Short-term income funds to get attractive, FMPs to lose sheen

The Reserve Bank of India’s move to cut interest rates is likely to make short-term income funds and dynamic bond funds more attractive. It will, however, take away a bit of sheen from fixed maturity plans (FMPs) — one of the most popular debt instruments preferred by rich investors when the interest rates are high. On Tuesday, yields of the 10-year government bonds slipped by about 10-12 basis points to 8.34% post the policy announcement. The yields for money market instruments, on the other hand, fell anywhere between 20 bps and 25 bps.

“With the rate reduction, liquidity conditions in the overnight market will improve. Hence, the yields of all near-maturity money market instruments will come off,” said Sujoy Das, head – fixed income, Religare MF.

According to Mahendra Jajoo, CIO, fixed income, Pramerica Asset Managers, the short term yields for money market instruments such as commercial papers and certificates of deposit are likely to come off by 50-100 basis points over the next couple of months. The reduction in short-term rates will benefit investors in short-term income funds. “We have been consistently recommending investors to look at the 1-3 year mid-maturity space given that interest rates are likely to fall. Investors with a moderate risk appetite will therefore merit from short-term funds and retail-focused regular savings funds,” said Chaitanya Pande, head - fixed income, ICICI Prudential AMC. Added Das: “Income funds with average maturity of about one year are likely to give superior returns.”

Another category of funds that is likely to do well is dynamic bond funds, said market participants. While interest rates seem to have peaked, it is difficult to determine when the next rate cut will be. Uncertainties with respect to inflation, global economy and currency movements are likely to persist. So, there is likely to be a fair amount of volatility in the money market, as well as government and corporate bond markets. Dynamic bond funds are well-suited to ride this volatility as they have a flexible duration and can invest in a mix of instruments, said industry observers. Dynamic bond funds are also ideal for those who don’t want to take a call on interest rate movements.

The reduction in interest rates is likely to make FMPs less popular. “FMPs will become slightly less attractive because of the steep rate cut but there will still be a market for these products given the high interest rates,” said Das. One-year FMPs that were giving returns of 10%-plus in March are now likely to fetch 9.5%, said market participants. Between October and March this year nearly 500 FMPs were launched by fund houses.

Source: http://www.financialexpress.com/news/shortterm-income-funds-to-get-attractive-fmps-to-lose-sheen/938035/0

RBI cuts repo rate by 50 bps; sees little room for more

The Reserve Bank of India (RBI) cut rates on Tuesday by an unexpectedly sharp 50 basis points to boost the sagging economy, but warned there was limited scope for more cuts, with inflation likely to remain elevated and growth on track to pick up, albeit modestly.

The RBI, which was tightening monetary policy long after central banks elsewhere began easing, lowered its policy repo rate to 8.00 percent, compared with expectations for a 25 basis point cut in a Reuters poll.

"RBI is indicating that there is a limit for further rate cut expectations, and I think they are pretty much done with further rate cuts this year," said Rajeev Malik, economist at CLSA in Singapore.

The RBI also warned that India's current account deficit, which widened to 4.3 percent of GDP in the December quarter, is "unsustainable" and will be difficult to finance given projections of lower capital flows to emerging markets in 2012.

The rupee has been under pressure as foreign investors worry about persistent inflation, a yawning current account gap and fiscal indiscipline on the part of New Delhi, prompting concern about the country's balance of payments.

Investors and companies cheered the rate cut, with bond yields and swap rates falling sharply, although the rally was capped by expectations for few further cuts in the near term. The BSE Sensex ended 1.2 percent higher.

Some RBI-watchers said Tuesday's move was risky given the potential for resurgent inflation.

"The RBI was clearly itchier to cut policy rates than expected, but the 50 bp cut may have been a bit too premature and aggressive, in our view. If that turns out to be the case, it could hurt RBI's credibility while doing little to raise growth on a sustained basis," HSBC economist Leif Eskesen wrote.

