MF turmoil: Can SEBI be held accountable?

SEBI's move to scrap entry loads on mutual funds may have been well intentioned, but it tripped badly in failing to assess the ground realities and the consequences of its actions

Five months after the Securities and Exchange Board of India (SEBI) scrapped entry loads on mutual fund (MF) schemes, the industry continues to be on the decline with further ill-conceived band-aid like trading through stock exchanges failing to attract investors. In the five months after the SEBI move, Rs7,200 crore of funds have moved out of equity schemes and flown, almost entirely, to Unit Linked Insurance Plans (ULIPs).

SEBI's move may have been well intentioned, but it tripped badly in failing to assess the ground realities and the consequences of its actions. It failed to visualise that sharply higher commissions paid by the insurance industry will suck money out of MFs. It also failed to ensure the availability of inexpensive alternative distribution channels. Consequently, investors continue to pay commissions, but only to other intermediaries such as banks or others in the exchange traded system. The question is, when will the regulator admit its mistake and initiate corrective action?

If SEBI had attempted to seek feedback before bringing in the regulation, it would have highlighted the impact of a hasty scrapping of entry loads on the fund industry and cautioned it against blundering ahead. A report by McKinsey & Co, the leading global consultancy firm, had enumerated some key issues even in August 2009, when the SEBI order came into effect. Even then, the fund industry was in turmoil and assets under management (AUM), which had been growing at 50% on a year-on-year basis, had declined by a sharp 17%.

McKinsey had pointed out that bank and national distributors who have control over the "customer's wallet" would be in a position to charge. That is exactly what is happening today. Banks were blamed for extorting huge paybacks from Asset Management Companies (AMCs), they have smoothly switched to debiting customer accounts for advisory fees.

McKinsey had also said that AMCs would have to continue compensating distributors (mainly banks) from their reduced fees. They may also increase exit loads for customers across holding periods—but this would be restricted to 100 bps. Here is what else McKinsey had predicted for the industry.

• Higher exit loads and transparent commissions would reduce the propensity to churn investments.
• Portfolio management services and alternate products will grow faster. AMCs and distributors will push higher margin products, especially debt products. This has indeed played out as predicted.
• The industry will undergo consolidation since smaller AMCs would find it difficult to manage the stress on their finances. Entry barriers will increase and it may even be difficult for new schemes to find distribution partners. However, the fact that SEBI has over 12 to 14 pending applications seems to suggest that the financial sector is not giving up on the mutual fund industry as yet.
• Most pertinently, the report had pointed out that it is IFAs (independent financial advisors) who help in geographic penetration of financial products. With IFAs, especially the smaller ones losing the incentive to sell mutual funds, the geographic penetration of the industry was bound to slow down. McKinsey's data shows that beyond the top eight cities, IFAs are the dominant distribution channel accounting for just under 50% of the market.

Source: http://www.moneylife.in/article/8/3204.html

Canara Robeco AUM crosses Rs 10,000-cr mark

Canara Robeco Asset Management Company, a joint venture between Canara Bank and Robeco, today said its assets under management (AUM) has crossed the Rs 10,000-crore mark as on January 8.

This is a growth of over 370 per cent in its AUM since the JV was formed in September 2007, a company statement said here today.

The growth in the AUM can be attributed to the consistent top quartile performance of its equity and fixed income funds across categories as well as the growing acceptance of Canara Robeco products amongst distributors and investors.

"The Rs 10,000-crore AUM mark achievement has been accomplished at a time which witnessed a fair degree of volatility in the markets and thus crossing this milestone in such challenging market conditions speaks volumes about the trust reposed in us by our investors and distributors," Canara Robeco Asset Management chief executive Rajnish Narula said.

"We will continue to invest significantly into our business and look forward to launching world class investment products in the near future to augment our growth," Narula said.


Source: http://www.business-standard.com/india/news/canara-robeco-aum-crosses-rs-10000-cr-mark/83046/on

Equity funds come on top in 2009

Equity-oriented funds were the strongest performers across all fund categories in 2009, said a report released by credit rating agency Crisil.

These funds registered a one-year return of over 80 per cent, driven by the sharp up-tick in equity markets with mid- and small-cap stocks outperforming large caps.

The year also witnessed a near two-fold rise in the assets under management (AUM) of the mutual fund (MF) industry. However, December was a dampener for the industry, which suffered the highest monthly net outflows due to withdrawals by companies and banks.

The Crisil Fund~eX (which tracks diversified equity funds) was up 81 per cent in 2009, reflecting the highest growth among all MF categories. This was better than the 76 per cent growth registered by the S&P CNX Nifty index.

