New AMFI chief blames distributors for mis-selling, ignores role of AMCs

The newly-appointed chief executive of industry body Association of Mutual Funds in India (AMFI) is looking to hit the ground running. Within days of his appointment, he announced his intention to crack the whip on the blatant mis-selling of mutual fund products to retail investors. However, his ire has been misdirected towards distributors, largely ignoring the role played by asset management companies (AMCs) in pushing the distributors to sell products aggressively.

In a recent interview with Business Standard, HN Sinor, the new chief at AMFI, acknowledged that mis-selling runs rampant in the mutual fund industry and that small investors were being short-changed on a regular basis. Announcing that this situation needed to be addressed on a priority basis, he indicated that distributors engaged in mis-selling should be suspended from selling mutual fund products.

While it is heartening to see that the new chief of AMFI has taken up arms against mis-selling, it would be unfair to tie the noose around distributors’ necks. This is very simply because distributors don’t manufacture products. Neither are they responsible for shoddy performance of the majority of mutual fund schemes. If anything, it is the AMCs of mutual funds that are promoting mis-selling in a bid to generate more business. Distributors are merely being lured into the high-stakes game being played by such AMCs.

Moneylife has previously written (see here) about how large AMCs are wooing distributors to sell their products more aggressively by organising lavish junkets for those who meet their business targets. It is this aggression that may lead to mis-selling. Indeed, has anybody ever come across any mutual fund company pulling up any distributor for mis-selling? 

An independent financial advisor (IFA) who spoke to Moneylife on the condition of anonymity said, “The regulator gives a verbal indication of what the AMCs should pay to distributors but none of the AMCs follow that. AMCs are forced to lure distributors with upfront brokerage as high as 4% because of the changed rules of the game. After the new rule that payment of trail commission will go to the new distributor, competition for assets under management (AUM) shopping has become very intense. No distributor is certain of the trail commission coming to them. They want to earn future trail commissions upfront. It means there is no obligation or attraction for them to serve investors after the allotment. The new broker will also not service investors because he won’t get any trail commission which is already paid upfront.”

The irony is that if there is any segment of distributor that indulges in mis-selling it is the industry where Mr Sinor has worked for decades—the banking industry. “Banks mis-sell products involving large sums of money under false representation. They rely least on the strength of the product and requirement of investors. They are constantly abusing their trusted relationship with depositors. There is a need to regulate AMCs and bank distributors more,” he added.

Small distributors are also feeling the heat after the no-entry load ban imposed by SEBI last year. In such a scenario, they are under pressure from the large distributors who are leaving no stone unturned to grab their business from under their nose. In the race to fight for their very survival, small distributors are not thinking twice before selling fund schemes blindly to investors. It is time AMFI realised where the root cause of the problem lies. It has come under a lot of fire recently for being a toothless body with no concrete measures or actions for improving industry standards. It has largely done nothing significant to standardise any of the practices. Mutual fund prospectuses are a shame compared to the IPO prospectuses. If AMFI wants to bring about some positive changes, AMFI must look within. It has a lot in its plate to start with.

Will Birla MF’s Capital Protection Fund leave a hole in its capital?

Birla Sun Life Mutual Fund (MF) is keen to attract fixed-deposit holders through its Capital Protection (CP) Fund and aims to mop up as much as Rs700 crore. According to sources, the company’s new fund offer (NFO), Birla Capital Protection Fund, had been extended to 10th March from 5th March as it was unable to meet its ambitious target. Birla MF is targeting close to Rs600-Rs700 crore and has so far managed to generate only Rs200 crore.

“The NFO was launched on 5 February 2010 and was scheduled to go on for a month. However, in view of the fewer days on account of holidays and breaks and to ensure convenience for investors, the due date was extended to 10th March. The NFO collection figures can only be verified after the scheme is closed for subscription, and the MIS is generated,” said a spokesperson for Birla MF.

While the fund is aggressively marketing the capital protection product, the irony is that the product will leave a hole in the capital of Birla Asset Management Company (AMC). Industry sources reveal that the company can earn 1.75% per annum in this product over a period of 27 months, which is the duration of the scheme. This means an earning of 3.9%. However, the cost of running the scheme will be much higher. Here is the math.

The processing charge for the issue will be about 0.3%. This leaves the AMC with 3.6% out of the fees. As against this, Birla MF will offer 2.75% as commission to distributors. That leaves it with 0.85%. If the Fund manages to raise, say, Rs500 crore from the scheme, its earnings over the 27 months will be just Rs4.25 crore. However, the Fund has already spent over Rs7 crore in advertisements and other promotional costs. This leaves the fund house with a large loss.

“The advertisement for the NFO had been done extensively with the aim of generating awareness for the Fund. The expense ratio that the Fund intends to charge the investor would be 1.5%,” added the company official. The official, however, declined to divulge any details of the Fund’s target or how the company would recover its advertisement costs.

“The advertisement charges are sometimes deducted from the scheme after some time. The NFO has collected around Rs220 crore,” said an independent financial advisor (IFA).

This would be hard in this kind of a Fund where returns are thin. The Fund will allocate 90% of the money to bonds and 10% to equity. It intends to reduce tax liability by the triple-indexation method.

Courtesy :-http://www.suchetadalal.com/?id=bb5b242f-20e7-0c4a-4b979662bb0f&base=sections&f

Don't expect great returns

During the end of the financial year, insurance companies try to tap tax-payers with innovative schemes, including guaranteed returns products.
Life Insurance Corporation of India (LIC) recently launched Wealth Plus, which gives guaranteed returns. Last year, it had launched Jeevan Aastha, which promised to give Rs 9 and Rs 10 for every Rs 100 invested, depending on the policy tenure. The earlier policy invests in debt instruments such as government bonds. Wealth Plus, on the other hand, invests in equities and assures returns linked to the highest net asset value (NAV) of the fund over a seven-year period.

