Fund houses in no hurry to stock up on RIL shares

Indian fund managers say they are in no hurry to load up on shares of India’s largest corporate Reliance Industries (RIL) although there is no longer an overhang of the gas dispute with the Supreme Court verdict on Friday being positive for the refining and petrochemical giant.

Almost all mutual funds have been underweight on the RIL stock for the past few months because of the uncertainty over the legal outcome of the battle for gas from the Krishna Godavari basin gas field. But some fund managers do concede that they may have to increase their exposure to the stock if it starts gaining because of strong capital flows into India.

“It is certainly a positive for the company, but the market had worked out the worst case scenario and how much the stock price would be impacted by a positive or negative verdict,” said the head-equities at a local fund house.

On Friday, Reliance Industries shares touched a high of Rs 1,060, before retreating to Rs 1033.85 at close, up 2.3% over the previous close. Reliance Industries has the highest weightage in the 30-share BSE Sensex (close to 12%) as well as in the 50-share NSE Nifty (a little over 10%). Since most diversified equity schemes are benchmarked to either of the two indices, fund managers risk underperforming their benchmarks if RIL shares move up sharply. Yet, domestic fund managers chose to take that gamble, and have not been hit hard since the stock has been underperforming key indices for a while now.

At the end of September 30, 2009, all equity schemes combined held 8.86 crore shares of Reliance Industries. That number shrank to 8.1 crore shares by March 31, 2010. “The outlook on the market as a whole has turned bearish,” said another fund manager, adding, “Reliance (Industries) shares are fairly valued at these levels, and so investors may not be in a hurry to buy them.”

But the fund manager said the stock would benefit indirectly if the overall market sentiment worsened. “During a (market) downturn, investors tend to sell their holdings in mid- and small-cap shares and deploy that money in large-cap shares. Such a trend will benefit Reliance Industries,” he said.

Interestingly, mutual funds had increased their exposure to ADAG firm Reliance Natural Resources Limited in April. While many fund houses are yet to disclose their portfolio, mutual funds holdings in absolute terms rose to 65.84 lakh shares in April, compared with 49.62 lakh shares in March.

“It is mildly positive for Reliance Industries as there will be higher realisation for gas, compared to the MoU terms and quite negative for Reliance Natural Resources in terms of price at which gas will be supplied, and also supply volumes may differ from those initially agreed upon,” said Sukumar Rajah, managing director & chief investment officer, Asian equities, Franklin Templeton Investments.

“The court’s verdict pertains to a specific MoU in relation to government’s rights over the gas reserves and sets the tone for future pricing in the sector,” he said. Reliance Industries shares have fallen a little over 5% in 2010 so far, compared to the decline of 4% in the Sensex.

Some fund managers reckon that the Reliance Industries stock could outperform key indices near term, though the stock is fairly valued. “A big chunk of foreign money is flowing into Indian shares through exchange-traded funds, most of which track the MSCI (Morgan Stanley Capital International) indices,” said the chief executive at a domestic fund house.

“That is why a stock like Airtel is holding on despite a negative outlook on the sector... liquidity flow is strong... so if money continues to pour in through ETF, Reliance (Industries) shares will be among the big gainers,” he said.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/analysis/Fund-houses-in-no-hurry-to-stock-up-on-RIL-shares/articleshow/5905218.cms

Did you know? Passive funds are not mandated to disclose tracking error

Since passive funds, such as index and exchange-traded funds, are mandated to mimic their benchmark indices, there’s no straight-forward way to tell which index fund is better than the other. One of the very few ways to see how good or bad an index fund is its tracking error (TE).

What is TE? The deviation of an index fund’s performance from its benchmark index is measured by a number called TE. Passive funds incur TE for several reasons. They pay commission to brokers to buy and sell scrips that increased their costs that eventually reduce their net asset values. Cash holdings also contribute to TE as higher TE affects performance. The lower the TE, the better is a passive fund.

Disclosure standards: The capital market regulator, the Securities and Exchange Board of India, mandates a disclosure of several portfolio attributes that enables investors to track their mutual fund investments efficiently. Unfortunately, TE is not one of them. Different fund houses have different standards; some disclose every month diligently and others conveniently avoid doing it. The periodicity of calculation also differs; some give one-year TE, others give three-year TE.

