MF sector will adapt to Sebi norms

The mutual fund industry has been under pressure over the last one year after market regulator Sebi tightened rules to curb misselling by distributors. Distributors now have to directly negotiate the initial commission with investors. Naval Bir Kumar,president and CEO, IDFC Mutual Fund , says the industry is attempting to cope with the changes in the Sebi norms . But margins, he points out, have dropped and there is aneed to raise productivity.

The tightening on the operational fronts like risk management and disclosure norms was long awaited, Kumar says. "The last one year has been one of transition for the asset management industry and all stakeholders connected with it. The industry is still in the throes of this transition. Over a period of time, however, one would expect the industry to respond with simple, yet innovative products, improved customer service and more productive channels of distribution. With changes coming in all financial products, one would expect more congruence in the way to approach investors, he says.

“We can embrace these changes for the retail market only if we create products whose returns are much less volatile and have the flavour of a fixed deposit. Hence, we have been focusing on capital protection funds, asset allocation funds and other hybrid funds such as monthly income funds (MIPs). We are also increasing the range of products for high networth individuals (HNIs) and launching alternative assets class such as private equity funds to attract HNIs.”

Mutual funds complement, and not compete with, other investment avenues like insurance products. It is probably the only product that has all the advantages of tax benefits, liquidity, returns and transparency, he says.

According to him, so far, most investors based their decisions on short-term goals and the industry, on its part, launched several new fund offers in overheated markets. In a market where the industry was thriving on NFO game, products were launched to suit the flavour of the month and distributors’ interest. Kumar reckons that somewhere along the way, an NFO became the primary medium to raise assets than conventional sales and it spawned an entire machinery to that effect. The focus currently is on building performance and assets in the ongoing schemes. Distributors, clients, media and AMCs have all aligned towards that goal.

Another target group, according to him, is retail investors in Tier-II cities. In developed countries, retail investors enter the markets mostly through pension and insurance funds. However, in India, they usually invest directly. “So far, equity has become a product where investors pour money only at the peak and by that time, there is a correction. To overcome these issues, the industry launched the systematic investment plan (SIP). The product is yet to take off in a big way. For the retail investor, bank deposits continue to be the most preferred saving instrument. The trend is, however, changing and investors are looking at MFs as an alternative investment option now, he said.

With most retail investors continuing to stay away from the markets due to a sharp rise in a very short period, Kumar says that investors should be proactive in their decisions. "Money that retail investors save can help them earn more if they invest in instruments like MFs rather than in fixed deposits. So, investments are an important part of planning for the long term.”

"We need to bring investors back. There are various parts of business — one segment is corporate savings and other is HNIs. We are increasingly looking to target the HNI segment through innovative products like hybrid infrastructure schemes," he says.

Today, around 25% of the industry’s assets come from beyond the top 10 cities, up from 9% in 2003. This is expected to go up. India has been a best performing market globally in the past few quarters. “We have entered moderate interest rate scenario, though inflation continues to be a worry.” But there could be some pressure on interest rates as the private sector is getting aggressive in sectors like infrastructure.

Kumar, however, believes that the markets are overvalued. "India is attracting capital since Europe and the US are yet to come out of the woods. At the same time, low or negative growth in these countries is a risk to India. As of now, there are no worries about asset bubbles and earnings growth is seen stable even with the slowdown in the West."

Source: http://economictimes.indiatimes.com/opinion/comments--analysis/MF-sector-will-adapt-to-Sebi-norms/articleshow/6757321.cms?curpg=2

‘Inflation may surprise on the upside'

Monthly Income Plans and balanced funds have demonstrated that they have beaten inflation over a longer period of investments and should be actively considered by investors. - AMANDEEP CHOPRA, HEAD-FIXED INCOME, UTI AMC

The debt market is hotting up, with short-term debt funds doing well, fixed maturity plans delivering good yields and rates rising. Business Line put a few questions to Mr Amandeep Chopra, Head-Fixed Income, UTI AMC on the attractive options for investors today.

