The broker goes for broke. Season two

By gradually tightening the commission norms, Sebi has tried to nudge the industry for the last three years towards performance-based selling to the retail market

It is always the transition generation that finds it the most difficult to adjust to change. I was a rookie business journalist in 1992 when the Harshad Mehta scam broke and the securities market reform began. I remember talking to a small stock broker in Delhi discussing the incipient changes. Sitting far away from the trading floor and with my livelihood not at risk, I found it easy (though a bit callous, on hindsight) to tell him that his business was history. That the market would corporatize. That costs would come down and unless he either expanded very fast or became an employee, business was over. With the size of business he serviced, on the new brokerage structure that would emerge, he would not be able to survive.

Out of the shambles of the stock market scam emerged new institutions that looked at more order in the markets. Screen-based trading, depositories, brokerage disclosure were all new concepts that were resisted every inch of the way by the market incumbents. The stock market was a closed club of brokers. I still remember the cantankerous old fox of the Delhi Stock Exchange explaining the bhai-chara (brotherhood) system to me in his Punjabi-twanged, expletive-filled narrative. The sub-text of the story was: They were all broker-brothers who were able to sort out all their problems. Investors? Well, they bought at the highest price of the day and sold at the lowest price, since the outcry (guys gesturing and hollering at each other to make the trade on the floor of the stock exchange) system prevented the investor from knowing at what time and what price the trade got executed. Sounds primordial today, doesn’t it? Investors wanting 100 shares were looked at as if they were beggars, charged rates that were more than 5% of the trade. And service? Well that was for the big boys.
One issue that got the brokers really worked up was the decision to get them to declare their brokerage on the contract note. There was a violent reaction, brokers threatened to go on strike. They prophesied doom for the markets. For the economy. For the National Stock Exchange (NSE). Employees of NSE actually got threats after they found a trail of money from the brokers leading to the underworld. Now, almost 20 years later, India has one of the most efficient markets in the world, brokerages are down to 20-40 basis points (you pay 20 paise each time you transact Rs100 worth of shares) and the time when delivery of shares (if you were lucky enough to get your signatures matched) took more than a month, seems like from another planet.
Judging by the activity just under the surface in the mutual fund industry, it’s Season Two time. By gradually tightening the commission norms, the Securities and Exchange Board of India (Sebi) has tried to nudge the industry for the last three years towards performance-based selling to the retail market. Throwing money at the distribution chain and chasing corporate and high net-worth customers was not the way it was supposed to be. With mutual funds going no-load (you no longer pay the embedded cost in the price), the reactions in the industry are as expected. While some fund houses (the product manufacturer) are giving public statements opposing the move, privately they are laughing. For too long the tail twisted the dog—there are stories of how large distributors would not even take calls from mutual fund heads unless they were promised a commission of 8%. Other fund houses that target assets under management, are hiring lawyers, chartered accountants and sharp-shooter compliance officers to find that last remaining loophole that will allow them to still milk the system. That one last time.
The 55,000 mutual fund distributors plus banking distribution chains are working on two fronts. Defensive and offensive. The lowest of the low-life used all of July to heavily churn their customers (you). Check your July statement to see the transactions for the month. Each time the bank or your agent bought you a fund, you paid the bank/agent/advisor Rs2.25 on Rs100 of transaction. Do this three times on a corpus of Rs10 lakh and they made at least Rs60,000 off you, just in a month. If you found you’ve been churned, find another point of sale. If this was defensive, the offensive strategy is to quickly cobble together an association, lobby with the ministry of finance, the Prime Minister’s Office, or whoever would listen, and go to court. A New Delhi-based distributor-led attempt to litigate against the no-load order fell flat on its face, first when the fund houses refused to pay for the legal fees and two, when the court threw the case out. If history is any beacon to the future, it will settle down. You will end up paying less, in a more transparent manner, the market will expand and the occasional jay walker will still get hit, but the systemic problem will get over.
What you have to do: There are no free lunches. Sebi is not saying that you can buy funds for free. All it is saying is, by making mutual funds no-load, the person servicing you will really be your agent, rather than the agent of the mutual fund. And as your agent, you need to pay him directly for the service he gives. You pay your doctor, your lawyer, your shrink. Now you pay your financial adviser. If you’ve been happy with your adviser, begin paying for that service. Or get shoddy service and get hit by products that harm. Advice from a Mumbai-based value-for-money distribution house: Look beyond the glitz of the sales team and examine your statements carefully. If not, well, it’s your money, no amount of regulation can help you.

