Investing via MFs is still thesafe bet: SMC Investments

Even as high value blue chips are seeking newer lows, is it time for retail investors to shift the investment focus from mutual fund to direct equity investment at least for those who have some serious exposure to equity markets?

The reasons for this are many. The returns from mutual fund investments have remained stagnant, and in many cases negative, for the past two years and even dividend payouts from them has come down, partly because of SEBI diktat and partly because of their poor show.

MFs & Value picks

With many market intermediaries such as ICICIdirect.com and SBICapsec.com, introducing Equity SIPs, it is possible for investors to spread their direct stock investment risks and could cast their net wider to pick up a bigger basket of blue chips.

The advantage of such a strategy is that if and when the markets recover, the return from stocks could beat the returns from MF schemes.However, Mr D.K. Aggarwal, CMD, SMC Investments and Advisors Ltd, said that investors should utilise the expertise and experience of the fund managers.

In a falling market, generally investors tend to buy cheaply priced stocks (i.e. stocks which have fallen substantially) than the under-valued stocks and thus they are not able to reap the benefit of buying value stocks in a falling market.

But fund managers of mutual funds have the right acumen in value picks.

Adverting to the risk involved in the two approaches, and how the investors could guard themselves against any steep erosion in investment value, he said that though there was ‘extra cost attached in the first approach, where one buys stocks by putting money into equity MFs', the same is more than compensated by the value that a fund manager brings while picking stocks and also timing the entry and exit in stocks.

At the same time, if investors pick the stock, ‘there are very high chances of getting wrong in stock selection and any one mistake can erode the money to large extent'.

When pointed out that many market intermediaries have started equity SIPs, he said, under equity SIP, investment into equities were made at regular intervals in instalments which ensured that one can benefit even if market further slides down and the average buying price is normally lower.

New investors could better adopt the SIP route. The main advantage of it was that if the market went down, their next investment will buy more stocks and when the market goes up, investment will increase in value.

PE and investment

On whether the lower market PE was a credible guide for making investments, he said market PE ‘no doubt has come down to a level of around 16-17'. However, even now ‘these PE levels are higher than the last 5 years' average PE levels'.

Investing at a PE of around 13 with a long-term horizon in the Indian context seems to be a safe bet. However, lower market PE is no guarantee that the performance will be better in near future, he cautioned.

What is his advice to investors to distribute their investments in terms of percentage — directly in stocks and in MF schemes? Mr Aggarwal said, ”We advise at this juncture that 25 per cent of investments can be put into equities either directly or through mutual funds.”

Source: http://www.thehindubusinessline.com/markets/stock-markets/article2383625.ece

MF chiefs for less micro regulation

Lack of penetration, reduction in distributor base and swift changes in regulations, besides adverse market conditions continue to hurt the mutual fund industry this year.

Speaking at the Business Standard Fund Cafe, top CEOs of the asset management industry were unanimous that the problems they were facing were largely due to the lack of financial literacy. As a result, the industry was paying more attention to increasing the penetration to attract long-term stable fund inflows. “While people keep on talking about high savings rate in India, investment through stocks or mutual funds is not so high,” said Sundeep Sikka, CEO of Reliance Mutual Fund.

While all CEOs agreed that regulations set by the Securities and Exchange Board of India (Sebi) had been benefitting investors, the issue was the pace at which those were being changed. “When there are too many changes too quickly, one does not get the desired results. There are around 16 million demat accounts in India. However, investors investing in MFs are more than those investing directly into equities. The cost that a customer pays is a regulated cost,” explained Franklin Templeton Investments President Harshendu Bindal.

According to the CEOs, providing more information to investors does not mean that they understand it more. Too much of information, at times, could end up confusing investors. “Today, the industry discloses more than anyone else. I believe too much of information paralyses the mind,” added Sikka.

“I am not sure if that is good for the industry,” agreed IDFC Mutual Fund MD & CEO Naval Bir Kumar, adding the Indian mutual fund industry was the most micro-regulated industry in the world. “Even the font size of the advertisements has been prescribed,” added Kumar.

Though industry players admitted things had settled down considerably after the entry-load ban, the distributor base and, as a result, growth in the investor base, had suffered.

