You need to be Lucky and brave!

As an asset class, Equity stocks offer the best returns. But so many of us have burnt our fingers in the process?

How is it that very few investors can make real profits, grow their networth and consistently beat the market? That’s because it often takes one or more of the following rare traits…

The vision to identify breakthrough products, leaders, and brands
The knowledge to spot an undervalued gem in a sea of glass
The courage to buy and hold when others are running scared

Occasionally, you’ll come across an investor with one of these valuable characteristics. And it’s likely that person does quite well. But I can’t imagine a person who can offer all three.

That would take two very different and even contradictory approaches…

Sounds scary? But fortune favors the brave only!!

Tips on Financial Planning and Budgeting

Getting rich is in your hands, nobody else’s . So get started with working hard or smart (depends on you again), adding to your finance knowledge and generally taking responsibility for yourself. Get Rich Or Die Trying.

If Financial decisions look like rocket science to you and Investing is even more daunting, here are some baby steps for you.

This one is from Deborah Fowles, Guide to Financial Planning in About.com Seems very elementary but I doubt how many people are scoring more than 5/10. Here it goes, the top ten:

1. Get Paid What You’re Worth and Spend Less Than You Earn : Hey, I get less than what I deserve and so do you!! And I’ve not done any budgeting so that I may be sure of the second part.

2. Stick to a Budget : I’m ashamed, no budgeting exercise for myself, not to speak of sticking to one.

3. Pay Off Credit Card Debt: Thank God, I finally get a score on this one. I’ve managed to stay clear though I’ve had to suffer with the agonising interest calculations earlier.

4. Contribute to a Retirement Plan: I do have a pension plan but I’ve never cared to figure out whether it is sufficient! Will give 1/2 for that one to me.

5. Have a Savings Plan: Yeah ,I’ll be partial to myself and give some score here too! I do save about 15% of my income though it’s a recent phenomena. Better late than never!

6. Invest! : Pretty straight forward. But few people manage to find an hour for that in a week. They’ll rather watch TV(Big Boss is on these days!)

7. Maximize Your Employment Benefits : A meeting with your HR guy!! Brace yourself. I have no hope with my guys.

8. Review Your Insurance Coverages: Putting a finger on that is important from the family point of view. Those of you without that responsibility can breathe easy on that count. But I get full marks here!

9. Update Your Will: Never thought about that up till now. Bless Ms Fowles.

10. Keep Good Records: I will, as part of my New Year resolutions. But I’ve yet to get started on that. Next Monday, I promise.

Phew!, I score about 4/10!! So much potential to improve!!

But before I sign off, for guys who suddenly want to get started with their budgeting exercise, here are percentages of major spending categories from the US Bureau of Labor Statistics (2003) Consumer Expenditure Survey. May not apply to you and me but it’s an interesting statistic anyway. Gives you an idea where you stand and where you can increase/decrease your expenses.

Food at home 7.7%
Food away from home 5.4%
Alcoholic beverages 1.0%
Total food and drink 14.1%
Housing 32.9%
Apparel and services 4.0%
Vehicles 9.1%
Gasoline and motor oil 3.3%
Other transportation 6.7%
Healthcare 5.9%
Entertainment 5.0%
Personal care products and services 1.3%
Reading .3%
Education 1.9%
Tobacco products and smoking supplies .7%
Miscellaneous 1.5%
Cash contributions 3.4%
Personal insurance and pensions 9.9%

Work on your Budget sheet for two hours and it’ll tell you a lot about yourself. Look at it as a personality test!!

And yes, Taxquery wonders how any financial planning can be successful without tax planning. He’s dead right. Go to his wonderful blog for tons of info on Taxes

Financial Planning is Life Planning

I have always been smug with my assumption that a sophisticated finance professional will take care of all my wealth creation needs. But the day my over friendly and over smart advisor came, I was more confused when he left than when he had entered!! He talked about sophisticated jargons, terms, options, technology, software, analysis and at the end of it asked me to decide on my own risk appetite. Damn it, if I have to do my own analysis what the heck was he doing, sitting smugly on my sofa while I looked like a sheep in my own house.

To be fair to my financial advisor, he helped me understand that one must take responsibility for oneself. And he logged me on to the fascinating world of finance and investing. As part of the learning process I have built this e-scratch pad and have really enjoyed the process.

My initial findings - investing is no rocket science and can be easily understood by a layman.

There are very interesting tools and calculators available which even a child can use and play with.

It’s easy to be overwhelmed with the investment options. 650 odd Mutual Funds, More than 2000 scrips to choose from, options, futures, commodities, real estate, deposits, insurance, tax saving schemes and bonds like PF, NSC, KVP, Infrastructure bonds, et al……. At times I feel the importance of the proverb: ” Ignorance is bliss”

Apart from the overwhelming options, you are faced with finance jargon, terminologies, irrational behaviour of the stock markets and smug finance professionals.

Wait a minute. It’s critical to be responsible for your wealth and as I said in the beginning, it’s pretty interesting too! Here’s a indicative list of what you should know for a start and I promise I’ll take them one at a time.

1. Why to Invest, Golden rules of investing, Your Financial planning steps.
2. Introduction to stocks, derivatives, options.
3. Introduction to Mutual Funds
4. Introduction to Insurance
5. Product review.
6. Sensex review.
7. Asset allocation, Time, Value of money, etc….

Mutual Funds v/s Direct Stocks Investing

Investing in the equity market directly is exciting and sexy. You are in the thick of things and are able to take responsibility for yourself. Though the volatility and the information overload makes it a daunting task.

How about investing through Mutual finds? Doesn’t it have its own loading and administrative charges and the fund managers making merry on your hard earned money? And can’t we see the best performing mutual funds and follow their portfolio?

Here are some points to ponder:

We should allocate our time to investment decisions in proportion to our income generation goals.

Convenience and hassle free investing should be a major factor.

Fund managers are into it full time. If we able to identify fund managers who have consistently performed over last 3-5 years, nothing like it.

The fund manager also has the muscle power of crores of Rupees and is able to take entry and exit decisions impartially.

MFs continuosly churn their portfolio. When MFs buy and sell stocks, they don’t have to pay capital gains as you do when you churn.

We are likely to panic over market crashes. MFs can take advantage of a crash!
With Systematic Investment plans (SIP), you can start investing with as low as Rs 500 per month.

There is another financial product called ETF: Exchange Traded Funds. They are the least expensive and manage themselves on their own.

Take your call.

Is India Rising turning into an Illusion?

Summary: As inflation soars to 13%, and with the manufacturing and infrastructure sectors now in the midst of a decisive slowdown, international and Indian investors need to revisit the fundamentals which triggered the India growth story nearly three years ago. Was India Rising merely a slogan adopted on the back of the exponential growth in disposable incomes within upper middle class Indians? And, were government issued statistics, and related forecasts, entirely misleading since they failed to encompass the future impact of growth, not in the gross domestic product, but in the poor-rich divide?  

