Firms want to avoid handling the low-value cheques they would have to collect if they charge small investors
Some mutual fund distribution companies, which predominantly cater to low-value retail investors, have decided not to charge for their services from customers beginning August. Even larger distributors, which handle a broader variety of clients including high net-worth investors and companies, have decided to keep a no-commission model open for smaller investors.
A July rule from capital markets regulator Securities and Exchange Board of India, or Sebi, does away with entry loads of up to 2.25% for investors and caps at 1% the portion of exit loads used for marketing expenses.
However, the new regulation, effective 1 August, has created a logistical logjam for distributors.
Earlier, the invested amount would go directly to the asset management company, which would deduct the commission and pass it on to the agent. Under the new regulation, if a person invests Rs1,000, distributors will need to collect a cheque of Rs25 as commission separately.
Rather than increase overhead costs by investing in technology, staff and other back-end services, and hoping for the customer to pay for it, some companies have decided to entirely do away with commissions for small, retail investors.
J. Rajagopalan, managing director, Bluechip Corporate Investment Centre Ltd, 90% of whose clientele is retail investors, says, “For a multi-location distribution house like us with 240 locations, managing back-office operations becomes a huge issue. We do not have the infrastructure to manage the flood of low-value cheques that will hit us if we implement the twin-cheque system. Internally, we have decided we will not charge investors from 1 August.”
Also, charging investors under the new environment is not going to be an easy task, said K. Venkitesh, national head (distribution), Geojit BNP Paribas Financial Services Ltd.
“Imagine buying a shirt for Rs600 and giving two cheques, one for the manufacturer for Rs450 and one for the shopkeeper for the remaining amount. This is the same thing. It is not going to be easy to convince the consumer what he is paying for,” he said.
New Delhi-based Bajaj Capital Ltd had also decided to forego a commission for low-value customers. “We don’t like charging the customer. If a person really wants only the transaction services and does not want any advisory or support services, we will not charge,” said joint managing director Sanjiv Bajaj.
However, he added that if a customer wanted services such as consolidated statements, portfolio advice, etc., he would have to pay for it.
Rajagopalan of Bluechip said the trail commission, which agents get from fund houses at the end of the year based on the assets they helped bring in, would help them cover costs of providing services to retail investors.
New distribution companies, however, have already started offering the no-commission model, saying that the new model will, in the long term, work to everyone’s benefit.
Chennai-based Wealth India Financial Services, has launched a free website where investors can buy and sell funds without paying any upfront charges.
“We decided to start a company that would be positioned to take advantage of this development,” said Srikanth Meenakshi, director, Wealth India Financial Services. “We launched FundsIndia.com, where retail investors could come (and) register, become investors and buy or sell mutual funds with no loads, no transaction fees for any amount.”
FundIndia has empanelled with 16 mutual funds and is in talks with more. It plans to have a country-wide online-only network without any regional sales points, a low-cost, scalable model that can be sustained with just the trail commission.
S. Raghunathan, head of Computer Age Management Services Pvt. Ltd, an industry veteran who has been associated with the mutual fund industry for at least three decades, said the new regulation would work out to be a “win-win” situation. “As we reduce distribution costs, more and more people will start gaining confidence and volumes will grow. As volumes grow, everybody can make enough money through the trail commissions.” He cites the example of the demat revolution that changed the face of the brokerage industry 15 years ago.
“When demat was first introduced, people had similar apprehensions. They thought life would become difficult for the brokers. But look at what has happened. Volumes have grown exponentially. I expect a similar result here also,” he said.
However, the no-commission model will not be the only model in operation. Distribution comes at a cost and someone will have to bear the cost if not the consumer, say some distributors.
While there is some expectation that fund houses will fray some of the costs, say experts, there is also the hope that this will lead to innovation in distribution models such as deep discount brokers, discount brokers, premium brokers and full advisories.
Tuesday, July 28, 2009
Friday, July 10, 2009
With no entry load, MF distributors eye HNIs
With market regulator Securities and Exchange Board of India (Sebi) abolishing 'entry load' for investors from August 1 2009, several distributors have slightly altered plans to include high net-worth individuals (HNIs) in their targets rather than retail investors. With the ban on entry load or commission an investor pays while purchasing units of a mutual fund, the earnings of distributors will take a huge hit, and they would want to compensate for this by targeting HNIs.
