at around Rs. 550 crore. Fidelity and L&T Finance had declined to comment on this figure at the time.

The acquisition valued Fidelity MF at 6.2% of its average assets under management (AUM) of Rs. 8,881 crore for the quarter ended December.

According to data available with registrars and the capital market regulator, the average AUM of Fidelity MF's five equity schemes grew by an average Rs. 73 crore to Rs. 5,698 crore in the March quarter from the December quarter .

The 50-stock Nifty index of the National Stock Exchange grew 14.52% between January and March, while the 30-share benchmark Sensex of BSE went up 12.61%. In line with this, the net asset values (NAVs) of the five schemes of Fidelity MF grew 13.16-20.32%.

Going by the returns these schemes offered to investors or their NAVs, a back-of-the-envelope calculation shows that the average assets of the five equity schemes should have grown by Rs. 877.99 crore and not Rs. 73 crore. This means, these schemes witnessed an outflow of Rs. 805 crore.

Most fund houses during the quarter saw a net inflow of money into equity schemes.

Fidelity had six equity schemes, but five have been considered for calculations as they contribute the bulk to the AUM. They are Fidelity Equity, Fidelity India Growth, Fidelity India Special Situations, Fidelity Tax Advantage and Fidelity India Value.

The figures are also available with the Association of Mutual Funds in India (Amfi), an industry lobby.

A Fidelity MF spokesperson rejected the contention that there had been an outflow to the extent calculated by Mint.

"We are not seeing much outflow and have not seen a net outflow of anywhere even close to Rs. 800 crore in the five equity schemes of Fidelity Mutual Fund during the January-March 2012 period. Therefore, it would be absolutely incorrect and wrong if any such story is carried," the spokesperson said.

A senior Fidelity group official said, "In January, after informing Sebi (Securities and Exchange Board of India) about our business plan, we informed our investors, as per the rule, that they could redeem their investments in fixed-maturity plans, or FMPs, as they could not be rolled over. This news may have led to an exit of investors."

The outflow from equity schemes flags the critical issue of protecting the assets of a fund house that is on the block. The price paid by L&T Finance to acquire the assets of Fidelity MF was based on the size of the equity schemes, but by the time the deal is consummated, the size of the schemes may shrink, distorting the valuation. The deal has not closed yet.

Outflows from Fidelity MF schemes are happening before the so-called free-exit period. Once Sebi approves an acquisition, investors in the selling fund house are given a month's time to withdraw their investments.

L&T Investment Management Ltd, a subsidiary of L&T Finance, is in the process of securing Sebi approval for the acquisition. L&T MF currently manages average assets worth Rs. 3,897.6 crore.

Following the deal, L&T Finance had said that the combined entity will have a market share of 2% in terms of AUM. But if the erosion of assets continues, that may not happen.

An industry expert, who did not want to be named, pointed out that in case of a merger between two banks, the banking regulator typically imposes a moratorium and freezes operations of the bank that is being absorbed. This is to protect deposit liabilities and advances.

Fund house acquisitions are valued on the basis of the asset mix, network strength, long-term earnings prospects and profitability. There have been several acquisitions of Indian MFs at valuations ranging from 1.6% to 13% of AUM.

There are 44 fund houses with total average AUM of Rs. .64 trillion in the March quarter.

Fidelity MF had a team of seven people to manage its equity schemes.

"Fidelity MF investors had certain trust on its fund managers built over years. L&T doesn't have much experience in mutual fund management and unless they create a trust among investors, it will be a challenge to retain the investors," said the CEO of foreign MF who declined to be named.

Source: http://www.livemint.com/2012/04/26000423/Fidelity-MF-sees-Rs-805-cr-out.html

Retail investors switch to safer, low-risk MF options in hard times

Despite volatile markets, weak sentiments and a faltering growth story, retail investors are not fleeing the market. On the contrary, they are adopting a new strategy to counter the current situation: shifting investment from high risk, high-return equity schemes of mutual funds to low risk, low-return debt schemes of MFs.

The number of folios in equity schemes of mutual funds declined to 37 million at the end of March 2012 from 38 million at the end of March 2011, whereas the number of folios in debt schemes grew to 4.5 million at the end of March 2012 from 3.9 million at the end of March 2011.

"It shows that there are investors who do not rush to open fixed deposit just because there is volatility in the market," said Arindam Ghosh, vice-president and head, retail sales, JP Morgan Asset Management. "They rather go for less-risky instrument available in the market."

