A reform continuum

Regulators are notorious the world over for being behind the curve when it comes to policing. A sudden slew of changes are usually the result of either a scam in an industry or political pressure. Reforms initiated by the Securities and Exchange Board of India (Sebi) in Indian mutual funds reported in the last 12 months seem to be an exception. There is no scam in the industry and there is no political pressure on the regulator to show performance. We must view these changes in the context of a fallout of the 2008 crisis when the short-term debt market froze, and efficient housekeeping aimed at getting regulation abreast of market events, growth of the industry and detection of process errors.

This newspaper sees the changes in the past 18 months as part of an ongoing process to tweak the fairly robust Mutual Fund Regulations of 1996. The changes are in two key areas. The first set looks at making it less profitable for fund houses to service the corporate sector. With a bulk of the assets coming from non-retail sources, Sebi had been nudging mutual funds towards reducing their corporate focus and looking after the investor category they were supposed to—the retail investor. The biggest change will kick in from 1 July when short-term debt securities will be valued on a mark-to-market basis and not by the current straight-line method. Most retail investors will remain unaffected, but this will make the parking of short-term money by corporations less predictable and more volatile. While the industry gets used to this, the next part of reform is already on the agenda— to get funds to stop massaging their net asset value number by managing the cost figure.

The second set of reforms looks at investor protection. Protection of the investor tops the list of three objectives of a securities market regulator as mandated by the International Organization of Securities Commissions, the representative body of the world’s securities market regulators. Retail investors need protection in two areas: one, from badly constructed products; two, from being sold the wrong product, even if it is well constructed. While product construction in the Indian fund industry is good, the other area is still wide open for reform. The proposal to constructsale-side guidelines that include basics such as profiling consumers and matching consumers to suitable products are a step in the right direction. This paper would like to see the “right-selling” guidelines being extended by the ministry of finance to the entire retail financial sector.

Source: http://www.livemint.com/2010/06/02201953/A-reform-continuum.html?atype=tp

Peerless MF launches Income Plus Fund

Peerless Mutual Fund has launched a new open ended debt scheme as Peerless Income Plus Fund. The investment objective of the scheme is to generate regular income through a portfolio of predominantly high quality fixed income securities and with a marginal exposure to equity and equity related instruments.

The New Fund Offer (NFO) will open for subscription from June 9, 2010 to July 8, 2010. The scheme re-opens for continuous sale and repurchase within 30 days from the date of closure of New Fund Offer. The New Fund Offer (NFO) price for the scheme is Rs 10 per unit. (View - New Fund Offers open NOW)

Speaking on the launch, Akshay Gupta, CEO, Peerless Mutual Fund said, “Peerless group has a captive base of 8 million customers predominantly in tier 2 and tier 3 towns. It has also serviced 5 crore customers thus far. These customers are untapped for such products and have immense loyalties for the trusted Peerless Brand. Accordingly for the benefit of such customers we have tried to capture the essence of their investment behavior and saving habits, and then customise our new fund and service offering so that every Indian gets an opportunity to be a part of this new capital market revolution”.

Stressing on the value-add services part Mr. Gupta said “We are ready with multi-lingual call centers, multi-lingual statement of accounts, vernacular customer education programs. This is to ensure that all new to industry customers will be comfortable with Mutual Funds”. In terms of the style of management of these funds he said “We will be managing this fund conservatively so as to ensure minimum volatility and consistent returns. This is practically possible if we are dynamic in managing the equity component and remain cautious on the maturity of debt component.”The scheme offer growth and dividend option. Dividend option offers pay out and re-investment facility.

The minimum application amount is Rs 1000 and in multiples of Re 1 thereafter. For additional purchases Rs 100 and in multiples of Re 1 thereafter.

Entry load Nil, Exit load 1% if redeemed before a period of 1 year.

The scheme would invest 80% to 98% of assets in debt & money market instruments. Securitized debt cumulative allocation shall not exceed 25% of the net assets of the scheme (excluding foreign securitized debt). Investment in derivatives shall be up to 50% of the net assets of the scheme. It would further allocate 2% to 20% of assets in equity and equity related instruments and/ or units of equity mutual fund schemes.

