Irda's new rules not much help: MFs

Say a nascent industry can’t grow unless distributors are incentivised properly.

Domestic mutual fund houses do not anticipate much benefit from the new rules of the Insurance Regulatory and Development Authority (Irda), effective from tomorrow.

While there is a reduction in insurance agents’ commission from an average 12-15 per cent to single digits, fund houses say the difference is still huge. An industry at a nascent stage, grappling with several regulatory issues, cannot grow unless distributors are incentivised properly, they say. They do not agree that Irda’s actions would result in a major jump in sales of MF products. Ever since the Securities and Exchange Board of India (Sebi) put a ban on entry load in August 2009, MF distributors started shifting to selling more unit linked insurance products (Ulips) and other financial products. National distributors and banks managed to adjust in the changed business scenario but the independent financial advisors (IFAs) who cater to retail investors were the worst hit.

Some sales officials in the MF industry say there are expectations that insurance agents would prefer to bring MF products into their portfolio to make up their revenue losses to some extent, if not fully. “Remuneration is an important part of the business which stands true for the insurance sector, too. So far, insurance agents were working on a high-revenue model, which will no more be the case once new guidelines go effective. We believe that for those agents who are into the pure insurance business, MFs will also become important,” said the chief marketing officer of a top MF house.

But industry players aren’t optimistic on whether it would mean a push for MF products. “Though with cutting down of commissions, some parity has been brought. But a 7-9 per cent commission for insurance products is very high against virtually no commission for MF agents. It does not seem that such a step from Irda will be fruitful for MFs,” said another sales head of a mid-sized asset management company.

At the maximum, we can give 1-1.25 per cent payout to our distributors from our own pockets, he adds. “Beyond which, it is not economical to run the business for long,” he said.

According to a Mumbai-based large MF distributor, there is a certain section of intensely-driven agents who would opt for re-starting the sale of MF products. How far will it help the industry is a question mark, he added.

More, industry players said it was not that apart from insurance products only MFs were available. “There are a wide variety of financial products, which include fixed deposits and post office schemes which agents can cater to,” said a sales head in the industry.

Source: http://www.business-standard.com/india/news/irda/s-new-rules-not-much-help-mfs/406522/

Tata P/E Fund declares 10% dividend

Tata Equity P/E Fund — Dividend Trigger Option A (5 per cent) has declared a fourth dividend in the last four quarters.

The scheme has declared a dividend of Re 1 on the face value of Rs10 /unit). The record date is September 3. NAV of the fund as on August 26 was Rs 41.3720 /unit. Pursuant to payment of dividend, the NAV of the scheme would fall to the extent of the payout and statutory levy (if applicable).

Tata Equity P/E Fund had introduced the “5 per cent Dividend Trigger Option” on October 1, 2009.

Under Dividend Trigger A, the Fund initiates the declaration of dividend when there is an appreciation in NAV by 5 per cent from the base NAV (Last ex-dividend NAV) in a calendar quarter.

Source: http://www.thehindubusinessline.com/2010/09/01/stories/2010090151611100.htm

Gilt fund units back in favour among rich investors

Long-term gilt funds, which invest in government bonds with long-term maturity, including the 10-year benchmark bond, have been out of favour among many investors in the past year or so.

But analysts see merit in increasing exposure to these schemes since yields on 10-year government bonds are unlikely to rise much from these levels, with softening inflation expected to limit policy rate hikes by the RBI.

“At current yields on the 10-year benchmark bond, medium-to-long-term gilt funds are very good bargains,” said Devendra Nevgi, principal partner, Delta Global Partners.

“They can generate double-digit returns in the next 2-3 years,” he added. The yield on 7.80% benchmark bond maturing in 2020 was at 7.99% on Monday. It has been hovering around the psychological 8% mark in recent weeks, after rising from a low of 5.25%.

Bond yields and prices move in opposite direction; when yields rise, prices fall and vice-versa. Traders in long-term government bonds, including banks and mutual funds, rely on price jumps in this security to clock higher returns in their portfolios.

Some investors, mainly the affluent, have already started buying gilt fund units in a phased manner, similar to the systematic investment plan. These are investors, who are not sure about the extent of rise in bond yields, but don’t expect it to rise sharply from these levels.