Excerpts from the interview:

What is your outlook on interest rates? Given that RBI has stated that ‘reversal of monetary stimulus' is almost done, how much more do you expect rates to rise?

We expect the interest rates to remain largely range bound. With inflation being on the forefront again, the RBI may go ahead with two more rate hikes of 25 bps each. The market appears to have already factored in at least one more rate hike and may not react to the actual hike unless the central bank continues to be hawkish in its stance.

With the equity market touching new highs and the debt funds continuing to invest in shorter-term instruments, which reduces effective yields, where should debt investors focus today?

While the short-term debt funds will remain an anchor in an uncertain time, investors can look at close-ended funds such as fixed tenure plans and fixed maturity plans and Monthly Income Plans with a stable dividend distribution history like the UTI Monthly Income Scheme.

Given the outlook that we are nearing a peak in interest rates, it would be a good strategy to allocate a small portion of overall investment portfolio, say 5 per cent, to income funds such as UTI Bond Fund.

What is your outlook on inflation? What are the safe investment options for those looking to beat inflation over the long term?

Inflation may surprise on the upside in the near months as it has remained pretty sticky based on the recent data releases. However, we expect it to moderate from January 2011 onwards, yet remain above the RBI's target levels.

Monthly Income Plans and balanced funds have demonstrated that they have beaten inflation over a longer period of investments and should be actively considered by investors.

Recent months have seen a slowdown in bank deposit growth. Are retail investors allocating the money to other debt investments?

The real rate of return on bank deposits is low due to high inflation at present, and it appears that there has been no significant credit growth yet that can compel banks to hike deposit rates, hence retail investors are chasing higher yield and riskier asset classes like equity, real estate and commodities.

Unless the credit growth on a year to date basis picks up substantially the deposit rates may maintain status-quo.

Over the last few months yields of longer-dated securities have somewhat stabilised. Are mutual funds moving to long dated instruments or will they stay with short-term debt?

Based on our view, we have increased duration of our long term funds - UTI Bond Fund and UTI Gilt Advantage.

FMPs have made a strong comeback in recent months with MFs raising a large sum through these funds. Can 3-month to 1 year FMPs offer better yields than bank deposits today on a pre-tax basis?

Yes, based on prevailing short-term rates – 3-month at 7 per cent and 1 year at 8 per cent, FMPs can offer better returns than deposits.

Quite a few companies are opening up FD programmes again. How should an investor choose between fixed deposits and debt mutual funds?

The factors to consider are diversification of the invested portfolio which a single company's fixed deposit cannot offer. Liquidity too may be non-existent in a company FD.

With introduction of infrastructure bonds and renewed interest in the debt market, will there be improvement in corporate debt trading volumes?

Yes, we have already seen improvement in debt market volumes for year-to-date FY2010 with more issuers and larger issues hitting the markets. With no surprises on enhanced supply of G-Secs, we can see more activity in corporate bond markets in the second half.

Source: http://www.thehindubusinessline.com/iw/2010/10/18/stories/2010101850521300.htm

Q&A: Harshendu Bindal, Franklin Templeton Investment

'Profits are likely to remain stagnant'

Franklin Templeton Investment (India), which manages Rs 42,142 crore, has the distinction of purchasing India’s oldest fund house, Kothari Pioneer Mutual Fund, in 2002. President Harshendu Bindal tells Joydeep Ghosh & Neha Pandey that the domestic fund industry’s profits of 12-15 basis points are much lower than the international standards. Edited excerpts:

While the stock market has been rallying, action at mutual fund houses, in terms of launch of new fund offers (NFOs) and fund collections, has been muted. Why?
It is due to a combination of factors. During 2006-08, we witnessed many NFOs due to buoyant market conditions. The pricing environment was also attractive. Many new players were entering the industry and building their product range.