RBI Governor Duvvuri Subbarao said the deeper-than-forecast cut is intended to ensure that banks cut their lending rates soon. Indian banks have been reluctant to lower lending rates amid still-tight liquidity and high deposit costs.

The country's largest lender, State Bank of India (SBI.NS) said later on Tuesday that it would cut rates on some loans that have high interest rates, while ICICI Bank (ICBK.NS) said it would reduce deposit and lending rates. Neither were more specific.

Economists have in recent weeks been scaling back their rate cut forecasts. Nomura said it expects the RBI to hold off from cutting rates at its next reviews in June and July, and forecast just one more 25 bps rate cut in 2012. Citigroup expects just one more rate cut in the current fiscal year.

India's economy grew by 6.1 percent in the December quarter, its slowest in almost three years, but the central bank had been reluctant to begin cutting rates as inflation remained elevated.

Subbarao maintained a cautious view in his policy statement.

"It must be emphasised that the deviation of growth from its trend is modest. At the same time, upside risks to inflation persist. These considerations inherently limit the space for further reduction in policy rates," Subbarao said.

CAUTIOUS VIEW

The RBI raised rates 13 times between March 2010 and October 2011 as it struggled to contain price pressures, with headline inflation at one point accelerating into the double digits as the cost of fuel and food soared.

Headline wholesale price index eased slightly to 6.89 percent for March but was still above expectations, as a drop in manufacturing inflation was offset by a surge in food inflation, data showed on Monday.

On Tuesday, the RBI left unchanged the cash reserve ratio (CRR), the share of deposits that banks must hold with the central bank, at 4.75 percent, in line with expectations, after cutting it by 125 basis points since January to ease tight market liquidity.

Subbarao said liquidity conditions are moving towards normal after several months of acute shortages of cash in the banking system, but also said the RBI would take "appropriate and proactive" steps if needed to revive liquidity.

The central bank said its baseline expectation for gross domestic product growth in the fiscal year that ends in March 2013 is 7.3 percent, compared with an expected 6.9 percent in the just-completed year.

It expects headline inflation to end the year at 6.5 percent, with little deviation foreseen during the year.

BOTTLENECKS

Sluggish capital investment has exacerbated bottlenecks in the Indian economy, bringing down its capacity for non-inflationary growth to 7.5 percent, according to Subbarao, from 8.5 percent before the global financial crisis.

He reiterated the need for the government to cap its subsidy burden, which led to a bloating of the fiscal deficit in the recent fiscal year to 5.9 percent of GDP.

The weakened government has been unwilling to pass along higher global oil prices to end-users, but pressure on the fiscal deficit is expected to force it to do so.

"It is imperative for macroeconomic stability that administered prices of petroleum products are increased to reflect their true costs of production," Subbarao said.

Corporate India, dejected over government inaction that has thwarted capacity expansion, has long clamored for rate cuts.

Siddhartha Roy, economic adviser at the Tata Group, the software-to-steel conglomerate that is India's biggest business house, said Tuesday's rate cut is welcome but more is needed.

"First we need more rate cuts to the tune of around 150 basis points in order to make the real interest rates realistic. Then, the fiscal side needs to be controlled to prevent crowding out of the private sector and available liquidity is well distributed," he said.

Source: http://in.reuters.com/article/2012/04/17/rbi-rate-cut-repo-rate-crr-subbarao-gdp-idINDEE83G02Z20120417

No big hikes, bonus for mutual fund industry staff this year

Four CEO exits in a month, abysmal pay hikes, ban on bonuses and whispers of downsizing - the Indian mutual fund industry is going through one of its roughest patches in a decade.

Fund house managements are taking a hard look at slow AUM (asset under management) growth, scheme underperformance, low profits and rising costs.

Boards of trustees of several MFs are pushing for pay cuts, skipping bonuses, increasing variable component in salaries and forewarning employees of a possible "right-sizing".

