Entry Fee Removal May Slow Indian Mutual Fund Spread

Indian capital market regulators' move to scrap an entry fee on mutual funds is expected to bring more transparency in the growing industry even though it may temporarily hurt mutual fund penetration as distributors will lose the incentive to sell funds.
In the long run, the move should bring down the cost of investing in mutual funds, attracting more investors and helping the industry grow, experts said.
"The idea behind the SEBI move is to make mutual fund schemes available to the investor at the lowest cost possible," said Anil Chopra, group chief executive and director, Bajaj Capital Ltd.
The so-called entry load is a fee that asset management companies, or AMCs, deduct from the amount of money an investor puts in a scheme to pay for marketing and distribution expenses, most of which is an upfront payment to distributors as commission.
Last week, C.B. Bhave, chairman of the Securities & Exchange Board of India, said the upfront commission shall now be paid by the investor to the distributor directly, adding that distributors will have to disclose the commission received for their services.
The benefit for investors would be that they now get to negotiate the amount of commission payable.
Also, the removal of the entry load can actually increase the compounded return for investors as the entire amount they wish to put in a fund would get invested.
For example, earlier, if an investor paid 100,000 rupees for a fund investment, he was allotted units only worth 97,750 rupees-97,500 rupees after deducting the entry load.
At present, equity funds typically impose an entry load of 2.25% to 2.50% on their schemes.
Also, distributors will now be more accountable to investors.
"This is a path-breaking change, and one which would check mis-selling of mutual fund schemes by distributors," said Jagannadham Thunuguntla, head of equity at Nexgen Capitals Ltd.
Mr. Thunuguntla said distributors could now look at turning into advisers who educate investors on the prospects of a fund and its potential performance by demanding an advisory fee in return.
"The taste of easy money (by just selling a scheme) would be gone...the distributors will have to make sure they give the best advice to the investors in order to ensure regular income," he said.
The SEBI move comes at a time when fund managers are looking to make the most of the revival in Indian markets.
Total assets under management for fund houses in India rose 16% in May to a record 6.39 trillion rupees ($135.90 billion), compared with 5.51 trillion rupees in April, as the benchmark Sensex has soared over 50% since the start of 2009.
Mutual fund penetration in India is still a low 3% of total household savings, and the industry is banking on tapping investors in tier II and tier III cities for growth.
But the SEBI move may limit these efforts in the short-term as the industry may see a fall in the number of distributors, and consequently a fall in business volumes, say analysts.
Experts say distributors might look at other business opportunities as they would now cease to receive the fixed commission from the AMCs for selling mutual funds.
"Selling mutual funds will become much less attractive," said Dhirendra Kumar, chief executive, Value Research - an independent provider of investment information on mutual funds.
Manish Sonthalia, a fund manager at Motilal Oswal Securities Ltd. said, "(Fund) mobilization would tend to slow down and, even if profitability does not get impacted directly, volumes at AMCs would be hit."
In the short term, distributors may opt to sell other investment products like unit-linked insurance plans, or ULIPs, pension schemes and post-office savings certificates, which could hurt the asset management industry.
An option out for fund houses is to distribute their products directly, Mr. Kumar of Value Research said.
However, analysts say this is unlikely as setting up distribution centers at several locations across the vast Indian subcontinent would be costly and time-consuming for AMCs.

Source: http://online.wsj.com/article/SB124584142778546881.html?mod=googlenews_wsj

Sahara MF launches Sahara Super 20 Fund

Sahara Mutual Fund launched of its new equity scheme christened as "Sahara Super 20 Fund", an open ended growth fund with the objective to provide long term capital appreciation by investing in pre-dominantly equity and equity related securities of around 20 potentially attractive companies selected out of the top 100 largest market capitalization companies, at the point of investment.
The new fund offer opens for subscription on June 25, 2009. During the NFO period, the units of Sahara Super 20 Fund can be subscribed at Rs 10 per unit (plus applicable load). The NFO would close for initial subscription on July 23, 2009.
"The Indian economy is showing signs of revival and is returning to a potential growth path. The political stability has further improved the outlook. and the economy is expected to show a better growth on the back of improvement in consumer sentiment, policy reforms and projected growth in agriculture, and services sector, said Naresh Kumar Garg, CEO, Sahara Mutual Fund.
"Under such a scenario, it is the large cap companies, which would reflect this growth first and the fund aims to capture the benefits by investing in such companies."
The new scheme, which is benchmarked to CNX Nifty does not guarantee any assured returns. At least 65% of the total assets will be invested in equity and equity related securities and upto a maximum 35% of the total assets may be invested in debt and money market instruments.
Under the scheme one can opt for dividend option, (including dividend re-investment option) or growth option. Minimum application amount is Rs 5,000. Systematic investment plan (SIP) is also available with the scheme.