Today, the conditions are quite different due to regulatory changes and most fund houses are focusing on selling existing products.

With the distribution community undergoing a change, they might not be able to push equity products. Our conversations with many of our distribution partners indicate that they may remain positively disposed towards the equity asset class but are not finding the environment conducive.

Despite their strong track record over market cycles, some of our equity funds like Templeton India Growth Fund or Bluechip Fund (with annual returns of about 26 per cent over the last 10 years), have not witnessed as much interest as they should. Whereas, if a bank announces 10 per cent rate on its deposits, investors line up outside its branches.

Recently, it was reported that the fund industry posted a net profit of around Rs 970 crore in 2009-10. On assets of Rs 6-7 lakh crore, we are talking of 12-15 basis points. What is the global experience?
In the US, profits are higher at 22 basis points of the average assets under management. This is true even in developed markets where margins have been under pressure due to regulatory developments.

However, it is a volume game. Without economies of scale, it becomes difficult.

The numbers in India are on the lower side (due to the large portion of money market assets). Only 10-12 players are making money in the industry. In India, you need a certain economy of scale, which only few players enjoy.

Also, the Rs 970-crore figure has to be looked at in the context of the previous financial year, which was one of the worst for the industry. The tightening liquidity impacted their money market books and the equity markets were down. This year, the markets have picked up and the asset mix is improving, so revenues were better.

Will this trend continue?
I think profits are likely to remain stagnant or fall. Now that fund houses have to pay distribution fees from their pocket, margins will go down further. So, the recent profits look great, but people have to be cautious. Our financial year ends in September and the latest numbers are not in, but the last three-four years have been profitable.

Are your profits operational, or is the purchase of Kothari Pioneer in 2002 for Rs 350 crore still being amortised?
The amortisation was completed three years back and we are actually in good shape with cash flows. We have benefited from our mix of assets – around 70 per cent of these are in long-term funds.

Reports suggest Franklin has been selling banking and automobiles, which others have been bullish on. Any particular concerns?
We are actually positive on the banking side. In the Indian context, the long-term story is an interplay of growing consumption and investment due to infrastructure spending. Given the low penetration of most financial services, the long-term outlook for the sector remains positive.

In our portfolios, our fund managers’ stock-selection depends on various factors, including relative valuations. Hence, rebalancing the portfolio should not be seen as a top-down call. We are bottom-up stock pickers. As a sector, we generally have a positive view on banking and financial services index.

Investors have booked profits aggressively. But they are not entering the market. Why? Even the number of folios is down.
In terms of composition of assets, around six months back, 60 per cent of the money was in the money market and 40 per cent on the long-term side. Now, it’s close to 50-50. In fact, it will be slightly higher on the long-term side. To me, it is a good sign that long-term assets are increasing, but it’s more to do with lower allocation to the money market amid tighter systemic liquidity.

Long-term money is coming on the hybrid and fixed-income side. However, on the equity side, we are witnessing outflows. Luckily, most investors are booking good profits, which is not a bad sign.

The flip side is if markets correct, will they come back? Hopefully they will. If we look at 2010, there were decent net positive flows in months when the markets corrected.

Lumpsum or systematic investment plan (SIP)?
SIP is my personal favourite. You can do STP (systematic transfer plan) or SIP, but systematic investing is always the better way to get exposure to the equity markets. Lumpsum sometimes becomes a question of timing in the investor’s mind.

Daily or monthly SIP?
A daily SIP may work for those convinced about daily averaging. However, it may encourage short-term behaviour and also may not make sense from an operational perspective. I feel we should encourage long-term investments and not look at short-term trends. A monthly SIP seems ideal, given the monthly income flows.

Source: http://www.business-standard.com/india/news/qa-harshendu-bindal-franklin-templeton-investment/411602/

Principal MF Declares Dividend For Its Emerging Bluechip Fund

Record date for dividend is 15 October 2010.