Many debt market participants don’t expect the yield to rise beyond 8.15-8.25%. “By creating average at higher yields and with other fundamental factors, like lowering commodity prices, lowering inflation, higher revenue and other receipts by the government, affecting the market positively, the said strategy should pay good returns to the investor,” said Sunil Jhaveri, chairman, MSJ Capital, a New Delhi-based mutual fund advisor.

A fall in inflation is expected to reduce the pace at which the RBI hikes rates. Although a liquidity crunch is expected in September due to advance tax outflows and a possible interest rate hike by RBI, market participants said the crunch is expected to ease soon. Normally, the borrowings tend to be less in the second half of the year. So, the supply of g-secs tends to be less while there is an increase in demand.

“With tight liquidity conditions prevailing in the money market, banks have increased their deposit rates leading to higher deposit creation in the system which will create additional demand for g-secs,” said Ritesh Jain, head-fixed income, Canara Robeco Mutual Fund.

Source: http://economictimes.indiatimes.com/markets/stocks/market-news/Gilt-Fund-Units-back-in-favour-among-rich-investors/articleshow/6465074.cms

Bill deals body blow to mutual fund dividends

Retail investors in stocks may have a lot to cheer about but risk-averse people who prefer to park their money in dividend-yielding equity mutual funds may be forced to scout about for alternative options before the direct tax bill comes into effect by April 1, 2012.

Salaried people, who funnel their money directly into stocks, will be gung ho over the fact that they will not have to pay a capital gains tax on equity investments that they hold for more than a year — a tax break they enjoy at present and which the original bill had intended to scrap.

But even more attractive is the provision that says the short-term capital gains tax —levied on stocks flipped before 12 months — will be linked to an individual’s income tax slab.

In the case of investments held for less than one year, short-term capital gains tax will be levied in three slabs of 5, 10 and 15 per cent, respectively. This is 50 per cent of the marginal rate of income tax — 10 per cent for those with an income between Rs 1.6 lakh and Rs 5 lakh, 20 per cent in the income bracket between Rs 5 and 8 lakh, and 30 per cent for those with incomes above Rs 8 lakh.

At present, the short-term capital gains tax is a flat 15 per cent irrespective of the tax slab that the investor belongs to.

Individuals in the low-income bracket will have to pay a capital gains tax of 5 per cent. Only those in the top income bracket will have to pay 15 per cent as they do at present. Tax experts say that if the surcharge is included the short-term capital gains tax actually goes up to well over 16 per cent.

Vishal Malhotra, tax partner at Ernst & Young, told The Telegraph that the changes proposed in the short-term capital gains tax should encourage small salaried earners to invest in stocks as they will be subject to a lower rate of tax than in the current regime.

Market circles also reacted positively to the new capital gains tax proposals.

“These will induce greater investments in the stock markets, particularly from the retail end. The markets were apprehensive over the proposals pertaining to capital gains tax. It is heartening to see that zero long-term capital gains tax has been maintained,” said a research head from a brokerage.

Mutual fund woes

The big blow to mutual fund investors is the fact that income distributed by mutual funds to unit holders of equity-oriented fund or that distributed by life insurer to policy holders of an approved equity-oriented life insurance scheme will be taxed at 5 per cent.

According to Gautam Mehra, executive director at PwC, this will impact returns from the stock markets.

Dhirendra Kumar, CEO of Value Research, said the 5 per cent dividend distribution tax would prompt mutual fund investors to move away from dividend-paying schemes and opt for growth plans.

Source: http://www.telegraphindia.com/1100831/jsp/business/story_12877062.jsp

MIP performance — Lacklustre year

In line with the performance of pure debt funds, Monthly Income Plans (MIP) have had a lacklustre year compared with their historical performance.

MIPs on an average managed to deliver 7 per cent returns over the last one year period, partly aided by a decent rally in the equity market. MIPs typically have a maximum allocation of anywhere between 10 per cent and 25 per cent of their total investment in equity markets.

Only 45 per cent of the 38 MIPs (with a one-year track record) under growth option, outperformed the Crisil MIP blended index over the last one year.