The performance of diversified equity funds was supported by strong performance by the mid- and small-cap stocks with the respective indices showing growth in excess of 100 per cent in 2009. Balanced funds also rode the rising equity markets with the Crisil Fund~bX (which tracks balanced funds) returning 70 per cent in 2009. Most debt categories gave single-digit returns with gilt funds giving negative returns on account of rising interest rates witnessed in the year, especially in the second half.

Overall, 2009 was positive for the MF industry on the AUM front, with average AUM almost doubling to Rs 7.96 lakh crore in December 2009 from Rs 4.21 lakh crore a year ago. Month-end AUM on the other hand saw a 60 per cent growth on a year-on-year basis.

Krishnan Sitaraman, director at Crisil FundServices, said, “This growth was primarily due to high liquidity in the system, which saw large inflows into liquid and ultra short-term debt schemes.”

The buoyant equity markets, which grew sharply in 2009, gave a similar boost to equity fund AUM. While AUM of debt-oriented funds saw a 55 per cent growth over the year, equity fund AUM saw a much higher 77 per cent growth mainly due to mark-to-market gains.”

At the same time, December proved to be a dampener for the MF industry, as it witnessed the highest ever monthly net outflows of Rs 1.57 lakh crore. Most of the net outflow was from ultra-short debt schemes and liquid funds. Accordingly, average AUM fell 1.6 per cent or Rs 13,000 crore to Rs 7.96 trillion in December. Month-end AUM witnessed a steeper fall of 19 per cent to Rs 6.7 lakh crore.

The fall in AUM in December was on expected lines due to quarter-end withdrawals by companies and banks from ultra-short debt and liquid schemes. A similar trend is also seen in March and September. Companies withdraw their investments to meet advance tax payments, while banks prune mutual fund investments to meet their quarter-end balance sheet requirements on capital adequacy. However, equity-oriented funds witnessed a rise in AUM of Rs 5,600 crore on mark-to-market gains.


Source: http://www.business-standard.com/india/news/equity-funds-cometop-in-2009/382587/

'Industry is full of non-serious players'

UK Sinha, other than being the chairman of the country’s fourth-largest fund house, is on various panels, including the recently-formed committee for rationalising foreign institutional investments. He tells Vandana he has asked the finance ministry to frame a mutual fund policy. Excerpts:

Things were not hunky dory for mutual funds (MFs) in 2009. What is your outlook for the industry?
The outlook for this year is very challenging. The regime prevalent till July 2009 has been disturbed in a manner that affects the asset management industry negatively. If it had been done for the financial sector as a whole, the situation would have been different. But it has been done only for the asset management industry. The trend that has emerged is that distributors have started selling other products.

Do you think the ban on entry load will create a transparent and more investor-centric industry in long term?
It will not, the reason being that only one piece of the puzzle has been tackled. There are three-four pieces. The ban on entry load should have been combined with an investor campaign. There is no distributor regulation today. So, investors’ choices are getting limited. If there is no level-playing field, the industry will continue to shrink, not because of poor performance but because others are able to attract investors more effectively. One has to look at how the industry has grown in other parts of the world.

Now, if you look at other parts of the world, what the Securities and Exchange Board of India (Sebi) has done is in the interest of customers, provided you do not give other products the option to keep functioning in the same way as they are functioning today.

In the UK, for example, the Financial Services Authority has said that from 2011, it will introduce a product combining pension, insurance and mutual fund. Since this has not been done in India, people are migrating to other products.

Despite the fact that a dozen players want to set up shop, there are others who are exiting. Is consolidation inevitable?
I am of the view that consolidation should happen. It makes economic sense. But in India, people get attached to their ventures and do not admit failures. I am aware of only two cases where it has happened. Another reason is that opening a mutual fund is easy in India. You need only Rs 10 crore capital. An insurance venture, on the other hand, needs a paid-up capital of Rs 100 crore plus asset-based additional top-up. Except UTI, there is no serious player which has no other business besides mutual funds. So if they are not making money in mutual funds, they are making money elsewhere. That is why I say that the industry is full of non-serious players.