LIC is not alone in the market with such a product. Reliance Life Insurance has Reliance Life Highest NAV Guarantee Fund, which assures the highest NAV for the entire term of the policy. Many other players have similar plans. Tata AIG Life insurance sells such a scheme under the name InvestAssure Apex Pension Plans; Birla Sun Life Insurance has Platinum Premier Plan; SBI Life Insurance calls it Smart Ulip; ICICI Prudential Life Insurance sells Pinnacle; and Bajaj Allianz Life Insurance's Max Gain gives a similar guarantee.
These plans capture the highest NAV of the fund and lock it. Thus, a customer gets returns based on the highest NAV, even if stock markets undergo a correction. However, before buying, there are a few things you should look at.
Working: To give the highest NAV-based returns, insurance companies follow a trading strategy known as constant proportion portfolio insurance (CPPI). Institutions around the world use this model to ensure a fixed minimum return for investors who are risk-averse.
In CPPI, a fund allocates the corpus between safe assets (debt-based papers) and risky assets (equities), depending on stock market performance and interest rates. Depending on losses or gains from the equity investment, the insurance company constantly rebalances the equity-debt mix to lock the highest NAV.
Returns: Most of these products are available for a limited period. In the initial phase, the company decides the asset allocation between equity and debt. "The debt portion could be small if interest rates are high and equity markets have low volatility," said Sashi Krishnan, chief investment officer at Bajaj Allianz Life Insurance Company. He explained that if the market falls, the allocation to debt is increased and vice-versa. "As it is not a pure equity product, it will definitely not give pure equity-based returns," said Manish Kumar, head of investments at ICICI Prudential Life Insurance.
Costs: Most insurance companies charge a guarantee fee over and above the 3 per cent cap that the Insurance Regulatory and Development Authority (Irda) has prescribed. "This is primarily to make up for any shortfall," said Krishnan.
Insurance companies normally charge 0.2 -0.5 per cent. For example, LIC's Wealth Plus has a guarantee charge of 0.35 per cent of the fund value every year. While Bajaj Allianz levies a charge of 0.25 per cent on the fund value every year, ICICI Prudential's Pinnacle charges 0.10 per cent annually to give the guarantee. "This also includes the cost the insurance company incurs for setting up algorithms and other infrastructure related to this product," Kumar said.
Should You Buy? For small investors, products based on this structure are available with insurance companies only. High net worth individuals (HNIs) can approach wealth management companies for such arrangements.
Risk-averse investors who want to avoid insurance due to high costs can look at monthly income plans (MIPs) of mutual funds. These are essentially for investors who have low appetite for volatility. They invest 10-30 per cent in equities and the rest in debt. In the MIP category, the top 10 funds by returns have given yields of over 10 per cent in the past five years.

Low MF assets speak volumes on investor apathy

At a time when the Indian economy is being lauded for its relentless growth and Indian companies are in the process of raising thousands of crores in the primary markets, the mutual fund industry is standing out like an eyesore. The sorry state of affairs in the mutual fund industry is evident from the miniscule corpus many of the fund houses are managing.

Here are the unpleasant facts. 18 out of 37 Asset Management Companies (AMCs) have less than Rs1,000 crore as assets under management (AUM) in their equity schemes. From these, 13 funds have less than Rs500 crore of AUMs. On an average, these 18 fund houses have Rs355.99 crore in equity MF schemes. Between them, they are managing a ridiculously low corpus of Rs6,407.80 crore.

Reliance Mutual Fund, the largest fund house, has AUM of Rs35,204 crore. HDFC Mutual Fund manages a corpus of Rs22,657 crore. These amounts might seem princely when compared to the small fund houses, but compared to international fund houses, even these are paltry.

Shinsei Mutual Fund is the smallest among the 18 funds, having a corpus of Rs19.47 crore as on 10 February 2010 while Escorts Mutual Fund and Benchmark Mutual Fund have Rs28.32 crore and Rs48.88 crore respectively in their kitty.

Quantum Mutual Fund and Baroda Pioneer Mutual Fund have AUM of Rs48.96 crore and Rs66.14 crore respectively.

Some of the bigger names in the industry like Bharti AXA Mutual Fund (Rs308.37 crore), AIG Mutual Fund (Rs612 crore) and Axis Mutual Fund (Rs874.11 crore) also appear in the list of funds having less than Rs1,000 crore.

Indian companies are capitalising on the recent bull-run by raising thousands of crores through IPOs and FPOs. In 2010, 17 companies have come out with public offers, (as on 8 March 2010). Despite the rush for raising funds and the flourishing equity markets, the investing public seems disinterested in vying for a share of the pie. The action in the equity markets has failed to catch on to the mutual fund industry.

Indeed, the lull being witnessed by most equity fund houses is a study in contrast to the growth of the economy. Despite equities being touted as the best asset class for the long term, investors continue to shy away from equities. Even the government’s efforts towards encouraging participation in equity mutual funds have failed to do the trick.  

