Finance ministry, Sebi looking to make mutual funds attractive for distributors

The finance ministry and capital market watchdog Sebi will think of ways to revive the fortunes of the mutual fund industry by making the incentive structure more attractive for distributors. The ministry will meet industry representatives and Sebi officials on Monday before drawing up a plan to give a leg up to the industry that is faced with steady outflows, partly due to disinterested distributors.

Commissions to distributors and marketing expenses were met by the fund house by charging an entry load of 2.25% from investors. Of every Rs 100 an investor put in, Rs 2.25 was charged as entry load while Rs 97.75 went into stock purchases. Of this, the chunk was earmarked for distributor commission.

The entry load was banned in 2009 by former Sebi chief CB Bhave, who felt that investors were being taken for a ride by distributors who encouraged investors to churn their portfolios. The ban, however, dried up inflows into mutual funds.

"The objective is to reinvigorate the mutual fund sector," a finance ministry official told ET, confirming that the issue to bring back incentives was on the agenda and would be taken up with the market regulator. In the absence of sales push, coupled with a dismal market, equity schemes assets fell 11% in a year to Rs 1.67 lakh crore in May.

The meeting comes close on the heels of Prime Minister Manmohan Singh's statement on Wednesday that there were problems facing the mutual fund industry that needed to be resolved.

current Sebi Chairman UK Sinha may find it difficult to lift the ban as it may be perceived as anti-investor. "The UK had proposed a similar ban ahead of India, but later deferred it for three years, and that too after giving the domestic industry 18 months to adjust. There may be a need to follow this example in the wake of global developments," said a government official.

While several fund houses rampantly misused the entry load mechanism to shower distributors with gifts and foreign junkets, the ban stunned funds as well as intermediaries, which had no time to restructure themselves.

Brokers felt it could have been done in a phased manner as it made little sense for them to sell MFs in smaller cities for collecting investments worth a few lakhs. Industry body AMFI and mutual fund houses have made several representations to Sebi in the last one year advocating review of the cost structure, so as to have a wider retail participation and geographical penetration. Experts suggest a comprehensive package of measures to revive the industry.

"Like any other industry, mutual fund industry is also under pressure due to weak economic environment. Measures like reversing entry load ban will not alone revive the industry. There is a need for having greater flexibility in managing the expense ratio. Mutual funds should also be allowed to launch pension funds to attract long-term investors," said Dhirendra Kumar, CEO, Value Research.

Sebi had earlier informally sounded out market participants on reversing the ban on entry load, but never went ahead to revoke it. It has also met various market participants like fund houses, investors associations, distributors and mutual fund advisors in the last few months to seek their views on the subject, sources said.

"As part of the discussion, Sebi had sought views of industry participants as to whether reversing the ban on entry load would be in the interest of investors," said a person who participated in one such discussion some weeks ago.

Sebi is also in favour of pushing the Rajiv Gandhi Equity Saving Scheme, which seeks to provide tax breaks to first-time investors in equities, to be made available to investors through the mutual fund route.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/finance-ministry-sebi-looking-to-make-mutual-funds-attractive-for-distributors/articleshow/14480401.cms

FinMin mulls re-introduction of entry load for mutual funds

The Finance Ministry may advise the Securities and Exchange Board of India (SEBI) to consider measures including re-introduction of entry load to bail out the mutual fund industry. The Mutual Fund Advisory Committee of SEBI is scheduled to meet on July 17.

However, experts feel that rather than bringing back entry load, the effort should be to allow mutual funds to launch pension schemes. At the same time, the Rajiv Gandhi Equity Scheme should be routed through mutual funds, they suggested.

Highly placed official sources said that after the Prime Minister’s directive to resolve issues about the mutual fund industry on Wednesday, the Finance Ministry is getting ready to draw up an action plan.

Re-introduction of entry loads, which will boost income for funds, is one of the key proposals. Since any move in this regard can be made only by SEBI, the Finance Ministry will advise the regulator, one source said.

SEBI banned entry loads from August 1, 2009. This was done to empower the investors in deciding the commission paid to distributors in accordance with the level of services received, to bring about more transparency in payment of commission and to incentivize long term investment.

The mutual fund industry has been unhappy with this. “First of all, introduction of such a move was not correct. Even the world body, though agreed in principle, did not introduce it, but India did,” said a senior fund executive.

But bringing back entry loads is expected to further dampen sentiment, particularly when the markets are down. This will take away the investors to other avenues, he added.

Earlier this month, the SEBI chief Mr U.K. Sinha, had said that various stakeholders have given their suggestion but not about re-introduction of entry load.

In fact SEBI has requested the Finance Ministry that facilities in the recently announced Rajiv Gandhi Equity Saving Scheme should be made available for investment through mutual funds. This will help the investor to reduce the risk, while benefiting the industry.

Echoing the same sentiment, Mr Dhirendra Kumar, CEO of Value Research said, “Rather than pressing for re-introduction of entry load, the Government should facilitate mutual funds to launch pension funds.”

Such a move will help the industry to get long term funds, which will also help the stock market. It is estimated that the mutual fund industry can easily mobilise Rs 50,000 crore through pension funds.

Source: http://www.thehindubusinessline.com/markets/stock-markets/article3581465.ece

Mutual Funds offering combo schemes to woo investors with plans that invest in gold, debt & equities

Weak markets are making fund houses look at new ways to generate investor interest in products. The latest attraction is a combo deal — schemes that invest in gold, debt and equities. Also, they are betting big on US markets to reap the advantages of the falling rupee.

This comes at a time when the net asset values (NAVs) of multiple asset funds, which invest in gold, debt and equity, have hit their 52-week highs and funds with direct or indirect exposure to stocks of USbased companies have made handsome gains.

Multiple asset mutual funds (MFs) have given 8.2%-10 .9% returns in the past year (till June 22). Except MFs that invest in the defensive FMCG and pharmaceuticals sectors and funds with exposure to stocks of overseas companies, all other equity MF categories were in the red in the one-year period.

"If these three assets (gold, equity and debt) are combined , they would be able to contain losses much more effectively ," says Anil Rego, CEO, Right Horizons, a wealth management firm.

"It is easier to take this product to investors as the risks involved are much less," says Rupesh Nagda, head, investment advisory and products , Alchemy Capital Management . "It is a good option for retail investors as it would be difficult for them to keep shifting money from one asset class to the other," he says. Moreover, investors also do not have much insight into how different asset classes behave in such volatile conditions , Nagda says.

With equities not doing well over the five-year period, usually considered a benchmark for long-term performance, investors are losing patience leading to a sense of fatigue among them, say experts. Diversified equity MFs have moved up by a measly 5.5% a year in the past five years.

Several funds (including sector-oriented funds) that invest in stocks of US-based firms have, however,made it to the top-10 list in the last one year. Incidentally, the best performing equity MF for the period invests exclusively in NASDAQ-100 stocks.

Experts however advise caution on this front. With the rupee plunging to new lows against the dollar and the US markets unlikely to repeat the past year's performance, the prospect of making big gains are much less, they say.

Source: http://articles.economictimes.indiatimes.com/2012-06-26/news/32424752_1_multiple-asset-diversified-equity-mfs-debt-equities