In last fiscal, when the Sensex went up to 19,100 (in April 2011) and fell to 15,100 (in December 2011), the number of folios (equity and debt schemes) did not see a sharp decline. Total number of folios at the end of March 2012 stood at 42 milliom against 43 million at the end of March 2011.

A mutual fund scheme that invests major portion of its corpus into equity and equity-related instruments is called an equity mutual fund. In debt-oriented schemes the money is invested in bonds and other debt instruments. Since money is invested in debt instruments such as government bonds, corporate bonds, debentures, the returns are comparatively low and carry very low risk.

"In the last one year, when the market was volatile, we did not see any significant surge in redemption from retail investors," said Lalit Nambiar, senior vice-president and fund manager, head, research, UTI Mutual Fund.

Source: http://www.hindustantimes.com/News-Feed/BusinessBankingInsurance/Retail-investors-switch-to-safer-low-risk-MF-options-in-hard-times/Article1-846150.aspx

Wednesday, April 25, 2012

Soaring crude oil prices are the biggest risk: Swati Kulkarni

Interview with Fund manager, UTI Mutual Fund

Firm crude oil prices, depreciating rupee and ballooning current account deficit are expected to keep the economic growth rate at around seven per cent for another year, says Swati Kulkarni, fund manager, UTI Mutual Fund in an interview with Priya Kansara Pandya. Edited excerpts:

Where are the Indian markets headed in 2012?
We are positive on Indian markets as the valuation is now comfortable at 13x FY13 earnings, which is close to the historical average. The downside from the current levels seems to be limited. However, in the near-term, we expect range-bound movement.

What are the likely triggers for an upside and what is the probability of that event happening?
Softening of commodity prices, manageable inflation levels and a pick-up in the investment cycle can lead to an upside. It is difficult to predict the probability as a lot depends on crude prices and other global events. However, given the below-normal world economic growth, the demand side support for a structurally high level of crude seems unlikely. We expect crude prices to remain range-bound.

So, that means there will be less pressure on the rupee?
The rupee is under pressure because of the current account deficit and capital flows, which have been volatile. The probability of rupee crossing 54 levels is grim. We expect it to remain between 52-54 levels in the medium-term.

What are key risks to the Indian economy?
The first and the biggest risk, of course, is the price of crude oil. I feel the budgeted estimates for oil subsidies may be inadequate. The second biggest risk we see is weak investment cycle, which has not seen a pick-up for some time now. This could affect consumption and future employment potential, which in turn could affect economic growth. As a result, this will keep our growth at seven per cent for another year or so.

However, I would like to put a caveat here that everything does not look gloomy at this point in time. All these concerns are fine when you are trading at 21-22 times. We are trading at much lower levels.

After raising rates 13 times between March 2010 and October 2011, the Reserve Bank of India (RBI) has not guaranteed further rate cuts after the surprise 50 basis points cut in April. Will it succeed in kickstarting growth?
We should understand that the rate hikes did not happen at one go. So, we should also be patient for rate correction and let it happen over a period of time. RBI cannot take quick steps without addressing the real problems. Currently, the base effect for inflation is expected to be favourable for some time.

But strong consumption, rising crude oil prices and current account deficit can again put pressure. By the end of this calendar year, there is a likelihood of inflation surfacing again due to supply side constraints and structural issues. Further, if fiscal deficit continues to balloon then what is the guarantee that these rate cuts will not lead to further inflation? Certain asset bubbles can be created. Thus, I feel, RBI is going in the right direction. Rather than 25 bps, having a 50 bps rate cut may have a better visible transmission.

Do you expect any more rate cuts going ahead?
We don't expect that as fiscal correction is necessary. But at least from hereon, I don't expect interest rates to go up further. They seem to have peaked and that trend is clear.

Which sectors are expected to do well in the coming quarters?
Besides consumption, cement and pharma sectors are expected to do well. However, energy will not do well due to price controls and stressed global petrochemical margins. Also, the engineering sector could remain subdued as order inflow momentum is yet to pick up pace.

What has been your strategy in the past six months and will that continue?
In past six months, we have reduced exposure from rate insensitive sectors like information technology (IT) and shifted to auto and banks assuming that interest rate cycle is peaking out. That would continue. Others, more or less, remain the same.

We had neutral position on consumer. We preferred cement to construction and real estate stocks. However, with likely peaking of interest rates, we may review this preference.