The solution: A TE of up to 2% is generally acceptable, though few index funds cross this limit. As TE is the best indicator to differentiate one index from another, a regular and standardized disclosure helps.

Source: http://www.livemint.com/2010/05/06214429/Did-you-know-Passive-funds-ar.html

Birla Sun Life MF Unveils India Reforms Fund

Birla Sun Life Mutual Fund has unveiled a new fund named as Birla Sun Life India Reforms Fund, an open ended equity scheme. The New Fund Offer (NFO) price for the scheme is Rs 10 per unit. The new issue is open for subscription from 10 May and closes on 9 June 2010.

The investment objective is to generate growth and capital appreciation by building a portfolio of companies that are expected to benefit from the economic reforms, PSU divestment and increased government spending.

The scheme will have dividend and growth plan. Dividend plan shall have payout and reinvestment option.

The scheme would allocate 65% to 100% of assets in equity and equity related instruments with medium to high risk profile. It would further allocate up to 35% of assets in debt and money market instruments (including securitized debt) with low to medium risk profile.

The minimum application amount is Rs 5000 and in multiples of Re 1 thereafter.

The fund seeks to collect a minimum subscription amount of Rs 1 crore under the scheme during the NFO period.

For units redeemed / switched out within 1 year from the date of allotment, an exit load of 1% of applicable NAV is payable. For units redeemed / switched out after 1 year from the date of allotment, no exit load is payable

Benchmark Index for the scheme will be S&P CNX 500.

The fund manager for the scheme will be Ankit Sancheti.

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

Mutual Fund investment will be inflation buster

Redemption pressures as well as entry load ban by SEBI has seen mutual fund industry sail through these hard times, but industry believes going ahead investment in mutual fund could be one big inflation buster.

“With inflation being high, the choice of beating inflation can now not be bank deposits. Investments will ultimately flow into the equity market and that would be a pull for the industry,” Jaideep Bhattacharya, UTI Mutual Fund Chief Marketing Officer told The Pioneer.

He added that with credit offtake increasing, banks are not parking much money with the mutual funds and so, we do not see much of bank money coming into mutual fund.

But in India, with only 8 per cent of savings is parked in mutual fund, there is a lot of money that needs to be harnessed. And adding salt to the injury was the ban on entry load by sebi, further demoralizing agents from selling mutual funds.

Bhattacharya said: “We have been conducting investor awareness programmes and also training our distribution channels to cope up with it, though the industry has devised their own structure.”

He further added that agents are being trained on how to move away from the transaction model to an advisory model.

UTI mutual fund in 2009-10 added a record Rs 31,463 crore asset under management and recorded 8.6 per cent growth in market share. In equity, the company recorded Rs 656 crore of net sales.

Bhattacharya said it has been an eventful year for UTI mutual fund. “We have crossed the one crore investor mark and this has been due to our continued focus on training, investor programmes and technological upgradation,” he said.

Going forward, Bhattacharya said that more and more people will allocate larger amount of money into equity.

“Systematic Investment Plan (SIP) is going to be the flavour of the year,” he said.

SIP is an instrument offered by mutual fund in which specific amount has to be invested for a continuous period at regular intervals. It is more like a recurring deposit in banks.

On asked if the company is launching any new fund, he said: “We have a large number of funds that are doing well. Going forward, we would be promoting the existent funds.”

He added that if and when we are faced with an investor need and there is a product gap, we will come out with a new fund offer.

Source: http://dailypioneer.com/254658/Mutual-Fund-investment-will-be-inflation-buster.html

MF agents flout SEBI rule on sub-brokers

Self-styled distributors, lacking basic qualifications to sell mutual fund units are advising investors as to where they should put their hard-earned money. Distributors need to pass the Amfi Advisors’ Module if they want to sell mutual fund schemes to investors.

If industry officials are to be believed, top national distributors, who sell investment products across asset classes, are not insisting on Amfi certification while appointing sub-brokers (sub-advisors or franchisees). This is more prevalent in franchisees or sub-broker offices in tier-II and tier-III cities, according to sources.

“Top distributors simply ask for a small membership fee at the time of empanelling as a sub-broker. They are not really concerned about Amfi registration or any certification. The sole criterion is how many investors you can bring into the branch,” said a fund industry source. These distributors are allowed to sell products across asset classes, from equity mutual funds to ULIPs, corporate deposits and even Nabard bonds on certain occasion.

