Why fund investors didn’t get their timing right

“Buy low and sell high” is a lesson mutual fund investors in India continue to ignore, as trends in money flows into mutual funds over the past two years show. Flush with funds in a rising stock market until early 2008, equity funds saw new inflows dwindle in the bear market, reviving only in the recent rally.
However, the good news is that older fund investors held on patiently as NAVs fell, and reaped gains from the subsequent rally. Another key trend was some investors shifting attention to other asset classes when returns from equities fell. Gold ETFs and income funds saw steady inflows during periods marked either by uncertainty or poor performance by equities.
The tendency to chase returns rather than anticipate them appears to have taken hold of many equity fund investors over the past two years. Net inflows into equity funds (gross sales minus redemptions) peaked, with the stock market in January-2008 at Rs 12,717 crore, though some spillover effect remained with healthy inflows in the following months. However, from April onwards, fund flows dipped as the market’s free fall continued. Behind the curve

An analysis of trends in monthly equity fund flows between early 2007 and now shows that investors have been slow to react to market spikes as well as its falls. Though the equity market was buoyant from August 2007, the gush of inflows caught up only later in November. When the market corrected in January 2008, inflows continued for a few more months.
Net flows that had turned negative following the October 2008 crash, remained so till April 2009 (but for February, which reported net inflows). They resumed in full flow again in May 2009, two months into the recovery rally. These suggest that investments, more often than not, chased good performance from equity funds.
Investments picked up after equity funds put in an average holding period return of 32 per cent between August and November 2007, and 25 per cent in the two-month period between March 2009 and April 2009.
Herd mentality, the need for assurance that the investment value will not drop immediately after committing funds, and the fear of missing out on rallies appear to be the key motivating factors for retail investors in equity funds. Such a short-term approach to equities may also have limited investor participation in the current rally, as the monthly net inflows remained unimpressive throughout last year and the first quarter of the current year.
New fund offerings also garnered larger sums during bullish phases — equity NFOs in April-January 2008 saw inflows of Rs 33,191 crore — but investors appeared to have given them a wide berth during the bear phase.
Fund houses too should shoulder some of the blame for this; as new fund launches have peaked during good times. Triggered also by fewer offerings during the period, equity NFOs garnered only Rs 2,293 crore between April 2008 and March 2009.
The revival in equities since April 2009 has seen more new funds cropping up. With positive response from investors, these have collected over Rs 3,221 crore between April and July. Reluctant to pull out

However, what’s interesting is that while new money committed to funds dropped in 2008, the year did not see any significant pick-up in redemption activity. Investors preferred to remain invested in equity funds, despite a fall in, or poor performance of, the market.
While pullouts from equity funds did pick up a little after the January 2008 correction, they dwindled considerably in the months thereafter and remained low throughout 2008. Though the average NAV of diversified equity funds plunged by 55 per cent in 2008, average monthly redemption numbers stood at just Rs 3,375 crore.
Even in October, when the equity market nose-dived to new lows, investors refrained from pulling out a large chunk of their investments. Investors took out only Rs 2,652 crore in October, compared to Rs 7,536 crore in January 2008, the market peak. Another interesting sidelight is that some investors did cash out close to, though not exactly at, the market peak. Equity fund redemptions, which began to inch higher as early as May 2007, peaked in October 2007, well ahead of the market peak in January.
That the average monthly redemption stood at about Rs 6,905 crore between April-December 2007, even when equity funds notched up average holding period returns of 73 per cent, suggests that a section of investors does constantly monitor fund portfolios and book profits.
The trend appears to be gathering strength in the recent rally too. Following the broader market rally, the average monthly redemption between May and July 2009 went up to Rs 4,082 crore.

Looking beyond equities

Spurred by the need to make up for the lack of returns in equities, a section of mutual fund investors appear to have ventured beyond equity funds too. A host of other dynamics, such as higher inflation and interest rates in 2008, may also have triggered the flow of funds into other assets.
Income funds, which primarily invest in debt securities with varying maturity periods, reported net outflows in November and December 2007 (coinciding with a rising equity market). However, following the crash in equities, fund flows into income funds turned positive and remained buoyant till the Lehman Brothers collapse in September.
While it can be argued that income funds usually see participation only from the well-informed investors (such as banks and other financial institutions), retail participation in other assets is also evident from fund flows into other categories.
For instance, net inflows into gold ETFs have been rising steadily since the January 2008 crash and 2008 saw gold ETF assets expand by about 54 per cent. Investors also appear to have taken temporary shelter in low-risk gilt and liquid funds in October 2008 following the collapse of equities worldwide. Flight to safer avenues following a liquidity crunch, both domestic and global, may explain the changed stance, especially since the asset classes saw poor inflows in the earlier months.
ELSS funds too saw a change in fund patterns. Being tax-saving instruments, these funds generally tend to report peak flows toward the end of a fiscal year.
In keeping with this, while ELSS funds did report higher net flows in the four-month period between December 2007 and March 2008 (peaked in March with Rs 2,071 crore net inflows), the risk-appetite of investors appears to have fallen sharply since.
The downward spiral in equities in 2008 led to a lower quantum of net flows between January-March 2009 (Rs 547 crore in March 2009). That these funds, notwithstanding the lock-in, saw a pick-up in redemption activity in October 2008 and more recently in June 2009 also points to the reluctance of investors to lock in funds for the long term.
Overseas investing too appears to have lost its charm, what with these funds recording net outflows since October 2008. What’s more, the funds reported a significant jump in net outflows (Rs 127 crore) in May 2009, which also coincided with a broader equity rally.

Source: http://www.thehindubusinessline.com/iw/2009/08/30/stories/2009083050650700.htm

A layman's guide to interest rate futures

Interest rate futures, that long cherished dream of Indian bankers, bond dealers, and reformers will be launched on Monday. This is an instrument that will help a company fix its interest cost, irrespective of interest rate movements.
According to CNBC-TV18’s Gopika Gopakumar, after a long wait of six years, interest rate futures will yet again be traded on the NSE. Listed on the exchange will be a contract worth Rs 2 lakh. Each contract will comprise 10 year government securities with notional interest rate of 7%.
A potential investor like a mutual fund can open an account with a bank or brokerage already registered as trading members with the NSE. If the fund buys a 10-year government security from the spot market at Rs 101, and expects interest rates to rise by December, then it will ask its bank or broker to sell a December futures contract at say Rs.97.50. It pays a margin of 2.33% for the first day and 1.61% for subsequent days. Assume rates go up and the spot price of the government security falls to Rs100, then the futures contract will fall to Rs 96.60.
In this case, the mutual fund is making a loss in the spot market. But it is making a gain in the futures contract (Rs 97.50-96.60). Its loss is thus minimized to 10 paisa against one rupee if it was unhedged. On the other hand, if a mutual fund expects rates to fall, then the fund will go long, i.e. it will buy a futures contract to hedge itself. Note that in this product the investor has to physically deliver bonds when the contract matures. It can deliver any bond with residual maturity of 8-12 years.

Hemant Mishr, Regional Head-Global Markets, Standard Chartered Bank, expects active participation from institutional players both financial and the non-financial institutions. "I see mutual funds, insurance players being active players." However, he does not see active retail participation at present.

B Prasanna, MD, ICICI Securities Primary Dealership Company, says though in the initial period it will probably be institutional market participants using this product, he expect quite a bit of the retail households, broking communities to enter into the particular product going forward.

Here is a verbatim transcript of the exclusive interview with Hemant Mishr and B Prasanna on CNBC-TV18. Also see the accompanying video.

Q: This looks like complex instruments, so who will be the audience or the users, it will not be as common as currency futures?
Mishr: Yes, this won’t be as common as currency futures and it’s slightly more complex than the futures that Indian investors have seen whether its equity or currency futures. In terms of the participants in this market, I would expect institutional players both financial and the non-financial institutions, I would expect the mutual funds to be an active player, I would expect the insurance players to be there. There is a thought that the retail investors run in a risk whether it is through a mortgage or a personal loan. I don’t at this point in time expect active retail participation in this. The banks would be more critical and more active counterparties for this.

