Mutual Fund NEWS Group: August 2012

Thursday, August 30, 2012

Reliance Capital launches SIP through SMS

Investors will be able to start a SIP by sending an SMS through their registered mobile numbers

Reliance Capital Asset Management (RCAM) today launched a systematic investment plan (SIP) in mutual funds through SMS under its 'Invest Easy' initiative.

As per the initiative, investors will be able to start a SIP by sending an SMS through their registered mobile numbers.

"SIP through SMS is the latest service offering from RCAM. This feature will make it cost efficient and convenient for over 900 million mobile users across the country to participate and make investments in mutual funds," Reliance Capital Asset Management chief executive Sundeep Sikka said in a statement.

This new feature has been launched under the company's 'Invest Easy' initiative, which aims to use technology for making it convenient for customers to invest in mutual funds.

"We already have over 2.5 lakh customers under the 'Invest Easy' initiative that allows investors to transact online on the net, on their mobiles, through call centres and now using SMS. A large number of our customers are already migrating to the online platform and we see this number growing exponentially through this facility," Sikka said.

He said the company would strengthen its reach among small-ticket investors through this initiative.

Source: http://www.business-standard.com/india/news/reliance-capital-launches-sip-through-sms/184565/on

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Retention, not exit, will help fund houses

The already-struggling mutual fund industry has a new headache. According to the Securities and Exchange Board of India's latest guidelines, the exit load that fund houses charge will be ploughed back into the scheme, and not to the balance sheet, as was done earlier.

This, on one hand, will improve the net asset values for investors who stay in the scheme. But fund houses' balance sheets will lose out on one component of income.

While details of the guidelines are yet to be notified, industry players are already talking about reducing upfront fees to ensure there isn't an adverse impact on their profit and loss accounts.

What will, of course, help them is the rise in the total expense ratio by 20 basis points, and an additional 30 basis points if the incremental increase in assets is from smaller cities.

According to the chief marketing officer of a large fund house, the net impact will be marginal but that can be taken care of, if industry adopts the new business model to bring down upfront commissions.

The exit load was meant as a deterrent for investors so that they did not leave the scheme in less than a year, in case of equities. Normally, one to two per cent is imposed based on the tenure of investment. "But exit of investors before investment duration also benefited AMCs as they used to get exit load amount besides helping distributors make money because of the churning," he further explains.

"Though prima facie it appears that this arrangement of routing the exit load back to schemes may impact us. But since, the regulator has allowed us to charge extra 20 basis points and shifted the service tax out of the total expense ratio the impact will lessen," says the chief executive officer (CEO) of a small-sized fund house who did not wish to be named. Already, only 15 out of 44 players made profits in 2011-12. Of this, four houses had profits of less than Rs 10 crore.

Fund houses have a bigger dilemma – whether to reward entry into schemes through an upfront commission or hike the trail commission to reward staying invested for a longer time.

"In today's context, if I pay high upfront commission, what's the guarantee that investors will remain with me. And, in case he moves out within a year, exit load collected will go to schemes and not the AMCs. So, I would lose the upfront as well as the exit load. Rather, I would increase trail commissions and reduce or phase out upfront fees," added the CEO.

Most of the chief executives echoed this. Moreover, this kind of probable strategy is also in line with what majority of independent financial advisors (IFAs) want. If trail goes up, distributors will be encouraged to retain and service their clients for longer duration benefitting all stakeholders of the industry. Currently, on an average upfront fee ranges from 10 bps to 50 bps while trail commission is around 30-80 bps.

According to independent industry experts, large fund houses may not find it difficult to continue with higher up-front payouts as they are relatively better placed than smaller fund houses and new entrants in the fund management business.

In FY12, overall commission payouts to mutual fund distributors were 5 per cent higher at Rs 1,860 crore against Rs 1,770 crore in FY11.

Source: http://www.business-standard.com/india/news/retention-not-exit-will-help-fund-houses-/484834/

Saturday, August 25, 2012

Reliance Mutual Fund Invests In HT Media

Relaince Mutual Fund has invested around r13.05Cr in HT Media. The fund acquired 15,00,000 shares at R87 per share of HT Media through bulk deal on BSE.

Reliance Mutual Fund already holds 2.83% stake through Relliance Growth Fund account.

HT Media Ltd is an Indian mass media company based in Delhi, India. It publishes Hindustan Times, an English daily, and Mint, a business paper. It operates 19 printing facilities across India with an installed capacity of 1.5 Mn copies per hour.

HT Media had bought social networking site DesiMartini through its online subsidiary Firefly eVentures in 2007 and invested in Micro Technologies through 5 lakh CCD's worth R20 Cr.

Source: http://www.dealcurry.com/20120824-Reliance-Mutual-Fund-Invests-In-HT-Media.htm

Friday, August 24, 2012

Benefit for direct investors in small MF schemes

Sebi guidelines will help the financial savvy and the ones still finding their feet in the stock markets.

The equity market regulator, the Securities and Exchange Board of India, has made it more profitable for direct mutual fund (MF) investors. In its recent guidelines, it has proposed to keep two net asset values (NAVs) in mutual fund schemes – one for the direct investor and another for the ones who come through distributors.

But, before going for the direct route, undertake a cost-benefit analysis. Though, the final difference in costs between a direct investor and one going through a distributor will only emerge when the numbers are actually declared by the fund houses, a little bit of number crunching can give us a ball park figure.