Over 250 million Indians continue to live on less than one dollar a day; roughly 600 million more live on less than two dollars. But, a dollar or two apart, if national poverty statistics are calculated on the bases of a basket of essentials, India is mired in poverty. Despite hundreds, probably thousands, of anti-poverty initiatives adopted since Indian independence in 1947, the wealth distribution matrix continues to shift, year after year, in favour of industrialists, landlords, money lenders, criminal syndicates and, of late, the 75-million strong upper middle class.

Blaming rising energy and commodity prices, New Delhi has just announced a downward revision in the 2007 growth estimate to 7.7%, from 9%. But already, a broad range of economists are emphasizing that 5% is a more realistic target for 2008. “Then, of course, we have to see the impact of the monsoons on the harvest,” a senior cabinet minister said yesterday on condition of anonymity. “Mother Nature remains the biggest single component of national performance data, regardless of the marked expansion in manufacturing and services.” 

International asset managers have failed to understand the most fundamental of truisms: that India Rising is a meaningless slogan without significant, material and sustainable changes in the vast agrarian hinterland, where 75% of Indians live. While it is quite possible for an investor to extract short and medium term profits from a stock market driven by massive infrastructure spending, consumer demand and the outsourcing window, it is not prudent for portfolio strategists to assume that the factors which justify short and medium term trading lay the foundations for longer term rewards.

In other words, India-related valuations currently employed by equity and debt investors need to be dramatically revised downwards. The price of oil and food is now placing tremendous pressures on middle class families who have been surviving or thriving, thus far, on ill-advised credit; the poor are already enveloped by a sense of desperation and hopelessness. With domestic interest rates trending higher, default ratios for mortgages and credit card loans are due for a sharp rise towards the end of this year. More importantly, while rural poverty and marginalization is sparking unrest in at least two dozen pockets of conflict, the working poor in India’s cities are rapidly embracing the agendas of radical religious and social groups.

Quite obviously, the level of impoverishment has not kept pace with the growth of political consciousness, as many Indian progressive and leftist intellectuals would have liked; as such, nobody should expect anything remotely similar to a mass revolution. But impoverishment does impose severe constraints on consumer surpluses and purchasing power, and on debt servicing abilities on usurious loans. The question is: at what point will the collective degradation in family balance sheets, in the villages and in the townships, cause a genuine reversal of the real growth cycle? 

Bear in mind that, as opposed to the commonly-recognized GDP, real growth in India needs to be measured by benchmarks which fully incorporate all the intermediate stages of production, starting with the agricultural sector, and which identify core trends governing the process of capital formation and capital spending. 

The GDP framework is not structured to incorporate one other salient fact: that the Indian economy is, to a considerable extent, driven by the vast pool of underground capital, acquired through organized criminal activity, illegal logging, loan sharking, smuggling, widespread corruption and, of course, plain old-fashioned tax avoidance. Estimates of the size of underground capital vary; but conservative figures range from 25% of the official economy in places like Delhi and Punjab, to 50%-plus in Mumbai, and in certain cities in the states of Uttar Pradesh and Bihar.

Hardly any Indian economist has credibly explained the impact, negative or otherwise, of black money on national growth. Government statistics do not venture to engage the issue, and for good reason. Since more than 70% of India’s politicians survive on, or are the beneficiary of, handouts from the perpetrators of such money. But underground surpluses will, at the first signs of economic or political uncertainly, begin moving away from cash-generating activities to find homes either in non-dynamic items like gold or in offshore deposits which clearly offer a play on potential declines in the worth of the Indian Rupee over the next decade; at least three Dubai hawala outlets confirm a steady flow of transfers from India and Pakistan in recent weeks.

The inherent problems pertaining to the wealth gap between rich and poor, the inability to substantially upgrade the agricultural infrastructure over many decades, the vagaries of the monsoon rainfall, the looming prospects of loan defaults and the forthcoming capital allocation adjustments in the underground economy, all create unprecedented risks for international investors today. Are the rating agencies capable of defining those risks? That is the question which mutual fund managers should be asking prior to selling India Rising to their retail participants at this juncture.

Today’s Investment Portfolio Imperative: Asset Swaps

Summary: The recent crisis in the debt market has had a direct and adverse bearing on portfolio valuations. But all is not lost; asset managers need not liquidate bonds and debentures, or shares for that matter, at a loss. Asset swaps now offer a compelling method to exchange risk profiles. The chaos in pricing offers unique opportunities to trade risk, and to exit negative holdings in a non-traditional manner. 

In its most rudimentary form, an asset swap is an exchange of the cash flow or risk profile of one asset for another, for a given, pre-determined period of time. Assets swaps are undertaken for a variety of reasons but, fundamentally, they are driven by an investor’s need to improve or rationalize the character of an underlying asset (debt paper or equity) on specific terms.

For example, an investor might desire to switch from a floating interest rate profile into a fixed rate interest stream for a period of two years. Another investor might want to exchange a Euro risk for Yen for five years. Or, an investor might consider that the time is appropriate to switch from equity volatility to relatively stable debt paper. Briefly, the opportunities afforded by asset swaps are limited only by the numerous, virtually unlimited, opportunities available in the marketplace today. 

Why asset swaps today? 

The sub-prime crisis demands that virtually every investment portfolio be scrutinized from the twin prisms of re-pricing and reallocation; re-pricing because the risks embedded in any investment instrument have multiplied in recent weeks, reallocation because the quality of an overwhelming portion of the currently outstanding debt instruments is now being questioned.

The transition in asset valuations (and related valuation techniques) could well continue through the next 12-18 months. This transition is likely to cause serious damage to investment portfolios, given that higher oil and food prices are adding to the questions surrounding the core fundamentals of the debt market. The global economy, which is in the midst of significant re-alignment, will inevitably force wider spreads and lower liquidity in the months ahead. 

In brief, failure to take decisive measures to protect and, quite possibly, enhance your investment portfolio today is likely to degrade overall risk-reward profiles; a dormant portfolio is, quite simply, a disaster waiting to happen. 

Furthermore, it should be pointed out, that traditional hedges like futures, forwards and options are no longer workable in the current environment; either the costs are prohibitive, or hedge contracts are simply not on offer pursuant to the dramatic market shifts in recent weeks. An asset swap, as a consequence, is the only instrument which fills the void; asset swap structures are undeniably based on shares, bonds or convertibles; but they go beyond the scope of traditional investment vehicles by providing an extremely high degree of flexibility with respect to investment strategy, short or long term.

Significant Pointers

From the perspective of the junior markets, the most challenging asset swaps will be being influenced by the need to swap equity into debt, primarily due to the fear of renewed (and unprecedented) potential downside in hundreds of junior (growth-oriented) share listings; asset swap specialists already report a seemingly unending stream of inquiries seeking to cover downside risk in this area. The other subject of immediate relevance is the interplay between resource-based operations on one hand and debt or hybrid prices on the other. Given the founding premises of the collapse in the sub-prime market, real estate real will become another focus for asset swap traders. 