According to industry sources, which include views from over half-a-dozen domestic fund houses, and a few leading HR consultants, the best and the biggest domestic fund houses are offering just about 9-12% increments to top performers. Bonus payouts, which are performance-linked, are being kept as low as 12-20% of salaries.

"There's little to reward employees this year," said the CEO of a bank-sponsored fund house.

March and April are important months for fund companies that follow a "two-year lap calendar". Fund houses strive hard to maintain high asset bases and 'NAV levels' in March as it becomes a reference point for the following year.

However, average AUM of the Indian fund industry fell over 2% to 6.64 lakh crore in the March quarter. Asset bases of fund houses like IDBI Mutual, JM Mutual, Kotak Mutual Fund, L&T Mutual and Religare Mutual, among others, dipped 10-35% during the three-month period starting January.

"The sales and marketing departments have not been able to bring in investors; fund managers have also not showcased any extraordinary performance," the person said.

A few corporate marketers have managed to bring in money; they'll be given a 25% bonus and small increment," added the person.

In the bullish years of 2006 and 2007, even mid-sized fund houses paid bonuses in the range of 40-50%; increments were in the range of 20-30% in those years, as per data sourced from various HR consultants.

"Increments and bonuses in asset management companies have fallen significantly this year. Fund houses have failed to grow their assets or put up good fund performance; it's not going to be a very rewarding time for fund professionals," said E Balaji, MD & CEO, Randstad India.

Boards of most fund houses are now trying to reduce their operational costs. Many of them are planning to "cut flab" in their marketing, sales and other support departments.

According to Balaji, most fund houses are only resorting to "selective replacement hiring" to fill up senior-level vacancies. "Mutual fund and investment banking have been the worst-hit trades in the financial services industry. We may see a downsizing this year. Cuts may come initially in out-of-flavour verticals like aviation, mining and renewable energy," said R Suresh of Stanton Chase.

In the last one year, brokerages made news for sacking employees and folding up bases in smaller towns as trading volumes shrank.

The crisis in mutual funds came to the fore with the exit of four CEOs in quick succession. Piyush Surana of Daiwa Asset Management, Arindam Ghosh who headed Mirae Mutual Fund, and Rajan Krishnan of Baroda Pioneer Mutual Fund have resigned in the past three weeks.

Sameer Kamdar, who was supposed to head ASK Asset Management, resigned last week after a two-year wait for Sebi approvals. "We're not sure what's making them leave... the real reasons could be pressure on performance, cost-cutting or differences in strategies," Balaji of Randstad India said.

According to the CEO of a large corporate fund house, FY12 was probably the worst year in the history of funds in India.

"The industry was hit badly by frequent regulatory changes, volatile equity markets, disinterested distributors and outflow of bank money from debt schemes. We missed all our targets last year," he said.

Source: http://economictimes.indiatimes.com/news/news-by-industry/jobs/no-big-hikes-bonus-for-mutual-fund-industry-staff-this-year/articleshow/12709546.cms?curpg=2

Do not exit Fidelity MF in a panic

Jharna Bhiwandiwala stopped her monthly investments in Fidelity schemes through systematic investment plans after L&T Mutual Fund announced acquiring the assets under management of Fidelity MF in India. “I stopped my SIPs in Fidelity’s equity funds since its managemnt team was not part of the acquisition and the performance of equity schemes of L&T Mutual Fund did not provide me the desired comfort on its fund managers,” she said.

There are many others who are thinking on similar lines but going by the facts, taking such a decision in haste may not be a good idea. Express Money provides you five reasons why you should not exit from your Fidelity investment.

The Deal is yet to get Sebi approval

Before you decide to exit, keep in mind that the regulator (Securities and Exchange Board of India) has yet to approve this acquisition which involves the sale of assets under managemnt by a foreign fund house to a domestic firm without its equity management team. So, while you have your concerns, the regulator may also have some queries and hence you should wait till the approval comes.