For mutual funds, market regulator Sebi has made it mandatory for distributors to pass certification test (advisors module) and obtain registration number from Amfi. Institutions selling mutual funds have also been directed to enlist only certified advisors or product sellers. Insurance regulator IRDA also mandates advisors, including ULIP sellers, to pass the agents’ test before selling indemnity/investment products. Large-sized distributors are squarely flouting these rules while taking in sub-advisors.

The way to becoming an advisor, without taking Amfi advisors’ module test, is very simple. The aspiring advisor can just walk in to the branch of a national distributor, meet the area manager or business development head, and let them know his plan to become a mutual fund advisor. If the aspirant is well net-worked to bring in a few lakhs of rupees as investments (in mutual funds and ULIPs), branch officials collect a joining fee and hands out products to sell. If the newly-inducted sub-broker pays a higher fee, he is also allowed to use portfolio management software and product terminals owned by the distributor.

“We can only check the credentials of independent financial advisors (IFAs); it is impossible to check the certification of employees or sub-advisors empanelled with large distributors. We’ll have to go by their declaration that all advisors working for them are compliant to sell mutual funds,” said the channel head of a corporate-promoted fund house.

While fund houses are aware of this trend, they are not really worried about it. According to them, Amfi advisors’ module syllabus is outdated — sources say the syllabus was last updated in mid-2006 — and could slightly out of context, considering the large number of changes effected to mutual fund industry post-2008.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/MF-agents-flout-SEBI-rule-on-sub-brokers/articleshow/5910921.cms

Are High Costs eating into your Investment returns?

ULIP, or the Unit Linked Insurance Plans, are in the news, of late. It all started when SEBI, the stock market regulator, passed an order prohibiting 14 insurance companies from selling units of ULIP to investors. IRDA immediately came to the rescue to the insurance players asking them to continue their operations in spite of the SEBI order.

Lot has been written about the battle between the regulators, between two industries, between two products, etc. Lot has also been discussed whose jurisdiction it is or whether there can be multiple regulators. The issue is little different from the above points when it comes to the investors. It should hardly matter to an investor who regulates an industry or certain products as long as there is regulation and it keeps the interest of the investor paramount.

The battle is not between two regulators (SEBI and IRDA), two industries (insurance and mutual funds) or two products (ULIPs and mutual funds). It is between transparency and opacity, it is between low cost and high cost. It is about being fair to the consumer.

While choosing any investment product, what should an investor look for? As mentioned earlier, one should keep an eye on costs and in order to know the costs, transparency is a must.

The regulators have made good moves in the direction of transparency. The Pension regulator has designed the product such that there is no commission to the intermediaries. SEBI (regulator of the mutual fund industry) last year removed entry loads on mutual funds and thus reduced the commission that can be earned by mutual fund distributors. IRDA, the insurance industry regulator, has asked insurance companies to disclose the commission paid on selling of certain policies. These are important developments and really empower the investors to take informed investment decisions – provided the investor wishes to use these arms. As has been seen often, the investor does not bother to know about his or her own rights and then when something goes wrong, blames the system.

Let us come back to the development we discussed about empowering the investors. The intermediary (a.k.a. agents, distributors, sellers, relationship managers, brokers) can earn money in two ways, (i) through commission from insurance or mutual fund companies or (ii) by charging fees from the clients. The difference between the two is that while the commission is decided by insurance or mutual fund Company by looking at volumes, the fees is a function of the perception of the investor about what value one gets from the advisor.

In an investor-advisor relationship, the investor pays the price either directly or indirectly and the advisor is expected to offer some value. The value can be divided into three broad categories: advice, service and transaction facilitation.

Advice includes how one should invest the money, analysis of various options and help in selection of appropriate ones. Service includes monitoring of the portfolio performance, handling various non-commercial transactions (as and when) like change of address, change of bank details, change in nomination, etc. Transaction facilitation is nothing but implementation of the investment advice, buying various products as per the plan or changing the investments, or taking money out of some investments as needed.

Between the three, advice requires highest level of skills, knowledge and abilities, whereas transaction facilitation needs the least. Let us now come back to the fees v/s commission discussion. The commission becomes due only when a transaction (especially purchase) is done. The insurance or a mutual fund company pays the commission based on the volume of business generated and not on the basis of whether the intermediary offers any advice or any service to the investor. The recent developments across the regulators, have only reduced (or made transparent) the margins earned by the intermediaries on account of transaction facilitation.