Principal Mutual Fund has approved the declaration of dividend on the face value of Rs. 10 per unit under dividend option of Principal Emerging Bluechip Fund. The record date for dividend distribution is 15 October 2010.

The quantum of dividend will be Rs. 1 per unit, subject to the availability of distributable surplus as on the record date. The NAV of the scheme was at Rs. 27.69 per unit as on 7 October 2010.

Principal Emerging Bluechip Fund (G) an open-ended equity scheme with an investment objective to achieve long-term capital appreciation by investing in equity & equity related instruments of mid cap & small companies.

Source: http://www.indiainfoline.com/Markets/News/Principal%20MF%20Declares%20Dividend%20For%20Its%20Emerging%20Bluechip%20Fund/3328003833

Investors pull out Rs 12.8k cr from equity MFs

Investors of equity mutual funds (MFs) are laughing all the way to the bank. With the markets trading close to their all-time highs, investors have pulled out a record Rs 12,804 crore from equity MF schemes in September, which is about 50% more than the previous high hit in October 2007.

Equity MF redemptions surged 63.7% month-on-month in September, pushing fund houses to sell stocks to meet the huge spurt in exits. Fund houses net sold stocks worth Rs 7,236 crore to meet redemptions in September, the highest in 2010, Sebi data shows.

The sell-off in September is more than twice that of August and has not lost steam in October. Fund managers have net sold equity to the tune of Rs 2,573 crore so far in the month.

"It was almost like an avalanche. Large redemption requests came when sensex crossed 20,000 points," said a senior industry official. "Most investors, who wanted to redeem, have done it now since investments were made when sensex was trading between 15,000 and 21,000 points," said Jaideep Bhattacharya, chief marketing officer, UTI MF.

A lot of investments that came through new fund offers in 2006-08 are also being redeemed. "The markets have run up quite sharply. So, investors are pulling out money from equities and allocating it to monthly income plans, liquid funds and bank deposits," he said. Investors are also channelling the money into IPOs for short-term gains, say industry officials.

The sudden spurt in redemptions has resulted in a sharp jump in net outflows, which have touched Rs 14,624 crore so far this year. Net outflows from equity schemes have topped Rs 7,011 crore in September alone, more than double that of the preceding months, Association of Mutual Funds in India (AMFI) data shows. In all, investors have made total redemptions of Rs 63,948 crore in the first nine months of the calendar year, AMFI data shows.

However, redemptions have started to come down in the past week, say industry officials. "If sensex sees a mild correction, money would start flowing back," an official said. But some analysts said that there would be more redemption when sensex crosses 21,000 points. With nearly 50% of diversified equity mutual funds yet to recover lost ground, officials believe that another round of redemptions would happen once the market moves up.

Source: http://timesofindia.indiatimes.com/articleshow/6745044.cms?prtpage=1

Q&A: Nimesh Shah, MD & CEO, ICICI Prudential AMC

Look at sectors which are underpriced

With the domestic equity market close to its earlier peak, fund managers are cautious. Some sectors have outperformed the benchmark indices while others are still trading at lower valuations. In an interview with Mehul Shah and Chandan KK, ICICI Prudential AMC’s Managing Director and CEO Nimesh Shah says investors should avoid sectors which have already rallied and focus on spaces that are still underpriced. Edited excerpts:

What is the mood among retail investors?
Retail investors have gone through the entire cycle of ups and downs in the last three years and that too in a smart manner. I am quite impressed by the way they have behaved in mutual funds. They were not the first one to redeem when the markets crashed. Rather, they showed a good approach by waiting till the markets turned around.

What should retail investors keep in mind while selecting a mutual fund scheme?

One should not look beyond three to four categories, namely largecap, midcap, flexicap categories. Then, there are sector-specific funds. Historically, retail customers come in a particular sector when that has already rallied. An investor should be able to understand which sector would do well and should not look at those that have already outperformed.

