Mutual fund investors miss making big gains

Small is the new big.

At least, when it comes to equity mutual fund performance over the last one year.Data from Value Research, as on October 27, show that the top 20 performer schemes gave an average return of 126.42% in the period.

But, interestingly, they held only 2.51% of the assets (or investor money) parked in a total 430 equity mutual fund schemes.

That is, just Rs 4,836 crore out of Rs 192,574 crore, including tax-saving plans and exchange traded funds.

Another way to look at it: The 20 funds that more than doubled returns constitute only 0.77% of the total assets of the mutual fund industry of Rs 627,999 crore (through 1,090 schemes) as on September 30, 2009.

This is startling stats, and tells that mutual fund investors have completely missed out on the best performing schemes.

Someone investing even in the 20th best scheme would have doubled money -- made exactly 114.04% gains -- but in all, only Rs 143.8 crore were put in by investors in the scheme.

The best returns were given by ICICI Prudential Discovery (Institutional Plan) at 154% followed by the same fund's Regular Plan which returned 150.56%.

No. 2 Taurus Infrastructure Fund knocked up a 147.35% gain.

ICICI Prudential Discovery has an asset base of just Rs 407.16 crore (regular and institutional plan clubbed) and Taurus Infrastructure Fund Rs 28.59 crore.

The third best scheme, JM Multi Strategy Fund, returned 138.83%. It's assets? Just Rs 52.29 crore.

Of the 20 best performing open-ended equity schemes, only two had an asset base of more than Rs 500 crore -- DSP Black Rock World Gold Fund (Rs 1,685.96 crore) and Birla Sunlife Mid-cap (A) (Rs 780.91 crore).

But the World Gold Fund and the AIG World Gold Fund (corpus Rs 280.61 crore) that also features in the top 20 schemes are not really equity funds.

The Income Tax Act, 1961, defines an equity fund as that which invests an average 65% of its assets in Indian equities over the last twelve months.

These schemes are feeder schemes, which invest in international funds that, in turn, invest in gold and other precious metals and mining stocks.

What goes in favour of these schemes is the fact that they are small.

A small scheme needs fewer stocks to do well for the overall performance of the scheme to improve, unlike a large scheme.

As assets under management increase, fund managers are left with fewer options to invest.Also, as a mutual fund scheme becomes successful, the fees it earns becomes more lucrative.

This is well put by Jason Zweig, the respected personal finance writer, in his commentary to Benjamin Graham's all-time investment classic, The Intelligent Investor: "As a fund grows, its fees become more lucrative, making its managers reluctant to rock the boat. The very risk that managers took to generate their initial high returns could now drive the investors away and jeopardise all that fee income. So the biggest funds resemble a herd of identical and overfed sheep, all moving in sluggish lockstep, all saying "Baaaa" at the same time."

The other question to ask is, why have investors missed out on the rally in these small schemes?
If fundmen are to believed it is primarily because distributors selling these schemes to investors have gone missing.

"Initially, performance was being rewarded with inflows. But that is not happening now because of many reasons," says an equity fund manager with an international mutual fund house, hinting at the change in the distributor commission payout method that has come into effect since August 1, 2009.

Since August 1, schemes cannot charge an entry load from an investor to pay commission to a distributor. It is now between the investor and the distributor to decide how much commission is to be paid.

More than half the top-20 schemes had assets under Rs 100 crore. Some had as low as Rs 3.87 crore. The average assets held by the top 20 equity schemes was Rs 241.82 crore.

Waqar Naqvi, chief executive officer at Taurus Asset Management Company, says the Taurus Infrastructure fund had around Rs 7.7 crore in April 2009 and now it is Rs 28.59 crore.

"So, we have got fresh flows. But retail participation is still missing. If Sensex hits the 20,000 mark again retail investors would come in," he said. "In August, September and October 2009, distributors have been in hibernation that has of course been hitting us. But we are drawing plans to take the performance to investors by rolling out advertising campaigns, distributing booklets etc," Naqvi sad.

The industry that is grappling with missing flows and a new norm for commission payouts, should adapt to the changes in a while say officials.

Source: http://www.dnaindia.com/money/report_mutual-fund-investors-miss-making-big-gains_1304361

New SEBI fee structure raises MF distributors hopes on PMS

The new fee structure for mutual fund distributors has fund houses focussing again on businesses that were earlier considered unviable or worthless. Barely a few months ago, fund houses considered their portfolio management services (PMS) business a ‘white elephant’, as competition in the segment prevented them from attaining the scale they desired.

But now, with SEBI scrapping entry load on mutual fund schemes and the resultant lull in equity scheme sales, asset management companies (AMCs) have begun redrawing their business plans around PMS, which cater to wealthy investors. This is mainly because AMCs have the freedom to fix fees and commission that suit the growth of their PMS businesses.