Source: http://www.livemint.com/2009/08/25215204/The-broker-goes-for-broke-Sea.html?h=B

Birla Sun Life MIP outperforms bank FDs and MIS

Birla Sun Life Mutual Funds open-ended monthly income plan (MIP) II-Savings 5 plan has performed well with the fund generating a CAGR return of 12.5 per cent over a three-year period against the benchmark Crisil MIP Blended Index returns of 8.4 per cent as on July 31

An investor who has invested Rs 1-lakh in the scheme since its inception in May 2004, would have received Rs 540 as average monthly income in the form of dividends against Rs 440 from a bank FD and post-office monthly income scheme till July 31, Birla Sun Life CEO A Balasubramanian told reporters here.

During the same period while the Rs 1-lakh invested initially would not have appreciated in conventional saving options, it would have grown to Rs 1.12-lakh in this fund.

More importantly, the income from the conventional investment options are taxable but income from BSL MIP II Savings 5 is not taxable.

Post-tax monthly income for FD and PO MIS is calculated on a rate of interest of 8 per cent per annum and 7.25 per cent per annum, respectively.

Birla Sun Life Asset Management Co is one of the top five asset management firms in India with an average asset under management of Rs 57,331-crore as on July 31.

Source: http://www.zeenews.com/news558243.html

HDFC MF to launch Short Term Opportunities Fund

HDFC Mutual Fund has filed an offer document with securities and exchange board of India (SEBI) to launch HDFC Short Term Opportunities Fund, an open-ended income scheme.

The new fund offer (NFO) price for the scheme is Rs 10 per unit.

Investment objective:
The investment objective of the scheme is to generate regular income through investments in debt / money market instruments and government securities with maturities not exceeding 30 months.

Plan:
The scheme offers growth and dividend option. Dividend option offers sub-option with payout and re-investment facility.

Asset allocation:

The scheme will invest 60% to 100% of asset in debt and money market instruments including securitized debt, with a risk profile of low to medium. Investments in securitized debt, if undertaken, shall not normally exceed 75% of the net assets of the scheme. 0% to 40% of investment will be in government securities with low risk profile. In addition to the instruments stated above, the scheme may enter into repos /reverse repos as may be permitted by RBI. From time to time, the Scheme may hold cash. A part of the net assets may be invested in the collateralised borrowing & lending obligations (CBLO) or repo or in an alternative investment as may be provided by RBI to meet the liquidity requirements.

Load structure:

The entry load for the scheme is not applicable. In respect of each purchase/switch-in of units, an exit load of 1% is payable if units are redeemed/switched-out within 1 year from the date of allotment. No exit load is payable if units are redeemed/ switched-out after 1 year from the date of allotment.

Minimum application amount:

The minimum amount is Rs. 5,000 per application and any amount thereafter. In case of investors opting to switch into the scheme from the existing schemes of HDFC Mutual Fund (subject to completion of lock-in period, if any) during the NFO Period, the minimum amount is Rs. 5,000 per application and any amount thereafter.

The minimum subscription (target) amount of Rs. 10 million is expected to be raised during the NFO period of HDFC Short Term Opportunities Fund.

Benchmark index:
The scheme`s performance will be benchmarked against CRISIL Short Term Bond Fund Index.

