Mutual funds may come up with low-cost distribution mod

Almost 10 months since the entry-load ban on mutual funds was implemented, the asset management companies (AMCs) are considering low-cost distribution models to supplement their existing network.

AMCs are looking at taking on fresh graduates as trainees or on internship to market their products and create customer awareness, according to senior industry experts.

Inflows into equity funds have slowed down with distributors opting to sell products such as the Unit Linked Insurance Product (ULIP) and the post office savings scheme, with the income from mutual funds becoming almost negligible.

Distributors were earlier earning 2.25 per cent commission on the sale of funds which, in turn, charged the amount from the customer.

The Securities and Exchange Board of India banned entry load on mutual funds effective August 1, thereby bringing down distribution premium charges to 0.4-0.5 per cent from two-to-three per cent earlier.

Trainees

In order to overcome this hurdle, AMCs have been trying to devise models for distribution. While some fund houses are offering the distributors' commission of about 1.5 per cent from their pockets, others are looking at appointing trainees for creating consumer awareness.

ICICI Prudential, for instance, plans to hire 50 trainees to support its existing distribution network. “The bank has a strong branch network and we are trying to leverage on that. We are also looking to hire about 50 people as trainees to work in co-ordination with our existing distribution network,” said Mr Raghav Iyengar, National Head-Sales and Distribution, ICICI Prudential.

Some of the AMCs have also been hiring B-school graduates as interns for marketing their products. “The fund houses have been approaching us and are ready to send their interns to work with us to boost the sale of mutual funds,” said the head of an investment advisory services company in the city.

IDBI AMC plans to rope in AMFI-certified graduates in a limited number of branches in Mumbai and Pune to market its products. “The graduates will be a part of our out-bound sales team and will initially use the bank and AMCs' existing infrastructure as the nodal point. To start with, they will be off the rolls, but based on their performance could be absorbed in the company,” said Mr Arun Kumar Singh, Executive Director and Compliance Officer, IDBI Asset Management.

The company has initiated a pilot project in a few cities and has recruited 76 graduates. “We are looking at pricing. It should be enough to keep the new recruits motivated. We will expand the model in 53 locations, and eventually to the entire country. We will leverage from the large network of IDBI branches for the mutual fund business,” Mr Singh said.

Source: http://www.thehindubusinessline.com/2010/06/04/stories/2010060452051000.htm

Bharti AXA MF Announces Change in Fund Managers for Regular Return Fund

Bharti AXA Mutual Fund has announced that Mr. Ramesh Rachuri and Mr. Gaurav Kapur have been designated as the new fund managers (fixed income and equity portions respectively) of Bharti AXA Regular Return Fund, in place of Mr. Sujoy Kumar Das and Mr. Prateek Agarwal, the current fund managers (fixed income and equity portions respectively). The changes are effective from 4 June 2010.

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

400,000 accounts exit MFs in April

As many as 400,000 investors in the Rs8 trillion Indian mutual fund (MF) industry could have exited in April. Distributors’ lack of interest in selling MFs to investors and profit-booking by retail investors and financial institutions are the two reasons behind the exodus, say industry executives and analysts.

While poor sales effort can be attributed to the stock market regulator’s August 2009 decision to scrap commissions on the sale of funds, the profit- booking is a result of uncertainty in the market over the sustainability of the global economic recovery, especially given the recent events in Europe.

Investor accounts are folios with unique numbers that store details of the investment. Each investor can have multiple investor accounts. To be sure, the drop of 400,000 accounts doesn’t necessarily mean there were fewer investors in MFs at the end of April than at the beginning of the month. It is mathematically possible for, say 100,000 existing investors to exit from an average of five funds each—resulting in the extinguishing of 500,000 accounts—even as 100,000 new investors entered an average of one fund each, resulting in the creation of 100,000 accounts.

According to figures provided by industry body, Association of Mutual Funds in India (Amfi), the number of accounts fell from 46.9 million to 46.5 million and equity assets of around Rs1,300 crore were redeemed net of new sales in April. This is more than 10 times the drop in investor accounts between September 2009 and March. During that period, the number of accounts fell by 37,161.

“The folios have shown a sharp decline. This is an area of concern and we’re looking at ways to address this,” said H.N. Sinor, chief executive of Amfi, who spoke to Mint two weeks ago. He said folio numbers are a better gauge of the business than assets under management (AUM).

