MFs may face large redemptions from banks

Mutual funds will have to grapple with large redeemptions, with banks, which figure among the big-ticket investors, planning to pull out money amid concerns that returns from liquid schemes could dip further. Fund houses think such redemptions could start from August end. 

As part of the new rules that followed last year’s money market crisis, the capital market regulator Securities and Exchange Board of India (Sebi) had restricted MFs from investing liquid plan funds in instruments with maturities beyond 90 days. Since the new regulation became effective in June, the return on liquid plans have fallen from 5% annually to 3.5%-4% in the first quarter. 

Till now banks often parked their surplus fund in liquid schemes which generated a better return than other comparable short-term instruments. As on June 30, banks had outstanding investments of over Rs 1.20 lakh crore in such schemes. This will change now since most banks feel that the investment restriction will impact MFs ability to generate a better return. “Substantial amount of money being parked in liquid plans is a phenomena that is not going to last for long. Sebi norm will drive banks to find ways to lend more to the manufacturing sector,” said M V Nair, CMD of Union Bank of India. Mr Nair, who is also the chairman of Indian Banks’ Association, said, “We expect credit to pick up in the second half of this year....We are receiving more loan proposals.” 

In absence of a loan offtake from corporates, banks are sitting on a huge surplus, a substantial part of which is being placed with the Reserve Bank of India under the central bank’s reverse repo facility. But given a return of 3.5% which the central bank offers, banks find MFs a better option. 

Fund houses realise the shift in investments that’s about to happen. “There is a good chance that inflows from banks into liquid funds will start tapering off in the coming months, with returns going down dramatically,” said Ritesh Jain, head of fixed income at Canara Robeco Mutual. According to him, fund houses can do little to improve performance of liquid plans given the strict regulations. 

In a move to minimise mismatches and liquidity crunch, Sebi told MFs in May that maturity of securities cannot exceed that of the scheme. While the funds started rejigging their investments from June, the full impact on the scheme returns would be felt only in September by when most of the long dated, high yielding papers would mature. 

Mr Jain thinks that while the possible impact on liquid schemes have been factored in, liquid plus plans — the ultra-short term plans — may also face the heat. Allured by returns higher than liquid plans, banks have been shifting to liquid plus schemes. “Now, if they withdraw from these funds, MFs will face a problem during redemption. This is beacuse securities in these schemes are of longer maturity,” he said. Ultra short term plans have more leeway in investing in structured and longer tenure assets which enable them deliver a better return.

Source: http://economictimes.indiatimes.com/Market-News/MFs-may-face-large-redemptions/articleshow/4823803.cms

Have the markets changed or have funds changed?

To the discerning investor, the ongoing happy hours on the stock markets have shown
mutual funds in a rather unflattering light. Sure, stocks are up and so are equity mutual funds. But relatively few mutual funds are able to beat the equity market indices. Since the market turned upwards after hitting a bottom in early March, the average diversified equity fund is up about 70%, with about 20 of the 268 funds being more than a 100%.
During the same period the Sensex and the Nifty are up about 87 % and the broader indices are also up around 90 %. This isn’t what the deal is supposed to be with mutual funds. The main job of a mutual fund is supposed to be beating the indices. That’s what the investor pays for. Otherwise, the investor would be much better off investing in an index fund or an index-based exchange traded fund (ETF) which have far lower expenses than actively managed funds.
What makes this curious is that that this isn’t the way it has generally been in India. Historically, Indian equity mutual funds have managed to beat the indices quite handily. For example, from 2002 to 2007, the average equity diversified funds routinely beat the major indices. Rs 10 lakh invested in the average equity fund on January 1, 2002 would have become Rs 97 lakh by 31st December 2007. In the Sensex, it would have become Rs 62 lakh.
However, over the last year or so, this hasn’t been true. During last year’s market decline as well as the subsequent rise, relatively fewer funds have beaten the indices. Is this a fundamental shift? Have the markets changed or have funds changed? Or are these just unusual times and eventually one can expect normalcy to be restored? A bit of everything, I suspect.
One major reason has been that over the last year and a half, stocks have been driven first one way and then the other by what could be called extraneous reasons. Historically, investment managers do well in picking out sectors and companies that will do better than others but do poorly in catching trend changes that originate in the broader economy and polity.
I know, that’s not the impression they like to give when they speak in the media but it’s true. The better fund managers are basically good stock pickers on a relative basis. If steel prices edge up, they’ll know which auto companies will hurt more than others. But if you expected them to predict and time the swings and lurches of global economic roller coaster, then that isn’t going to happen. Some of them make the right guesses some of the time, but that’s about it.
Moreover, the huge increase in the number of equity funds that has happened has inevitably led to a decline in fund management standards. There were 62 equity diversified funds in 2002; now there are about 270. On top of that, the product design choices made by fund companies have ensured that a huge number of the newer funds are constrained by some theme or the other which doesn’t quite make it a sector fund butdoesn’t allow the fund manager to exploit all kinds of markets well.
Does this mean that the age of index investing is finally dawning in India? Perhaps it is. Going in for an index funds ensures that you will never underperform the index and nor will you ever outperform it. I find that since equity investors are generally the kind of people who are both optimistic and overconfident, few of them like the idea of limiting their upside relative to the indices. Still, if present trends continue, the day may not be far when many more investors will start looking at index funds seriously.