Source: http://www.business-standard.com/india/news/soaring-crude-oil-prices-arebiggest-risk-swati-kulkarni-/472489/

We need to review entry load ban decision again: Amfi CEO HN Sinor

Capital market regulator Sebi and industry players will have to review some of its past decisions, including the ban on entry load, if they want mutual funds to have larger retail participation and deeper geographical reach, said HN Sinor, chief executive of the Association of Mutual Funds in India or Amfi. In an interview with ET, Sinor said Fidelity Mutual Fund's move to exit India and the recent exit of chief executives of four asset management companies are worrisome. Edited excerpts:

Not many are hopeful about the health of the Indian mutual fund industry. What's your view?

Unlike banks, the AMC business has a fragmented structure - it's like a three-legged stool. You have manufacturers on one side, distributors on the second and transfer agents on the third. And on top of this three-legged stool sits the investor. You've to create a 'win-win' situation for all the three legs of the stool. There has to be something for everybody in this business. If you need mutual funds to reach out to larger geographies, we will have to review the cost structure. And if there's some push there, perhaps, we may again see some good days.

By cost structure, do you mean entry load?

One mistake Sebi made was to implement the entry load ban in a cut-and-dry manner. They should have implemented it in a slow, phased manner. The decision to ban the entry load was seen very positively by many; many said it was an investor- friendly move... many also complained about it. In those days Sebi and Amfi felt, the Indian enterprise was very smart and would find a way to come around it.

But today, after two years, I realise, we've not been able to adjust our business model to the entry load ban. We need to dispassionately review the (entry load ban) decision once again. I am not taking any sides here... I am just taking a view from the top. We've to expand this industry, and for doing that if we have to bite the bullet, we should bite the bullet.

Are you suggesting a roll-back of entry load?

We should at least initiate a discussion on that. Saying an emphatic 'no' to this, to my mind, is not a solution today. Any business settles down after 6-8 months of policy changes, but it has not happened here.

Distributors are not seeing it worthwhile to sell mutual funds. Manufacturers are finding it difficult to expand or penetrate beyond 20 cities. It does not make a business case for manufacturers to go and sell the product in Timbuktu to collect just Rs 5 - 10 lakh of investments. In such cases their costs would be very high. Why will manufacturers go to far-flung towns when they can garner a much larger amount at a lower cost from Ghatkopar? It doesn't make sense for fund houses to go beyond the top-20 cities within the current expense ratio.

But Sebi officials say distributors are still making money selling funds.

If you look at the commission pay-outs of distributors, there are just about 200 distributors who draw a gross revenue of over Rs 1 crore. Of the 200, the top-20 are institutions and banks. At an individual level, there are only 185 IFAs whose gross revenue exceeds Rs 1 crore. Of the 16,000-odd active distributors, only 185 are earning a reasonable sum of money selling funds. What will others do? They will resort to tricks like deliberate churning of portfolios or mis-selling of funds. It's this environment which is pushing them to do something which is not right. Globally, there's a cost attached to this business and it is borne by investors.

Are you talking to the regulator for a roll-back?

Sebi has been very receptive to any kind of ideas. But then it's difficult for any regulator to undo something. We need to kick-off the debate once again. We've to discuss it in a dispassionate manner.

How are mutual funds sold in other countries?

Frontloading in Singapore is about 3%; their expense ratio works out to about 2.5%. Investors there pay in excess of 5% to asset managers. Asset management business in India is the cheapest in the world. Cost to investors is lower than anywhere else in the world. We need to look at this aspect with a little open mind. My counterparts in other countries, who have plans to ban frontloading, are closely watching the impact of entry load ban in India. They're not very confident after seeing the India experience. UK came out with a consultative paper in 2009, but now I hear they have postponed their plans.

Fidelity's exit too has not gone well with the fund management industry.

Confidence level is very low in the industry. After Fidelity's decision to move out and the quick exit of four CEOs, even we're a little worried. If officials desert the industry like this, we have a big problem at hand.

Source: http://economictimes.indiatimes.com/opinion/interviews/we-need-to-review-entry-load-ban-decision-again-amfi-ceo-hn-sinor/articleshow/12860300.cms?curpg=2

Tuesday, April 24, 2012

Reliance MF schemes emerge as top three performers for Q1-2012

Mutual funds are considered a better investment option due to relatively better safety of capital, but they have also scored over the direct stock market investments in terms of returns to investors.