Is there a case for raising the regulatory cap?
Yes, but that would be a haphazard way of doing things. Sebi or the government should look at a policy for mutual funds. Today, the question is what space should mutual funds occupy. Which savings should flow to the industry? What is the expectation of the government from this segment? All these have not been articulated. The role of mutual funds should be delineated. I remember that a finance minister used to tell the media that he wants retail investors not to buy and sell securities directly. He said he wanted them to come through the MF route. He was making an important policy statement. Similarly, mutual funds are not for daily churn and time has come for the government to rethink the role of MFs vis-a-vis pension and insurance industries. Globally, the MF industry has grown on pension money, which is not allowed in India. The MF industry is getting more and more marginalised. I have written to the finance ministry asking it to draft a mutual fund policy.

How do you plan to leverage the T Rowe Price brand and expertise?
Just like us, it does not have any business other than asset management. It is driven by investment professionals, not owned by a particular business house. We believe that T Rowe Price has a lot of international money that can come to India. Their future investments into India will be routed through us, including the foreign institutional investment (FII) money. We plan to launch an offshore fund in the next two-three months. We also plan to launch an international fund for domestic investors.

You are on the panel for rationalising FII investments. What are the issues you have looked at?
We are trying to submit the report by April. We met recently but I cannot comment on the contours of what transpired at the meeting. We are seeking feedback from FIIs as well. The terms of reference are aimed at reviewing the existing policy on foreign inflows other than foreign direct investment. The panel will study the arrangements related to use of participatory notes and suggest any change in policy, if required.

Source: http://www.business-standard.com/india/news/industry-is-fullnon-serious-players/382509/

Fidelity Global Real Assets fund floats on

Fidelity Mutual Fund has launched a new fund named as Fidelity Global Real Assets Fund, an open ended fund of funds scheme.

The new fund offer (NFO) price for the scheme is Rs 10 per unit. The new issue is open for subscription from Jan.11, 2010 and closes on Jan.29, 2010.

The investment objective of the scheme is to generate long-term capital growth from a portfolio which will be primarily invested in Fidelity Funds - Global Real Asset Securities Fund, an offshore fund launched by Fidelity Funds (an open ended investment company incorporated in Luxembourg) and similar to an Indian mutual fund scheme.

Speaking about the launch of the new fund, Ashu Suyash, managing director (MD) and country head – India, Fidelity International, said, ``Indian investors have always had a soft spot for physical assets, like gold and real estate. The Fidelity Global Real Assets Fund brings you the option of adding a whole range of physical or real assets through the convenience and affordability of a diversified equity fund.``

Amit Lodha, portfolio manager of the Fidelity Funds - Global Real Asset Securities Fund, said, ``I believe that the Fidelity Funds - Global Real Asset Securities Fund provides investors with the opportunity to benefit from a new type of investment approach from Fidelity International by combining thematic thinking and bottom-up stock idea identification. The allocation to thematic drivers will be dynamic and anticipate and exploit different points in the economic cycle – not just when there is a commodities / resources bull market.``

The scheme offers two options - growth option and dividend option. The dividend Option offers dividend payout and dividend re-investment facilities.

The scheme would invest 80% to 100% of assets in shares / units of the underlying scheme / foreign securities with high risk profile and up-to 20% of assets in money market instruments and/or liquid/cash schemes of mutual funds registered with SEBI with low to medium risk

The exit load charge will 1% of applicable NAV if exited within 1 year from the date of allotment or Purchase applying first in first out basis.

Benchmark is a blend of the following indices - MSCI ACWI Industrials, MSCI ACWI Real Estate, MSCI ACWI Utilities, MSCI Materials and MSCI Energy. The weights assigned to each individual index while calculating the custom benchmark is 20%, 20%, 10%, 20% and 30% respectively.

Source: http://www.myiris.com/newsCentre/storyShow.php?fileR=20100112170016707&dir=2010/01/12&secID=livenews

Silly errors in MF forms: how not to make them

It may appear the simplest of tasks, but one small mistake and it could take months to make that investment. Common errors you should steer clear of

Elementary,” said the legendary detective Sherlock Holmes every time he deciphered a clue. We bet you’d say the same, every time you perform the simple task—or at least suppose it’s simple—of filling a mutual fund (MF) form.

By now, you can blurt out details such as your name, address and telephone number even while sleeping. Some of you may even remember your bank account number or permanent account number (PAN). So, what’s the big deal after all?

It could take you several days if not months to finally submit your “simple” MF form if you overlook even minor details. Your MF form can get rejected for the silliest of errors you make. Not only is it tiring to fill up forms again, you may even end up losing market upsides, if any.

Here are some common errors people make while filling forms.

Not joining existing folio
If you invest in a scheme of a fund house that is already in your MF portfolio, make sure you use your existing folio. A folio is a combination of all your investments within the same fund house.