For May, Amfi reported average AUM of Rs8.03 trillion, compared with Rs7.7 trillion a month ago.

Amfi plans to conduct investor education programmes across the country to create awareness among investors about benefits of MFs.

Meanwhile, several fund houses launched new offers in May to bring fresh investors into the fold. Some have been successful, but not to the extent expected. The biggest of these offers, which was from from DSP BlackRock, collected Rs670 crore. “We received about 54,000 applications, of which roughly 80% would be retail and HNI (high networth individual) applications. We targeted much more. But given the volatile markets, we think this is reasonable,” said a senior official with the fund house requesting anonymity.

Birla Sun Life Asset Management Co. Ltd, SBI Funds Management Pvt. Ltd, Axis Asset Management Co. Ltd, IDFC Asset Management Co. Ltd and Mirae Asset Global are selling their new funds currently.

According to an executive at a fund house, the normal life of retail investors, who typically invest in equity funds, is 15 months. Every year, retail folios grow by 20-30%, inclusive of churning. For instance, between March 2009 and September 2009, the number of retail accounts grew from 46.3 million to 46.9 million.

“This year we’ve seen a fall because the number of retail investors exiting the industry is more than the number of new customers coming in. So the net growth in retail folios becomes negative,” said the chief executive of a large foreign bank-controlled asset management firm, on condition of anonymity. He puts the blame squarely on the lack of motivation for advisers.

“After Sebi (Securities and Exchange Board of India) scrapped entry loads, distributors are not really motivated to sell mutual fund schemes with the same aggression as earlier. If retail investors are not motivated to stay on, they are most likely to exit their investments completely once the equity markets go up,” he added. “For convincing the retail investors to stay invested for a long term, the distributors and agents need to motivate and educate them, which has almost stopped in the absence of incentives.”

In August, Sebi had banned entry loads. The move was intended to help retail investors, but the inability of asset managers to adjust to it and come up with a workable distribution model even after almost a year is resulting in this large-scale loss of retail assets, said an analyst.

According to Maju A. Nair, associate vice-president in charge of the MF business at Mumbai-based Sharekhan Ltd, small investor accounts that have investments under Rs10,000 are the worst hit. “Distributors incur time and money for serving the clients, small or big. But these guys are very sensitive to charges on advice. So, these are the ones who are left with no advice and often head for the exit door.”

According to Sebi, at the end of March, individual accounts, which accounted for 97% of investor accounts, contributed nearly Rs2.45 trillion, or 40%, of the Rs6.17 trillion AUM. Firms and institutions accounted for only 0.95% of the total investor accounts, but for Rs3.37 trillion, or 54.75%, of AUM.

Non-resident Indians and foreign institutional investors accounted for 1.9% of accounts and 5.47% of assets.

Source: http://www.livemint.com/2010/06/03234158/400000-accounts-exit-MFs-in-A.html

New fund offers can signal mutual fund turnaround

Can a few new fund offers (NFOs) from reputed fund houses help the mutual fund industry regain its lost ground? According to industry players, NFOs from reputed players such as SBI MF, Birla Sun Life, DSP BlackRock among others would definitely generate a positive buzz about the industry and it may help bring some of the mutual fund sellers, who have vanished since the entry load ban by Sebi in August, back to the fold.

"DSP is one of the most respected fund houses in the country. When they come out with an NFO, that too a totally different proposition of a heavily concentrated portfolio of 25 stocks, it generates a lot of buzz," says a mutual fund distributor, who doesn't want to be named. According to market sources, DSP BlackRock NFO, which closed for initial subscription on Friday, had collected around Rs 700 crore. The figures couldn't be officially confirmed. The fund house was hoping to collect around Rs 2,000 crore.

"The SBI Mutual Fund NFO is also expected to do well because SBI would back it strongly. Birla and others would also do reasonably well," says Uday Merchant, a mutual fund distributor. However, he is quick to add that mega NFOs collecting Rs 5,000 core or so is now history.

"I don't think people are really interested in NFOs these days. The complete distribution network has collapsed after the entry load ban in August. Earlier, we just had to distribute the NFO form with newspapers and there would be good response from investors. But that is not the case any longer."