No subscription figures till close of public Issues

Regulator moves to curb demand inflation, asks exchanges not to disclose bid details while an issue is open

N. Sundaresha Subramanian and Anirudh Laskar

Mumbai: Capital market regulator Securities and Exchange Board of India (Sebi) is cracking down on the practice of reporting oversubscription in public issues. In a bid to discourage inflation of demand, Sebi has asked the exchanges to stop making the subscription number public while an issue is open, according to two officials familiar with the development.
At present, the category-wise bidding details for a public issue are updated hourly on exchange websites while it is open. For forthcoming issues, the information will be available only after the issue closes.
“Sebi is worried about multiple subscriptions and misrepresentation of demand,” said S. Vishvanathan, managing director and CEO, SBI Capital Markets Ltd. A Sebi spokesperson declined to comment.
The move comes amid steps announced on Saturday by Sebi. This includes institutional investors having to pay their entire subscription as an upfront margin. All public share sales—initial, follow-on and rights issues—that hit the market after 1 May will be subject to the new rules.
The move is aimed at curbing inflated demand in public issues and providing a level playing field to all investors, Sebi said in a statement. Qualified institutional investors (QIBs) are required to deposit only 10% of their subscription. Sebi chairman C.B. Bhave said the steps were in line with the aim to cut the listing timeline to seven days from the current 21.
Experts believe the moves will bring some rationality in the pricing of public issues.
“The days of aggressive pricing will be over,” said U.R. Bhat, managing director, Dalton Strategic Partnership Llp. “Now, only genuine investors will come in for bidding and most of the bids are likely to take place at the lower end of the price band, which is good.”
Bhat said the moves may not affect subscription levels significantly. “Issues floated in the past one year have already been witnessing lower subscriptions, both in QIB and the retail portions, compared to those during the bull run of 2007,” he added.
Smaller funds may be put at a disadvantage, said Naresh Kothari, president, Edelweiss Capital Ltd. “Earlier both small and large long-only funds used to bid for equal number of shares with 10% margin money. But now with 100% upfront margin, large fund investors will have an advantage over small ones,” he said.
Sebi also gave in-principle approval to introduce physical delivery in equity derivatives after discussions with exchanges and market participants.
Sayee Srinivasan, head of product strategy, Bombay Stock Exchange, said physical delivery is unlikely to replace the existing cash settlement system. It could be optional, or a new set of products with physical delivery may be introduced. “I don’t think it’s a good idea to tamper with an existing market which is liquid.”
The step may be easier to implement in single-stock futures as delivering individual stocks that constitute the index could be complicated. “Physical delivery does not mean leverage would come down. The moment there is a margin, the element of leverage automatically comes in whether or not delivery is physical,” he said.

Templeton MF insists on clearance certificate for trail commission

After the Securities and Exchange Board of India (SEBI)’s circular on payment of trail commissions, asset management companies (AMCs) are trying to play safe by insisting on a no-objection certificate (NOC) in case of a change of distributor. The mutual fund (MF) industry is still undecided on whether to pay the trail commission to the new distributor or the old one as the poaching game unfolds.

Moneylife has a document sent by Templeton to independent financial advisors (IFAs), which reads: “The payments of trail commission on assets that are transferred from another distributor to your ARN code shall be subject to us receiving a ‘Clearance Certificate’ from the previous distributor. In case any Assets under your ARN Code are transferred to another distributor at the request of the investor, you shall not be entitled to receive any trail commission on such assets.”

Therefore, Templeton is still insisting on receiving a clearance certificate from the old distributor in order to pay out trail commission.

The Association of Mutual Funds in India (AMFI) had instructed all asset management companies (AMCs) in its circular issued in September 2007 that investors can switch to a new distributor without obtaining an NOC from the existing distributor. However, most AMCs continued to demand an NOC from harried investors. Due to such inconsistent practises, SEBI stepped in to reiterate that all AMCs have to comply with the AMFI circular dated 5 September 2007 and not to insist on an NOC.

The whole issue stems from the growing business of assets under management (AUM) transfer. After the circulars from AMFI and SEBI on payment of trail commission, the AUM snatching game has begun to gain traction. According to industry sources, HDFC MF and UTI MF are not happy to pay trail commission to the new distributor though they have not come out with a formal announcement. Even AMFI took almost two years to implement its own decision on trail commission.

“Most of the AMCs are not insisting on an NOC especially after the SEBI circular,” said an IFA.

“The SEBI circular doesn’t say anything specific about the payment of trail commission. If an investor gives a letter that he wants to change his distributor, then the AMC should not ask for an NOC from the old broker. AMFI has said that an AMC may pay the brokerage to the new distributor subject to rules,” said other IFA.

Harshendu Bindal, president, Franklin Templeton Investments (India), said, “We have been processing all investor requests for a change in distributor without insisting on an NOC from the existing distributor, even before the SEBI circular, as part of AMFI best practices. Our understanding is that the SEBI guidelines are regarding the change of distributor code based on investor request and don’t pertain to payment of trail commission.”  

“If the request for change of broker also asks for transfer of trail commission to the new broker we will change the broker code. However, given our contractual obligations with the distributors, we would ask for a consent letter from the old distributor for transferring the trail commission on historical assets. Irrespective of the type of request, we would accept a valid instruction from the investor for changing his broker code,” Mr Bindal added.

“I am not in favour of something which could prevent an investor from shifting to a new distributor. There are some malpractices in the industry where people are poaching on trail (commission). When an investor himself wants to be serviced through a distributor it is necessary that he compensates him indirectly,” said a chartered financial analyst.

“There is still some ambiguity in this case. Some AMCs have taken a stand that they will continue to pay the trail commission to the old distributor,” he added.

Small investors are nowhere involved with a say on trail commission as it is decided by the AMC and the agent. But industry sources say that some high net-worth individuals are beginning to bargain for a percentage of the trail commission from distributors. Whether an investor would easily get a clearance letter from the old distributor is another issue.