As per a performance analysis of stock market benchmarks and mutual fund equity schemes, as many as 50 large equity MF schemes, with an average asset size of at least Rs 1,000 crore, have given better returns than the market barometer Sensex during the first quarter of 2012.

While the stock market benchmark index Sensex gained 12.6 per cent during the January-March 2012 quarter, the surge was higher for a total of 50 MF schemes and the top three performers belonged to Reliance Mutual Fund.

The returns were over 20 per cent for this period for as many as 11 such funds, including five Reliance MF schemes.

Even for the six-month period ending March 31, 2012, the returns were higher than Sensex for as many as 29 schemes.

Asked about the robust performance of Reliance MF schemes, Reliance Capital Asset Management CEO Sundeep Sikka told PTI: "We had made some changes in our portfolio and had aligned our portfolio according to market conditions, as a result of which our funds were able to post good returns."

While judging a MF scheme, investors should go for a fund house of fund manager who is able to manage the volatility of the markets and has a long term track record of giving good returns, Sikka noted.

The top three performers in the equity mutual fund space were from Reliance MF. Reliance Tax Saver (ELSS) fund posted returns of 26.07 per cent, followed by Reliance Banking Fund with returns of 26.06 per cent and Reliance Diversified Power sector fund with returns of 22.94 per cent.

Others in top 10 included HDFC Mid Cap Opportunities Fund (ranked fourth with returns of 22.71 per cent), ICICI Pru Discovery Fund (5th, 22.57 per cent), Reliance Vision (6th, 22.44 per cent), DSP BlackRock Small and Mid cap fund (7th, 22.18 per cent), UTI Infra fund (8th, 21.71 per cent), IDFC Sterling equity fund (9th, 21.36 per cent) and Reliance Equity Opportunities fund (10th, 21.01 per cent).

In the first quarter of this year the BSE benchmark index Sensex posted returns of 12.61 per cent, while the wide-based Nifty gave returns of 14.52 per cent. The BSE 100 index rose by 15.59 per cent during this period.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/reliance-mf-schemes-emerge-as-top-three-performers-for-q1-2012/articleshow/12837567.cms

Friday, April 20, 2012

Why there are no 'star managers' in Indian mutual fund industry

Vicky Mehta, Senior Research Analyst, Morningstar India

An oft-repeated phrase in the Indian mutual fund industry is "we don't have a star manager culture; instead we follow a team-based, process-driven investment approach".

Fund companies avoid the term 'star manager' like the plague. They never miss an opportunity to proclaim the presence of a strong team and investment process. But are the latter and 'star managers' mutually exclusive? More importantly, what is so revolting about being a 'star manager'?

Think about it, isn't a 'star manager' only like any other professional who excels at his work? For instance, an equity fund manager who has consistently delivered an impressive showing over the long haul and across a market cycle, and who displays a sustainable level of skill, should qualify as a 'star manager'.

That isn't necessarily bad, is it? To draw a cricketing analogy - is having Sachin Tendulkar in the team a disadvantage, simply because he ranks among the best batsmen in the world?

The disapproval

Perhaps the disapproval for star managers stems from certain preconceived notions. For instance, being a star manager is associated with job-hopping. But that isn't always true.

Several of the best-ranked managers in the country have been associated with the same fund company for a decade or thereabouts. Maybe star managers are perceived as being mavericks and poor team players.

Again that hypothesis is questionable. Some of the best managers have built strong and stable investment teams. Several of them have also tended to adhere to an investment style that gels well with the fund company's approach.

Acknowledging key-man risk

Clearly there's more to this star manager aversion. Let's revisit the point about star managers and a team-based, process-driven approach being mutually exclusive.

Fund companies would like us to believe that all members in their investment teams think alike and every decision is based on consensus. But that's rarely the case. Let's not forget that investing is a personalised activity with no definite rights or wrongs.

This in turn, necessitates the presence of skilled managers. Furthermore, while the significance of a robust investment process cannot be overstated, it takes a proficient manager to skillfully execute the process. For instance, a model might throw up a list of 'investment-worthy' stocks; but it is the manager who decides which ones to buy.

If strong investment processes in isolation were adequate, all funds could have been run on quant models and managers would have been redundant. Here's what this boils down to - fund companies try to underplay the key-man risk associated with funds, by declaring that they don't have star managers.

