Manavendra Prasad: Mutual funds are still the best bet

Though there are more than 3,000 mutual fund schemes, these are well classified across the risk-return spectrum

In an article “Who cares for mutual funds” (Business Standard, September 1), Subir Roy takes what participants in the stock markets call a contra view — an approach contrary to popular belief and understanding to get the best results for the investor.

Let us look at what Mr Roy says while restricting himself to discussing investments in equity-focused schemes.

There are more than 3,000 mutual fund schemes compared to some 500 actively traded shares and, therefore, it is difficult to select the right mutual fund scheme. If one can research mutual fund schemes, it is possible to research stocks too.

The questions are: what is the right tenure of the investment and how does the churn get affected by the performance of the scheme? The performance of the scheme can be affected by a change in fund managers. Choosing stocks of the 20 best-known companies and holding them for a long term are more likely to give handsome returns compared to returns from mutual funds.

This is a crude way of looking at mutual funds, which is arguably the simplest, cheapest and the most regulated way of creating wealth. Let us see why.

Researching mutual funds is a very simple thing: pick up five or six of the most well-known fund houses and you can be confident of robust system and processes with well-defined products with a consistent performance.

Compare this with picking stocks: it involves numerous variables from understanding financial ratios, to the business franchise, to the global macroeconomic environment. It is not possible for a lay investor do so. After all, even equity research analysts specialise in a limited number of adjacent industries.

Though there are more than 3,000 mutual fund schemes, these are well classified across the risk-return spectrum. Choosing two or three different schemes in each category from the well-known fund houses is far simpler than choosing the top 20 companies that will best negotiate vagaries of economic change over the next five to seven years. Unlike stocks, good mutual fund schemes come at no extra cost. On the contrary, they have the wherewithal to keep costs in check.

Organisations with well-established processes, which India’s better-known fund houses can now claim to have, do not let their investment performance suffer because of a change in personnel. Such organisations neither create nor promote rock-star fund managers.

Investing in index funds is a passive way of participating in the market and they are judged by how closely they track the respective index. However, the better performing schemes have for the larger part of the last few years outperformed the market. Therefore, passive investments are yet to become attractive in the domestic markets.

A lay investor should arrive at an asset allocation for her investment portfolio depending on her risk profile and returns requirement. Some model asset allocations suggest a 70 per cent exposure to equity and the rest to debt for an investor in her late twenties or early thirties. The allocation to equities reduces progressively as one grows old.

The investor should review her asset allocation once every quarter and rebalance her portfolio to the model asset allocation. This approach helps book profits and enables higher investments when equity markets are doing badly. This discipline frees one of the decisions of the tenure of investments and insulates one from any mis-selling.

Fortunately, the Indian mutual fund industry has evolved greatly in the last few years and the regulator has pushed it to become more transparent and investor-friendly. This ensures that many investor misgivings are addressed. Though there have been quite a few cases of miss-selling, expected regulations and guidelines for mutual fund advisors will largely address this issue.

Investment is a science, it cannot be done on the basis of one’s perceptions of companies or the economic environment. It needs expert advice and holding directly held securities in ones portfolio is for the high-net-worth individuals who can afford it.

For lay investors, mutual funds are the best vehicle to participate in the capital markets. Mutual funds bring with them the advantages of professional management. They offer high liquidity and reduced costs because of economies of scale and most importantly, reduce risk through adequate diversification. For small investors, a systematic investment plan while sticking to the discipline of reviewing and realigning the asset allocation is the best way to create wealth.

Source: http://www.business-standard.com/india/storypage.php?autono=409893

Companies offer more fixed income options for retail investors

If you are scouting for safe investment options, here's some good news. The universe of fixed income options, which was restricted mainly to bank deposits for quite some time, is set to expand, with better rates on offer as well.

Tight liquidity conditions are prompting more companies to raise public deposits from retail investors. Mutual fund houses, seeing an opportunity in the current regime of rising interest rates, are rolling out a slew of fixed maturity plans (FMPs). And topping this off, financial institutions such as IDFC, REC and Life Insurance Corporation are preparing to make public offers of 10-year ‘infrastructure' bonds which offer tax benefits.