Currently, mutual funds charge up to 2.5 per cent as expenses. Add another 20 basis points to that and the investor will be paying around 2.7 per cent – the average expense for a smaller scheme of Rs 500-700 crore will be to the tune of 2.4 per cent.

Of this, for equity funds 1-1.25 per cent is charged as investment management fees, registration and transfer charges, custodian charges, investor communication (for printing half-yearly results), trustee fee, etc. All these will come to around 1.75-2 per cent. After all these expenses, the fund house will have 40-65 basis points that could be passed on to the investor.

For a larger size fund of Rs 3,000 crore, the numbers would be lower. The expense ratio for such schemes is to the tune of two per cent. So, direct investors will stand to gain very little in schemes that are managing large amounts. The savings will be from trail commissions that are paid to the distributors.

For someone who is investing Rs 1 lakh in an equity mutual scheme, the savings would be around Rs 500-700 annually. Direct investors were anyway exempt from paying any entry load (during the entry load regime). However, despite this benefit, still 95 per cent of mutual fund investors buy units through a distributor such as a bank, brokerage, financial planner and so on, say experts.

"At present, people don't take the direct route because choosing a suitable mutual fund scheme and doing the necessary paperwork on their own is still quite a cumbersome process," explains Jaideep Bhattacharya, managing director, Baroda Pioneer AMC.

From a retail investor's perspective, there will be some savings. But what one needs to consider is – can they take the call on what is the best fund to invest in? The question is important because many put in money because some scheme is performing exceptionally well for a short period. And then get trapped in bad times. If you are unsure about the scheme, it is important that you should take professional help even at a cost.

Another move that will expand the investor base, is allowing people without a PAN card or a bank account to invest cash up to Rs 20,000 in MF schemes. At the moment, you need identity proof and bank account for any investment-related transactions. This move, fund experts say, will help people in Tier-IV, V and even VI cities.

Amar Ranu, senior manager (third party products), Motilal Oswal Private Wealth says the ones that are likely to take this route should invest in balanced funds, since they would be first-time investors. Within balanced funds, monthly income plans (MIPs) are a good option.

Investors can opt for both combinations – 65 per cent equity or debt – depending on their age and risk profile. In case of 65 per cent equities, the downside is higher in the present market conditions. In good market conditions, they do better than 65 per cent debt products.

Source: http://www.business-standard.com/india/news/benefit-for-direct-investors-in-small-mf-schemes/484240/

Contrarian view: Domestic institutional investors see opportunity in Bharti Airtel, Maruti Suzuki stocks

India's institutional investors have been buying significantly into Bharti Airtel and carmaker Maruti Suzuki over the past six months, although the stocks were heavily beaten down. They, apparently, prefer to take a contrarian bet on these companies at a time when their valuations are at historic lows.

Shareholding of domestic institutional investors such as mutual funds and insurance firms in Bharti rose to 8.4% from 8.2% in the first six months of 2012, with mutual funds being the main acquirer. This was despite India's largest telecom company battling a slide in margins, slowing revenue growth in its African unit and a spate of downgrades by brokerages.

Fund managers who spoke on condition of anonymity, because they are barred from discussing specific stocks, said they are looking at a contrarian investment opportunity in Bharti stock, which sank to a near six-year low on Wednesday.

Saurabh Mukherjea, head of equities at Ambit Capital, believes Bharti's stock price will firm up in the coming quarters. Sankaren Naren, CIO, ICICI Prudential Asset Management, reckons that the entire telecom industry is an attractive investment bet considering that there is still latent demand for telecom services in the country.

In the first six months of the year, institutional investors moved out of quite a few heavyweight stocks as many companies, especially capital goods firms, have faltered in the face of policy paralysis and lack of approvals stalling infrastructure projects.

State-run Bhel, a favourite with mutual fund managers earlier, is now shunned. The company's June 2012 quarter results showed that at Rs 1.33 lakh crore, its order backlog was at its lowest since September 2009.

After selling Bhel, many institutional investors have bought into L&T. However, Bhel's dirt-cheap valuations appear to have attracted some foreign institutional investors and local banks, which have raised their holding in the company.

While FII holding in Bhel rose from 12.2% to 12.9% during the first half of 2012, local banks have increased their stake from 1% to 4.6%. This comes as a bit of a surprise considering that earnings visibility for Bhel is quite weak, with the current order backlog providing it comfort for just a couple of years. What has prompted local fund managers to raise their exposure to L&T is its well diversified business model, growing global presence and surprisingly good set of financial numbers over the past two quarters.

The combined shareholding of local institutional investors and foreign portfolio investors in Bhel rose to 52.5% from 51.6% during the first half of the year. L&T has an order backlog of over Rs 1.53 lakh crore, its highest till date.

With the consumption story still strong, fund managers are fairly bullish on the automobile sector. What has changed in the past few months is their choice of companies. While local fund managers are more optimistic when it comes to two wheeler companies such as Hero and Bajaj Auto, despite their muted sales volumes, foreign portfolio investors have reduced their exposure to both these companies because of slowing rural consumption, a weak monsoon and tax related issues in some export markets such as Sri Lanka.

