The collapse of Lehman triggered the world financial crisis this time last year. Stock markets crashed; credit was frozen and banks were scurrying for cash; crude oil prices dipped and gold prices shot up; investment shrank.
Finally, the financial crisis translated into recession with severe loss of employment and income. With the inter-linking of economies no country escaped these drastic consequences.
India was hit badly but avoided recession. Nevertheless growth dropped and is yet to recover. FIIs repatriated more than $13 billion and deepened the fall in stock prices.
Sensex plunged 62 per cent, much more than Dow Jones. The RBI had to draw down reserves. The rupee fell 20 per cent, industrial production declined and exports slumped.
Indian banks, except probably two, did not have exposure to sub-prime debt since they did not have much international business. Besides, the regulations of RBI did not permit excessive debt:equity ratio. Hence Indian banks were largely unaffected.
The international crisis prompted the Indian Government to act. That was more to avert recession than to back up the financial system.
Stimulus packages were introduced mainly aimed at increasing demand by reducing excise duties and increasing investment in infrastructure. The RBI did pump in liquidity with cuts in CRR, SLR, and the repo and reverse repo rates. Recovery has started but progress is slow.
There are lessons to learn from the crisis and new initiative to be taken.
First, with large infusion of cash by Federal Reserve, it is likely that the dollar will weaken in future against other currencies. RBI has a large part of its foreign exchange reserves in dollars and should therefore change the composition of reserves in favour of the euro and gold.
Second, although most banks are owned by Government, they should be financially sound on their own. Therefore the capital base of banks has to be sound and conform to the new Basel standards. Banks should be modernized and to attain economic size through mergers.
Third, financial supervision has to be strong. That also requires that there should be coordination among the concerned agencies like the RBI, fiscal authorities, Sebi, etc.
Fourth, regulation should go hand in hand with innovation of financial instruments. The financial crisis was to a large extent spurred by financial instruments like Collateralized debt obligations (CDO).
Fifth, RBI should keep constant watch on liquidity requirements. The financial system in the U.S. would have collapsed but for the timely release of cash by Federal Reserve. The measures taken by RBI were a little too late.
Sixth, Government should curb fiscal deficit to ease pressure on the market and continue to take steps to open up the economy, whether in respect of trade, convertibility of the rupee, external commercial borrowing and foreign investment, since the benefits would be much more than the safety of a closed system.
It appears that the worst is now over and the salvage operations are complete. It is time to reform the system to enable it function smoothly and efficiently under good supervision.
(You can e-mail Dinker H. Pai Panandiker at: dpanandiker@gmail.com)
Saturday, September 12, 2009
Wednesday, September 2, 2009
MFs: Tackling a missing intermediary
There are several issues that are faced by investors when they are dealing with their mutual fund investments.
One of these relate to a disruption in the mode of receipt of services related to the investment. This happens when there is no existing distributor available to serve the investor. This is an important matter that has become a reality for several people and hence will need a clear strategy from the investor regarding the manner in which this will be tackled.
Developing situation
There are times when the investor is put in a strange situation. In most cases, investors use the help of distributors or other advisors for making their mutual fund investments.
The total assets of mutual funds at the end of July 2009 stood at nearly Rs 6.90 lakh crore and a very miniscule percentage of this involves direct investment by the investor. The process involved various types of services in the process of making the investment.
In several cases, there is a situation where the distributor no longer wants to serve the client or there might be a situation where the distributor even exits the business. In the last six months, there has been a sharp fall in the interest of investors.
During the period April - July 2009 for which figures are available the number of new schemes varied in the range of 4-6 a month impacting a major source of income for intermediaries. In such a situation, the investor finds that when it comes to solving some question, they have to look at some different option.
The easiest way is to look for another distributor and advisor and shift to this route, but now with additional payment required on the part of investors for using their services, there is an increasing bent towards going it alone. This can result in a sticky situation where the investor realises that there needs to be some steps for the purpose of ensuring that there is no disruption in the service that they receive.
Contact possible
In case of any situation, the investor has to understand that the mutual fund is the entity with which the entire investment is based. This remains the base entity with which all the details about the investment is available and hence the investor can ensure that they get any required information from the mutual fund itself.
This is the best source for ensuring that there is clarity about the entire situation and this will also provide options for ensuring the smooth continuation of activities. The data required for this purpose is the Folio Number that is present on all mutual fund statements. All the necessary details are available with the mutual fund, which can be retrieved.
There is the entire list of mutual funds that are available with the market regulator SEBI (Securities and Exchange Board of India) and the fund association AMFI (Association of Mutual Funds in India). There are around 35 mutual funds in operation at the end of July in the country.
Code
There is now no entry load that is present for making an investment into a mutual fund. This means that there is no expense that the investor has to worry about now as compared to the situation earlier when only direct investments did not have any entry load.
If the investor is careful and they take a look at the details on the mutual fund statement that they get then they will be able to see that there is a space where the code for the distributor is mentioned.