More FD windows

With their expansion plans taking off again, more Indian companies are tapping the fixed deposit market to raise funds from retail investors. Companies from the realty and infrastructure space with high fund requirements such as Jaypee Infratech, Jaiprakash Associates, Ansal Properties and Unitech have been inviting retail deposits at high interest rates that start from 10-10.5 per cent for one year and go up to 11.50-12.50 per cent for a three year term. Large deposit takers such as Tata Motors, HUDCO, Jaiprakash Associates and Sundaram Finance, in fact, saw a doubling of their fixed deposit outstanding (Rs 8,000 crore) in 2009-10, compared to the preceding year.

Mr Anil Chopra, Group CEO for Bajaj Capital, explains: “Fixed deposits help companies manage liquidity and working capital requirements. It is relatively simpler than borrowing from banks and is unsecured. More companies are tapping the fixed deposit route; however, not all are blue-chip companies.”

Traditional deposit-takers such as Fenner India, Wheels India and Sundaram Industries, too, have re-opened deposit windows, offering more moderate rates of 7.5-8 per cent for 1-3 years.

FMPs popular again

Another debt category that is seeing a lot of action is FMPs – closed end debt funds that invest in short term instruments such as commercial paper, bank certificates of deposit and company bonds for fixed terms of 3 months to one year. Mutual funds have mopped up Rs 14,600 crore through 60 such launches since June.

Attractive yields of 7-8 per cent on short term debt, tax efficiency and top-notch credit quality are the reasons why FMPs are proving popular with affluent retail investors who have surpluses to park, says fund managers.

“In the last three months, since June, yields on three-month paper have gone up from about 4.50 per cent to nearly 7 per cent. Yields on one-year paper have gone up from about 6 per cent to 8 per cent. The hike in repo and reverse repo rates and the fact that we have moved from a surplus to a deficit liquidity situation, has attracted investors to FMPs”, says Mr Dhawal Dalal, Senior Vice-President and Head- Fixed Income, DSP BlackRock Mutual Fund.

Mr R. Sivakumar, Head of Fixed Income at Axis Mutual Fund, points out that investors who seek predictability with diversification come to FMPs.

“FMPs offer better post-tax yields than bank deposits. They also allow you to invest in a diversified pool of corporate issuers rather than just one issuer. The other factor is that the kind of companies that have access to the bond or commercial paper markets are very different in credit quality from the ones that borrow in the deposit market; the former are typically rated AAA or P1+”.

Infrastructure bonds

Then, for investors who would like to take advantage of additional tax exemptions (up to Rs 20,000) under section 80CCF of the Income-Tax act, there is the new breed of infrastructure bonds. IDFC has plans to raise over Rs 3,400 crore through its 10-year infrastructure bond issue which opened last week. The bonds offer a coupon rate of 8 per cent with a 10-year lock in period. For investors who would like a ‘buyback' option after five years, the interest rate would be 7.5 per cent.

Source: http://www.thehindubusinessline.com/2010/10/04/stories/2010100451830100.htm

MFs' assets under management up 4% in Sept

The average Assets Under Management (AUM) of the mutual fund industry saw a nearly 4 per cent increase in September due to the rally in the market but redemptions continue to plague the industry, say experts.

The monthly AUM data for September, posted on the Association of Mutual Funds of India's Web site, may have gone up due to an increase in the Net Asset Values and not necessarily because of an increase in investor numbers, they say.

The AUM of the industry for September stood at Rs 7.12 lakh crore, up from Rs 6.87 lakh crore in August.

“Overall, the markets have done really well and that is reflected in the data. The global markets are stabilising and there have been fresh inflows, which will continue to come. The investors are also getting confident.

“However, redemptions still continue to exist and there could be some reason for concern there. But going forward, we are expecting some positive trends in the industry,” said Mr Gopal Agrawal, Deputy C.I.O and Head – Equity, Mirae Asset Global Investments (India) Pvt Ltd.

Liquidity situation

Experts have noted an improvement in the liquidity situation in the markets which has led to better numbers in September.

“The reason for increase in AUM this month has been two-fold. Compared to August, September saw a rise in the money market funds and also an increase in the mark-to-market values in equity funds,” said Mr Akshay Gupta, Chief Executive Officer, Peerless Funds Management Company Ltd.

As far as redemptions are concerned, there will be no respite from it, say analysts. “But these redemptions are now market-led,” said Mr Gupta.

