Will index funds behave themselves?

The mutual fund industry seems to be waking up to the virtues of index investing. IDFC Mutual Fund is launching one and IDBI Mutual Fund is launching another. But index funds have not covered themselves with glory so far. Not only do index funds do not accurately track the movements of their underlying benchmark indices, leading to what is called tracking error, but some funds make nonsense of index funds by trying to actively manage such funds, when all they are supposed to do is passively follow the index. This gives rise to “outperformers” among index funds—a contradiction in terms.
HDFC Index Fund managed a return of 21.13% over 10 years when the Nifty has gone up 17.10%. ICICI Prudential Index Fund managed a return of 21.48% over eight years with growth in the Nifty at 20.15% and UTI Nifty Fund managed returns of 13.38% over 10 years with growth in the Nifty at 12.92%.

This outperformance could be partially due to an element of active management. To enhance returns, ICICI Prudential Index Fund invested 15.48% of Rs96.6 crore in the futures market on 31 March 2010. UTI Nifty Fund too has put some money in futures and bank deposits. This shows how index funds are trying to manage money actively to outperform the benchmark and show greater returns. They are also known to be trying to time the market, something that explains underperfomance (fund managers are bad at timing) leading to tracking error in some cases.

Among the index funds, LIC MF Index Fund recorded a return of 1.01% against 24.24% of the underlying index, leading to a tracking error of 23.23% as on 26th April. Birla Sun Life Index Fund recorded a return of 9.83% as against 25.06% return of the index, leading to an error of 15.23%. — Zeeshan Mardani

Fee Based Model

The insurance watchdog did the right thing, asking life insurers to disclose the commission paid to agents selling unit-linked insurance plans (Ulips). This is a logical step after the cap on Ulip charges.

The move will bring in more transparency, discourage mis-selling of Ulips and help investors take informed decisions. The disclosure on commissions will also blunt the sting in the spat between the Insurance Regulatory and Development Authority (Irda) and market regulator Sebi over Ulips.

Mutual funds that Ulips compete with launched a vehement attack on insurers for charging hefty upfront commissions to drive Ulip sales. Irda has, therefore, been forced to tighten regulation. True, in an under-insured country like India, there has to be an incentive to market insurance products.

However, a commission as high as 40% of the premium on insurance covers defies logic. Insurance companies should lower commissions and eventually transit to a fee-based model.

A government committee on investor awareness has recommended a fee-based model for all financial products. The suggestion would allow an investor to negotiate charges directly with the agent. Ideally, this is the way a financial product like Ulip should be sold.

An agent who offers a service to the investor should charge a fee that is mutually agreed upon, and not solely fixed by the seller of the financial product. Sure, this would make the task of agents more difficult.

But they should reconcile to that correction. Sebi has already shown the way. It scrapped entry loads on mutual funds, paving the way for investors to negotiate charges directly with distributors.
  
The pension fund regulator has gone a step further and adopted a load-free model. However, such a model runs the risk of slow offtake. Fees are in order. Investors need choice and better disclosures in financial products to take informed decisions.

In a country where many do not understand the difference between term insurance and investment-linked insurance, the regulator should go all out to enhance disclosure that would serve to raise the level of financial literacy as well.

MFs pull out Rs 5.8k cr from mkt

Mutual Funds (MFs), including UTI, lowered their holdings in 15 Sensex (^BSESN : 17690.62 -54.66) companies in the quarter ended March 2010, an analysis by FE has shown. MF holdings in Hindalco Industries (HINDALC0.NS : 142 0) fell the most, decreasing to 2.93%, a fall of 2.5%, from 5.43% in the previous quarter. "Mutual funds offloaded bluechip shares after facing redemption pressures." said Kishor P Ostwal, CMD, CNI Research.
MFs divested Rs 5,796 crore worth of equities in the quarter ended March 31 on the back of redemptions from its unit holders.
M & M, Hero Honda Motor, Tata Steel (TATASTL.BO : 647.45 -9.45), ACC (ACC.NS : 900.25 -8.75), Infosys Technologies (INFOSYS.BO : 2741.65 +0.95) and Reliance Infrastructure were among the other companies where MFs offloaded. ITC's latest share holding pattern was not available. The second highest decrease in stake was registered in M & M, from 5.81% to 4.16%, in the fourth quarter. In ACC, the stake fell from 1.74% to 1.22% during the above period. Public sector giant ONGC (ONGC.NS : 1045.15 +27.15) saw MF holdings decrease marginally from 2.26% to 2.21%.
MFs hiked stake in Grasim Industries followed by HDFC Bank, Larsen & Toubro and BHEL (BHEL.NS : 2474.5 -33.1). For the private sector giant Reliance Industries (RELIANCE.NS : 1062 -10), MF holdings increased from 2.42% to 2.61% during the quarter.
The average share of MFs stake in total of 29 Sensex companies decreased from 4.08% to 3.95% during the March quarter.

DSP BlackRock MF unveils Focus 25 Fund

DSP BlackRock Mutual Fund has launched a new fund DSP BlackRock Focus 25 Fund, an open ended equity growth scheme. The face value of the new issue will be Rs 10 per unit. The New Fund Offer (NFO) will be open for subscription from April 23 to May 21, 2010. The scheme re-opens for continuous sale and repurchase not later than June 20, 2010.

The primary investment objective of the Scheme is to generate long-term capital growth from a portfolio of equity and equity-related securities including equity derivatives. The portfolio will largely consist of companies, which are amongst the top 200 companies by market capitalisation. The portfolio will limit exposure to companies beyond the top 200 companies by market capitalization up to 20 percent of the net asset value.

The scheme offers growth and dividend option. Dividend option offers payout and reinvestment facility. The minimum investment amount is Rs. 5000 and in multiples of Re. 1 thereafter. Entry load for the scheme will be nil. The exit load will be one percent for holding period less than 12 months and nil for holding period above and up to 12 months.

The scheme will allocate 65 percent to 100 percent of assets in equity and equity related securities, which are amongst the top 200 companies by market capitalization. It would invest up to 0-20 percent of assets in equity and equity related securities, which are beyond the top 200 companies by market capitalization. It would further allocate up to 35 percent of assets in debt securities, money market securities and cash and cash equivalents. The scheme's performance would be benchmarked against BSE Sensex. The scheme would be managed by Apoorva Shah

SEBI raps AMCs for pampering distributors

Market watchdog Securities and Exchange Board of India (SEBI) is working to stop the unethical practice of mutual fund houses lavishing distributors with expensive incentives such as cash payouts and expensive foreign junkets in return for peddling their products. Besides finding such rewards unethical, SEBI is also examining whether these incentives are being funded by investors’ money in the name of fund expenses, a top SEBI official told PTI. SEBI is apparently contemplating strong remedial measures to keep such practices in check.

Moneylife was among the first to have highlighted how fund companies were in competition to organise lavish junkets for their distributors, unable to incentivise distributors through entry loads, post the ban. As SEBI has rightly pointed out, the bigger question is who ultimately paid for these fancy trips and cash emoluments? Deducting such expenses from investors’ money was a common practice earlier, till the regulator came down heavily on AMCs and prevented the fund industry from making investors pay for such extravaganzas. So, AMCs were supposed to bear the expenses on their own, but suspicions still abound whether fund houses are draining the investors’ kitty through some subverted measures.

There have been several instances of such dole-outs, ranging from the subtle to the outrageously lavish. For those distributors who had raked in the maximum moolah, HDFC Mutual Fund had organised a trip to Italy for four days. Earlier, Reliance Mutual Fund took some of its distributors to Kashmir while HSBC took them to Kerala for a long weekend. According to distributors, Templeton was running a scheme wherein any distributor who achieves his target was entitled to a foreign trip.

Others have been offering cash incentives to distributors. As an ‘early bird incentive’ to proactive distributors, Religare offered cash emoluments for certain number of applications received before a certain date for its Religare Monthly Income Plan (MIP) Plus. The same product had another incentive structure in place depending on the volumes gathered by the distributor. For single applications up to Rs99,999, distributors were offered 0.75% as commission. For mobilising applications worth Rs1,00,000-Rs4,99,999, the commission offered was 1% and so forth.

However, as we have pointed out earlier, while extravagant incentivisation of distributors is unethical, offering innovative incentives is an unavoidable outcome of the current regime. Small incentives to distributors are necessary for the survival of the mutual fund industry. In the absence of such incentives, the industry may well come to a virtual standstill.

The CEO of a prominent fund advisory agreed, “Incentives should not be the whole and soul of selling a product. I think that SEBI’s concern is whether they (fund companies) are charging it to the scheme or not. I don’t think they are saying whether they should do it or not. If AMCs feel that they want to reward their agents, it is entirely at their discretion. As long as they are not charging it to the scheme, it is alright. SEBI’s intent is to draw a line between what is exorbitant and what is okay—which is perfect. There has to be some leeway for allowing AMCs to reward distributors.

HSBC MF gets off SEBI hook with a mere warning

Market regulator Securities and Exchange Board of India (SEBI) has let off HSBC Mutual Fund, HSBC Asset Management (India) Pvt Ltd (HSBC AMC) and its chief executive officer with a mere warning, despite finding them contravening regulations.
 In an order, SEBI's full-time director Dr KM Abraham said, “I hereby warn the Board of Trustees of HSBC Mutual Fund, HSBC Asset Management (India) Pvt Ltd and its chief executive officer that they shall strictly comply with the law governing their conduct and business of mutual funds in the securities market.” 

The matter relates to the HSBC Gilt Fund. It was alleged that in January 2009, HSBC AMC changed fundamental attributes of the scheme without following procedures. In a letter dated 3 March 2009, the AMC told the market regulator that it has made certain changes in the scheme. HSBC AMC said that it changed the name of the scheme to HSBC Guild Fund from HSBC Guild Fund-Short Term Plan, changed the benchmark index to 'I Sec Composite Index' from 'I Sec Si-Bex' and modified duration of the portfolio not exceeding 15 years from 'normally not exceeding 7 years'.

Following the changes, some investors complained to SEBI that their value of investments in the scheme had come down. They also alleged that the same was because of the abrupt changes in the investment objective such as shifting the investments from ultra short-term to long-term bonds of the scheme in January 2009.

There were some media reports which said that the Fund had shifted about 80% of its assets from ultra short-term to long-term bonds in a single day. The AMC cited liquidity crisis and the corresponding volatility of the assets under management, as the reasons for increasing the duration.

The AMC had launched a scheme called HSBC Gilt Fund during the year 2003. The scheme is an open-ended scheme, which sought to generate reasonable returns through investments in government securities (also referred to as G-Secs).

The said scheme had two plans—Long Term Plan and the Short Term Plan. In the offer document, it was mentioned that the Short Term Plan was suitable for investors seeking to obtain returns from a plan investing in gilts (including treasury bills) across the yield curve with the average maturity of the portfolio normally not exceeding seven years and modified duration of the portfolio normally not exceeding five years. The Long Term Plan was intended to suit investors with surpluses for medium to long periods and that the plan would invest in gilts (including treasury bills) across the yield curve with the average maturity of the portfolio normally not exceeding 20 years and modified duration of the portfolio normally not exceeding 12 years.

However, the AMC wound up the Long Term Plan after failing to get the minimum 20 investors mandated by SEBI and continued the Short Term Plan. Subsequently, the said plan underwent certain changes, the major change being the change of the modified duration from 'normally not exceeding 5 years' to 'not exceeding 15 years'.

The counsel for the AMC argued that it was specifically mentioned in the offer document that the average maturity and the modified duration could undergo a change in case the market conditions warrant and according to the views of the concerned fund manager and contended that SEBI did not object to the same while scrutinising the offer document.

Dr Abraham in his order said: "The noticees may be technically correct in stating that the changes made by them are not fundamental attributes, as per the aforesaid SEBI Circular, and therefore there is no legal compulsion on them to adhere to the procedure and manner prescribed under Regulation 18 (15A) of the Mutual Funds Regulations. However, the vital point that the noticee seems to have sadly overlooked is the aforesaid Regulations clearly extend to all changes that affect the interests of unit-holders."

"I am of the view that the board of trustees of the Fund and the Fund have contravened the provisions of Regulations 18(9) & 18(22) of the Mutual Funds Regulations and Clauses 2, 6 and 9 of the Code of Conduct laid down in the Fifth Schedule of the Mutual Funds Regulations. Further, the AMC has contravened Regulations 25(1) & 25 (16) of the Mutual Funds Regulations and Clauses 2, 6 and 9 of the said Code of Conduct. The Chief Executive Officer of the AMC having failed to ensure that the mutual fund complies with all the relevant legal provisions has contravened Regulation 25 (6A) of the Mutual Funds Regulations," Dr Abraham said in an 18-page order.

New biz for life insurance grew 25 pct in FY10

Led by state-owned LIC, new business for the life insurance industry recorded a growth of 25 per cent during 2009-10, overcoming the decline witnessed a year ago on account of the global financial meltdown.
According to industry sources, the 23 life insurers mopped up a first year premium of Rs 1.09 lakh crore in 2009-10 compared to Rs 87,108 crore in the previous year. In 2008-09, the insurers registered a degrowth of 6 per cent.
In 2009-10, Life Insurance Corporation collected a premium of Rs 70,891 crore compared to Rs 52,954 crore in 2008-09, thereby growing by around 34 per cent during the year. The market share of LIC has also increased to 65 per cent in 2009-10 compared to around 61 per cent in the previous year.
The other 22 private insurers mopped up a first year premium of Rs 38,399 crore in FY2010, compared to Rs 34,154 crore during the previous year, translating into a growth of over 12 per cent.
Among private life insurers, SBI (SBIN.NS : 2223.1 +117.3) Life emerged as the biggest player. The insurer collected Rs 7,041 crore as first year premium in the last fiscal compared to Rs 5,386 crore in 2008-09, thereby growing by over 30 per cent.
However, ICICI (ICICIBANK.NS : 943.85 -8.05) Prudential, which was at the top position in 2008-09, registered a 7 per cent degrowth during 2009-10.
It managed to mop up a Rs 6,334 crore premium in the last fiscal as against Rs 6,813 crore in 2008-09.
Among other big players, Reliance Life collected Rs 3,921 crore as first year premium in 2009-10, compared to Rs 3,541 crore in the previous year, thereby growing by over 10 per cent.

Equity funds pip Sensex in bull run

Equity fund managers do well in bull markets, but any signs of sideways or bearish sentiments, they underperform (or give lesser returns than that of) market returns, according to a study conducted by FE of decade long returns of diversified equity funds vis- -vis its benchmark indices.
For each (calendar) year, the returns of equity funds were compared with its benchmark indices which varied from Sensex (^BSESN : 17573.99 +101.43), BSE 100 to S&P CNX 500. In the bull market of 2009, when Sensex rallied 81%, almost all funds (97% of equity funds) outperformed (or gave more returns than) its benchmark index returns. But for the year 2010 till date, when the market has literally given no returns, the outperformance figure came down to 63%.
Long-term outperformance is key to the survival of fund managers and the fund management industry. Afterall, the mutual fund industry gets paid as management fees for its active fund management - which are typically 1-1.25% pa of assets.
But, any chances of sustained underperformance would mean the investors might shift to lower-cost index funds. In developed markets especially in US, a large proportion of equity funds are allocated towards index funds. This is because US fund managers are increasingly finding it difficult to beat markets year after year. However, in India, the case is different. In fact, in the entire bull market cycle, the outperformance figures have been around 92% on an average. What is worrisome though is what happens in a bear market.
The year 2008 was the worst year ever for the equity fund managers, when the markets tanked. Sensex fell by 52% in 2008 and only 4% of funds managed to give more returns than that of Sensex. In the bear market of 2001 and 2002, when Sensex corrected 18-20%, the outperformance was lower at 12% and 22% respectively. As a retail investor though, long term performance (3-5 year returns) is key - and here at least 80% have given more returns than that of its benchmark.
While this should keep the investors happy, a soul search also needs to be done as to how the returns were earned. While the long-term outperformance scorecard looks good for Indian equity fund managers, there is a crying need to stick to investment mandate.

IndusInd Bank to unveil credit card

Bangalore: To extend its reach to the customers, IndusInd Bank plans to enter the credit card segment. The bank expects a turnover of around Rs. 500 crore from the new business in its very first year, reports Rupee Times.

Talking to Rupee Times, Paul Abraham, CEO of IndusInd Bank said, "So far, our retail lending has been entirely secured. We want to move towards unsecured lending. A credit card will complete the suite of products. We expect the credit card business to pick up in the next three years and will target around Rs 500-crore business in the first year."

The bank has partnered with IIT- Madras to provide the technology for this facility. "From a manufacturer to a dealer, everyone across the chain can avail themselves of credit under one umbrella. The objective is to disburse credit faster and, thereby, help us grow the loan book," said Ramesh Ganesan, EVP head - Transaction Banking, IndusInd Bank.

In the last financial year, the bank has shown commendable performance owing to higher margins and increased loan book. It posted a net profit of Rs 97.96 crore in three months to March 2010, a 94 percent jump year-on-year. Total income stood at Rs.852.57 crore, a growth of nine percent.

United Stock Exchange of India gets SEBI's approval

The United Stock Exchange of India (USE) has finally got the permission from SEBI to commence operations in currency futures. The exchange is expected to launch contracts in all the four pairs of currencies -- $-rupee; Euro-rupee; Pound Sterling -rupee and Japanese Yen-rupee, reports PTI.

After the approval, BSE's Managing Director and CEO Madhu Kannan said that USE has tentatively planned to commence operations in June 2010. According to the company's release, Nearly 150 members have submitted their applications for membership of USE. Most of the members of BSE are expected to join USE.

T S Narayanasami, Managing Director & CEO, USE said, "USE's membership drive is in full swing and we are pleased to see spontaneous response from the banks which are natural partners of USE apart from broking community. Trading membership is initially free with nil transaction charges to begin with."

In the years to come, USE may play an important role in transforming India into a modern financial hub, by being India's most preferred stock exchange.

Investors need not worry over ULIP issue: Khurshid

Corporate Affairs Minister Salman Khurshid today downplayed fears that investors would lose confidence due to the row between SEBI and IRDA over market- linked insurance policies, as the issue will be resolved in favour of either one regulator or the other by the courts.
"Investors will have confidence that at the end of the day, even if there is disagreement between regulators, one regulator will prevail (over ULIP issue). It's only a matter of time, one regulator will prevail. So investors need not worry," Khurshid told reporters on the sidelines of an Assocham event on transpCorporate Affairs Minister Salman Khurshid today downplayed fears that investors would lose confidence due to the row between SEBI and IRDA over market- linked insurance policies, as the issue will be resolved in favour of either one regulator or the other by the courts.

"Investors will have confidence that at the end of the day, even if there is disagreement between regulators, one regulator will prevail (over ULIP issue). It's only a matter of time, one regulator will prevail. So investors need not worry," Khurshid told reporters on the sidelines of an Assocham event on transparency and accountability.
Related Stories

* Orient Green Power plans IPO, files prospectus with SEBI
* Shirram EPC up 4% after associate company files DRHP
* Banks' proposal to float holding firms revived
* Warns brokers against mis-selling
* Sebi to tighten distributor certification norms

He said regulators are new institutions and there are bound to be overlaps in their functioning.

"There are overlap rules that are supposed to apply... Engagement rules... If we find there is a gap in engagement rules, we clarify. I think that is what the Finance Ministry wanted to do, either do itself or let courts do it. In this case, the Finance Ministry seems to have suggested that let the courts decide the overlap rules," he said.

Engagement rules refer to practices followed in situations of opposing interests. ULIPs are products which combine insurance features with market investment.

Khurshid said conflict may arise between the Competition Commission of India and SEBI or the Central Electricity Regulatory Commission, but engagement rules are supposed to resolve these issues.

"Everywhere, in the Competition Commission for instance, there will be an overlap with SEBI, electricity commission, and we have engagement rules. They are supposed to resolve any such issue, any potential or actual conflict. It is not an impossible task," he said.

Conflict between market regulator SEBI and insurance regulator IRDA arose when the former banned 14 life insurers from raising money from market-linked insurance schemes (ULIPs), following which the latter asked the companies to ignore the order.

Subsequently, the Finance Ministry intervened and the two regulators agreed to jointly seek a legally binding mandate from the court as to who has jursdiction over ULIPs.

Till then, status quo ante was restored by the Finance Ministry.

After the agreement, SEBI amended its order and banned only new ULIPs launched after April 9, when the first order of SEBI was issued.

IRDA, however, asked the companies to ignore this directive as well.
He said regulators are new institutions and there are bound to be overlaps in their functioning.
"There are overlap rules that are supposed to apply... Engagement rules... If we find there is a gap in engagement rules, we clarify. I think that is what the Finance Ministry wanted to do, either do itself or let courts do it. In this case, the Finance Ministry seems to have suggested that let the courts decide the overlap rules," he said.
    
Engagement rules refer to practices followed in situations of opposing interests. ULIPs are products which combine insurance features with market investment.
    
Khurshid said conflict may arise between the Competition Commission of India and SEBI or the Central Electricity Regulatory Commission, but engagement rules are supposed to resolve these issues.
    
"Everywhere, in the Competition Commission for instance, there will be an overlap with SEBI, electricity commission, and we have engagement rules. They are supposed to resolve any such issue, any potential or actual conflict. It is not an impossible task," he said.
    
Conflict between market regulator SEBI and insurance regulator IRDA arose when the former banned 14 life insurers from raising money from market-linked insurance schemes (ULIPs), following which the latter asked the companies to ignore the order.
    
Subsequently, the Finance Ministry intervened and the two regulators agreed to jointly seek a legally binding mandate from the court as to who has jursdiction over ULIPs.
    
Till then, status quo ante was restored by the Finance Ministry.
    
After the agreement, SEBI amended its order and banned only new ULIPs launched after April 9, when the first order of SEBI was issued.
    
IRDA, however, asked the companies to ignore this directive as well.

Highlights of RBI's FY11 Annual Policy Statement

MAIN HIGHLIGHTS

* Hikes reverse repo, repo rate, CRR by 25bps each
* Reverse repo, repo rate hikes with immediate effect
* CRR hike effective from Apr 24
* CRR hike to impound 125 bln rupees from banks
* FY11 GDP growth projection at 8.0% with upside bias
* March end inflation projection at 5.5%
* FY11 banks' credit growth projection at 20.0%
* FY11 banks' deposit growth projection at 18.0%
* FY11 money supply growth projection at 17.0%
.
STANCE

* Hike in policy rates, CRR to help contain inflation
* Hike in policy rates, CRR to anchor inflationary expectations
* Measures to sustain recovery process
* Govt borrow needs, private credit demand will be met
* Hikes to align policy tools with evolving state of econ
* To closely monitor macro events, prices; take warranted steps
* Econ firmly on recovery path, industrial growth broad based
* India economy resilient, recovery consolidating
* FY11 econ growth to be higher, more broad-based vs FY10
* Lower policy rates can complicate inflation outlook
* Lower policy rates also impair inflationary expectations
* Despite 25bps hike in rates, real policy rates still negative
* Need to
normalise policy rates in calibrated manner
* Inflationary pressures "accentuated" in recent period
* Inflation getting increasingly generalised
* Capacity constraints to re-emerge as econ growth rises
* Must ensure demand-side inflation does not become entrenched
* FY11 fresh govt bond issuances 36.3% higher vs FY10
* FY11 fresh govt bond issuances "a dilemma"
* Policy considerations demands liquidity be curbed
* Govt borrow needs supportive liquidity conditions
* Need to absorb liquidity without hurting govt borrow plan
* To respond swiftly, effectively to inflationary expectation
* To actively manage liquidity, ensure private credit demand is met
.
INFLATION
* Significant changes in drivers of inflation in recent months
* Overall food inflation high despite seasonal ease
* Rise in global commodity prices upside risk to inflation
* Household inflation expectations remain at elevated level
* Demand pressures may rise as recovery gains momentum
* Monsoon prospects unclear, blur FY11 inflation outlook
* Volatile crude prices cloud FY11 inflation outlook
* To ensure price stability, anchor inflationary expectations
* To monitor overall, disaggregated components of inflation
* keeps medium-term inflation objective of 3.0%
* An unfavourable monsoon may exacerbate food inflation
* Unfavourable 2010 monsoon may add to fiscal burden
.
GROWTH
* GDP projection assumes normal monsoons
* GDP projection also assumes good industrial, services growth
* Industrial growth to take firmer hold going forward
.
FISC
* Fiscal prudence to avoid crowding out private credit demand
* Fiscal prudence must shift to structural improvements
* Govt borrow "very large", can pressure interest rates
.
GLOBAL
* Pace of global econ recovery remains uncertain
* Uncertain global econ recovery downside risk to India GDP
* Trade, financial linkages to other economies may impact India GDP
* Commodity price seen up more if global recovery gain momentum
* Rise in global commodity prices may up inflation pressure
* Expansionary fiscal policy may not be unwound in advanced economies
* Expansionary policies may trigger large FX flows to India
* Excessive flows challenge to FX rate, monetary mgmt
* FX rate policy not guided by pre-announced target
* Keep flexibility to intervene in FX market to manage volatility
* Need to be vigilant volatile FX rate movements
.
MARKET

* RBI panel to mull single point reporting for OTC FX derivatives
* To launch reporting platform for secondary deals of CDs, CPs
* Asked FIMMDA to develop CD, CP reporting platform
* To allow banks to purchase non-SLR bonds by infra companies in HTM
* OKs bourses to launch plain vanilla dollar/rupee options

The New Pension Scheme: Good intentions, poor execution

 In the current Budget, the Central government had announced that it would contribute Rs1,000 towards each New Pension Scheme (NPS) account opened this year. The Pension Fund Regulatory and Development Authority (PFRDA) plans to make the scheme more attractive. While various efforts have been made to make the NPS attractive, the Centre has failed to attract its own States towards the scheme.

Even after six years of its launch, only 12 States have executed the NPS scheme, eight have merely entered into an agreement with the NPS Trust. Administrative difficulties in identification of eligible employees and the difficulties of implementation of a payroll-linked programme are some of the difficulties that have been cited by various States for non-implementation of the scheme.

The NPS was introduced by the government in April 2004, to cover all entrants in government service. It was subsequently extended to the general public later. At that time, around 23 States in the country had notified adoption of the NPS for their employees.

However, even after six years, the implementation of the scheme has not taken off. According to the 13th Finance Commission Report (2010- 2015), only 12 States have executed their agreements signed with the Central Record Keeping and Accountancy Agency (CRA). In the case of NPS, the National Securities Depository Limited (NSDL) has been appointed as the CRA.The Report further states that an additional eight States have entered into agreements with the NPS Trust.

This lacklustre performance from the States has led to an abysmal transfer of funds worth Rs 133crore so far to the NPS. The amount is quite meagre compared to the total corpus that the government had transferred to pension fund managers. As on 31 March 2008, this amount stood at over Rs1,117 crore. Thus, the total amount transferred to the NPS stands at around 10% of the total amount that the Centre had allocated to the Scheme. According to the Report, this Rs113 crore is the transfer amount put together for only two States.

The Report states, “The contributions of State employees are lying in the State public accounts, earning a return equal to the interest rate allowed for the General Provident Fund. The migration to the NPS needs to be completed at the earliest.” The Report has also recommended a grant to assist States build a database for their employees and pensioners.
The Centre’s intentions may be noble, but if it can’t get the States to follow the NPS, how will it convince the general public to go in for what otherwise is a well-conceived scheme? — Amritha Pillay

Important changes in PPF rules

Public Provident Fund Scheme, 1968: (1) Clarification regarding reckoning of the date of deposit (2) Reiteration of instructions on opening of an account for a minor

Circular No. DGBA.CDD. H-7530/15.02.001/2009-10, dated 29-3-2010

1. Reckoning the date of deposit in case of cheque payment:

(a) As you are aware, in terms of Ministry of Finance letter No. F. 3(9)-PD/72 dated September 4, 1972, in the case of Public Provident Fund Scheme, 1968 (PPF) “when a subscriber makes a deposit by local cheque or demand draft, the date of tender of cheque or draft at the Accounting Office is treated as date of deposit, provided the related cheque is honoured on presentation for encashment.” However, in case of all other Small Savings Schemes of the Government of India (GoI), such as, Post Office Savings Schemes (POSS), as also Senior Citizens Savings Scheme, 2004 (SCSS), if the money is deposited in the account by means of a cheque (local or outstation),the date of encashment of the cheque is treated as the date of deposit.

(b) In order to bring uniformity in the reckoning of the date of deposit in the PPF vis-à-vis POSS and SCSS, the GoI, vide their letter F. No.7/7/2008/NS-II dated February 10, 2010, have decided that hereafter in modification of Ministry of Finance letter No.F.3(9)-PD/72 dated September 4, 1972 “when a deposit is made in the PPF account by means of a local cheque or demand draft by the subscriber, the date of realization of the amount will be the date of deposit.”