Now the service and advice that the intermediaries offer can be judged only by the investor. The investor is now empowered to decide what is appropriate amount of cost to the investor and earning for the advisor based on one’s assessment (and not perception) of the advice and services offered.

Now that IRDA has asked insurers to disclose the commission payable to agents, someone argued that this may lead to passing back of commission by the intermediaries.

Let us consider two options:

(1) paying reasonable fees to your advisor after buying low cost and right products, or

(2) buying costly and appropriate (?) products and then taking some part of the commission back from the broker.

We have put a question mark after the word appropriate in option (2) with a reason.

It is human psychology to work for the benefit of the one who is closest in the entire chain of cash flow. In spite of the investor paying everyone in the chain, the intermediary would try to offer maximum benefit to the insurance or mutual fund company to get maximum commission since these companies can influence how much commission they can pay the intermediary. In such a case, although the economical costs to the investor may be the same under both the above options, one is likely to end up with inappropriate products in option 2. The probability is definitely high. We do not want to suggest that all intermediaries are bad and work against the interest of investors – many keep the investor’s interest as their primary goal. However, the reasoning we offered is only logical.

Why costs are important? Isn’t a cheap product generally associated with low quality? Well, the argument is sound, but when it comes to investment products, one must understand that the final output, i.e. return on investment, only goes down if the costs are high. At the same time, in order to offer superior investment advice, the advisor need to incur some costs and must be compensated for the same. If the compensation comes in form of higher returns on investment or in form of convenient service, the higher cost may be justified. In all other cases, it is better to buy something that does not cost much – you might end up getting the same product at much lower cost, in turn increasing your return on investments.

In the end, we recommend the investor should consider using the empowerment that the regulators have offered them. We recommend the following steps:

(1) Asking questions about costs should be the starting point

(2) It is better to pay fees to an advisor than to get pass back from an intermediary. By paying fees to an advisor, one is putting responsibility on the advisor.

(3) The fees should be in line with the value you get from your advisor. Once again, asking questions will help you get the right and desired information. Satisfy yourself about the credentials and credibility of the advisor.

Source: http://www.moneycontrol.com/news/mf-experts/are-high-costs-eating-into-your-investment-returns_455821.html

Welcome, correction

A dip in the market is an opportunity if you have missed out on the action earlier or even to rejig the portfolio.

A falling stock market has few takers. On April 26, when the Indian stock markets felt the first tremors of the Greek crisis, many experts started predicting a correction.

Since then, the Bombay Stock Exchange Sensitive Index, or Sensex, and the CNX Nifty have already fallen over 4 per cent in the last nine trading sessions. Investors, obviously, are unsure of the magnitude of correction or if there will be one at all.

This is quite similar to last March, when the Sensex was languishing at the 8,000 level, most people were uninterested in putting in any fresh money.

There were reports that the number of folios with mutual funds fell sharply because even systematic investment plans (Sips) were not being renewed. As a result, in the turnaround that followed, many investors missed out.

Hemant Rustagi, chief executive officer, Wiseinvest, sums up an investor’s psyche and says, “Investors are always in a dilemma. They want the market to go up for existing investments, but want it to fall to make fresh investments.”

For a value buyer, one share of Reliance Industries (RIL) was available at Rs 859.15 (52-week low) on July 13, 2009. The scrip closed at Rs 1,010.90 on Thursday – almost 15 per cent more expensive.

For different kinds of investors, a falling market presents different opportunities.

The first timer: For those who have not entered the market, a falling market is a wonderful opportunity to start investing in a portfolio of stocks as well as in mutual funds, and at a much cheaper price.

Says VK Sharma, head (private broking & wealth management), HDFC Securities, “For those, who have missed the boat, a correction is a great opportunity to get stocks at a lower value.”

However, financial planners are more cautious. They feel that first-time investors should look at equity diversified funds initially. This allows them to have a slice of the entire market.

If you are starting out, try out a mix. Say if you have Rs 1 lakh to invest, you can put Rs 50,000 in equity diversified fund.

Also, depending upon you regular income flow, start two-four systematic investment plans (SIP) of Rs 5,000 each, one could be an equity-linked saving scheme that will give you tax benefits under Section 80C. Use the rest to buy some blue chip stocks.

