Heavy Load on Mutual Funds

Mutual funds in India have a tall hurdle to cross. The Securities Exchange Board of India (SEBI) wants the net worth of companies that manage mutual funds to be five times larger than it currently is. Recently, the sub-group headed by Roopa Kudva, managing director and chief executive officer of credit rating agency CRISIL, has recommended that the net worth requirements of asset management companies (AMCs) be increased to Rs. 50 crore from Rs. 10 crore. According to the committee, this will signal the AMC’s seriousness of intent in setting up the business, and also bear the AMCs initial losses without facing serious financial strain.

The Issue

Naturally, this has not gone down well with AMCs having a low capital base. They fear these norms favour big mutual funds that are part of the committee and can easily meet the net worth requirement of Rs. 50 crore. The SEBI group, on its part, feels that a net worth requirement of Rs. 50 crore is just 0.33 percent of Rs. 15,000 crore, which is the average capital under management for Indian mutual funds. Hence, although the new norms will hurt small players, this number is not high enough to deter serious contenders.

Our Take

An AMC is not like a bank. A bank is in the business of taking and lending deposits. If the borrowers default then the bank has an obligation towards the deposit holders. An AMC works differently. It simply collects funds and buys stocks. If people want their money back, it can sell the stock and return the money. Investors in mutual funds know that the value of their investment can decrease. One key logic behind the SEBI proposal is that a higher net worth will enable AMCs to be better placed to obtain liquidity lines from banks, in case they suddenly need to draw cash to meet investor redemptions. This may not be the case.

At Rs. 50 crore net worth, the mutual fund will perhaps get a Rs. 80 crore short term credit line from the banks. In reality, this is of very little use because a fund might have raised and deployed anywhere between Rs. 500 to Rs. 1,000 crore in the market. The recent crisis has shown that even the best run bank with the highest capital reserves cannot withstand a run without government guarantees. If customers lose confidence in a mutual fund scheme, even a net worth of Rs. 100 crore will be insufficient to stem the tide of customer redemptions. The cost of starting and managing an AMC is very low worldwide. The SEBI sub-group appointed for this task itself states that in the USA, an AMC can be started at as low as $100,000. In the Euro Zone, AMC capital is linked to assets under management.

Indian AMCs need a healthy environment to compete. Competition should be encouraged by allowing all kinds of players to get into the AMC market, else it will lead to a situation where three to four AMCs will dominate the entire mutual fund market and this will be a huge disservice to the investors. Thus, instead of concentrating on net worth criteria for AMCs, it is important to concentrate on investor protection and risk management systems without hurting the spirit of competition.

Source: http://business.in.com/article/resolution/heavy-load-on-mutual-funds/14182/1

Good, but don't go overboard

With the government planning to raise Rs 40,000 crore through divestment in public sector units (PSUs), retail investors have a good investment avenue. No wonder mutual funds want to attract them by launching PSU schemes.

When SBI Mutual Fund launched its PSU fund last month, the company’s Managing Director and CEO Achal Kumar Gupta said: “PSUs have tremendous growth potential. They have helped in creating a diversified industrial base for the country.”

SBI Mutual Fund’s new fund offer, which closes on June 14, will invest in stocks of domestic public sector undertakings and in debt and money market instruments issued by these companies.

UTI Mutual Fund, Religare Mutual Fund and Sundaram BNP Paribas Mutual Fund had launched similar funds last year.

Returns from these funds have been quite impressive. As on June 7, UTI Top 100 Funds had given 9 per cent returns in the last one year, against 11 per cent returns from the Bombay Stock Exchange (BSE) Sensex. This is even better than BSE’s PSU Index, which returned 7.41 per cent in the period.

Others like Religare PSU Equity Fund returned 3.38 and 3.27 per cent over three months and six months, respectively. Sundaram PSU Opportunities gave 0.5 per cent over three months.

There is a strong case for investing in PSU funds. V V Anand, executive vice-president, SBI Mutual Fund, said: “The PSU Index has outperformed the Sensex in the last 10 years. Therefore, we believe there is immense unlocked potential in these companies.” In the last 10 years, the PSU Index has returned over 805 per cent, while the Sensex has given almost 251 per cent returns.

Experts believe that given the scale, the size and the reasonable valuation of most PSUs, holding these stocks can be a good bet from a risk-reward perspective.

The PSU theme looks promising on the back of strong fundamentals of these companies, most being leaders in their sectors. During the economic slowdown, they showed greater resilience than their private sector counterparts.

The new norm of minimum 25 per cent public holding in all listed companies will help investors get a good value for money and choice of companies, say experts.

However, one should avoid investing directly in these stocks if he/she lacks the knowledge of the stock market. It is advisable to take the mutual fund route in such a case.

However, all PSU funds in the market do not have a proven track record, for they have been around for hardly three to six months.

Mukesh Dedhia, director, Ghalla Bhansali Stock Brokers, said: “Concentrate on equity diversified funds as most of these invest in government companies.”

For instance, HDFC Top 200 holds PSU heavyweights like State Bank of India (SBI), Punjab National Bank, GAIL, NTPC, ONGC and Oil India. Similarly, Reliance Regular Savings Equity Growth invests in SBI, ONGC, GAIL, HPCL, Indian Bank and Hindalco.

As an investor, if you have good equity funds, there is a strong likelihood that you already have exposure to most of these stocks. But, if you want to invest in the theme, it should not account for more than 20 per cent of your equity portfolio.

“Such funds are not meant for small portfolios (who invest up to Rs 10,000 by way of systematic investment plans), but help the bigger ones to diversify further,” said Pankaj Mathpal, a certified financial planner.

Source: http://www.business-standard.com/india/news/gooddon/t-go-overboard/398221/