Source:
http://www.suchetadalal.com/?id=e23df737-3b47-bf5e-4b8e659cf029&base=sections&f

Sucheta Dalal :Chidambaram the Hedge Fund Manager

Sucheta Dalal :Chidambaram the Hedge Fund Manager

Equity MFs see first revival since entry load ban

The mutual fund (MF) industry saw net inflows in equity schemes in January, the first time since the Securities Exchange Board of India banned entry load on equity schemes in August last year. During the month, sales of equity MFs almost doubled on a month-on-month basis.

According to data released by the Association of Mutual Funds in India (AMFI), the equity segment registered net inflows of Rs 980 crore as against net outflows of Rs 2,185 crore in December. Equity sales during the month stood at Rs 7,837 crore as against Rs 4,047 crore in December as the three new fund offers in the equity segment during the period mopped up Rs 1,590 crore.

Equity heads and chief investment officers of various fund houses said a relatively stable market in January attracted investors.

"Retail as well as HNI (high net worth individual) money poured into equity schemes in January," said an equity head of a mid-sized fund house.

Distributors said investors who booked profit when the market rallied sharply last year were coming back.


POSITIVE NOTE
Net inflow/(outflow) in equity schemes
Month Inflow/ (Outflow)
August ‘09 (142)
September ‘09 (1,756)
October ‘09 (2,123)
November ‘09 (1,109)
December ‘09 (2,185)
January ‘10 (980)
All figures in Rs crore.
Figures in bracket shows outflow
Source : Association of Mutual Funds in India (AMFI)


On the debt side, the industry saw net inflows of Rs 1,06,092 crore. The entire flow remained in the positive territory for all the schemes combined (at Rs 97,242 crore)

Liquid and money market schemes continued to see net outflows (Rs 10,218 crore). This figure was Rs 14,267 crore in December.

Gilt funds and fund of funds were the other two categories that saw net outflows, of Rs 257 crore and Rs 58 crore, respectively.

In January, total sales of MF products stood at Rs 8,84,738 crore as against Rs 7,76,811 crore in December

SIPs losing sheen, net addition declines to 50,000 a month

Inflows into systematic investment plans (SIPs), where investors put money in mutual funds periodically, are on a decline because of poor returns and distributors' lack of interest in serving small investors.

According to executives at various distribution houses, net SIP additions have come down to 50,000 accounts per month from a high of 250,000 in 2007 and 2008. Also, lapsed SIPs are not being renewed. There is no official data on SIP account details.

"SIPs had slowed down, but we have seen the momentum come back in the last two months," said Sundeep Sikka, chief executive, Reliance Mutual Fund.

Bajaj Capital Chief Executive Anil Chopra said the main reason for SIPs not finding favour with distributors was that they were not finding it profitable to serve smaller customers. "The economics does not seem to be working out. If you look at the numbers, SIPs have actually died down. For most advisors on the offline platform, serving a small ticket size like Rs 2,000 or 3,000 per month does not cover even petrol expenses. So, it becomes unviable."


LOST BATTLE
For the period between Feb 1, 2009 to Feb 1, 2010
Fund Annualised
SIP return Annualised
non-SIP return
DSP Balckrock Opportunities 53.89 79.33
HDFC Top 200 80.55 97.95
Birla Sunlife Top 100 50.86 82.01
IDFC Premier equity 85.65 108.08
Principal Large Cap 59.03 75.62
UTI Opportunities 50.04 79.92
All the figures in % Source: Valueresearch Online


According to rough estimates, there were close to 4.2 million SIPs running at the peak of the bull run, which has come down to 2.5-3 million. SIPs took a big hit in 2009 when adverse market conditions played havoc with retail investors' portfolios. A lot of investors cancelled their SIPs after failing to meet their commitments. Several distributors also blame the new commission regime for the fall.

According to Maju Nair, head of distribution at Sharekhan, banks and independent financial advisers (IFAs), which were major contributors to SIPs, had been badly hit by the new commission regime. "IFAs have gone out of business and are looking at other revenue streams by selling insurance products. Bank are also not pushing for SIPs in a major way as they are getting only 50-80 basis points."

"The cost of providing the service has become more than the money they will make. So, everybody across the distribution spectrum is looking for a substantial size," said Nair.

The worst affected, according to experts, is the micro SIP segment, with distributors finding it difficult to serve investors with ticket sizes as low as Rs 50 and Rs 100. Distributors said this had turned out be a loss-making proposition for most fund houses.

However, Sikka of Reliance Mutual Fund said, "Investor confidence seems to be returning and we are getting fresh inflows. Advisors will have to look at the life-time value of a customer and not just short-term interests. The micro SIP is more of an entry-level strategy where we are trying to bring retail investors at the smallest level into the fold."

Reliance mutual fund has a micro SIP, Reliance Common Man SIP, in which one can invest a minimum of Rs 100 per month. Similarly, SBI has Chhota SIP and UTI has IIMPS (Invest India Micro Pension Services).

Lessons from the world financial crisis

The collapse of Lehman triggered the world financial crisis this time last year. Stock markets crashed; credit was frozen and banks were scurrying for cash; crude oil prices dipped and gold prices shot up; investment shrank.

Finally, the financial crisis translated into recession with severe loss of employment and income. With the inter-linking of economies no country escaped these drastic consequences.

India was hit badly but avoided recession. Nevertheless growth dropped and is yet to recover. FIIs repatriated more than $13 billion and deepened the fall in stock prices.

Sensex plunged 62 per cent, much more than Dow Jones. The RBI had to draw down reserves. The rupee fell 20 per cent, industrial production declined and exports slumped.

