Wednesday, August 26, 2009

The broker goes for broke. Season two

By gradually tightening the commission norms, Sebi has tried to nudge the industry for the last three years towards performance-based selling to the retail market

It is always the transition generation that finds it the most difficult to adjust to change. I was a rookie business journalist in 1992 when the Harshad Mehta scam broke and the securities market reform began. I remember talking to a small stock broker in Delhi discussing the incipient changes. Sitting far away from the trading floor and with my livelihood not at risk, I found it easy (though a bit callous, on hindsight) to tell him that his business was history. That the market would corporatize. That costs would come down and unless he either expanded very fast or became an employee, business was over. With the size of business he serviced, on the new brokerage structure that would emerge, he would not be able to survive.

Out of the shambles of the stock market scam emerged new institutions that looked at more order in the markets. Screen-based trading, depositories, brokerage disclosure were all new concepts that were resisted every inch of the way by the market incumbents. The stock market was a closed club of brokers. I still remember the cantankerous old fox of the Delhi Stock Exchange explaining the bhai-chara (brotherhood) system to me in his Punjabi-twanged, expletive-filled narrative. The sub-text of the story was: They were all broker-brothers who were able to sort out all their problems. Investors? Well, they bought at the highest price of the day and sold at the lowest price, since the outcry (guys gesturing and hollering at each other to make the trade on the floor of the stock exchange) system prevented the investor from knowing at what time and what price the trade got executed. Sounds primordial today, doesn’t it? Investors wanting 100 shares were looked at as if they were beggars, charged rates that were more than 5% of the trade. And service? Well that was for the big boys.
One issue that got the brokers really worked up was the decision to get them to declare their brokerage on the contract note. There was a violent reaction, brokers threatened to go on strike. They prophesied doom for the markets. For the economy. For the National Stock Exchange (NSE). Employees of NSE actually got threats after they found a trail of money from the brokers leading to the underworld. Now, almost 20 years later, India has one of the most efficient markets in the world, brokerages are down to 20-40 basis points (you pay 20 paise each time you transact Rs100 worth of shares) and the time when delivery of shares (if you were lucky enough to get your signatures matched) took more than a month, seems like from another planet.
Judging by the activity just under the surface in the mutual fund industry, it’s Season Two time. By gradually tightening the commission norms, the Securities and Exchange Board of India (Sebi) has tried to nudge the industry for the last three years towards performance-based selling to the retail market. Throwing money at the distribution chain and chasing corporate and high net-worth customers was not the way it was supposed to be. With mutual funds going no-load (you no longer pay the embedded cost in the price), the reactions in the industry are as expected. While some fund houses (the product manufacturer) are giving public statements opposing the move, privately they are laughing. For too long the tail twisted the dog—there are stories of how large distributors would not even take calls from mutual fund heads unless they were promised a commission of 8%. Other fund houses that target assets under management, are hiring lawyers, chartered accountants and sharp-shooter compliance officers to find that last remaining loophole that will allow them to still milk the system. That one last time.
The 55,000 mutual fund distributors plus banking distribution chains are working on two fronts. Defensive and offensive. The lowest of the low-life used all of July to heavily churn their customers (you). Check your July statement to see the transactions for the month. Each time the bank or your agent bought you a fund, you paid the bank/agent/advisor Rs2.25 on Rs100 of transaction. Do this three times on a corpus of Rs10 lakh and they made at least Rs60,000 off you, just in a month. If you found you’ve been churned, find another point of sale. If this was defensive, the offensive strategy is to quickly cobble together an association, lobby with the ministry of finance, the Prime Minister’s Office, or whoever would listen, and go to court. A New Delhi-based distributor-led attempt to litigate against the no-load order fell flat on its face, first when the fund houses refused to pay for the legal fees and two, when the court threw the case out. If history is any beacon to the future, it will settle down. You will end up paying less, in a more transparent manner, the market will expand and the occasional jay walker will still get hit, but the systemic problem will get over.
What you have to do: There are no free lunches. Sebi is not saying that you can buy funds for free. All it is saying is, by making mutual funds no-load, the person servicing you will really be your agent, rather than the agent of the mutual fund. And as your agent, you need to pay him directly for the service he gives. You pay your doctor, your lawyer, your shrink. Now you pay your financial adviser. If you’ve been happy with your adviser, begin paying for that service. Or get shoddy service and get hit by products that harm. Advice from a Mumbai-based value-for-money distribution house: Look beyond the glitz of the sales team and examine your statements carefully. If not, well, it’s your money, no amount of regulation can help you.