Q: It does look like it is only going to be an instrument. How useful will it be for a primary dealer and for banks, will you be able to almost negate an interest rate risk?
Prasanna: This is a very good product, it is a good for all kind of market participants, things like PDs. You can run directional trades on the long as well as on the short side using futures. You can also hedge your underlying risk like when there was a devolvement in the auction or the underwriting risk that you take in auctions, so there is a bit of something for almost all market participants in it. Having said that, I would also presume that the experience of currency futures have actually told us that the retail participants have actually come in a big way in that particular product, so though I agree that in the initial period its probably going to be the institutional market participants but going forward I would also expect quite a bit of the retail households, the broking communities to kind of enter into the particular product. To start with, it would be primarily institutional but later on it could be broad based to a lot of newer participants.

Q: If it is largely for institutions, would not the OIS swaps have done the same job. Why would this be different if institutions are going to hedge, surely they were doing the same with OIS?
Mishr: That’s a good point. The interest rate swap market has seen a lot of activity ever since they were first opened up in 1999. From a bank’s perspective, it would prefer a future for a simple reason that it’s a lot more cleaner both in terms of cash outflow and in terms of the risk in that instrument. Going forward, I see a big part of the bank’s liquidity actually going to the futures market, while corporates will continue to access the OIS market. So, when a corporate speaks to a bank, they might still might be wanting to hedge in the OIS, but the bank in turn will not want to hedge in the OIS market but would access the futures market.

Q: Will the larger economy be able to read any signals from the futures contracts in the interest rate industry?
Mishr: For the constraints that have been placed on government of India bonds, that typically is an exaggerated movement when the interest rate cycle turns. We have seen that in the past couple of weeks. I would expect positive feedback from futures into the cash market at two levels. One, in terms of incremental liquidity that comes into the GoI market, but also about trading happening across the curb. I don’t expect this to happen in the next few months or even in the next one year, but a possible situation when you got a future not only on the 10-year bond but on the five year and the one year bond which will feed into incremental liquidity and trading in the five year and the one year cash markets as well.
Prasanna: Just adding one more point here which most of us seem to have missed out ‑ the ability to strip out interest rate risk to credit risk which is inherent in a corporate bond. This is an important factor which will allow the participants to do so. Hence this product will not only add some kind of liquidity to the cash market which is what the positive feedback which Mishr was referring to, but it will also galvanize the trading in bond markets. A person who wants to take an exposure in corporate bonds can strip out the interest rate risk by shorting IRF if he wants to take the credit risk.

Q: Let me come to the product itself. The manner in which it has been launched at this point in time, does it satisfy you or do you think it needs some bit of tweaking? Are you nervous about some features?
Mishr: The process that was followed by the joint technical committee of RBI and Sebi was very comprehensive in terms of seeking market contract from a host of participants, banks, MF industry, insurance companies etc. In may ways, this is closer to what will succeed in the market place. However, it is important that we have reasonable expectation out of this. In terms of timing, this is just wonderful. With the interest rate cycle turning round and with the markets being as volatile, if I compare 2009 with 2007; the interest rate volatility on the 10 year curb at that point of time was 8% and its more like 35-40 at this point of time, so if it won’t succeed now, it won’t succeed in any point of time.

Q: How much can it neutralize the risk for say a mutual fund or bank, how much can it take out really?
Prasanna: I would still presume that the quality of the fund management team is more important because it is not a solution which is going to make you money in all kind of phases, you still have to take the right view. A derivative is something which will only make you money if you take the right view. I guess it is very important to see what kind of strategies a fund manager is employing with this product.

Q: The other problem that people or regulators rather common people will have with any derivative instrument, we know how the currency derivatives ruined or troubled the corporates and even banks, do you think this has potential for such kind of trouble, people speculating for its own sake and getting carried away because of a one way movement in the direction of trade?
Mishr: There are two points important out here. The world is migrating slowly from OTC to exchange, so there is a lot standardization happening in the OTC space that the regulators like the EUS treasury and the FSA are the few are pushing. That is the trend and trajectory, in interest rate futures. This is a relatively complex instrument compared to our currency and equity futures which is something that the investor has to keep in mind which is why I am a bit weary about proposing that to retail investors on day one. But if someone wanted to take a view on an interest rate, the exchange traded future is the best possible choice at this point in time.
Prasanna: I just wanted to make a point on what could potentially to bring this product more successful. One is the fact that there has to be a very strong linkage between the cash and the futures market for any successful derivative product launch. In that respect, I think there are a couple of things which the regulators would need to do going forward to make this product a bigger success. One is to bring about a very active inter-bank term money curb at the short end where people can really transact for lending and borrowing for 1-2-3 months which is in our market at this point of time.
The second thing is again linkages between the cash and futures means that the ability for market participants to execute arbitrage strategies both ways between the cash and futures whenever the futures deviate from the futures price. Unfortunately, even in that respect we are not able to do it on both sides because you are not having the ability to short the cash bond because there are limits as for the period which you can do it. There are very strict positional limits which would probably allow the futures deviate from its fair price for a pretty long period of time, so these are the things that the regulators need to think about going forward for this product to become a bigger success. Then, you can expect a lot of participations from corporate treasuries etc.

Q: What should be the next step in the evolution of the interest rate market?
Mishr: The next step in my opinion would be having more benchmarks to the 10-year. Whether you look at it from an institutional perspective, we run risks which are not necessarily the ten year risks. If I am running a five year risk, I think the spread and the basis risk is far too much for me to take the view on the 10 year point, so having benchmarks across the yield curve as importantly having the money market benchmark is very critical. I would see this as the first step towards non-linear products for interest rates in India.

Q: Can you explain?
Mishr: There is no reason why we shouldn’t have interest rate options in India, compared to one of the more tradable benchmarks. Once you got more liquidity in the term money market, we will have that once it is actively traded. I see this as a base market for a lot of other products which will be benchmarked and settled on this whether it’s the BSE or the NSE future’s price. We look at the LME for instance, there are lots of OTC products which the LME three month price fixes, so that in my opinion would be the next logical step.

Source: http://www.moneycontrol.com/india/news/business/a-laymans-guide-to-interest-rate-futures/413340/1

MF houses lure investors with smart fund names

India’s largest equity mutual fund is something called Reliance Diversified Power Sector Fund, and I think that’s a problem. The problem is not with this fund as such, but in the fact the Indian investor has chosen to bestow this rank upon a fund that is narrowly focussed on a single sector. This is a problem because the core investment of every mutual investor (without exception) must always be a general diversified fund that is not constrained to invest in any theme or sector.
More than the Rs 5,300 crore managed by Reliance Diversified Power Sector fund, this problem is highlighted by the aggregates of the entire fund industry. In all, India’s equity funds manage Rs 1.68 lakh crore and an absurdly high Rs 58,000 crore (31%) is in sectoral or thematic funds. This is way too high. How high? Well, I would venture to say that it’s too high by a margin of about 100% or so. The truth of the matter is that it’s difficult to visualise an investor who should be investing through a mutual fund and yet who should be taking sector calls himself.
The very idea of mutual fund is, one is of hand off investing . You pay a fund company because you don’t have the time or the expertise to judge where to invest. An important facet of this decision-making is to decide which sector to invest in. When you decide that say, 25% of your investments should stay in a power or an infrastructure or a technology fund, then you are making decisions that you shouldn’t . The way to make mutual funds work for you is to put your money only in diversified funds and then let their fund managers do their job of choosing which sector makes sense and when.
Of course, I’m being a little disingenuous here. No investor sits down and actually decides how much to invest in this or that sector. No, that decision gets taken for them by the manner in which funds are marketed and how investors react to the message.
Even the name of the fund plays an important role. According to its name, Reliance Diversified Power Sector Fund is both a diversified as well as a power sector fund. That’s a complete contradiction in itself. If you are a sector fund then you can’t be diversified. And in any case, how the average investor is to figure out what the name actually signifies.
Consumer goods style naming is not uncommon in mutual funds. We have a DSP Blackrock T.I.G.E.R. fund (which supposedly stands for The Infrastructure Growth and Economic Reforms), Sundaram BNP Paribas S.M.I.L.E. (Small and Medium Indian Leading Equities), ING C.U.B. (Competitive Upcoming Businesses), Morgan Stanley A.C.E (Across Capitalisations Equity), Canara Robeco F.O.R.C.E. (Financial Opportunities, Retail, Consumption & Entertainment), and ICICI Prudential Ninja (Nifty and Nifty Junior Advantage).
These are only some of the more fanciful names that have been thought up to sell funds. Clearly, fund companies have a very different idea of what works than what a thoughtful investor should be doing. But I guess that is a comment both on how investments are bought and how they are sold.

