India rushes to beat ban on entry fees

Indian mutual funds have been working against the clock to push new products on to the market before a ban on entry fees that asset managers charge investors becomes effective on August 1. 

Since the investor-friendly move was announced on June 18 by the Securities and Exchange Board of India, the country’s market regulator, nine new funds have been put on offer by asset management companies. 

The mutual funds that have rushed to launch products in the past five weeks include big enterprises such as JPMorgan, Franklin Templeton, DSP BlackRock, Religare Asset Management as well as other, smaller operators. 

The ban on entry loads – the 2.25-2.5 per cent fee mutual funds charge investors on schemes, which is used by money managers to pay distribution commissions – is seen by insiders as being a paradigm-shifting reform for the Indian market.

“This is one of the most significant changes that the mutual funds industry has seen in recent times,” says Sanjoy Banerjee, executive vice-president of ICRA-MutualFundsIndia.com, a local rating agency.

“It is a positive move for the benefit of the investor community, for the benefit of regulation and for the transparency of the mutual funds industry.” 

However, the ban is also likely to have a negative impact on India’s $137bn (€96.4bn, £86.2bn) mutual fund market, because distributors will have less of an incentive to promote new products offered by mutual funds.

“In the short term there will be disruption to business, as distributors will try to find other products that reward them better,” says Naval Bir Kumar, chief executive of IDFC Asset Management, which has about $5bn under management. 

“Clearly there will be a reduction in business and activity will slow down. The ban will change the intermediation that currently exists, because the revenue pool that fund managers and distributors today work on and which they share between themselves will be reduced from August 1 onwards.” 

Fund managers also fear that, in the short term, they may face growing competition from insurance and pension funds, since distributors are likely to market more products similar to mutual funds that have not been hit by the entry load ban. 

Mr Kumar says: “In the future you could see a shift away of sales to other investment products . . . you could have insurance companies trying to create products that look very similar to mutual funds products but without the pricing restrictions which are being imposed on us.”

However, over the medium to long term, fund houses and distributors are expected to revamp their business models and will look for new pay-out structures, according to Sukumar Rajah, chief information officer at Franklin Templeton India.

“Distributors will evolve an advisory fee model and will also get remuneration from fund houses for distributing products either in terms of upfront or increased trail,” he says. 

The ban is expected to have a big impact on the way distributors take care of their clients, according to market analysts.

“Distributors have not evolved in India. They don’t give specific services to investors,” says Mr Banarjee of ICRA-MutualFunds . 

“What has been happening until now is that once a distributor sold a fund he forgot about the investor. Now he will have to continue to be in touch with the investor, providing real services, so that the investor feels obliged to pay the distributor.”

The consensus among fund managers and analysts is that investors will benefit substantially from the new market changes, as products will become cheaper to buy. 

This, coupled with the return of strong market sentiment – the Bombay Stock Exchange’s benchmark Sensex index has risen 32 per cent so far this year and has almost doubled since March – is likely to spur a new wave of investments in mutual funds.

“We have witnessed a sharp increase in foreign institutional investors’ interest in the local markets – $6.6bn in the quarter ending June 2009,” says Mr Rajah of Templeton. “Hence, [in spite of the ban] the medium- to long-term prospects continue to be positive for the industry.”

Mr Kumar of IDFC also believes that the short-term fall in product launches from August 1 onwards could be compensated for by a strong market performance and more active mutual fund investors. “Most investors believe the rule change is a good move; it will make investors a bit more proactive. So when I talk to my team I tell them that if the end consumer is happy, then this can’t be really that bad for us,” says Mr Kumar.

Source: http://www.ft.com/cms/s/0/aeefc570-787d-11de-bb06-00144feabdc0.html

Mutual fund distributors waive commission for small investors

Firms want to avoid handling the low-value cheques they would
have to collect if they charge small investors

Some mutual fund distribution companies, which predominantly cater to low-value retail investors, have decided not to charge for their services from customers beginning August. Even larger distributors, which handle a broader variety of clients including high net-worth investors and companies, have decided to keep a no-commission model open for smaller investors.