Birla Sun Life MIP outperforms bank FDs and MIS

Birla Sun Life Mutual Funds open-ended monthly income plan (MIP) II-Savings 5 plan has performed well with the fund generating a CAGR return of 12.5 per cent over a three-year period against the benchmark Crisil MIP Blended Index returns of 8.4 per cent as on July 31

An investor who has invested Rs 1-lakh in the scheme since its inception in May 2004, would have received Rs 540 as average monthly income in the form of dividends against Rs 440 from a bank FD and post-office monthly income scheme till July 31, Birla Sun Life CEO A Balasubramanian told reporters here.
During the same period while the Rs 1-lakh invested initially would not have appreciated in conventional saving options, it would have grown to Rs 1.12-lakh in this fund.
More importantly, the income from the conventional investment options are taxable but income from BSL MIP II Savings 5 is not taxable.
Post-tax monthly income for FD and PO MIS is calculated on a rate of interest of 8 per cent per annum and 7.25 per cent per annum, respectively.
Birla Sun Life Asset Management Co is one of the top five asset management firms in India with an average asset under management of Rs 57,331-crore as on July 31.

HDFC MF to launch Short Term Opportunities Fund

HDFC Mutual Fund has filed an offer document with securities and exchange board of India (SEBI) to launch HDFC Short Term Opportunities Fund, an open-ended income scheme.

The new fund offer (NFO) price for the scheme is Rs 10 per unit.

Investment objective:
The investment objective of the scheme is to generate regular income through investments in debt / money market instruments and government securities with maturities not exceeding 30 months.

Plan:
The scheme offers growth and dividend option. Dividend option offers sub-option with payout and re-investment facility.

Asset allocation:
The scheme will invest 60% to 100% of asset in debt and money market instruments including securitized debt, with a risk profile of low to medium. Investments in securitized debt, if undertaken, shall not normally exceed 75% of the net assets of the scheme. 0% to 40% of investment will be in government securities with low risk profile. In addition to the instruments stated above, the scheme may enter into repos /reverse repos as may be permitted by RBI. From time to time, the Scheme may hold cash. A part of the net assets may be invested in the collateralised borrowing & lending obligations (CBLO) or repo or in an alternative investment as may be provided by RBI to meet the liquidity requirements.

Load structure:
The entry load for the scheme is not applicable. In respect of each purchase/switch-in of units, an exit load of 1% is payable if units are redeemed/switched-out within 1 year from the date of allotment. No exit load is payable if units are redeemed/ switched-out after 1 year from the date of allotment.

Minimum application amount:
The minimum amount is Rs. 5,000 per application and any amount thereafter. In case of investors opting to switch into the scheme from the existing schemes of HDFC Mutual Fund (subject to completion of lock-in period, if any) during the NFO Period, the minimum amount is Rs. 5,000 per application and any amount thereafter.

The minimum subscription (target) amount of Rs. 10 million is expected to be raised during the NFO period of HDFC Short Term Opportunities Fund.

Benchmark index:
The scheme`s performance will be benchmarked against CRISIL Short Term Bond Fund Index.

Fund managers:
The fund managers of the scheme will be Anil Bamboli and Anand Laddha.