The scheme's performance would be benchmarked against CRISIL MIP Blended Fund Index.

The scheme will be managed by Ganti N Murthy and Kaushik Dani.

Source: http://www.moneycontrol.com/news/mf-news/peerless-mf-launches-income-plus-fund-_463105.html

Mutual funds liquidate CDs to tackle redemption pressure

Fund sell-off pushes up yields of Certificates of Deposit in secondary market.

Caught in the Euro cross-fire, mutual funds have begun liquidating Certificates of Deposit (CDs) to meet the redemptions of the foreign institutional investors (FIIs).

FIIs are large investors in MFs, particularly in the debt markets schemes. FIIs are not allowed to invest directly in CDs. Traders said that redemptions were largely by FIIs driven by mounting risk aversion, as a consequence to the escalating Euro crisis.

The fund sell-off of CDs, in turn, resulted in pushing up CD yields in the secondary market, leading to a sharp divergence between secondary and primary markets rates. Six month CDs in the secondary markets are at 6.3 per cent now.

Buyers of the CDs are mostly banks — and they are doing so at steep discounts. CDs maturing in November are sold by some funds at yields as high as 6.3 per cent or well over the three month bulk deposit rates. The card rate for three-month bulk deposits range between 4.5 and 5 per cent, as of now, among the public sector banks.

However, banks continue to receive CD subscription from corporates at rates lower than the prevailing one-year term deposit rates.

On June 2, the State Bank of Travancore was able to raise Rs 290 crore at a weighted yield of 6.7 per cent.

Subscription to the CDs was mostly from cash surplus corporates, both private and in the public sector, traders said.

Some private sector corporates have opted to invest in public sector bank CDs, as capacity ramp up of investments continue to be on hold for some more time.

Credit lines

Corporates normally deploy internal resources in the initial stages of such investments, before drawing down their sanctioned credit lines. That credit lines have not been drawn down, was evident from the incremental CD ratio that is at minus 26 per cent now.

FIIs, in May, sold the equivalent of Rs 9,436 crore ($2.4 billion) of equities and picked up only Rs 2,450 crore ($535 million) of debt, almost entirely short-term instruments for liquidity purposes.

Yet, despite the FII selloff, liquidity in the markets remained under control. This was evident from the weighted average collateralised borrowing and lending obligations rates that remained well below the Reserve Bank of India's repo rate.

On Wednesday, the weighted CBLO rates were barely 5.2 per cent or 5 basis points below the RBI repo rate. (CBLO platform allows money market participants to lend overnight/term liquidity against a collateral of eligible securities.)

However, with advance tax outflows looming, short-term liquidity preference remained high.

Yield

As a result, the yield on the 91-day T-bill spiked to 5.20 per cent but was level with the 364-day T-bill cut-off yield, implying that the liquidity overhang could return to haunt the markets soon. This fear manifested in the 10-year YTM dropping to 7.49 per cent, down from last weekend's 7.58 per cent.

Source: http://www.thehindubusinessline.com/2010/06/08/stories/2010060851530600.htm

MF sellers watch out, SEBI's listening

Telemarketing agents soliciting customers by promising huge returns on mutual fund investments may do well to think twice before making tall claims. For, market watchdog the Securities and Exchange Board of India (Sebi) may be listening.

Capital market regulator Sebi, which administers mutual funds, is said to be contemplating various ways to weed out any kind of mis-selling by distributors, agents and relationship managers of the fund houses. The possible guidelines for the same are being drawn by Sebi, along with the National Institute of Securities Markets, an institution entrusted with the tasks of educating investors and market players.

The suggestions currently being deliberated include recording of sale or promotional calls that the executives, including those at fund houses and distributors, make to new or existing customers, a top official said. The fund houses would also need to audit these recordings periodically and report compliance to mutual fund industry body Amfi and Sebi on a periodic basis, the official said, adding that such compliance reports would be needed to be filed along with the remedial actions for all the mis-selling activities noticed in these recordings.

The distributors, although they agree that the mis-selling of products can be checked with these measures, are not very keen to adopt the practice, given the fact that their payouts have already gone down with the recent volatility in the market and scrapping of entry-loads on mutual funds.