At best it's a defense mechanism to ensure that they don't lose assets when a proficient manager exits. Neither would they like to acknowledge that a manager change can result in a change in the fund's character. Indeed, the degree of keyman risk varies and needs to be estimated on a case-by-case basis.

In some situations, it might be easy for a new manager to step in and run the fund as in the past; while in others, it may not be possible to do so. Nonetheless, it is naive to dismiss manager-risk as being immaterial.

Fund companies deny the existence of 'star managers' to understate key-man risk; investors on their part, must evaluate if the fund remains as good a bet, sans its 'star'.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/analysis/why-there-are-no-star-managers-in-indian-mutual-fund-industry/articleshow/12738218.cms?curpg=2

Thursday, April 19, 2012

Lock in to FDs now or find other alternatives quickly

The higher than expected 50bps repo rate cut by the RBI will make banks re-price their deposit rates downward. The reason is that borrowing costs for banks in the overnight markets will be 50bps lower at around 8%, which is the repo rate and RBI has given banks leeway to access the MSF (Marginal Standing Facility) at 9% by letting them go below 2% of their SLR (Statutory Liquidity Ratio) limit.

Banks have to hold 24% of their deposits (NDTL or Net Demand and Time Liabilities) in government bonds as SLR. The banking system deposit base is around Rs 60 lakh crores. Banks are holding around 29% of their deposits in government bonds. Hence banks can technically borrowing 5% (the excess SLR) of Rs 60 lakh crores, which works out to around Rs 300,000 crores from the RBI at the repo rate of 8%. Banks can also borrow 2% of Rs 60 lakh crores, which works out Rs 1.2 lakh crores through the MSF window at 9%. Banks will not be worried about liquidity given the Rs 4.2 lakh crores leeway offered to them by RBI at 50bps lower rate of interest post the repo rate cut.

The easing policy signal given by the RBI through the repo rate cut coupled with access to liquidity will make banks lower their deposit rates. Banks by lowering deposit rates and keeping loan rates steady will increase their NIMs (Net Interest Margins). Higher NIM's will lead to higher profits for banks, which comes at the cost of lower rates of interest for depositors.

Fixed deposit (FD) investors should quickly lock on to FD rates before they are brought down. Investors should also increase the tenure of their FD's as they can then earn higher interest rates for a longer period of time.

FD investors should also look for alternative fixed income investments to counter the expected fall in deposit rates. Alternative investments include investing directly in fixed income securities issued by banks, Corporates and the Government of India or indirectly through fixed income mutual fund schemes.

The current yields on one year, two year, five year and ten year maturity AAA rated corporate bonds are 9.6%, 9.3%, 9.35% and 9.4% respectively and the yields are likely to come down on the back of easing policy rates and easing liquidity conditions. Fall in yields will also give capital gain benefits to investors leading to higher returns from investments in fixed income securities.

Government bond yields in the one year, two year, five year and ten year maturity segments are trading at levels of 8.3%, 8.3%, 8.35% and 8.4% respectively. The high borrowing program of the government will keep yields steady despite rate cuts, but yields will start trending down going forward leading to capital gains for investors.

Investors who cannot access the corporate bond and government securities market (Indian fixed income markets are not conducive for direct retail participation) should invest in mutual fund schemes that invest in fixed income securities. Investors looking to benefit from fall in corporate bond yields should invest in short term and long term income funds while investors looking to benefit from fall in government bond yields should invest in long term gilt funds.

Expected one year returns to investors if yields fall by 50bps in corporate bonds and government bonds will be around 9.5% post expenses in short term funds and around 11.5% in income funds. Government bond funds will generate around 11.5% as maturities in government bond funds are generally higher than income funds.

Source: http://www.moneycontrol.com/news/fixed-income-bank-deposits/lockto-fds-now-or-find-other-alternatives-quickly_694312.html

First case of conversion of Gold ETF units to physical Gold in 10 gms!

Mr. Ashok Dhamnaskar, an investor from Mumbai has become India`s First Investor to convert ETF units to physical gold. On Thursday April 12, 2012, Mr. Dhamnaskar redeemed his Motilal Oswal MOSt Shares Gold ETF units to get physical gold.