A July rule from capital markets regulator Securities and Exchange Board of India, or Sebi, does away with entry loads of up to 2.25% for investors and caps at 1% the portion of exit loads used for marketing expenses.
However, the new regulation, effective 1 August, has created a logistical logjam for distributors.
Earlier, the invested amount would go directly to the asset management company, which would deduct the commission and pass it on to the agent. Under the new regulation, if a person invests Rs1,000, distributors will need to collect a cheque of Rs25 as commission separately.
Rather than increase overhead costs by investing in technology, staff and other back-end services, and hoping for the customer to pay for it, some companies have decided to entirely do away with commissions for small, retail investors.
J. Rajagopalan, managing director, Bluechip Corporate Investment Centre Ltd, 90% of whose clientele is retail investors, says, “For a multi-location distribution house like us with 240 locations, managing back-office operations becomes a huge issue. We do not have the infrastructure to manage the flood of low-value cheques that will hit us if we implement the twin-cheque system. Internally, we have decided we will not charge investors from 1 August.”
Also, charging investors under the new environment is not going to be an easy task, said K. Venkitesh, national head (distribution), Geojit BNP Paribas Financial Services Ltd.
“Imagine buying a shirt for Rs600 and giving two cheques, one for the manufacturer for Rs450 and one for the shopkeeper for the remaining amount. This is the same thing. It is not going to be easy to convince the consumer what he is paying for,” he said.
New Delhi-based Bajaj Capital Ltd had also decided to forego a commission for low-value customers. “We don’t like charging the customer. If a person really wants only the transaction services and does not want any advisory or support services, we will not charge,” said joint managing director Sanjiv Bajaj.
However, he added that if a customer wanted services such as consolidated statements, portfolio advice, etc., he would have to pay for it.
Rajagopalan of Bluechip said the trail commission, which agents get from fund houses at the end of the year based on the assets they helped bring in, would help them cover costs of providing services to retail investors.
New distribution companies, however, have already started offering the no-commission model, saying that the new model will, in the long term, work to everyone’s benefit.
Chennai-based Wealth India Financial Services, has launched a free website where investors can buy and sell funds without paying any upfront charges.
“We decided to start a company that would be positioned to take advantage of this development,” said Srikanth Meenakshi, director, Wealth India Financial Services. “We launched FundsIndia.com, where retail investors could come (and) register, become investors and buy or sell mutual funds with no loads, no transaction fees for any amount.”
FundIndia has empanelled with 16 mutual funds and is in talks with more. It plans to have a country-wide online-only network without any regional sales points, a low-cost, scalable model that can be sustained with just the trail commission.
S. Raghunathan, head of Computer Age Management Services Pvt. Ltd, an industry veteran who has been associated with the mutual fund industry for at least three decades, said the new regulation would work out to be a “win-win” situation. “As we reduce distribution costs, more and more people will start gaining confidence and volumes will grow. As volumes grow, everybody can make enough money through the trail commissions.” He cites the example of the demat revolution that changed the face of the brokerage industry 15 years ago.
“When demat was first introduced, people had similar apprehensions. They thought life would become difficult for the brokers. But look at what has happened. Volumes have grown exponentially. I expect a similar result here also,” he said.
However, the no-commission model will not be the only model in operation. Distribution comes at a cost and someone will have to bear the cost if not the consumer, say some distributors.
While there is some expectation that fund houses will fray some of the costs, say experts, there is also the hope that this will lead to innovation in distribution models such as deep discount brokers, discount brokers, premium brokers and full advisories.

Source: http://www.livemint.com/2009/07/26212527/Mutual-fund-distributors-waive.html?h=B

Mid-cap funds a rollercoaster ride

Equity markets are quoting strong and, given the 60-63% return delivered by the key mid- and small-cap indices, attention is moving towards this space. Since mid- and small-cap-oriented mutual funds suffered the most in the recent downturn, the opportunities to bounce back are significant. We undertake a review of these mid- and small-cap focused funds that are reaping the maximum benefits of the uptake in markets.


Performance: As the name suggests mid- and small-cap funds predominantly invest in companies that are relatively smaller by way of market capitalisation. However, the definition of such companies is difficult to describe and varies from fund to fund. Nevertheless, the stocks these funds invest in usually constitute the smaller companies of the BSE 500 and CNX 500 indices. 

Since the US subprime crisis and its effects, corporate earnings suffered tremendously. Domestic markets dropped sharply from January 8, 2008 onwards and hit their lowest levels on March 9, 2009. While there was an improvement in sentiment in January-February of 2009, it has been since March that a clear uptrend is visible.

From the universe of equity mutual funds, we have confined ourselves to the funds that have either been described as mid-cap funds as per their offer documents or whose major investments have remained in small- and mid-cap stocks dominantly for a long time. 

We managed to zero in on 29 schemes and charted their performance between March 9, 2009 and July 21, 2009.