Another strategy could be moving money through systematic transfer plans (STPs). Said Anil Rego, chief executive officer, Right Horizons, a financial planning firm, “When markets are falling, buy in tranches at different index levels by way of STP. In case of a sharper fall, move higher amount of money and quickly.”

Already in, but entered at a high level: Corrections are great opportunities for them. Most people enter the market during a bull run. For example, between July and December 2007, the Sensex rose from 14,800 to 20,200 levels – a rise of 38 per cent. During the same period, equity mutual funds collected Rs 59,601 crore. Clearly, investors feel more comfortable in a rising market.

Once the market corrects, they are a nervous lot. And, that is primarily because of the value of their shares fall sharply. But, they could look at cost-averaging. That is, buying the same shares at a lower price to reduce their holding cost. Importantly, SIPs should be continued for the same reason because you get more units for the same installment.

A word of caution though – if you own cyclical stocks, it is important to do proper research. “If there is a stock in the portfolio that is dependent on commodity cycles, be careful with the cost-averaging strategy,” added Sharma. For instance, there are expectations that reduced demand from China will adversely impact commodity prices in the coming days. As a result, related companies could suffer. Here, a cost-averaging strategy could go for a complete toss.

Well-diversified portfolio: A correction is an opportunity to move money. If there are dud stock as or some non-performing funds in the portfolio, which have not performed in the rising market, you can move money from them to better stocks and funds. Similarly, if you have overexposure to some sectors, prune it.

Investing in stock markets is not a cakewalk. There will be dips and rises. But overtime, a patient investor will surely be able to make money.

Source: http://www.business-standard.com/india/news/welcome-correction/394084/

Volatility Index mirror global trends, surges 38%

India’s volatility index, VIX, which gauges investors’ risk perception about sharp swings in the market based on options prices, has risen quite a bit in the past two weeks. This trend is in line with the rise of volatility indices worldwide.

India VIX rose from 19.23 on April 21 to 23.69 on May 5. The rise is even more significant on a month-on-month basis with the index going up from 17.20 on April 6, 2010 to 23.69 on May 5, 2010. That’s a rise of nearly 38%. Still, India VIX is a long way off from its peak of 85.13 it had touched in November 2008, in the aftermath of the global financial crisis that caused equity markets around the world to free fall.

The India VIX seems to be mirroring global volatility trends. For instance, the Chicago Board Option Exchange’s CBOE Volatility Index, based on S&P 500 Options prices, has risen from 18.7 on 21 April to 24.15 on May 5. That’s a gain of about 29.14%. The Dow Jones Industrial Average dipped 2.31% during this period. According to Bloomberg data, the 10-day volatility for the Dow was at 20.58 compared with 13.05 for the last 30 days. This indicates that volatility over the last 10 days has risen.

Of late, Indian equity markets has become increasingly vulnerable to negative newsflow from the Eurozone area. “Investors are panicking because of the fears that Greece and other European countries may not be able to solve their debt crisis,” said Girish Patil, manager-derivatives, Antique Stockbroking. “So, there is a huge demand for put options from foreign institutional investors and domestic mutual funds. This is like buying an insurance against possible meltdown in equity.”

According to Siddarth Bhamre, head of equity derivatives at Angel Broking, FIIs have options strike prices of 4700, 4800, 4900 adding open interest. “This means they expect the market to be volatile and see some correction in the near future. Implied volatility (VIX) is a function of premium. The premium goes up as volatility increases and vice versa,” he said.

In this scenario of rising VIX, Bhamre advises clients to use short strangle in Nifty. “If the market comes to 5000-odd levels then you sell 4,900 put and 5,100 call. This way you get a premium of Rs 170-180 and you are safe till 4,720 on the lower side and 5,280 on the higher side.”...

India VIX has been trading at around 17-18 in April 2010, its lowest levels since the index started in April 2008. Experts feel that the VIX will not fall below its current levels of about 23.

“Whether it will rise is a matter of debate. But it will certainly not fall below these levels,” said Patil of Antique Stockbroking, adding that the Eurozone debt crisis is a significant negative that will loom over the market for some more time.

However, the market could get some respite if the dollar appreciates against the yuan as it will make US goods and services cheaper and more competitive internationally, said Patil....

Source: http://www.financialexpress.com/news/volatility-index-mirror-global-trends-surges-38/616080/2