Most importantly, the asset swap is a structured product. While there are standard currency and interest rate swaps which are commonly used in the asset swap segment of the capital markets, incorporating risk transfers (e.g. equity to bonds, debt-quality exchanges and commodity-linked mechanisms) into an asset swap format requires a degree of innovation and engineering. 

For junior companies, the exponential rise in precious metals and energy prices has created a powerful window of opportunity in the asset swap arena. To take one particular example, there is now a growing demand, from the corporate sector, to swap out of equity or debt risk into gold and oil futures, based on production schedules. Resource-based companies must exploit this window now.

Conclusion

For over two decades, managements have struggled to precisely identify the relative costs between debt and equity. The lack of making that determination has been the root cause of the impairment in the hybrid marketplace, for convertible debt and warrant-driven instruments. The asset swap process needs to incorporate the relative valuations with a high degree of exactness. In fact, the recognition of the true cost of capital itself lays the foundations for asset swaps which significantly enhance investment portfolios.

 

Irda plans to review regulations

The Insurance Regulatory & Development Authority (Irda) has initiated a review of the regulations to ensure that they are in sync with emerging market needs.

Irda chairman J Hari Narayan said today that the scope of the revision was “not yet known”, but indicated that selling of mutual funds by insurance companies and that of insurance policies by mutual funds were aspects under deliberation.

Hari Narayan said Irda would soon take up the issue with the Securities and Exchange Board of India (Sebi), which is the regulator for mutual funds.

The insurance regulator is also studying the issue of portability of policies and is looking at options including using PAN (permanent account number) card as a tool for portability. While the general insurance council has already discussed the issue of letting health insurance policyholders change companies, without losing out on benefits like bonus and coverage of pre-existing diseases, a final decision is awaited.

In addition, Hari Narayan said, Irda will also constitute a body to review the broking regulations. To ensure adequate supply of brokers, the regulator said, it would be desirable to allow post-graduates or diploma holders into the field and then conduct examinations over a specified time.

The review of the regulations come at a time when the government is also pushing for amendments to insurance laws, which among other things, seeks to raise the foreign investment ceiling from 26 per cent to 49 and also extend the mandatory listing period from 10 years stipulated at present.

While many of the rules, first prescribed through the Insurance Act, 1938, are still in place, a bulk of the guidelines related to solvency, minimum capital requirement, advertising and approval of products were put in place in 2000 when the sector was opened up to private players. Some of the norms like those governing investment or agent training norms have been updated, while new ones for segments like unit-linked insurance plans or Ulips have been prescribed.

At the same time, there are demands from the insurance companies to shift to a risk-based capital structure or put in place a new product approval system.

The regulator also wants to get rid of legal jargon. “The insurance companies should take the lead and provide examples of policies written in simple language,” Hari Narayan said.

Mirae Asset MF appoints new personnel

Mirae Asset mutual fund has appointed Srinivasa Rao Kapala, Head-Product of Mirae Asset Global Investment Management (India) (the AMC) has been designed as Key Personnel with effect from 21 August 2008.
Mr Dae Kyun Mok ceases to be Fund Manager ?Overseas Investment of the AMC with effect from 21 August 2008. Further, Rajesh G Aynor, Investment Analyst has been designated as the Fund Manager -Overseas Investment of the AMC and is accordingly designated as Key Personnel of the AMC

Patience - Only way for MF investors...

Those who have invested in equities through mutual funds, unit linked insurance plans and portfolio management services are wondering what to do next...

Here is a look at how mutual fund investors are faring, and why there are fears that there could be a panic sell-out.

Meet Pranav Kotlikar - …a 27-year old banker who had never looked at the stock markets till his friends began cashing in on the bull run of the last three years…

while Pranav did not byte the equity bullet totally, he began moving most of his monthly savings into mutual funds in 2006… the returns were spectacular, and Pranav felt on top of the world but six months into this year, Pranav is more than a little lost…

Pranav: "I stayed on after the market slide…I wish I had not done that.. I've lost almost Rs 2 lakh…"

Pranav is just one of the over four crore individuals who put their money in mutual funds trusting it to be a safe haven for their savings. And who could blame them? If you went to any bank branch or met any financial planner over the last two years, chances are you would have opted for one of the following as a sure shot way of saving for a happy and early retirement

Mutual funds, especially systematic investment plans

Unit linked insurance policies, childrens plans and pension plans

Portfolio management services

Until January this year, all of the above would have made you feel secure. Mutual funds gave returns of anywhere between 40-50%. Assets under management grew five-fold in just 3-4 years, and investor base grew by a staggering 57% in 2007…

Then things turned, and with the 30% slide in the markets, the picture is different....

Today, the NAVs of 80% equity funds have returned to their one-year lows. Diversified equity returns have shrunk into negative territory, and is now at a minus 8.2%.

Dhirendra Kumar of Value Reserach says: I am surprised there is no panic... Now, it will start as people start losing their capital..."

These are tough times, and those who have seen bull runs and slides still insist that there is nothing like patience. Systematic investments could ensure that people like Pranav cover money no matter which way the markets go…

http://www.utvi.com/stock-market/mutual-funds-news/5701/patience---only-way-for-mf-investors---.html

Sebi should enhance networth for MFs

To ensure that only serious players with a long-term view enter the mutual funds space, market regulator Sebi should enhance the networth limit for companies seeking MF license to Rs 10 crore from the present Rs 2 crore, a report said.

"With the high cost of operations in the initial years and a relatively longer gestation period, there is a case for re-consideration of Rs 10 crore net worth criteria set from the present Rs two crore for obtaining a mutual fund license," Confederation of Indian Industry and PriceWaterHouseCoopers said in their joint report.

This would ensure that only major players who are committed to the mutual fund industry are capable of sustaining over a long-term would be able to operate in the industry, the report said.

With more players entering the industry, the fee rates are likely to drop in the period ahead and may prompt the fund houses to seriously consider outsourcing, it said.

Moving ahead, MF players would also have to bridge the demand-supply gap of human-assets needs and the companies should tie-up with educational institutions to offer programmes dedicated to the financial services industry, the report said.

Similarly, there was a case for re-consideration of cap on the maximum amount of expenses that can be charged to a scheme, it said.

"Charging additional expenses would enable the fund houses to invest more on expanding the investor network and improvise on delivering quality services to the investors," it said

How To Start Investing - Part I

Many times I am asked the following : 
“I want to invest. How do I get started?”

At first I thought this would be easy, but after some thought and discussion I needed to think about this some more. There is a lot of bad advice out there, and people require a heads up on a lot of things they will encounter from other ‘investors‘, not to mention the media. I will give my best attempt to address them in this multi-part article. I’m not the best writer, and I notice that at many times, not all of my thoughts and ideas are fully captured in my articles. After I complete this series, I will probably improve upon them over time.