Your infrastructure fund has completed five years. Is it a good time to invest in these kind of funds?
Between the last peak and now, infrastructure funds have not done well compared with other funds. May be it is the right time to pick funds in the infrastructure space. India has just started investing in the infrastructure sector. The country is nowhere near the world’s scale. This sector has not done well over the last three years, but the growth in the economy has continued. So, companies in this space have to grow. This sector is also underpriced as stocks have not appreciated much.

How is the profitability on the retail equity business front with the entry load ban?
We are scale players and have Rs 16,000 crore assets under management (AUM) in the retail equity business. To a certain extent, the profitability has got affected, but I do not expect all businesses to make money every quarter. This is a business we want to invest in and want to grow over a period of time, no matter whether I make money or not in a quarter or a year. Apart from this, our institutional and portfolio businesses are making reasonable profits. The only challenge is the retail equity business.

With debt valuation norms coming into force, how has the business changed?
What the regulator has done is a great risk mitigation thing for sponsors, investors and companies. For sponsors, this is the best thing from the risk adjustment point of view, as their risk has gone down considerably. With the liquid funds of less than 90-day duration and the rest of the portfolio being mark-to-market, the industry should go for a lesser duration. Moreover, for asset management companies, it will become a more logical business to run.

Are you considering no-exit load for equity schemes?
I am against removing the exit load. We do not want speculators to come into mutual funds. I want investors. The exit load to a certain extent ensures that if an investor comes in, he is conscious of the fact that he has to stay. I would rather have exit loads, so that there is a slight deterrence. We believe an investor can make money in equity if he stays for a long time.

Source: http://www.business-standard.com/india/news/qa-nimesh-shah-mdceo-icici-prudential-amc/411168/

It’s time to add value to services

In recent times, with the objective of ensuring full transparency, both the Sebi and Irda have forced the hands of the asset management and insurance companies, respectively, to overhaul product pricing, and in many cases, the products themselves

The wealth management industry in India has truly gone through a paradigm shift in the last one year or so. Till the shift came in, common practices of entry load structure and exit load compulsions for mutual funds, charge structures for unit-linked insurance plans (Ulips) were borne by the customer. A portion of these load structures and charges were given as commission to banks, distributors and financial institutions. The customer was being made to pay a charge that should have been ideally given by the product manufacturer to his partner.

Positive changes

In recent times, with the objective of ensuring full transparency, both the Securities and Exchange Board of India (Sebi) and Insurance Regulatory and Development Authority (Irda) have forced the hands of the asset management and insurance companies, respectively, to overhaul product pricing, and in many cases, the products themselves.

The first change was initiated in August 2009 by Sebi, abolishing the entry load structure for all equity mutual funds. A more recent change was pushed through by Irda in September 2010, bringing in a new charge structure for Ulips. Both the regulators have ensured that changes are to the benefit of the end user. This is clearly a welcome change. As a distributor of third-party investment and insurance products, I know that the new products to be launched will be even more customer-friendly.

As for the existing ones, customers are already benefiting from the simplicity of the load structure. Another key benefit of these new initiatives will be from the client’s point of view. Clients will now be more aware of the structure of these products and the specific benefits that would accrue to them.

The distributor’s role here is also huge and I know for certain that the time and effort spent on educating the client on the product benefits is a lot more now. For instance, product illustrations adopted by insurance companies are becoming far more comprehensive.

The way ahead for wealth management industry

Business models have evolved and shall continue to evolve over time. Often changes, of the kind now seen, act as triggers. In the case of the wealth management industry, most banks are now adopting a fee-based model charged on advisory instead of pure product-driven distribution strategies. From the client’s perspective, they will pay a fee to the distributor only if they see value in the overall offer that they buy into.

