Equity funds witness outflows of Rs 3,400 cr in July

Equity schemes witnessed net outflows of Rs 3,400 crore in July, highest in the last 12 months. With distributors shying away from selling mutual funds and retail investors redeeming in the rising equity markets, it has become difficult for the asset management companies (AMC) to attract new investors.
Sundeep Sikka, CEO of Reliance Mutual Fund says, "Historically, surging markets have led to redemptions. And today investors are wary of making lump-sum investments." In the month of July, equity markets were up by 2%. While the equity schemes witnessed net redemption's in the month of July, the mutual fund industry on an overall basis witnessed inflows of over Rs 31,600 with most money flowing into money market schemes.
According to the data provided by the Association if Mutual Funds in India (Amfi), income schemes saw net inflows of Rs 475 crore while it was Rs 34,300 for money market schemes. For the same period, balanced and ELSS schemes saw outflows of Rs 43 and 139 crore, respectively. Among other category of funds, exchange traded funds including gold and other witnessed inflows of Rs 530 crore while fund of funds investing overseas saw redemption of Rs 112 crore.
Ever since the market regulator scrapped entry load in August last year, equity schemes has seen net redemption's of over Rs 11,500 crore. Money has flowed into equity schemes in only three out of twelve months.
Sikka adds that it is encouraging to find that SIP (Systematic Investment Plan) investments are continuing even in this volatile market. In July, average assets under management of the fund industry stood at over Rs 6.65 lakh crore down by 1.52% against Rs 6.75 lakh crore in June.

Change in mutual fund fee structure
Securities and Exchange Board of India (Sebi) has asked mutual fund houses to provide investors an exit option before increasing administrative fees in a fund of fund (FoF) scheme. Fund of fund schemes are those where a mutual fund invests in a scheme of another MF.
In a July 29 notification sebi said that the total expense charged from investors in the scheme should not exceed 0.75 % of either the daily or weekly average net assets.

Outstanding investments in India notch up Rs 100 lakh crore milestone

Outstanding investments in India crossed the Rs 100 lakh crore mark in the March 2010 quarter.
CMIE's CapEx database reveals that Indian corporates continue to announce fresh projects, even after commissioning huge capacities in the last few years. Projects worth Rs 6.5 lakh crore are scheduled for commissioning in 2010-11. This figure stood at Rs 2.3 lakh crore in 2007-08, Rs 2.9 lakh crore in 2008-09, and Rs 4 lakh crore in 2009-10.
The current investment boom is not triggered by any big push from the government. The chief growth driver is increasing demand, impelled by a sharp rise in corporate wages, salaries of government employees, and income of the farming community. The continuous flow of fresh investment announcements reflects the confidence of Corporate India that this growth in demand is sustainable.
The corporates are unlikely to face any problems in funding these projects, because there has been a handsome growth in domestic savings in the last eight years. Gross domestic savings as a proportion of GDP went up steadily from 23.5 per cent in 2001-02 to 36.4 per cent in 2007-08.
The Indian economy is expected to return to its nine per cent growth trajectory after a two-year blip. We expect the real GDP to grow by 9.2 per cent in 2010-11, as compared to an estimated 7.1 per cent in 2009-10. All three broad sectors of the economy are projected to do well. The industrial sector is projected to grow by 9.6 per cent, services by 9.8 per cent, and the agriculture and allied sector by 5.8 per cent.
For fiscal 2010-11, inflation as measured by the wholesale price index (WPI) is projected at six per cent, as compared to the 3.6 per cent estimated for fiscal 2009-10.

MF NFO investors to be ASBA-less till Oct

Market regulator SEBI today extended the deadline for mutual funds to implement the ASBA facility for new fund offers to October 1.
Under ASBA--Application Supported by Blocked Amount-- deposits of applicants remain in their accounts till the shares are allotted.
"It has been decided that Mutual Funds/AMCs shall provide ASBA facility to investors for all NFOs launched on or after October 1, 2010," the Securities and Exchange Board of India (Sebi) said in a circular.
Earlier in March Sebi had made it compulsory for MFs to extend ASBA facility for all NFOs from July 1.
ASBA is currently in place for all participants in the Indian capital market.
The move would help investors save interest cost on borrowing and help companies get rid of the hassles associated with refunds.
However, some experts feel that the said move will not have much implication for the market, since mutual funds get most subscription in last days of its closing.
Sebi said the move would "protect the interest of investors in securities and promote the development and better regulation of the securities market."
In March the market regulator had also reduced the period between the opening and closing of issues from the present 30-45 days to 15 days to ensure that investors' money is not blocked for longer period.

