NSE, BSE may join hands for mutual fund trading

The proposed online portal will help investors buy and sell mutual fund units and get onsolidated statements

A working group of the Association of Mutual Funds in India, or Amfi, has recommended that India’s two largest bourses, along with other firms, jointly build a transaction platform for mutual funds trading in India.
The group has suggested jointly engaging three consortia that have bid to build the platform: National Stock Exchange and National Securities Depository Ltd; Bombay Stock Exchange and Central Depository Services Ltd; and registrars Karvy Computershare Ltd and Computer Age Management Services Ltd.
“We have recommended an open architecture where strengths of all three consortia will be leveraged for the benefit of the mutual fund industry,” said Jaideep Bhattacharya, who heads the Amfi committee and is chief marketing officer of UTI Asset Management Co. Ltd.
The committee, which submitted this proposal to Amfi last week, has also suggested that mutual fund trackers Morningstar India and rating agency Icra Ltd provide the data support for this platform.
Amfi expects the platform to go live by March.
The proposed online portal will help investors buy and sell mutual fund units and get consolidated statements. With the abolition of upfront commission, few distributors are keen on servicing small investors and the transaction platform will come in handy for them.
“We have received proposals on the operationalization of the platform. A decision will be taken in a week or two. The final clearance has to come from Sebi,” said A.P. Kurian, chairman, Amfi.
According to him, the platform would provide a better reach for the industry, higher efficiency in transactions and cost control over a long term. “Similar platforms exist in developed markets like Australia and Canada. It is our effort to bring such world-class service to our investors,” he told Mint.
Officials from the bidding companies refused to comment as the proposal is yet to be finalised. The chief executive officers of four leading asset management companies confirmed the broad structure of the proposal but refused to comment as they are not familiar with the details. “A presentation is likely to be made for the members in a couple of weeks, after which a decision will be made,” one of them said.
In a parallel move, Amfi is exploring the listing of open-ended mutual fund schemes on an exchange platform.
The system has to be tweaked in such a manner that the relevant mutual fund will be the counterparty for transactions and the registrar will have to create and extinguish units for every purchase and sale, respectively, say industry experts.

Source: http://www.livemint.com/2009/09/28235001/NSE-BSE-may-join-hands-for-mu.html?h=B

'Banks have not developed the system model to distribute third-party products'

Italy-based Pioneer Investments, which signed an asset management joint venture agreement with Bank of Baroda (BoB) last year in a major move to extend its presence in India’s mutual fund market, is set to increase its presence in 300 branches of BoB in the next year. Its CEO-Asia, Angus W Stening, puts emphasis on the need for banks to be the main distribution channel after the Securities and Exchange Board of India (Sebi) tweaked norms, in a conversation with Chandan Kishore Kant. Excerpts:

What impact would Sebi’s new norms on entry load have on the Indian mutual fund industry?

It will definitely be a catalyst for the change in the distribution dynamics. The independent financial advisors (IFAs) will always play a role for all sorts of products. This industry has been an IFA-driven market from the start. However, have we seen a change in the first two months? No, we have not.
Now the question is, will the financial advisors move away from mutual funds to deposits or life insurance products? Absolutely, they will. But will the investors stop buying mutual funds, as they have to give commissions to the advisors? No, that will not happen.

Which part of the distribution channel will have to be more active now?

It will be the banks. I think this is one regulatory change which will make banks more active in the distribution side of the business, particularly the public sector banks. How they do that and how they structure has to be seen. The banks now have to be a part of the process.

Why banks? Why not the financial advisors?

The banks are more trusted and regulated institutions. The national reach of the branch network of banks and their customer base is amazing in India.
The public sector banks, in particular, have the reach which a foreign bank may not be able to achieve. Why is there a lower penetration in distribution of mutual fund products? A concern which Reserve Bank of India (RBI) rightly pointed out in its annual report. It is because the banks have not developed the system model to distribute and the processes to manage the distribution of third-party products. And this change in norms will require that.

