Q&A: Nimesh Shah, MD & CEO, ICICI Prudential AMC

Look at sectors which are underpriced

With the domestic equity market close to its earlier peak, fund managers are cautious. Some sectors have outperformed the benchmark indices while others are still trading at lower valuations. In an interview with Mehul Shah and Chandan KK, ICICI Prudential AMC’s Managing Director and CEO Nimesh Shah says investors should avoid sectors which have already rallied and focus on spaces that are still underpriced. Edited excerpts:

What is the mood among retail investors?
Retail investors have gone through the entire cycle of ups and downs in the last three years and that too in a smart manner. I am quite impressed by the way they have behaved in mutual funds. They were not the first one to redeem when the markets crashed. Rather, they showed a good approach by waiting till the markets turned around.

What should retail investors keep in mind while selecting a mutual fund scheme?

One should not look beyond three to four categories, namely largecap, midcap, flexicap categories. Then, there are sector-specific funds. Historically, retail customers come in a particular sector when that has already rallied. An investor should be able to understand which sector would do well and should not look at those that have already outperformed.

Your infrastructure fund has completed five years. Is it a good time to invest in these kind of funds?
Between the last peak and now, infrastructure funds have not done well compared with other funds. May be it is the right time to pick funds in the infrastructure space. India has just started investing in the infrastructure sector. The country is nowhere near the world’s scale. This sector has not done well over the last three years, but the growth in the economy has continued. So, companies in this space have to grow. This sector is also underpriced as stocks have not appreciated much.

How is the profitability on the retail equity business front with the entry load ban?
We are scale players and have Rs 16,000 crore assets under management (AUM) in the retail equity business. To a certain extent, the profitability has got affected, but I do not expect all businesses to make money every quarter. This is a business we want to invest in and want to grow over a period of time, no matter whether I make money or not in a quarter or a year. Apart from this, our institutional and portfolio businesses are making reasonable profits. The only challenge is the retail equity business.

With debt valuation norms coming into force, how has the business changed?
What the regulator has done is a great risk mitigation thing for sponsors, investors and companies. For sponsors, this is the best thing from the risk adjustment point of view, as their risk has gone down considerably. With the liquid funds of less than 90-day duration and the rest of the portfolio being mark-to-market, the industry should go for a lesser duration. Moreover, for asset management companies, it will become a more logical business to run.

Are you considering no-exit load for equity schemes?
I am against removing the exit load. We do not want speculators to come into mutual funds. I want investors. The exit load to a certain extent ensures that if an investor comes in, he is conscious of the fact that he has to stay. I would rather have exit loads, so that there is a slight deterrence. We believe an investor can make money in equity if he stays for a long time.

Source: http://www.business-standard.com/india/news/qa-nimesh-shah-mdceo-icici-prudential-amc/411168/

It’s time to add value to services

In recent times, with the objective of ensuring full transparency, both the Sebi and Irda have forced the hands of the asset management and insurance companies, respectively, to overhaul product pricing, and in many cases, the products themselves

The wealth management industry in India has truly gone through a paradigm shift in the last one year or so. Till the shift came in, common practices of entry load structure and exit load compulsions for mutual funds, charge structures for unit-linked insurance plans (Ulips) were borne by the customer. A portion of these load structures and charges were given as commission to banks, distributors and financial institutions. The customer was being made to pay a charge that should have been ideally given by the product manufacturer to his partner.

Positive changes

In recent times, with the objective of ensuring full transparency, both the Securities and Exchange Board of India (Sebi) and Insurance Regulatory and Development Authority (Irda) have forced the hands of the asset management and insurance companies, respectively, to overhaul product pricing, and in many cases, the products themselves.

The first change was initiated in August 2009 by Sebi, abolishing the entry load structure for all equity mutual funds. A more recent change was pushed through by Irda in September 2010, bringing in a new charge structure for Ulips. Both the regulators have ensured that changes are to the benefit of the end user. This is clearly a welcome change. As a distributor of third-party investment and insurance products, I know that the new products to be launched will be even more customer-friendly.

As for the existing ones, customers are already benefiting from the simplicity of the load structure. Another key benefit of these new initiatives will be from the client’s point of view. Clients will now be more aware of the structure of these products and the specific benefits that would accrue to them.

The distributor’s role here is also huge and I know for certain that the time and effort spent on educating the client on the product benefits is a lot more now. For instance, product illustrations adopted by insurance companies are becoming far more comprehensive.