Indian banks, except probably two, did not have exposure to sub-prime debt since they did not have much international business. Besides, the regulations of RBI did not permit excessive debt:equity ratio. Hence Indian banks were largely unaffected.

The international crisis prompted the Indian Government to act. That was more to avert recession than to back up the financial system.

Stimulus packages were introduced mainly aimed at increasing demand by reducing excise duties and increasing investment in infrastructure. The RBI did pump in liquidity with cuts in CRR, SLR, and the repo and reverse repo rates. Recovery has started but progress is slow.

There are lessons to learn from the crisis and new initiative to be taken.

First, with large infusion of cash by Federal Reserve, it is likely that the dollar will weaken in future against other currencies. RBI has a large part of its foreign exchange reserves in dollars and should therefore change the composition of reserves in favour of the euro and gold.

Second, although most banks are owned by Government, they should be financially sound on their own. Therefore the capital base of banks has to be sound and conform to the new Basel standards. Banks should be modernized and to attain economic size through mergers.

Third, financial supervision has to be strong. That also requires that there should be coordination among the concerned agencies like the RBI, fiscal authorities, Sebi, etc.

Fourth, regulation should go hand in hand with innovation of financial instruments. The financial crisis was to a large extent spurred by financial instruments like Collateralized debt obligations (CDO).

Fifth, RBI should keep constant watch on liquidity requirements. The financial system in the U.S. would have collapsed but for the timely release of cash by Federal Reserve. The measures taken by RBI were a little too late.

Sixth, Government should curb fiscal deficit to ease pressure on the market and continue to take steps to open up the economy, whether in respect of trade, convertibility of the rupee, external commercial borrowing and foreign investment, since the benefits would be much more than the safety of a closed system.

It appears that the worst is now over and the salvage operations are complete. It is time to reform the system to enable it function smoothly and efficiently under good supervision.


(You can e-mail Dinker H. Pai Panandiker at: dpanandiker@gmail.com)

MFs: Tackling a missing intermediary

There are several issues that are faced by investors when they are dealing with their mutual fund investments.

One of these relate to a disruption in the mode of receipt of services related to the investment. This happens when there is no existing distributor available to serve the investor. This is an important matter that has become a reality for several people and hence will need a clear strategy from the investor regarding the manner in which this will be tackled.

Developing situation

There are times when the investor is put in a strange situation. In most cases, investors use the help of distributors or other advisors for making their mutual fund investments.

The total assets of mutual funds at the end of July 2009 stood at nearly Rs 6.90 lakh crore and a very miniscule percentage of this involves direct investment by the investor. The process involved various types of services in the process of making the investment.

In several cases, there is a situation where the distributor no longer wants to serve the client or there might be a situation where the distributor even exits the business. In the last six months, there has been a sharp fall in the interest of investors.

During the period April - July 2009 for which figures are available the number of new schemes varied in the range of 4-6 a month impacting a major source of income for intermediaries. In such a situation, the investor finds that when it comes to solving some question, they have to look at some different option.

The easiest way is to look for another distributor and advisor and shift to this route, but now with additional payment required on the part of investors for using their services, there is an increasing bent towards going it alone. This can result in a sticky situation where the investor realises that there needs to be some steps for the purpose of ensuring that there is no disruption in the service that they receive.

Contact possible

In case of any situation, the investor has to understand that the mutual fund is the entity with which the entire investment is based. This remains the base entity with which all the details about the investment is available and hence the investor can ensure that they get any required information from the mutual fund itself.

This is the best source for ensuring that there is clarity about the entire situation and this will also provide options for ensuring the smooth continuation of activities. The data required for this purpose is the Folio Number that is present on all mutual fund statements. All the necessary details are available with the mutual fund, which can be retrieved.

There is the entire list of mutual funds that are available with the market regulator SEBI (Securities and Exchange Board of India) and the fund association AMFI (Association of Mutual Funds in India). There are around 35 mutual funds in operation at the end of July in the country.

Code

There is now no entry load that is present for making an investment into a mutual fund. This means that there is no expense that the investor has to worry about now as compared to the situation earlier when only direct investments did not have any entry load.

If the investor is careful and they take a look at the details on the mutual fund statement that they get then they will be able to see that there is a space where the code for the distributor is mentioned.

This means that the commission for the investment goes to that particular entity and they are the ones who will be servicing the investor. When it comes to the issue of ensuring that there is a direct investment that is made, then the investor would have to ensure that the space for the code is blank or that it is mentioned direct.

This will also ensure that there is no trail commission that is going to any entity, especially if the investor is direct. If the investor wants to check directly with the fund then various funds allow transaction through their own website and this includes funds like HDFC MF, Franklin Templeton MF, ICICI Pru MF among others.

Checking

There are two angles to the entire investment that they have. One of them relates to the investment that has already been made and hence this will have a separate situation because this is complete, but the requirement here deals with proper monitoring.

On the other hand, there is also the case of new investment and if this is done using a distributor then the investor will have to pay fees that are decided between the two parties. In case of a small distributor, this can be negotiated, so you might end up paying something like Rs 500 for a Rs 50,000 investment.

On the other hand, big players leave little room for bargain and the amount here is fixed like Rs 30 per transaction for systematic investment and so on. This is the reason why they need to be clear about the manner in which they are investing so the choices can be selected.

There can also be a direct interface that is set up between the mutual fund and the investor. This can be done through interacting through some center of the fund or through the transfer agent. Most major cities have these offices.

Another way in which the same situation can be set up is through the route of using the internet for the interactions. In this situation, the investor makes further investments as well as redemption and other changes through their login on the internet and hence there is some clarity available for them about the exact status of their investment.