FII shareholding in Hero and Bajaj has dropped by about 0.56 and 1.25 basis points, respectively, while the holding of local institutions rose by similar margins.

In the passenger car segment, while mutual funds raised their stake in Maruti Suzuki from 3% to 3.8% given its strong product portfolio, Tata Motors' global presence has made it an attractive investment for FIIs who have increased their stake from 24% to 27.7% in the January-June 2012 period.

In stark contrast to the belief that Maruti may have seen a flight of investors after the labour strife at Manesar, many local institutional investors have perceived it as a contrarian investment opportunity, and are gradually increasing their stake. "Many large investors believe that the Manesar issue was overplayed and see the panic-selling as a great buying opportunity," says Saurabh Mukherjea of Ambit Capital.

Source: http://economictimes.indiatimes.com/markets/stocks/stocks-in-news/contrarian-view-domestic-institutional-investors-see-opportunity-in-bharti-airtel-maruti-suzuki-stocks/articleshow/15626175.cms?

Thursday, August 23, 2012

Canara Robeco Mutual Fund to hire 2 managers for equity assets

Canara Robeco Mutual Fund is said to be roping in two fund managers to manage its equity assets. The mutual fund industry is abuzz with talk that the fund is hiring Ravi Gopalakrishnan, former chief investment officer of Pramerica Asset Management and Krishna Sanghavi, former fund manager with Kotak Mutual Fund.

Such talk comes in the wake of Soumendra Nath Lahiri quitting Canara Robeco to join L&T Mutual Fund. The buzz in the industry is that Canara Robeco is hiring two fund managers to ensure it is not stranded if one of them quits.

In the past couple of years, two fund managers have moved out of Canara Robeco. Replacing Gopalakrishnan at Pramerica Mutual Fund is BP Singh, who was chief investment advisor at Baer Capital-promoted Beacon India Alpha Equity Fund — an India-focused hedge fund.

Prior to his stint at Beacon, BP Singh was heading equity investments at Deutsche Asset Management. Senior officials at both Canara Robeco and Pramerica Asset Management declined to comment.

Source: http://economictimes.indiatimes.com/news/news-by-company/corporate-announcement/canara-robeco-mutual-fund-to-hire-2-managers-for-equity-assets/articleshow/15610661.cms

Wednesday, August 22, 2012

Indian funds are the cheapest and cleanest in the world

A fund will have three kinds of costs—entry, ongoing and exit. By banning entry loads, India has collapsed all costs into the annual cost and the exit load

Now that the dust has settled over last week's announcements by the Securities and Exchange Board of India (Sebi) and the merits or otherwise of the hike in mutual fund costs have been chewed over, two issues have emerged that still need a comment. One, that Indian funds are the most expensive in the world. Two, that the changes are pro-big fund houses.

The 50 basis point (bps) hike (30 bps for non-metro penetration and 20 bps to take care of the exit load clawback getting ploughed back into the scheme) in expense ratios will bring the entry level cost of an equity fund to 3% a year. Funds are allowed to charge expense ratios on a sliding scale. The first Rs.100 crore of assets under management will now be charged 3% (2.5% earlier), the next Rs.300 crore 2.75%, the next Rs.300 crore 2.5% and all assets after Rs.700 crore will be charged 2.25%. If the average cost was 2% earlier, it will now be 2.5%. Let's look at what the rest of the world charges: the median annual recurring cost in the US is 0.94%, in UK 1.67%, China 1.3% and South Africa 1.47%. Remember, we're talking about managed funds and not passive index huggers. At 2.5% annual cost, India is indeed the most expensive. But that is only half the truth; to see the total impact of cost, we need to build in all other costs as well. A fund will have three kinds of costs—entry, ongoing and exit. By banning entry loads, India has collapsed all costs into the annual cost and the exit load. If we build in the 1% exit load on money that leaves an equity fund before 365 days, we get a total cost of 3.5%. Now look at what the US and UK charge. The US, with its three share classes, has costs that range from 1.18% to 7.1%. The UK funds cost an average of 6.67% a year.

Not only are Indian funds the cheapest, they are also the most transparent. Costs in other markets such as the UK and US are not so easy to define. The US, with its various share classes and cost sub-categories, is almost impossible to navigate for an average investor. The UK too seems not to define costs as well. Says financial planner Nick Cann, chief executive of the UK-based Institute of Financial Planning: "The annual management charge on mutual funds in UK varies quite a lot. There's no set minimum and maximum, 1.5% per annum is pretty typical although 0.5% of that is usually paid away to the adviser (if there is one). Some charge more (specialist funds usually go upto about 2%), others charge less although few go below 1% per annum." Maybe it's time we stop beating ourselves up and look at mutual funds as the lowest cost, transparent vehicle for a variety of retail investment needs.

The second crib is around the smaller asset management companies (AMCs) getting short-changed by linking the hike in expense ratios to gathering non-metro business and for the exit load clawback rise in expense ratios. The argument is that this will benefit the larger fund houses. Two points here. One, smaller AMCs are represented on the mutual fund committee and need to use that forum to put their voices across. Two, when a business is started there are no guarantees getting handed out. What prevents a new AMC from coming in with a business plan that looks at focusing on a non-metro region rather than trying to replicate the high-cost 15-metro-heavy existing business model of the large AMCs? The mutual fund industry is more than 20 years old and those that have been there for those many years will have an advantage over the newcomers. I don't understand why the regulator should give sops to the newbies to make their business profitable.