What’s your plan for expansion in India?

Our target is to have presence in 300 branches in the next 12 months. These will be access points for the investors to buy our products.
Clearly, we want to take that number up as time goes on. Bank of Baroda (BoB) is a good partner and has provided us access to public sector space. We need to create a distribution channel. Since July last year, we focussed on the training of staff in the Baroda branches. At the same time, we are very focused on costs. We don’t want to take a conservative approach but a measured approach.

Won’t you look for channels outside Baroda branches?

I don't have a retail chain outside Baroda and I don’t plan one for at least the next 12 months. Our focus is to support Baroda. We both feel we need to invest in our point of sales locations.
What you do in this business is develop a prototype model and replicate it around the nation. When we start to see some traction, then only can we start opening up and broadening our distribution base to non-Baroda for retail.

What portion of your asset under management comes from retail and institutions?

Currently, institutional participation is as high as 95 per cent. For the retail space, we need to have a product pipeline.

You are hugely dependent on institutions.

Absolutely, yes. I think initially in the first six months, else could we go across Rs 5,000 crore in equities? No.

Where do you see your retail participation in future?

India has not got a 50-year track record in equity investment. I will be happy to get 25 per cent of the assets from retail and 75 per cent from the institutions.

You don’t sound bullish on growth from smaller cities and towns, which is in contrast with what the local CEOs talk of.All I’m saying is that we are not there now. And, possibly could not be there, as we are very much at the beginning. Managers have to look at this for a long-term business and turn away from short-term opportunistic goals. The structural change from Sebi in terms of front-end load is going to have long-term implications.

Will you invest in the branding of your JV with BoB?

We don’t have to do a joint venture brand. Since we have a strong brand and Bank of Baroda is equally a strong brand, then why the need to invest in a third brand?

Source: http://www.business-standard.com/india/news/%5Cbanks-have-not-developedsystem-model-to-distribute-third-party-products%5C/371452/

L&T Fin pays Rs 45 cr for DBS Chola AMC

L&T Finance — the financial services arm of engineering major Larsen and Toubro — announced its entry into India’s mutual fund industry on Thursday, by buying DBS Cholamandalam Asset Management for Rs 45 crore.
The buyout values DBS Cholamandalam AMC — a unit of the joint venture between the Murugappa Group and Singapore’s DBS, at 1.55% of its total assets under management of Rs 2,893 crore on August 31.
Equirus Capital was advisor to L&T Finance for the deal, while Edelweiss Capital advised DBS Chola. Industry officials said the valuation is one of the lowest among the deals in the domestic mutual fund industry in the recent years.
In June, Japan’s Nomura bought a stake in LIC Mutual Fund for a valuation of about 2.5% of the fund’s assets under management. Last year, IDFC bought Standard Chartered Bank’s asset management business for a price that worked out to 5.7% of assets under management. Both these deals were considered expensive for the buyers, as a major chunk of the assets was debt at the time of acquisition.
Some in the industry believe that the deal is expensive for L&T as well, given the asset management company’s debt-laden asset mix. DBS Cholamandalam’s total assets comprises close to Rs 253 crore in equity and the rest in debt, according to data from Morningstar India, quoting AMFI figures.
The mutual fund industry has been abuzz with talks about DBS Cholamandalam AMC being on the block since 2007, though the company has officially denied it all the while. The current valuation is just a shade of what was offered to buy the AMC in 2007, said a person, who was familiar with the talks during the last stake sale attempt in 2007.
“The promoters were asking for 8% of the assets in 2007, when assets were over Rs 5,000 crore. What was offered was 6%,” said the person, on condition of anonymity. DBS Cholamandalam officials were unavailable to comment on the matter.