The waning performance of MIPs over the last six months was due to the falling prices of corporate debentures and gilts (marked by rising yields). Surplus liquidity condition up to April 2010 meant that the short-term rates were also not attractive.

Thanks to the flattening of the yield curves, some funds have made decent returns by holding on to the short-term maturities post-April.

Top performers

HDFC MIP-Long-term plan, Reliance MIP and HSBC MIP are among the top performing funds over the last one year period.

These funds were consistently among the top five MIPs over the last three and five-year periods. Good performance of HDFC MIP and HSBC MIP can be attributed partly to the higher exposure to equity (over 20 per cent). Funds such as ICICI Pru MIP 25 and UTI MIS advantage plans have also outperformed the Crisil MIP index by virtue of having high equity exposures.

However, others such as Reliance MIP, Tata MIP Plus and LIC MIP delivered good returns, despite having relatively lower exposure to equity; thanks to the constant churning of their respective portfolios.

Reliance MIP, for instance, has not significantly reduced the average maturity of its portfolio, despite the rates trending up over the last six months. Earlier, funds cut their average maturity period in anticipation of rising rates.

Bharti AXA Regular Return Fund, Tata MIP, ING MIP, DSP BR Savings Manager and Fortis MIP were among the under-performers.

While there is no secular trend for the under-performance, some schemes were not invested and were sitting on cash while other funds held on to the corporate debt whose value fell over the one-year period.

With equity markets trading at a 30-month high and further monetary tightening expected investors may be better-off sticking to funds with a good track record, sizeable corpus and limited exposure to the equity markets.

Source: http://www.thehindubusinessline.com/iw/2010/08/29/stories/2010082950200800.htm

'Selling MFs to retail investors makes no business sense for distributors' : CEO, PEERLESS MF

It's been more than a year since the capital market regulator did away with the entry load barrier. But the mutual fund industry is still experiencing teething problems and is unable to lure retail investors. Peerless Mutual Fund, chief executive officer, Akshay Gupta in an interview with Suneeti Ahuja Kohli talks about the problems faced by the industry and how his company plans to tackle the same and much more. Excerpts:

Mutual funds have completed a year of operations without the entry loads. How has the experience been?

We have just started our retail operations in July. So, we cannot say much on this. However, from an industry perspective, I can clearly say that the number of retail applications and the subscription amount have gone down drastically. I keep hearing from various registrars that there has been almost 50 per cent reduction in transactions. So clearly, distributors are shying away from selling mutual funds to retail investors because it doesn't make any business sense to do it now. It is just not viable for them. So they are focusing on other financial products like insurance and company deposits. While the former gives them a better commission and incentive structure, the latter give distributors three years of commission as a lump sum in the first year.

Entry load ban, essentially, has resulted in two things. The retail applicants, who used to bring investments of Rs 1,000 to Rs 1 lakh, have gone down drastically. It was introduced for preventing malpractices such as mis-selling and a lot of churning of portfolios by agents. But because of this and consequent lowering of commission due to ban on the entry, load, the retail population of India is they are now not getting this kind of service and access to these kinds of products.

What are the various channels of distribution that you use to sell your products? And, is there any target number of retail investors Peerless wants to achieve in the near term?

Peerless Mutual Fund is initially trying to target an active and accessible pool of retail clients available to us through our distribution network. Peerless is an 80 year old company and has around one crore customers. So we are trying to convert them slowly. We are facing a few challenges like complying with the KYC (know your customer) norm. It will take us at least five to six years to convert these clients partially.

Even our business is commission sensitive. And one can see interest levels being far higher in case of insurance products rather than in mutual funds. Peerless as a distributor also sells Max New York Life Insurance. So you will see agents are far happier selling insurance than a mutual fund. So what we are trying to do is focus on tier II and tier III towns, where there is a high recall of the Peerless brand. And, we are targeting the lower middle to middle class. We are putting in all efforts to educate them, convince them and convert them.

In such a scenario, don't you think banks are better points of sale for the mutual fund companies? Do you have any such tie-ups?

We haven't tied up with any bank as of now. We are still selling through IFAs (independent financial advisors) and our distributors. More organized bigger networks, like banks, will be able to channelize more sales than the IFAs. And eventually, IFAs will have to merge into such organized bigger networks. So, national level distributors or aggregators are the people who will be able to give better terms to them rather than going directly to asset management companies. Existence of small agents is a question mark now. We are also in the process of finalizing our tie ups with a few banks and should be able to share details in the next three to six months.