End note: Out of all the debate, there may emerge some things that may need a tweak. One example is the exit load calculation. The way the numbers are done right now, it seems that the fund houses' benefit will be a multiplier to that of the investors. Exit load calculations need to be seen on incremental assets gathered by the fund and not on to the total corpus. An update a year later will also help in mapping out how this change has impacted the industry and the investor. Since we know what we are trying to map, possibly the data collection could happen on an ongoing basis rather than defining the data metrics a year later.

Source: http://www.livemint.com/2012/08/21213341/Indian-funds-are-the-cheapest.html

Small town financial advisors not enthused by Sebi's moves

Independent Financial Advisors seek higher trail commissions, mutual fund executives agree.

Independent Financial Advisors (IFAs), a strong link between asset management companies (AMCs) and potential investors, especially in the smaller cities of the country, are not excited with the tweaks made by the capital markets regulator, Securities and Exchange Board of India (Sebi) last week to increase penetration of mutual fund products. Rather, they termed the steps as a "drop in the ocean".

In its quick check with small IFAs spread across the country, Business Standard, found out that majority of financial advisors have lost a significant chunk of their revenues from selling mutual funds. Though frustrated, they said they wanted a clear and concrete road-map for the industry.

Sanjeev Sharma, an Indore-based IFA, says, "Amfi aur Sebi ko cheezein clear rakhni chaahiye. Jab aap kuchh change karo to hamein samay lagta hai adjust karne mein. Ek saal beeta nahi ki fir se parivartan ho jata hai, jo sahi nahi hai (Amfi and Sebi should keep things clear. It takes time to adjust in a new business model, but rules get tweaked in a year which is not good)."

The sentiment is reflected by a Patna-based advisor Manu Mehrotra, who says, "I have upgraded my office and invested in technology to service my clients but people are used to free financial advice which is not helping us. By increasing 30 bps (basis points) in expense ratio, it's not going to increase penetration of mutual fund products." He adds that investors must pay as advisors need to be remunerated for their services.

Last week, Sebi allowed AMCs to charge an extra 30 bps as expense ratio provided the new fund flows from beyond the top 15 cities make up 30 per cent of the overall assets.

Though none of the AMCs have yet called upon IFAs about how they plan to take things further, the latter said they would prefer increment in their trail-commissions rather than a rise in upfront commissions.

Bikaner-based Suresh Modi, who lost more than 80 per cent of his mutual fund business over the last few years, says, "I get 5-10 basis points (bps) as upfront commission. But my trail commission is around 50 basis points. It would be better if AMCs increase the trail to 80 bps." Other advisors echo Modi's opinion. Moreover, they say that if trail goes up they would like to retain clients for a longer period of time, which will be good for all stakeholders.

Currently, on an average, upfront commissions to IFAs range between 10 bps to 50 bps (though in some cases it is as high as 1.5 per cent) while the trail stands in the range of 30 bps to 80 bps.

The demand by IFAs for higher trail has also found takers in the industry. Chief executives say they will be in a better position to take a call on the same once Sebi brings out the fineprint of the measures announced last week.

Sanjay Sachdev, chief executive officer (CEO) of Tata Mutual Fund, says, "I am in favour of higher trail-commission. Though, as of now, I cannot make any commitment till things get clear." Agrees Akshay Gupta, CEO of Peerless MF.

According to Dhirendra Kumar, chief executive of Delhi-based mutual fund tracking firm Value Research, "Higher trail-commission is quite a legitimate demand from IFAs. It will help retain funds for longer period. I believe, distributors should not only get higher trailing commissions on the new flows but also on the existing fund mobilisation."

Indore's Sharma, rightly points out, "We will keep trying to adjust with new norms and service our clients for longer-term if trail goes up."

Source: http://www.business-standard.com/india/news/small-town-financial-advisors-not-enthused-by-sebis-moves/483966/

Tuesday, August 21, 2012

Sebi’s new steps may ring in a Rs 775 crore windfall for mutual funds

While there has been wide criticism on plans to re-introduce entry load on mutual fund investments, a look at the steps taken by the Securities and Exchange Board of India (Sebi) in its board meeting on Thursday leads to the conclusion that even a "regressive" measure like the introduction of entry load of 1 per cent could have actually been better for investors than the proposal for the additional TER (Total Expense Ratio) of up to 50 basis points (bps) that finally passed muster.

Through the twin measures (additional TER of 30 basis points and 20 bps respectively) that is slated to push the expense ratio up by an aggregate of up to 50 bps, Asset Management Companies (AMCs) stand to make additional revenue of around Rs 775 crore per annum on the total outstanding equity assets under management of Rs 1,55,132 crore as on July 31, 2012. However, if Sebi had chosen to introduce an entry load of 1 per cent on the new sales during the year the burden on investors was likely to have been far lower.

According to the data available with AMFI (Association of Mutual Funds of India), total equity sales during the last 12 months stood at Rs 42,570 crore and a 1 per cent charge on that comes to Rs 425 crore, which is significantly lower than the Rs 775 crore that will go in the form of higher expense ratio from the entire equity AUM.