Source: http://economictimes.indiatimes.com/news/news-by-industry/indl-goods-/-svs/engineering/LT-Fin-pays-Rs-45-cr-for-DBS-Chola-AMC/articleshow/5058414.cms

Mutual fund agents, distributors get new Code of Conduct

Apex sectoral body AMFI has issued a fresh code of conduct for mutual fund intermediaries like agents and distributors, mandating them to disclose all commissions received from different schemes.
The revised code of conduct was issued by the Association of Mutual Funds in India (AMFI) following market regulator SEBI's circular asking the mutual fund distributors to disclose all the commissions payable to them from various schemes.
In a statement today, Sebi said all intermediaries of mutual fund companies would have to follow the code of conduct strictly.
"If any intermediary does not comply with the code of conduct, the mutual fund shall report it to AMFI and Sebi. No mutual fund shall deal with those intermediaries who do not follow code of conduct," Sebi said.
Reacting to the move, mutual fund tracking firm Value Research Online CEO Dhirendra Kumar said, "It puts onus on the Mutual Fund. Since intermediaries are not accountable to SEBI, mutual funds would have to ensure that they (intermediaries) are brought to task."
The code also requires intermediaries to adhere to guidelines issued by Sebi, highlight risk factors of each scheme, abstain from indicating or assuring returns, maintain confidentiality of all investors deals and ensure that all communications are sent on time, among others.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/Mutual-fund-agents-distributors-get-new-Code-of-Conduct/articleshow/5047949.cms

Sebi may segregate retail, institutional MF schemes

In a bid to protect the interests of retail investors, the Securities and Exchange Board of India (Sebi) is planning a clear segregation of retail and institutional schemes. Sources said Sebi might ask fund houses to create separate portfolios and net asset values (NAVs) for retail and institutional schemes.Sebi is working on the move as during the liquidity crunch of October 2008, fund managers sold the most liquid stocks in their portfolio to meet redemption pressures, leaving retail investors in a spot.
At present, although mutual funds offer both retail and institutional plans, these are separate only in the name as their portfolio and NAVs are the same. The only difference is the expense ratio, which is more for retail investors. Sources said Sebi was looking at doing away with this disparity as well.
Vineet Arora, head of products & distribution at ICICI Securities, said, “It is a welcome move. There is an obvious difference in behaviour between retail and institutional investors. Institutions tend to panic more than retail investors. Since redemption pressures are more from institutions, schemes for them will have to keep more cash, which may impact returns.”
Mutual funds charge 2-2.5 per cent from retail investors in equity schemes. The fee for institutional investors is only 0.5 per cent. The expense ratio is the percentage of a mutual fund’s net assets/corpus that goes towards meeting its expenses. The ratio covers fund management fees, marketing and selling expenses, and registrar fees. Funds with lower expenses give better returns, which is one reason why institutional schemes post better returns than retail ones. A case in point is ICICI Prudential’s Focussed Equity Fund institutional plan, which has posted 19.64 per cent returns compared with the retail plan’s figure of 18.49 per cent. There are several schemes where such a disparity exists.
Deepak Sharma, CEO, Sarthi Wealth Management Consultants, said, “The segregation is necessary after the kind of outflows witnessed in October 2008. It will ensure that retail investors are not at a disdvantage during large-scale redemptions.”
Recently, Sebi Chairman CB Bhave had expressed concern over the mutual fund industry’s over-dependence on funds from corporate houses. The Reserve Bank of India has also picked holes in the business model adopted by mutual funds. “A high dependence on corporates for funds implies a lesser role for the retail investors,” it said in its Annual Report 2008-09.
According to a Celent report, institutional investors contribute 56 per cent of the industry’s assets while retail investors account for only 37 per cent. By comparison, retail contribution in China is 70 per cent.

Source: http://www.business-standard.com/india/news/sebi-may-segregate-retail-institutional-mf-schemes/371171/

Following own rule while investing in equities 'suicidal'

A couple of years ago, hopes were high that a large chunk of household savings, which account for nearly two-third of all domestic savings in India, will find its way to the stock market through mutual funds, insurance companies and banks.
Investments in shares and debentures by households grew at a rate of 149% a year during FY 2005-07 as mutual funds and unit-linked insurance policies made rapid inroads in urban India. In FY08 the stock market absorbed nearly 12% of all household savings in India, up from less than 1% in FY04.