Source: http://economictimes.indiatimes.com/articleshow/4952904.cms

HDFC MF files offer document for Banking and Financial Services Fund

HDFC Mutual Fund has filed an offer document with securities and exchange board of India (SEBI) to launch HDFC Banking and Financial Services Fund, an open-ended equity 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 long term capital appreciation from a portfolio that is invested predominantly in equity and equity related securities of companies engaged in banking and financial services.
Plans:The scheme shall offer growth and divided option. Dividend option offers divided payout and dividend re-investment facility.

Asset allocation:The scheme would invest 65% to 100% of asset in equity and equity related securities of companies engaged in banking and financial services, with a risk profile of medium to high. The scheme would invest 0% to 35% of asset in equity and equity related instruments of companies other than banking and financial services, with a risk profile of medium to high. The scheme may invest 0% to 35% of asset in debt and money market instruments including investments in securitized debt, with low risk profile. Investment in securitized debt shall not exceed 20% of the net assets of the scheme.

Load structure:Entry load charge is not applicable for the scheme. In respect of each purchase / switch-in of units, an exit load charge of 1% is payable if the 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:Minimum application amount for purchase will be Rs. 5,000 and any amount thereafter. For additional purchase the amount will be Rs. 1,000 and any amount thereafter.

Target amount:The minimum subscription (target) amount of Rs. 10 million is expected to be raised during the NFO period of HDFC Banking and Financial Services Fund.

Benchmark index:The scheme`s performance will be benchmarked against BSE Bankex Index.

Fund managers:The fund managers of the scheme will be Vinay R. Kulkami and Anand Laddha.

Source: http://www.myiris.com/newsCentre/storyShow.php?fileR=20090831102412707&dir=2009/08/31&secID=livenews

Reliance MF announces changes under Regular Savings Fund - debt option

Reliance Mutual Fund has decided to revise the maximum investment limit for Reliance Regular Savings Fund - debt option.
Revised maximum investment limit:Accordingly the maximum investment amount per investor (across all folios) is Rs 10 million.
Existing maximum investment limit:The maximum investment amount per investor (across all folios) is Rs 50 million.
The aforesaid revision will come into effect from Sep. 1, 2009.
Reliance Regular Savings Fund is an open ended scheme which seeks to provide the choice of investing in debt, equity or hybrid options with a pertinent investment objective and pattern for each option.

Source: http://www.myiris.com/newsCentre/storyShow.php?fileR=20090831122611707&dir=2009/08/31&secID=livenews

Standout performers

BIRLA SUN LIFE MID-CAP PLAN A

It started as a middle-of-the-road performer and began to take on the competition from 2006. Savvy sector selection is the primary reason for its above-average returns.

Betting heavily on engineering and services proved fruitful in 2006. In 2007, it capitalised on the rally in metals, financial and engineering. And, in 2008, it fled to FMCG and healthcare. The fund manager is now focusing on construction, capital goods, power and cement.
The portfolio is churned quite frequently, with nearly 40 per cent of the stocks making an appearance for less than six months. Nevertheless, this fund can't be called aggressive. In fact, it avoids concentrated bets. Since 2005, no sector has breached the 20 per cent mark (though this is quite a high limit) and no single stock has crossed an allocation of six per cent.
What's interesting is the fund manager's flexibility. At the end of 2008, he was heavily into debt, which he totally offloaded in early 2009, to significantly move into cash.
During market rallies, this fund does make its mark. Yet, during downturns, it will not dramatically stray from the category average. But its appeal lies in the fact that over the long run, it rewards its investors. In the three-year and five-year periods as of July 31, 2009, the fund returned 19 per cent (category average, 9 per cent) and 30 per cent (category average, 24 per cent), respectively.

IDFC PREMIER EQUITY PLAN A

There's no arguing with the numbers. In its history, this fund has underperformed the category average in just two quarters out of 14.
In 2007, it trounced the competition with a return of 110 per cent (category average, 64 per cent). In the bear phase, running from January 2008 to March 2009, it shed 54 per cent (category average, minus 64 per cent). Its three-year trailing returns of 30.45 per cent (July 31, 2009) places it streets ahead of the competition.
Hats off to fund manager Kenneth Andrade, who boldly rides his bets. Little wonder that allocation to services touched 44.74 per cent (May 2007) or FMCG accounted for 21.66 per cent (March 2009). Neither does he shirk from taking contrarian stands; his bias towards services ever since inception and his restraint from going heavy on energy, despite the sector gaining impressively, are cases in point.
With a focus on small companies, Andrade has an interest in keeping the fund's size small. He maintains a tight portfolio spread across 26 stocks (one-year average), whose allocations don't cross seven per cent, barring Shree Renuka Sugars.
Since Andrade took over the fund in February 2007, he has maintained a high debt allocation, which peaked at 25.53 per cent (June 2008), while cash peaked at 12.24 per cent (May 2008). Due to these high allocations, he missed out on the latest rally to some extent ,with a return of 91 per cent as against the category average of 104 per cent (March 9-July 31, 2009).
However, the fund's history still makes it a compelling pick.

SUNDARAM BNP PARIBAS S M I L E Regular

Though a category beater in 2006 and 2008, it didn't deliver headline grabbing returns. Its performance of 81 per cent (category average, 64 per cent) in 2007 brought it in the limelight.
Fund manager S Krishna Kumar timely increased the allocation to metals from 6.5 per cent in June 2007 to 13 per cent in July and maintained it around those levels till the end of that year. The sector gained 89 per cent during the July-December period. The allocation to energy and engineering towards the end of the year also helped.
Recently, the fund manager doubled exposure to metals from six per cent (May) to 12 per cent (June) and the fund delivered remarkably in the bull run from March 9 to July 31, 2009, with a return of 117 per cent (category average, 104 per cent). Being heavy on energy also helped.
Right now, he is bullish on energy, industrials, IT, auto and sugar.
What's interesting is that he delivered impressively during the latest rally, though cash exposure averaged at around 14 per cent between February and April.
With this offering, you may be sure of ample diversification amongst sectors, as well as stocks. Overall, it's a good performer, with a three-year trailing return of 19 per cent (category average, 9 per cent) as on July 31.

Source: http://www.business-standard.com/india/storypage.php?autono=368511

IT will be closely watched in months to come

An average return of 105% over the past six months --that is what an average technology sector fund has given. During the same time period, an average diversified equity fund delivered 77% and the Sensex returned 77.48%.