With Mr. Nitin Rakesh, MD & CEO, Motilal Oswal AMC and his team were present to facilitate the redemption process. Overwhelmed Mr. Dhamnaskar said, ?I was looking for the avenue to buy gold at a cheaper price yet with the best of quality for my son`s wedding. But I found it difficult to get both at the same time. I had to pay premium for pure gold or compromise on the gold quality for cheaper price. That`s when my broker invited me to a seminar organized by Motilal Oswal Mutual Fund, where I was introduced to MOSt Gold Shares, which offered quality gold at a better rate than Banks and Jewellers?. Talking about buying MOSt Gold Shares ETF`s units, Mr. Dhamnaskar said, ?It was as easy as buying gold from any other available avenue, as I used a smarter way to buy gold!"

Mr. Nitin Rakesh, while handing over the Gold bar, said, "Our primary objective for designing MOSt Gold Shares was to offer best of both worlds - investment and consumption; and with investors like Mr. Ashok Dhamnaskar, it`s been effectively achieved".

Motilal Oswal MOSt Shares Gold ETF (MOSt Gold Shares) is an open ended exchange traded fund that invests in gold bullion. MOSt Gold Shares is India`s 1st Gold ETF of its kind which seamlessly enables Investment as well as Consumption of Gold for Retail Investors.

With the auspicious occasion of Akshaya Tritiya just around the corner, MOSt Gold Shares offers an excellent opportunity to investors who are looking to buy gold both for investment & consumption. Investors can easily avoid waiting in the queue at banks or the maddening rush at the jewelers on this day. All they need to do is buy units of MOSt Shares Gold ETFs at prices lower than offered by Banks and jewelers and redeem them for pure imported physical gold whenever they want.

MOSt Shares Gold ETF

The NAV of the MOSt Gold Shares unit will track spot price of 1 gm of gold. Valued at spot gold bullion prices, investors can get pure imported Gold at a price lower than banks & jewelers by redeeming the ETF units for physical gold bars in as low as 10 grams across 22 cities in India. It will provide investors a means of participating in the gold bullion market and take physical delivery of gold when needed. MOSt Gold Shares is supported by RiddiSiddhi Bullions Limited (RSBL), as Primary Authorized Participants & Market Makers. RSBL is one of the largest bullion dealers in India.

MOSt Gold Shares is listed on the NSE and BSE. The fund manager of the scheme is Mr. Rajnish Rastogi. The investment objective of the Scheme is to provide return by investing in Gold Bullion.

Source: http://hdfcsec.com/News/NewsDetails.aspx?NewsID=547794&NewsType=M

Wednesday, April 18, 2012

Short-term income funds to get attractive, FMPs to lose sheen

The Reserve Bank of India's move to cut interest rates is likely to make short-term income funds and dynamic bond funds more attractive. It will, however, take away a bit of sheen from fixed maturity plans (FMPs) — one of the most popular debt instruments preferred by rich investors when the interest rates are high. On Tuesday, yields of the 10-year government bonds slipped by about 10-12 basis points to 8.34% post the policy announcement. The yields for money market instruments, on the other hand, fell anywhere between 20 bps and 25 bps.

"With the rate reduction, liquidity conditions in the overnight market will improve. Hence, the yields of all near-maturity money market instruments will come off," said Sujoy Das, head – fixed income, Religare MF.

According to Mahendra Jajoo, CIO, fixed income, Pramerica Asset Managers, the short term yields for money market instruments such as commercial papers and certificates of deposit are likely to come off by 50-100 basis points over the next couple of months. The reduction in short-term rates will benefit investors in short-term income funds. "We have been consistently recommending investors to look at the 1-3 year mid-maturity space given that interest rates are likely to fall. Investors with a moderate risk appetite will therefore merit from short-term funds and retail-focused regular savings funds," said Chaitanya Pande, head - fixed income, ICICI Prudential AMC. Added Das: "Income funds with average maturity of about one year are likely to give superior returns."

Another category of funds that is likely to do well is dynamic bond funds, said market participants. While interest rates seem to have peaked, it is difficult to determine when the next rate cut will be. Uncertainties with respect to inflation, global economy and currency movements are likely to persist. So, there is likely to be a fair amount of volatility in the money market, as well as government and corporate bond markets. Dynamic bond funds are well-suited to ride this volatility as they have a flexible duration and can invest in a mix of instruments, said industry observers. Dynamic bond funds are also ideal for those who don't want to take a call on interest rate movements.