A hike in expense ratio is more dangerous also because in the case of entry load, 1 per cent would have gone only on the investment amount during the year but in the case of higher expense ratio, it will go on both new and old investment, which will only compound the cost for investors every year. Since mutual fund is a long-term product for 5, 10 or 20 years, an investor will end up paying a far higher amount over the tenure of investment.

Consider this: If you invest Rs 1 lakh every year for 20 years and the investment grows at 10 per cent per annum, at an expense ratio of 2 per cent, your total outgo stands at Rs 8.6 lakh over 20 years but at an expense ratio of 2.5 per cent it will jump to 10.75 lakh. Thus the burden of this additional expense ratio of 50 basis points is not a few thousands but Rs 2.15 lakh over the tenure of investment.

A higher expense ratio guarantees an increase in revenue for mutual funds every year whether they take special efforts or not for penetration but an increase in entry load of 1 per cent for sales beyond 15 cities would have ensured that they take special efforts to earn more. Sebi's action is also a blow for existing investors as they will be funding the AMCs for penetrating into smaller cities.

While Sebi has asked AMC's to credit the exit load (charged on early withdrawal) back to the scheme, which is widely seen as a positive move, exiting investors of the scheme will have to hope that more than 20 per cent of the assets are redeemed within one year by certain investors in order to be able to benefit from the same.

For example: If the size of a scheme is Rs 1,000 crore and only 10 per cent of the assets (Rs 100 crore) are redeemed within one year of investment then Rs 1 crore (1 per cent exit load) is collected as exit load and will be added back to the scheme taking the AUM to Rs 901 crore. However, since AMC's have been allowed to claw back an additional TER of 20 basis points on the entire scheme AUM, Rs 1.8 crore (0.2 per cent of Rs 901 crore) will be charged by AMC's from the scheme which will bring the AUM down to Rs 899.2 crore. This is lower than Rs 900 crore that would have been as per old regulations and thus long- term investors in the scheme are at a loss.

However if 25 per cent of the assets are redeemed within one year of investment then with exit load coming back to the scheme, the AUM will stand at Rs 752.5 crore and even if 20 bps are taken out of the scheme by AMCs, the AUM will stand at Rs 751 crore, which is higher than Rs 750 crore as per the old regulations. This will benefit the long term investors.

Source: http://www.indianexpress.com/news/sebis-new-steps-may-ring-in-a-rs-775-crore-windfall-for-mutual-funds/990825/0

Monday, August 20, 2012

Good for industry, good for investors

Investors would be a tad disappointed with the Securities and Exchange Board of India's (Sebi) latest measures to 're-energise' the mutual fund industry. The market regulator has put the onus on them – by increasing some costs marginally– to provide more funds for the industry and distributors.

So, the expense fee is up 20 basis points. Then, there is another 30 basis points if the fund house collects 30 per cent of its money from smaller cities and the service tax incidence will be on the investors – all these will increase the costs for the investor.

While Sebi's changes have received both bouquets and brickbrats, the exact manner in which they will play out, will only be known over a period of time.

On the face of it, the increase in the permissible total expense ration (TER) is a negative measure for investors and a positive one for the asset management companies (AMCs). However, it is not as bad as it seems. First of all it is not applicable on the entire corpus of the scheme. Only that portion which is procured from the smaller centres will be eligible. Hence, the TER will not rise by a uniform 30 basis points for everyone.

The weighted average will be much lower. This is a small price to pay if it achieves the objective of increasing penetration.

The introduction of a new plan for self directed investors plugs a gap which has been existing since January 1, 2008. Self-directed investors (such as ones who invest through a mutual fund's website) have often asked why they should bear the trail commission component in their Net Asset Values when they are investing on their own, This change will remedy that unintended consequence. This will spur more investors in the top 15 cities to invest on their own. After all, they are the ones supposed to be more enlightened and more at ease with technology.

Easing the process for enrolling distributors should have a positive effect in terms of enrollment in the case of smaller centres in the long term. However, increasing the number of educated but 'mutual-fund illiterate' agents will actually increase the training costs for funds. After all, selling a relatively complex product like a mutual fund is different from selling Government guaranteed savings products such as National Savings Certificates.

Again, different levels of certifications will not be of much help if the consumers / investors are unable to discern one from another. This is only going to help the cause of educational institutes who provide coaching for such certifications. A reduction in the fees for the exams and registration, is a good, albeit, not critical proposal. After all, serious distributors will keep their registration alive, despite the fees and the ones who are not serious will not continue even if there are no charges.

The service tax and brokerage aspect is not such a big issue as it is being made out to be. Across industries providers are passing on the service tax to consumers, who are paying up without a murmur. To top that, here the tax is levied only on the fund management charges and not on the entire expense ratio. Hence, the final impact on the investor should not be significant. To offset this, the cap on brokerage that a scheme pays, is bound to help the cause of investors.

The relaxation in the requirement for PAN card for applying for mutual funds, appears to be a cosmetic move. It is unlikely to result in hordes of farmers queuing up to purchase units by paying in cash. But more pertinent, there is no clarity on how the redemption proceeds will be processed. It is highly unlikely that it will be in cash. This may be a bigger impediment than the PAN Card for such prospective investors.

Mis-selling and churning are widespread evils. However, as in the case of insider trading, it is difficult to pin down offenders who mis-sell. Usually, agents make clients sign on undertakings that they have understood the features and are cognisance of the various risks involved. If at all, push-comes-to-shove, agents could always hold up that document as evidence that they were in compliance.