Source: http://economictimes.indiatimes.com/Features/Investors-Guide/Have-the-markets-changed-or-have-funds-changed/articleshow/4824038.cms

MF distributors explore alternative revenue models

Faced by the challenge of revenue losses due to removal of entry load from 

mutual fund schemes, the distributors are contemplating 
alternative revenue models 
wherein the online platform has emerged as the top option. 

From August 1, investors do not have to pay any entry load as per SEBI’s new regulation. However, it will result in revenue losses for distributors who used to get the entry load commission of 2.25 per cent. 

Brokerages are trying to find out measures to compensate such losses. Distributors feel that increase of business volume along with reduction of cost should be the basic objective for such compensation. 

Accordingly, they are concentrating on online trading platform, which saves costs to a large extent as it saves on papers and documentations and employee cost. One need not go to a customer’s residence to get MF forms filled as well. 

Said Hitungshu Debnath, executive director – distribution & wealth management, Angel Broking: “we want to make the online platform popular in smaller cities, primarily targeting tech-savvy young to middle age groups who want to invest to secure their future. Though it is a time-consuming process, it is the only way out.” 

While Angel Broking is planning to add more MF features to its existing online trading, Centrum is set to introduce online trading by October, primarily aimed at retail customers. 

“We keep getting advisory fees of 1% on an average from our big-ticket clients. We expect to raise retail customer base with low ticket size by promoting online service,” said V Sriram, head – wealth management, Centrum Broking, who feels the need to educate customers of online MF buying and selling. 

The aim is that once it becomes popular bringing big volume of customers, distributors will be able to impose a service charge of around 1 per cent to customers who also will not hesitate to pay seeing the hassle-free operations. 

Besides online trading, distributors are negotiating with asset management companies to increase trail commission or any alternative commission that will bring some financial support. AMCs pay trail commission to distributors, depending on the duration for which an investor stays invested. 

According to sources in touch with AMCs, the latter may increase exit load beyond 1 per cent and the extended part of exit load might go to the distributors. 

“Market volume holds the key for us. That can only be made faster through online trading,” mentioned Rakesh Goyal, head – distribution, Bonanza Portfolio, who feels that removal of entry load has acted in their favour as now they do not face competition from IFAs for whose entry load was the source of income. 

With 1,200 office locations, the brokerage is chalking out plans to multiply the base of retail customers through online trading.

Source:http://economictimes.indiatimes.com/MF-distributors-explore-alternative-revenue-models/articleshow/4815482.cms

FIIs, MFs hike stakes in over 100 cos in Q1

Foreign institutional investors and domestic mutual funds hiked stakes in over 100 different companies in the April-June quarter,CMIE data for nearly 250 companies out of the S&P CNX 500 shows. The stake of FIIs went up in 116 companies while mutual funds increased their holdings in 125 companies in the three-month period which saw the S&P CNX 500 go up by 43%. 

The S&P CNX 500 is the country’s first broadbased benchmark and represents about 95% of total market capitalisation. In comparison, only 38 promoters saw value in their stocks by hiking stake, while 196 promoters maintained holdings at the same level as they were at the end of March. 

The change in strategies was evident as FIIs which lowered stakes in nearly 100 companies shifted away from midcaps and smallcaps in sectors such as real estate, media, FMCG, hospitality, pharma and smaller banks besides others. 

Sectors which saw FII ramping up stakes were auto, finance, hospitals, telecom but most companies fell into largecap category boasting of market cap above Rs 10,000 crore. 

Mutual funds displayed different traits boosting stakes in real estate, shipping and power companies, but reducing exposure to banks, metals, pharma and infra-led themes like metals and cement.
"Valuations have not reached an untenable level even now. Mutual funds are sitting on same cash and inflows into equity funds through new fund offers as well as existing schemes will trickle into equity markets very soon. Some concerns exist on valuations but they are specific to certain select companies,’’ said David Pezarkar, head of Equities at Shinsei Asset Management.