Fund managers:
The fund managers of the scheme will be Anil Bamboli and Anand Laddha.

Source: http://www.myiris.com/newsCentre/storyShow.php?fileR=20090825181420707&dir=2009/08/25&secID=livenews

Brokerages focus on core business

Equity brokerage volume jumps 66% in April-June while non-broking income dips.

Broking firms have renewed their focus on the core business as non-broking income has shrunk and equity brokerage volume has moved closer to peak levels.
Aided by increasing stock prices and easing global concerns, domestic equity brokerage volume has grown 66 per cent in the first quarter of 2009-10 on a sequential quarter-on-quarter basis, second only to the highest-ever volume recorded in the third quarter of 2007-08, according to a recent report by ICRA. The turnover in the first quarter of 2009-10 alone equated to 36 per cent of the total turnover in 2008-09.
The growth was driven by the cash segment, which accounted for 27 per cent of the total turnover, which was same as that in the third quarter of 2007-08. In the fourth quarter of 2008-09, the cash segment had accounted for only 23 per cent of the total turnover, the report said.
On the other hand, non-broking continued to be under pressure as revenues from this business had been hit more than that from the broking business.
While merchant banking revenues declined with delay in the final closure of deals, the income from distribution income decreased with lesser number of mutual funds on offer and decrease in life insurance premium, the report noted.
In addition, recent regulations such as removal of entry load on mutual fund schemes and changes in the fee structure of unit-linked products in the insurance sector are likely to affect the non-broking business of broking houses.
In recent years, broking firms have been leveraging retail network beyond equity broking to distribution of third party products, IPOs, margin funding and merchant banking.
The distribution business generally accounts for 15-20 per cent of the total income of prominent broking firms.
“The new regulations will severely affect the distribution income and, hence, we have to devise new distribution models. However, this will take some time and we will be focusing more on broking business in the near future,” said R Venkataraman, director of India Infoline.
“Distribution income is likely to be hit due to the ban on entry load and also a possible shift of insurance products towards non-unit linked,” said Karthik Srinivasan, research analyst, ICRA.
In non-unit linked products, commissions are generally less than that in unit-linked ones. Recently, the Insurance Regulatory and Development Authority (Irda) had imposed a cap on unit-linked insurance plans (Ulips).
“The new regulations are definitely going to impact the way brokerage firms work, and we are creating a new model to offset the impact. We will have to find out how to manage assets so as to give the best returns to the clients while deriving our commissions. However, the shift to a new model will take some time,” said Angel Broking Executive Director (Equities Broking) Vinay Agrawal.
Although stock prices have shown a rising trend and many IPOs have been lined up this financial year, ICRA expects revenue contribution from merchant banking to remain low as compared to 2007-08.
But, equity brokerage yields continue to remain under pressure due to increasing competition and few firms offering a flat fee structure. The average broking yields declined from 7-8 basis points to 5-6 basis points in the last few years, the ICRA report said, adding that it might not fall below 4 basis points in the medium term.

Source: http://www.business-standard.com/india/news/brokerages-focuscore-business/368086/

Mutual funds largely eschew derivatives play

Since its inception in 2000, the derivatives market has emerged as a major market segment.
This type of trading allows market players to hedge their exposures or take bets depending upon their view on market situations. With Sebi allowing mutual funds to participate in derivatives, fund managers do take positions through futures and options in order to hedge their positions. It also allows investment managers to take arbitrage advantage of mis-pricing arising out of two different markets i.e. cash market and derivatives market, thus, locking the profit in case the price differs in both the markets.
While the advantages of trading in the derivative segment are many, mutual funds have not gone overboard in investing in this segment. The total exposure of mutual funds in derivatives market at the end July 2009 was close to Rs 1,360 crore. When compared to the volumes clocked in the derivative markets, mutual funds participation is marginal.
Investing in the derivative segment is fraught with its own set of risks, as a result of while, Sebi permitted mutual funds to dapple in the derivatives market. It has done this with some wise restrictions in place. The maximum net position by mutual funds in derivatives has been capped to the extent of 50% of the portfolio.