The reduction in interest rates is likely to make FMPs less popular. "FMPs will become slightly less attractive because of the steep rate cut but there will still be a market for these products given the high interest rates," said Das. One-year FMPs that were giving returns of 10%-plus in March are now likely to fetch 9.5%, said market participants. Between October and March this year nearly 500 FMPs were launched by fund houses.

Source: http://www.financialexpress.com/news/shortterm-income-funds-to-get-attractive-fmps-to-lose-sheen/938035/0

RBI cuts repo rate by 50 bps; sees little room for more

The Reserve Bank of India (RBI) cut rates on Tuesday by an unexpectedly sharp 50 basis points to boost the sagging economy, but warned there was limited scope for more cuts, with inflation likely to remain elevated and growth on track to pick up, albeit modestly.

The RBI, which was tightening monetary policy long after central banks elsewhere began easing, lowered its policy repo rate to 8.00 percent, compared with expectations for a 25 basis point cut in a Reuters poll.

"RBI is indicating that there is a limit for further rate cut expectations, and I think they are pretty much done with further rate cuts this year," said Rajeev Malik, economist at CLSA in Singapore.

The RBI also warned that India's current account deficit, which widened to 4.3 percent of GDP in the December quarter, is "unsustainable" and will be difficult to finance given projections of lower capital flows to emerging markets in 2012.

The rupee has been under pressure as foreign investors worry about persistent inflation, a yawning current account gap and fiscal indiscipline on the part of New Delhi, prompting concern about the country's balance of payments.

Investors and companies cheered the rate cut, with bond yields and swap rates falling sharply, although the rally was capped by expectations for few further cuts in the near term. The BSE Sensex ended 1.2 percent higher.

Some RBI-watchers said Tuesday's move was risky given the potential for resurgent inflation.

"The RBI was clearly itchier to cut policy rates than expected, but the 50 bp cut may have been a bit too premature and aggressive, in our view. If that turns out to be the case, it could hurt RBI's credibility while doing little to raise growth on a sustained basis," HSBC economist Leif Eskesen wrote.

RBI Governor Duvvuri Subbarao said the deeper-than-forecast cut is intended to ensure that banks cut their lending rates soon. Indian banks have been reluctant to lower lending rates amid still-tight liquidity and high deposit costs.

The country's largest lender, State Bank of India (SBI.NS) said later on Tuesday that it would cut rates on some loans that have high interest rates, while ICICI Bank (ICBK.NS) said it would reduce deposit and lending rates. Neither were more specific.

Economists have in recent weeks been scaling back their rate cut forecasts. Nomura said it expects the RBI to hold off from cutting rates at its next reviews in June and July, and forecast just one more 25 bps rate cut in 2012. Citigroup expects just one more rate cut in the current fiscal year.

India's economy grew by 6.1 percent in the December quarter, its slowest in almost three years, but the central bank had been reluctant to begin cutting rates as inflation remained elevated.

Subbarao maintained a cautious view in his policy statement.

"It must be emphasised that the deviation of growth from its trend is modest. At the same time, upside risks to inflation persist. These considerations inherently limit the space for further reduction in policy rates," Subbarao said.

CAUTIOUS VIEW

The RBI raised rates 13 times between March 2010 and October 2011 as it struggled to contain price pressures, with headline inflation at one point accelerating into the double digits as the cost of fuel and food soared.

Headline wholesale price index eased slightly to 6.89 percent for March but was still above expectations, as a drop in manufacturing inflation was offset by a surge in food inflation, data showed on Monday.

On Tuesday, the RBI left unchanged the cash reserve ratio (CRR), the share of deposits that banks must hold with the central bank, at 4.75 percent, in line with expectations, after cutting it by 125 basis points since January to ease tight market liquidity.

Subbarao said liquidity conditions are moving towards normal after several months of acute shortages of cash in the banking system, but also said the RBI would take "appropriate and proactive" steps if needed to revive liquidity.

The central bank said its baseline expectation for gross domestic product growth in the fiscal year that ends in March 2013 is 7.3 percent, compared with an expected 6.9 percent in the just-completed year.

It expects headline inflation to end the year at 6.5 percent, with little deviation foreseen during the year.

BOTTLENECKS

Sluggish capital investment has exacerbated bottlenecks in the Indian economy, bringing down its capacity for non-inflationary growth to 7.5 percent, according to Subbarao, from 8.5 percent before the global financial crisis.

He reiterated the need for the government to cap its subsidy burden, which led to a bloating of the fiscal deficit in the recent fiscal year to 5.9 percent of GDP.