BEFORE BEGINNING

The answer is not that straight forward. Before you begin I have some important recommendations:

- Hold Your Money - Hold your money until you’ve assessed if you need the money in the near future or not. If you need it, you will want to put it in a short term secured financial instrument (such as a GIC or term deposit) or high savings interest account because it may be money you cannot lose, or it may be difficult to re-accumulate in a short period of time. In addition, after you learn more, you may find a more suitable short term place for your money that you wouldn’t have been able to evaluate adequately.
- Learn First - You will most likely have an idea of what an investment means to you, and what you want to invest in. Most people think stocks & mutual funds, but there are others which include real estate as well. The investment world contains much more than just those investment vehicles too. Learn about the other investment vehicles. An investment plan will most likely be made, and your choices may change afterwards.
- Patience - Many people don’t want to wait, and jump in right away without knowing anything. Many people will also recommend that you don’t wait, stating that now is the best time. Others will tell you to buy “safe” or “low risk” unsecured investments, to make money while you are learning, instead of actually learning first. Real risk comes from not knowing what you are doing and not being able to properly assess your personal financial situation in relation to the investments.
- Patience is required until further knowledge is accumulated on the subject matter. You will be better able to make investment decisions, whether it be stocks, or even what real estate to put your money in. You may then also have an idea of how (if at all) you may want to split money among different investments. Don’t be worried about lost opportunities to make money while you are learning. When you are more knowledgeable, you will have plenty of time to make money, and will be able to see the opportunities you wouldn’t otherwise be able to see. Also, if you use up your capital on bad investment decisions, then you have a lot less to use on good ones.
- Continue Learning - Investment, styles & techniques are imprecise & highly debated. Many should be tools that you are able to use in various situations & stages. You’ll find investing very much an imprecise art, and perspectives on investing philosophies/methods will be like religions to people. No matter what one investor says, it may always be invalid to another. Some examples include groups who believe totally and/or partially in market efficiency, market psychology, fundamentals, technical analysis, etc. Keep an open mind, and most importantly continue to educate yourself with financial knowledge.
- Logic, Not Emotion - When investing you must keep your emotions out of the picture, in order to make logical decisions and assessments. Most people fail because of this. This is probably the largest make or break factor of any investor. Even if you have the knowledge, emotion distorts an individual’s thinking, resulting in action that is not based on the knowledge.

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BEGINNING - THINGS TO CONSIDER

Decide whether you want to Do-It-Yourself, or rely heavily on a Financial Advisor. I’ll use the letters DIY & FA in the rest of this article.

DIY or FA? There are advantages & disadvantages that each person needs to consider carefully. The paths will be very different, but you can always change your mind later as well. My preferred choice is Do-It-Yourself.

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Do-It-Yourself:
- Results vary from individual to individual - DIY as a consequence, is highly dependent on the individual investor’s attitude & mindset, as well as knowledge & experience. All of which can be accumulated/learned.
- Time, effort, commitment - Learning, analysis, research, planning (but it doesn’t necessarily mean difficult work, or spending hours on end each day). As with anything, there are things that you will need to do. DIY requires more of a commitment.
- Individual goals - Super wealthy, affluent, financially free, retire early, etc. In the majority of cases many of these goals may be achieveable only through DIY.
- The role of your FA - An information resource, financial resource (instruments, financing/capital, etc). Will be less hands on.
- Control - You are the decision maker, manager of risk, and the most knowledgable in terms of what investmestments will be the most suitable at each moment in time. Basically you’re the captin of the ship.
- Trust - Can you trust yourself to have & keep the necessary temperment? Learn what is necessary? Take steps to invest properly? Does your family trust you for this task? You also need to trust the information, and ability of the FA to do what you need them to do.
- Investments - Virtually an unlimited range of investment vehicles and business opporunities.

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Financial Advisor:
- Results will vary from advisor to advisor - Is dependent on the advisor’s attitude & mindset, their knowledge, their ability to adequately assess what is suitable for you, and your own knowledge of yourself.
- Time, effort, commitment - Learning enough about yourself so that the advisor can assist you. Finding a knowledgeable & competent advisor. Keeping up to date with general economic news. Also, requires commitment, but less than DIY.
- Individual goals - Retire early, retiring at 65, etc. Can an advisor help you reach your goals?
- The role of your FA - Decision maker, information resource, financial products & instruments. Will be more hands on.
- Control - Less control, as you will most likely not have an adequate amount of knowledge. Relying more on the advisor. Less of a decision maker. You still give final consent.
- Trust - You must trust your advisor a lot more, as you will be relying on them almost completely.
- Investments - Most likely limited to GICs, mutual funds, stocks.

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Contrary to what the general public is lead to believe by banks & investment firms, people need to understand that investing is not just the act of purchasing an investment (GICs, mutual funds, stocks, real estate, etc). Investing is much more, and there are important steps to follow whether you DIY or rely on a FA. If you are not willing to do all the steps, you may be financially better off by putting money into secured GICs, high interest savings accounts, & paying off the mortgage. The alternative is losing money from unknowledgeable decision making or bad advice. We have seen countless individuals across the globe who lost their life savings from blind investing in stocks, mutual funds, and other products recommended by their local bank, investment firm, and financial advisor. People have also lost money in real estate as well through improper investing and speculation.

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THE STEPS

The steps for either are straight forward, but extremely important. No step can be skipped or fast tracked. Most are valid for both DIY or FA, but one focuses on certain aspects more than the other. The steps should also be revisited continually:

Steps For DIY:
1. Make sure your personal finances in order first.
2. Educate yourself on the subject area & increase your knowledge on a continual basis.
3. Make sure you have the right attitude & mind set.
4. Know yourself, your needs, & your goals. (Gives you direction - learning, control, etc.)
5. Build your advisory team.

Steps For FA:
1. Make sure your personal finances are in order first.
2. Educate yourself on the economy & general economic trends.
3. Know how to find a competent, knowledgeable, and honest financial advisor.
4. Know yourself, your needs, & your goals (so that the advisor can best assist you).
5. Build your advisory team.



In Part II, I will elaborate on each step and its importance.

Rupee inches closer to 44 mark

Surging demand for dollars pushes currency down to 43.71 to a dollar.

Hit by an acute dollar shortage in the foregn exchange market today, the spot rupee lost 19-20 paise to reach an intraday low of 43.86 against the greenback in the first half of the trading session. Towards the end, the spot rupee recovered to close at 43.70-71 to a dollar.

According to dealers, foreign institutional investors (FIIs) continued to pull out of the equity market even as the BSE Sensex gained 135 points on Wednesday.

Dealers said while foreign investors were exiting the Indian markets for better returns in the West Asian and overseas markets, domestic players like insurance companies and mutual funds continued to remain major buyers in the domestic equity market.

