Wednesday, April 18, 2012

Short-term income funds to get attractive, FMPs to lose sheen

The Reserve Bank of India’s move to cut interest rates is likely to make short-term income funds and dynamic bond funds more attractive. It will, however, take away a bit of sheen from fixed maturity plans (FMPs) — one of the most popular debt instruments preferred by rich investors when the interest rates are high. On Tuesday, yields of the 10-year government bonds slipped by about 10-12 basis points to 8.34% post the policy announcement. The yields for money market instruments, on the other hand, fell anywhere between 20 bps and 25 bps.

“With the rate reduction, liquidity conditions in the overnight market will improve. Hence, the yields of all near-maturity money market instruments will come off,” said Sujoy Das, head – fixed income, Religare MF.
According to Mahendra Jajoo, CIO, fixed income, Pramerica Asset Managers, the short term yields for money market instruments such as commercial papers and certificates of deposit are likely to come off by 50-100 basis points over the next couple of months. The reduction in short-term rates will benefit investors in short-term income funds. “We have been consistently recommending investors to look at the 1-3 year mid-maturity space given that interest rates are likely to fall. Investors with a moderate risk appetite will therefore merit from short-term funds and retail-focused regular savings funds,” said Chaitanya Pande, head - fixed income, ICICI Prudential AMC. Added Das: “Income funds with average maturity of about one year are likely to give superior returns.”

Another category of funds that is likely to do well is dynamic bond funds, said market participants. While interest rates seem to have peaked, it is difficult to determine when the next rate cut will be. Uncertainties with respect to inflation, global economy and currency movements are likely to persist. So, there is likely to be a fair amount of volatility in the money market, as well as government and corporate bond markets. Dynamic bond funds are well-suited to ride this volatility as they have a flexible duration and can invest in a mix of instruments, said industry observers. Dynamic bond funds are also ideal for those who don’t want to take a call on interest rate movements.

The reduction in interest rates is likely to make FMPs less popular. “FMPs will become slightly less attractive because of the steep rate cut but there will still be a market for these products given the high interest rates,” said Das. One-year FMPs that were giving returns of 10%-plus in March are now likely to fetch 9.5%, said market participants. Between October and March this year nearly 500 FMPs were launched by fund houses.

Source: http://www.financialexpress.com/news/shortterm-income-funds-to-get-attractive-fmps-to-lose-sheen/938035/0

RBI cuts repo rate by 50 bps; sees little room for more

The Reserve Bank of India (RBI) cut rates on Tuesday by an unexpectedly sharp 50 basis points to boost the sagging economy, but warned there was limited scope for more cuts, with inflation likely to remain elevated and growth on track to pick up, albeit modestly.

The RBI, which was tightening monetary policy long after central banks elsewhere began easing, lowered its policy repo rate to 8.00 percent, compared with expectations for a 25 basis point cut in a Reuters poll.
"RBI is indicating that there is a limit for further rate cut expectations, and I think they are pretty much done with further rate cuts this year," said Rajeev Malik, economist at CLSA in Singapore.

The RBI also warned that India's current account deficit, which widened to 4.3 percent of GDP in the December quarter, is "unsustainable" and will be difficult to finance given projections of lower capital flows to emerging markets in 2012.

The rupee has been under pressure as foreign investors worry about persistent inflation, a yawning current account gap and fiscal indiscipline on the part of New Delhi, prompting concern about the country's balance of payments.

Investors and companies cheered the rate cut, with bond yields and swap rates falling sharply, although the rally was capped by expectations for few further cuts in the near term. The BSE Sensex ended 1.2 percent higher.

Some RBI-watchers said Tuesday's move was risky given the potential for resurgent inflation.

"The RBI was clearly itchier to cut policy rates than expected, but the 50 bp cut may have been a bit too premature and aggressive, in our view. If that turns out to be the case, it could hurt RBI's credibility while doing little to raise growth on a sustained basis," HSBC economist Leif Eskesen wrote.

RBI Governor Duvvuri Subbarao said the deeper-than-forecast cut is intended to ensure that banks cut their lending rates soon. Indian banks have been reluctant to lower lending rates amid still-tight liquidity and high deposit costs.

The country's largest lender, State Bank of India (SBI.NS) said later on Tuesday that it would cut rates on some loans that have high interest rates, while ICICI Bank (ICBK.NS) said it would reduce deposit and lending rates. Neither were more specific.

Economists have in recent weeks been scaling back their rate cut forecasts. Nomura said it expects the RBI to hold off from cutting rates at its next reviews in June and July, and forecast just one more 25 bps rate cut in 2012. Citigroup expects just one more rate cut in the current fiscal year.