Suppose, you invest in three schemes of HDFC Asset Management Co. Ltd—HDFC Equity, HDFC Taxsaver and HDFC Prudence. The fund house will allot account numbers for each of the three schemes, and also club them under a folio for which you will get a unique folio number.

In keeping with the Securities and Exchange Board of India’s (Sebi) guidelines, your fund house will send a consolidated account statement once a year, mentioning details of all your holdings. It’s like putting all relevant files (think of these as your account numbers) in a single filing cabinet (think of this as your folio).

A consolidated statement would reduce paper work and make it easier for you to monitor your investments. Also, effecting changes would be easier. For instance, your bank account or address details with the three HDFC schemes will get changed with a single application. K. Venkitesh, national head (distribution), Geojit BNP Paribas Finance Services Ltd, says: “Less than 10% of investors opt for the same folio number even though it reduces work substantially.”

Not choosing an option
Most schemes have various plans and options. Typically, “plans” specifies the category of investors such as institutional and retail. “Option” caters to either “dividend” or “growth”. Make sure you select the right plan and option.

Usually, different plans have different restriction levels in terms of the minimum investment amount. While institutional plans require a minimum investment of Rs25 lakh to Rs1 crore, depending on the fund house, retail plans need just Rs5,000. If you select the institutional plan for a small amount, your application will be rejected.

Also, decide whether you want the “dividend” or “growth” option. In other words, decide whether you want to receive dividends as and when the fund declares them or wish to see your money grow. Forget to select your option and the fund house allots you its default option, which could be either. For instance, Birla Sun Life MF imposes a default option of “dividend reinvestment” for all its schemes, except Birla Sun Life Tax Relief ’96, where the default option is “dividend payout”.

Jaydeep Kashikar, director, Brainpoint Investment Centre Pvt. Ltd and a Mumbai-based financial planner, says: “Some people invest in equity funds expecting dividends, but don’t get dividends because they don’t make any choice. The auto option may move the fund into, say, a growth option.”

Wrong SIP start date
Every time you enroll for a systematic investment plan (SIP), the fund house, typically, takes a month to process the application. Your SIP starts after that. Make sure your SIP start-date in the form is at least 30 days away from your application date. So, if you enroll for an SIP on 7 February, the earliest you can start it is 7 March. If you put 1 March, your application gets rejected. Typically, you can start your SIPs on the first, seventh, 10th, 15th, 20th and 25th day of any month.

There’s more. If you want an electronic clearing service (ECS) facility for the SIP and you have a joint account, all bank account holders will have to sign on the form near the “bank mandate” section. Under the SIP mandate section, though, only MF account holders need to sign.

Not filling ‘mode of holding’
Picture this. You and your spouse have invested jointly in an MF. Some months down the line, equity markets shoot up while you are travelling. You call up your spouse to book profits. She can’t because, as it turns out, your signature is mandatory. By the time you return, it’s too late.

Your mode of holding determines who manages your investment during an emergency. If you have a second account holder, you get two choices: “either or survivor (EoS)” or “joint”. Under EoS, you or the second account holder can buy fresh units, switch or sell. Even if the second holder, say, sells your holdings, the sales proceeds would go to the primary holder’s bank account. If you select “joint”, signatures of all account holders are mandatory for any buy, switch or sell. Again, you don’t choose and your fund does it for you. Fund houses such as Tata and Reliance have “joint” as the default holding mode while funds such as Birla and Mirae have EoS.

Not quoting your PAN
It’s common knowledge to quote your PAN while investing in an MF, but still a lot of us forget to mention it in the form, while remembering to attach a copy. “If you submit forms at the registrar’s offices without mentioning your PAN, 99% of times your application gets rejected even if you have attached the PAN card copy. However, if you submit at your fund’s offices, chances that they would double-check and fill the gap are much higher,” says Venkitesh.

Sometimes the registrar will accept your form if you submit your PAN card copy without noticing that you haven’t entered your PAN in your form. As a result, later, your fund may end up sending you reminders that you have not submitted or quoted your PAN.

Source: http://www.livemint.com/2010/01/11194813/Silly-errors-in-MF-forms-how.html

IDFC MF Unveils Monthly Income Plan

IDFC Mutual Fund has launched a new fund named as IDFC Monthly Income Plan, an open ended fund of funds scheme. The New Fund Offer (NFO) price for the scheme is Rs 10 per unit. The new issue is open for subscription from 11 January 2010 and closes on 9 February 2010.