Learn why FDs are hazardous for wealth creation

Can you find anyone who has become wealthy by leaving his or her money in the bank or an FD? If you want to create wealth, you must move away from this mentality of thinking that a savings account or an FD is the best home for your money.Much has been made of the so-called comparison between mutual funds and ULIPs in the past few months. Our opinion is that the public debate on these two investment options misses the bigger point. The reality is that the bulk of the household savings for Indian families is tied up in bank accounts earning 3.5% interest and in FDs, both of which are highly inefficient investment options for wealth creation. Add to this the announcement this week that inflation has now touched double digit levels, and its an even scarier thought that most of us still prefer to leave our money in a bank, rather than in instruments that are higher yielding, be they equity mutual funds or ULIPs.
So the real debate should be whether families in their effort to create wealth are making a mistake in leaving their money in the bank vs. choosing to invest through instruments like mutual funds and ULIPs that offer a reasonable prospect of better long-term returns.
Mutual Funds vs. ULIPs - no big deal
Call it a turf war or clash of regulators, frankly in the long run it's not a big deal from the end customer's perspective. Whether its SEBI or IRDA, consumers should feel comfortable and secure that there is a regulator who is mandated to look after their interests.
Every investment instrument has pros and cons. We challenge you to find one that is perfect. So, there will always be promoters or detractors of both mutual funds and ULIPs.
Objectively speaking, however, there is a better chance of you being able to meet your long-term financial goals through equity mutual funds and/or a ULIP than the default option for most Indians, which is to leave money in the bank.
Almost every one of us will have one of the following goals that require a substantial amount of money in the future: funding our graduate education, marriage, house purchase, taking care of children's financial needs, funding their education and marriage, being adequately funded towards our own retirement.
Experience from all over the world has shown that our salaries are not enough to fund these goals. We need to invest into the capital markets, subject to our risk taking capacity, to take advantage of the compounding of capital, i.e., money that creates more money. No lesser authority than Albert Einstein remarked, "compounding is the 8th wonder of the world because it allows for the systematic accumulation of wealth".
The advantage of equity mutual funds and ULIPs is that they are instruments that offer you a better rate of compounding for your capital than cash lying in the bank, and thereby provide a better chance of creating wealth in the long run.
Savings Accounts and FDs - bad deal for wealth creation
Let's make ourselves clear. Savings accounts and FDs have a purpose and we cannot over generalize and make a blanket statement that they are bad instruments. However, when it comes to wealth creation they are not good instruments for you to invest through. We will show you why.
First of all, a savings account earns you a mere 3.5% interest rate, a level that is fixed arbitrarily. Similarly, a fixed deposit contractually fixes the rate of return at the start date of your deposit, and you cannot earn more than what you signed up for, even if interest rates in the markets were to rise. Compare this to a return that the equity market can earn you. History and experience of equity markets from around the world suggests that in the long-term equity markets are likely to "compound your capital" at approximately 12% per annum. Compared to this, a 3.5% savings account return just does not match up.
Secondly, savings accounts and FDs are highly tax inefficient. Any interest you earn through these will be taxable in your hands as income, and you will be liable to pay tax on this income. Compare this to equity mutual funds and ULIPs where at least for the time being until the new direct tax code is implemented you pay zero taxes on your gains if you hold these instruments for the long-term. And, if you invest into an equity linked savings scheme (ELSS mutual fund) you might find this an even more tax efficient investment than a regular mutual fund.
Finally, and perhaps most crucially, by leaving your money in a bank or an FD, you are losing the purchasing power of that money. Because you are earning a fixed return through these instruments, these instruments cannot offset the corrosive effect of inflation or rising prices within the economy. If one's bank account returns only 3.5% pre-tax, but the level of prices is rising at 10%, one doesn't have to be a mathematical genius to figure out that in the long run one's standard of living will suffer. You will hardly be able to create any wealth, because whatever returns you earn does not even help you keep pace with the rising prices in the economy, let alone give you a surplus that can earn you further returns.
If you are already wealthy then FDs might be a good wealth preservation instrument, but please don't use them to create wealth for yourself.
Don't sit idle, invest actively
Putting your money into a savings account of an FD is almost akin to sitting idle. India is going through an inflection, which is likely to last for a few decades, where the equity capital markets will be the best avenue for long-term investment and a good way to build an alternate and legitimate source of wealth. If you believe in India's economic growth potential, then move at least some of your money from your bank account into a higher yielding instrument to give yourself a fair chance to create long-term wealth.
By www.iTrust.in - India's leading one-stop financial supermarket for real estate, home loans, investments, taxes and financial planning.