According to dealers, while foreign banks on behalf of their FII clients continued to buy dollars, the supply was ensured from exporters, who were selling their dollar receivables for the near term (one to three months) to take advantage of the depreciating spot rupee.

The Reserve Bank of India (RBI) also remained one of the major sources of dollar supply. It sold the greenback in the spot market with an underlying agreement to buy it back in the forward market from banks besides the outright sale of dollars. This measure is to ensure depletion of foreign exchange reserves since the sale of dollars today will be replenished by dollar sales by exporters or other players in the forex market at a future date, said a dealer.

Dealers also attributed a strengthening dollar overseas to the weakness in the rupee weakening. The dollar has been gaining due to a weakness across global currencies. “If the rupee continues to depreciate in this manner, the spot rupee may touch and even breach the 44 mark to a dollar in the beginning of the next week,” said a dealer.

Besides FIIs, oil companies also continued to buy dollars, fearing a fast depreciation of the rupee.

The premium on the forward dollars declined today as both exporters and RBI were selling dollars in the forward market, thereby pushing up the rupee premia. FIIs and oil companies, on the other hand, were buying dollars from the spot market. The annualised premia for six-month and one-year forward dollars closed lower at 3.12 per cent and 2.70 per cent today as against 3.45 per cent and 2.93 per cent on Monday respectively.

Time to increase your Gold Portfolio

UTI Gold ETF has given significantly higher return than UTI contra or any other equity diversified scheme. Return in UTI Gold in last one year was 42 per cent approx whereas UTI contra return was -2.32 per cent (negative). This was primarily due to rising gold prices internationally in last one year. However in long run say in 5-7 years, return in diversified equity fund may outperform gold fund.

It is advisable to put 50 per cent in any Gold Fund and remaining 50 per cent in a good diversified equity fund

Read this before deciding further

What are the different Gold Funds in India?

There are five different Gold based ETF’s available for trading as well as investments on the NSE. Below, we list them one by one:

Benchmark Gold BeES:
Thiswas the first off the block Gold ETF available in India for trading and investment. This comes from the Mutual Fund house called “Benchmark Asset Management Company”, which is the primary front runner in the Indian Markets for introducing the ETF Funds trading in India. The Benchmark Gold BeES ETF has managed to give consistent returns to the investors and matches the returns of all the other Gold based ETFs. ICICIDirect Trading Symbol: GOLDEX

UTI-Gold Exchange Traded Fund:
Closely following Benchmark was the UTI-Gold ETF and is one of the best performers in the Gold based ETF segment. It has the long standing trusted name of UTI Asset Management Company and has been a hot favourite for investors looking for investing in Gold based ETF or Exchange Traded Funds. ICICIDirect Trading Symbol: UTGOLD

Kotak GOLD ETF:
It was in June 2007, when Kotak Mutual Fund house decided to launch the Kotak GOLD ETF, and this fund has also lived up to the investors expectations. ICICIDirect Trading Symbol: KOTGOL

Reliance Gold Exchange Traded Fund:
How can Reliance, which is a real big name in India, be left behind? Reliance Gold Exchange Traded Fund or ETF too have a Gold based ETF and this fund too has managed to live up to the expectations of the investors. The returns are similar to those of the other Gold based ETF available in India. ICICIDirect Trading Symbol: RELGOL

Quantum Gold Fund:
A new fund from the Quantum Fund house called the Quantum Gold Fund. Returns similar to the ones by the other Godl based ETFs. ICICIDirect Trading Symbol: QUGOLD

So now the investors looking for investing in Gold that too specifically in Gold based ETF now have a wide variety and choice. The interesting thing is that the returns on all these various Gold based ETF’s have been almost similar. The only thing an investor should be careful about is the expense ratio or fund management charges. Though the are ETF, so the only thing an investor needs to pay is the brokerage, but sometimes the ETF may also levy a fund management fee from the investors.

Are FMPs risk-free investment avenues?

The rising yields in debt markets have resulted in FMPs (fixed maturity plans) emerging as attractive investment options for investors. Also, the testing conditions in equity markets have in no small measure, contributed to the allure of FMPs. 

Simply put, FMPs are debt-oriented investment avenues from the mutual funds segment with a fixed investment tenure; also, they profess to offer a reasonably assured (predetermined) return. This is achieved by locking in a yield (return) at the time of getting invested. Hence an investor who is invested in the FMP until its maturity, is virtually assured of clocking the projected return.

However, it should be understood that FMPs are not the risk-free avenues they are made out to be. For instance, the possibility of the actual return varying from the indicated return cannot be ruled out. Market conditions, inappropriate investments (say a credit default in any of the underlying investments) or even a poor investment style (a mismatch between the maturity profile of the FMP and that of its underlying investments) can be responsible for the same. 

In conclusion, while FMPs would qualify as low risk investment avenues, they are certainly not the risk-free avenues they are made out to be.

Mutual Funds Update from CRISIL India

All CRISIL Mutual Fund indices with the exception of the CRISIL MF~Gilt index posted positive returns in July 2008. The CRISIL Fund~eX (which tracks diversified equity funds) with returns of 5.40 per cent in July was in line with the benchmark S&P CNX Nifty which ended the month at 7.24 per cent over the earlier month.

The hybrid CRISIL Fund~bX (which tracks balanced funds) was up by 3.76 per cent, while the CRISIL MIPEX, (benchmark for monthly income plans) which has a lower equity component, posted returns of 0.97 per cent. Among pure debt indices, the CRISIL Fund~dX (which tracks Long-Term Bond Funds) ended 0.43 per cent up while the CRISIL STBEX (benchmark for Short-Term Bond Funds) gave monthly returns of 0.29 per cent while the CRISIL~LX Index ended up by 0.71 per cent. The CRISIL MF~Gilt Index however gave negative returns of 0.15 per cent.

Banking Sector Funds - the top performers in the equity mutual fund space. In the equity category, banking sector funds performed well with relief rallies in banking stocks driven by valuations becoming attractive after a prolonged southward movement." Reliance Banking Fund posted 13 per cent returns for the month ended July 2008 followed by the UTI Thematic - Banking Sector Fund with 11.50 per cent gains and JM Financial Services Sector Fund with 10.12 per cent returns.

There were six diversified equity oriented schemes which gave over 10 per cent returns during the 1-month ended July 31, 2008. Of these, the top four schemes belonged to LIC Mutual Fund, viz., LICMF Growth Fund (12.3 per cent returns), LICMF Equity Fund (11.47 per cent returns), LICMF Infrastructure Fund (11.29 per cent returns) and LICMF Opportunities Fund (10.8 per cent returns).