According to mutual funds players, this will be the distributor strategy for at least the first few months starting August 1.
Distributors feel HNIs will provide appropriate remuneration for their advice, while it will take few months for retail investors to decipher with their distributor a 'non entry load' fee structure for advice rendered.
Kanwar Vivek, CEO of Birla Sun Life wealth management says, "The move to end the entry load structure is one of the ground-breaking events for the Indian mutual fund (MF) industry. We are planning several strategies that can attract investors after August 1. However, for the first few months, we will be targeting HNIs along with retail investors. We are also preparing what commission we can charge from retail investors, as this step has been taken to help retail investors investing in MF."
Last month, Sebi had banned entry load from August 1 in all the MF schemes. A senior official from one of the leading asset management companies (AMC) said, "This move will have a huge impact on the distributors and independent financial advisor (IFAs). However, we might not see any major New Fund Offer (NFO) in the coming months, due to this ban on entry load. It will take at least a year for things to settle, but in the long term, this can be very helpful for retail investors."
In the month of June, MF assets under management (AUM) stood at Rs 6,70,993.13 crore, a rise of 4.98% or Rs 31,863.31 crore compared to Rs 6,39,129.81 crore in May. Sebi has directed AMCs to carry a suitable 'disclosure' on application forms that upfront commission will be paid by investors directly to the distributors based on their assessment of various factors including the service rendered by the distributor.
On 'exit load' paid by investors, Sebi said that a maximum of 1% will be maintained in a separate account by mutual fund companies to pay commission to the distributors. It directed distributors to disclose all commissions payable to them for different competing schemes of various mutual funds.
According to mutual funds players, this will be the distributor strategy for at least the first few months starting August 1.
Distributors feel HNIs will provide appropriate remuneration for their advice, while it will take few months for retail investors to decipher with their distributor a 'non entry load' fee structure for advice rendered.
Kanwar Vivek, CEO of Birla Sun Life wealth management says, "The move to end the entry load structure is one of the ground-breaking events for the Indian mutual fund (MF) industry. We are planning several strategies that can attract investors after August 1. However, for the first few months, we will be targeting HNIs along with retail investors. We are also preparing what commission we can charge from retail investors, as this step has been taken to help retail investors investing in MF."
Last month, Sebi had banned entry load from August 1 in all the MF schemes. A senior official from one of the leading asset management companies (AMC) said, "This move will have a huge impact on the distributors and independent financial advisor (IFAs). However, we might not see any major New Fund Offer (NFO) in the coming months, due to this ban on entry load. It will take at least a year for things to settle, but in the long term, this can be very helpful for retail investors."
In the month of June, MF assets under management (AUM) stood at Rs 6,70,993.13 crore, a rise of 4.98% or Rs 31,863.31 crore compared to Rs 6,39,129.81 crore in May. Sebi has directed AMCs to carry a suitable 'disclosure' on application forms that upfront commission will be paid by investors directly to the distributors based on their assessment of various factors including the service rendered by the distributor.
On 'exit load' paid by investors, Sebi said that a maximum of 1% will be maintained in a separate account by mutual fund companies to pay commission to the distributors. It directed distributors to disclose all commissions payable to them for different competing schemes of various mutual funds.
Saturday, July 4, 2009
India Funds dominate world top-100 stock funds in Q2
MUMBAI (Reuters) - Fifty one India-focused funds were among the world's top 100 performing stock funds in the quarter to June as domestic shares leapt by nearly half, recording their biggest surge in 17 years, data from fund tracker Lipper showed.
They are led by those investing in shares of infrastructure firms, a favoured theme in Asia's third largest economy after the Congress-lead coalition won a strong mandate in April-May polls raising hopes for higher spending on roads, ports and bridges.
The Lipper's list of 29,942 world stock funds with a track record of at least a quarter showed India funds recording an average 50.45 percent jump in their net values in three months to June as compared to just over 18 percent gain for the fund group.