NSE plans to list Nifty in London

Hopes to draw on LSE's expertise in small and medium enterprise segment.
The options contract of India's top equity benchmark index – S&P CNX Nifty of the National Stock Exchange (NSE) – could soon be listed on one of Europe's largest stock exchange, the London Stock Exchange (LSE). The managements of the two bourses on Wednesday signed a deal to evaluate future business opportunities between them.

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Outside India, Nifty futures contracts are traded on the Chicago Mercantile Exchange (CME) and the Singapore Stock Exchange (SGX).
The benchmark index of NSE's rival, the Bombay Stock Exchange's Sensex, is already slated to be listed on the Deutsche Bourse and will start trading from October. The Sensex comprises 30 companies. Sources in the exchange said it is in talks to list the Sensex on other European exchanges, too.
In NSE's case, according to the Letter of Intent, both the exchanges will explore the possibility of having an agreement whereby the FTSE Group may license the FTSE 100 Index to NSE, while the domestic bourse may license its benchmark Nifty-50 to LSE for trading. LSE owns 50 per cent in the FTSE Group, a leading provider of market data and index.
"Currently, only Nifty Options will be listed on LSE and, at a later stage, it could be more than that," said Ibukun Adebayo, LSE's head of primary market division in India and international business development officer.
NSE Joint Managing Director Chitra Ramakrishnan said the exchange was confident that the Letter of Intent with the LSE would open up new investment opportunities for Indian investors and expand the bouquet of investible instruments that the NSE platform provides. "We also hope to draw upon the expertise of LSE in the small and medium enterprise segment (SME) for the benefit of Indian SMEs and investors," she added.
The agreement was signed by LSE's Chief Executive Xavier Rolet and NSE's Ramakrishnan in the presence of UK's Chancellor of Exchequer George Osbornse, who is leading a high-profile British business delegation to Mumbai.
The Nifty covers about 23 sectors of the Indian economy and over 60 per cent of the total market capitalisation of the underlying bourse.
LSE has been making persistent attempts to revive its derivatives trade. At present, LSE's derivatives operations are centred around Italian exchange IDEM and its London-based Russian derivatives exchange EDX.

SKS Microfinance: An IPO at a PE multiple of 50 reminds one of the era of tech boom

There are other issues like commitment of the top management, high remuneration paid to top executives, geographical concentration of business and mismatch in its assets and liabilities

The much talked about initial public offering (IPO) of India's largest microfinance lender, SKS Microfinance Ltd, hits the capital market today with a price band of Rs850 to Rs985 per share. The issue closes on 2 August 2010. The issue opened for subscription yesterday for anchor investors. SKS is issuing 1.67 crore equity shares of Rs10 each.

With earnings per share (EPS) of Rs32.98 as on 31 March 2010, SKS trades at price earnings ratio of 26 at the lower band and 30 at the upper band. The issue consists of a fresh issue of 74.45 lakh shares with 50.37 lakh shares reserved for retail investors. Qualified Institutional Buyers (QIBs) will be allotted one crore shares. The company is expecting to raise Rs1,427 crore-Rs1,654 crore through this IPO. 

Financials and other information provided by SKS appear good on paper. However, there are some issues with the company, like high valuation of the IPO, question of commitment from the top management, high remuneration paid to top executives, geographical concentration of business and mismatch in its assets and liabilities.

At the upper price band of Rs985, the company is demanding a valuation of almost 50 times its FY10 earnings. For a non-banking financial company (NBFC), which has a limited period of operational history and no dividend record, the valuation looks very much stressed.

Although the company in its draft red herring prospectus (DRHP) claims that it has no competitive peers, SE Investments Ltd, a microfinance lender, is already listed on the Bombay Stock Exchange (BSE). SE Investments' EPS stands at Rs1.21 in the first quarter of FY10. The company posted a net profit of Rs17 crore. Based on the EPS of the first quarter of FY10, its P/E works out to 11 (annualised), which is lower than the PE of SKS.  