The additional 20 basis points towards penalty for early redemptions may not really deter inveterate traders, as the figure is fairly insignificant. However, it is a non-event for investors who remain invested.

A slew of measures have been proposed, aimed at safeguarding the investor against wolves in sheep's clothing. Unfortunately, there are so many stratifications available within the proposals, that virtually everyone will be eligible to serve as an advisor. Ultimately, investors will go to the ones they trust, irrespective of whether the Regulator believes they are eligible or not. The only puzzling thing is the point which states that people who give advice in good faith are exempt. This could be the Achilles heel of this section.

In a nutshell, the proposals are a step forward. However, revival of the industry may depend as much on market sentiment, as on regulatory forbearance. I only hope retail investors do not flock to mutual funds after the stock market has already enjoyed a stellar run. In that case, no amount of regulation could prevent them from suffering loses whenever the markets undergo the next bout of correction.

But given the thrust of Sebi, it proves that the low retail penetration is the effect of the apathy of funds and distributors and not the effect of the ban on entry loads.

As mutual funds had limited personnel, there was an over-reliance on distributors to garner retail and High Net Worth (HNI) monies. The distributors, in turn, concentrated on the easier pickings (read top cities) which in turn led to sub-optimal nationwide penetration. These moves will hopefully make things simpler.

Source: http://www.business-standard.com/india/news/good-for-industry-good-for-investors/483643/

All you need to know about Sebi's market reforms

In a move to boost the capital market and the mutual fund industry, the Securities and Exchange Board of India (Sebi) has come up with a slew of measures to increase retail participation, give more flexibility to mutual funds and companies issuing initial public offers and encourage distributors.

After days of speculation, the regulator finally announced steps to get the mutual fund industry out of the woods by allowing higher charges towards expenses and better cost management. Some of these steps may, however, result in higher cost for mutual fund investors.

Fund houses can now charge a 0.20 percentage point higher fee (also called expense ratio) towards different expenses. This is to compensate them for forgoing the exit load, which was earlier used to pay for distribution and other costs.

The entire exit load will now be ploughed back into the scheme. Exit load is usually charged for redemptions within a year of investment. But some funds charge it for a longer period.

Mutual funds can also charge an additional 0.30 percentage point expense ratio for new inflows from Tier II and Tier III cities (other than top 15 cities) if 30 per cent new inflows come from these cities. This is aimed at promoting mutual fund penetration in smaller towns and cities.

At present, mutual funds can charge up to 2.5 per cent expense ratio.

Sebi has also removed the sub-limits on expenses under different heads. At present, mutual funds can allocate a maximum of 1.25 per cent as fund management charge, 0.5 per cent as distribution charge, etc. However, with no sub-limits, they will be free to allocate the 2.5 per cent expense ratio the way they want to.

This is a pragmatic move, says Waqar Naqvi, chief executive officer, Taurus Mutual Fund.

The regulator has also exempted mutual funds from paying service tax. Now, the service tax (12.36 per cent) will be borne by investors.

However, to encourage direct investments, a lower expense ratio is proposed for direct investors.

In another important move, Sebi has proposed that units will be allotted at the net asset value of the day on which the payment is realised. This is for investments above Rs 2 lakh.

"Corporate investors usually make pay through cheques, which take at least a day to be encashed. However, they are allotted units at the NAV of the day on which the request is made, thus allowing them an extra day's benefit, at the cost of existing investors," explains Surjit Mishra, executive vice-president and national head, mutual funds, Bajaj Capital.

RETAIL PARTICIPATION IN IPOs
The capital market regulator has also announced measures to increase retail participation in the primary/IPO market.

Now, investors can apply for initial public offers (IPOs) through electronic mode as well. Stock exchanges have been asked to make application forms available on their websites. Brokers uploading the electronic applications form will be compensated by the companies.

To ensure allotment to more investors , it has been proposed that retail investors get a minimum number of shares irrespective of their application size. The minimum application size for all investors has also been increased to Rs 10,000-15,000 from the existing Rs 5,000-Rs 7,000.

"After the IPO application, retail investors were unsure of the allotment. As the minimum application size has been increased along with assurance that allotment will happen to the extent possible for all investors, interest in the primary market may be rekindled as many investors had turned cynical towards applying for good issues," says P Phani Sekhar, fund manager, PMS, Angel Broking.

To allow investors take more informed decisions, the regulator has said that the company issuing IPOs must announce the price band of the issue at least five working days before the issue opens as against two working days at present.

Easing the norms for follow-on public offers (FPO), Sebi has reduced the requirement of average free-float market capitalisation from Rs 5,000 crore to Rs 3,000 crore. Besides, to help companies comply with the 25 per cent minimum public shareholding norm, Sebi has allowed companies to do so through rights and bonus issues.

Change in issue size to the extent of 20 per cent of the original issue can be made without the need for re-filing with Sebi. This will save a lot of time and resources in mobilising IPO proceeds.

Source: http://businesstoday.intoday.in/story/sebis-mutual-fund-ipo-reforms-all-you-need-to-know/1/187300.html

Garnering 30% assets from smaller cities a tough task, say MFs

The permission to charge an additional 30 basis points (bps) as total expense ratio (TER) on sales beyond the top 15 cities may look attractive, but mutual fund industry executives have taken it with a pinch of salt.