Trend

The primary reason why fund managers invest in futures and options segment is with the aim to hedge risks. Derivatives are used as an instrument to minimise the risk exposures and limit the degree of fluctuations in prices, which is rampant during a bear market. On the other hand, in a bull phase, the managers are less averse to risk and hence do not hedge as extensively. Hence, theoretically, the exposure in derivatives would ideally be higher in the bear phase while it can drop down during a bull phase.
For the worst of the bear phase -- marked between January 2008 and March 2009 -- the exposure to derivatives witnessed a large increase. In case of ICICI Prudential Mutual Fund, the exposure into the derivatives segment climbed from 1.77% as a proportion of equity assets under management in January 2008 to 5.86% in March 2009. On the other hand, even in the current improved market conditions, DSP Black Rock Mutual Fund allocated 12.52% of its equity assets to derivatives during July 2009.
On an average, the highest allocation in the derivative segment across asset management companies was in the month of November 2008, with four fund houses allocating anywhere between 11.50% and 14% of their equity assets to derivatives.
The theoretical assumption of higher exposure to derivatives in bad times and a significant drop in derivative positions in better times is vindicated by the holdings of mutual funds between March 2009 and July 2009. Since markets began looking more upbeat after the Lok Sabha elections, the assets allocated to derivatives have also drastically reduced, as have the number of schemes hedging through derivatives.
Moreover, before January 2008, there were hardly any positions in the derivatives segment, with barely 10 diversified equity schemes dappling in derivatives. On the other hand, there have also been some AMCs such as HDFC Mutual Fund, Reliance Mutual Fund, SBI Mutual Fund, UTI Mutual Fund and few others which have not ventured into this segment over the past two years.

Performance

In order to assess whether the strategy of investing in derivatives works or not, we segregated the schemes which invested in derivatives and those which did not. Between January 2008 and March 2009, out of 187 diversified equity schemes, as many as 75 invested in futures and options. Moreover, the returns delivered by these 75 funds are not very different from the remaining diversified equity funds. The range of returns is also comparable. The funds which invested in derivatives on an average lost 59.89% while the other diversified equity funds lost 55.75% on an average.
A look at the near-term performance since March 2009 also shows that the returns of these schemes have not been dented drastically over the recent uptake in equity markets. One of the strategies of investing in derivatives is that of gaining from the mis-pricing between the cash and the derivatives market.
Using this strategy, AMCs have floated arbitrage schemes. Unlike the run-of-the-mill equity funds, this class skirts the 'high risk' tag that is synonymous with equity investment. But then again, the returns are also much lower and are more similar to what a debt-oriented mutual fund would produce. The returns for equity arbitrage schemes over the past year have been in the range of 5-10%.
While the use of derivatives by mutual funds as a hedging mechanism is a popular one, in the Indian context, their participation has been unimpressive. It is unlikely the diversified equity class of funds will exploit this option if the uptake in equity markets persists. However, with the success of the arbitrage category of funds, the share of mutual funds investing in this market segment is likely to change in the long run.

Source: http://www.dnaindia.com/money/report_mutual-funds-largely-eschew-derivatives-play_1284900