Source: http://economictimes.indiatimes.com/Personal-Finance/Sahara-MF-launches-Super-20-Fund/articleshow/4700892.cms

Retail investors stay longer than biggies in equity funds

Business Line Research Bureau Retail investors take a longer-term view of mutual fund schemes than high net worth individuals (HNIs), FIIs, banks or financial institutions, according to the Association of Mutual Funds in India (AMFI).The findings of the first numbers released by the AMFI on holding periods of investors for March indicate that 46 per cent of retail investors – by assets – held their equity funds beyond 24 months; 36.4 per cent of HNIs also had a two-year-plus holding period. However, only about 18 per cent of the banks, financial institutions and FIIs who invested in equity funds held on beyond 24 months.
More HNIs than retail investors held for one to two years. Overall, about 82 per cent of retail assets stayed on for more than a year in equity funds.
The report also indicates that equity funds made up 26 per cent of the total assets managed by the fund industry. Retail investors were the major investors in equity funds, making up 64.8 per cent of equity assets. They accounted for an even higher 68.2 per cent of the balanced funds.
HNIs were the next largest category of investors with a 20.6 per cent share of equity and 22.2 per cent in balanced funds (according to AMFI, HNIs are those who invest more than Rs 5 lakh).
Debt funds, as expected, are dominated by companies, with corporates accounting for 64.7 per cent of debt assets. HNIs were also big debt investors with a 28.6 per cent share.
Retail investors made up only 4 per cent of the asset base of debt funds. According to a report, AMFI is planning to publish this report every six months.

Source: http://www.thehindubusinessline.com/2009/06/25/stories/2009062551921300.htm

LIC to invest Rs 50,000 cr in stocks in FY'10

Life Insurance Corporation of India (LIC) on Wednesday said it will invest nearly Rs 50,000 crore in the equity market this fiscal.
"We expect to invest nearly Rs 50,000 crore in equities this year against Rs 40,800 crore last year," LIC Managing Director Thomas Mathew told reporters here.
So far in this fiscal, the largest life insurer has invested about Rs 8,000 crore in the equities.
As per exposure norms, LIC is also investing in government papers and corporate debt.
Yesterday, LIC Chairman T S Vijayan said during the current fiscal, the life insurance company is eyeing a premium income growth rate of 20 per cent.
As regard new premium income, which declined by nearly 10 per cent in 2008-09, he said the company is expecting a growth rate of 25 per cent during the current financial year.
LIC collected a premium income of Rs 1,55,000 crore in 2008-09, which included first premium income of Rs 52,000 crore.

Source: http://economictimes.indiatimes.com/LIC-to-invest-Rs-50000-crore-in-equity-market/articleshow/4696158.cms

Infrastructure shares are hot commodities for MFs in India

Infrastructure shares are hot commodities for funds in India after the recent elections, and their attraction is only set to grow as theMutual FundsPaperwork for MF investments!MF InvestmentsWhen do you jump a mutual fund?new government lays out plans to improve the country’s overburdened roads and bridges in next month’s budget.
Fund managers are hoping the new government will bolster spending on infrastructure, remove policy bottlenecks by easing land acquisition rules and environmental clearances, amend labour laws and simplify procedures for project approvals.
While such expectations have helped infrastructure shares surge twice as fast as India’s benchmark index since mid-May, a clear roadmap in the budget would further improve visibility and could convince the funds to pay even higher valuations.
Fund managers are also betting on a pick-up in earnings for such firms later this year, helped by lower interest rates and commodity prices and a revival in economic growth.
“Basically the opportunity is very big,” said Sankaran Naren, equity chief investment officer at ICICI Prudential. All that is required is for everything to be lubricated properly. I am interested in clarity,” Naren, who manages about $780 million in India’s biggest infrastructure mutual fund, added.
Engineering firms Bharat Heavy Electricals, Larsen & Toubro, Crompton Greaves and Reliance Infrastructure, were among the 20 most popular stocks for domestic fund managers in May.
The shopping list also included construction firms Jaiprakash Associates and Punj Lloyd, as funds sought exposure to sectors such as power and construction.
India’s biggest fund firm, