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.