Mutual fund industry makeover: season 2

Ease of entry and exit and low entry and exit costs are two attributes that any retail offering works hard to get right

For equally good food, which cafe would you pick—one that has good parking and is on the ground floor or another that has difficult parking and is two flights up a dark stairway? I find myself choosing the first over the other most times. I also find my selection process sensitive to costs of access such as parking fees. I tend to avoid places that will charge more than the usual Rs10 as parking.

Ease of entry and exit and low entry and exit costs are two attributes that any retail offering works hard to get right. Financial products are just the same. Unless buying, keeping, tracking, consolidating and selling are cheap and easy, retail products such as mutual funds will remain boutique, ones that are sold and not bought.
In this backdrop, look at what is causing the latest round of hand-wringing in the mutual fund industry. The capital market regulator has allowed mutual funds to list on stock exchanges, and on Monday, 30 UTI schemes were listed and began trading on the National Stock Exchange. Others would follow.
While the public statements of brokers, fund houses, banks and distributors are all politically correct, offline, the venom is vitriolic. Fears of funds turning into casinos, of brokers not willing to sign up, and an overall feeling of “this will not work” are plenty. This comes soon after one round of venting after the 1 August move over to no entry and exit charges in funds—also known as loads—which incidentally is being watched carefully by regulators across the world to see how it works, as it is a global first. The past six months have seen change, both in the plumbing of the mutual fund innards and in the way they intersect with the lives of investors.

If we go beyond the noise, what’s happening is this: Mutual funds were envisaged to be a bus that retail investors could ride to get the benefit of fund management through a fraud-free route. However, the short-term nature of capitalism along with the valuation hunger—the larger the corpus of money a fund house manages, the larger will be its valuation in a stake sale or while listing—ensured that the institutional business got the maximum attention, innovation and service and the retail investor was given peripheral attention and even then it was the use of the new fund offer route to gather assets.
A crucial part of this was the distributor who had access to the retail investor—you and me—and was mostly happy to sell us garbage as long as he was paid his cut. Of course, the story is much worse in another part of the market, but let’s deal with just funds here in isolation.
But the Indian investor, like the voter, is no fool. There must be a reason that we still keep the bulk of our savings in low-yielding, sticky and tax-inefficient bank deposits. We’ve not had the confidence to step over to managed funds because we don’t trust the advice. And they are difficult to transact compared with direct equity.
Now view the regulatory changes in the light of this backdrop. By removing loads, the market regulator has removed the key cause of mis-selling of funds. Sellers, including relationship managers of banks, would tell you that a Rs10 NAV (net asset value) was cheaper than an older fund with a Rs50 NAV, hence you should buy the new one. Of course, the new one earned him more commission and, anyway, who was tracking his lie about the NAV?
Now there is one cost that you need to look at—the expense ratio that is capped at 2.5% a year today and likely to come down as we go along. Look at the stock market listing of funds as step two of the no-load move. And here the main participants driving the change are on firm ground; they saw this happen in the last decade when the stock markets went demat with online screen-based trading. Costs, transaction time and fraud have all come down exponentially.
Once the market and the actors in the drama have digested this new piece of change, the mutual fund world will look something like this: There will be large distribution houses, including banks, that will offer us a 20-50 basis points transaction fee for buying and selling mutual funds, just as we do stocks. One basis point is one-hundredth of a percentage point.
This will typically carry no view on what you should buy. If you want advice, you will have to pay for it, either through advisers attached to these large entities or through independent financial advisers and planners who will charge a fee, just like a doctor or lawyer or architect.
As we go along, the rules will come in that will deter advice that is motivated, tied to a particular company or in any other manner compromises your investment decision. While there is no perfect world, there is a world with no parking tickets, cafes that serve great food that are easy to enter, have toilets that work, and are not built like traps.