Source: http://economictimes.indiatimes.com/FIIs-MFs-hike-stakes-in-over-100-cos-in-Q1/articleshow/4814142.cms

Positive earnings have surprised mkts: Motilal Oswal AMC

Earnings of individual companies have surprised markets on the positive side, Nitin Rakesh, CEO, Motilal Oswal Asset Management, said. According to Rakesh, there were many investment themes that looked appealing. “If you look at it from purely the ability of corporate to grow, the economic growth, demographic profile, it doesn’t look like we have to worry about the overall trend of the market,” he said. “Overall we are still cautiously optimistic, the idea is not so much a call on the overall market, there are investment themes out there that are so appetizing that one has to make sure that your portfolio does include those things. So it’s not a question of just a top-down call on the market, it’s a question of whether is there an opportunity to create wealth even at these prices and we believe there is.”
Here is a verbatim transcript of Nitin Rakesh’s exclusive interview on CNBC-TV18. Also watch the accompanying video.

Q: I believe you and Raamdeo Agrawal have been touring the foreign seas, what is the mood right now on India are people still as bullish as it seems to look on the good days?
A: One thing is very clear that over the last six-weight weeks especially after the big election news, we are on the radar and a lot of people have watched us with interest, but there is still a sense of apprehension for two counts, one while the feel-good factor is back and we are on the radar, they are expecting a lot to be done by the government as is the anticipation. So, for example, they would like to see some concrete moves on the reforms front, they would like to see some progress being made on the infrastructure front. The second apprehension comes from the fact that because of our short move in the market — 80% plus — suddenly there is a sense that the big move may have been over for now and there is a sense of caution so there might be some people who may have gone underweight over the last few weeks in terms of what their weightage was and what it is today.
The overall appetite seems to be good, it’s for us now to follow through with the actions on the reform front, on the infrastructure front, FDI — insurance is one of the big things that people are watching out for because insurance being such a large part of the global financial markets, there is a fair sense of disappointment over the past few years that we haven’t been able to move the reforms needle upfront. That one regulation on FDI, 26% versus 49% will have a major impact on the way we are perceived on a reforms perspective and also there are a whole host of other things that they would like to see.

Q: Would you concur that the big move is done for the moment and the market needs to consolidate here and catch its breadth or do you think it can run past its intermediate highs and climb a whole lot higher by the end of the year?
A: We have to look at it from an overall perspective; I talked about the same issue a few weeks ago when we said that whether the market is cheap or expensive, that depends on what your earning estimates are. So if you look at it from an earnings estimate perspective, while we were in mid-teens valuations, that seemed fairly valued but given that there are a lot of positive surprises coming out of the earnings both from profitability perspective and even some topline growth numbers. We may have underestimated the impact that earnings will have on the market.
We are probably the only country in the world where the overall aggregate profit number for this quarter the June ending quarter will be higher than the profit number in any quarter ever. Those are obviously things that get hidden behind all the noise. So if you look at it from purely the ability of corporate to grow, the economic growth, demographic profile, it doesn’t look like we have to worry about the overall trend of the market.
If we look at real short-term movements, whether it’s going to go past 4,650 before 4,200, that’s a question of momentum, volatility, capital flows and the tug-of-war between bulls and bears so that’s very hard to call. But overall we are still cautiously optimistic, the idea is not so much a call on the overall market, there are investment themes out there that are so appetizing that one has to make sure that your portfolio does include those things. So it’s not a question of just a top-down call on the market, it’s a question of whether is there an opportunity to create wealth even at these prices and we believe there is.

Q: Do you sense any hesitation in capital commitment because more or less aside from a couple of slip-ups, companies haven’t had any problem raising cash whether via QIPs or GDRs?
A: There is a fair amount of appetite for the right investment themes. For example, infrastructure seems to be one of those themes where before you could talk about the India story, people would ask you about what have you thought about the infrastructure opportunity in India. So for themes and stories that people have accepted as opportunities, I don’t think there is dearth of capital.
If you see the issue form the top down perspective, we are still seen globally as from a global investor’s point if view especially an institutional or a retail investor point of view, we are still seen as a small volatile market and exposure taken almost always is within the emerging markets, and within that BRIC was the buzz word and its now becoming BIC, so there is some money flowing into us in lieu for the markets but that is still very small exposure and that will only change if the stories that are being out there actually turn into reality, but I don’t think there is any dearth of capital and there is a fair amount of liquid money lying in the government treasuries globally and that will move into riskier assets as it has been moving and the level of comfort with the global economy is much better today. If we talk to people on the street in New York for example, everyone has a view that the worst is behind us now things look better, the banking numbers and the consumer numbers are looking better. So there is no dearth of capital or the fact that people are not willing to commit capital. The issue is: can you get the story out of there, can you make sure that there is follow-through on those promises?