(kindly ensure that your cheque is cleared by the 5th of the month to earn interest for that month,

also do not wait for 31st March to make PPF deposits)

(c) You may bring this to the notice of your branches undertaking PPF business and ensure that the same is also incorporated in the computerized system. The information should also be duly displayed at the branches for awareness of the customers.

2. Opening of an account for a minor:

(a) In view of complaints being received about non-opening of accounts for minor by some Agency banks, it is reiterated that as per Rule 3 (1) of PPF Scheme, 1968, an individual may, on his own behalf or on behalf of a minor, of whom he is the guardian, subscribe to the Public Provident Fund. Further it is reiterated that as clarified, vide Ministry of Finance letter F.7/34/88/-NS II dated November 17, 1989, either father or mother can open a PPF account on behalf of his/her minor child but not both.

(b) You are advised to reiterate these instructions to your branches operating the PPF Scheme.

FinMin puts Sebi's Ulips order on hold

The government today said the two regulators Sebi and IRDA have agreed to maintain the status quo that existed before market regulator's ban on 14 life insurers from raising funds for unit-linked schemes.
The status quo will be maintained till a court decides who can regulate ULIP schemes, Finance Minister Pranab Mukherjee told reporters here.
ULIP is an insurance product in which a bulk of the premiums is invested in equities and bonds.
"To resolve any ambiguity and to ensure smooth functioning in the market, the regulators have agreed to jointly seek a binding legal mandate from an appropriate court," Mukherjee said.
"Meanwhile, status quo ante is being restored," he told reporters outside the finance ministry.
Mukherjee's comments came after a series of meeting between Finance Ministry officials and IRDA Chairman J Hari Narayan Sebi chief C B Bhave.
Sebi last Friday banned 14 life insurance companies from raising funds through unit-linked insurance policies.
A day later, insurance sector regulator IRDA asked the companies to ignore the Sebi order and do business as usual.
The ball had since gone into the Finance Ministry's court. Bhave and Hari Narayan held separate meetings with Finance Secretary Ashok Chawla on the ongoing tussle between the two regulators.
The life insurance companies against whom Sebi passed the order are SBI Life, ICICI Prudential, Tata AIG, Aegon Religare Life, Aviva Life, Bajaj Allianz, Bharti AXA, Birla Sunlife, HDFC Standard Life, ING Vysya Life, Kotak Mahindra Old Mutual Life, Max New York Life, Metlife India and Reliance Life.

Insurance houses present a united front; defy SEBI ban on ULIPs

The government today said the two regulators Sebi and IRDA have agreed to maintain the status quo that existed before market regulator's ban on 14 life insurers from raising funds for unit-linked schemes.
The status quo will be maintained till a court decides who can regulate ULIP schemes, Finance Minister Pranab Mukherjee told reporters here.
Several of these companies have been flooded by customer enquiries, with anxious policy holders desperate to know whether their policies are safe and operational. Even those that have not been named among the 14 companies are getting regular calls from nervy customers.

Following the insurance sector regulator Insurance Regulatory and Development Authority’s (IRDA) go-ahead to continue selling ULIPs, insurance companies have presented a united front in openly ignoring the SEBI diktat. When Moneylife contacted several companies under the pretext of customer enquiries, we were told that ULIP products would continue to be offered until further communication to the contrary is received from the company management. We were also informed that existing holders of ULIPs would face no difficulties and that they would continue collecting premiums as usual.

These companies include AEGON Religare, Aviva Life, Bajaj Allianz, Bharti AXA Life, Birla Sun Life, HDFC Standard Life, ICICI Prudential, Kotak Mahindra, Reliance Life, SBI Life, Tata AIG Life, Max New York Life. Officials from Metlife India and ING Vysya Life could not be reached.

An official from Bajaj Allianz said, “This ban will not affect our customers—existing or new. You can buy new plans or continue paying premiums on existing policies.”

Another official from Bharti AXA Life said, “We will continue to issue new ULIP policies till the time we get a directive to the contrary from our management. Existing policy holders need not be concerned about their policies.”
A representative from Reliance Life reiterated, “Our customers need not worry. ULIPs are regulated by IRDA and not SEBI. As such, we will continue to offer ULIPs to new customers.”

With IRDA firmly standing by insurance companies, the battle between the two financial regulators has taken an ugly turn. SEBI had on Saturday issued a startling order barring 14 insurers from selling ULIPs without its approval. The very next day, IRDA took the market watchdog head-on by challenging SEBI’s ban and stating in its directive, "Notwithstanding the SEBI order, these insurance companies can continue to do business as usual, including offering, marketing and servicing ULIPS." — Moneylife Digital Team

JM Financial Buys Out Partner SRS In $500M Real Estate JV

Kampani citing conflict of interest with the US partner launching independent PE play in India.

Infinite India Investment Management, an equal joint venture between JM Financial and US-based SRS Investments, managing real estate assets worth $500 million, has been called off. JM has acquired SRS stake in the four-year-old JV, which ceased to exist from April 1 this year.
SRS plans to start its independent private equity operations in India, while limiting its exposure to real estate. JM Financial will continue investing in realty and is expected to raise a new $100-million fund next year.
Infinite has been an active investor in the Indian real estate even though one of its portfolio firms Maytas Properties, promoted by the disgraced B Ramalinga Raju family of Satyam Computer, turned a risky asset.
"We have bought the stake of SRS in Infinite India Investment Management. They have decided that they want to set up a fund that does private equity in India. This would have been a conflict of interest for us since we already have a $225-million private equity fund. The separation was done in a very cooperative manner," Vishal Kampani, Managing Director, JM Financial Group, told VCCircle.
Without disclosing the amount, Kampani said, JM bought SRS' stake at a nominal value "since we were doing all the work on the ground in India". Infinite India Investment Chairman Karthik Sarma, who represented SRS, could not be contacted immediately for comments.
JM Financial will assist SRS in managing its real estate portfolio and work towards unlocking value from co-investments in the sector.
Infinite India was set up as a 50:50 JV between JM Financial and SRS Private Investment Management LLC in late 2006. It was initially managing India-focused real estate assets worth around $380 million, of which JM Financial raised around $170 million. The rest was contributed by SRS, which managed $260 million for real estate investments in India.
In 2008, it roped in third party investors for $150 million investment in Maytas Properties, which took the funds under management to $520-$530 million.
JM currently has an investible surplus of $50 million from its allocation towards the JV. SRS, on its part, may utilize the surplus for the PE play, though this could not be confirmed independently.
Besides Maytas, Infinite had invested in a host of projects across tier-I and tier-II cities, including $50 million infusion into the Kolkata-based Srachi Developers and almost a similar tranche into Heera Group in Thiruvanathapuram. Some of its other investments were into a 32-acre mixed-use development in Mumbai, a 1.8 million IT park in Chennai, a large retail space in Vishakapatnam and a few other entity level investments in real estate hospitality firms in Bangalore and Delhi.
The JV was one of the largest India-focused real estate funds behind HDFC Property Fund and IL&FS Realty Fund, both of which are in excess of $800 million, and Sun Apollo's $630-million operations. "We now believe that India's real estate market is very localised and there is no scope for international expertise there. If you look at most of large India-focused realty funds, they are all managed by local expertise," Kampani added.
This will not be the first time when JV partners in a real estate PE play have parted ways. ICICI Venture had a joint venture for real estate investments with US-based real estate developer and investor Tishman Speyer. In 2008, the JV fell apart with ICICI Venture exiting TSI Venture India Pvt Ltd, which has investments of $700 million.
Meanwhile, Kampani added that Infinite was trying to recover value from its investments in Maytas Properties. "We have won a stay order from the High Court in Andhra Pradesh directing Maytas not to sell assets. The arbitration proceedings have also gone in our favour till now," Kampani said.
Infinite India roped in third party investors to pump in $150 million into the company, which were routed into specfic projects across cities. The largest investor in that consortium was one of JM's realtions in the US, Kampani added. Months later, the promoter family at Satyam Computer, which also managed Maytas, was rocked by a Rs 7,000-crore financial scam.