The way ahead for wealth management industry

Business models have evolved and shall continue to evolve over time. Often changes, of the kind now seen, act as triggers. In the case of the wealth management industry, most banks are now adopting a fee-based model charged on advisory instead of pure product-driven distribution strategies. From the client’s perspective, they will pay a fee to the distributor only if they see value in the overall offer that they buy into.

Overall planning: This will change the way products are sold to clients in the future. The role for a pure “transacting intermediary” will shrink. The intermediaries, in order to command attention from clients, will instead have to move towards an overall wealth management approach that involves financial planning and client asset allocation leading up to need-based sale of suitable investment or insurance products. Effective education of product benefits and matching it to the requirements of the client will be followed as a standard practice.

Customizing products and value addition: Banks and wealth management firms are now evolving the manner in which they sell an investment proposition to their clients. Providing customized and comprehensive investment solutions, focusing on technology and increasing convenience and analytical support will be the de rigueur composition of all banks and wealth management firms. They will now have to increasingly ensure that clients recognize the value-add in their services in order to willingly obtain fee from them.

New role of relationship manager: At the core of any wealth management proposition for a bank is the relationship manager. In the future, the role of an relationship manager will change; new regulations acting as the trigger here too. In short, banks will have to evolve into becoming a one-stop total solutions provider to their clients.

Source: http://www.livemint.com/2010/10/11230820/It8217s-time-to-add-value-t.html?h=B

Longer stay in India to increase NRIs' tax liability

Domestic households savings contribute significantly to India’s overall domestic savings rate. The credit goes to the Indian tax laws to a certain extent, as they provide tax incentives to individuals to invest in some specified tax-saving instruments. Section 80C of the Income Tax Act (Act) provides for a deduction of `1 lakh in certain investments (tax saving instruments)/payments made during the year.

The various investments which are eligible for deductions under Section 80C are equity-linked savings schemes (ELSS) offered by LIC and mutual funds, unit-linked insurance plans (Ulips) for self and/or spouse, children, life insurance policies for self, and/or spouse, children, employees’ contribution to recognised provident funds (PF), approved super-annuation fund, contribution to public provident fund (PPF); deposits in post office schemes such as National Savings Certificate (NSC), Senior Citizen Savings Scheme (SCSS), if it applies and the post office five-year time deposits, term deposit with a scheduled bank for a period of at least five years, investments made in bonds issued by the National Bank for Agriculture and Rural Development (Nabard) and debentures issued by specified companies.

In addition to the above investments, the following payments also qualify for deduction under Section 80C: payment of tuition fees for full-time education in any Indian university, college, school, educational institution (available for any two children), and repayment of the principal portion of a housing loan.

Besides Section 80C, one can also make an investment up to `20,000 in specified infrastructure bonds to save tax. Further, an individual gets a deduction of up to `15,000 (`20,000 where the individual is a senior citizen) for the health insurance of self and his family. There is an additional deduction of `15,000 where the health insurance is taken for the parents (`20,000 where any of the parents is a senior citizen).

However, the situation may undergo dramatic changes after the Direct Taxes Code (DTC) comes into play. DTC, 2010, proposes to restrict the deduction of `1 lakh only to some approved fund(s)— such as an approved provident fund, pension fund, super-annuation fund, PPF among others. However, an additional deduction of `50,000 has been proposed to cover payments such as life insurance premiums (premium not to exceed 5% of sum insured), health insurance premiums and the tuition fee. That means an individual won’t get any tax incentives for existing tax-saving instruments other than those covered in the DTC.

Non-resident Indians (NRIs) visiting India, will need to be more vigilant, post the DTC regime. Under DTC, if their stay in India exceeds 60 days during a year and 365 days for the past four tax years, then they may be considered as residents of India. Currently, they become residents only when their stay exceeds 182 days. Once they become a resident, they may have to pay tax on their global income, if their stay in India for the past seven tax years exceeds 729 days and if they are residents in two out of the past 10 tax years. In a nutshell, NRIs run the risk of triggering worldwide taxation soon if they spend a significant time in India.

The DTC proposals relating to individual taxation have undergone significant change since the DTC was proposed in August 2009. One will really need to wait for the final bill, which will become operational from April 1, 2012.

Source: http://economictimes.indiatimes.com/personal-finance/tax-savers/tax-news/Longer-stay-in-India-to-increase-NRIs-tax-liability/articleshow/6733168.cms