The Indian mutual fund industry's average assets under management (AUM) fell for the second consecutive month in July to Rs.5.31 trillion from Rs.5.66 trillion in June 2008 (including fund of funds). The decline by over 6 per cent in mutual fund assets can be attributed to redemptions due to volatile equity markets, tightness in money market, an unfavourable inflation outlook as well as on prospects of interest rates moving northwards after RBI hiked repo rates by a higher-than-expected 50 bps to 9 per cent and raised banks' CRR (cash reserve ratio) by 25 bps to 9 per cent in its latest quarterly monetary policy review.

http://www.ranjanblog.com/2008/08/mutual-funds-update-from-crisil-india.html

Funds favour private banks, infra, oil firms

Mutual funds, which were net buyers to the tune of Rs 1,412 crore in July, showed a preference for private banks, infrastructure and oil exploration companies. According to data compiled by Value Research, a mutual fund research company, among the most favoured stocks were HDFC Bank (Rs 339 crore), Cairn India (Rs 221.5 crore) and ONGC (Rs 212 crore).

Other stocks that were in demand include Axis Bank, Bharti Airtel, Larsen and Toubro, Reliance Infrastructure and ABB. “Some of the stocks like HDFC Bank and Larsen and Toubro are logical buys because they have been beaten down badly in the market,” said Shankar Sharma, director, First Global, a brokerage firm.

According to Amitabh Chakraborty, President (equities), Religare, during the last month, crude oil prices were beginning to moderate, but still closed the month at $126 a barrel, giving credence to beliefs that perhaps there was another rally in the offing.

This led to demand for oil exploration companies like ONGC and Cairn India. However, in the last ten days, crude oil prices have plummeted to $113 a barrel. And there are expectations that they will come down further after the Beijing Olympics because of a fall in demand for diesel, which is being used as fuel in place of coal for polluting reasons.

Besides, the US consumption of crude oil is already on the decline. On Tuesday, the US government data showed that the oil demand for the first half of 2008 has declined by an average of 800,000 barrels a day compared with that during the same period a year ago, the sharpest decline in 26 years. “There will be a rethinking about oil exploration companies like Cairn and ONGC in the next few months, depending on how sharply the prices fall,” said Charaborty.

Rate-sensitive sectors like banks have been in demand, mainly because any fall in oil prices means inflation will soften.

But private sector banks have got preference as they are insulated from the expenditure of Rs 60,000 crore on agricultural loan waivers, unlike the public sector banks. Gopal Agarwal, head of equity, Mirae Asset Global Investment India, said sectors like banks, infrastructure and even auto could be in demand, if the interest rates start easing.
Source: Business Standard

Provident Funds get more investment flexibility

New Delhi, August 15: The massive cash balances that provident funds sit on every December-January, in the absence of central government securities to park them in, will be history. The new investment pattern for non-government provident funds as well as superannuation and gratuity trusts, notified by the finance ministry on Thursday, allows the funds to invest those idle balances in gilt mutual funds. 

In 2007-08, the EPFO had kept more than Rs 10,000 crore idle, as per a recent audit report. Incidentally, EPF’s earnings for 2007-08 are, therefore, only enough to pay 8.25% interest compared to 8.5% paid in the year before. The finance ministry’s new investment guidelines, that will become operational from April 1, 2009, can rectify this, going forward. 

The guidelines leave no room for provident fund managers to cite investment restrictions put in by government for lack of returns on the money put in by the 40 million organised sector workers as their retirement savings. Significantly, the new guidelines have also raised the cap on equity investments from 5% to 15%, besides expanding the universe of eligible stocks where the money could be invested. 

Also included in the universe of investment options will be money market mutual funds, rupee bonds of multilateral institutions like the World Bank and term deposits of private sector banks. More importantly, for the first time, pension fund trusts have been given the freedom to actively trade their portfolios. This change from a regime where securities had to be held till maturity would usher in better returns as funds can react to market dynamics. 

Another major change is a move away from stipulating rigid caps for different investment instruments, which will impart greater flexibility in making investment choices. The new pattern simply specifies overarching investment limits, within which trustees can choose. 

While the bouquet of investment options has been expanded, trustees have been made more explicitly responsible for investment decisions. However, sections feel since India is yet to get professional trustee companies in place, the new options may remain unused as existing trustees may shy away from taking hard decisions. 

While welcoming some of the changes, Amit Gopal, India Life Asset Management, which consults several company-run PF trusts, points out that the stiff new accounting standards for retirement funds make companies liable to make good any losses in the same year that they occur. “Therefore, trustees may not be keen to take risks, as they will face flak from both the employees and the company,” he said. 

“Increasing the stock investment limit from 5% to 15% will remain only on paper. Investors would benefit only if trustees take a risk, which is unlikely to happen in the present scenario,” said a senior government official.

INFLATION COOLS IN CHINA, NOW IT'S TURN OF INDIA !

BEIJING - China's politically volatile consumer inflation rate eased in July, but prices rose by a still-high 6.3 percent over the same month last year, a government news agency reported Tuesday. 
The figure was a decline from June's 7.1 percent but well above the government's target of 4.8 percent for the year.
The government has imposed price controls on basic food items and taken other steps to stave off rapid price rises that communist leaders worry could fuel public frustration and possible protests.
The rise in overall consumer inflation has been largely driven by double-digit increases in the price of food.

Beijing's efforts to cool price rises have been hampered by sharp increases in global prices for oil and grain, as well as winter storms in southern China that wrecked crops.

Yahoo.com

Inflation rises to 12.44 percent, finance ministry 'disappointed'

India's annual rate of inflation rose further to 12.44 percent for the week ended Aug 2, goading the finance ministry to say it was a "major disappointment".

Data on wholesale prices released by the commerce ministry Thursday showed that the inflation rate - the highest since May 1994 - has jumped to this level from 12.01 percent for the week ended July 26, and 11.98 percent the week before.

“After being nearly stable for four weeks, this rise has come as a major disappointment," the finance ministry said in a statement soon after the data was released.

"The annual rate of inflation calculated on point-to-point basis stood at 12.44 percent for the week ending August 2," stated the ministry of commerce and industry in the official data released Thursday for the wholesale price index (WPI) for all commodities.

The WPI, based on final data for the week ended June 7, stood at 236.5, as compared to 235.2 (provisional), taking the annual rate of inflation to 11.66 percent as compared to 11.05 percent (provisional).

The main reason for the increase in the inflation rate during the week was higher prices of food articles and fuel, both jumping 0.9 percent.

The index for food articles rose on account of higher prices of maize (which rose 4 percent), condiments and spices (3 percent), fruits and vegetables (2 percent). Non-food articles went up by 0.2 percent.

The index for fuel, power, light and lubricants rose due to higher prices of light diesel oil (16 percent), bitumen and furnace oil (8 percent each), and aviation fuel (3 percent).

The finance ministry said that in the primary articles group, the annual point-to-point inflation increased to 11.43 percent as compared to 10.32 percent for the week before.

"In the commodity group of fuel and power, the rate of inflation has risen to 17.99 from 17.12 percent."

C. Rangarajan, in an exclusive interview to IANS soon after stepping down as the Prime Minister's Economic Advisory Council (EAC) chairman Wednesday, said he did not rule out the possibility of inflation rate touching the 13 percent mark.