India's first monthly income plan with Gold!

As an Indian investor, you have found comfort in two places traditionally, one is fixed income and the other is gold. Fixed income investors, whose investment objective over the years has been to grow their capital at a steady rate which can outdo inflation in the long run, have found equities as a necessary ally - however, the accompanied volatility at times may have given you sleepless nights. The question to be asked is whether there exists an asset class which can do the job of protecting portfolio from the impact of inflation, without overly relying on equities. Well, the answer is Gold. The shiny yellow metal has been regarded as an effective hedge against inflation, and is known to preserve the purchasing power over a long period of time. Religare MIP Plus fits the bill in this regard, by combining asset classes like debt, equity and gold (through Gold ETFs) in a portfolio, not only it lends a steady look, but also reduces the volatility of equities to a large extent.

Equity mutual funds record Rs2,016 crore in outflows 

After sailing in positive territory last month, equity mutual funds have again witnessed an outflow in March. Equity schemes recorded Rs2,016 crore of redemption in March compared to Rs1,514 crore net inflow in February while the BSE Sensex gained 7% during the same period. The assets under management (AUM) of equity schemes has increased 3% in March at Rs1,74,054 crore from Rs1,68,672 crore last month while the combined AUM of all schemes declined 20% in March (Rs63,979 crore), from Rs7,66,869crore in February 2010.

Redemptions of all combined schemes jumped 81% at Rs99,35,942 crore in FY09 compared to Rs54,54,650 last year. March witnessed Rs11,27,635 crore redemptions, up 50% from February which saw redemptions of Rs7,52,798 crore. There is a sharp increase of 51% redemption in March 2010 compared to the corresponding period last year.

“Markets are improving so there is some profit booking. Very restrictive NFOs were allowed during this year. There was also a pressure on commission paid to distributors,” said D Mohanty, country head (Retail), UTI Asset Management Company Ltd (UTI).—  Ravi Samalad

 

Back Capital-hungry Manipal may tap Kotak PE fund

Manipal Health Systems, the Bangalore-based healthcare chain, is close to raising around Rs 150 crore from Kotak Private Equity Fund in a structured transaction. The investment, if it comes through, is expected to give an exit to IDFC Private Equity Fund, which had invested Rs 90 crore during late 2006.
Industry sources indicate that Manipal Health Systems is looking at a holding company structure to draw in the investment from Kotak PE fund, which will then funnel the investment to consolidate its hospitals across South India. Manipal Health has been in the market for the past 18 months with a mandate to raise as much as $100 million.

The company was close to sealing deals with two large global PE players in addition to a global strategic player, but due to economic downturn and valuation differences the deal did not materialise," sources close to the deal said.
Manipal Health Systems, with a topline of around Rs 500 crore, offers tertiary, secondary and primary healthcare delivery services from 17 hospitals, nine primary care clinics and 55 community health programmes. The five-decade-old group has over 7,000 beds and 5,000 doctors and treats around 1.5 million out-patients and 400,000 inpatients annually. Manipal is also looking to expand its presence in Mumbai and Delhi markets. Manipal Health Systems and Kotak PE Fund officials could not be reached for comments.
The scenario of healthcare chains consolidating in India has come to fruition in the recent past with Fortis taking giant strides in the market. Flush with funds by exiting Ranbaxy, Fortis after acquiring Wockhardt Hospitals for around Rs 900 crore recently went on to acquire a significant position in Singapore-based Parkway Hospital for around $686 million.
The emergence of Fortis as a pan-India player in this segment is expected to be matched closely by the established Apollo Hospitals Group, which according to industry information is also readying for consolidation.

ELSS Funds emerge major gainers for week ended Apr. 9

ELSS Funds

NAVs of the ELSS funds category gained 1.91% in the week ended Apr.09, 2010.

Among the ELSS funds, SBI Tax Advantage Fund Series 1 gained 3.50%, IDFC Tax Saver (ELSS) Fund added 2.83%, Bharti AXA Tax Advantage Fund - Eco Plan rose 2.78%, Bharti AXA Tax Advantage Fund - Regular climbed 2.74% and L&T Tax Advantage Fund - Series I gained 2.63%.

Equity-Diversified Funds

NAVs of the Equity-Diversified funds category gained 1.73% in the week ended Apr.09, 2010.

Among the Equity-Diversified funds, JM Core 11 Fund - Series 1 gained 5.80%, HSBC Small Cap Fund added 5.34%, SBI Magnum Midcap Fund rose 5.11%, DSP BlackRock Micro Cap Fund - Regular climbed 4.96% and SBI Magnum Sector Funds Umbrella - Emerging Business Fund gained 4.90%.

Index Funds

NAVs of the Index funds category gained 1.31% in the week ended Apr.09, 2010.

Among the Index funds, SBI Magnum Index Fund gained 2.08%, Benchmark S&P CNX 500 Fund added 1.42%, LICMF Index Fund - Sensex Advantage Plan rose 1.36%, Tata Index Fund - Sensex Plan - B climbed 1.34% and UTI Master Index Fund gained 1.34%.

Balanced Funds

NAVs of the Balanced funds category gained 1.08% in the week ended Apr.09, 2010.

Among the Balanced funds, ICICI Prudential Child Care Gift Plan gained 3.94%, JM Balanced Fund added 3.80%, Canara Robeco Balance rose 2.72%, Principal Child Benefits Fund-Career Builder climbed 2.67% and HDFC Children`s Gift Investment Plan gained 2.48%.
Debt Funds

NAVs of the Debt funds category gained 0.13% in the week ended Apr.09, 2010.

Among the Debt funds, DWS Fixed Term Fund - Series 50 - Plan A gained 2.64%, ICICI Prudential S M A R T Fund - Series G - Retail added 2.25%, SBI Magnum NRI Investment Fund - FlexiAsset Plan rose 2.13%, Birla Sun Life Equity Linked FMP - Series A - Retail climbed 1.91% and DWS Fixed Term Fund - Series 43 - Regular gained 1.60%.

Sector Funds

All the sector fund categories gained during the week ended Apr.09, 2010. Among major gainers in the sector fund categories, were Media and Entertainment (2.76%), Auto (2.6%), Infrastructure (2.21%), Financial Services (2.19%), Bank (2.1%), Services (2.03%).

Cancellations, ceased accounts outstrip new SIP registrations in March

While stock markets are charting an upward course for several weeks now, mutual fund investments have exhibited a contrarian trend. The latest exhibit in this grim scenario is the rapidly declining investor interest in systematic investment plans (SIPs) of mutual fund schemes.

Here are the bare facts. Since December 2009, new SIP registrations have witnessed a steady downhill trend. New registrations in SIPs have gone down from about 280,000 in December 2009 to around 225,000 in March 2010.

Meanwhile, the number of SIP cancellations has increased from around 67,000 in January this year to around 83,000 for March. Between February and March, the number of ceased SIP transactions has gone up to around 108,000. Most alarmingly, cancellations and ceased transactions are more than the new SIP registrations for the month of March, a month when people make a lot of investments.