“Valuations in the market are very high. So, those who had invested in 2007-08 and had seen a massive drop of 50-80 per cent in 2008-09, will now want to get out of the market. These redemptions are more of opportunist selling and profit-booking,” he added.

SIP route

While high redemptions and net outflows on the equity side continue to be cause for anxiety, there has been good news from the Systematic Investment Plan (SIP) side.

“The retail participation is seen happening here. At our retail counters, we have experienced high investor interest in the SIP route,” said Mr K. Venkitesh, National Head – Distribution, Geojit Financial Services.

Looking forward, industry experts say that AUMs will continue to increase, albeit in small doses, and that there will not be in any dramatic increase, as was experienced earlier.

The credit off take, all-time high interest rates and high market valuations have ensured that there will be no dramatic increase either in the debt/fixed income or the equity side of the industry, they said.

Source: http://www.thehindubusinessline.com/2010/10/03/stories/2010100352030300.htm

AIG to sell India MF biz

US insurer American International Group Inc., or AIG, is in talks with potential buyers to sell its mutual fund business in India, valuing the unit at 4-5% of the assets it has under management, according to three officials familiar with the development.

Bank of America Merrill-Lynch has been appointed as the investment banker to broker a sale of AIG Global Investment Group Mutual Fund, which has Rs1,019.77 crore of assets under management (AUM), said the three officials.

All three officials declined to be identified. Two of them are with companies that are in the fray to buy the mutual fund.

US insurer American International Group Inc., or AIG, is in talks with potential buyers to sell its mutual fund business in India, valuing the unit at 4-5% of the assets it has under management, according to three officials familiar with the development.

Bank of America Merrill-Lynch has been appointed as the investment banker to broker a sale of AIG Global Investment Group Mutual Fund, which has Rs1,019.77 crore of assets under management (AUM), said the three officials.

All three officials declined to be identified. Two of them are with companies that are in the fray to buy the mutual fund.

Source: http://www.livemint.com/2010/10/03235320/AIG-to-sell-India-MF-biz.html?h=A1

Sebi says no crisis in mutual funds; industry agrees

The market regulator said the mutual fund industry was doing fine and industry representatives agreed. That was the overriding theme at the Business Standard Fund Café, organised here today.

K N Vaidyanathan, executive director of the Securities and Exchange Board of India, who was the chief guest, said the average of assets under management (AUM) reached a record level in 2009-10. Referring to the perception that equity AUMs were doing badly, Vaidyanathan said these actually went up to Rs 177,000 crore in the year from Rs 150,000 crore in 2008-09. Of every four asset management companies, three made profits in the period.

“The regulator’s focus is on investors, nobody else,” he said. Defending Sebi’s decision to ban entry load, Vaidyanathan said distributors were gaining at the expense of investors. The top 10 distributors cornered around 30 per cent of the commissions and they earned profits which were 25 times what the industry as a whole generated in 2008.

On the general criticism about Sebi’s tough measures, he quipped that the man who first said the world is round was beheaded.

Speaking on ‘Mutual Funds: the strategies for survival’, he complimented the industry for “standing like a man” during the slowdown of the 2008 financial crisis. Vaidyanathan said the industry should now concentrate on building trust, scale (“few products, but real big ones”) and infrastructure in terms of reach and distribution. “The cost of investment in the secondary market is less than half basis points, compared to 8 basis points in the mutual fund industry. That’s 16 times more expensive,: he said.

The industry agreed with Sebi’s views that almost all was well and that mutual funds were doing well. Sundeep Sikka, CEO of Reliance Capital Asset Management Company, said: “Direction is important and not speed. Fifteen months is a short period to adjust to regulatory changes.”

Sandeep Dasgupta, CEO, Bharti AXA Investment Managers, felt the industry needed to build sticky assets so that it could serve investors better. “We have to gain investor confidence,” he added.

While there was consensus that the new guidelines would strengthen the industry in the long run, some felt there was a need to take another look at some of these. “The regulator should take a relook at some regulations to see if there is a need for some course correction,” said A Balasubramanian, CEO of Birla Sun Life AMC.

Rajan Mehta, executive director with Benchmark Asset Management Company, said there were ways of reaching out to the masses through the exchange platform and offering low cost services.

Source: http://www.business-standard.com/india/news/sebi-says-no-crisis-in-mutual-funds-industry-agrees/409841/