Source: http://www.livemint.com/2009/12/01222206/Mutual-fund-industry-makeover.html?h=B

Mkt may make fresh highs in a year: Axis AMC

The stock markets on Monday opened the week — and the month — on a positive note. After a scare last week that Dubai may default on its debt that resulted in a two-day correction, the markets bounced back on Monday.
The National Stock Exchange’s 50-share Nifty index rose 90 points to settle above the psychological 5,000 mark, clearly helped by strong growth in India’s quarterly GDP, which turned in at 7.9%.
In an interview with CNBC-TV18, Rajiv Anand, CEO and MD, Axis Asset Management Co, discusses his view on the market and how it may pan out ahead.
Below is a verbatim transcript of Rajiv Anand’s exclusive interview on CNBC-TV18.

Q: You have seen strong GDP numbers. They are following what the stock markets have done from retrospective effect. Are you convinced that the uptrend continues to remain intact and how would you be positioned on the markets right now?
A: I think the numbers were a positive surprise but just a hint of caution there. I think a large part of that bounce has really come from government spending, which is up 26% odd so on the private consumption side while we seem to have broken a six quarter downward trajectory that still continues to be a little weak.
Going forward, I think, two things will kick in: the impact of the weak monsoon and private consumption weakness will continue going forward is really the moot point. But looking at these numbers, we do believe that the investment spend should look much better as there is growing confidence that this economy is going to do well going forward.

Q: You keep a careful eye on the bond market as well. What are they talking about in terms of how soon tightening might begin because that might be the obvious offshoot of such a fantastic GDP figure that tightening will happen sooner and faster?
A: I think the bets were on something in April but I think those bets have been pushed back a little bit. I think market expectation is that perhaps you could get a CRR hike sometime in December but remember that from an exit policy perspective most of the emergency stimulus is already out of the way. SLR is gone from 24% to 25%, emergency funding for NBFC in mutual fund is out of the way. Open market operations (OMOs) of the Reserve Bank of India supporting the government borrowing programme are out of the way.
The exit strategy has already started and the point clearly RBI is making is that the exit strategy is certainly going to be a non-disruptive one so therefore to that extent it will continuously be a balance between managing that inflation and the liquidity in the system.
At the same time, I think, the RBI is also not totally convinced that this growth trajectory will continue. Like the point that I just made about the fact that it seems to be hinged upon government spending and that is really not the kind of growth that you would see on a sustained basis, so it is going to be a balanced exit strategy and I certainly do believe that it will not be disruptive.

Q: What about the global impact, last week, the markets got fumbled because of the news from Dubai has that sort of been chucked off or would you still watch?
A: I think what the market is basically saying is that while there could be potentially be some sort of problem in Dubai, Abu Dhabi — which has got all the oil and more importantly all the money — will basically take care of Dubai. But I am not very sure that it is as simple as that.
It is a play that will unfold in the days or weeks to come and it will be interesting to see especially the larger international banks that have exposure in Dubai — how exactly that plays out and whether there is a technical or otherwise default in Dubai and then what exactly these banks will react.
I am not very sure that it is as simple as the markets are making it out to be while the number at USD 60 billion odd is the larger picture and the current number is about USD 3-4 billion. The problem is a little more complex than the markets are making it out currently.

Q: What about the banks? How do you approach that pocket now?
A: We are quite positive as far as banks are concerned. For two reasons, one is we do believe that gross domestic product (GDP) growth will continue to be strong in this country and I think if that is going to happen that growth needs to get funded and domestic banks or local banks need to play that active part so the asset side will continue to do well in an environment where savings are growing at a vicinity of 35%. Banks, with the distribution that they have, to be able to sell investment products etc are well positioned to manage the liability side as well as the fee-based income so net-net it is a great basket to be in and we are quite positive as far as banks and some of the non-banking financial company (NBFC) are concerned in this country.