"It is a good sign that fund houses are not coming up with pure vanilla schemes to complete their portfolio. DSP is offering a concentrated portfolio; SBI is banking on the PSU theme and Birla on the reform story," says Y Jawahar, VP — head, distribution, Mata Securities.

Source: http://timesofindia.indiatimes.com/biz/india-business/New-fund-offers-can-signal-mutual-fund-turnaround-/articleshow/6005284.cms

Local AMCs turn to offshore advisory biz as inflows dry up

These days, leading asset management companies are focusing more on their ‘offshsore advisory’ business, where they give research-based advice to foreign funds that invest in India for a fee. This comes in the wake of a slowdown in their local investment management business, with money flows into mutual fund schemes drying up, because of the reluctance of distributors’ to sell these products due to lower commissions.

“We are now forced to look at other avenues such as offshore advisory more seriously, because the local market looks dull at the moment, as distributors are just not co-operating to sell mutual fund products,” said a senior official with a private mutual fund, which runs this business.

Top officials of some leading asset management companies are believed to have made overseas visits recently to make a pitch to potential investors for advisory services. Among domestic fund houses, Reliance Mutual Fund, ICICI Prudential Asset Management, DSP Blackrock Mutual Fund and UTI Mutual Fund, among others, are known to have offshore advisory business.

In this business, AMCs get a fee of around 15-50-basis points (100 basis points is equal to 1%) of the transaction size, said industry officials. In some cases, the fee is based on a profit-sharing agreement, but such instances are fewer, they said.

“The offshore advisory business is not easy, as there is heavy competition from broking houses. But this has the potential to make up for the slackening of the local business,” said a top official with another private mutual fund.

Distributors have been averse to selling mutual fund products from August 2009, when the Securities and Exchange Board of India (Sebi) rule to clamp down on fees to distributors came into force. The market regulator barred the practice of charging entry loads by mutual funds, where the fund house deducted 2.25% of the investors’ money to distribute to the brokers. Now, distributors are aiming to sell more of insurance products and companies’ fixed deposits, as they fetch higher fees.

The offshore advisory business of AMCs came under the Sebi lens recently, a reason why fund officials were unwilling to officially comment for this story.

The market regulator felt that some fund houses were not maintaining a ‘Chinese wall’ to operate local investment management, offshore advisory and portfolio management services units, according to a source privy to the matter. AMC officials clarified that the mutual fund, offshore advisory and PMS teams do business separately.

Critics feel AMCs’ focus on offshore business is not in the best interests of the industry in the long-term. “Fund houses should use their time and resources to build a network here rather than overseas, given that India is among the most under-penetrated markets world-wide,” said a sales head with a mutual fund, jointly owned by a foreign institution and a local bank.

Source: http://economictimes.indiatimes.com/Local-AMCs-turn-to-offshore-advisory-biz-as-inflows-dry-up/articleshow/6005510.cms

AMCs split over plan to increase net worth

Domestic fund houses are divided over the proposed increase in the minimum net worth of asset management companies (AMCs) from Rs 10 crore to Rs 50 crore.

The increase has been recommended by the Committee on Review of Eligibility Norm, constituted by the Securities and Exchange Board of India (Sebi).

While large fund houses say this will ensure entry of only serious players, smaller AMCs are opposed to the proposal. The committee said large net worth would signal the company’s seriousness.

Sources say this is becoming a hot issue and is likely to come up for discussion at the general body meeting of the Association of Mutual Funds in India next week.

“Does it mean that fund houses with high net worth are serious and smaller players are not?” said the chief executive (CEO) of a small fund house. “I believe the minimum net worth should be reduced to Rs one crore. We are here to provide services to investors. In the outside world, the net worth requirement (for AMCs) is minuscule and it’s unfortunate that in India we are moving in the opposite direction.”

“Seriousness should not be connected with the money a fund house manages. It has to be linked with ethics, policies and business models. The move favours bigger players,” said another executive.

However, the CEO of a leading fund house said, “On Wednesday, anybody can get into the fund management business. There has to be a certain base capital requirement. I am in favour of raising the net worth.”

Echoing this, the head of another establishment said, “As public money is involved, the capital requirement should be higher. I strongly support this. The net worth of sponsors of mutual fund houses should also be re-looked at.”