Q: There has been a lot of talk this quarter about how best to approach technology post its earnings where do you stand?
A: I am cautiously optimistic because there was so much pessimism in the prices, what we have seen over the last few days after the results is essentially a reversal back to the fair value; technology continues to be a clear play on global recovery, the initial signs are that it is stabilizing, the larger companies held the operating leverage so I would actually be positive on this sector overall.

Q: How would you position yourself in the telecom sector now given valuations and given the kind of earnings that you are seeing?
A: Bharti has continued to demonstrate leadership at every level and there is obviously a big event with the company because of the MTN merger but we have presentation of about 40% at this point in time so 400 million plus subscribers on the base of about 1 billion population, so there is still some steam left, the larger players obviously have a bigger leverage because of the cost and profitability factor. We would continue to stay focused on the leaders in this space but still stay invested in this sector.

Q: How are you approaching commodities as a space right now, not so much with what’s happening with energy but the metals basket?
A: The overall commodity space has continued to move up globally as well, so there is no reason to say that one has to take a cautious view so we have to ride the momentum of the commodity boom. Whether we are going to go back to situations that we saw two-three years ago, we have our doubts but clearly there are cyclical plays out there that we continue to focus on, every commodity almost, globally has been demonstrating a strong upmove so there is momentum and opportunity out there.

Q: Do you track Sun Pharma, it’s lost some of that premium valuations now.
A: The news emanating out of the US subsidiary is not that great and there will be an overhang on the stock, I haven’t tracked the developments of late, there might be some more days before we really see this one out of the woods.

Q: What are your thoughts on cement as a sector?
A: This is one of the sectors that continues to give positive surprises right from Q4 of last year, so we continue to stay positive, we have tracked a lot of the cement companies closely, we still believe there are opportunities across the spectrum in the cement sector including some of the midcap names out there. So the results will ratify this later on in the next few days but there is opportunity in the cement sector.

Source: http://www.moneycontrol.com/india/news/mf-interview/positive-earnings-have-surprised-mkts-motilal-oswal-amc/407537/1

Fund houses merge schemes to save overhead costs

Simplify choice, offer better clarity for investors.

Fund houses are merging their less successful schemes with the more robust ones, ridding themselves of what werereduced to a clutter in the current market. In the process, they have saved overhead costs.
In July, Kotak Mutual Fund, Principal Pnb Mutual Fund and Fidelity Mutual Fund merged some of their select schemes into their much larger schemes. Some of the other fund houses to have merged schemes in the recent past are UTI Mutual Fund, JM Financial Fund and ING Mutual Fund.
Merging schemes helps the fund houses bring down costs and manage funds better, said Mr Dhirendra Kumar, Chief Executive Officer of Value Research.
Sometimes schemes are so similar that it amounts to duplication, and it makes economic sense for AMCs to merge them and simplify matters.
Both Principal’s JuniorCap and Emerging Bluechip, which were merged, are mid-cap funds and had similar objectives and mandates, said Mr Rajat Jain, Chief Information Officer of Principal Pnb Mutual Fund.

Better choices

The investor either has the choice to exit the scheme which is being closed or opt to accept fresh units of the scheme into which it is being merged. Also, according to a notice of one fund house, the transaction of getting new fresh units would be considered as redemption from the scheme which is being merged and may entail capital gain or capital loss and securities transaction tax.
For the investor this simplifies choice and offers better clarity, said a fund manager.
The recent fund mergers have seen Kotak Technology fund, Kotak MNC and Kotak Global India being merged with Kotak Opportunities; while Principal JuniorCap was merged with Principal Emerging Bluechip fund.

Open plans

In the debt category, two plans of Principal Child Benefit Fund, (an open-ended balanced scheme) were merged; two plans of the Principal Government Securities Fund, (an open-ended dedicated gilt scheme) were merged; while Fidelity Multi Manager Cash was merged with Fidelity Cash Fund. Sometimes mergers happen as there are some schemes whose mandate does not allow them to participate in a diversified range of stocks, said Mr Krishna Sanghvi, Head of Equities at Kotak Mutual Fund.
Some schemes have specific mandates which in the current market environment do not give returns, explained another fund manager. For example, a sector-specific fund will not do well if the respective sectoral stocks are not faring well.