Q: You have your pulse pretty much on the entire domestic fund flow picture. We have seen domestic institutions; insurance companies and mutual funds come from a pretty heavy profit booking and every time we go above that 5,000 mark. FIIs have come aggressively in the derivatives market what is your sense. Do you sense that there is enough economic data point right now possibly a much better earnings season, a much better second half to point towards some bit of buying even above these 5,000 levels or do you sense domestic institutions like yourself who can change till it remains slightly cautious at these levels?
A: I think the markets over the last three months if you look at the headline level are up 6-7% but the midcap index is up about 15-16%. So the story is not really at the index level but it has become a lot more stock-specific because clearly if you look at a valuation perspective, we are probably not cheap, probably at the higher end of fair value, so to speak. To that extent there is some element of churn that one is seeing and what one is also seeing is some element of profit taking by the retail investor out of mutual funds as the markets reach the 17,000 or thereabout so I think there is little bit of — I won’t call redemption pressure but — some money being taken off the table.
That is really what is leading to some element of profit taking. I think January to March is a big quarter as far as local insurance companies are concerned so I think we do believe that you will see a lot of money coming in from the insurance companies.
You are also seeing on the mutual fund we ourselves for example our first fund Axis Equity fund open for subscription at this point as do a couple of the other mutual funds. So I think going forward we certainly will see some amount of money coming into the domestic institutions.

Q: It is up in the air and we won’t hold you to it but what are the chances that by December — end of this calendar year — the market will have taken out its intermediate high? Do you sense that momentum is leaning that far?
A: As far as we are concerned, the macro picture looks good. The micro numbers look good and more importantly we have got liquidity on our side and domestic flows will continue to be good and I also believe that foreign inflows into the country will continue to be strong. So I think I won’t be surprised if we see a new high on this market in the next one year. I am really not sure where we will be in December but I think we will see a new high in the next one year.

Source: http://www.moneycontrol.com/news/mf-interview/mkt-may-make-fresh-highsa-year-axis-amc_428184.html

More Mutual Funds line up to trade on NSE

No clarity yet on brokerage fee, securities transation tax yet.

At least 10 domestic mutual funds (MFs) would list their schemes within a week on the National Stock Exchange’s (NSE’s) Mutual Fund Services Platform, which was launched on Monday.
UTI became the first MF to list its scheme, which got more than 300 applications worth around Rs 75 lakh.
The platform will enable investors with demat accounts to buy MF units on the exchange. UTI Asset Management Company Chairman and Managing Director, UK Sinha, said, “The tie-up will be an additional facility provided to investors and will work along with the existing distribution network.”
NSE has over 200,000 trading terminals spread across 1,500 towns and cities.
Securities and Exchange Board of India Chairman CB Bhave said, “The platform will benefit investors in a major way. Other stock exchanges and depository participants will launch the platform soon.”
Transactions on the platform will be processed on the same business day on which the investor’s funds are credited to the MF’s bank account. Investors also have the added advantage of obtaining the same day’s net asset value (before 3 pm).
In addition to online subscription and redemption, investors may apply for new fund offers and additional subscriptions. The facility will also enable switching of units.
No entry load will be charged for applications not routed through a broker or distributor but forwarded to MF houses online. There is no clarity on levy of brokerage and securities transaction tax. NSE officials declined comment on this.
NewsWire18 adds: However, NSE would not levy any fee on mutual fund transactions through brokers on its online platform for a few months, Managing Director Ravi Narain said on Monday.
India’s largest bourse also plans to offer systematic investment plans and liquid schemes on the platform, Narain said. Participants will be able to access the system from 9 am to 3 pm.
Meanwhile, five mutual funds, Birla Sun Life Mutual, ICICI Prudential Mutual, Fidelity Mutual, Reliance Mutual, and Tata Mutual, were in talks with NSE and NSDL for trading schemes on the platform, said NSDL Managing Director and Chief Executive Officer Gagan Rai.
NSDL, the only depositary participant roped in by NSE for its platform, would waive all depositary charges for the first few months, Rai said.
“We are still in the process of working out. But I can assure you that charges (after the first few months) will be much less than the normal depositary charges,” he said.