SKS reported a net profit of Rs174.8 crore on total revenues of Rs958.9 crore and an operating revenue of Rs873.50 crore for the year ended 31 March 2010. It had a negative cash flow of Rs541.20 crore for the year ended March 2010.

According to the DRHP, the key management of SKS Microfinance has decided to sell their stake in the run-up to the IPO under both stock option and stock purchase plans at a significant premium. Collectively, the transactions would imply a sale of 1.42 million shares or 8.4% of the IPO size. Although the Reserve Bank of India (RBI) has approved the transactions and there is nothing illegal about en-cashing investments, this raises a larger question of commitment on the eve of an IPO.
Another related fact is that out of the total issue size of 1.68 crore shares, more than half or 55.7% shares are put on sale by Sequoia Capital.

According to KA Prasanna of firstchoiceipoanalysis.com, the IPO of SKS Microfinance will make the promoters, and other venture capitalists including some private equity funds that have stakes in these companies, millionaires. The hapless borrowers continue to live in abject poverty, he added. Earlier in February, SKS Microfinance's founder and chairman Dr Vikram Akula sold 9.45 lakh shares at Rs639 per share to Tree Line Asia Master Fund (Singapore) Pte for $12.9 million, Mr Prasanna added.

SKS Microfinance also offers high remuneration to its top management. Its chief executive and managing director, Suresh Gurumani, is entitled to a consolidated salary of Rs1.5 crore per annum, besides a performance bonus of Rs15 lakh per year, with annual increments up to maximum of 100% with the board having the liberty to approve any further increase over and above the 100%. Another shocking part is that Mr Gurumani was paid a one-time bonus of Rs1 crore in April 2009, barely five months after joining the company.

SKS Microfinance maintains a medium- to long-term borrowing profile, against which its lending maturity is within one year. This creates a significant asset-liability mismatch and exposes the company to interest rate risk.

SKS has expanded its membership to 6.8 lakh across 19 States during FY10 from 2.02 lakh in five States from FY06. Currently the company has 2,029 branches with total outstanding loans worth Rs2,936.70 crore as on 31 March 2010. During the same period, its debt to equity ratio stood at 2.84:1 with net non-performing assets (NPAs) of Rs4.8 crore or 0.16% of outstanding loans.
SKS provides small loans exclusively to poor women located in rural areas across India. The loans extended are purely for business and other income-generating activities and not for personal consumption. The company will use the IPO money to meet future capital requirements. 

With increased area of operation and scaled-up activities, microfinance is increasingly gaining credibility in the mainstream finance industry with many traditional large finance organisations contemplating a foray into this business. From the geographical perspective, microfinance activity has traditionally been concentrated in southern India as 57% of the microfinance institutions (MFIs) and about 71% of the microfinance borrowers of the country are from this region.

Currently, the National Bank for Agriculture and Rural Development (NABARD) holds the right of regulatory oversight over MFIs except NBFCs. However, there exists a significant regulatory risk as the government may create a separate regulator for all MFIs. More importantly, the high interest rates charges by these MFIs may attract regulatory actions from the government or regulators, which may have a material impact on the ability of these institutions to sustain high returns. For the year to end-March, SKS charged an interest rate ranging from 26.7% to 31.4% to its customers.

Recent rules require NBFCs to maintain a capital adequacy ratio of at least 12% by 31 March 2010 and 15% by March next year. SKS' capital adequacy ratio was much higher at 28.3% as on 31 March 2010.

Kotak Mahindra Capital Co Ltd, Citigroup Global Markets India Pvt Ltd and Credit Suisse Securities (India) Pvt Ltd are the lead book running managers to the issue.

Rating agency CARE has assigned an 'IPO Grade 4' to the SKS IPO indicating 'Above Average' fundamentals.

Background
Swayam Krishi Sangam (SKS) Society, a non-profit, non-government organisation (NGO), converted itself into SKS Microfinance, a non-banking financial company-non deposit taking (NBFC-ND) in 2005. Later in 2009, SKS Microfinance became a public limited entity from a private limited company. In addition to loans the company offers insurance products and productivity loans or loans designed for purchase of goods that enhance the productivity of members. SKS Microfinance has a tie-up with Bajaj Allianz Life Insurance Co Ltd and as of March 2010, had sold 2.9 million insurance policies.