The recent circular from the regulator on allowing distributors to charge transaction fees of Rs 100-150 on a minimum investment of Rs 10,000 has also received a lukewarm response. “It is not that the load regime is coming back. It’s a baby step to ensure some costs are recovered,” said Birla Sun Life Mutual Fund CEO A Balasubramanian. Sikka felt the fee would help in penetration of mutual fund products in smaller cities and towns.

On top of it, India’s poor financial literacy poses the biggest challenge for the growth of the mutual fund industry. According to them, inculcating better investment habits and spreading awareness about mutual funds, among other financial products, hold the key to the growth of funds in the country. “There is no other way by which retail investors can participate in equities but mutual funds,” says Kotak Mutual Fund CEO Sandesh Kirkire.

According to him, the issue is how to bring long-term funds and address financial illiteracy. “We are reasonably bullish on the future of the industry,” he added. Currently, less than four per cent of India’s population invests in MFs.

“There cannot be any short-cut to reach out to the under-penetrated market but to create financial literacy and spread knowledge about what a mutual fund is,” added Sikka. For this, the industry is conducting around 500 investor awareness programmes every month across the country.

Fund managers are perturbed by the fact that investors tend to take MF only as investments in equities. The industry sees that in the near term selling debt funds can be a challenge for distributors.

But there is hope. ICICI Prudential Mutual Fund CEO Nimesh Shah said: “Convincing distributors that they should be in all asset classes is now becoming easier.”

Source: http://www.business-standard.com/india/news/mf-chiefs-for-less-micro-regulation/446808/

P.V.K Mohan, Head – Equity, Principal Mutual Fund

Mr. P.V.K. Mohan has been appointed as Senior Fund Manager–Equity of Principal Mutual Fund on 21st May, 2010.An Electrical Engineering Graduate from REC, Calicut and a Post Graduate from IIM Bangalore, Mr. Mohan has over 16 years experience in equity research and fund management. In his previous assignments he has worked with IL&FS and IL&FS Mutual Fund, DSP BlackRock Investment Managers and ICICI Prudential Asset Management Company.

Interview

1) What is the likely impact of US downgrading on India? To what extent will the ongoing global crisis hit Indian economy?

The impact of US credit downgrading is more sentimental in the near term as it was not totally unexpected. The world markets have reacted adversely to this event, probably even more so as this would bring under scanner several other economies with large deficits. In case of India, there are concerns on the large centre and state deficits, but much depends upon how Government takes measures and policy reforms in order to address this. Exports which have witnessed strong growth in recent months would probably slow down. Overall, Indian economy is likely to witness a slower growth of around 7.5%, but this would still be healthy relative to the low or no growth in other parts of the world.

2) What is your view on the inflation levels? What are your expectations on RBIs stance of hiking repo rate?

Inflation is quite high at over 9% despite RBI taking steps to tame it. We could see some moderation in inflation in the coming months because of base effect and as the slowdown gathers momentum. We expect another rate hike of around 25 bps by RBI in the September review, but much also depends upon the state of the global economy at that point of time.

3)What are the medium and long term strategies that you adopt in the current market scenario? Could you throw some light on the structure of your research team?

We have a team of four analysts who are sector specialists. Our approach is focused on fundamentals, wherein we look for sectors and within that, companies with good growth prospects over the next 2-3 years. Generally we prefer companies with a dominant presence within their sectors, with proven management, financial stability and available at attractive valuations relative to their peers, the market and in relation to their growth prospects.

4) For equity schemes, what are kind of risk management measures in place at the AMC?

We have defined limits for sector and stock exposure compared to that in the benchmark index. We do however invest in several companies outside the benchmark index. This ensures a more balanced portfolio construction.

5)Which sectors you are bullish on?

Some of the sectors we like include Energy, Telecom, Financials (post recent correction), Consumer, Pharmaceuticals. We also see some good bottom up opportunities in Auto & Auto Ancillaries, Industrials.

6) What will be your advice to retail investors in the present scenario?

An investor can enter the market at the current levels with a view of 12 months or more to fetch better results. There may be some volatility and corrections in the near term, but the risk-reward seems favourable at this juncture.

Source: http://www.mutualfundsindia.com/fm_pvk.asp