But, Sebi seems to be firm on its position and the new guidelines, if implemented, would be part of its various investor protection measures taken in the mutual fund space. Recently, Sebi also asked fund houses to disclose all complaints received by them on their websites and also in their annual reports. Besides, it has cracked down on the expensive gifts and payouts by fund houses to distributors.

As per the Code of Conduct framed by Sebi for the MF space, “Mutual funds are required to monitor the activities of their distributors, agents, brokers to ensure that they don’t indulge in any malpractice or unethical practice while selling or marketing mutual funds units. “

Any non compliance with the Mutual Funds Regulations and Guidelines pertaining to Mutual Funds, especially guidelines on advertisements and/or sales literature and/or Code of Conduct shall be reported in the periodic meetings of the Board of the AMC and the Trustee (s) and shall also be reported to the board by the AMC(s) in their compliance taken reports and by the trustees in their half-yearly reports.”

Similarly, Amfi has also prescribed a code of conduct for MF intermediaries, under which the intermediaries should “follow the Code of Conduct” strictly and not indulge in any practice contravening it directly or indirectly. “Non compliance with the Code of Conduct shall be reported by the MFs to the board and Amfi. Further, no MF shall deal with intermediaries contravening the prescribed Code of Conduct,” the Code says.

Source: http://economictimes.indiatimes.com/MF-News//articleshow/6018378.cms

‘It is a stock-picker's market'

Wherever we see corporates with profitability and visibility of growth in top-line, and management moving in the right direction, those are the companies we are bullish on. These stocks may fall in any sector, so we are less sector-specific.

It appears that the hard lessons learnt in the past two years have not only instilled caution in retail investors but also made fund managers more choosy in selecting sectors and stocks. In an interaction with Business Line, Mr Navneet Munot, Chief Investment Officer, SBI Mutual Fund, shared his views on the market, the growth potential for the industry and his recently launched PSU fund.

Excerpts from the interview:

The market corrected 10 per cent from its recent peak. Do you expect further correction?

The recent volatility is driven by global concerns — the concern over the alarming debt, and the contagion emanating from the peripherals of Europe. So there could be some more volatility arising from global factors. Barring that, I don't see any wrong with the domestic economy. We are positive about the domestic economy and the growth momentum is very strong. I would tend to believe that the downside is pretty limited, considering the domestic potential. Even if the market corrects by 5-10 per cent, it will still be quite attractive.

Going by your April portfolio, it appears that you are fully invested. In the event of a further market correction will you lose the short-term opportunity?

There is some amount of cash in the portfolio but our belief for several months now is that market will be in a narrow range and our focus has to be on stock-picking. Our investments are done on the basis of a long-term strategy and are rightly positioned. We don't take large cash calls. But in portfolio composition we are under-weight in some of the more globally sensitive sectors stocks such as metals, and are more focused on domestic themes.

What are your sector views at this juncture?

Our view is that it would be more of a stock-picker's market; that is why we are not bullish or bearish on sectors. Within sectors, wherever we see companies with profitability and visibility of growth in top-line, and we find the management doing well and moving in the right direction, those are the companies we are bullish on.

These stocks may fall in any sector, so we are less sector-specific and more a bottom-up stock picker. Some of the themes we prefer are domestic consumption; we also feel there will some pace of execution in infrastructure sectors such as power and roads and buildings. We are also bulish on a few other sectors, such as healthcare, for instance;we believe there is opportunity in generic and also domestic formulation markets. We are bearish on metals and financials.

With the latest 3G auction, what is your outlook for the telecom sector? Is there any opportunity for equity investors over the next couple of years in this sector?

Unfortunately there has been a slew of negative news in this industry for the past several months. The competition in the industry has intensified. At some point in time there may be consolidation in the industry. I am not sure what the tipping point is; some of the larger players may survive, and they will also thrive. So, in our Contra Fund, we are over-weight on telecom stocks as a contrarian play, but we are underweight in most of our other funds.

The sector top-line may be 15 per cent but predicting the bottom will be tricky. As the enterprise values of some stocks are entering the comfort zone this sector is currently a contrarian call.