Some mid- and small-cap funds spiked considerably after a sharp correction in the markets. Eight funds out of the 29 managed to beat the BSE Mid Cap index over the last four-and-half months. At the same time, the average diversified equity fund managed to deliver much smaller return of 77.36%, while smaller cap funds, on an average, delivered 95.27%. Principal Junior Cap Fund has so far emerged as the best performer, generating an impressive 126.95% returns over the past four-and-half months. Fund houses such as JM Financial, Sundaram BNP Paribas and SBI Mutual Fund have managed two schemes each in this space and delivered high returns on both schemes managed.

Yesterday's losers, today's toppers: During the phase between January 8, 2008 and March 9, 2009, the average mid- and small-cap fund lost (-) 65.78%, while the equity diversified funds' category contained losses to (-) 57.29%.

A look at the top 10 worst performers reveals some disturbing results. Ideally, the worst performers are expected to emerge as the highest returning funds when the markets pick up. The top 10 performing funds' list should bear close resemblance to the top 10 worst performers. However, only five funds from the worst performers list made it to the best performers list. These are JM Emerging Leaders, JM Small and Mid-Cap Fund, SBI Magnum Midcap and Emerging Businesses and Canara Robeco Emerging Equities fund. One of the top performers, SBI Magnum Sector Umbrella-Emerging Business Fund, lost far more than the category average of (-)72.15%. Again JM Emerging Leaders Fund and JM Small and Midcap fund were the worst performers, losing more than 85.96% and 87.1%, respectively, but have managed to impress in the recent uptake.

We also found that of the least losers in the January 8-March 9 period, three funds made it to the topper's list. The ability to regress the least and then come up on tops is what all funds aim to achieve. The three funds that managed to achieve this rare feat are Sahara Midcap, Sundaram BNP Paribas Select Midcap and SMILE funds.

Sector break-up: The main reason for good performance can be attributed to the sectoral allocation. In terms of sectoral performance, these funds kept a high allocation to the banking sector, which performed very well. The larger BSE Bankex grew by 130.35% since March 2009. Within the banking sector, while Bank of Baroda -- a large-cap scrip -- was the most popular among the 29 fund houses. Among the mid- and small-cap companies, Federal Bank was the preferred choice. During the period under consideration, Federal Bank posted a return of 94.11%. Oriental Bank of Commerce was the other favourite in the banking space. 

In the oil and gas sector, Castrol India Ltd was the top mid-cap stock, followed by Indraprastha Gas Ltd. Castrol posted returns of 32.14% on an absolute basis over the aforementioned period. 

Considerable allocation to the realty sector also paid rich dividends. Among all sectoral indices, BSE Realty has been the top performer as it rose 166.04% since March 2009. However, holdings varied significantly across schemes within this space.

SBI Magnum Sector Umbrella - an Emerging Businesses Fund, which delivered an impressive 120.52% March 2009, maintained a high allocation to the engineering sector. However, some of the funds that played it safe and clung on to the pharmaceuticals sector lagged behind in performance.

Conclusion: While the returns by these funds over a period of four-and-half months look extremely exciting, investor caution is called for. At the end of the day, these mid- and small-cap stocks oscillate widely with severe ups and downs. The average nervy investor might be tempted to dip into this space -- however be prepared for a rollercoaster ride.

Source: http://www.dnaindia.com/money/report_mid-cap-funds-a-rollercoaster-ride_1277301

MFs may face large redemptions from banks

Mutual funds will have to grapple with large redeemptions, with banks, which figure among the big-ticket investors, planning to pull out money amid concerns that returns from liquid schemes could dip further. Fund houses think such redemptions could start from August end. 

As part of the new rules that followed last year’s money market crisis, the capital market regulator Securities and Exchange Board of India (Sebi) had restricted MFs from investing liquid plan funds in instruments with maturities beyond 90 days. Since the new regulation became effective in June, the return on liquid plans have fallen from 5% annually to 3.5%-4% in the first quarter. 

Till now banks often parked their surplus fund in liquid schemes which generated a better return than other comparable short-term instruments. As on June 30, banks had outstanding investments of over Rs 1.20 lakh crore in such schemes. This will change now since most banks feel that the investment restriction will impact MFs ability to generate a better return. “Substantial amount of money being parked in liquid plans is a phenomena that is not going to last for long. Sebi norm will drive banks to find ways to lend more to the manufacturing sector,” said M V Nair, CMD of Union Bank of India. Mr Nair, who is also the chairman of Indian Banks’ Association, said, “We expect credit to pick up in the second half of this year....We are receiving more loan proposals.” 