How many subscribers have shown interest in your first retail fund and what is the business mix of AUM (asset under management) for retail and institutional clients?

The new fund offer attracted 20,000 investors and a total AUM of Rs 25 crore. As of now, we have a total of Rs 1,500 crore of assets under management.

The RBI has time and again raised concerns over the amount of money parked by banks in the liquid schemes of mutual funds. Has the Securities Exchange Board of India (Sebi) also said something on this?

When you give anybody a better opportunity, he would tend to hold on to that opportunity. Banks, when they invest in mutual funds, do it when there are prospects of better returns compared with alternate instruments available like the call money market, the collateralised lending and borrowing obligation (CBLO) or may be other bank's certificate of deposit. So, banks are opportunistic investors like any other investors and they will bend towards better returns. Keeping in mind lakhs of crore of funds that they manage, a difference of even a 0.25 or 0.5 percentage point makes a lot of difference. Therefore, if a few thousand crore come in mutual funds, I, frankly, do not think it is a bad deal.

Till now, Sebi hasn't said anything to us. However, banks, if I understand correctly, have been briefed informally that they should keep in check money that is being parked in mutual funds.

What is your outlook for equity markets?

There are two factors that are driving the equity markets right now. One is the liquidity factor, primarily coming from the foreign players, which will continue. The second thing are the fundamentals. Now, the fundamentals of specifically the first quarter have not been very great in some of the sectors. So, there will be some sort of profit booking in a few sectors. But at the same time, India and China are the only attractive markets for foreign institutional investors (FIIs). A lot of FIIs look at these two countries as havens of growth. So money will keep pouring in and in fact it has in the last six months unless and until there is another global economic meltdown, which is quite unlikely due to the fiscal stimulus doled out to the countries. There will be a lot of cash flow in the global economy and also in India. Already we have seen $3.5 billion coming into the Indian economy. We expect another $5-6 billion in next few months.

Indian equity markets will not have any problems, unless fears of another recession strengthen and liquidity is sucked out of the system. At home, the rising number of primary issues is sucking liquidity from the secondary markets. Although there is nothing wrong with this, it will tend to make the markets range bound.

Any particular sectors that you are bullish on?

We are quite bullish on the infrastructure space as it is a long-term space. Besides, we are also bullish on the banking sector because that is the core representation of the economy. Cement, heavy industries, oil and gas sectors too look attractive at the moment. We are not very keen on the commodity space and specifically on sectors such as pharma and auto. Auto sector has had a run and now scrips should correct.

How about the debt space?

Debt markets will totally dependent on what is happening on liquidity in the market. It is easing out a bit now. Overall, unless inflation is contained, the interest rate yield curve will tend to go up. If RBI's measures to contain inflation in another 3-6 months are not successful, I think a few more hikes will take place and that will tighten the liquidity further. In case inflation is stabilized, then yields will be completely stabilized. We are also under artificial squeeze of liquidity because of the broadband auction.

Source: http://in.news.yahoo.com/48/20100830/1238/tbs-selling-mfs-to-retail-investors-make.html

MFs question Sebi's unit transfer order

Domestic fund houses have questioned the market regulator’s recent circular mandating unrestricted transfer of mutual fund units between demat accounts. Mutual fund (MF) players have cited operational difficulties in implementing the norm.

Sources in the fund market said the issue was being taken up with the Securities and Exchange Board of India (Sebi) through the Association of Mutual Funds in India.

On finding that mutual fund schemes prohibit transfer on a regular basis, Sebi had directed fund houses to allow free transfer of all mutual fund units from one demat account to another by October 1, 2010.

GREY AREAS

Knowing about beneficiary Who should pay exit load Issues of dividend payout Different TDS provisions for NRIs & non-NRIs Scope for potential frauds Depositories’ hefty charges for daily data for such transfers Stamp duty

“It’s a new concept with a lot of complications and operational issues. A major technical enhancement is required to make this work,” said the chief investment officer of a large fund house.