Tell us about your new fund offer with a PSU theme…

PSUs have the necessary scale and the size, which is critical at this stage of the country's economic growth. The resilience shown by the public sector during difficult times, better corporate governance standards, and their size and the scale is crucial.

The productivity and efficiency shown by PSUs during the last several years and their ability to stand up to competition has improved. Divestment will be a big catalyst for unlocking value and they are going to be value generators.

In the last three years PSUs outperformed the market. Over a ten-year period they have outperformed the BSE Sensex. So we believe that they are rightly positioned to take advantage of the opportunity in the economy.

Also, from a risk-return perspective, when the domestic front is looking good, even as there may be some uncertainty on the global front, a PSU fund fits nicely into any equity portfolio.

Do you anticipate any moderation in inflation and what is your take on interest rate movement in the near future?

We see a global fall in commodity prices. This is a positive for countries such as India. We are large importers of commodities such as metal and crude. If the monsoon is good, food inflation will also fall. A softening in global commodities and decline in food prices can bring inflation down to 5 per cent at the end of the year.

On the interest rate front, policy rates are going to increase by 75 to 100 basis points over the next 12 months.

To some extent it's already priced in to bond markets. We continue to expect the short-term rates to remain tight after the outflows on account of 3G licences and the pick-up in credit rate growth. So excess liquidity will dry up and put pressure on short-term rates.

Long-term bond yields have softened quite a bit in the last few weeks on bunching up of positive factors on account of more than expected auction rates on 3G; global risk aversions also helped to bring down the long-term rates.

Source: http://www.thehindubusinessline.com/iw/2010/06/06/stories/2010060650430800.htm

FIIs shift from equities to debt, buy bonds worth Rs 2,450 cr

The ongoing European crisis has shifted foreign institutional investors’ interest from risky equity markets to relatively safer debt market instruments.

Since last month, Foreign Institutional Investors’ (FIIs) have invested a huge chunk of their money in the debt market by way of government and corporate bonds and debentures, while their interest in equities has largely turned negative.

FIIs were gross buyers of debt worth Rs 19,376.30 crore in May this year, while they sold debt worth Rs 16,925.80 crore, thus becoming net buyers of Rs 2,450.60 crore of debt, as per data available with market regulator SEBI.

However, during the same period, FIIs were net sellers in the equity market, selling shares worth Rs 9,436.70 crore.

“Since the last two months, the euro has been falling and investors’ money is shifting to both the dollar and gold.

There is a huge amount of risk aversion in the market, due to which FIIs are shifting their hard-earned money to the debt market, which is considered a safer haven than equities during volatile times,” SMC Global Vice-President Rajesh Jain said.

Due to the eurozone debt crisis, investors are hedging their euros by buying precious metals and dollars.

Following the global turmoil and the increasing uncertainty in the stock markets, foreign investors are trying to seek safety and higher returns by increasing their investments in the debt market.

However, to invest in debt market instruments like government or corporate bonds, FIIs have to seek permission from SEBI, which is not the case in equities.

The government has set a ceiling of $5 billion for investment in government securities and $15 billion for corporate bonds, which it is looking to raise, in order to improve the availability of funds in the system.

During the current year, foreign investors had invested a whopping Rs 27,050.9 crore in debt till May. “There are two types of FIIs in the market - stable ones and the freaky ones. The stable ones are still buying stocks, while the freaky ones like hedge funds are creating the volatility in the market and are shifting their investments from the stock markets to the debt markets,” CNI Research Chairman and Managing Director Kishore P Otswal said.

Meanwhile, the eurozone turbulence has led foreign investors to snap their three-month long investment streak in the Indian equity market and emerge as net sellers of shares worth over Rs 9,400 crore ($2 billion) in May.