Size that matters

According to some fund managers, the small size of a scheme could also lead to its merger with another.
According to Value Research data, Kotak Tech had a fund size of Rs 18.74 crore, Kotak MNC Rs 26.70 crore, and Kotak Global India, Rs 51.48 crore as at June end, while Kotak Opportunities (into which these were merged) had a fund size of Rs 903.48 crore.
Principal Junior Cap had a fund size of Rs 53 crore, while Principal Emerging Blue Chip Fund stood at Rs 71 crore as on June end. In some cases, the merger of schemes helps asset management companies to gracefully exit from a scheme which is not performing well by extinguishing it through merger with a better performing one.

Source: http://www.thehindubusinessline.com/2009/07/24/stories/2009072451701200.htm

Sebi cap on investment period hits liquid funds' assets

The Securities and Exchange Board of India’s (Sebi’s) guideline that liquid funds can no longer invest in papers of more than 91 days’ tenure has led to a sharp fall in their assets under management (AUM).

This, coupled with a fall in returns of short-term (three months) securities and bonds, has added to the woes of fund managers. Mahendra Jajoo, head, fixed income and structured product, Tata Mutual Fund, said, “Returns from short-term papers have slipped quite sharply, leading to a fall in returns from liquid funds by 275-300 basis points.”
Annualised returns from liquid funds have slipped from 7-8.5 per cent a year earlier to 4.5-5 per cent now, as per the industry estimates. According to data from the Association of Mutual Funds in India (Amfi), investors withdrew Rs 34,378 crore from liquid funds in June.
Navneet Munot, chief investment officer, SBI Mutual Fund, said, “As per Sebi guidelines, fund managers cannot invest in papers of more than 91 days, which has adversely impacted returns of these schemes.” Earlier, fund managers were able to generate higher returns from this category by investing in a judicious mix of short- and long-term papers.
However, fund houses may find themselves in a serious trouble if there is a run on liquid schemes because longer-term papers have to be sold at a discount. This is likely to hurt existing investors because of a fall in net asset value of these schemes. Liquid funds are short-term debt funds that offer investors the option of withdrawing their money at a very short notice, ranging from overnight to just over a week. Investors, especially companies and banks, prefer these schemes to park their short-term funds because of quick entry and exit options.
Experts said that money from liquid funds had shifted to ultra short-term funds (a reincarnation of liquid-plus funds). In ultra short-term funds, the lock-in period is five days (liquid funds have no lock-in).
Liquid funds face taxation on two fronts. First, there is a dividend distribution tax (DDT) of 28.32 per cent. Second, there is also a short-term capital gains tax of 33.9 per cent for the highest income bracket. For ultra short-term funds, while there is a lower tax incidence of 14.2 per cent of DDT, short term capital gains tax remains the same.
Also, the ability to invest in longer-term papers of say 150 to 180 days helps them generate better returns. For instance, while liquid funds, returns are at 0.33 per cent per month, ultra short-term funds return 0.44 per cent. “Ultra short-term funds were investing in papers of up to one year, which helped them generate better returns,” said Jajoo.

Source: http://www.business-standard.com/india/news/sebi-capinvestment-period-hits-liquid-funds%5C-assets/364730/

HDFC MF - INTRODUCTION OF NO ENTRY LOAD AND TREATMENT OF EXIT LOAD

No Entry Load for all Schemes with effect from August 1, 2009
The following changes will be effected to the Scheme Information Document(s)/Key Information Memorandum(s), wherever applicable for all the Schemes of HDFC Mutual Fund ("the Fund"). The provisions of the addendum shall be applicable on aprospective basis, effective from August 1, 2009.

Entry Load

In accordance with the requirements specified by the SEBI circular no. SEBI/IMD/CIR No.4/168230/09 dated June 30,2009, no entry load will be charged for purchase / additional purchase / switch-in accepted by the Fund with effectfrom August 1, 2009. Similarly, no entry load will be charged with respect to applications for registrations underSystematic Investment Plan/ Systematic Transfer Plan / HDFC FLEXINDEX Plan accepted by the Fund with effect fromAugust 1, 2009.

Exit Load/Contingent Deferred Sales Charge ("CDSC")

With effect from August 1, 2009, exit load/ CDSC (if any) up to 1% of the redemption value charged to the Unitholderby the Fund on redemption of units shall be retained by each of the Schemes in a separate account and will be utilizedfor payment of commissions to the ARN Holder and to meet other marketing and selling expenses.
To read the addendum, please click here