India's economy grew by 6.1 percent in the December quarter, its slowest in almost three years, but the central bank had been reluctant to begin cutting rates as inflation remained elevated.

Subbarao maintained a cautious view in his policy statement.

"It must be emphasised that the deviation of growth from its trend is modest. At the same time, upside risks to inflation persist. These considerations inherently limit the space for further reduction in policy rates," Subbarao said.

CAUTIOUS VIEW
The RBI raised rates 13 times between March 2010 and October 2011 as it struggled to contain price pressures, with headline inflation at one point accelerating into the double digits as the cost of fuel and food soared.

Headline wholesale price index eased slightly to 6.89 percent for March but was still above expectations, as a drop in manufacturing inflation was offset by a surge in food inflation, data showed on Monday.

On Tuesday, the RBI left unchanged the cash reserve ratio (CRR), the share of deposits that banks must hold with the central bank, at 4.75 percent, in line with expectations, after cutting it by 125 basis points since January to ease tight market liquidity.

Subbarao said liquidity conditions are moving towards normal after several months of acute shortages of cash in the banking system, but also said the RBI would take "appropriate and proactive" steps if needed to revive liquidity.

The central bank said its baseline expectation for gross domestic product growth in the fiscal year that ends in March 2013 is 7.3 percent, compared with an expected 6.9 percent in the just-completed year.
It expects headline inflation to end the year at 6.5 percent, with little deviation foreseen during the year.

BOTTLENECKS
Sluggish capital investment has exacerbated bottlenecks in the Indian economy, bringing down its capacity for non-inflationary growth to 7.5 percent, according to Subbarao, from 8.5 percent before the global financial crisis.

He reiterated the need for the government to cap its subsidy burden, which led to a bloating of the fiscal deficit in the recent fiscal year to 5.9 percent of GDP.

The weakened government has been unwilling to pass along higher global oil prices to end-users, but pressure on the fiscal deficit is expected to force it to do so.

"It is imperative for macroeconomic stability that administered prices of petroleum products are increased to reflect their true costs of production," Subbarao said.

Corporate India, dejected over government inaction that has thwarted capacity expansion, has long clamored for rate cuts.

Siddhartha Roy, economic adviser at the Tata Group, the software-to-steel conglomerate that is India's biggest business house, said Tuesday's rate cut is welcome but more is needed.

"First we need more rate cuts to the tune of around 150 basis points in order to make the real interest rates realistic. Then, the fiscal side needs to be controlled to prevent crowding out of the private sector and available liquidity is well distributed," he said.

Source: http://in.reuters.com/article/2012/04/17/rbi-rate-cut-repo-rate-crr-subbarao-gdp-idINDEE83G02Z20120417

No big hikes, bonus for mutual fund industry staff this year

Four CEO exits in a month, abysmal pay hikes, ban on bonuses and whispers of downsizing - the Indian mutual fund industry is going through one of its roughest patches in a decade.

Fund house managements are taking a hard look at slow AUM (asset under management) growth, scheme underperformance, low profits and rising costs.

Boards of trustees of several MFs are pushing for pay cuts, skipping bonuses, increasing variable component in salaries and forewarning employees of a possible "right-sizing".

According to industry sources, which include views from over half-a-dozen domestic fund houses, and a few leading HR consultants, the best and the biggest domestic fund houses are offering just about 9-12% increments to top performers. Bonus payouts, which are performance-linked, are being kept as low as 12-20% of salaries.

"There's little to reward employees this year," said the CEO of a bank-sponsored fund house.

March and April are important months for fund companies that follow a "two-year lap calendar". Fund houses strive hard to maintain high asset bases and 'NAV levels' in March as it becomes a reference point for the following year.

However, average AUM of the Indian fund industry fell over 2% to 6.64 lakh crore in the March quarter. Asset bases of fund houses like IDBI Mutual, JM Mutual, Kotak Mutual Fund, L&T Mutual and Religare Mutual, among others, dipped 10-35% during the three-month period starting January.

"The sales and marketing departments have not been able to bring in investors; fund managers have also not showcased any extraordinary performance," the person said.

A few corporate marketers have managed to bring in money; they'll be given a 25% bonus and small increment," added the person.

In the bullish years of 2006 and 2007, even mid-sized fund houses paid bonuses in the range of 40-50%; increments were in the range of 20-30% in those years, as per data sourced from various HR consultants.

"Increments and bonuses in asset management companies have fallen significantly this year. Fund houses have failed to grow their assets or put up good fund performance; it's not going to be a very rewarding time for fund professionals," said E Balaji, MD & CEO, Randstad India.