After a lull of close to two years, things seem to be looking up for these funds. In part, this has also been due to the falling rupee, which in turn, has meant more bang for each buck these companies which essentially earn their revenues from overseas. Comparing the performance of the IT sector with others, we find that the sector has emerged the third-best performing since the beginning of this year. The top two best performing sectors were metal and auto. However, this is in stark contrast to the trend in 2007 and 2008, where the sector was among the worst performers.
The period between 2003 and 2007 was the longest and most profitable bull run in the history of the Indian economy; The Sensex moved up from 3390 points to 20286 points. In 2003, the IT sector specific mutual funds managed to deliver 71.43% returns, while in 2006 they delivered 45.57% return. These returns were outstanding compared with the returns clocked by BSE IT.
This bull phase was brought to an end by the sub-prime crisis. The sub-prime crisis reared its ugly head for the first time in mid-2007 and severely hampered the outlook for technology companies, most of which depended on revenues from the overseas clients.
During 2007, share prices of the giant IT companies such as TCS, Wipro and Infosys hit rock bottom as they dipped in the vicinity of 50%. In the initial months of 2007, the prices of TCS hovered around Rs 1,300, which dropped to approximately Rs 944 by November. A similar trend could be seen in the case of Wipro and Infosys. These scrips were among the most popular within the IT sector.
The scenario in the current year stands in stark contrast to the trend over the past two years. The performance from January 2009 till date, on an average, has been as high as 77.52%. The stock prices of companies like Wipro and Infosys have moved up, on an average, by more than 100%. The sector-specific mutual funds consequently increased their exposure in core technology companies to 74.35% in July from 61.97% in January 2009.
For more than a decade, the technology sector was aggressively courted by mutual fund schemes. In fact, paying little heed to principles of diversification, mutual fund schemes hoarded technology stocks. And then came the dismal dotcom bubble burst phase of 2000-01 and mutual funds in India learnt the lesson of diversification the hard way. While better diversification in portfolios emerged, technology stocks, however, continued to take the centrestage in the portfolios of diversified equity schemes.
The data reveals that up until March 2007, the allocation to technology scrips by the average diversified equity fund rarely dropped below 10%. As an average, across a wide range of diversified equity schemes, this number is large. However, the allocation to the sector almost halved during 2007. Since March this year, there has been a trend reversal of sorts with a discernible uptake in the positions taken in the IT sector. However, it remains to be seen whether the sector will win back patronage of diversified equity schemes.
A similar trend is evident in case of sector schemes. Sector schemes, by their nature, can at best stack money in cash, in case of absence of any lucrative opportunity in the sector. However, this hasn't been the case for technology sector funds. There was a discernible move towards allocating funds to alternate sectors such as telecom and entertainment. DSP BlackRock Technology.com was a trendsetter in this respect. The fund management had enough foresight to include a broader segment in its investment objective. In fact, it is only after DSP BlackRock Technology.Com tasted success with its investments outside core technology companies that other IT sector funds began to diversify their holdings. The only scheme that refrained from doing so was Franklin Infotech Fund, which consistently invested in core technology companies. At the same time, some fund houses like UTI and Kotak discontinued their technology schemes and merged these with other diversified equity schemes.
The key to sustaining this recent performance by the sector will hinge on the rate of recovery in the western economies. While domestic demand has enabled the sector to stay afloat, larger gains will come from businesses overseas. Whether the current scenario marks a trend reversal is yet to be clear, but we are certain that this sector will be closely watched over the coming months.

Source: http://www.dnaindia.com/money/report_it-will-be-closely-watched-in-months-to-come_1286454

See new high for mkt in 1-2 years, buy on dips: Reliance MF

Madhu Kela, Head of Equity Investments, Reliance Mutual Fund, sees the Nifty setting a new high in the next 12-24 months on account of higher fund flows and economic fundamentals starting to move up. He advises investors to buy midcap companies which will perform and create value going forward. "Over the next 12-24 months, investors will see a lot of opportunities if they buy and hold." He recommends investors to buy stocks on dips.
Speaking on whether the Nifty can retest its previous lows, Kela says he does not see the Nifty breching 3,800-4,000 levels. "The only thing which could take Nifty to that level is if something globally happens."
On the recent spate of initial public offerings, he believes India Inc should have priced those issues at least 10-15% cheaper than where they were priced. However, he was quick to add that they stll makes sense from a long-term perspective.

Here is a verbatim transcript of the exclusive interview with Madhu Kela on CNBC-TV18. Also see the accompanying video.

Q: Do you think we formed a base now for the Nifty, we should not look too much southward of 4,000?
A: Yes. Going by what is being presented as of now and going by the trend of last six months, I would argue that the 3,800-4,000 level must hold because in the crossing over, 3,800 was a very big resistance to cross over. In the fall also, 3,800-3,900 was a very big support. Market took that support many times before decisively going down.

Q: Do you see in the course of this summer globally that Nifty retesting 3,900-4,000 kind of levels and if yes what could get it there because it is not going there, it is just taking support at higher levels of 4,300?
A: Too many people are waiting, I am also one of them because we keep getting money and we definitely have some cash.

Q: A lot of cash or a lot of it has been deployed?
A: No, I don’t think there is a lot of cash now. We have deployed it. For the last three-four months, we are deploying it.
I think the only thing which could take Nifty to that level is if something globally happens. The last two-three weeks for the monsoon have been reasonably good. So, there is something which has to go wrong globally for the Nifty to go back to 3,800-3,900 levels.

Q: You think the monsoon has discounted that for the moment?
A: Yes, because most of the part of the country has quite well rains in the last two-three weeks. In the south, there is excess rain. In northeast, northwest there are rains. North remains a matter of concern. For the country as a whole if you have one-two more good weeks of monsoon, then this fear may have been discounted.

Q: June, July, August we have spent in this broad range of 4,000-4,700. Do you think we are ready to breakout now or would that be surprising to you?
A: For various people market means various things. For a day trader, it is very important to time it for the day. For investors, we look for a consistent period of outperformance. Whether 4,700 is taken out in the next two months or it is taken out next month that is less important to me than saying that are we really heading for a new high in the Nifty in next twelve to twenty-four months. I think we are heading for it.

Q: Twelve months or twenty-four months?
A: Twelve to twenty-four months. The direction is very important and the most important thing for forming that judgement is you see the amount of liquidity which is being thrown in the world, which is running into trillions of dollars. Now, you are starting to see the real economic fundamentals also start to move up. Every data point which we have been observing for the last three months in the West has surprised and is optimistic. It is better than what the world was expecting. So, if you have a slow but decisive fundamental recovery and money coming into emerging markets because of the dollar being weak, then we should definitely head towards a new high in the next twelve to twenty-four months.

Q: In that sense, where are we compared to the last bull market? If you look back and think about 2003, 2004 where have we reached if this is indeed a multi-year kind of a bull cycle which has begun again in your eyes?
A: I think markets have seen a very sharp rise. Let us accept that because in March we were at 2,500-2,600 and now we are at 4,500-4,600, so it is like 80-90% rise. I do not think that there is too much beta. Can the pace of the rise which has happened in the last six months continue? To me, the answer is no. But will you have opportunities? This is the most interesting phase of the market where you take those stock specific bets and market is very skeptical about the run and valuations have run up. So, people do not have conviction to buy. This is the time if you can get those ideas and create alpha for your portfolio, I am finding it to be very interesting place to be in.

Q: You are saying that the easy money on the Nifty might have been made?
A: Stock specific there are humongous opportunities. In my opinion, if one is right in predicting the bull run and predicting India, you could find even companies today which are in the vicinity of Rs 5,000-15,000 crore market cap, that could go up 3-5 times over the next few years.

Q: When will midcaps recover? We have had a big run in the Nifty but many midcaps or even non-index largecaps are trading at 20-30% of their peak value. If you are saying that in 12-24 months the Nifty will get back to a new high, when will these stocks outside the index get back to their old highs?
A: Market is narrowing, so now everything will participate. You need a sizeable company. A company which is having Rs 2,000 crore market cap was like a midcap. Now, that Rs 2000 crore has become RS 6,000 crore and Rs 8,000 crore for many midcap names. If you compare it from the peak obviously they have not recovered to that extent, but if you see the leadership, if you see companies which are able to perform and create wealth, those companies are getting narrowed. As the market matures, obviously they will get even narrower. I don’t think one should expect a big bang, full-fledged recovery in midcaps. I see a lot of midcaps performing. That is where the real challenge is that are you able to identify that real alpha in this market to make that extra buck which is to be made out of this market.