Overall planning: This will change the way products are sold to clients in the future. The role for a pure “transacting intermediary” will shrink. The intermediaries, in order to command attention from clients, will instead have to move towards an overall wealth management approach that involves financial planning and client asset allocation leading up to need-based sale of suitable investment or insurance products. Effective education of product benefits and matching it to the requirements of the client will be followed as a standard practice.

Customizing products and value addition: Banks and wealth management firms are now evolving the manner in which they sell an investment proposition to their clients. Providing customized and comprehensive investment solutions, focusing on technology and increasing convenience and analytical support will be the de rigueur composition of all banks and wealth management firms. They will now have to increasingly ensure that clients recognize the value-add in their services in order to willingly obtain fee from them.

New role of relationship manager: At the core of any wealth management proposition for a bank is the relationship manager. In the future, the role of an relationship manager will change; new regulations acting as the trigger here too. In short, banks will have to evolve into becoming a one-stop total solutions provider to their clients.

Source: http://www.livemint.com/2010/10/11230820/It8217s-time-to-add-value-t.html?h=B

Longer stay in India to increase NRIs' tax liability

Domestic households savings contribute significantly to India’s overall domestic savings rate. The credit goes to the Indian tax laws to a certain extent, as they provide tax incentives to individuals to invest in some specified tax-saving instruments. Section 80C of the Income Tax Act (Act) provides for a deduction of `1 lakh in certain investments (tax saving instruments)/payments made during the year.

The various investments which are eligible for deductions under Section 80C are equity-linked savings schemes (ELSS) offered by LIC and mutual funds, unit-linked insurance plans (Ulips) for self and/or spouse, children, life insurance policies for self, and/or spouse, children, employees’ contribution to recognised provident funds (PF), approved super-annuation fund, contribution to public provident fund (PPF); deposits in post office schemes such as National Savings Certificate (NSC), Senior Citizen Savings Scheme (SCSS), if it applies and the post office five-year time deposits, term deposit with a scheduled bank for a period of at least five years, investments made in bonds issued by the National Bank for Agriculture and Rural Development (Nabard) and debentures issued by specified companies.

In addition to the above investments, the following payments also qualify for deduction under Section 80C: payment of tuition fees for full-time education in any Indian university, college, school, educational institution (available for any two children), and repayment of the principal portion of a housing loan.

Besides Section 80C, one can also make an investment up to `20,000 in specified infrastructure bonds to save tax. Further, an individual gets a deduction of up to `15,000 (`20,000 where the individual is a senior citizen) for the health insurance of self and his family. There is an additional deduction of `15,000 where the health insurance is taken for the parents (`20,000 where any of the parents is a senior citizen).

However, the situation may undergo dramatic changes after the Direct Taxes Code (DTC) comes into play. DTC, 2010, proposes to restrict the deduction of `1 lakh only to some approved fund(s)— such as an approved provident fund, pension fund, super-annuation fund, PPF among others. However, an additional deduction of `50,000 has been proposed to cover payments such as life insurance premiums (premium not to exceed 5% of sum insured), health insurance premiums and the tuition fee. That means an individual won’t get any tax incentives for existing tax-saving instruments other than those covered in the DTC.

Non-resident Indians (NRIs) visiting India, will need to be more vigilant, post the DTC regime. Under DTC, if their stay in India exceeds 60 days during a year and 365 days for the past four tax years, then they may be considered as residents of India. Currently, they become residents only when their stay exceeds 182 days. Once they become a resident, they may have to pay tax on their global income, if their stay in India for the past seven tax years exceeds 729 days and if they are residents in two out of the past 10 tax years. In a nutshell, NRIs run the risk of triggering worldwide taxation soon if they spend a significant time in India.

The DTC proposals relating to individual taxation have undergone significant change since the DTC was proposed in August 2009. One will really need to wait for the final bill, which will become operational from April 1, 2012.

Source: http://economictimes.indiatimes.com/personal-finance/tax-savers/tax-news/Longer-stay-in-India-to-increase-NRIs-tax-liability/articleshow/6733168.cms