The basic rule for investment in equities is to buy securities when the equity market is falling. But every time the market crashes,retail investors rush out of the market, creating a stampede and hurting themselves so badly that many wouldn’t want to return ever. This gives equities a bad name and restricts the upside potential for retail investors.
Take the case of the market turmoil in Jan’ 08 and the free fall since then. This induced individual investors to flee to the safety of traditional investment avenues like bank deposits, insurance polices and cash and household savings in shares and debentures declined by 78% in FY09 against the average growth of 71.5% in previous three years. But actually they had missed a golden opportunity.
The Sensex had stabilised at around 8000 in November 2008 and hovered around this level till mid-March .

The signs of recovery and improved global liquidity reversed the trend in equity market to northward since mid-March ’09. The Sensex nearly doubled in less than six months. And guess what, retail investors are back in Dalal Street. The rising retail participation is evident from the rising assets under management of the equity mutual funds, which have grown from Rs 1,01,000 crore in Feb ’09 to Rs 1,81,000 crore by the end of Aug ’09.
But now, most of stocks comprising Sensex and Nifty have nearly doubled in the last six months and their valuations look stretched. Obviously, with each rise in the market, the chances of making a loss is higher than making a gain. In contrast, during the 2008 meltdown, the chances of a bottoming out was greater than a further fall.

So, if one decides to enter the equity market now, the returns are likely to be at best modest given the fact that most stocks are near their year highs while some have touched all time highs.
Then there are concerns on account of underlying inflationary pressure and a strong likelihood of a monetary tightening by the central bank. This may drag the equity markets down. If this happens, retail investors may book a loss and equities will again get a bad name.
Investors should not forget that booms and busts cycles are an integral part of equity markets and if one plays these cycles smartly, she can generate long-term wealth and prosperity. Big corrections are actually a buying opportunity.

Source: http://economictimes.indiatimes.com/quickiearticleshow/5007798.cms

Equity funds valuation up by Rs 80,000 crore in 5 months

Encouraged by the V-shape recovery in the market value of equity portfolio, the mutual fund industry has started rewarding investors with dividends.

Data compiled by the Association of Mutual Funds in India (AMFI) suggest that equity funds portfolio valuation has risen by Rs 80,000 crore in the five months between March 31, 2009 and August 31, 2009, due to a 60 per cent recovery in the benchmark indices and over 100 per cent rise in mid-cap and small cap stocks.
Dividend payout data sourced from MutualFundsIndia.com shows 71 equity-related dividend paying schemes were back in the dividend paying list in the first half of the current financial year compared to only 4 in the financial year 2008-09. Overall, 96 equity schemes have paid dividend in the first half so far compared to 42 equity schemes in the first half of the financial year 2008-09.
Among the equity funds that paid higher dividends are Franklin India prima fund (60 per cent), Birla Sun Life basic industries fund, Reliance RSF equity fund, SBI magnum sector umbrella fund and Taurus star share fund (50 per cent each) and Principal emerging blue-chip fund, Sahara banking & financial services fund and Birla Sun Life tax relief 96 fund (40 per cent each).
Prateek Agrawal, head of equity at Bharti AXA investment managers said “It is ideal to book profits and reward investors with dividend payments, especially during the current market condition which is good. Investors usually tend to stay invested longer in equity-oriented schemes, which have this discipline.”