India funds were led by Naya Bharat Property Company fund, domiciled in the Isle of Man, which gave a return of nearly 135 percent, followed by JM Core 11 Fund, a concentrated 11-stock portfolio, which rose more than 100 percent.
"Stocks in India were spurred on by a steady diet of positive macro data and the strong victory of the incumbent Congress party in national elections mid-May" said Rajeev Baddepudi, a senior research analyst for ASEAN at Lipper.
Indian shares surged 49.3 percent during April-June, the fastest in Asia after Vietnam, on signs of economic recovery and hopes for market-friendly policies by the re-elected Congress-lead government.
The gain was the biggest rise for the benchmark in any quarter since it soared 124.5 percent in January-March in 1992 when Manmohan Singh, the then finance minister, kicked off reforms to open up the economy.
INFRASTRUCTURE
Hopes are high that Manmohan Singh, currently in his second-term as prime minister, would further open up the economy to foreign investment and remove policy bottlenecks.
This has led to sharper surge in shares of infrastructure firms, with capital goods stocks rising nearly twice as fast as the bechmark index in June quarter, lifting portfolio gains for funds primarily investing in the sector.
For instance, all top five Indian funds part of the Lipper's top-100 list are infrastructure or property funds.
Fund houses JM Financial Asset Management and Sundaram BNP Paribas Mutual Fund have four funds each in the list, while Benchmark, India's passive fund manager, DBS Cholamandalam, SBI (SBIN.NS : 1809.65 +50.2) Funds Management and Taurus Mutual Fund had three schemes each.
(For more news on Reuters Money click http://in.reuters.com/money)
They are led by those investing in shares of infrastructure firms, a favoured theme in Asia's third largest economy after the Congress-lead coalition won a strong mandate in April-May polls raising hopes for higher spending on roads, ports and bridges.
The Lipper's list of 29,942 world stock funds with a track record of at least a quarter showed India funds recording an average 50.45 percent jump in their net values in three months to June as compared to just over 18 percent gain for the fund group.
India funds were led by Naya Bharat Property Company fund, domiciled in the Isle of Man, which gave a return of nearly 135 percent, followed by JM Core 11 Fund, a concentrated 11-stock portfolio, which rose more than 100 percent.
"Stocks in India were spurred on by a steady diet of positive macro data and the strong victory of the incumbent Congress party in national elections mid-May" said Rajeev Baddepudi, a senior research analyst for ASEAN at Lipper.
Indian shares surged 49.3 percent during April-June, the fastest in Asia after Vietnam, on signs of economic recovery and hopes for market-friendly policies by the re-elected Congress-lead government.
The gain was the biggest rise for the benchmark in any quarter since it soared 124.5 percent in January-March in 1992 when Manmohan Singh, the then finance minister, kicked off reforms to open up the economy.
INFRASTRUCTURE
Hopes are high that Manmohan Singh, currently in his second-term as prime minister, would further open up the economy to foreign investment and remove policy bottlenecks.
This has led to sharper surge in shares of infrastructure firms, with capital goods stocks rising nearly twice as fast as the bechmark index in June quarter, lifting portfolio gains for funds primarily investing in the sector.
For instance, all top five Indian funds part of the Lipper's top-100 list are infrastructure or property funds.
Fund houses JM Financial Asset Management and Sundaram BNP Paribas Mutual Fund have four funds each in the list, while Benchmark, India's passive fund manager, DBS Cholamandalam, SBI (SBIN.NS : 1809.65 +50.2) Funds Management and Taurus Mutual Fund had three schemes each.
(For more news on Reuters Money click http://in.reuters.com/money)
Portfolio Management Under Sebi Scanner
The Securities and Exchange Board of India (Sebi), after tightening the norms for the mutual fund industry, is now looking at portfolio management services. The market regulator will soon be coming out stricter and comprehensive guidelines for PMS.
According to a senior banker with a leading foreign bank that offers wealth management and portfolio management services, Sebi has been in dialogue with several service providers to get their views on making the services more transparent and investor-friendly. "We have been deliberating with the regulator and it should be coming out with guidelines in the coming few weeks," the executive said on the condition of anonymity.
