Sebi takes a hard look at MF biz model

The Securities and Exchange Board of India (Sebi) is looking into the business model of the mutual fund industry. “The mutual fund industry hasn’t penetrated much into the retail space. Therefore the regulator is looking at its business model,” a source in the finance ministry told The Indian Express. Sebi is also analysing some specific aspects such as the spread of business of the asset management companies and their consistency in income.

The mutual fund industry was opened up for private sector in 1993. After 16 years of operation, only 4 per cent of the household savings have found their way into investments in mutual funds. The industry is concentrated largely with big-ticket institutional investors and doesn’t offer much incentive to the retail players. Currently, almost 70 per cent assets under management belong to the institutional investors. “Mutual funds have become treasury tool for the institutional investors. A lot of retail investors lost money because of institutional dumping. Huge redemptions by institutional investors have reduced the net asset value of various funds, and in turn caused losses to retail investors,” said Sanjoy Banerjee, executive director at icraonlie.com.

While retail investors are charged both for entry and exit, the high net worth individual (HNI) investors are allowed load-free entry and exits. Although Sebi has allowed load-free entry to retail investors in case of direct applications, this hasn’t encouraged retail investors much. “The retail and institutional mix is unfair for retail investors. Tax arbitrage offered by mutual funds has attracted a lot of HNIs and institutional investors. Once this tax advantage is scrapped, mutual funds will be forced to go retail,” said Dhirendra Kumar, CEO, Valueresearch.

Besides, the seasonality of business is also a concern. “Mutual funds are not considered as an all-weather investment by many. When equity markets are up, people usually flock towards mutual fund schemes and when they are down, people withdraw money,” said Kumar.

Source: http://www.indianexpress.com/news/sebi-takes-a-hard-look-at-mf-biz-model/458289/0

'Promoter put' skews risk pricing at mutual funds

YV Reddy, the former RBI Governor had, in an interview to DNA last week, said that central banks providing clear guidance on policy had led to underpricing of risk.
This thought, while interesting, should not come as a surprise.
It can also be argued that market behaviour was rational. The relative underpricing of risk stemmed from the faith that markets had in central banks delivering the goods.A rational, and possibly similar mispricing of risk behaviour can be seen in the Indian mutual fund industry, especially the fixed-income category of funds which contribute bulk of the industry's size.
For the past several months many mutual funds have been grappling with potential (and possibly actual) credit defaults.The most prominent of these have been due to funds' exposure to the real estate industry.
We've also had instances from other industries, for example, pharma major Wockhardt and crumbling retailer Subhiksha.
These instances have been widely reported and debated in the media. So investors being well aware of the potential credit losses, could be expected to avoid funds which have such exposures.
On the contrary, the opposite seems to have happened.
Most fund houses that faced such issues have been promoted by leading business groups of the country.
These promoters have stepped in and protected the funds (and hence investors in those funds) from any credit losses.
While such business decisions may seem in the interest of investors, it leads to moral hazard and pernicious behaviour of investors who tend to completely eschew prudent risk assessment, while taking investment decisions.
These investors take comfort from the implicit -- let's call it the 'Promoter Put' -- signal given out by fund houses.
HDFC Mutual Fund, which possibly moved out the biggest chunk of such assets from the fund to the asset management company, has seen a healthy rise in inflows since.The 'Promoter Put' at work can also be seen at other large funds that resorted to such measures to protect investors from credit losses.
Fund managers who took the right risks but do not have the umbrella of the 'Promoter Put' seem to have suffered the worst. Normally, such a fund should witness a healthy rise in funds under management at the expense of those whose judgements were less than exemplary.
However, no such thing has happened. In fact, larger the fund house and greater the reputation of the group to protect, the greater seemed to be the implicit 'Promoter Put'.Much as the 'Greenspan Put'* turned out to be pernicious, investors should realise that taking investment decisions based on the implicit 'Promoter Put' could lead to harmful consequences.
Investment decisions are best taken on the basis of proper risk evaluation and assessment of the portfolio and the fund manager.
Even the fund management industry would be better placed if they realise that proper risk assessment is the way forward and should therefore prime investors on return expectations accordingly.
Mutual Funds are risk products and investor understanding of these products needs to account for it. Investors seem to want the best of the good times but none of the bad.It's is an unhealthy situation that needs to be reversed at the earliest.
* Former US Federal Reserve chairman Alan Greenspan bolstered falling stockmarkets by consistently reducing interest rates. The market's feeling that the Fed will always bail out created an artificially high appetite for risk and aglobal liquidity machine,which together spawned the bubble that has now burst. The term 'Greenspan Put' was coined in 1998 when the Fed cut rates after the hedge fund Long Term Capital Management collapsed.