This means that the commission for the investment goes to that particular entity and they are the ones who will be servicing the investor. When it comes to the issue of ensuring that there is a direct investment that is made, then the investor would have to ensure that the space for the code is blank or that it is mentioned direct.
This will also ensure that there is no trail commission that is going to any entity, especially if the investor is direct. If the investor wants to check directly with the fund then various funds allow transaction through their own website and this includes funds like HDFC MF, Franklin Templeton MF, ICICI Pru MF among others.
Checking
There are two angles to the entire investment that they have. One of them relates to the investment that has already been made and hence this will have a separate situation because this is complete, but the requirement here deals with proper monitoring.
On the other hand, there is also the case of new investment and if this is done using a distributor then the investor will have to pay fees that are decided between the two parties. In case of a small distributor, this can be negotiated, so you might end up paying something like Rs 500 for a Rs 50,000 investment.
On the other hand, big players leave little room for bargain and the amount here is fixed like Rs 30 per transaction for systematic investment and so on. This is the reason why they need to be clear about the manner in which they are investing so the choices can be selected.
There can also be a direct interface that is set up between the mutual fund and the investor. This can be done through interacting through some center of the fund or through the transfer agent. Most major cities have these offices.
Another way in which the same situation can be set up is through the route of using the internet for the interactions. In this situation, the investor makes further investments as well as redemption and other changes through their login on the internet and hence there is some clarity available for them about the exact status of their investment.
Using either or all of these will help the investor meet their requirements.
One of these relate to a disruption in the mode of receipt of services related to the investment. This happens when there is no existing distributor available to serve the investor. This is an important matter that has become a reality for several people and hence will need a clear strategy from the investor regarding the manner in which this will be tackled.
Developing situation
There are times when the investor is put in a strange situation. In most cases, investors use the help of distributors or other advisors for making their mutual fund investments.
The total assets of mutual funds at the end of July 2009 stood at nearly Rs 6.90 lakh crore and a very miniscule percentage of this involves direct investment by the investor. The process involved various types of services in the process of making the investment.
In several cases, there is a situation where the distributor no longer wants to serve the client or there might be a situation where the distributor even exits the business. In the last six months, there has been a sharp fall in the interest of investors.
During the period April - July 2009 for which figures are available the number of new schemes varied in the range of 4-6 a month impacting a major source of income for intermediaries. In such a situation, the investor finds that when it comes to solving some question, they have to look at some different option.
The easiest way is to look for another distributor and advisor and shift to this route, but now with additional payment required on the part of investors for using their services, there is an increasing bent towards going it alone. This can result in a sticky situation where the investor realises that there needs to be some steps for the purpose of ensuring that there is no disruption in the service that they receive.
Contact possible
In case of any situation, the investor has to understand that the mutual fund is the entity with which the entire investment is based. This remains the base entity with which all the details about the investment is available and hence the investor can ensure that they get any required information from the mutual fund itself.
This is the best source for ensuring that there is clarity about the entire situation and this will also provide options for ensuring the smooth continuation of activities. The data required for this purpose is the Folio Number that is present on all mutual fund statements. All the necessary details are available with the mutual fund, which can be retrieved.
There is the entire list of mutual funds that are available with the market regulator SEBI (Securities and Exchange Board of India) and the fund association AMFI (Association of Mutual Funds in India). There are around 35 mutual funds in operation at the end of July in the country.
Code
There is now no entry load that is present for making an investment into a mutual fund. This means that there is no expense that the investor has to worry about now as compared to the situation earlier when only direct investments did not have any entry load.
If the investor is careful and they take a look at the details on the mutual fund statement that they get then they will be able to see that there is a space where the code for the distributor is mentioned.
This means that the commission for the investment goes to that particular entity and they are the ones who will be servicing the investor. When it comes to the issue of ensuring that there is a direct investment that is made, then the investor would have to ensure that the space for the code is blank or that it is mentioned direct.
This will also ensure that there is no trail commission that is going to any entity, especially if the investor is direct. If the investor wants to check directly with the fund then various funds allow transaction through their own website and this includes funds like HDFC MF, Franklin Templeton MF, ICICI Pru MF among others.
Checking
There are two angles to the entire investment that they have. One of them relates to the investment that has already been made and hence this will have a separate situation because this is complete, but the requirement here deals with proper monitoring.
On the other hand, there is also the case of new investment and if this is done using a distributor then the investor will have to pay fees that are decided between the two parties. In case of a small distributor, this can be negotiated, so you might end up paying something like Rs 500 for a Rs 50,000 investment.
On the other hand, big players leave little room for bargain and the amount here is fixed like Rs 30 per transaction for systematic investment and so on. This is the reason why they need to be clear about the manner in which they are investing so the choices can be selected.
There can also be a direct interface that is set up between the mutual fund and the investor. This can be done through interacting through some center of the fund or through the transfer agent. Most major cities have these offices.
Another way in which the same situation can be set up is through the route of using the internet for the interactions. In this situation, the investor makes further investments as well as redemption and other changes through their login on the internet and hence there is some clarity available for them about the exact status of their investment.
Using either or all of these will help the investor meet their requirements.
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