Fund managers may be there for some time

While the equity fund managers are not part of the deal, they will actively be around for almost two years. The approval will come in three to six months and then the transition period may take another six to eight months.

“L&T MF has demanded that equity fund managers of Fidelity should stay for around one year after the transition is complete or till their own fund managers are comfortable with it. Taking everything in consideration, equity fund managers of Fidelity will manage the affairs for atleast two years from now,” said a source close to the development.

Existing processes may continue

Experts say that Fidelity will share its standard fund management processes with L&T in the transition phase and there is likelihood of continuity in the equity schemes for now and hence investors should not take a decision in haste. “There is nothing that should trigger redemption,” said Dhirendra Kumar, MD, Value Research. “Investors should wait how things evolve at L&T and past in not necessarily a reflection of the future. There is also a possibility that some equity fund managers of Fidelity join L&T MF.” Experts feel that L&T has got the money to hire good fund managers.

Be careful when your distributor asks you to switch

While investors are apprehensive, distributors may ask you to switch over to other fund house as it tends to benefit them.

A switch-over allows them to make some extra money on your investments and thus do not go by your distributor’s advice in this case. Market experts say that competitors would try to take advantage of the situation and try to lure Fidelity’s investors to them.

Wait for Fidelity to come out with exit option

Experts say that if you redeem your investments with Fidelity now, you may have to pay an exit load of 1 per cent and also capital gains tax (short term tax) in case the investment is not more than one year old. However, once the deal gets Sebi nod, then as per the regulations Fidelity will have to come out with one month exit option from their schemes without charging any exit load and that will be a good time to exit if one has decided to exit in any case.

Source: http://www.financialexpress.com/news/do-not-exit-fidelity-mf-in-a-panic/937080/0

Market will remain volatile this year too

The market might lack triggers for further rally unless the government delivers on better fiscal management and pushes reforms, says J Venkatesan, VP equity at Sundaram Mutual Fund, in an interview with Prasanna Deshpande. Excerpts:

How do you see the Indian equity market behaving during 2012-13? Are stocks attractively valued, and going ahead, do you see further rally?
The Indian capital market should continue to remain volatile in the current year also. Throughout last year, the market was worried about the European crisis, but with the infusion of about Euro 1 trillion into the system through LTROs, the huge global risk seems to have been averted in the short term. With the ensuing surge in global risk appetite, India also received good FII inflows, which moved the market by more than 10 per cent in this calendar so far. But the domestic risks still remain.

While we do expect the interest rate cycle to start reversing this year, there may not be a significant reduction. Inflation might start inching up again from June. Unless the government delivers on better fiscal management and further reform measures, the market might lack triggers for fresh rally despite being valued at around the long term average of 14 times FY13 earnings.

Which sectors and stocks you are betting on?
We cannot talk about stocks. But at this point of time, we continue to like defensive sectors like pharma, consumer stocks, including staples, discretionary items and autos. We believe the non-performing loan cycle might peak in about two quarters, hence financials could be a good medium-term play. We would like to remain underweight on commodities and real estate. We also remain underweight on the IT sector as we are apprehensive of their growth because of delay in global discretionary spending.

What do you expect from the January-March quarterly earnings season? Will corporate earnings improve in the coming quarters?
While overall growth for the year could be in the region of about 10 per cent to 13 per cent for this quarter, there would be earnings dispersion across sectors next year. While pharma, consumer goods and financials could see better earnings growth, materials could show de-growth. Further, we also feel that there could be earnings downgrades, though of lesser degree.

Do you think RBI will cut repo rate in its next credit policy announcement? How much do you expect the RBI to cut key rates this financial year?
We do expect RBI to signal a rate reversion cycle with a modest 25bps in the April policy. Having said that, we do not think overall rate cuts would exceed 75bps for the current financial year.

Do you expect inflation and fiscal deficit to decline in FY13?
It would be difficult for the government to meet the 5.10 per cent fiscal deficit target. They have slipped by 130bps for the FY12. We expect inflation to come down to around 7.30 per cent in FY13 from 8.60 per cent in FY12.