Boards of most fund houses are now trying to reduce their operational costs. Many of them are planning to "cut flab" in their marketing, sales and other support departments.

According to Balaji, most fund houses are only resorting to "selective replacement hiring" to fill up senior-level vacancies. "Mutual fund and investment banking have been the worst-hit trades in the financial services industry. We may see a downsizing this year. Cuts may come initially in out-of-flavour verticals like aviation, mining and renewable energy," said R Suresh of Stanton Chase.

In the last one year, brokerages made news for sacking employees and folding up bases in smaller towns as trading volumes shrank.

The crisis in mutual funds came to the fore with the exit of four CEOs in quick succession. Piyush Surana of Daiwa Asset Management, Arindam Ghosh who headed Mirae Mutual Fund, and Rajan Krishnan of Baroda Pioneer Mutual Fund have resigned in the past three weeks.

Sameer Kamdar, who was supposed to head ASK Asset Management, resigned last week after a two-year wait for Sebi approvals. "We're not sure what's making them leave... the real reasons could be pressure on performance, cost-cutting or differences in strategies," Balaji of Randstad India said.

According to the CEO of a large corporate fund house, FY12 was probably the worst year in the history of funds in India.

"The industry was hit badly by frequent regulatory changes, volatile equity markets, disinterested distributors and outflow of bank money from debt schemes. We missed all our targets last year," he said.

Source: http://economictimes.indiatimes.com/news/news-by-industry/jobs/no-big-hikes-bonus-for-mutual-fund-industry-staff-this-year/articleshow/12709546.cms?curpg=2

Just click away from joining most active Mutual Fund India google group

Google Groups
Subscribe to Mutual Fund india
Email:
Visit this group

Aggrasive Portfolio

  • Principal Emerging Bluechip fund (Stock picker Fund) 11%
  • Reliance Growth Fund (Stock Picker Fund) 11%
  • IDFC Premier Equity Fund (Stock picker Fund) (STP) 11%
  • HDFC Equity Fund (Mid cap Fund) 11%
  • Birla Sun Life Front Line Equity Fund (Large Cap Fund) 10%
  • HDFC TOP 200 Fund (Large Cap Fund) 8%
  • Sundram BNP Paribas Select Midcap Fund (Midcap Fund) 8%
  • Fidelity Special Situation Fund (Stock picker Fund) 8%
  • Principal MIP Fund (15% Equity oriented) 10%
  • IDFC Savings Advantage Fund (Liquid Fund) 6%
  • Kotak Flexi Fund (Liquid Fund) 6%

Moderate Portfolio

  • HDFC TOP 200 Fund (Large Cap Fund) 11%
  • Principal Large Cap Fund (Largecap Equity Fund) 10%
  • Reliance Vision Fund (Large Cap Fund) 10%
  • IDFC Imperial Equity Fund (Large Cap Fund) 10%
  • Reliance Regular Saving Fund (Stock Picker Fund) 10%
  • Birla Sun Life Front Line Equity Fund (Large Cap Fund) 9%
  • HDFC Prudence Fund (Balance Fund) 9%
  • ICICI Prudential Dynamic Plan (Dynamic Fund) 9%
  • Principal MIP Fund (15% Equity oriented) 10%
  • IDFC Savings Advantage Fund (Liquid Fund) 6%
  • Kotak Flexi Fund (Liquid Fund) 6%

Conservative Portfolio

  • ICICI Prudential Index Fund (Index Fund) 16%
  • HDFC Prudence Fund (Balance Fund) 16%
  • Reliance Regular Savings Fund - Balanced Option (Balance Fund) 16%
  • Principal Monthly Income Plan (MIP Fund) 16%
  • HDFC TOP 200 Fund (Large Cap Fund) 8%
  • Principal Large Cap Fund (Largecap Equity Fund) 8%
  • JM Arbitrage Advantage Fund (Arbitrage Fund) 16%
  • IDFC Savings Advantage Fund (Liquid Fund) 14%

Best SIP Fund For 10 Years

  • IDFC Premier Equity Fund (Stock Picker Fund)
  • Principal Emerging Bluechip Fund (Stock Picker Fund)
  • Sundram BNP Paribas Select Midcap Fund (Midcap Fund)
  • JM Emerging Leader Fund (Multicap Fund)
  • Reliance Regular Saving Scheme (Equity Stock Picker)
  • Biral Mid cap Fund (Mid cap Fund)
  • Fidility Special Situation Fund (Stock Picker)
  • DSP Gold Fund (Equity oriented Gold Sector Fund)