SKS uses a village-centred, group-lending model to provide unsecured loans to its members. SKS Microfinance organises prospective clients into groups so that they can address the issue of information asymmetry and lack of collateral by transferring what could be an individual liability to a group liability and holding the group morally responsible for repayment. If one member fails to make the loan payment on time, the company may not extend any to that particular group in the future. Thus, the group can make payments on behalf of the individual defaulter.

According to the 2009 'Microfinance India State of the Sector' report, the average loan outstanding per client increased 23.8%to Rs5,200 in 2009 from Rs4,200 in 2008.

Know-your-distributor norms from Amfi soon

The Association of Mutual Funds in India (Amfi) plans to introduce Know-your-distributor (KYD) procedure for mutual fund distributors with effect from August 1 for all the entities desiring to engage in marketing of mutual fund products and ARN holders. It has been also been decided to engage services of NSDL Database Management Services, a wholly-owned subsidiary of NSDL.In its letter to the fund houses, Amfi stated : "In view of urgency in the matter, kindly convey meeting of KYC Committee and submit recommendations promptly, so that KYD is implemented with effect from August 1."




Reliance Broadcast bags Delhi Metro deal



Reliance Broadcast Network on Monday said it has bagged a five-year contract from Delhi Metro Rail Corporation (DMRC) for construction related works. The company has won the deal for developing DMRC's high potential line-III, Reliance Broadcast Network said in a filing to the BSE (^BSESN : 17957.37 -120.24).



SAIL (SAIL.NS : 208.55 +1.3) plans to pump Rs 100 cr into UP unit



SAIL on Monday said it will invest Rs 100 crore to revive its Uttar Pradesh unit, formerly known as Malvika Steel, which the steelmaker acquired last year. "The total cost of the plant's phase-1 revival has been estimated to be Rs 100 crore," the company said in a statement. SAIL acquired the defunct Malvika Steel for Rs 209 crore last year and rechristened it as the Jagdishpur SAIL unit.



HUL shareholders okay buyback



The shareholders of Hindustan Unilever have approved buyback of equity shares of the company. This is the company's second buy back in less than three years. The FMCG major had announced a buy back in July 2007, eventually buying 30.2 million shares for Rs 626.27 crore at an average price of Rs 207.13. At the time, it had announced a cap of Rs 230 per share for the buyback.



SKS Micro IPO price band at Rs 850-985



The nation's largest microfinance company SKS Microfinance on Monday fixed the price band of its IPO at Rs 850 to Rs 985 per share. The Hyderabad-based microfinance firm expects to raise up to Rs 1,654 crore through the initial public offering, which opens on July 28.



CIL (CUMMINS.BO : 615.75 +27.45) likely to file IPO papers next week



Coal India is likely to file a draft prospectus next week for its initial public offering, billed to be India's biggest issue, through which the government expects to raise about Rs 15,000 crore. "The company's board is meeting on August 5 to finalise the draft red herring prospectus (DRHP) and in all probability, papers will be filed with market regulator Sebi within the first week of August," a person in-the-know of the development, said.



Grasim's plant to operate in full swing



Grasim Industries, an Aditya Birla Group company, on Monday said production at its Nagda staple fibre plant, which was closed due to water shortage, will be back in full swing with monsoon filling up its reservoir. "With the onset of monsoon and the arrival of water in the Nagda reservoir, the staple fibre plant and the Chemical plant at Nagda have restarted in gradual manner and production is expected to be restored to full capacity soon," Grasim said.



UltraTech gets nod for Samruddhi merger



UltraTech Cement on Monday said it received nod of the Bombay High Court and Gujarat High Court for the merger of Samruddhi Cement with itself. Last year, the boards of Ultratech Cement and Samruddhi Cement, a wholly-owned subsidiary of Grasim Industries, unanimously approved Samruddhi's merger with UltraTech.

Investing for a long period the sip way

It is always difficult for retail investors to decide when to invest in and pull out of the stock markets. It becomes all the more difficult to do a long-term financial planning if markets are volatile and investors are not confident to invest in equities directly.




During such a phase, a retail investor can look at systematic investment plan (SIP) of mutual funds. As the name suggests, it is a method of investing a fixed sum regularly in a mutual fund and is like saving in a recurring deposit. It makes more sense to invest in a SIP when markets dip as one is not buying units at peak but small amounts continuously which will average out over a period of time. So, over a longer period of time upwards of five years your chances of making profit are much higher when compared to an one-time investment.