Q: There were a lot of risk associated with the kind of stocks that you are talking about in 2008, balance sheet risk etc. Do you think the time has come now for investors to say I will not hide in a cocoon because I have a fear of losing my money, I will go out and take a little bit of risk now and by these kind of stocks that you are talking about?
A: I think people by and large will resort to this because if you look at the world, it is such a big paradox because so much liquidity is being thrown. At one end, people are struggling to protect their capital. In America if your money is in dollars and in the bank, your money is getting lost. So, emerging markets have done 50-100%. Similarly, index stocks have gone up like 50-100-150% in large companies and now some of them look richly valued from 12-18 months perspective. People have no choice but to look at qualitative midcaps. Let me make a distinction here. Just because we made a lot of money identifying these small companies and they became multibaggers, not everything which is small will become a multi-bagger. So, these are characteristics of these companies. If you bet money there, some of them still have a lot of value.

Q: You have been deploying a lot of cash over the last two-three months, you have been buying midcaps yourself aggressively in your portfolio?
A: Yes, we have been buying companies which have growth characteristics. In our scheme of things, if I think that the Nifty goes to new high, can this particular company if I am buying it at 10-12 P/E multiple and has a 30-35% kind of earning visible growth over the next three-four years, can we buy those kind of companies which are still at a discount? Everyone is not able to raise money, you are getting these opportunities, promoter themselves are wanting to sell some of these companies to you because they need capital.

Q: We went through a phase when the first big rise in the market happened when a lot of fund managers including hedge fund managers underperformed the index because largecaps did so well. Do you think in the next year or two, it could be turned around, where people with good portfolios beat the index quite a bit?
A: Absolutely. That is my firm conviction that you will end up beating the broader market if you do the right stock picking and hold it with conviction. The backdrop of this rise is that we have seen such turmoil times in October and December-January that everyone is very scared. People are not participating with a full heart in that sense. If I buy thing at Rs 100 and it becomes Rs 120-130, I am very tempted to book profits. People have forgotten in one sense what a bull market is like. Because everyone has underperformed, everyone is trying to catch up, so let me make these 10-20%. For sometime these 20-30% trades will work, but after that once you buy a stock, you sell it and then it comes off. You think it will come off a little more but if you are not able to buy it and if it goes higher than what you sold then mentally you are closed. You cannot buy that stock.

Q: That is why I have asked you about 2003-2004 because this exact phenomenon played out, people traded for a while and they missed the big 4-5 times kind of moves which happened over the next couple of years. Do you think we have entered that phase where if you buy and hold today, you can actually make multiple returns not just trade these 20% moves?
A: Over the next 12-24 months you will see a lot of opportunities if you buy and hold. If you have conviction, ultimately all of us are operating that given these circumstances you are buying a particular set of stocks, if situation changes then we will stand to change. But as things stand, if people will build a portfolio for next 12-24 months, they will stand to gain.

Q: How did you think the last few initial public offerings (IPOs) were priced because that is one conduit where a lot of people start getting in when they have been out of the market for a year because of a bad fall? Do you think they have left adequately on the table?
A: No. It is a little unfortunate part of the corporate India story that ultimately people know what is good for them in the long run but they cannot resist the temptation of the short-term pricing. If they leave some on the table, it is very good for them as a group and also for the broader market because retail investor is just creeping in. He is a poor fellow who has been out, has lost so much money that for 12-18 months he has not crept in. Some of these IPOs were filled even at a retail level by two-three times, you allow him to make money then he will come in the next IPO. I would have loved these issues to be priced at least 10-15% cheaper than where they were priced.

Q: Did you participate or you just let it be?
A: We have institution compulsion. If I had a choice, I may have skipped some of them. But in our overall scheme of things, it still makes sense from a long-term perspective. We participated, but did we participate with vengeance that this is my idea and I want to put a lot of money to work? The answer is no.

Q: What about the qualified institutional placements (QIPs)? Are you letting a lot of them pass or are you participating?
A: No, I am letting a lot of them pass. We have been selective. The problem is that there are ten merchant bankers and everyone is advising the management on the best price one can get for the issue which is never good for investors because we don’t want to buy the best priced companies, we want to buy a risk return reward. We have participated in a few of them and we have made money. I wouldn’t say that we have a closed mind that I don’t want to participate in QIPs but we want to participate wherever we can see risk reward.

Q: You spoke about liquidity and a lot of money which is coming into emerging markets. If that is true, then commodities should also do well once again, are you backing commodity stocks?
A: Yes. By and large, we have a overweight position on commodity stocks.

Q: Across the board?
A: Yes, in a lot of portfolios.

Q: Not just metals, even sugar etc?
A: Yes. We have some bets in sugar. Let us say you take three-four countries which one is positive about ‑ China, India, Brazil and Indonesia. I don’t understand too much of Russia so I am keeping that aside. These four countries put together is like 50% of the world population and these countries like China is at USD 6,000 per capita income, India is at USD 2,800, Indonesia is at USD 3,900 and Russia is at similar levels. Over the next five years, you will see at least 30-50% rise in per capita income of these countries. On one hand, you have a subdued growth in these developed markets and on the other hand you have per capita income rising in these countries. With such a large domestic base, money will flow in bunch to these emerging markets. Within that, I think India will be a very big beneficiary because if you have a standalone story then to go and pitch to USD 500 billion pension funds becomes difficult. But if you are part of the bunch, then allocation of money to India will become much easier.

Q: What is the sense you get when you speak to fund managers globally now? Have they reinvested or are still short?
A: A lot of them are still skeptical, underweight, playing it very fearfully. I don’t think a lot of people are still yet to pay with high conviction. I bought X at Rs 40, I sold it at Rs 60, but I don’t think that is the real conviction is what I am able to see.

Q: Are they at least feeling that they have missed out or not?
A: Yes, 100%. We felt that because we were sitting on cash from November 2007 to February. So for 14 months we protected our funds. You get little carried away with your own success and so is the case with lot of people who have been right in predicting the last downfall.

Q: So, you are saying even you have not moved as swiftly as you wanted to?
A: I would have left more swiftly but at least we have an open mind. I think markets have made us much more humble in last 15 years to accept that yes we were wrong and have to carry on with life. So, we are carrying on with life, we are looking at opportunities on a daily basis and have taken large bets in the last four-five months in select companies. We have invested money wherever we like.

Q: You bought things in pharma which was considered a defensive sector, what attracts you in that theme?
A: That has been my biggest call and it has done very well. Even today, the opportunities are 3-4 fold. The penetration level in the pharma sector is very low. Insurance is picking up. You have people who are getting insurance, there are better medical facilities, so the consumption of medicines and medical-related services in the domestic market with this rising per capita income will go up sustainably higher over the next 5-7 years. There is opportunity in the contract research and manufacturing side. You can higher a PhD for Rs 50,000 do your work here. I see a big opportunity like USD 50-60 billion of spends on an annual basis. Can a substantial portion of that move to India? The answer is yes. In a multinational space, if you see, we have started to adhere to patent laws in 2005. It took one to one-and- a-half years for the multinational companies to be convinced that yes we are serious about it.
If you look at the multinational pharma companies, they are available at ridiculously low levels and at historic low valuations. Will it pay off in six months, I don’t know, but will it pay off. In my timeframe of 3-5 years, I am very convinced. Even now you can get into the pharma sector. A lot of these companies are listed at 10-12-13 times PE multiples with a growth rate which could be 20-30% over the next 3-5 years.