New pension-cum-savings scheme by year end: PFRDA

A new kind of pension-cum-savings scheme is on the anvil which would provide a safety net as well as liquidity to the holder.
The scheme, called tier II account, may be introduced by the end of this calendar year, a top official of Pension Fund Regulatory and Development Authority (PFRDA) said.
"We are working on a pension saving account under New Pension System (NPS) and is likely to be operationalised by the end of this year," the official said.
The essential feature of this saving account would be liquidity. Customers needing money in emergency situations would be able to withdraw their deposited sum.
In this pension saving account, customers can withdraw almost the entire amount, though a small part might be retained with the fund manager, as directed by the interim pension regulator, the official said.
The pension amount withdrawn would be subjected to tax as it is under exempt-exempt mode like the Tier I account.
Under exempt-exempt, the amount is exempted from tax when deposited and also when it accrues interest, but tax is levied at the time of withdrawing the amount.
"Investment patterns and other guidelines would be the same as applied to Tier I account, which was operationalised from May 1," the official added.
However, the customers who wants to open the Tier II account should essentially have a Tier I account.
"Those who wants to open the Tier II account must also have Tier 1 account. Both the account should run separately," the official added.
Under the present structure of NPS, a customer can only withdraw 20 per cent of the money as a lump sum before he or she attains 60 years of age. On attaining 60 years, the customers can withdraw 60 per cent as lump sum.
Besides the pension-cum-saving scheme, PFRDA is working on a separate fund management guideline for corporates, a move that will allow them to enter into agreements with fund managers for managing the pension fund of their employees.
NPS was implemented for government employees who joined service on or after 1 January 2004. On May 1, it was extended to all citizens.
There are six fund managers for all citizens' scheme-IDFC Mutual Fund, Kotak Mahindra, SBI, UTI Asset Management, ICICI Prudential Life Insurance and Reliance MF-to manage the corpus of customers.
Besides, there are 21 Points of Presence (PoPs) of NPS, which include, State Bank of India, ICICI Bank, IDBI Bank, Oriental Bank of Commerce, Axis Bank and Union Bank of India.
PoPs are contact and collection points for customers wanting to be part of NPS.

Source: http://economictimes.indiatimes.com/Personal-Finance/Savings-Centre/Savings-News/New-pension-cum-savings-scheme-by-year-end-PFRDA/articleshow/4929088.cms

RMF declares dividend in three of its flagship schemes

Reliance Pharma Fund beats market expectations Reliance Banking Fund maintains
consistent track record with dividend returns totaling 160% since inception.

RMF declares dividend in three of its flagship schemes
Reliance Pharma Fund beats market expectations
Reliance Banking Fund maintains consistent track record with dividend returns totaling 160% since inception.
MUMBAI, August 24, 2009: India’s largest Mutual fund house, Reliance Mutual Fund, part of the Anil Dhirubhai Ambani Group, announced dividend for three of its flagship equity schemes. The three schemes namely Reliance Banking Fund, Reliance Pharma Fund and the Reliance Tax Saver (ELSS) Fund have shown consistent performance over a sustained period as shown below:

Total dividend since inception:

Reliance Banking Fund --160%

Reliance Pharma Fund--40%

Reliance Tax Saver (ELSS) Fund--20%

“Our aim has always been to maintain positivity of results and ensure that we focus on long term wealth creation for our investors through prudent investment, monitoring of trends and higher safety. ” said Reliance Mutual Fund CEO Sundeep Sikka.
The dividend declared and the record dates are 28th Aug 09:

Reliance Banking Fund --160%
Reliance Pharma Fund--40%
Reliance Tax Saver (ELSS) Fund--20%

Benchmarked against the BSE Healthcare Index, the Reliance Pharma Fund has consistently delivered superior returns over the last five years, beating both its benchmark and peer Pharma funds by a considerable margin. (Source: www.valueresearchonline.com)
In the banking sector Reliance Banking Fund has a holding in the top performing banks in the country. “As the banks we are invested in are able to reduce lending rates, their business portfolio has grown multi fold. We expect a higher percentage of growth in the next quarter as the finance bill announced seems positive for this sector” said Mr. Sikka.
The Reliance Tax Saver (ELSS) Fund has been a steady performer that has in the last six months given returns of over 60% to investors. The investment portfolio of the fund comprises of blue chip companies that are consistent performers with strong fundamentals and excellent management capabilities with long-term growth outlook. With over 56 schemes in its portfolio, spread across 71 lakh investors, and an Assets Under Management (AUM) exceeding over One Lakh Crore, RMF has emerged as the largest and fastest growing mutual fund in the country. It has a presence in over 300 cities across the length and breadth of India and a large Fund Management team that comprises the best professionals in the Industry.

