In the best quarter in 68, active funds trail index

The past quarter has been the best in 17 years --- or 68 quarters --- for the Sensex during which the benchmark rallied nearly 50%.
Naturally, there was a case for investment in passively managed funds --- that which just buy the benchmark index.
But actively managed funds, which claim that through systems, processes and fund manager's abilities pick and choose stocks that outperform, have failed miserably. The 78 such schemes, which charge a fee for their outperformance, have not matched the 49.3% rise in the Sensex during the quarter ended June 30.
Of these, 26 schemes returned less than 40% and three below 30%. The others have returned between 40% and 49.1%
At the same time, five of seven index funds that track the Sensex have returned in excess of 50%.
The top-performing one, UTI Master Index (G) returned 50.96%, the Tata Index Sensex (G) 50.83%, the HDFC Index Sensex Plus(G) 50.82%, and funds from Franklin India and LIC Mutual 50.71% and 50.55%, respectively.
Remember, these funds charge less fees compared with active funds.
Clearly, fear was the key to underperformance as fundmen, burnt by the October meltdown and falling markets in the first quarter, took a cautious approach and stayed out of stocks.
At the end of March, over 15% of the equity diversified funds' assets were held in cash. Even after the substantial rally during April, funds continued to hold significant cash and shied away from investing in high-beta stocks such as infrastructure, real estate and midcaps.
"Both investors and the mutual fund industry missed out on the rally. Many were sitting on cash and deployed it only towards the latter half of the rally," said Vivek Pandey, equity fund manager at SBI Mutual Fund.
Funds which had stayed invested in so-called high growth sectors such as infrastructure and high-momentum midcap space were winners during the period.
What's interesting is four of top five best performing schemes come from one fund house. JM Financial's Core -11-1, Basic doubled investor money.
JM'sEmerging Leaders,and Small and Midcap Funds have given returns in excess of 85%. Other big gainers include mid cap funds of Principal, Magnum, Sahara and ING. Fund managers argue that looking at returns over such a short term is not advisable.
"Investors should not try and time the market. They should invest in a disciplined fashion with a horizon which is longer than 3-6 months. They should at least be looking at a period of 2-3 years, and the longer the better," said Harsha Upadhyaya, fund manager at UTI Mutual Fund.
Much of the rise in the markets has been attributed to foreign fund flows.
Foreign institutional investors (FIIs) have put in Rs 36,560 crore over the period of the rally. The outlook for the Indian markets is still strong over the long-term added experts although over the last two weeks they have been net sellers by Rs 2,889 crore.During the period, the Sensex has risen by 6,500 points.
"FIIs have come into India in 2009, except for the last two weeks.They were selling last year because of redemption pressure, but at some level FIIs would turn buyers," said Harsha Upadhyaya.
A better political scenario post the elections also bode well for the Indian markets says Pandey.
"Previously FIIs have pointed to the stable political authority in China as a reason for their preference of the country to India. Now our country has a stable and strong government which should be a positive for flows to the country," he said.

Source: http://www.dnaindia.com/money/report_in-the-best-quarter-in-68-active-funds-trail-index_1270264

MF distributors to get fee from 1 pc of redemption proceeds

After scrapping the entry load on mutual funds, the Securities and Exchange Board of India (SEBI) has said a maximum of one per cent of the redemption proceeds, or exit load, should be maintained in a separate account which can be used by the asset management companies (AMCs) to pay commissions to the distributor and take care of other marketing and selling expenses.

“Any balance should be credited to the scheme immediately,” said a Sebi circular. Sebi had abolished initial issue expenses and mutual fund schemes were allowed to recover expenses connected with sales and distribution through entry load only. Further, investors making direct applications to the mutual funds were exempted from the entry load.
In terms of existing arrangement, though the investor pays for the services rendered by the mutual fund distributors, distributors are remunerated by AMCs from loads deducted from the invested amounts or the redemption proceeds. SEBI (Mutual Funds) Regulations, 1996 also permit AMCs to charge the scheme (under the annual recurring expense) for marketing and selling expenses including distributor’s commission.

Source: http://www.indianexpress.com/news/MF-distributors-to-get-fee-from-1-pc-of-redemption-proceeds/483991

Cap put on MF sales expenses pie in exit load

Earlier, the entire exit load charged could be used for sales and marketing
expenses by AMCs

The Securities and Exchange Board of India has put a cap of one per cent on the maximum amount an asset management company can retain from the exit load or the contingent deferred sales charges (CDSC) on mutual funds for marketing and selling expenses.
“Of the exit load or CDSC charged to the investor, a maximum of one per cent of the redemption proceeds shall be maintained in a separate account which can be used by the AMC to pay commissions to the distributors and to take care of other marketing and selling expenses”, SEBI said in a circular. The balance should be credited to the scheme immediately.
This would be applicable to redemptions from mutual fund schemes including switch-out from other schemes from August 1. Earlier, the entire exit load charged could be used for sales and marketing expenses by the AMCs but now it would be restricted, said the CEO of a mutual fund house.
The market regulator, which had said in June it would scrap entry loads for all mutual fund schemes, said this would be applicable from August 1.
This would also apply to additional purchases and switch over from one scheme to other schemes, new mutual fund schemes launched on and after August 1 and systematic investment plans (SIPs) registered on or after August 1.
If the AMC and the distributors want to make money there is a possibility that they could encourage an investor to exit one scheme and invest in another and encourage “churning” in order to earn from the redemption proceeds, said an industry official.
MF application forms will have to carry suitable disclosures that the upfront commission to distributors has to be paid to them directly by the investor.
SEBI clarified that distributors should disclose all the commissions payable to them for the different competing schemes of various mutual funds, one or more of which they may be selling to the investor.

Source: http://www.thehindubusinessline.com/2009/07/02/stories/2009070252450100.htm

MFs park funds in CDs

Mutual funds purchased short-term money market instruments today on view that rates could fall next week in the wake of persistent ample liquidity in the banking system, dealers said.

“We expect the rates on one-year certificates of deposit (CDs) to fall to 5 per cent by next week. The liquidity is abundant in the system, which is one reason why the rates have fallen,” said a fund manager with a mutual fund.
Short-term rates have already slipped by 60-80 basis points in the last one month due to ample liquidity.
“Mutual funds also purchased papers today as they expect cash to come back into their schemes by next week,” said a dealer with a mutual fund. Banks refinanced the redemption of their existing CDs by borrowing at lower rates today, dealers said.
United Bank of India placed six-month CDs at 4.20 per cent, 20bps down from Monday. Three-month CDs were quoted at 3.30-3.50 per cent, unchanged from Tuesday.

Source: http://www.business-standard.com/india/storypage.php?autono=362673