The smaller AMCs questioned the committee’s observation that a higher net worth was required to protect investors from market-driven stress as large AMCs would be better placed to obtain liquidity lines from banks.

“Had it been the case, why did larger fund houses knock the doors of the central bank in October 2008, when the industry suffered immense redemption pressure?” said the head of a mid-sized AMC.

Source: http://www.business-standard.com/india/news/amcs-split-over-plan-to-increase-net-worth/396855/

Mutual Funds may have to keep PMS biz separate

ASSET management companies (AMCs) that provide portfolio management services may soon have to maintain a “Chinese wall” between the two businesses, by ensuring that there is no conflict of interest.

Capital market regulator the Securities and Exchange Board of India (Sebi) has proposed to review its mutual fund (MF) regulation that allows asset management companies to carry out other businesses, such as portfolio management service (PMS). Some of the leading fund houses provide the portfolio management service under the same umbrella by sharing infrastructure facilities.

The reasoning within Sebi about this proposal is that investment decisions in the MF business should not be shared with its portfolio management segment. Sebi fears that the AMC might priortise the portfolio management business over the MF business as the fund house is allowed to fix remuneration to distributors according to the services provided.

The issue is expected to be discussed when the regulator’s advisory committee on mutual funds meets on Monday.

The meeting will also discuss whether the Real Estate Investment Trust proposal should be continued or withdrawn or merged with Real Estate MFs. Besides, the committee that has representatives from the industry, law firms and investor associations, is likely to discuss the fungibility of expenses.

Fund houses now charge about 2.5% of the assets under management of the schemes as fund management fees annually . This fee typically covers management fees, operating expenses and trail ommissions. The regulator may consider providing flexibility to fund houses to charge management fees which is currently capped at 1.3% within the fund management fees.

Besides the total expense ratio the regulator has also proposed an enhanced performance measurement disclosure. Although the industry body Amfi, has put in place a lot of methods of disclosures, the regulator may be looking at having uniform dates across all funds that would help retail investors better understand the performance about their MF investments, said a person faimiliar with the development.

At present, schemes end in different periods for all the fund houses. Sebi is also looking at having an institutionalised way of doing the distribution, wherein fund houses will have to supervise the distributors. Besides, the regulator may also ban fund houses from selling equity options.

Source: http://economictimes.indiatimes.com/Mutual-Funds-may-have-to-keep-PMS-biz-separate/articleshow/5992904.cms

Mutual funds may have to disclose derivatives exposure

Mutual funds may have to provide more disclosures regarding investment in equity derivatives, though they would still be allowed to take exposure to these instruments.

The Securities and Exchange Board of India (Sebi) mutual fund advisory committee, which met on Monday to discuss on various issues, has proposed mutual fund houses be more transparent.

“The disclosure requirements have been made more consistent and uniform for all mutual fund houses. As such they are not aggressive participants but take exposure only for hedging purposes, hence they have not been restricted from investing in these instruments” a source familiar with the development told DNA Money.

There were certain apprehensions regarding MF exposure to equity derivatives and that they may be banned from selling options. The selling of options is a risky affair and can lead to unlimited losses if the bets go wrong.

The committee also discussed changes to regulation with regards to mutual funds keeping their portfolio management services (PMS) activities separate. Some asset management companies (AMCs) also provide PMS, and utilise the same infrastructure facilities.

“There needs to be streamlining of the activities and a separate committee would be set up to look into the same though these are initial stages” said the source.

The other main issue on the committee’s agenda was limiting distribution expenses and providing flexibility to MFs to levy fund management charges. However, the committee could not arrive at a decision.

The structure of mutual fund expenses, which AMCs charge customers, stays put for the moment. “The situation remains status quo on the fund management charges” said the source.

The committee, comprising industry and Sebi representatives, was to discuss various ways to charge MF expenses. Currently, MFs charge about 2.25-2.5% of assets under management of the scheme as fund management charges annually, which typically covers management fees (1.25%) and operational, promotional or distributional expenses.

The regulator had proposed to provide flexibility to AMCs by removing the sub-limits on various categories of expenses if the overall cap on total expense ratio is lowered to 1.5% from current 2.25-2.5%.

Source: http://www.dnaindia.com/money/report_mutual-funds-may-have-to-disclose-derivatives-exposure_1390368