Investment Objective:
The primary objective of the scheme is to generate regular returns through investment primarily in debt oriented mutual fund schemes (such as Income and Liquid funds). The secondary objective of the scheme is to generate long-term capital appreciation by investing a portion of the scheme's assets in equity oriented mutual fund schemes.

Options:
The scheme offers dividend and growth option. Dividend option offers payout, reinvestment and auto sweep as its sub option.

Asset Allocation:
IDFC Monthly Income Plan will allocate 65% to 100% of assets in units of mutual funds investing in debt / liquid / income funds and up-to 25% of assets in units of mutual funds investing in equity funds with high risk profile. It would further allocate up-to 15% of assets in money market instruments with low to medium risk profile

Minimum Application Amount:
The minimum investment amount is Rs 5,000 and in multiples of Re 1 for Non SIP and in multiples of Re 0.01 for switches. Additional ongoing purchase (Non SIP) - Rs 1,000 and in multiples of Re 1 thereafter. For SIP purchase Rs 1,000 which is subject to minimum of 6 installments of Rs 1,000 each.

Minimum Target Amount:
The fund seeks to collect a minimum subscription (minimum target) amount of Rs 1 crore under the scheme during the NFO period.

Load Structure:
There shall be no entry load in the scheme. Exit load charge of 1% of the NAV shall be applicable if investors who redeem / switch out such investments within 365 days from the date of subscription applying First in First Out basis, (including investments through SIP/STP). No exit load shall be applicable for switches between options of the schemes.

Benchmark:
The Scheme's performance will be benchmarked against CRISIL MIP Blended Index.

Fund Manager:
Ashwin Patni will be the fund manager for the scheme.

Source: http://www.apollosindhoori.cmlinks.com/MutualFund/MFSnapShot.aspx?opt=9&SecId=10&SubSecId=22,24

Ban on Entry load cuts churn in MF schemes

The ban on entry load (the fees charged from investors for entering a scheme) has brought some sanity in mutual fund (MF) distribution. The move has ensured a drastic reduction in portfolio churning from the levels seen in 2006-07.

While there is no data to prove it, sales heads at asset management companies say the incidence of investors shifting schemes frequently has gone down substantially.

Distributors and independent financial advisors (IFAs) admitted that this was rampant some time ago but not now, as it had become less rewarding due to the ban on entry load.

Portfolio churning had become a serious issue, with a section of distributors advising investors to churn funds frequently just to earn more commission. During the entry-load regime, fund houses used to give distributors heavy incentives. This meant distributors recommending even schemes not suited to an investor’s risk profile.

“A section of the distribution community was obviously doing it. But in the last four-five months, we have not noticed frequent shifting of schemes. The number of transactions and the overall business have been quite muted, but from the investment pattern that we have observed, retail investors are now more focused on performance than switching funds. Churning has come down significantly,” said the national sales head of a mutual fund.

One of the regulator’s motive in scrapping the entry load was to stop these activities. However, mis-selling continues, with distributors and smaller IFAs giving preference to insurance than mutual funds as the former earns them more commission. However, instances of distributors asking investors to switch funds within a span of days has come down.

“The revenue model has changed. It is not viable for distributors to do that now because the incentive has gone. The average holding period for our investors in equity funds who come through the SIP (systematic investment plan) route is 12 months, which we expect to go up as investors mature. There is much more awareness among retail investors now,” said Puneet Kapoor, head of products at Kotak Mahindra Bank.

The churn has also come down because the number of IFAs selling MFs has gone down significantly. After the ban on entry load kicked in from August 1, industry estimates suggest that close to 70 per cent of IFAs shunned MF distribution. For agents in tier-II towns, it did not make sense to sell MFs because they could not survive on margins of 50-60 basis points to 1 per cent.

“Logically speaking, churning should have come down, but there are no figures to support it. The main reason for churning portfolios frequently has been done away with. The flow of NFOs (new fund offers), one of the major reason for the churn, has died down and there is not much enthusiasm now, as shown by the collection of recent offerings. Retail investors have become more mature and the level of awareness has risen sharply. Investors now question the logic of investing in a particular scheme”, said Vineet Arora, head of product & distribution at ICICI Securities.

Investors pulled out Rs 1,109 crore from equity funds in November. Since August, the category has seen net outflows of Rs 5,130 crore. But, analysts say that most of it is profit-booking and not necessarily portfolio churning. The latter would have meant some inflows coming back, which has not happened as there have been net outflows for the past few months.

Source: http://www.business-standard.com/india/news/banentry-load-cuts-churn-in-mf-schemes/382200/