The NAV returns for the last six months for the 3 schemes in the growth plan as of last month end are as follows:
Reliance Banking Fund : 66.85%

Reliance Pharma Fund : 60.40%

Reliance Tax Saver (ELSS) Fund : 60.52%

About Reliance Mutual Fund
RMF has grown to be the leader in the Mutual Fund Industry in a short span of less than 5 years, beating much more established players in the field. With Assets Under Management (AUM), of 1,08,334 crore, RMF is a clear leader with a 30% lead over its nearest competition. With More than 90% of the applicants having less than Rs. 50,000 of investments and over 1 million SIP investors proves that Reliance Mutual Fund is truly a very retail focused fund house. Reliance Mutual Fund schemes are managed by Reliance Capital Asset Management Limited., a subsidiary of Reliance Capital Limited, which holds 93.37% of the paid-up capital of RCAM, the balance paid up capital being held by minority shareholders. Reliance Capital Ltd. is one of India’s leading and fastest growing private sector financial services companies, and ranks among the top 3 private sector financial services and banking companies, in terms of net worth. Reliance Capital Ltd. has interests in asset management, life and general insurance, private equity and proprietary investments, stock broking and other financial services.

Source: http://www.prlog.org/10318675-rmf-declares-dividend-in-three-of-its-flagship-schemes.html

Funds launched before load ban raise Rs 900 cr

Five new fund offers (NFOs), launched in a rush during July to beat the load ban that came into effect from August 1, have together raised around Rs 900 crore.
The NFOs were BlackRock World Energy Fund, Franklin Templeton Build India Fund, Kotak Select Focus Fund, Religare Business Leader Fund and JP Morgan JF Greater China Equity offshore Fund. According to mutual fund and distribution industry sources, DSP BlackRock World Energy Fund raised Rs 350 crore, Franklin Templeton Build India Fund collected around Rs 225 crore, Kotak Select Focus Fund mopped up around Rs 175 crore, Religare Business Leader Fund collected Rs 70 crore and JP Morgan Greater China Equity Offshore Fund raised Rs 52 crore.
Kotak Select Focus Fund was to close on August 20, but now the fund house has extended the date of closure to August 23. An executive of a distribution house said Kotak Mutual Fund expects the collection to reach at least Rs 300 crore.
The fund offers had come on the back of fears that customers might defer investing in mutual funds till the August 1 entry load ban came into effect. However, those tracking the industry feel that funds hit the market with the conviction that investors would lap up good offers even if they were to pay the upfront entry fee of 2.25 per cent, mainly because of the buoyant equity market conditions.
Krishnamurthy Vijayan, executive chairman of JP Morgan AMC, said that had the investors decided to wait for the no-entry load regime to take off, DSP BlackRock might not have been able to raise Rs 350 crore.
Sapna Jhawar, research analyst, Sharekhan, said investors would not wait for the entry load ban to come into effect if a fund is good. “Given the buoyancy in equity markets, I think investors would not mind paying a 2.25 per cent load in order to participate in the uptrend. Even if you exclude the NFO collections in July, the total inflow increased by 13 per cent during the month,” she added.
Saurabh Nanavati, CEO of Religare Mutual Fund, said there were a number of NFOs vying for investors’ attention and “keeping this fact in mind, the collection has been decent”.
He said that the NFO received 13,000 applications from retail investors compared with 15,000 for DSP BalckRock World Energy Fund and 18,000 for Franklin Templeton Build India Fund.

Source: http://www.mydigitalfc.com/mutual-funds/funds-launched-load-ban-raise-rs-900-cr-265