Using either or all of these will help the investor meet their requirements.

SEBI NORMS - Indian mutual fund industry to revisit business model

The Rs7.2 trillion Indian mutual fund industry is revisiting its business model to be in sync with the new norms put in place by the capital market regulator, the Securities and Exchange Board of India, or Sebi.
India has 36 asset management companies (AMCs) and at least some of them are planning to start their own distribution business instead of selling funds through third-party distributors. Among other things, they plan to cut distributors' commission by 25-30 basis points (bps) and shift their focus from frequent churning of funds to managing money for the longer term.
One basis point is one-hundredth of a percentage point.

Sebi banned fund houses from charging investors an upfront fee of up to 2.25%, known as entry load, from 1 August.
That encouraged fund houses to fine-tune the exit load, or the penalty they charge investors on premature redemptions, from six months to three years. In other words, fund houses have forced the investor to lock in their investment for three years if they do not want to pay the exit load.

The exit load is currently capped at 1% of investment.

However, only retail investors are subjected to this and fund houses do not charge the exit load on any investment of Rs5 crore and above.

The plan was to use the exit load to take care of the commission paid to the distributors. The fund houses also announced a new incentive structure for distributors ranging between 0.5% and 1.25%.
JM financial Asset Management Pvt. Ltd is offering 1.25%, UTI Asset Management Ltd 1% and HDFC Asset Management Ltd 70 bps, one of the lowest in the industry.

However, this move has not gone down well with the market regulator. It has directed fund houses to bring parity in the exit load for all class of investors, irrespective of the amount of investment.

It also said fund houses should follow a uniform exit load structure for all plans within a scheme. Normally each mutual fund scheme has different plans catering to different classes of investors.

Finally, on Tuesday, Sebi asked the fund houses to limit the lock-in period to one year.
The three-year lock-in, planned by AMCs, would have covered a major portion of equity fund investments in the industry.

According to the industry lobby Association of Mutual Funds in India (Amfi), 57.23% of all the equity investments as of 31 March were less than two years old. The rest of the corpus was more than two years old, but Amfi does not specify the maturity profile.

According to Rajesh Krishnamoorthy, managing director of iFast Financial India Pvt. Ltd, a transaction intermediary, "a minuscule portion of assets would be more than three years old".

This means that had the lock-in period been kept at three years, almost the entire assets under management would have been subjected to the exit penalty. Only 20.33% of the equity assets managed by the industry were less than one-year-old on 31 March.

A majority of the sales in mutual funds come from thirdparty distributors. Some fund houses say the dependence on third-party distributors may decline gradually following the regulatory changes.

"The brokerage structure has to come down to adopt the new changes. The impact of the recent changes on distributors' commission could be 25-30 basis points across the industry," said Suresh Soni, chief investment officer at Deutsche Asset Management (India) Pvt. Ltd.

Waqar Naqvi, CEO, Taurus Asset Management Co. Ltd, said "Incentives for distributors will have to come down.
Each AMC will take a call based on its subscription-redemption ratio. It varies between 35% and 50%. This means roughly between 35% and 50% of the subscriptions into mutual funds get redeemed within the first one year." Subscription-redemption ratio is the proportion of investors withdrawing their investments. If the ratio is high, funds will pay a lower upfront commission.
Loyalty bonus Some fund houses say while reducing the incentives for distributors, a separate loyaltybased bonus programme could be started by the AMCs in order to encourage the distributors.

"The entire business model needs to be reworked to encourage the distributors, as their commissions are reduced by 25-30 bps. We may have to start loyalty-based bonus programmes for the distributors to encourage them to continue with fund distribution business and add more long-term investors to our customer base," said the chief marketing officer at an AMC, controlled by a large bank, who didn't want to be named.

As a part of the loyalty programme, a distributor will be paid a fixed commission every year as long as the investor stays invested in a scheme.
This could happen as early as next month.

"One way out could be (to) progressively increase the trail commission earned by the distributors--the longer the investor remains the higher trail the agent gets," said an executive whose fund house is currently offering a new fund.

The trail commission is paid to agents by fund houses at the end of the year based on the assets they helped bring in.

For instance, if the first year trail is 50 bps, it could be raised to 60 bps in the second year and 75 bps in the third.

"Although we cannot comment on specific changes that will be made in distributors' commission, we believe that even if margins fall, the volume is poised to increase as mutual fund loads have been relaxed for investors. We believe that margins will be compensated by volumes," said Sundeep Sikka, CEO, Reliance Capital Asset Management Ltd, which manages at least Rs1.08 trillion in assets.

"The trail commission is essential if the distributors need to be encouraged to sell. But if there is no penalty on exit, it makes more sense for the distributor to encourage the investor to sell the units and enter a new scheme," said Sanjay Sinha, CEO, DBS Chola Asset Management Ltd.

Others agree. "If something becomes cheaper the demand goes up," Soni of Deutsche Asset Management said. According to him, fund houses will revise their business model and work more on volumes rather than on margins.

"Some fund houses may shift their focus from thirdparty distribution channel and start their own distribution services and strengthen their physical and Internet banking channels," he added.

As of June, there were 91,671 agent distributors registered with Amfi. Most banks and 20-25 large national and regional distributors also sell MFs.

Asset allocation for disciplined investing

There are no short cuts to investing and more often than not investors burn their fingers in trying to time the market. My advice therefore to all investors with long-term investment goals is to follow disciplined investing with a risk reward balance. It definitely pays.