"Inflation may touch the 13 percent-mark," he said, even as the government projected inflationary trends to moderate to 8-9 percent by March 2009.

"The trends of moderation in inflation should begin in December," said Rangarajan, now nominated to the Rajya Sabha. He added: "Monetary tightening is needed to contain inflation."

The statement came a week after Planning Commission Deputy Chairman Montek Singh Ahluwalia said inflation would fall below the 10 percent mark by this fiscal-end.

"Inflation is expected to moderate below the double-digit mark by the end of the current fiscal," Ahluwalia said.

The latest increase in inflation rate comes on a day the central government revised the recommendations of the Sixth Pay Commission to grant substantial hikes to its five million employees.

However, Finance Minister P. Chidambaram said its impact on inflation was taken into account when the government cleared the recommendations.

“The payout is not a new development. It has been factored into when the Budget was prepared and the Prime Minister's EAC and the RBI (Reserve Bank of India) gave their estimates,” he said.

Government opens way to private provident fund to beat inflation

New Delhi, Aug 14 (IANS) Private provident and other retirement funds will be allowed to directly invest up to 15 percent of their investible funds in the capital market, giving fund managers a greater degree of flexibility.

A finance ministry notification Thursday also announced easing of other existing norms. These investment pattern norms were last revised Jan 24, 2005.

The new norms will come into force from the next fiscal starting April 1, 2009, it said.

The new norms have been finalized after taking into account feedback received on proposed norms that had been put up at the finance ministry website last September.

The notification said that provident funds, superannuation funds and gratuity funds can now "directly invest up to 15 percent of their investible funds in shares of companies on which derivatives are available on the Bombay Stock Exchange and the National Stock Exchange."

"This is a very healthy sign because in inflationary times, when the rate of interest is below the rate of inflation, then provident funds which are guaranteed return funds become guaranteed risk funds," Naresh Pachisia, managing director of leading securities manager and mutual funds distributor SKP Securities Ltd, told IANS.

"So if these funds can invest in equities which can provide a high rate of return then the overall returns on the funds can be maintained at a rate higher than the inflation rate," he explained.

"The 15 percent ceiling also seems just right because even if the equities investment goes wrong, the total capital is still protected," Pachisia said.

“If the fund loses, say, at the most by 50 percent, then 7.5 percent of the total funds will be lost. But it will earn at least 9 percent on the 85 percent that it will be forced to invest on debt instruments.

“Since 9 percent of 85 percent is 7.65 percent of the amount invested, it will cover the possible loss of 7.5 percent,” Pachisia explained.

The other norms announced are aimed at giving the fund managers "greater flexibility in terms of a wider variety of financial instruments as well as greater freedom to actively manage the portfolio," the notification said.

Highlight of the new norms:

* Central and state government securities and units of gilt mutual funds have been merged into a single category and trustees can invest up to 55 percent of the investible funds in them. Earlier, they had to invest 40 percent in central and state government securities only, and at least 15 percent in state government securities;

* A flexible ceiling has been provided for various instruments instead of fixed investment ceiling as at present;

* Providing new instruments, such as rupee bonds of multilateral funding agencies and money market instruments;

* Permitting investment in term deposit receipts of not less than one-year duration issued by commercial banks subject to specified criteria.

* Fund trustees can exit from a rated financial instrument when their rating falls below investment grade, as confirmed by one credit rating agency;

* The trustees can indulge in trading of securities provided the turnover ratio - the value of securities traded during the year, divided by the average value of the portfolio at the beginning and end of the year - does not exceed two;

* Trustees will be required to conform to the investment pattern norms only by the end of the financial year, although they are expected to do so throughout the year.

* Trustees can exceed the investment ceiling up to 10 percent of the limit prescribed during the year.

IANS
 
Printed from www.mangalorean.com

Private PFs don't invest even 5% in equities

The finance ministry’s proposal to allow private provident funds (PFs), superannuation funds and gratuity funds a greater exposure to equity and market-linked instruments has been cheered on by market participants. However, the ground reality is completely different. 

Interestingly, very few of the funds allowed to invest in equities have even utilised their cap of 5%. According to various industry experts, even those funds, which do invest in equities, have an exposure of only 1-2%. Further, with the recent spike in bond yields, government securities as well as corporate bonds have been giving returns of over 9%. This is well above the returns of 8.5% which these funds are supposed to guarantee. 

In a proposal made in September last year, the finance ministry had suggested a greater exposure for these funds, which manage the savings of employees of various corporates. It was mandated that these funds double their capital market exposure from 5% to 10% while reducing their exposure to government securities from 40% to 35%. A number of other changes in the investment pattern, including more exposure to money-market mutual funds and bonds or securities of PSU companies. 

While market participants have welcomed this proposal, the general perception is that a number of other regulations need to change to make equity investments viable. The main bone of contention is that of the guaranteed returns of 8.5%. In case the fund fails to throw up an 8.5% return, the employers are expected to provide for the rest. 

“The fact that these funds have to guarantee fixed returns while investing in instruments with variable returns did not find flavour with them,” said Amit Gopal, vice-president, India Life Capital, which manages funds for over 150 companies. 

Whether these funds will actually take to the proposed relaxation in exposure norms remains to be seen. “It is highly unlikely that private provident funds or superannuation funds would actually take advantage of the relaxation in investment pattern, if and when it happens. 

The basic risk appetite of these funds is completely different, even the bonds they invest in are top class bonds,” said a fund manager. In spite of having the expertise of huge treasury departments, banks and insurance companies that manage private provident funds have not invested heavily in the capital market, he added. At the moment, PF returns have been above the 8.5%-mark. Investments done in 2007-08, in particular, have given returns of over 9% while those of 30-year old trusts, which have been managed effectively, have consistently given returns of 8.5-8.8%.

Reliance MF buys engg & cap goods, banking, oil

Reliance Mutual Fund has enhanced its exposure to the engineering & capital goods, banking & financial services, oil & gas and utilities sector. However, it cut its holdings in the information technology, metals & mining and automotive pack. 

Unitech, BGR Energy Systems and Kotak Mahindra Bank were the top buys while Escorts, Dabur Pharma and Emco were the top sells.

A study of the equity portfolios managed by Reliance Mutual Fund as on July 31 shows that in the engineering & capital goods pack, BGR Energy Systems, Thermax, Alstom Projects and ABB topped the list of buys while Crompton Greaves, Suzlon Energy and Siemens topped the list of sells.(View - All Bulk Deals by Mutual Funds)

In the banking & financial services, the fund house purchased Kotak Mahindra Bank, IDFC and HDFC Bank while decreased its holding in Rural Electrification, ICICI Bank and HDFC.

In the oil & gas pack, Cairn India and ONGC were in the list of top buys whereas Reliance Industries and Shiv Vani Oil & Gas were in the list of top sells.(Check out - Which sectors are attracting Fund Managers?)  