Q: Which one of these spaces are most attractive, because not all companies do all of these strong domestic formulations or contract research which you outlined?
A: It will be purely stock picking. Basically, there will be companies which will be in contract research and manufacturing and you have a great management and you buy it and there will be players who would be very strong in domestic side of business and there will be ones who are committed to a MNC. The only caveat which I would like to tell you is that all of them want to delist and want to own 100% of their companies. So, you have to be with the person who has clearly spoken that I am for minority shareholders.

Q: In delisting, candidates can give it back to parent, is it?
A: Yes, but at the price at which they want to buy this. They feel that if the price is Rs 250 and if I pay Rs 400 then I have done justice to the minority shareholders, but no one is near to paying what their long-term potential is.

Q: In the last bull market, the big money was created by infrastructure and bank. Do you think it’s a good chance that they deliver again in this run or you are not as bullish on these two?
A: I think it will be selective. We had a big bull run in technology between 1998 and 2001 where in a lot of people bought it and about 400 tech companies got created. After the burst, we saw that even Infosys or Satyam will die. So, they took some time for the dust to settle down but that list of 400 became actually 15-20 companies for the next bull run to take on. I see a similar kind of a thing happening at some point of time in infrastructure, though it is too early. We haven’t yet played out the full bull run of the infrastructure sector, so you will still have a lot of companies participating. What the Finance Minister has indicated, if you see 9% of our GDP going into Infrastructure, that’s a very large number even though it is 3-4 years down the line.

Q: When you say infrastructure, do you include real estate there or not quiet?
A: I would be still very skeptic on real estate because we really don’t understand them. They bought land 15-20 years ago and I am paying the current market price of that land in my spreadsheet. Within the real estate sector, you see some big winners. Our search is that can we really pinpoint those companies and can we buy at the right risk-reward and at the right price.

Q: Are you now saying that in every big dip in the market I just get more and more invested and I ride this for 2-3 years?
A: Yes, that is currently my motive. We are always open and examining what could go wrong. We are working on more things as to if A, B, C, D, scenario emerges, can it last for one month or three months or even more. One big concern which I have is on Europe where still the banks are leveraged 50-60 times. A country like Switzerland is leveraged 3-4 times as a country as a whole. So, will this fizzle out at some point of time in the market, yes it will. Am I able to see that today, I am not able to. So, we have a list of stocks which we want to get invested into and buy into every dip, but at the same time we are keeping our mind open that if the global worry plays out at some point of time, can we readjust our portfolio?

Q: What would the top 2-3 things you would watch for which would tell you that things are going wrong globally and you need to move a lot of money to cash again?
A: One will be Europe which I would be very carefully watching. Second is this whole thing about China. There are lots of tail winds right now. The loan growth is like seven trillion yen in the first half of the year. The big bet about China is that if the global market recovers and if the export side of this story recovers much better as compared to what it has been in the last 6-9 months and they continue to stimulate the domestic consumption, then we might be able to play off. But that still needs time to play out. We have to watch whether the Chinese exports which had hit an all-time low in October-December of last year can really pick up. In the meantime, can the Chinese economy be sustained on that one engine which is domestic?

Q: In the pit of your stomach, do you get that feeling that we are in a bull market again?
A: Yes. I had mentioned that earlier too. The good thing which I think which humbled me personally over the last 15-17 years is that you have always the right to go wrong in the stock markets. What is important is how early do you correct and how much more time you spend on your own hypothesis, disregarding the world as it is developing. We went wrong for 2-3 months and we could not invest in those months as we could have invested, but we took a note and I am very clear that every dip in this market is a big buying opportunity.

Source: http://www.moneycontrol.com/india/news/mf-interview/see-new-high-for-mkt1-2-years-buydips-reliance-mf/413329/3

Midcap, smallcap MFs zoom 130% since March

Midcap and smallcap mutual funds are zooming up on the returns chart, outperforming benchmark indices. The top performing funds have given 130% returns since March this year.

The midcap stocks and small cap stocks are buzzing and so are the midcap funds and small cap funds.
Srinivisan Iyer, Equity Fund Manager, SBI MF said, “When we talk about midcap as a group, we are talking about an index and within the index there will be standard deviation. As a group midcaps tend to outperform in a rising market, they tend to underperform in a falling mkt purely because the beta in a midcap is very high. So, your call on midcap is a function of what u think the market is going to do. If you catch the right stocks you can do pretty well compared to the benchmark or your peer set. We like the media space within consumer discretionary, we like specific sectors within consumer staples, we like midcap IT, we like midcap pharma.

Source: http://www.moneycontrol.com/india/news/mf-analysis/midcap-smallcap-mfs-zoom-130-since-march/413342

Time to cash out?

Though the stock markets continue to be volatile, they have recovered from the lows touched in March this year. The markets have posted a growth of around 93% (as on August 26, 2009) since March 8, 2009. Expectedly, many investors who have lost a huge chunk of their invested corpus in the stock market crash last year are now eager to recover whatever they can. Now the question is - is it the right time for you to cash out? While you would promptly say YES, we have a contrarian view on this.

Sensex: Rise of the fallen

Broadly, there could be two reasons for making investments. First, and the most ideal reason, is to invest for the purpose of meeting one or more of your future goals/objectives. Second, and unfortunately the most commonly practiced, is to make "quick bucks" by participating in market movements. The latter option amounts to timing the markets, something that many investors try to do, but rarely succeed. In our view, redeeming investments should not be a function of market movements, but rather a result of the following:

1. Redeem if you are sure that the fund in question has failed to meet its purpose in your financial plan. The reasons behind this could include poor performance or change in investment mandate of the fund, which makes it a misfit in your portfolio.
2. Redeem if you have to rebalance your asset allocation. Also,before you cash out, make sure that you have decided where to reinvest the redemtpion proceeds.
3. Redeem when you have achieved your investment objective.

Where to invest: Liquid Funds...Liquid Plus Funds...or Bank FDs

Liquid funds with no entry and exit loads and practically no credit risk, have not only been popular with banks and companies to park their short term money, but have also emerged as stiff competition to the savings bank a/c. For the past few years, post-tax returns from liquid funds have been in the range of 5%-6% p.a. making them a hit among individual investors especially the high net worth investors (HNIs). However, liquid funds are fast losing their edge over the savings bank a/c with average returns dropping to 3.5% p.a. This is mainly on account of the decline in short-term interest rates and the SEBI guideline restricting these funds from investing in any security having a residual maturity of more than 91 days. The average maturity period of most of these funds ranges from 50 to 60 days.

Is there an alternative to liquid funds? Yes, investors can consider investing their money in ultra short bond funds (erstwhile liquid plus funds). These funds can invest in securities with higher maturities and hence are able to generate returns which are 50-80 basis points higher than liquid funds. However, these extra returns come with slightly higher interest rate risk and credit risk. Most of these funds also have a lock-in period of at least 7 days. The average maturity period of these funds ranges from 140-150 days.

There is yet another option for individual investors. Of late banks have been offering a facility to transfer the money sitting idle in savings bank a/c to fixed deposits. The rate of fixed deposit is however, slightly less than the rate of a conventional FD for similar maturity.

The beauty of this facility is that the money lying in the fixed deposits is not subject to any kind of lock-in i.e. the investor can withdraw the money as and when required either through the ATM or by issuing a cheque without any penalty for premature withdrawal. Moreover, if the interest rates move up, money can be moved from lower interest rate FDs to higher interest rate FDs without any penalty. To top it up, the amount can be transferred either online or through simple instructions on the phone using the ATM/debit card number and the PIN. We urge investors to check with their bank for any such facility and if it does exist go for it NOW. After all, opportunity only knocks once!

Should you invest in Monthly Income Plans?

It's common for diversified equity funds to emerge as a top-of-the-mind investment when stock markets are booming. In such a scenario, hybrid funds like Balanced Funds and Monthly Income Plans (MIPs) are relegated to the sidelines. Investors can miss out on a very critical component in their portfolio by shutting out hybrid funds completely. Hybrid funds (powered by their flexibility to invest across asset classes) can add immense value to the investor's portfolio (especially during the down turn). While the role of balanced funds in the investor's portfolio has been well-documented, it is time for investors to sit up and recognise the value MIPs can add to their portfolio.