Earlier, a senior Sebi official has mentioned the watchdog is indeed looking at all areas for making things transparent and investor-friendly. According to industry sources, there are several aspects that the regulator is looking at and one important aspect is the PMS fees.
There are no restrictions now on fees charged by service providers. However, since the market is competitive, rates remain reasonable. "But there are instances of fee structures changing with the market trend. During the boom of 2007-08, some charged atrocious fees, and there were also some handsome profit sharing agreements," says a Mumbai-based broker. Hence, the regulator is expected to cap the fees charged by portfolio managers.
This, however, might not go down well with the 229-odd portfolio managers registered with Sebi. But rthe regulator isn't much worried about that. "In 1992, when we had asked brokers to disclose the fees they charge to clients, there was an uproar, and trading closed for four days, however, they had to comply and things are much better now," said the Sebi official.
Generally, portfolio managers have three schemes, one where a flat fee of around 2% of the portfolio amount is charged, and the service provided includes investment advice at regular intervals and managing the portfolio. The second scheme includes a fixed fee and a profit-sharing scheme, the latter usually kicks in when a return over the government bond (risk-free return) rate is crossed. Then, there is the totally variable scheme where the manager charges a total variable fee structure based on profit sharing.
The first two are said to be the more popular, and the third variety usually gains ground when the market is booming and is offered to high-ticket clients.
The norms are also expected to cover the 'wealth management' area. There are no specific norms now for this burgeoning industry that has several service providers like banks, brokers, financial service firms and individuals. Sebi has applied to the finance ministry to extend the definition of the term 'securities' in the Sebi Act to several instruments, especially alternative investments like those in art and several structured products that usually beat the definition and thereby the Sebi purview. Wealth managers are known to offer such products to their clients and there is usually an issue in the valuation of these instruments, noted a banker. They don't want a Madoff- like situation happening in India where exotic products are peddled to wealthy clients under Ponzi schemes, he adds.
The market size of PMS is estimated to around Rs 1 lakh crore. Sebi has been tightening the PMS norms over the years. In May 2008, Sebi had increased the networth requirement for portfolio managers from Rs 50 lakh to Rs 2 crore and also asked the portfolio managers not to pool accounts of clients. Pooling of clients would mean portfolio managers becoming quasi-mutual funds, not giving customised services.
On June 23, 2009, Sebi clarified that there should be a clear segregation of each client's fund through proper and clear maintenance of back-office records. It also mentioned that portfolio managers were not allowed to use funds of one client for another client. Portfolio managers will also have to maintain an accounting system containing separate client-wise data for their funds and provide statement to their clients for such accounts at least every month. Importantly, managers will have to reconcile client-wise funds with the funds in their bank account every day.
Transparency drive
and#149;Sebi likely to set limits on fee charged by PMS providers
and#149;Guidelines may cover 'wealth managers' as well
and#149;Alternate assets like art, structured products under lens
and#149;Emphasis on reporting asset position and charges likely
and#149;Has already ordered separate client accounts and statement
According to a senior banker with a leading foreign bank that offers wealth management and portfolio management services, Sebi has been in dialogue with several service providers to get their views on making the services more transparent and investor-friendly. "We have been deliberating with the regulator and it should be coming out with guidelines in the coming few weeks," the executive said on the condition of anonymity.
Earlier, a senior Sebi official has mentioned the watchdog is indeed looking at all areas for making things transparent and investor-friendly. According to industry sources, there are several aspects that the regulator is looking at and one important aspect is the PMS fees.
There are no restrictions now on fees charged by service providers. However, since the market is competitive, rates remain reasonable. "But there are instances of fee structures changing with the market trend. During the boom of 2007-08, some charged atrocious fees, and there were also some handsome profit sharing agreements," says a Mumbai-based broker. Hence, the regulator is expected to cap the fees charged by portfolio managers.
This, however, might not go down well with the 229-odd portfolio managers registered with Sebi. But rthe regulator isn't much worried about that. "In 1992, when we had asked brokers to disclose the fees they charge to clients, there was an uproar, and trading closed for four days, however, they had to comply and things are much better now," said the Sebi official.