Reliance Mutual, ICICI Prudential Asset Management, Tata Mutual Fund, Birla Sunlife MF and HDFC MF are believed to be attempting to boost their PMS business. The revival in broader markets is aiding fund houses to make a pitch to potential investors, according to PMS providers.

"With markets improving steadily, investors have become more confident about their investments. The whole idea of wealth management is gaining ground among investors," said Amish Munshi, head-PMS, Tata Mutual Fund. The renewed interest in PMS products nowadays is in stark contrast to the period in 2008, when service providers struggled to convince new clients to put in money and existing clients to stay invested due to the market crash.

Early in 2009, DSP BlackRock Investment Managers wound up its domestic PMS business, while Franklin Templeton is reported to have closed down select products. Industry officials said many other mutual funds considered PMS as ‘secondary business’ till the SEBI’s move in August to scrap the entry load of 2.25%.

The move deprived distributors of the commission from mutual funds, resulting in them selling more of insurance products and fixed deposits. Starting August, equity scheme sales have nearly halved in three months’ time. As per AMFI data, sales of equity schemes have come down to Rs 3,363 crore in September, logging a 15% fall from August.

"From a pure marketing point of view, promoting PMS products make more sense to relationship managers, as it gives them higher performance credits than selling mutual funds. PMS has become the core focus of many fund houses. Customised investment products are now being aggressively sold to investors," said Akhilesh Singh, business head, wealth management, Emkay Global Financial Services.

The mode of remunerating fund managers has changed from performance-linked management fee to fixed annual fees in the case of most fund houses. Fund management charges are levied in the range of 2.25 and 3% (of corpus), irrespective of loss or gain in portfolio at the end of term.

A few smaller fund houses are also following the old performance-linked management fee where investors share percentage of profits (generated on the portfolio) with the fund manager, apart from a small flat fee (1-1.5%). Distributors’ remunerations are in the range of 0.75 and 1.50% of fund management charges levied from investors.

While conventional wealth management companies and broking firms have raised their minimum investment limits to about Rs 50 lakh to Rs 1 crore, PMS schemes run by mutual funds firms have much lower entry levels — with many starting at Rs 10 lakh.

According to wealth managers, it takes an investment of at least Rs 20 lakh to have a decent portfolio. At current market levels, such portfolios will have an array of mid-cap stocks, derivative instruments and a few large-cap stocks. "Getting investors into these schemes is still a very hard task for most fund houses. People who have lost money investing into PMS schemes in 2008 are not willing to put money anymore. PMS schemes based on structured notes, however, are witnessing some interest from savvy investors," said the CEO of large fund house.

Source: http://economictimes.indiatimes.com/MFs-hope-to-be-lucky-with-PMS/articleshow/5174659.cms

RBI concerned about circular trade between banks and MFs

Almost 90% of the funds parked by banks in mutual funds (MFs) come back into banks in the form of overnight borrowings through various channels. Though the issue of circular investments between banks and MFs has been discussed in public domain for several months now, the Reserve Bank of India has, for the first time, put it in the public domain data pointing to the extent of such circular trade.

According to the latest data, banks parked Rs 66,687 crore in MFs as of September 25, 2009. These investments are essentially in debt and liquid schemes. MFs, in turn, have lent Rs 29,504 crore under the collateralized lending and borrowing obligation (CBLO) platform and Rs 29,328 crore under market repo, respectively.

The CBLO is a facility which allows non-banks to lend to banks short-term surpluses. MF lending through CBLO and market repo as a percentage of banks’ investment in mutual funds has gone up from about 64% in July to 88% in September.

MFs also subscribe to commercial paper issued by corporates, which is tantamount to lending to corporates by MFs. This lending is ostensibly from funds raised from banks, which are the largest investors in debt MFs. The Reserve Bank has objected to such indirect lending by banks through intermediaries as MFs may lend to corporates that banks themselves have rejected and pose a regulatory concern.

But more serious is its concern over the circular investment between MFs and banks. In an interview to ET on Tuesday, the Reserve Bank governor, D Subbarao said,"... there is concern over the circularity in the movement of liquidity in the system. We have requested banks to take the issue to their board, discuss it at their senior management level and have some governance norms for their investment in debt mutual funds. They must also discuss in their club, the IBA (Indian Banks’ Association) and act as a self regulator."

Though the IBA still has to receive any formal communication from the central bank on this matter, a senior official explained the rationale behind RBI’s concerns on the condition of anonymity.

"As for banks, they earn 3.25% by parking surplus funds with the Reserve Bank. However, they have to pay the corporate income tax of 30% on the income. One ends up losing about 90 bps (basis points 1 bps= 0.01%). Whereas, income from mutual fund is tax-free., even if the returns by deploying the funds in MF is 50 bps low and then borrowing it again through CBLO, the bank still ends up making more income. However, this could pose a systemic risk in case of sudden unwinding of liquidity."