MIPs invest predominantly in debt instruments with a small portion of assets allocated to equities. The equity component provides MIPs with just the edge it needs to outperform conventional debt funds. The equity component usually varies between 5%-30% of assets. So under what circumstances would MIPs add value to an investor's portfolio? The graph below answers this question.

As is evident from the graph, during the crash in the stock markets last year, MIPs have fallen less as compared to the BSE Sensex indices. And this is where it adds value to an investor's portfolio. When the stock markets rally, they will lag conventional equity funds, but when the markets move down, they will limit the fall in an investor's portfolio.

Hence MIPs become important from an asset allocation perspective. Although, you can reach the desired asset allocation by allocating the assets in equity and debt; MIPs offer a convenient way of achieving the same.

ING Mutual Fund to convert ING C.U.B Fund into open-ended scheme

ING Mutual Fund has informed that ING C.U.B. (Competitive Upcoming Business) Fund will be converted into an open-ended scheme. The scheme was launched in August 2006 as a three years closed-ended scheme, to be subsequently converted into open-ended scheme.
Consequent to the change, for all the prospective investors, an exit load of 1% for redemptions within 365 days will apply.
The aforesaid conversion would come into effect from Sep.10, 2009.
ING Vysya C.U.B Fund seeks to provide long-term capital appreciation by investing pre-dominantly in a diversified portfolio of equity and equity-related securities of companies of small market capitalization.

Source: http://www.myiris.com/newsCentre/storyShow.php?fileR=20090827181220707&dir=2009/08/27&secID=mf

UTI MF declares dividend under Banking Sector Fund

UTI Mutual Fund has approved Sep. 4, 2009 as the record date for declaration of dividend under dividend option of UTI Banking Sector Fund.
The face value of per unit is Rs 10.
The quantum of dividend will be 22% or Rs 2.20 per unit on the face value as on the record date.
UTI Banking Sector Fund is an open end equity oriented scheme, which has the investment objective of capital appreciation through investments in the stocks of the companies / institutions engaged in the banking and financial services activities.

Source: http://www.myiris.com/newsCentre/storyShow.php?fileR=20090829122133707&dir=2009/08/29&secID=livenews

Ban on entry load may impact AMCs: McKinsey

The ban on entry load on mutual fund products could impact distributors and asset management companies (AMCs) in terms of profitability and reduce their reach beyond urban centres, according to a report by the management consulting firm, McKinsey & Company.

The Securities and Exchange Board of India (Sebi) has banned the entry load charge on mutual fund products from August 1. Now, distributors have to negotiate with customers for commission, which is to be paid through a different cheque.
During FY09, industry profitability dropped from approximately 22 basis points (bps) to 14 bps. One basis point is one-hundredth of one percentage point. "In short term, there will be a sharp decline in profits," the report said.
According to a chief executive officer of a foreign mutual fund, current profitability will certainly be around or below 10 bps. He further added that industry would have to work with a wafer-thin margin.
The commission paid by customers would depend on the channel of distribution, the report added. "The impact of the regulation may be the most severe on independent financial advisors (IFAs), especially the smaller ones, as they have the least ability to charge for advice. Unless compensated by higher volumes, IFAs may face a revenue loss of 30 per cent," it said.
Banks and national distributors, according to the report, might be better placed to charge customers approximately 100 bps for mutual fund transactions and advice. AMCs, to continue the sales push, might have to compensate distributors for reduced commissions to some extent.
The report also pointed out that a churn in equity assets was expected to come down with customers becoming completely aware of the commission to paid per transaction.
The recent regulatory changes were also likely to create potential for consolidation. "The industry is likely to witness consolidation as smaller AMCs may not be able to accommodate the acute profit and loss stress," said the report.
McKinsey has pointed out that various categories of mutual fund products might have differential growth. It said, "Within equity, the prevalence of closed-ended funds will increase, with AMCs driving for low churn ratios."
It added that the emergence of debt products within the retail segment might receive further impetus with the narrowing down of difference between equity and debt profitability due to higher payouts.
On poor penetration in the rural sector, the report said that with IFAs facing a major impact on profitability, penetration beyond top cities could slow down.

Source:http://www.business-standard.com/india/news/banentry-load-may-impact-amcs-mckinsey/368431/

4 lakh SIP accounts closed in recent months

Over four lakh systematic investment plan (SIP) accounts have been closed during the last few months, the RBI said in its annual report.
This would constitute over 10 per cent of the SIP accounts with the Indian mutual funds industry, which, according to Value Research, has an estimated 35 to 40 lakh SIP accounts.
The RBI, however, did not spell out the reasons for the closure of such a large number of SIP accounts.
“I have some reservations on such a high number of SIP accounts getting closed over the last few months,” Mr Dhirendra Kumar, CEO, Value Research, said. The Association of Mutual Funds in India does not furnish details on SIP accounts in its monthly mutual fund data.
“A downturn in the market and subdued NAV (net asset value) movement of the mutual fund units could have catalysed and accelerated the discontinuation of SIP accounts,” Mr Kumar said.

Source: http://www.thehindubusinessline.com/2009/08/28/stories/2009082852040100.htm

Sebi mulls 5-fold rise in ticket size for portfolio services

Plans to raise networth requirement for floating portfolio services.

The Securities and Exchange Board of India (Sebi) is planning a five-fold increase in the ticket size for investing in portfolio management service (PMS) schemes — from Rs 5 lakh to 25 lakh.
After making it mandatory to segregate accounts of PMS investors, the market regulator is also mulling to raise the networth requirement for floating a PMS. Sources in the know said that Sebi might raise it to Rs 5 crore from the current requirement of Rs 2 crore.
Sebi is actively considering these moves following a number of complaints from small PMS investors, who were taken for a ride in terms of returns as well as default on client obligations by the players. The market regulator basically wants to bring in better quality standards and ensure that only serious players are in the business.
Experts said that Sebi would like smaller ticket sizes to go into mutual funds and bring only sophisticated and savvy investors into PMSs.
Brokerages such as Sharekhan, Reliance Money and Motilal Oswal offer portfolio schemes starting at Rs 5 lakh. Sharekhan has products based on technical analysis such as Nifty Thrifty and Beta Portfolio with a minimum investment of Rs 5 lakh and a lock-in period of six months. Reliance Money, too, has portfolio management services starting at Rs 5 lakh.
Manish Porecha, head of PMS at Sharekhan, said: “If the investment ticket size is increased, it will be a welcome move for us as we will have to focus on fewer but quality customers. Having said that, there is a lot of appetite for PMS at the beginner’s level. There are lots of such investors who do not want to go to mutual funds, but at the same time want professional fund management. It will stop such investors from testing the market.”
PMS as a product has been fraught with discrepancies as there are minimal disclosure requirements, less accountability and several grey areas in regulation. These discrepancies leave it to the mercy of brokers and PMSs to interpret it in ways that suit them.
According to sources, Sebi is also looking at getting the accounts of PMS providers audited on a periodic basis to bring in more transparency. Last year, the regulator had asked stock brokers/clearing members to carry out complete internal audits on a half-yearly basis by independent qualified chartered accountants.
“Sebi has been discussing these issues with the PMS industry and might come up with new norms very soon,” said a source, who did not wish to be named.
“These steps are aimed at investor protection, similar to what the regulator did in case of mutual funds. They want to ensure better operational efficiencies and impose compliance cost in PMSs,” said Sriram Venkatasubramanian, head, FCH Centrum Wealth Management.
According to rough estimates, close to Rs 50,000 crore is being managed under PMSs. There are more than 300 Sebi-registered portfolio managers. However, experts said that there were a large number of unregulated entities practising it under the garb of colective investment schemes in Tier-II and III towns.
A lot of PMS providers show handsome indicative returns to woo clients. However, the actual returns that they give are quite different from the projected ones. Also, there are issues of preferential treatment to bigger and important clients, frequent churning of portfolio and higher management fees. While Sebi is looking to address these concerns, experts are of the view that it will be difficult for the regulator to regulate every aspect of portfolio management services.