One of the key advantages of SIP is rupee cost averaging. It means that when markets go down, the fixed SIP installments buy more units and vice-versa. Since SIP installments are made at different points of time and at different net asset values, the purchase price of units average out over the investment period. (See graphic)



The popularity of SIPs in India can be gauged from a recent report by Boston Consultancy Group and CAMS which says that from 7 lakh live SIPs in 2003, the number has risen up to 22.5 lakh till date. In fact, in the first quarter of 2010, SIP subscriptions accounted for 19% of total inflows into equity mutual funds, compared with just 2% in 2005.



The report also underlined that average tenure of equity money staying invested in one scheme is about 30 months and nearly 50% of the asset under management (AUM) has an investment tenure greater than two years. Nearly 70% of equity money has investment tenure exceeding 12 months.



One needs to be a disciplined investor to pay the SIP installment every month. However, if you miss paying any installment you can pay the amount the following month and continue with the benefits. Like most other investments, SIPs too come with a three-year lock-in-period.



One does not need to accumulate a lump sum to begin investing in SIP. However, if one invests Rs 10,000 per month in an equity fund and has a surplus of Rs 100,000 with a long view, the amount can just be pushed into the SIP account. Remember, SIP is just a payment mode and not a scheme. A SIP enables an investor to take advantage of the growth potential of mutual funds even if he/she does not have a large sum to invest. Most mutual funds require only Rs 500 per month to start a SIP. An investor can opt to pay the amount every month via electronic clearance service from his/her bank. The mutual fund will debit the amount from the account every month. An investor should monitor the scheme every 3-6 months and check what returns the fund has given.



Though SIP is a disciplined way to invest and any time is a good time to start, experts say an investor should avoid investing in too many funds. If one does so, there are chances of investing in similar type of funds and returns getting fragmented. To start with, it is always advisable to choose four to five funds and divide the investable surplus equally. For example, if one has Rs 5,000 to invest in SIPs every month, he/she should go for two funds which has given good returns over a period of five years. Similarly, if one has Rs 10,000, he/she should pick up four or five funds. By doing this, funds can be tracked closely, returns can be maximised and risks associated with every market-linked investment products can be spread out.

Fund Pointer: Churning Pot

When fund managers churn portfolios to capture momentum and ride the short-term cycles, performance invariably takes a hit 

Old habits die hard for many fund managers. Instead of making wise long-term investment decisions, some of them behave like traders and churn portfolios—their churning ratios going as high as 200%. Though they profess not to, many try to time the market, trade in derivatives and change their equity exposure at will. Out of the total 216 equity diversified schemes currently available in the market, 48 schemes have a churning ratio of more than 100%!
Many fund advertisements have an illustration of how a stock held over years can fetch handsome returns. They emphasise the importance of a buy-and-hold strategy. Sadly, many fund houses don’t seem to practise what they preach. The truth is: many fund managers try to chase momentum. Sometimes, they buy and sell the same stocks erratically for no sound reason.
This behaviour goes completely against the grain of mutual fund investing—making investments and staying invested for the long term. A high portfolio turnover does not necessarily lead to higher returns. On the contrary, returns often get eroded as a result of constant churning. The portfolio turnover ratio indicates the frequency of trades carried out by the fund manager—or the number of times he buys and sells stocks. Take, for instance, ICICI Prudential Growth Plan, which has yielded only 7% returns since inception, with a portfolio turnover of 232%. The ICICI Prudential Service Industries Fund too has provided returns of just 9% on its way to recording a turnover ratio of 231%. DSP BlackRock Top 100 Equity Fund recorded a churning ratio of 316% till March 2010. Returns were 6%. Similarly, the IDFC Enterprise Equity Fund, with a high turnover ratio of 206%, has managed to yield returns of just 3% since inception until March 2010. Others with a significantly higher turnover ratio but measly returns include Sahara Growth Fund, IDFC Strategic Sector (50-50) Equity Fund and JM Hi Fi Fund. On an average, schemes with a portfolio turnover ratio higher than 100% have yielded returns of 8% since inception.
On the other hand, schemes with comparatively low churning ratio (less than 100%) have provided better results. They have yielded 9% returns, on an average, since inception. Maybe returns have nothing to do with the number of times you buy and sell your holdings. The Templeton India Growth Fund, with a churning ratio as low as 8%, has managed to deliver 16% returns since inception. HDFC Mid-Cap Opportunities Fund has yielded 18% returns since inception with a churning ratio of 20%. Similarly, funds like the Tata Dividend Yield Fund (16%) and Reliance Equity Opportunities Fund (20%) have put in a decent performance, despite recording low churning ratios of 19% and 46%, respectively.
But that doesn’t mean that churning should not be practised at all. Slight churning of the portfolio every six months is advisable for a variety of reasons—to re-balance the portfolio and to account for drastic changes in the outlook for particular companies or sectors. However, constant and extravagant churning, as highlighted above, puts the portfolio under severe strain and the scheme ends up losing out in the long run. Interestingly, this is what fund managers preach, by and large. If this is supposed to be true for your individual investments, why should it not apply to fund companies?