Foreign institutional investors (FIIs) were gross buyers of stocks worth Rs 52,192 crore in May, they sold shares worth Rs 61,628 crore, becoming net sellers of Rs 9,436 crore, data available with SEBI showed. - PTI

Source: http://www.thehindubusinessline.com/blnus/05061821.htm

Q&A: Akshay Gupta, CEO, Peerless Mutual fund

'MF industry needs an entry barrier'

As retail penetration in the mutual fund industry in India is poorer compared to the global levels, domestic fund houses are taking measures to tap the segment. Akshay Gupta, chief executive of Peerless Mutual Fund, a new player in the domestic market, wants to build a profitable mass retail business. In an interview with Chandan Kishore Kant, he talks about the fund house’s objective of reaching a customer base of 5,00,000 in the next three years. Excerpts:

How has the journey of your fund house been since its launch in February this year?

We launched our liquid and liquid-plus plans and have assets under management (AUM) of Rs 1,000 crore. We want to build a stable, profitable and sustainable retail business and do not chase AUM.

What steps are you taking to achieve this?

We want to have at least 5,00,000 customers within three years. For that, we have started regional language call centres — Bangla and Malayalam to begin with — to make retail investors feel at home. We are also providing translated statements in these languages. Further, we will get into Hindi, Telugu, Tamil, Oriya and Gujarati. Similarly, we are developing training modules for our agents in four languages. This will help us focus on mass retail.

What feedback are you getting from IFAs (independent financial advisors)?

They have reduced the business. A small retail IFA is perplexed. I agree that charging for services is difficult, but it has to be started. Financial advisors cannot be taken for granted. Customers will have to respect them. And this will happen by not selling the wrong products.

How many products can we expect from Peerless this year?

The first retail product will be an MIP (monthly income plan) as an income-plus fund in June. We will launch at least three retail products in the next nine months after getting Sebi’s approval, across asset classes.These will be a mix of debt and equity. The products will be more towards gold and debt. We are trying whether we can have debt plus gold, part gold part debt, part gold part equity kind of products.

What’s the update on your search for a foreign partner?

Our talks with a potential partner have ended. We are not scouting for a foreign partner. If an opportunity comes up, we are ready to talk. As of now, there is nobody. Moreover, for the domestic business, we do not need a partner. But after we complete a year or so of operations, we would like to access foreign markets. We would definitely like to get into the feeder fund structure where we feed our funds. Let’s say we come out with a BRIC (Brazil, Russia, India, China) fund where the foreign partner manages the BRC part and we manage the I (India) part.

Do you agree with the recommendation that AMCs should have a higher net worth?

The net worth of AMCs should be higher than what it is at present. An entry barrier needs to be there. People without basic backing are entering the industry. This is unhealthy. A mutual fund is a pass-through vehicle for retail investors, and with such a definition one is not supposed to run PMS (portfolio management services). Other criteria, including the net worth one, should be made in such a way that they discourage frivolous player from getting into the business.

How long will the uncertain situation in the equity market continue?

We are in a phase of extreme volatility. A downward bias is expected. There will be corrections, but their size is unpredictable. The global economy is not yet out of the woods. The patient has come from the ICU to the general ward but has still not come back home. While the Indian economy and corporate results will be average to above average, having said that, we are not decoupled from the global market in the capital market space.

Source: http://www.business-standard.com/india/news/qa-akshay-gupta-ceo-peerless-mutual-fund/396977/

Taurus MF to launch Nifty Index Fund

Taurus Mutual Fund on Thursday announced the launch of Taurus Nifty Index Fund, an open-ended index linked equity scheme.

The NFO opens on June 4 and closes on June 10. "The fund will replicate the the S&P CNX Nifty Index by investing in the securities of S&P CNX Nifty Index in the same proportion/weightage," Taurus Mutual Fund's Chief Executive, Waqar Naqvi, told reporters here.

The Fund is expected to garner Rs 25-crore from the new fund offer. The total size of the index fund is Rs 1,100- crore, Naqvi said.

The fund is expected to provide an opportunity to own 50 of the fundamentally strong and best-known companies in India.

In developed markets like the USA and Europe, index funds are more favoured by retail investors as compared to actively managed funds. But at least 70 per cent of the actively managed funds fail to outperform the S&P 500 Index consistently over various time-frames.

However, in India, historically a majority of the actively managed funds have outperformed the index funds in the long-term since the markets were in the evolutionary stage, he said.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/Taurus-MF-to-launch-Nifty-Index-Fund/articleshow/6007729.cms