The weakened government has been unwilling to pass along higher global oil prices to end-users, but pressure on the fiscal deficit is expected to force it to do so.

"It is imperative for macroeconomic stability that administered prices of petroleum products are increased to reflect their true costs of production," Subbarao said.

Corporate India, dejected over government inaction that has thwarted capacity expansion, has long clamored for rate cuts.

Siddhartha Roy, economic adviser at the Tata Group, the software-to-steel conglomerate that is India's biggest business house, said Tuesday's rate cut is welcome but more is needed.

"First we need more rate cuts to the tune of around 150 basis points in order to make the real interest rates realistic. Then, the fiscal side needs to be controlled to prevent crowding out of the private sector and available liquidity is well distributed," he said.

Source: http://in.reuters.com/article/2012/04/17/rbi-rate-cut-repo-rate-crr-subbarao-gdp-idINDEE83G02Z20120417

No big hikes, bonus for mutual fund industry staff this year

Four CEO exits in a month, abysmal pay hikes, ban on bonuses and whispers of downsizing - the Indian mutual fund industry is going through one of its roughest patches in a decade.

Fund house managements are taking a hard look at slow AUM (asset under management) growth, scheme underperformance, low profits and rising costs.

Boards of trustees of several MFs are pushing for pay cuts, skipping bonuses, increasing variable component in salaries and forewarning employees of a possible "right-sizing".

According to industry sources, which include views from over half-a-dozen domestic fund houses, and a few leading HR consultants, the best and the biggest domestic fund houses are offering just about 9-12% increments to top performers. Bonus payouts, which are performance-linked, are being kept as low as 12-20% of salaries.

"There's little to reward employees this year," said the CEO of a bank-sponsored fund house.

March and April are important months for fund companies that follow a "two-year lap calendar". Fund houses strive hard to maintain high asset bases and 'NAV levels' in March as it becomes a reference point for the following year.

However, average AUM of the Indian fund industry fell over 2% to 6.64 lakh crore in the March quarter. Asset bases of fund houses like IDBI Mutual, JM Mutual, Kotak Mutual Fund, L&T Mutual and Religare Mutual, among others, dipped 10-35% during the three-month period starting January.

"The sales and marketing departments have not been able to bring in investors; fund managers have also not showcased any extraordinary performance," the person said.

A few corporate marketers have managed to bring in money; they'll be given a 25% bonus and small increment," added the person.

In the bullish years of 2006 and 2007, even mid-sized fund houses paid bonuses in the range of 40-50%; increments were in the range of 20-30% in those years, as per data sourced from various HR consultants.

"Increments and bonuses in asset management companies have fallen significantly this year. Fund houses have failed to grow their assets or put up good fund performance; it's not going to be a very rewarding time for fund professionals," said E Balaji, MD & CEO, Randstad India.

Boards of most fund houses are now trying to reduce their operational costs. Many of them are planning to "cut flab" in their marketing, sales and other support departments.

According to Balaji, most fund houses are only resorting to "selective replacement hiring" to fill up senior-level vacancies. "Mutual fund and investment banking have been the worst-hit trades in the financial services industry. We may see a downsizing this year. Cuts may come initially in out-of-flavour verticals like aviation, mining and renewable energy," said R Suresh of Stanton Chase.

In the last one year, brokerages made news for sacking employees and folding up bases in smaller towns as trading volumes shrank.

The crisis in mutual funds came to the fore with the exit of four CEOs in quick succession. Piyush Surana of Daiwa Asset Management, Arindam Ghosh who headed Mirae Mutual Fund, and Rajan Krishnan of Baroda Pioneer Mutual Fund have resigned in the past three weeks.

Sameer Kamdar, who was supposed to head ASK Asset Management, resigned last week after a two-year wait for Sebi approvals. "We're not sure what's making them leave... the real reasons could be pressure on performance, cost-cutting or differences in strategies," Balaji of Randstad India said.

According to the CEO of a large corporate fund house, FY12 was probably the worst year in the history of funds in India.

"The industry was hit badly by frequent regulatory changes, volatile equity markets, disinterested distributors and outflow of bank money from debt schemes. We missed all our targets last year," he said.

Source: http://economictimes.indiatimes.com/news/news-by-industry/jobs/no-big-hikes-bonus-for-mutual-fund-industry-staff-this-year/articleshow/12709546.cms?curpg=2