Further, he is expecting markets to perform reasonably well in the coming days, which could give further opportunities in terms of regular profit booking and dividend distribution.
Considering favourable market conditions so far in the current fiscal, 25 fund houses have considered dividend this time compared to only 12 same period of the previous fiscal. Among this 25 fund houses, 14 fund houses skipped dividend last year between April 2008 to September 2008.
This include Baroda Pioneer, Bharti AXA, Canara Robeco, Escorts, Fortis, ING, JP Morgan, Principal, Reliance, Religare, Sahara, Tata, Sundaram BNP Paribas and Taurus mutual fund.

Source: http://www.business-standard.com/india/news/equity-funds-valuationby-rs-80000-crore-in-5-months/370726/

'We are cautiously optimistic'

The world markets are abuzz with talks of an earlier-than-expected economic revival. Yet, it makes sense to be cautiously optimistic, Bruno Leefeels Bruno Lee, regional head, wealth management, personal financial services, Asia-Pacific, HSBC. In a conversation with ET, he articulates his views on the wealth management in India and the impact of the regulatory changes on the mutual fund pricing structure. Excerpts:

Many feel that the worst is behind us. Would you agree?
There is some positive improvement in terms of economic data in the US market and Asia. Also, the fear factor has significantly reduced. But, I think we still need to be cautious as there are things that might crop up such as the unemployment situation. Overall, I would say we are cautiously optimistic.

What has been your advice to your high networth income (HNI) clients?
We feel that one should not wait till the market touches a record high to return to investing in equity. HNIs should review and rebalance their portfolios on a regular basis to ensure that they are comfortable with their exposure to risk and the changing environment. Further, to deal with volatility in the markets, diversifying into different asset classes is crucial. In India, where fixed income has been providing attractive returns, clients should have a strategy to allocate assets among equity and fixed income. Indian investors need to understand that the fixed income environment is quite attractive and the equity market is recovering. But outside India, in the US or eurozone, interest rates are low. There is a huge pool of cash sitting on the sidelines. When people’s risk appetite increases, BRIC market will attract a lot of inflow and that will push up the market to the next level.

How do you see the recent regulations on Mutual Fund (MF) pricing structure affecting the market?
Overall, MF penetration is low in India. The regulation ensures more transparency in pricing, which we support. But the other thing to be considered is the high cost of distribution. Bulk of people’s savings are still in fixed deposits, so many are not familiar with stocks/MFs. Thus, it requires a lot of education and financial planning support. Also, unlike stocks, MF is an ongoing service and maintenance cost is high for distributors. So, we are looking at pricing it correctly without sacrificing the service quality.

As a distributor of MFs, what shape is the new charge structure likely to take?
We are thinking along the direction of giving customers a choice. Some customers may do only one transaction for a one-time fee. They could be sophisticated and require relatively limited ongoing servicing. But other customers may need more frequent updates and ongoing services, for them we could charge a certain advisory fee. The charges will also depend on their needs, which are different for customers with lower investible surplus and ones with higher investible assets. We will have to look at customer needs, behaviour and requirements to design an appropriate way within the regulatory environment.

We took some time do our research on how best this could be done and are now on the verge of launching our charge structure. We want to ensure that this is a sustainable, profitable structure, otherwise, it could kill the whole distribution.

What kind of potential do you see in the wealth management space in India?
At HSBC, we are excited about opportunities in India. Some estimate the retail segment will grow at around 10% CAGR, from 900,000 in 2007, to over 1.6 million until 2013. The country has a large young population. As education is important in India, there is a need to save for the long-term — for kids’ education and retirement. We are well positioned to provide quality wealth management services to the mass-affluent segment to help fulfil their important goals in life.

Which are the markets that seem attractive at the moment?
Our quarterly global fund managers survey indicates that the relative allocation to equity market will improve during the third quarter. At the same time, within the global equity market, Asia (excluding Japan), particularly the Greater China region, will continue to attract more inflows because of the continued growth. And recently, we have seen the market reaching a relatively high level compared to March. Sensex in India has almost doubled in about six months’ time. So that is a sign that the money is flowing back into the market.

Source: http://economictimes.indiatimes.com/articleshow/5035815.cms?flstry=1