Generally, portfolio managers have three schemes, one where a flat fee of around 2% of the portfolio amount is charged, and the service provided includes investment advice at regular intervals and managing the portfolio. The second scheme includes a fixed fee and a profit-sharing scheme, the latter usually kicks in when a return over the government bond (risk-free return) rate is crossed. Then, there is the totally variable scheme where the manager charges a total variable fee structure based on profit sharing.
The first two are said to be the more popular, and the third variety usually gains ground when the market is booming and is offered to high-ticket clients.
The norms are also expected to cover the 'wealth management' area. There are no specific norms now for this burgeoning industry that has several service providers like banks, brokers, financial service firms and individuals. Sebi has applied to the finance ministry to extend the definition of the term 'securities' in the Sebi Act to several instruments, especially alternative investments like those in art and several structured products that usually beat the definition and thereby the Sebi purview. Wealth managers are known to offer such products to their clients and there is usually an issue in the valuation of these instruments, noted a banker. They don't want a Madoff- like situation happening in India where exotic products are peddled to wealthy clients under Ponzi schemes, he adds.
The market size of PMS is estimated to around Rs 1 lakh crore. Sebi has been tightening the PMS norms over the years. In May 2008, Sebi had increased the networth requirement for portfolio managers from Rs 50 lakh to Rs 2 crore and also asked the portfolio managers not to pool accounts of clients. Pooling of clients would mean portfolio managers becoming quasi-mutual funds, not giving customised services.
On June 23, 2009, Sebi clarified that there should be a clear segregation of each client's fund through proper and clear maintenance of back-office records. It also mentioned that portfolio managers were not allowed to use funds of one client for another client. Portfolio managers will also have to maintain an accounting system containing separate client-wise data for their funds and provide statement to their clients for such accounts at least every month. Importantly, managers will have to reconcile client-wise funds with the funds in their bank account every day.
Transparency drive
and#149;Sebi likely to set limits on fee charged by PMS providers
and#149;Guidelines may cover 'wealth managers' as well
and#149;Alternate assets like art, structured products under lens
and#149;Emphasis on reporting asset position and charges likely
and#149;Has already ordered separate client accounts and statement
Wednesday, July 1, 2009
No entry fee on Indian mutual funds from Aug 1-SEBI
Indian mutual funds can not levy any entry charge for investments from August 1, the Securities and Exchange Board of India said in a note late on Tuesday.
Funds could, however, levy an exit fee of up to 1 percent of the redemption amount to pay commissions to distributors and for marketing and selling expenses, it added.
The regulator said investors would pay any upfront charge to distributors directly based on his service. It also directed distributors to disclose commissions payable to them by fund houses.
Funds could, however, levy an exit fee of up to 1 percent of the redemption amount to pay commissions to distributors and for marketing and selling expenses, it added.
The regulator said investors would pay any upfront charge to distributors directly based on his service. It also directed distributors to disclose commissions payable to them by fund houses.
Reliance Cap raises 23.5 bln rupees in infra fund
mutual fund manager Reliance Capital Asset Management has raised 23.5 billion rupees in a new equity fund, a top executive said, the highest collection by a stock fund, since at least March 2008.
Reliance Infrastructure Fund, which closed for initial subscription last month, tapped 436,000 investors from about 1,000 cities, chief executive Sundeep Sikka told Reuters.
The mop-up, more than the collective assets gathered by all the stock funds launched in the last 12 months, also makes the product the third biggest infrastrastructure mutual fund in India.
Infrastructure as an investment theme has gained favour in India following a strong mandate to a Congress-lead government in April-May polls.
Reliance Infrastructure Fund, which closed for initial subscription last month, tapped 436,000 investors from about 1,000 cities, chief executive Sundeep Sikka told Reuters.
The mop-up, more than the collective assets gathered by all the stock funds launched in the last 12 months, also makes the product the third biggest infrastrastructure mutual fund in India.
Infrastructure as an investment theme has gained favour in India following a strong mandate to a Congress-lead government in April-May polls.
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