Equity funds sitting on Rs 20,000-cr cash chest

Equity mutual funds are choosing to hold sizeable cash positions in view of current market uncertainties.
Data from Indsec Securities, based on January-end portfolios, show that average cash positions across equity funds were as high as 20 per cent, amounting to over Rs 20,000 crore across fund houses.
Mutual fund managers say that unprecedented volatility has prompted them to wait on the sidelines for buying opportunities. The proportion of cash to total equity assets has gone up from 10.1 to 20.5 per cent between January 2008 and now. Though the actual cash holdings have only increased from Rs 18,000 crore to Rs 20,000 crore, the contraction in equity fund assets (due to NAV declines and some outflows) has resulted in a larger proportion of cash. Cash includes cash and cash equivalents such as money market instruments and short-term debt instruments.
Among the larger asset management companies (AMCs) Reliance Mutual Fund and UTI Mutual Fund hold cash positions amounting to about 30 per cent of the equity assets while those such as SBI and HSBC Mutual hold about 20-22 per cent.
These cash holdings are not evenly spread across schemes.
Thematic funds, which typically focus on one sector (say, infrastructure) or theme (mid/small-cap stocks), account for a big portion of the cash holdings, while diversified equity funds have lower cash on their portfolios.
Reliance Diversified Power, Reliance Natural Resources, UTI Infrastructure and DSP BlackRock TIGER fund are some thematic funds which are high on cash and cash equivalents.
In some cases, cash positions (for funds such as Reliance or Birla Sun Life) are held against their exposure to derivatives in select schemes.

Are equity fund managers holding high levels of cash anticipating pullouts from the funds? Fund houses deny that that is the case.
Equity funds saw relatively small net outflows (redemptions) of Rs 1,378 crore in the choppy October-December 2008 quarter. In January, there was Rs 338 crore of new outflows.
Fund managers who are high on cash appear to be taking the view that the worst isn’t over yet for the stock markets. Mutual funds have made net sales in stocks amounting to Rs 2,521 crore so far in 2009.
Mr Sanjay Dongre, Senior Equity Fund Manager, UTI Mutual Fund, says that redemption pressures faced by the equity funds were at “negligible” levels, as the investor base was mainly retail.
“We are holding higher cash positions on our funds given the uncertainty prevailing in the marketplace, where the risk appetite of investors is extremely low. Our diversified funds hold a 15-18 per cent allocation to cash and the thematic funds hold larger cash positions.”

Asked if the fund house is looking for a specific market level (say, a Sensex of 8,000 or 8,500) to deploy this cash, Mr Dongre replied that it is uncertainty rather than the prevailing market valuation, that is prompting the cautious stance. “If we see risk capital returning to the markets and the uncertainty receding, we will go ahead and deploy that cash, even if market levels are higher than they are currently,” he said.
At the other end of the spectrum, fund houses such as HDFC Mutual Fund and Franklin Templeton Mutual hold only about 7 per cent of their equity fund portfolios in cash.
These AMCs have consistently followed a practice of remaining more or less fully invested, irrespective of market swings.

Source: http://www.thehindubusinessline.com/2009/02/23/stories/2009022351410100.htm

Sebi mulls norms to let investors decide MF fee

New regulations on entry load likely to be announced within a month; details of the plan yet to be finalized

The Securities and Exchange Board of India, or Sebi, is drafting new norms that would offer mutual fund investors a band or range of entry loads to pick from while purchasing units of a mutual fund, said a senior official at the market regulator. An entry load is the commission that an investor has to pay a distributor while purchasing units. Currently, investors pay an average 2.25% of the sum invested as entry load if they buy the units from a distributor, who is a third party, but they pay nothing if they buy directly from the fund house. The new norms are likely to be announced in a month, the official said requesting anonymity as details of the plan have not yet been finalized. Empowering Investors: Sebi chairman C.B. Bhave. The new Sebi norms are expected to make distributors more competent to justify their role. Abhijit Bhatlekar / MintAccording to the Association of Mutual Funds in India a 13-year old industry lobby, there were about 47 million mutual fund account holders in India at the end of 2008. There were some 35 mutual fund houses with net assets under management of about Rs4.6 trillion, at the end of January. The bulk of mutual fund unit sales in the country, however, are conducted through a large, unorganized network of distributors, which also include a few large players that have their own fund offerings. The largest third party distributors of mutual fund products in India are banks such as ICICI Bank Ltd and HDFC Bank Ltd. Several brokerages and non-banking finance companies also have large mutual fund products distribution businesses. “This (move) will hugely empower mutual fund investors,” said the Sebi official, adding that it would force “distributors to stay competent to justify their role”.