A SIP allows an investor to invest in a mutual fund by making smaller periodic investments (either monthly or quarterly) instead of a large one-time investment. This makes a SIP the preferred route for investing in funds for most investors.

All this while, the Sensex has been rising steadily and even touched 18,000, a 25-month high. Moneylife has previously written about how recent mutual fund outflows have defied stock market trends. (http://www.moneylife.in/article/8/3758.html).

Recently, we also revealed how redemptions from mutual funds have consistently outpaced subscriptions from August last year, when the Securities and Exchange Board of India (SEBI) introduced the no-entry load ban. (http://www.moneylife.in/article/8/4625.html).

Market players suspect that most of the current woes being experienced by this industry stem from the whirlwind initiatives taken up by SEBI to ‘fine-tune’ the industry practices. However, industry leaders have defended the new system by arguing that the industry would adjust to paying commissions, sooner than later. Their contention is that investors are pulling out money from MF schemes to book profits.

But, as pointed out by Moneylife, this is nothing but a veiled attempt to hide the fact that SEBI’s new rules regarding entry load and trail commissions do not help anybody, least of all investors because of the uneven playing field of the investment landscape. With commissions vaporising into thin air, distributors have lost incentive to sell mutual funds and are instead pushing heavy commission-earning products like unit-linked insurance plans (ULIPs) and corporate fixed deposits which are against investors’ interests in some cases.

An independent financial advisor (IFA) pointed out that apart from the lack of incentive to sell, distributors also face other hurdles in promoting SIPs. “Even banks and national distributors are not interested in selling SIPs as it is a very slow-earning option. Also, even if a distributor promotes a SIP, he is not assured of regular income anymore as some national distributor may poach his running SIP any time. Uncertainty of future trail (commission) and transfer of assets under management (AUM) is the main hurdle for brokers to promote SIPs.”

The IFA also pointed out that filling the SIP application form is very cumbersome and technical. There is no standard format across asset management companies (AMCs). Every AMC asks for data in different formats. — Sanket Dhanorkar

At last, AMFI ups the ante against mutual fund mis-selling

The Association of Mutual Funds in India (AMFI) has finally woken up to the messy game of assets under management (AUM) transfer and rampant mis-selling of mutual funds by banks and national distributors.
The industry body has sent warning notices to HDFC Bank, HSBC Bank, Kotak Mahindra Bank and NJ India Invest to stop this practice, reports CNBC TV18. AMFI has also sent a stern signal that if they don’t comply with the guidelines, AMFI will consider withdrawing their licenses.

Interestingly, Moneylife had first reported this practice on 2 February 2009. Post the implementation of the trail commission norms, AUM transfer by unethical means was gaining traction, and distributors and investors were being duped into signing dubious letters. (See here and here).

In the first article, we had identified HDFC Bank and NJ India Invest as among those distributors who were indulging in this practice. Now AMFI has acted against these two entities. AMFI is also in the process of issuing notices to other such entities.

Ironically, according to some smaller distributors, KN Vaidyanathan, executive director, SEBI, had addressed a gathering of distributors at the Bombay Stock Exchange (BSE) earlier this year where he had said that they should follow the practices of NJ India Invest and openly lauded the “ethical services” provided by NJ India Invest.

According to sources, NJ India Invest has a dedicated team for encouraging switchover of assets. In some cases involving national distributors, investors are duped into signing letters which eventually leads to a change of distributor, without the knowledge of the investor. The ban on no-objection certificates (NOCs) was supposed to ease investor woes while changing a distributor, but some players continued to demand an NOC from investors.

The entry of bank distributors in the MF distribution game is unlikely to end mis-selling of MFs. (See here). Recently, the State Bank of India has trained 18,000 employees to sell MFs through its banking channel. After SEBI allowed MF units to be traded through the exchanges in December 2009, brokerage houses have started providing free demat accounts to earn trail commission. Sources reveal that while converting physical MFs into demat forms, investors are made to sign a change of distributor. (Read here).

A Pune based certified financial planner K V Balaji  recounts his experience with ICICIdirect: “I have received an SMS from ICICIdirect, offering a 'free service of converting offline mutual fund investments to online investments'. On calling the number, the person spoke about ICICIdirect offering a free service. When I asked how will ICICIdirect garner any revenue from this 'free' service, he didn’t talk of the trail. Instead, he stated that ICICIdirect would manage yearly maintenance fee of Rs500 per account holder from its demat accounts.”

Our email queries sent to HDFC Bank, Kotak Mahindra Bank, NJ India Invest and ICICIdirect remained unanswered till the time of publishing this piece. — Ravi Samalad

DWS mutual fund invites Indian money for poorly-performing overseas agribusiness fund

Deutsche Asset Management today announced the launch of the DWS Global Agribusiness Offshore Fund (DGAOF). Sadly, the past performance of the underlying fund does not lend credence to its investment philosophy.

DWS has launched an open-ended overseas ‘Fund of Funds’ scheme. It will raise money from Indian investors and put it in DWS Invest Global Agribusiness Fund, managed by Deutsche Investment Management, Americas Inc. DGAOF will invest predominantly in units of this underlying fund, which is registered in Luxembourg.

However, the historical performance of the DWS Invest Global Agribusiness Fund is pathetic. Although it has beaten its benchmark index, the MSCI World Index, the actual returns are terrible in the context of exceptional returns that the Indian equity market has offered. Since inception in November 2006, the Fund has provided returns of just 4.18%. Over three years, the performance is even more skewed, with returns of 1.84%.

The Fund’s objective is to generate long-term capital growth by investing predominantly in units of overseas mutual funds, focusing on the anticipated growth in agriculture and would include affiliated and allied sectors.

The rationale behind the Fund’s objective is to capture the opportunity arising out of the pressure on food prices on account of a rising global population and incomes. The likely rise in global food consumption will benefit companies with a strong focus on agri-businesses.

Speaking at the launch, Suresh Soni, CEO, Deutsche Asset Management said, “The DWS Global Agribusiness Offshore Fund invests in that most basic human need: food. That is not novel but our idea to invest in all parts of the agribusiness chain is unique. Not only does this  offer investors an opportunity to diversify their investments beyond the local market, but the global scope and the wide array of sectors that the Fund could invest  in, will potentially help investors benefit from interesting opportunities around the globe.”

DWS Global Agribusiness intends to invest in the entire spectrum of businesses related to food production—from agricultural commodities to consumer products. The Fund intends to invest in companies in land and plantation, seeds and fertilisers, planting, harvesting, protecting and irrigation, food processing and manufacturing companies. — Moneylife Digital Team

source:-
http://www.suchetadalal.com/?id=864a1aa4-c703-1a92-4bbb540b2109&base=sections&f

Mutual fund redemptions continue unabated

The series of game-changing initiatives taken up by the Securities and Exchange Board of India (SEBI) in August last year to spruce up the mutual fund industry have largely blown up in the face of the beleaguered sector. Ever since SEBI changed the face of the industry last year, outflows have far outstripped inflows into various schemes of mutual fund houses.
According to data available with Moneylife from a leading registrar and transfer agent, redemptions in non-NFO (new fund offer), non-SIP (systematic investment plan) open-ended equity funds have shown a remarkable trend of steady haemorrhage of cash. Except for the month of February 2010, every month from August 2010 has seen outflows exceeding inflows into mutual funds.