Source: http://www.dnaindia.com/report.asp?newsid=1255843

Pioneer sees mutual fund assets doubling in year

Baroda Pioneer Asset Management hopes to double assets under management to 60 billion rupees ($1.2 billion) in 12 months as it strengthens distribution and attracts more debt fund clients, a top executive said.
The firm, in which Pioneer Global Investments, the fund arm of Italian bank UniCredit, has a 51 percent stake with remainder held by state-run Bank of Baroda, also plans to double presence to 12 cities and relaunch its funds.
The money manager will also use about 3,000 branches of its joint venture partner to reach out to clients in largely untapped Tier II and Tier III cities, chief executive Rajan Krishnan said.
Smaller Indian cities are considered key to the future growth of India's 5.9 trillion rupees funds industry that gets about three quarters of its assets from top-8 cities now.
"There is so much of a market outside the top-10 cities," Krishnan told Reuters in an interview on Wednesday.
"We manage over 3,000 crores. We definitely want to double our assets from here onwards in the next 12 months," Krishnan, whose firm relaunched India operations in 2008 after a more than 5-year gap, said.
Pioneer operated in India as Kothari Pioneer Mutual Fund and later Pioneer ITI Mutual Fund till mid-2002 before being bought over by Franklin Templeton Asset Management.
The venture, Pioneer's only onshore fund management operation in Asia, received regulatory nod last year and has seen rapid growth in assets since then -- average assets have jumped more than 26 times in 12 months from a low base of 700 million rupees.
The growth was almost entirely led by fixed income funds, a trend Krishnan sees continuing as inflows into equity assets remained subdued given a sharp drop in share prices.
"The AUM will be driven by fixed income," the Mumbai-based executive who joined the firm last year from the Indian mutual fund unit of U.S. firm Principal Financial Group, said.
"We will look to reposition our gilt and income funds, which are almost negligible in terms of size," he added.
The firm, which beefed up its fixed income desk by hiring former HSBC debt fund manager, Alok Sahoo, as its head in January, offers three fixed income funds.
Krishnan said two more debt funds were awaiting regulatory approval and could be launched in the next 12 months. The firm also plans to offer a large-cap stock fund if sentiments for equity investing improved.
Globally-invested funds, given the global fund management capability of Pioneer, were also on the cards but a launch is not an immediate priority, he said.
"We will probably wait for the markets to really start appreciating the need for global diversification."

Source: http://in.reuters.com/article/businessNews/idINIndia-39590120090513?sp=true

Mutual fund industry registers highest net inflow in 4 year

After a battering performance in March, the mutual fund industry has registered a net inflow of Rs 1,54,192 crore during April — the highest net inflow in the last four years. Although equity markets staged a rally last month and generated 15 per cent returns, mutual funds registered maximum inflows in the debt category at Rs 1,03,055 crore. The last time the industry registered such inflows was in August 2004, when there was a net inflow of Rs 1,55,686 crore.

During April, funds moved out of exchange traded funds (both equity and gold), gilt, balanced and equity funds to income funds. “During 2008-09, especially after September, a lot of money was withdrawn from debt funds. Now that the liquidity situation is normalised, money has again starting pouring in in this category. With so much volatility in equities, debt funds have become the flavour of the season for mutual funds,” said A P Kurian, chairman, Association of Mutual Funds in India (AMFI).

Source: http://www.indianexpress.com/news/Mutual-fund-industry-registers-highest-net-inflow-in-4-years/457651/

Benchmark S & P CNX 500 Fund introduces VIP facility

Benchmark Mutual Fund has approved an additional facility, Value Averaging Investment Plan (VIP) in Benchmark S & P CNX 500 Fund with effect from 20 May 2009.