The move could also help increase the current investor base, this official said. “Penetration of mutual funds can be much more (but) .. without distributors, it would have been even less,” said Uttam Aggarwal, who heads the mutual fund distribution business of Bajaj Capital Ltd, which is present in 90 towns and manages about one million investors. “Look at Quantum (Quantum Asset Management Co. Pvt. Ltd), its asset under management is in double digit crore,” said Aggarwal. Quantum does not have a distribution model and does not charge entry load from investors. At the same time, financial services firms with established distribution capabilities have now expanded to included funds management business to leverage their strength.“We are in this business to leverage our strong distribution capabilities,” says Nitin Rakesh, chief executive of asset management with domestic retail brokerage Motilal Oswal Financial Services Ltd, one of the latest players in the funds business. In fact, fund houses recognize the grip that distributors have over access in both directions. The penetration of mutual funds in India, have been “severely limited” by distributors, Ashu Sayash, managing director and country head (India) of Fidelity Advisors International, had said in June last year. He was speaking at the launch of FundsNetwork, an online fund distribution portal that Fidelity International, the world’s largest mutual fund manager, had launched. “The existing mutual fund business model is also not as profitable as insurance,” said Aggarwal. “Insurance allows you to reach the smallest towns but mutual funds have regulatory issues (such as daily net asset value, or NAV, disclosures and cap on marketing expenses).” Unlike the third party distributors of, say, insurance products, who can only sell policies of one firm, mutual fund distributors are free to sell schemes from any fund house. Not surprisingly, fund houses often fall over each other to woo distributors so they will push their products. Sebi currently allows mutual funds to spend up to 6% of a scheme as marketing expense, and fund houses typically spend part of this allocation on distributors.

Source: http://www.livemint.com/2009/02/17222436/Sebi-mulls-norms-to-let-invest.html

Market volatility may continue on rising US woes

Indian equities are seen extending last week’s losses, as fear of more bad news from the US financial sector is likely to keep the mood in world markets subdued. Leading US equity benchmark Dow Jones Industrial Average fell to a six-year low on Friday on concerns that many US banks would be nationalised.
Such a move, while saving those banks from any collapse, would erode the shareholder value, according to analysts. Such concerns were eased partly after the White House spoke in favour of US banks remaining in private hands.
Back home, the market is likely to be volatile in the first two trading sessions of the week, in the run-up to the expiry of the February derivative series on Thursday, as traders square off existing positions and take up fresh ones in the March series.
Fund managers believe possible interest rate cuts by the Reserve Bank of India, this week, could revive sentiment, albeit temporarily. "This time, unlike previously, the market is yet to factor in expectations of a rate cut, which is a consoling factor,” said a fund manager with a private mutual fund.
"Some aggressive short-covering may happen if RBI cuts rates aggressively, and its short-term impact will be huge, given the quantum of shorts present now,” he added.
Expectations of aggressive rate cuts by the central bank have strengthened, as government’s inability to dole out liberal fiscal relief measures due to deteriorating financial position, has put the onus on RBI to anchor the economy through the current economic crisis.
“Given the upcoming elections, the entire onus on stimulating growth now rests on the monetary policy, and we expect additional easing to the tune of 100-150 basis points (bps),” said Citigroup economists in a report.
“While rising Consumer Price Index (CPI) is a worry, we expect a minimum 100-150-bps cut in repo/reverse repo rates and cash reserve ratio (CRR) in the near term,” they added.
Last week, benchmark indices lost 7-8%, with the Nifty ending at 2,736.45 on Friday amid sustained selling by foreign institutional investors (FIIs) after the government said its fiscal deficit would widen to 5.5% in 2009-10.
An independent technical analyst said the Nifty has a crucial support at 2,600, breaking which the index could head below 2,500 levels. He advises even short-term traders to keep their directional bets to the minimum at the moment, given the uncertain market outlook.

Source: http://economictimes.indiatimes.com/Analysis/Market-volatility-may-continue-on-rising-US-woes/articleshow/4172103.cms