The downfall: Commissions, IFAs, cheques and folios

The number of cheques released by AMCs to mutual fund distributors is dwindling as well as the number of active IFAs.

The sweeping changes introduced by market regulator Securities and Exchange Board of India (SEBI) in the mutual fund industry are still showing their after-effects. According to sources, two years back, some 39,000-odd monthly cheques were issued by asset management companies (AMCs) to pay upfront commission to distributors. In 2010, this number has plunged to around 9,000-10,000. Upfront commission is released on a monthly basis while trail is paid quarterly. A distributor gets upfront commission when he acquires new business while trail is paid to service the existing client. Currently 0.25% is paid as upfront commission and 0.50%-0.75% is paid as trail depending on the fund house.

“The number of payments received through the electronic clearing service (ECS) as well as cheques has dropped. People either wanted to consolidate or leave the business. People who have decent assets under management (AUM) are undeterred. New people are not joining. The general perception is that this business is not as remunerative as it used to be for a new person to join. This is because of SEBI’s misplaced perception that there is no role of an intermediary,” said a top official from a leading fund house, preferring anonymity.

“The number of cheque issuances among AMCs have dropped,” says a Mumbai-based distributor on the condition of anonymity.

However, registrar and transfer agent (RTA) sources say that the drop in cheques is primarily due to the ECS system. ECS facility was extended to distributors because of the delay and misplacement of cheques.

The following message doing the rounds in the mutual fund industry is a shocking revelation of the number of active IFAs. “What is the similarity between tigers and IFAs? Only 1,411 left. Thanks to SEBI.”

According to an official from a mid-sized AMC in Mumbai, the number of active IFAs bringing in new business has gone down to 1,200 from 5,000 in Mumbai alone. Around 80% of the business comes from metros like Mumbai, New Delhi, Chennai and Bengaluru. In Pune, hardly 40-45 active mutual fund distributors are working. In industry parlance, an active IFA is defined as someone who is still giving door-to-door service and bringing in new clients.

“Last year’s HDFC and Reliance Mutual Fund list showed 1,400 IFAs in Pune but now it has come down. I was submitting 30-40 new applications earlier, now I submit hardly 5-7 applications,” said a Pune-based financial planner.

The drop in the number of monthly cheques indicates that new business is not coming in and distributors are relying on the trail commission and past Systematic Investment Plans (SIPs). The industry added just 2,355 folios while equity funds lost 1.47 lakh folios in the month of July.

Some distributors are now shifting their focus to allied financial services like general insurance and company fixed deposits, which offer decent commissions while others are completely changing their business model.

After the crackdown on upfront commissions, distributors are struggling to acquire new business. The commission does not even cover the cost of acquiring a client. Now, even the trail commission is not paid to a new distributor in the event of a broker change.

“I have been in this business since 19 years and have a decent AUM. Around 650 families are investing through me since 1994. I have incurred an operating loss of Rs1.75 lakh in the last one year because of ‘no load structure’. Investors are not ready to pay the advisory charges because a number of bank channels are offering free services. We are not able to cover the operating cost of our organisation. It is very difficult to survive. After a lot of convincing we get around Rs40,000 to Rs50,000 worth of investments,” said Yogesh Kulkarni, proprietor, Royal Investments.

Sources also indicate that some mutual fund distributors have completely stopped sending self-declaration forms to AMCs due to the paltry commissions involved. SEBI rules mandate that all intermediaries send a self-declaration form to fund houses annually, failing which the fund house can stop the commission paid to distributors. The self-declaration form contains an acknowledgement that a distributor has disclosed the commission received by him to the investor.