Speaking on the subject of links between banks, MFs and NBFCs, former RBI governor YV Reddy said in a speech last week: "It is also noteworthy that some mutual funds and NBFCs have close affiliations with large corporates or banks. No doubt, there could be what may be technically termed as fire walls, but a detailed study of their interlinkages, actual operations in concert or clusters with each other and in the equity and corporate bond markets would help reassurance that serious conflicts of interests with systemic consequences are not pervasive."

Source: http://economictimes.indiatimes.com/Circular-trade-seen-among-banks-MFs/articleshow/5174521.cms

Why should you plan for life after death

Across the world, a chief cause of unclaimed money seems to be bad communication. Somebody simply forgot to tell the spouse or kids or siblings about the assets he created.

Rs1,09,544 crore. According to the Reserve Bank of India (RBI), this is the money in unclaimed deposits in all scheduled commercial banks in India in 2007 . Add another Rs3,800 crore of unwanted money with the Employees Provident Fund. And several thousand crore more of unclaimed funds with the Life Insurance Corp. of India (LIC), for which I do not have any data, but expert estimates say it would be in four digits with a crore sitting comfortably behind. Why would somebody sweat away at work, stay away from kids, lose out on taking holidays and doing what they really loved, fight, scheme, machinate to get money under their belts and then die with all of it lying unwanted in some cold vault in the innards of the Indian financial system?

Unclaimed millions and crores is not a uniquely Indian eccentricity; news reports of unclaimed millions in life insurance companies in the US and the UK are plenty. Across the world, a chief cause of unclaimed money seems to be bad communication. Somebody simply forgot to tell the spouse or kids or siblings about the assets he created. It is difficult to visualize your own death and, therefore, difficult to imagine not being around to collect that deposit or bond or mutual fund when it matures or redeems. This is changing, though. A thin sliver of population that passes the twin filters of being urban affluent Indian and working with a financial planner shows a greater acceptance of their own mortality.

Bangalore-based financial planner Lovaii Navlakhi says: “The number of people who have their wills in place is between 3% and 10%. However, the number wanting to create wills is rapidly increasing.” Other planners agree that while there is resistance to making a will, the 40-something urban Indian is fast understanding the wealth-depleting implications of not having a road map in place in case of an untimely death. The other observation is that the parents of affluent Indians are leaving this world intestate or without having a will in place. And it worries the financially mature person no end.

For this 40-something knows that he will have to begin conversations around money and estate planning soon enough to nudge a parent into making a will. It is possibly the worst conversation in the world to begin, but one that will have to be made. To trace the financial life of a person who is not around to tell you where that policy document is, who has the keys to the locker, how many bank accounts there are and the details of the share certificates is a horrendous task. People who have been through the process of piecing together a life gone by say it is like putting together a jigsaw puzzle. Add the Indian legal and procedural system to this to make the emotional trauma of loss hurt even more. Other than the operational issues of having to complete the paperwork, the lack of a will prevents the family from knowing what the person would have wanted to do with the wealth he accumulated. Maybe he’d have wanted to give it all away to a loved religious order or to the charity where he worked. Lack of a will causes the court to apportion assets in the manner the Succession Act delineates.

Facilitating the estate planning of a parent is one of most touchy subjects in a family. Years of stuffing things under the carpet, of growing-up issues, of post-marriage family dramas, of sibling rivalries, make talking to your parents about putting their financial affairs in order a minefield of possible emotional explosions. One reason for the difficulty is the continuation of the parent-child role that somewhere centres around control and makes it tough for the parent to accept that the wheel of time has turned. For the adult child, the unpleasant thought of having to look clinically at the death of a loved one prevents such a conversation from even starting.

A US-based in-home elder care company, Home Instead Senior Care, uses the 40-70 rule that says if you are around 40 years old and your parents are around 70, then you need to begin conversations around estate planning. In our context, it helps to have a trusted uncle or family friend as part of the conversation to break into this difficult, emotional-trap-ridden conversation. Will dad think I’m trying to grab his money? Will mum cry? Will I end up bawling? After the first ice breaker, the idea is to communicate that a will is really a way to continue to control what happens to money, even after you are gone. It is a way to allow your spouse to continue leading the life she is used to.

Nobody said being the middle-aged, financially savvy urban Indian was going to be easy, but even death has its funny stories. This one has just been told on chat by an insurance veteran: Some people would buy a very large single-premium policy (that would work as a fixed deposit and carry an insurance amount) and then destroy the policy document. They fear that some people around them would think their lives worth less than the money they’d get if they died (or were done to death). So they burn the policy document. If they survive till maturity, they’d simply get the insurance company to issue them a duplicate policy. If they died in the interim, they’d simply add a few zeros to the stock of unclaimed money in the country.

Source: http://www.livemint.com/2009/10/27233648/Why-should-you-plan-for-life-a.html?h=B