In absence of a loan offtake from corporates, banks are sitting on a huge surplus, a substantial part of which is being placed with the Reserve Bank of India under the central bank’s reverse repo facility. But given a return of 3.5% which the central bank offers, banks find MFs a better option. 

Fund houses realise the shift in investments that’s about to happen. “There is a good chance that inflows from banks into liquid funds will start tapering off in the coming months, with returns going down dramatically,” said Ritesh Jain, head of fixed income at Canara Robeco Mutual. According to him, fund houses can do little to improve performance of liquid plans given the strict regulations. 

In a move to minimise mismatches and liquidity crunch, Sebi told MFs in May that maturity of securities cannot exceed that of the scheme. While the funds started rejigging their investments from June, the full impact on the scheme returns would be felt only in September by when most of the long dated, high yielding papers would mature. 

Mr Jain thinks that while the possible impact on liquid schemes have been factored in, liquid plus plans — the ultra-short term plans — may also face the heat. Allured by returns higher than liquid plans, banks have been shifting to liquid plus schemes. “Now, if they withdraw from these funds, MFs will face a problem during redemption. This is beacuse securities in these schemes are of longer maturity,” he said. Ultra short term plans have more leeway in investing in structured and longer tenure assets which enable them deliver a better return.

Source: http://economictimes.indiatimes.com/Market-News/MFs-may-face-large-redemptions/articleshow/4823803.cms

Have the markets changed or have funds changed?

To the discerning investor, the ongoing happy hours on the stock markets have shown
mutual funds in a rather unflattering light. Sure, stocks are up and so are equity mutual funds. But relatively few mutual funds are able to beat the equity market indices. Since the market turned upwards after hitting a bottom in early March, the average diversified equity fund is up about 70%, with about 20 of the 268 funds being more than a 100%.
During the same period the Sensex and the Nifty are up about 87 % and the broader indices are also up around 90 %. This isn’t what the deal is supposed to be with mutual funds. The main job of a mutual fund is supposed to be beating the indices. That’s what the investor pays for. Otherwise, the investor would be much better off investing in an index fund or an index-based exchange traded fund (ETF) which have far lower expenses than actively managed funds.
What makes this curious is that that this isn’t the way it has generally been in India. Historically, Indian equity mutual funds have managed to beat the indices quite handily. For example, from 2002 to 2007, the average equity diversified funds routinely beat the major indices. Rs 10 lakh invested in the average equity fund on January 1, 2002 would have become Rs 97 lakh by 31st December 2007. In the Sensex, it would have become Rs 62 lakh.
However, over the last year or so, this hasn’t been true. During last year’s market decline as well as the subsequent rise, relatively fewer funds have beaten the indices. Is this a fundamental shift? Have the markets changed or have funds changed? Or are these just unusual times and eventually one can expect normalcy to be restored? A bit of everything, I suspect.
One major reason has been that over the last year and a half, stocks have been driven first one way and then the other by what could be called extraneous reasons. Historically, investment managers do well in picking out sectors and companies that will do better than others but do poorly in catching trend changes that originate in the broader economy and polity.
I know, that’s not the impression they like to give when they speak in the media but it’s true. The better fund managers are basically good stock pickers on a relative basis. If steel prices edge up, they’ll know which auto companies will hurt more than others. But if you expected them to predict and time the swings and lurches of global economic roller coaster, then that isn’t going to happen. Some of them make the right guesses some of the time, but that’s about it.
Moreover, the huge increase in the number of equity funds that has happened has inevitably led to a decline in fund management standards. There were 62 equity diversified funds in 2002; now there are about 270. On top of that, the product design choices made by fund companies have ensured that a huge number of the newer funds are constrained by some theme or the other which doesn’t quite make it a sector fund butdoesn’t allow the fund manager to exploit all kinds of markets well.
Does this mean that the age of index investing is finally dawning in India? Perhaps it is. Going in for an index funds ensures that you will never underperform the index and nor will you ever outperform it. I find that since equity investors are generally the kind of people who are both optimistic and overconfident, few of them like the idea of limiting their upside relative to the indices. Still, if present trends continue, the day may not be far when many more investors will start looking at index funds seriously.

Source: http://economictimes.indiatimes.com/Features/Investors-Guide/Have-the-markets-changed-or-have-funds-changed/articleshow/4824038.cms