Brokerages focus on core business

Equity brokerage volume jumps 66% in April-June while non-broking income dips.
Broking firms have renewed their focus on the core business as non-broking income has shrunk and equity brokerage volume has moved closer to peak levels.
Aided by increasing stock prices and easing global concerns, domestic equity brokerage volume has grown 66 per cent in the first quarter of 2009-10 on a sequential quarter-on-quarter basis, second only to the highest-ever volume recorded in the third quarter of 2007-08, according to a recent report by ICRA. The turnover in the first quarter of 2009-10 alone equated to 36 per cent of the total turnover in 2008-09.
The growth was driven by the cash segment, which accounted for 27 per cent of the total turnover, which was same as that in the third quarter of 2007-08. In the fourth quarter of 2008-09, the cash segment had accounted for only 23 per cent of the total turnover, the report said.
On the other hand, non-broking continued to be under pressure as revenues from this business had been hit more than that from the broking business.
While merchant banking revenues declined with delay in the final closure of deals, the income from distribution income decreased with lesser number of mutual funds on offer and decrease in life insurance premium, the report noted.
In addition, recent regulations such as removal of entry load on mutual fund schemes and changes in the fee structure of unit-linked products in the insurance sector are likely to affect the non-broking business of broking houses.
In recent years, broking firms have been leveraging retail network beyond equity broking to distribution of third party products, IPOs, margin funding and merchant banking.
The distribution business generally accounts for 15-20 per cent of the total income of prominent broking firms.
“The new regulations will severely affect the distribution income and, hence, we have to devise new distribution models. However, this will take some time and we will be focusing more on broking business in the near future,” said R Venkataraman, director of India Infoline.
“Distribution income is likely to be hit due to the ban on entry load and also a possible shift of insurance products towards non-unit linked,” said Karthik Srinivasan, research analyst, ICRA.
In non-unit linked products, commissions are generally less than that in unit-linked ones. Recently, the Insurance Regulatory and Development Authority (Irda) had imposed a cap on unit-linked insurance plans (Ulips).
“The new regulations are definitely going to impact the way brokerage firms work, and we are creating a new model to offset the impact. We will have to find out how to manage assets so as to give the best returns to the clients while deriving our commissions. However, the shift to a new model will take some time,” said Angel Broking Executive Director (Equities Broking) Vinay Agrawal.
Although stock prices have shown a rising trend and many IPOs have been lined up this financial year, ICRA expects revenue contribution from merchant banking to remain low as compared to 2007-08.
But, equity brokerage yields continue to remain under pressure due to increasing competition and few firms offering a flat fee structure. The average broking yields declined from 7-8 basis points to 5-6 basis points in the last few years, the ICRA report said, adding that it might not fall below 4 basis points in the medium term.

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Aggrasive Portfolio

  • Principal Emerging Bluechip fund (Stock picker Fund) 11%
  • Reliance Growth Fund (Stock Picker Fund) 11%
  • IDFC Premier Equity Fund (Stock picker Fund) (STP) 11%
  • HDFC Equity Fund (Mid cap Fund) 11%
  • Birla Sun Life Front Line Equity Fund (Large Cap Fund) 10%
  • HDFC TOP 200 Fund (Large Cap Fund) 8%
  • Sundram BNP Paribas Select Midcap Fund (Midcap Fund) 8%
  • Fidelity Special Situation Fund (Stock picker Fund) 8%
  • Principal MIP Fund (15% Equity oriented) 10%
  • IDFC Savings Advantage Fund (Liquid Fund) 6%
  • Kotak Flexi Fund (Liquid Fund) 6%

Moderate Portfolio

  • HDFC TOP 200 Fund (Large Cap Fund) 11%
  • Principal Large Cap Fund (Largecap Equity Fund) 10%
  • Reliance Vision Fund (Large Cap Fund) 10%
  • IDFC Imperial Equity Fund (Large Cap Fund) 10%
  • Reliance Regular Saving Fund (Stock Picker Fund) 10%
  • Birla Sun Life Front Line Equity Fund (Large Cap Fund) 9%
  • HDFC Prudence Fund (Balance Fund) 9%
  • ICICI Prudential Dynamic Plan (Dynamic Fund) 9%
  • Principal MIP Fund (15% Equity oriented) 10%
  • IDFC Savings Advantage Fund (Liquid Fund) 6%
  • Kotak Flexi Fund (Liquid Fund) 6%

Conservative Portfolio

  • ICICI Prudential Index Fund (Index Fund) 16%
  • HDFC Prudence Fund (Balance Fund) 16%
  • Reliance Regular Savings Fund - Balanced Option (Balance Fund) 16%
  • Principal Monthly Income Plan (MIP Fund) 16%
  • HDFC TOP 200 Fund (Large Cap Fund) 8%
  • Principal Large Cap Fund (Largecap Equity Fund) 8%
  • JM Arbitrage Advantage Fund (Arbitrage Fund) 16%
  • IDFC Savings Advantage Fund (Liquid Fund) 14%

Best SIP Fund For 10 Years

  • IDFC Premier Equity Fund (Stock Picker Fund)
  • Principal Emerging Bluechip Fund (Stock Picker Fund)
  • Sundram BNP Paribas Select Midcap Fund (Midcap Fund)
  • JM Emerging Leader Fund (Multicap Fund)
  • Reliance Regular Saving Scheme (Equity Stock Picker)
  • Biral Mid cap Fund (Mid cap Fund)
  • Fidility Special Situation Fund (Stock Picker)
  • DSP Gold Fund (Equity oriented Gold Sector Fund)