Will FIIs continue to infuse funds in domestic stocks or will they pause on macro-economic worries?
The Indian market was the second-worst performing market in dollar terms globally in calendar 2011. We have received decent flows in the current calendar so far. From hereon, their flows would depend on the relative attractiveness of our market and their risk appetite levels. But if domestic factors improve significantly, we can expect the flows to continue.

On the global front, do you expect the US to come out with QE3, and what, according to you, would be its implications for the global financial market?
We do not think QE3 is likely in our base case. But we may not completely rule out QE3 with the US presidential elections around the corner and should the US economy throw up negative surprises. Should that happen, there would again be a surge in risk appetite levels and commodity prices would move up in the short term.

Will commodities market turn volatile if more liquidity enhancing measures are adopted by the west? At what level do you expect crude prices to stabilise?
Commodities would turn volatile more on account of a slowdown in China's growth. China being one of the largest consumers of commodities, their slowdown would disturb the demand-supply dynamics and impact prices. In the short-term, crude price is more a function of political disturbance in West Asia, but in the medium term, we think it will stabilise at current levels.

Source: http://www.mydigitalfc.com/companies/market-will-remain-volatile-year-too-556

Inflows into gold ETFs at 5-yr high.

Net inflows into gold exchange-traded funds (ETFs) for the financial year 2012 were the highest in the last five financial years as muted returns in most other asset classes and an uncertain outlook for the world economy prompted risk-averse investors to flock to the yellow metal.

Net inflows into gold ETFs for FY12 amounted to R3,646 crore, a 59% increase over the R2,289 crore garnered in the previous fiscal, data from industry body Amfi shows.

The figure is 43 times more than the amount collected in FY09, the year the global financial crisis shook world markets. Assets under management (AUM) for the category in FY12 have more than doubled over that in the previous fiscal, and multiplied more than 20 times in the past five years.

“Risk aversion among investors was pretty high for much of last year, which made them turn to gold, which is perceived as a safe haven,” said Nitin Rakesh, CEO, Motilal Oswal Asset Management Company. He added that the bull run in the yellow metal also made the yellow metal attractive: “Investors tend to flock to asset classes that are doing well.”

Gold ETFs as a category gave returns of about 34% for the financial year 2012, according to data compiled by Value Research. Gold prices appreciated as much as 35% in the period, touching R28,040 on the last day of the year.

Currently, a dozen gold ETFs are in operation.

According to Kishore Narne, senior VP and head —currency & commodity—Anand Rathi Securities, the psychological affinity Indians have towards gold made them invest in the commodity despite the sky-high prices.

“Gold has been the best performing asset over the past 10 years. It is a hedge against inflation, which has remained stubbornly high in the past two years,” said Mahendra Jajoo, CIO —fixed income— Pramerica Asset Managers.

Compared to gold, most other asset classes underperformed last year. For instance, industrial metal silver slipped 1%, while Indian equities as measured by the benchmark BSE Sensex slipped by more than 11% during the year. Debt fared better, with average category returns for FY12 clocking a little over 9%. According to market participants, Indian investors have grown more comfortable with investing in gold ETFs over the past two years.

This change in mindset, in turn, encouraged several fund houses to launch gold ETF products over this period. More specifically, inflows into this category last year were boosted by the launch of several gold fund of funds.

“At least 8-9 gold fund of funds were launched last year, which gave a significant boost to the assets under management of gold ETFs,” pointed out Rakesh.

Market participants believe that inflows into gold ETFs are likely to remain robust going forward unless the equity market starts outperforming. According to a recent statement by Thomson Reuters GFMS, one of the world’s leading economics consultancies in precious metals, the more-than-decade-long bull run in gold may come to end in early 2013 if prices touch new highs.

Source: http://www.financialexpress.com/news/inflows-into-gold-etfs-at-5yr-high/936115/0