Features of VIP:
Value Averaging Investment Plan (VIP) is based on value averaging which is a technique of adding to an investment portfolio and to endeavour to provide better return than similar methods such as Systematic Investment Plan (SIP). It was developed by former Harvard University professor Michael E. Edleson. Value averaging is a formula based investment technique where a mathematical formula is used to guide the investment of money into the portfolio over a time.
With the method, investors contribute to their portfolios in such a way that the portfolio balance increases by an amount calculated by a formula based technique, regardless of market fluctuations. As a result, when the market declines, the investor contributes more and when the market goes up, the investor contributes less. This is in contrast to SIPs based on Rupee Cost averaging which mandates that a fixed amount of money be invested at each period.

Advantages of VIP:
The three main advantages of VIP are as follows:
1. Higher returns: In most cases, VIP generates higher time weighted and money weighted returns compared to SIP because the investor invests less when markets are high and more when markets are low.
2. Lower acquisition cost: In most cases, VIP offers lower acquisition cost compared to SIP.
3. Meeting financial goals: VIP endeavors to maintain the portfolio value to the planned target amount reduces the risk of not meeting financial goals. It is done by adjusting the investment amount (within a specified range) to react to the return offered by the scheme.

Disadvantages of VIP: Monthly investment amounts are variable in VIP.
Plan Details
A. Investors in VIP will have to mention two amounts explained as under:

1. Nominal amount: This is the amount which the investor will invest at the time of enrolment for VIP. The nominal amount would be used to calculate target portfolio amount and in the circumstances when market rises in straight line giving the target return, this amount would be the actual amount to be invested.
The minimum nominal amount shall be Rs 2000 and in multiples of Re 1 thereafter and there is no maximum cap on this amount.
2. Maximum monthly debit amount:
This amount is the maximum amount which the investor would allow the fund to debit from their account. There is no upper limit for this amount shall be higher than the nominal amount.

B. The rate of return to be considered for VIP is 15% per annum, based on which installments of investments to be invested by the investor would be calculated.
Amount for investment in VIP:
Every month based on the portfolio value, the Fund will derive an amount be invested (subject to maximum monthly debit amount specified by the investor) for the next moth and that amount will be debited from the investor's account. The minimum amount to be debited from the investor's account is nil. Hence, there could be times that when markets have appreciated; there is no debit in the investor's account.

Risk factors pertaining to VIP:
• As the monthly investment amount is variable, it would be difficult for the investors to manage their cash flows.
• If the market moves in one direction i.e. either up or down, VIP may generate less return compared to SIP.
• If the NAV of the scheme continuously decreases, the absolute loss to the investor would be more than what the investor would have incurred by investing in SIP.

Source: http://www.apollosindhoori.com/Default.htm

NFO: Morgan Stanley Short-Term Bond Fund

Morgan Stanley Mutual Fund has launched new fund offer (NFO) period of Morgan Stanley Short-Term Bond Fund. The issue is opened for subscription from 12 May till 20 May 2009. It is an open-ended debt scheme. The face value of the new issue will be Rs 10 per unit.

Features of the Morgan Stanley Short-Term Bond Fund
Investment objective: The investment objective is to generate income from a diversified portfolio of short to medium term debt and money market securities.
Investment options: The scheme will offer two plans regular and institutional plus plan with growth & dividend options. Dividend option will further offer dividend payout and reinvestment facility. Regular plan will be having monthly dividend frequency while institutional plus plan will be having weekly and monthly dividend frequencies.

Minimum application amount: The minimum application amount under regular plan is Rs 5,000 plus in multiples of Re 1 thereafter. Under institutional plus plan, the minimum application amount is Rs 50 lakh plus and in multiples of Re 1 thereafter.
The scheme seeks to collect a minimum corpus of Rs 1 crore during NFO period.
Asset allocation: The scheme will invest 25%-100% in money market instruments and debt securities with maturity/ average maturity / interest rate reset not greater than 1 year. It will invest up to 75% in debt securities including government securities with residual maturity greater than 1 year. Investment in debt instruments including securitised debt shall be up to 100% of the net assets. No investment shall be made in foreign securitised debt.
The scheme may invest in derivative up to 50% of the net assets of the scheme. The scheme may also invest in foreign debt instruments up to 30% of the net assets of the scheme. Not more than 20% of the net assets of the scheme can generally be deployed in securities lending and not more than 5% of the net assets of the scheme can generally be deployed in securities lending to any single counter party.