For instance, he added, if an investor transferred units after holding them for six months and the other account holder sold those units later, who should pay the exit load. Also, dividend payouts and TDS (tax deducted at source) provisions, which were different for NRI and non-NRIs, were also an issue, he said.

Agreeing to it, the chief executive officer of a medium-sized fund house said, “National Securities Depository and Central Depository Services do not send data of such transfers on a daily basis to asset management companies. This becomes a hindrance in determining the actual beneficiary.”

Industry players feared there would be an increase in costs without any material benefit to the investor. “It should be noted that unlike an equity share, whose value keeps fluctuating, the net asset value of an open-ended scheme is comparatively less volatile and a transfer in such scheme does not serve much purpose. Besides, the stamp duty, too, is another grey area, as there is no clarity on who bears the cost,” said an industry player.

Fund houses added that they would be charged Rs 5,000 daily per net asset value (NAV) by depositories to get data for such transfers, which was prohibitively excessive. “Moreover, transfer of units increases activity at the end of registrar and transfer agents, which creates scope for potential fraud and may encourage non-adherence with the Prevention of Money Laundering Act,” said another industry CEO.

Though issues like TDS comes under the Income Tax Department, we wanted Sebi to bring clarity on issues which came directly under its jurisdiction so that the new mandates could be implemented within the deadline, said industry players.

With just a month left in implementation of the norm, industry players said a lot of backend work had to be done. “In case the regulator does not bring more clarity, it is unlikely that the industry can meet the deadline,” said another CEO.

Source: http://www.business-standard.com/india/news/mfs-question-sebi%5Cs-unit-transfer-order/405995/

Mutual funds upset over SEBI’s idea of forced listing of units on stock exchanges

The move will escalate compliance burden on AMCs who see no value addition to investors

Market regulator Securities and Exchange Board of India's (SEBI) intention to mandatorily list all mutual fund schemes has received widespread flak from the industry. According to industry players speaking to Moneylife on the condition of anonymity, listing fund units on the stock exchanges will not provide any value addition to investors but will only burden them with additional compliance requirements. They complain that they are already inundated with excessive compliance work after the sweeping changes brought in by the regulator over the past one year.

Partly due to such frequent and extensive changes, equity mutual fund schemes have witnessed Rs11,560 crore of redemption since the regulator abolished entry loads in August 2009. Since November 2009, the industry has lost a whopping 8.33 lakh equity folios till July 2010.

In a move to counteract the sudden fall in mutual fund inflows, the regulator allowed trading of fund units on the stock exchanges. National Stock Exchange (NSE) started its online trading platform for MFs on 30 November 2009 and the Bombay Stock Exchange (BSE) launched its BSE StAR MF platform on 4 December 2009. However, the volumes have been meagre so far. In July 2010, the NSE recorded 2,340 transactions with Rs20.65 crore of net inflows.
Last week, the regulator asked fund houses to facilitate smoother transfer of mutual fund units between two demat accounts. This too is going to increase the cost for fund houses without any material benefit to investors. Moneylife had earlier reported on how the regulator was seeking bank-sponsored mutual funds' help to boost trading volumes on the exchanges which received a tepid response from bankers.

Now in another forced measure, the regulator has asked all fund companies to compulsorily list their units on the exchanges. "The regulator has sought feedback from us. We will be replying in a few days. The cost of listing mutual fund units is less compared to stocks. All our equity schemes are already listed. We are sorting out the operational issues. The compliance department will have a tough time ahead," said an official who did not wish to be named.

In order to list units on the NSE, mutual funds with a corpus up to Rs100 crore have to cough up Rs16,000 initially; if the tenure of the scheme is more than six months, the listing fee as applicable for multiples of six months will be levied. Similarly, the initial listing fee for a scheme whose corpus exceeds Rs1,000 crore is Rs1.25 lakh.

Unlike MFs, companies have to shell out Rs25,000 as initial listing fees and have to incur an additional annual listing fee depending on the paid-up share capital of the company. As the share capital goes up further, the fee also goes up. Currently 20 fund houses have listed their schemes on the NSE while the Bombay Stock Exchange (BSE) has 23 AMCs on board.

Source: http://www.moneylife.in/article/72/8538.html