Source: http://www.business-standard.com/india/storypage.php?autono=378151

Geojit BNP Paribas launches MF Investments through NSE

Subsequent to Mr. C. B. Bhave, Chairman of Securities and Exchange Board of India (SEBI), inaugurating National Stock Exchange of India’s Mutual Funds Service System (MFSS), Geojit BNP Paribas Financial Services launched trading in UTI Mutual Funds through its countrywide network of offices.
Speaking on the launch of this service, Mr. C. J. George, Managing Director, Geojit BNP Paribas said, “It is our constant endeavour to provide our clients with new value added services. We will leverage our well developed infrastructure and distribution channels to reach this service to our expanding client base of over 500,000. While we are starting with UTI MF now, most of the funds will soon be available for investment through this route.”
MFSS has been launched with trade permitted initially only in select schemes of UTI Mutual Fund. Clients of Geojit BNP Paribas can invest in or redeem mutual funds in such schemes through the fully automated on-line order collection system called NEAT-MFSS by contacting the nearest branch on all market days. Through this service, investing in mutual funds and redemption will become as simple as investing in the stock market.
“There will not be any comAmission charged from clients during the month of December 2009 to attract investors into this service model,” C.J. George added.

Source: http://www.moneycontrol.com/news/mf-news/geojit-bnp-paribas-launches-mf-investments-through-nse_428107.html

‘Indians have missed out on mkt opportunity’

The country’s equity markets seem to depict strong volatility. However, they remain among the top-performing zones globally. S A Narayan, managing director, Kotak Securities, spoke with Akash Joshi and Udita Lal of FE on the state of the markets and shape of things to come. Experts
So with the markets improving, what is the outlook at the moment?
It is much better obviously. However, I don’t think there’s strong retail participation. I think Indians have missed out. Indians have made money only on stocks not sold. Not many have bought with conviction or built portfolio. So, you see the mutual fund net collections in the Indian scenario are very low. As the markets keep going up, we seem to be booking profit. Indian investors are very cautious. More seems to be driven by easy money available internationally. The only place it has been sticky is insurance.
Do you see international liquidity drying up in the near future?
I think there is time for it to dry up. The next big question the world will be asking is how do we get out of this. But I don’t think it has come to a point where anybody is comfortable with that. Will it be a concerted strategy by all developed economies or will each do it the way it feels is right because when the countries acted together on infusing liquidity, all of them had the same problem.
But that cannot be said for all of them coming out may be in the same pace or manner. Australia was the first one to start showing signs of recovery. I think India will start soon. But for us, it will be relevant when the US and Europe show signs of recovery. I think in three or four months, I see nothing being done. All of them still don’t want to take a call now. Obviously, it bothers them that a new asset bubble is coming in shape globally both in the commodity and equity side because of easy availability of liquidity. Regulators are worried because every bubble cracks in a big way.
There are a lot of traders still complaining about cost of compliance and the cost of trading, especially with the STT. Is that really so impairing?
STT is of course costly but from where we went to where we are today, you obviously increased STT and we made it, one because it is deductible from the tax to have an expense and two it is more affecting those who are arbitraged. Whereas, if I am an FII, it makes no difference to me.
The locals are at a disadvantage against FIIs. So, to that extent, it is unfair to make locals at par with FIIs when it is allowed. An arbitrage opportunity which could be exciting for an FII cannot be hit by a local because his cost structure is much higher. Third, obviously FIIs enjoy added advantage of being able to raise money at almost zero percent. So, if there is an arbitrage in the market at say 6 or 7%, an FII will definitely hit and be happy with it because it makes 4 to 5% spread but the locals cannot. So, to that extent it is not fair on the locals.
Where do you see the market headed in 2010?
Up to March, we will be reasonably okay. It will continue to focus on pullback of liquidity. I believe volatility will be very high in 2010.
From the Indian point of view, the worry is whether oil prices will be around $80 per barrel or will it touch the $100 range. Of course, we have a little bit advantage here because the rupee is strengthening over the dollar. But if the oil substantiates at the same level, it might create a problem.
By April-May-June you will be more or less clear on the US recovery story. The clarity will help because if there is recovery, technically the world starts authorising new consumer base to start selling. Recovery in Europe will take more time. What we are looking for is the exact time the excess liquidity is absorbed back by the markets.

Source:http://www.financialexpress.com/news/indians-have-missed-out-on-mkt-opportunity/548170/0