In March 2010, redemptions touched a high of Rs4,200 crore, compared to around Rs1,700 crore in the month of February. Normally, the month of March witnesses huge inflows into equity-linked savings schemes (ELSS) due to the tax benefit offered by these products. However, the current upheavals in the industry have overshadowed this phenomenon to show a deviation from the normal.

Moneylife has previously written (http://www.moneylife.in/article/81/3115.html) about how fund companies have been struggling with massive redemptions despite a surge in equity markets. As mutual funds normally benefit from a rising market, this steady drain of funds is even more galling for the industry.
 
After the ban on entry loads that came into play from 1 August 2009, outflow of money from fund schemes accelerated since most financial advisors could not get incentive to sell and service funds. The ban has dried up the distributors’ revenues and they are now asking investors to consider unit-linked insurance plans (ULIPs) and company fixed deposits as the next best investment opportunity.

SEBI's move may have been well intentioned, but it tripped badly in failing to assess the ground realities and the consequences of its actions. It failed to visualise that sharply higher commissions paid by the insurance industry will suck money out of MFs. It also failed to ensure the availability of inexpensive alternative distribution channels.— Sanket

ICICI, HDFC Bank to be treated as foreign banks

New Delhi: ICICI Bank and HDFC Bank, in overseas investors own more than 51 percent equity, is likely to be treated as foreign banks, as Indian government has decided not to make any further changes to its new policy on overseas investment.

The government's decision may impact future investment plans of these banks in subsidiaries or in sectors where there is a cap on foreign investment. The new rules categorize firms which are either predominantly foreign-owned or controlled as foreign companies. In the case of ICICI and HDFC Bank, foreign investment is over 51percent although management rests with Indians.



Talking to Economic Times on this issue, Union Commerce and Industry Minister Anand Sharma said that banks will not be excluded from the new norms. "I feel that this policy has done well. It was cleared by an empowered group of ministers. I don't think that is a large enough issue to reflect on the entire policy regime. I don't think there is any anxiety on this issue," said Minister.

The decision has been taken after discussions between the Reserve Bank of India, the Finance Ministry and the Industry Ministry which lasted over an year. According to the 2009 policy of the department of industrial policy and promotions, or Dipp, any company that is majority foreign-owned or foreign-controlled is deemed to be a foreign company. If such a company invests in other companies or sets up a subsidiary then its entire investment is treated as foreign investment without taking into account the holdings of Indian shareholders.

"We will not be changing our policy or providing exemptions to banks from the new FDI (foreign direct investment) norms issued. The matter has been communicated to the finance ministry which is also on board with our decision," said a Government official to Economic Times.

IDBI Bank to offer online payment gateway services

IDBI Bank announced that it has tied up with Venture Infotek, a transaction management firm, to unveil its internet payment gateway services. "We have over 100 web merchants to whom Venture Infotek is providing end-to-end services on their gateway. Venture Infotek will also help us in signing up many more net merchants," said IDBI Bank General Manager Murali Mohan.



Venture Infotek recently acquired Technonet Technologies, a payment gateway service provider, and has enhanced the technology platform of 'Eazy2Pay', its payment gateway to comply with all the latest Visa, MasterCard and RBI guidelines related to internet commerce. "With the acquisition of Technonet Technologies, we will be able to provide our customers with more choice in payment services and grow our merchant services business even more quickly," said Venture Infotek's Managing Director Piyush Khaitan.

Venture Infotek's 'Eazy2Pay' secures all transactions using Triple Data Encryption Standard (3DES) keys to encrypt cardholders' information and Merchant Plug-In (MPI) to facilitate 3D-secure verifications. "We are already seeing interesting volumes on our internet payment gateway platform, and these will increase as more and more card-holders register with issuers for the additional security requirement mandated by the RBI," Khaitan added.

Back Investing like PE firms

Individuals following this approach need to be more disciplined, optimistic and need some serious luck.
Many studies indicate that believers tend to live longer and be happier than atheists. This is because faith sustains optimism and optimists tend to outlive pessimists. In equity investing as in life, optimists tend to be bullish and being bullish pays.


Despite greater volatility, equity returns outscore other assets in the long run. Certainly this is true for India even though Indian bear markets often see over 50 per cent knocked off peak values. Since liberalisation (June 1991), there have been three major bear markets that have each knocked off over 50 per cent
However, the CAGR of the Nifty-Sensex is about 14.5 per cent across those 19 years. That comfortably outscores other assets and beats inflation, which ran at 7-8 per cent CAGR (consumer price index for urban non-manual employees).
Very few investors actually got close to 14.5 per cent because there was little scope for passive investment in the first 5-7 years. A small minority of investors made far more. The vast majority made much less.
The default vehicle of passive investors is the cheap, open-ended index fund. Until the monopolistic UTI started coming apart post-1998, Indian investors weren't offered that choice. They got closed-end, opaque schemes instead.
Over the past decade as markets have matured, passive investment vehicles have become available. Few Indian fund managers and individual investors have consistently beaten the indices and this gels with global experience. The 10-year CAGR of equity returns is lower, at 13 per cent (April 2000-April 2010). Inflation also dropped to about 6 per cent and nominal debt returns are lower as well.
Although it is against the odds and passive investing offers decent returns, many Indian investors prefer trying to actively beat the market. Their returns continue to vary wildly and bear little relationship with market indices.
If an individual investor decides to try and beat the index, there's logic to going the whole hog and chasing multi-baggers, rather than trying to eke out an extra 1-2 per cent. India is an emerging market with high growth rates and so, multi-baggers pop up often. Even one Infosys or Suzlon can turbo-charge a portfolio. The downside to chasing multi-baggers is low strike-rates (fewer winners) and big capital losses when investment decisions are wrong.
Venture Capitalists and Private Equity players accept low strike rates knowing that they will pick up an occasional big winner that over-compensates. But VCs and PEs have quality information, working closely with managements. They are also disciplined at managing money and always keep exit options in mind. Eventually, a VC or PE will exit, either through an IPO or via strategic stake sale.
Very few individual investors even consider exit options when they adopt a high-risk strategy. Fewer still accept they will be wrong at least as often as they are right and are therefore, psychologically ready to roll with losses. As a result, individual investors often fail to collect paper profits even when they pick the right stocks. They also end up losing far more capital than necessary, by refusing to exit when they've made wrong decisions.
A third common error is unevenly-weighted initial investment. The logic behind equally weighted investment can be simply illustrated with an exaggerated example. Suppose every fifth stock pick yields 1000 per cent return while the other four lose 100 per cent. If the investments are evenly weighted, the net return is 120 per cent. If the losers have higher initial weights, the winner may not generate enough to compensate.
An active investor looking for big killing must be careful about managing money and phlegmatic about potential losses. Keep initial investments at equal weights. Always keep a mental stop loss or exit option in mind, including cut-offs in terms of both time and money. If an investment doesn't yield returns within a given time frame, review it. If it loses more than a certain amount, review it.
Obviously levels must be decided on a case-by-case basis, considering variables like the specific business and the individual risk-appetite. The important thing is to think about it and be prepared for contingencies.
There's nothing wrong with adopting the VC-PE mode of "extreme active investing". But making it work for an individual requires the same disciplined approach that successful PEs-VCs adopt. It requires plenty of optimism, self-confidence, judgement and some luck. The injection of deliberately pessimistic scenario-building helps as well. Optimism must always be tempered with judgement in investing as in life.