Mutual Fund NEWS Group

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/

--
___________________________________________________________________________________
'I made my money by selling too soon.'

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

Blog:http://indianmutualfund.wordpress.com/
___________________________________________________________________________________

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