We all know of the proverb "Don't put all your eggs in one basket", similarly investors should diversify investments across asset classes, markets, managers, tenor, etc. to achieve desired returns with lower risk at the portfolio level.

Diversification involves dividing an investment portfolio among different asset categories, such as equities, fixed income and alternate investments. The process of determining which mix of assets to hold in a portfolio varies from investor to investor and also on the investment objectives.

If the portfolio has the right allocation, it will be well on its way to deliver the investment goals (with an acceptable amount of risk factored in).

Therefore, before making any investments, investors should define an investment philosophy and assess their investment objective, risk profile and suitability.

Your investment objectives need to be set, based on factors such as personal wealth level, age, family circumstances, investment/financial goals, need for regular income streams, understanding of asset classes and risk reward payoffs, conventional versus alternate assets such as art, commodities, real estate.

Some other factors include loss bearing ability, past investment experience time horizon of the investment, liquidity needs, proportion of liquid net worth in a high risk/locked-in product, tax status, inflation and market outlook.

The asset allocation that works best for an investor will depend largely on the time horizon and his/her ability to tolerate risk. Investors should pay attention to structural considerations such as financial planning, trusts, insurance and annuities, and tax and liability management.

Once an investor has decided on the investment objective and risk profile, asset allocation would include all or most of the following considerations/steps:


• Document all the assumptions made

• Calculate rates of return, standard deviation and correlation between different asset classes

• Check for consistency of returns across economic cycles & time periods

• Select the asset mix that would optimize the risk reward payoff – minimum risk for the desired return

• Agree on the benchmarks to be used for comparing performance results and degree of tracking vs. benchmarks

• Decide if the investments are to be made on a staggered manner (in 3 to 4 installments), recommended in volatile markets

• Implement the desired asset allocation through best in class products based on net of tax expected returns

• Evaluate portfolio hedging options and cost

• Active versus Passive management

• Periodic review and rebalancing


Asset allocation has evolved over time. In its initial stages of evolution, this was a simple philosophy of spreading eggs across baskets to spread losses. It then moved to a more complicated mathematical model where the amount of allocation to be made to each asset class was made based on the risk-return framework and correlation between asset classes.

In its more modern form, asset allocation is a more forward looking exercise which lays significant importance to qualitative overlay. This qualitative overlay is derived from experts and it makes asset allocation a more relevant exercise in today’s time, than a traditional quant-based asset allocation.

This overlay can be in terms of analysis of geo-political events, macro economic indictors, market sentiment, or any other factor that cannot be captured by standard risk metrics such as standard deviation of an asset class.

With this evolution in the area of asset allocation, comes into play the role of Tactical Asset Allocation. Tactical Asset Allocation, to some, is essentially about market timing. To my mind, however, it is not market timing but is a dynamic strategy that actively adjusts a portfolio’s asset allocation by taking an informed call on the portfolio in reaction to or in anticipation of the certain trends.

While the importance of long term investments and therefore strategic asset allocation cannot be undermined, in today’s markets, tactical asset allocation, if followed with rigor can certainly deliver alpha (incremental returns) to an investor’s portfolio.

Once invested, one should periodically review and rebalance investments if required. Investors should have pre-defined Profit & Loss booking levels based on their profiles. These levels should be periodically reviewed and reset based on market outlook.

Investors should also maintain certain liquidity in the portfolio to take advantage of sudden opportunities. In addition, investors could consider maintaining separate trading and investment portfolios with different investment objectives.

With increasing globalization, complexity, volatility and lack of time and/or expertise, smart investors always engage professional investment advisors to manage their portfolios. Good Investment Advisors have developed the skill, insight, perspective, and common sense needed to recognize when assets and/or markets may be entering cyclical and secular turning point.

Finally the most crucial factor of disciplined investing - never get emotionally attached to your investments. There is no harm in booking profits and staying liquid. Markets will always give opportunities to make returns from investments in the future.

David M. Darst, Chief Investment Strategist at Morgan Stanley Smith Barney says, "Rather than attempting to time the market in a limited number of asset classes, asset allocation seeks, through diversification, to provide higher returns with lower risk over a sufficiently long time frame and to appropriately compensate the investor for bearing non-diversifiable volatility."

NRI Keen To Invest In Indian MF

Many non-resident Indians are keen to keep their Indian ties intact and invest in various avenues like mutual funds (MFs), fixed deposits, real estate and so on.One Of Well Known Financial advisories says, "Most of these people look to return to India finally. That is one of the reasons why they are keen to invest here."

Apart of emotional reasons, it also makes sense as the economy of India is growing at better rate than other countries in the current situation. A wealth manager with a bank says, "The chances of getting double digit returns abroad are limited. In India, you can always hope to get 8-10 percent returns. For example, Indian stock market has given even 100 percent returns till a few years ago, something one can never dream of in a developed country."

However, financial advisors caution NRIs that they have to be careful while listing the details at the time of investment. They should clearly mention their status, complete with relevant documents and details. Advisor offers an example of investing in MFs, "They should clearly mention in the application form that they are NRIs. They should also provide their overseas address. In case of fixed deposits, they should know the difference between various deposits like NRE account and NRO account. This is crucial because you can repatriate the income under NRO, while you can't do the same in NRE account."

The issue of relevant papers and documents is something that creeps up regularly in conversations with financial experts. They all insist that having relevant documents is a key factor. "Some investments may require the investor's status card abroad. If they are going for insurance cover, the company may ask for details like work permit in some cases. It can vary from company to company," says Financial Planner

ICICI Bank to come out with IPO in 4 units, insurance stake sale possible

Keen to revive its plans to unlock values in its four units, in line with the revival in the stock markets, ICICI Bank Ltd Friday said it could make initial public offerings in four subsidiaries or sell stake in its insurance ventures, as soon as the government raises sectoral foreign direct investment (FDI) limit.