"It's an uphill task which demands concerted and sustained efforts," say officials.

In its statement, the Securities and Exchange Board of India (Sebi) had said: "AMCs (asset management companies) will be able to charge 30 bps if the new inflows from these cities/ towns are minimum 30 per cent of the total inflows. In case of lesser inflows the proportionate amount will be allowed as additional TER."

Barring a few top fund houses, most others do not enjoy widespread presence outside the top 10 cities. Moreover, according to the latest statistics, close to three-fourths of the overall industry's assets pour in from the top five cities—Mumbai, Delhi, Bangalore, Kolkata and Chennai. And after including the next top 10 cities, the industry gets a whopping 87 per cent of its assets. (see table)

A day after Sebi made its announcements, industry executives said this was no big relief for the industry. Rather, they term measures "half-baked".

According to Akshay Gupta, chief executive officer, Peerless MF: "Arguably, they (Sebi) could have done better. Present situation warrants well-defined steps to revive the sagging fortunes of the industry."

Executives told Business Standard it was unlikely that fund houses immediately start opening branches or point of sales across the country to "push" mutual fund products. Potential investors in small towns are still interested in real estate and gold, they say. "What we can do is leverage on our tie-ups with national distributors, mainly banks. Fund houses may go ahead for tie-ups with banks to strengthen their distribution channels," explained the chief marketing officer of a mid-sized fund house.

Jaideep Bhattacharya, managing director, Baroda Pioneer MF, says: "It's not going to be easy going beyond the top 15 cities. It will take time as the industry needs to build up infrastructure and distribution networks, which require concerted efforts and continuous investor awareness. To start with, one may not have volumes, but the important factor is money inflow from the hinterland is stickier."

Source: http://www.business-standard.com/india/news/garnering-30-assetssmaller-citiestough-task-say-mfs/483578/

Wednesday, August 8, 2012

UTI AMC shortlists 3 names for Chairman and MD position

UTI AMC, India's oldest asset management company with assets of around Rs 61,000 crore, could finally have a permanent boss after being headless for the last 18 months.

The AMC's board has recommended to its shareholders names of three candidates for the position of chairman and managing director, two persons familiar with the development told ET. The shortlisted candidates are AIG India chief executive and country head Sunil Mehta, senior advisor at McKinsey & Co in India Leo Puri, and Punita Kumar Sinha, former senior managing director of Blackstone Group's India-focused mutual fund.

A final decision will be taken by the five shareholders of UTI AMC - LIC, State Bank of India, Punjab National Bank, Bank of Baroda and T Rowe Price. The four Indian shareholders hold 18.5% each while the US-based T Rowe Price owns a 26% stake.

The board has also recommended the name of an internal UTI AMC executive as a fallback option if the shareholders do not agree on the three external candidates.

UTI Mutual Fund director Sachit Jain, who is part of the three-member search committee constituted by the board, said the board had sent the names of shortlisted candidates to the shareholders but declined to disclose their names. The UTI board chairman, PR Khanna, refused to comment and the three candidates, Puri, Mehta and Sinha, too, declined to comment.

Puri, the former head of McKinsey India, rejoined the consulting firm in December 2011 as senior advisor after serving a four-and-a-half-year stint as managing director of private equity major Warburg Pincus. He serves on the boards of Max India and Max Healthcare.

Mehta has been the country head and chief executive of AIG India and is responsible for all of its Indian businesses, including life and general insurance, financial services and investments. Prior to joining AIG, he was with Citibank for over 18 years.

Sinha, the daughter-in-law of former finance minister Yashwant Sinha, was in-charge of Oppenheimer's India-focused fund which was subsequently taken over by Blackstone. The fund with asset under management of about $1.22 billion was sold to Aberdeen Asset Management in December 2011.

UTI AMC, which runs India's fifth largest mutual fund, has not had a full-fledged chairman since UK Sinha left UTI to become the head of market regulator, Securities and Exchange Board of India in February 2011.

Sinha's departure was followed by an unseemly row between the finance ministry and T Rowe Price over the choice of his successor. While the finance ministry pushed for the appointment of Jitesh Khosla, a 1979 batch IAS officer and brother of Omita Paul, the powerful advisor of former finance minister Pranab Mukherjee, as the UTI AMC chairman, T Rowe Price insisted that a professional should be appointed.

Several permutations and combinations, including splitting the CMD's post into two, were discussed, but the deadlock could not be broken. A few board members also quit as UTI AMC slipped from fourth to fifth position in the mutual fund league table. Finally, earlier this year, Imtaiyazur Rahman was appointed interim CEO.

Once shareholders select and approve the name of the CMD, it will be ratified by the trustees of UTI.

Source: http://timesofindia.indiatimes.com/business/india-business/UTI-AMC-shortlists-3-names-for-Chairman-and-MD-position/articleshow/15400783.cms

Shriram Ramanathan to head L&T MF's Investment, Fixed Income

L&T Mutual Fund, offering services across the corporate, retail and infrastructure finance sectors, today said it has appointed Shriram Ramanathan as Head, Investment - Fixed Income. "I am pleased to welcome Ramanathan as the Head - Investment - Fixed Income at L&T Mutual Fund. He brings rich experience of over a decade in fixed income across both domestic and international markets. His appointment positions us well for future growth," L&T Finance Holdings Chairman and Managing Director Y M Deosthalee said.