Load structure: The scheme will not levy any entry nor exit load during NFO.
On an ongoing basis the scheme will not levy entry load but, it will charge 0.25% if redeemed within 15 days.

Benchmark index: The performance of the scheme is being benchmarked to the performance of CRISIL Short-Term Bond Fund Index.

Fund Managers: Ritesh Jain will be the fund manager for the scheme. He will handle the fixed income investments. Sridhar Sivaram, and Amay Hattangadi will be the dedicated fund managers for investment in foreign securities.

Rating: ICRA has assigned the “Credit Risk Rating mfAAA” to Morgan Stanley Short Term Bond Fund which means that Morgan Stanley Short Term Bond Fund carries the lowest credit risk, similar to that associated with long term debt obligations rated in the highest-credit-quality category. This rating should however, not be interpreted as an indication of the performance of the aforesaid Fund or of volatility in its returns.

Source: http://www.apollosindhoori.com/Default.htm

New rule to hit cash funds gains, assets

India's money market mutual funds returns are set to dip, as a new risk control rule restricts them to lower maturity instruments, taking some sheen off the popular fund category.
India's market regulator in January introduced the rule restricting investments by liquid or money market funds to papers of maturity of up to 182 days from Feb 1 and 91 days from May 1 as compared with one year before.
While a cut in maturity will reduce interest rate risks, it will widen the return differential between liquid funds and other short-term bond funds, hurting money market funds appeal among corporate and institutional investors, their main clients.
"Liquid funds returns as a category average will gradually fall," Bekxy Kuriakose, head of fixed income at DBS Cholamandalam Asset Management, said.
"We are already seeing a shift in preference from liquid to ultra short-term funds. This may continue," Kuriakose said.
Moderation in return will start showing in about a month or two as funds adjust portfolios to relatively lower yielding, shorter maturity papers, fund managers said.
"At present, liquid funds are giving annualised return of around 5 percent. This may drop to 4 percent going forward as the rates for three month CD/CPs (certificate of deposit/commercial paper) is around 3 to 4 percent," Kuriakose added.
Money market funds, favoured by corporates to park surplus cash, managed 1.4 trillion rupees, or nearly a fourth of Indian fund industry's assets under management at the end of April, according to data from the Association of Mutual Funds in India.
However, the assets remain volatile with billions of rupees flowing in and out of such funds every month.
One such surge when cash-starved corporates pulled out more than 900 billion rupees from debt funds contributed to a liquidity crisis in Sept-Oct, forcing the central bank to offer money through a special money market operation.
This also led to an unexpected negative one day returns from liquid or liquid plus funds from Mirae Asset, Franklin Templeton, DSP BlackRock and Kotak in October, forcing the regulator to step in with the the new rule.
Now, "their safety will be much higher. We will not see the repeat of a situation like Sept-Oct. But it will come at the expense of returns," said Mahhendra Jajoo, who manages about 160 billion rupees as head of fixed income for Tata Asset Management.
Jajoo expects the returns differential between liquid funds and short-term bond funds to widen to 150 basis points in the next two months from 50 basis points now, making some institutional investors look away.
However, the category will still attract a lot of money given the safety it offers, he added.

Source: http://in.reuters.com/article/businessNews/idINIndia-39566020090512?sp=true

Debt funds spur 42% surge in India fund assets

Assets of Indian mutual funds rose 42.23% to Rs5.9 trillion in April on record inflows in fixed income funds, data from the Association of Mutual Funds in India show.

This contrasts with a record Rs987 billion of outflows in March, that had lead to an 18% fall in the assets under management of the industry.

“There was a reversal in inflows in income and liquid funds after the huge redemptions in March. This is mostly institutional inflows, which have come back into fixed-income funds,” Chintamani Dagade, a senior research analyst with Morningstar India, said.

Fixed income funds collectively mopped up Rs1,545 billion, including Rs1,030.55 billion inflow in income funds, the highest ever since mutual funds data was made available in late 1999.

The inflow also included a record Rs518.52 billion collected by money market funds as banks, flushed with liquidity, parked surplus cash in mutual funds.

Equity funds, however, saw a net outflow of Rs1.1 billion, their highest monthly outflow since December as investors took advantage of a more than 17% rise in India’s benchmark index to book profits.

Source: http://www.livemint.com/2009/05/12110353/Debt-funds-spur-42-surge-in-I.html