The bank would take a call on the subject once the laws are amended to hike foreign direct investment in insurance sector to 49% from 26%, ICICI Bank chief executive and managing director Chanda Kochhar told reporters.

Earlier, in 2007, the bank was contemplating to list its three units—ICICI Securities, ICICI Prudential Life Insurance and ICICI Lombard General Insurance.

The bank had also announced its intention to transfer its entire holdings in ICICI Prudential Life Insurance, ICICI Lombard General Insurance Co, Prudential ICICI Asset Management Co and Prudential ICICI Trust to ICICI Holdings. At that moment, Reserve Bank of India had said it preferred to avoid an intermediate holding company structure, under which a bank is owned by a holding company that conducts non-banking businesses, because it would raise problems with regulation.
While pointing out that ICICI Bank's share price had increased three times in the last six months to about Rs750 per share, Kochar clarified that the listing of its unit would help in creating values for the stake holders. At this price, ICICI's market capitalisation is about Rs800 billion compared to market leader SBI's about Rs1.2 trillion.

"Still we are way off from the peak of over Rs1,450," she rued but said that she would strive to do everything to add value in the group for the shareholders.

"In all these four units, ICICI Prudential Life Ltd, ICICI Lombard Ltd, ICICI Securities Ltd and ICICI Home Finance Ltd possibility exists, but nothing that we have finalised currently. Hence, nothing you would see immediately," she said, when asked about the time frame she envisaged in terms of monetising investment in these entities.

She, however, was non-committal on any preferential treatment for its existing shareholders in the IPOs, saying they would anyway share the value unlocked from this exercise.

"As far as subsidiaries are concerned, over a period, we (will) clearly monetise some investment made in our subsidiaries. This means we would either do IPO or watch what happens on the insurance side that is clearance of government's norms to raise FDI cap for selling stake in the venture," Kochhar said.

A bill to increase FDI cap to 49% from 26 is awaiting the nod from the parliament. Currently, ICICI Bank holds 74% stake in both life and non-life venture insurance companies.

"In terms of IPO, we should wait for how the FDI cap issue turns out and then decide what percentage foreign partners will hold and so on. We will take a decision after that," she elaborated, but made it clear that time and market was not opportune for IPO in the life or general insurance ventures.

Pointing out that there was no need to take a decision on IPO in a hurry, she said the bank had enough capital and also the requirement of investible funds in these subsidiaries was very small this year.

"As I said we have enough capital to fund our growth but to fund growth of subsidiaries as well. And I think in the current market, it's not the best value and the right optimum value that they are going to get. I would rather wait for the market to reach a position where we get most optimum value and then look at," she added. – Yogesh Sapkale


source:-ww.suchetadalal.com

Reliance, HDFC MFs top Crisil ranking

Crisil's composite performance rankings (Crisl-CPR) saw Reliance Mutual Fund emerging as the most successful fund house for the first quarter, with their funds getting the maximum number of ranks (ten) in the top category of CPR 1.

HDFC Mutual Fund and ICICI (ICICIBANK.NS : 745.4 +25.85) Prudential Mutual Fund came up next with six CPR 1 ranks each, closely followed by Birla Sun Life Mutual Fund, DSP BlackRock Mutual Fund and UTI Mutual Fund with five CPR 1 ranks each.

For the quarter, Reliance MF showed a sharp improvement compared to the previous quarter ended March 2009, where the fund house received only four CPR 1 ranks.

According to Krishnan Sitaraman, director, Crisil FundServices, "Reliance Mutual Fund's strong performance was driven by its superior performance on risk adjusted returns as well as on portfolio related parameters in the equity, liquid and ultra short term debt categories."

For ICICI Prudential Mutual Fund, ICICI Prudential Income Plan and ICICI Prudential Short Term Plan came out strong on risk adjusted returns while ICICI Prudential Flexible Income Plan Premium performed well on portfolio based parameters like liquidity and company concentration.

For HDFC Mutual Fund, its HDFC Top 200 Fund came on top based on risk adjusted returns, while the HDFC Cash Management Fund Savings Plan revealed consistent CPR performance and returns. HDFC Cash Management Fund Treasury Advantage Plan was another CPR 1 ranker which did well on risk based parameters like volatility, company concentration and asset size

Draft tax code – how does it affect you?

Last Week, The Finance Minister announced the draft tax code. In his budget announcement on July 6 he had promised to follow up with the draft code. Well its here, and some of the changes, as you might have already seen in the press, are the most substantial that have been suggested in over a generation. So how do these affect you?


Well, the simple answer is that right now these changes don’t affect you. Why?

First of all, this is a draft code and contains proposals. Different interested parties have been invited to give their views, comments and feedback on the draft. You can too offer your feedback.

Secondly, if at all these proposals do pass muster, they will need to be drafted into a Parliamentary bill likely by end 2009 and be taken through legislative procedure. That itself could take time, and the Minister has suggested a start date of 2011 for when the code might actually be enforced, if it is a law by then.

So at the earliest, the impact of this tax code is likely two years away. So what should you be doing right now?

For starters just wait and watch. If you have strong views on some of the radical changes proposed, you should give your feedback here

Talk to your HR and payroll department to understand the impact of some of the proposed changes regarding how perquisites and benefits will be taxed. Ask them to explain to you how your take home pay might change and what they can do to mitigate the impact of any higher tax burden on you.

Sources:-www.reuters.in