Prior to joining L&T Mutual Fund, Ramanathan was Portfolio Manager Fixed Income with Fidelity Worldwide Investment's India business. "Fixed income is a key asset class in India, and one of the central planks of L&T Mutual Fund's growth strategy. Current investment interest is high given the global macro environment, and the structural story seems to be excellent one given low penetration rates of fixed income investment products in India. I am delighted at the opportunity to be able to contribute to the expansion of the business here," Ramanathan said.

Source: http://ibnlive.in.com/generalnewsfeed/news/shriram-ramanathan-to-head-lt-mfs-investment-fixed-income/1037342.html

Steps to attract retail investors to MFs soon: FM

The government will unveil a slew of measures in the next few weeks to attract more people to invest in mutual funds, insurance policies and others, Finance Minister P Chidambaram said today.

"In the next few weeks, we will announce a number of decisions to attract more people to invest in mutual funds, insurance policies and other well-designed instruments," Chidambaram, who took over the reins of Finance Ministry last week for the second time in UPA government, said in a statement.

The Finance Minister has come out with a broad roadmap aimed at regaining the confidence of investors in the Indian economy.

The average asset under management (AUM) of the mutual fund industry has been falling in the last two years. The average AUM slumped to Rs 6,64,824 crore at the end of March 2012 and fall of five% last fiscal followed a decline of 11% in 2010-11 financial year.

Further, mutual fund industry's plans to launch pension products to attract retirement money is getting delayed due to taxation and other regulatory hurdles.

As part of efforts to woo investors into the capital market, the government in the 2012-13 Budget had announced Rajiv Gandhi equity scheme.

The scheme would provide 50% tax deduction to retail investors with annual income less than Rs 10 lakh, for investment up to Rs 50,000, with a lock-in period of three years.

Source: http://www.business-standard.com/india/news/steps-to-attract-retail-investors-to-mfs-soon-fm/181701/on

Wednesday, August 1, 2012

Do expense ratios matter?

If a fund performs well, marginally higher costs are well worth it. If it doesn't, you must not invest in it in any case.

This question will seem almost blasphemous to anyone who has been reading up about mutual funds on the Internet.

In the US and most other developed markets, advisors and columnists make strenuous arguments to convince investors that costs are a critical factor to consider while choosing mutual funds.

They will also offer you calculations to show how even a small blip in costs affects your returns.

Different markets

But costs are certainly not one of the top factors that Indian investors should worry about while choosing funds. This particularly applies to equity funds. There are many reasons for this. For one, the absolute level of returns that Indian equity markets usually deliver is much higher than in the US. For instance, equity funds in India are expected to deliver at least 15 per cent a year to justify their risks.

Funds that have been around for 10 years or more have in fact delivered an average return of about 22 per cent a year.

As against this, the annual expenses of equity funds range between 1.5 per cent and 2.5 per cent. A difference of 1 percentage point in expense ratio between two funds makes little difference to overall investor returns.

Two, fund houses in India, unlike in the US, cannot charge vastly different expenses or costs for similar products.

The Securities and Exchange Board of India limits the annual expense ratio that any scheme may charge to unit-holders at 2.5 per cent of assets. The charges reduce progressively as fund size increases. Entry loads, or upfront charges on buying units, are completely banned.

Manager matters

In contrast, in the US, there is no regulatory cap on annual expenses. Entry loads on funds can go up to 8 per cent of the NAV. This allows room for fund houses in the US to differentiate their products on costs, which Indian funds can't.

Three, in the US the case for buying low-cost funds is often made on the premise that the majority of active equity funds don't outperform the market.

Why pay a manager any extra fee for active management, when you can get the same return through an index fund or exchange-traded fund?

But in India, active management does make a big difference to equity returns. The top-performing equity fund over the last five years, for instance, delivered a 13 per cent annualised return. The Sensex delivered less than 2 per cent.

If an active fund manager beat the Sensex by 11 percentage points, would you mind paying an extra 1 per cent in fees to the manager?

The vast difference between the best and worst performing funds in India also suggests that the manager can make a big difference to returns. The worst equity fund has lost about 7 per cent a year in value over the last five years.

To top it off, passive index products in India are far from perfect. The indices themselves are narrow and concentrated.

Funds that track them have significant tracking errors which reduce returns. Advocates of low-cost investing may still offer two counterpoints.

One, equity-fund returns in India over the last five years have declined to single digits. So shouldn't costs matter now? And two, costs may badly dent returns from a poorly performing fund.

Well, the honest response to this is that if you believe that equity funds will deliver only single-digit returns over the long term, which they did in the last five years, there is no point in investing in them at all.

Why take on equity risk if the returns are to be so measly? Costs don't enter into the picture here.

The same logic goes for poorly performing funds, too. If an equity fund delivers only a 6 per cent return, but sports an economical expense ratio of, say, 1 per cent, why go for it at all? You invest in funds to multiply your money, not to save a few paise here and there. The only situation in which costs may matter is if you are choosing between two funds with identical track records and prospects. If faced with such a choice, go for the one with lower costs, by all means!

Sorce: http://www.thehindubusinessline.com/features/investment-world/mutual-funds/article3696721.ece