Source: http://www.business-standard.com/india/news/sebi-mulls-5-fold-rise-in-ticket-size-for-portfolio-services/368181/

Common online platform for MF soon

Mutual funds may be among the most popular investment products, but the mechanics of investing in them are not very investor friendly.
For example, it can take up three days for changes that you make to your portfolio to become effective. To make life easier, the industry is now creating an online platform, but how does it help?
Now, it could take as long as three days to try to switch from units of one fund house scheme to another, but the upcoming mutual fund industry online platform promises to end all that.
CB Bhave, chairman of Sebi, said, “In case of the mutual fund industry, we don't have a central database. If you have investments in 15 different schemes then you will get 15 different statements."
The Association of Mutual Funds of India (AMFI) is acting on Bhave's words and plans to launch a common mutual fund platform in six months, with depositories NSDL/CDSL, and mutual fund registrars KARVY/CAMS as partners.
The platform will help investors view their entire portfolio on a single portal and switch between schemes of different fund houses.
AP Kurian, chairman of AMFI, said, "Our internal target to start operations is March 2010. The other operating platforms will get linked into this. This will be a master platform."
The four partners will share the initial cost, while fund houses will pay for the services on the platform. But the industry isn't complaining as it looks for ways to boost slumping sales and reduce costs.
Even more so, after the new norms on entry/exit loads that reduced commissions.
Jaideep Bhattacharya, chairman of AMFI panel, Common Industry Platform, said, "If you look at the profits of an Indian AMC, it is 6 bps lower than the world average and we are 4 bps higher when it comes to the global average of costs. So, we have to find a way to reduce costs and a technology platform will do just that."
Meanwhile, for several mutual fund investors, a common database will save a lot of hardships and will mean convenience at the click of a button.
For the industry that is desperately looking to lower transaction costs, such a platform could be a game changer, a challenge though would be to set it up in about six months’ time.

Source: http://profit.ndtv.com/2009/08/26233059/Common-online-platform-for-MF.html

'Insurance firms must control costs'

Growth in life insurance industry has come to a grinding halt after several years of high double-digit growth. To improve returns under the unit-linked insurance plans (Ulips), the regulator capped the amount insurance companies can charge the fund. The cap improves returns for policyholders, but it reduces margins for insurance companies. Life Insurance Council secretary general and former LIC chairman S B Mathur speaks to Mayur Shetty of the challenges for the sector. Excerpts:

What is the industry reaction to the regulatory cap on charges by life insurance companies?
Normally, in a competitive environment, charges should be determined by demand and supply. But given the developments in other sectors, capping of charges was inevitable in the short to medium term. It will definitely improve yield to policyholders. At the same time, companies will have to be very careful with their expenses — management costs or distribution costs or investing in future growth. Distribution is always an investment that is expensive in the short term and probably profitable in the long term. If the idea is to create some parity or level playing field with mutual funds, then there are other factors that influence the cost of insurance products.

Insurers have to sell 18% in rural areas. Why don’t we exempt Ulips from rural obligation as mutual funds are not bound so?
Besides, there is the issue of tax that raises cost for policyholders. For instance, the industry pays Rs 4,000 crore of service tax. Who bears the cost of these taxes? Likewise under income tax law, companies suffer double taxation as surpluses transferred from shareholder funds to policyholder funds to pay bonuses are taxed twice. Life companies pay a few hundred crores as stamp duty, which is merely a collection of revenue for the government. Ironically even this revenue collected for the government is subjected to service tax.

Will the cap push back break-even dates for life companies?
It could in some cases as companies that began their businesses a few years ago did so with a business plan. These plans will have to be recast in terms of net inflows.

The draft direct taxes code proposes to tax benefits of insurance policies. What is your reaction?
In life policies, payout is typically in a lump sum. If this gets added to income and there is no compensatory provision, then a person in a 10% tax bracket could move to a 30% bracket. Secondly, it is unfair because in a country like India as there is a corrosion in real value of savings. This also does not make sense taking into account the Indian ethos.
In India people not only save for the long term but also for the medium term such as school admissions, higher studies of children and their marriage and for buying a house. Retirement savings is not the only objective. I do not see the tax code promoting savings. In every sphere we borrow western concept without relating them to Indian environment. We saw that happen with a pension product that LIC introduced in 1969: the most popular selling product in the west — pension for life without return of capital — was a non-starter in India.

The IRDA has proposed a combi-product with life and non-life features...
There are some issues with the combi-product. Firstly, there are no real economies as they are two independent products clubbed together and sold by a common intermediary. The common intermediary has to be qualified life and non-life agent. So, a whole lot of agents will be disqualified. While the customer gets both policies at one place, he does not get the economies of scale. The combi-product will have to compete with stand-alone products with better features.

There is some confusion over whether a company can go public within 10 years of operations?
Earlier 10 years was prescribed as the time limit for dilution of promoters holding. The present guidelines clearly says dilution can happen only after 10 years. But in a situation where capital is scarce, there should be some dispensation allowing companies to go for IPO if promoters have the confidence.

What is your view on concerns that Indian promoters would become minority partner if FDI cap is raised to 49%?
Our understanding is that 49% would be an enabling provision. The level of promoter stake will depend on the agreement between two partners.

Source: http://economictimes.indiatimes.com/Opinion/Insurance-firms-must-control-costs/articleshow/4938748.cms

Fund houses make 50-basis point upfront payment to distributors

Sebi ban on entry load triggers the decision.

In a bid to compensate the distributors following market regulator Securities and Exchange Board of India’s (Sebi’s) ban on entry load, some mutual funds have decided to make at least 50 basis points (bps) upfront payment to them. A few others are going up to even 100 bps.
Sebi had banned entry load from August 1 and made it clear that distributors would have to negotiate the commission with customers and be paid through a separate cheque.
Admitting that it would put a burden on asset management companies (AMCs), fund houses said they had no option but to resort to such a move in order to attract investments through the distribution network.
Not everyone however can go beyond 50 bps. The chief executive officer (CEO) of a foreign mutual fund house having operations in India said only those with high profitability can manage to pay more than 50 bps.
Mutual fund scheme distributors said that the upfront payment structure was already in place. “Though the amount of upfront payment depends on how deep the AMCs’ pockets are, the average is 50 bps,” said a distributor.
“Especially if the exit load period is reduced to only the first year of investment, there is not much scope and there will be pressure on pricing,” said Akhilesh Singh, business head (wealth management) of Emkay Financial Services.
“Since 90 per cent of our business comes through the distributor network, we have to compensate them from our own pocket to the extent possible,” said the chief marketing officer (CMO) of one of the leading domestic fund houses seeking anonymity.
AP Kurian, chairman of the Association of Mutual Funds in India (Amfi), said: “There is no uniform call on how the distributors will be compensated. Since business models of different fund houses vary from each other, we have left it to them to take individual calls on how to approach the issue.”
Unless distributors were incentivised in such a situation, one could end up losing ground in a competitive scenario, added the CMO.
The CEO of another fund house said, “We have informed our distributors that we will pay a reasonable brokerage of 1 per cent. Though it will be a burden, but distributors have to be taken care of since they are our business partners.”

Source: http://www.business-standard.com/india/news/fund-houses-make-50-basis-point-upfront-payment-to-distributors/368183/

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.

Source: http://www.livemint.com/2009/08/25215204/The-broker-goes-for-broke-Sea.html?h=B

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.

Source: http://www.zeenews.com/news558243.html

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.

Source: http://www.myiris.com/newsCentre/storyShow.php?fileR=20090825181420707&dir=2009/08/25&secID=livenews