In the utilities space, Torrent Power, Tata Power Company and NTPC topped the list of sells.

Reliance Mutual Fund slashed its exposure to information technology, metals & mining and automotive stocks. In the information technology pack, HCL Technologies, Infosys Technologies and Patni Computer Systems were in the list of top sells while Satyam Computer Services and Tata Consultancy Services were in the list of top buys.

In the metals & mining pack, SAIL, Tata Steel, Hindalco Industries and Jindal Stainless topped the list of sells. Maruti Suzuki India, Tata Motors and Escorts were in the list of top sells in the auto space.

Templeton MF bets on banking, oil, cap goods

Templeton Mutual Fund has increased its holding in the banking & financial services, oil & gas and engineering & capital goods sectors. However, the fund house has reduced its exposure to information technology, metals & mining and chemicals sectors.

A study of the equity portfolios managed by the Templeton Mutual Fund as on July 31 shows that in the banking & financial services space, Federal Bank, HDFC Bank and ING Vysya Bank topped the list of buys while Yes Bank, India Infoline and Kotak Mahindra Bank topped the list of sells. Bank of India, LIC Housing Finance, Reliance Capital and Bajaj Holdings were newly introduced stocks.

Among the oil & gas stocks, HPCL, BPCL and Cairn India were top buys while Reliance Industries was top sold stock. It has made fresh investment in Indian Oil Corporation. (View - All Bulk Deals by Mutual Funds)

In the engineering & capital goods sector, Cummins India, ABB, Thermax topped the list of buys while Larsen and Toubro, Greaves Cotton and Suzlon Energy topped the list of sells. The fund house has exited Gremach Infrastructure and Shanthi Gears.

Templeton Mutual Fund slashed its exposure to information technology, metals & mining and chemicals. In the information technology pack, TCS and Infosys Technologies were in the list of top sells. It has exited Redington (India). (Check out - Which sectors are attracting Fund Managers?)  

In the metal & mining space, Tata Steel, Sterlite Industries (India) and Sesa Goa were top sells. 

In the chemical sector, it has sold over 26.55 lakh shares of Reliance Petroleum and over 14 lakh shares of Tata Chemicals.

AMFI initiates study on common online platform

The Association of Mutual Funds in India (AMFI) has initiated a study to form a common online platform which would facilitate investors and distributors in mutual fund transactions, A.P. Kurian, Chairman, AMFI, said here on Saturday. 

The association is also looking to simplify the process of application for different mutual funds by introducing a common application form for all asset management companies, he said. Talking to reporters on the sidelines of a Mutual Fund Summit organised by the Indian Chamber of Commerce, Kurian said: “A committee of seven-eight members is currently exploring the formation of an industry-wide common online platform which would help in buying and selling of all types of mutual funds available in the market.” 

The new system would take a few months to be implemented, he said. In response to a question whether the mutual fund brokers would become redundant in such an arrangement Kurian said the role of brokers would still be essential in providing investment advisory services. 

Application forms 

In regards to the introduction of a standardised application form across all mutual funds he said the investors currently faced a lot of complication in filling up forms of varied formats for different funds and the new system would simplify the process. 

A committee formed by AMFI is currently looking into the matter. The application forms should also categorically mention the amounts of commission to be paid for different services, he said, adding, “This would lead to a more transparent and open way of commissioning.” 

AMFI has recently submitted a proposal to the Security and Exchange Board of India to introduce variable pricing of distribution. This would ensure that the investors also had a role in deciding the commissions depending upon the service availed by them, he added.

Sebi mulls variable load structure for MF distributors

Securities & Exchange Board of India (Sebi) is looking to have a variable load structure for mutual fund distributors. The commission in the variable load structure regime, as proposed by the Association of Mutual Funds in India (Amfi) board, would depend on the quality and nature of service and advice given to an investor. 

Speaking to reporters after the one day seminar ‘ICC Mutual Fund Summit 2008’ organised by the Indian Chamber of Commerce here on Saturday, Sebi executive director R K Nair said: “In global markets, investors have a choice. They have different load for different services. We too are working towards it.” 

Incidentally, entry load is a charge levied on investors by a mutual fund in case an investor decides to invest in the scheme. Open ended mutual fund schemes charge anything between 2 % and 2.5% of the amount invested under different heads like marketing cost and distribution commission. 

Elaborating further, Amfi chairman A P Kurian said, the commission paid to distributors is not linked to the quality or extent of service as well as the nature or quality of advice. 

“In case Sebi clears the proposal, distributors along with the investor can jointly work out their commission depending on the quality of service or the nature of advice. The rate will largely depend on the extent of service and advice gven to the investor and will find mention in the investor’s application form,” he added.' 

“Since the variable load factor regime is a common practice in developed markets, Indian mutual fund industry should also strive towards this,” Mr Kurian said. 

This apart, Amfi is also working to have a structured common application format for all mutual fund schemes across the country instead of having different application forms from different mutual fund houses. The association is yet to take up the issue with Sebi.

Japanese giants eye Indian MF market

Though the market meltdown has hit the domestic mutual fund industry and affected investor sentiment temporarily, it hasn’t deterred global biggies from going ahead with their India plans. At least three financial giants from Japan — known for their conservative approach — are looking at setting up asset management business in India. 

Japanese financial conglomerates — Nikko, Nomura and Shinsei Bank — are exploring various options to enter the Indian mutual fund market, top mutual fund sources said. Nomura, which has signed an MoU with Life Insurance Corp (LIC), is likely to get a stake in LIC Mutual Fund. Shinsei Bank already has a relationship with India as it runs an asset management business with Guernsey-based UTI International Ltd, a wholly owned subsidiary of UTI Asset Management Company. 

“The Indian mutual fund industry has a huge growth potential and foreign players are looking at tapping it,” said Association of Mutual Funds of India chairman A P Kurian. “Some Japan-based pension funds are also looking at investing in India. But they’re likely to come as foreign institutional investors registered with market regulator Sebi. A major reason for the increasing Japanese presence in India is that they are wary of the kind of returns they can hope for in saturated US and European markets,” said a mutual fund source. 

It is not only Japanese companies that are making a beeline to enter the growing MF market but European companies are also heading to South Asia. While UK-based Schroder has plans to set up shop in the coming months, Belgium-based KBC Asset Management Company has announced its joint venture with Union Bank of India. Union Bank will have a 51 per cent stake in the joint venture company while KBC will hold the remaining 49 per cent stake. 

These new entrants will face tough competition from other foreign players like UBS, Goldman Sachs Group, Morgan Stanley and Credit Suisse, which have been studying the market dynamics for quite some time now. 

To cash in on the 50-60 per cent growth in assets under management that the industry has seen in the past, domestic stock broking houses are also eyeing a share of the pie. Indiabulls, Motilal Oswal and India Infoline also have plans to launch MF schemes soon. The average assets under management of the industry fell by 6 per cent in July to Rs 5.30 lakh crore.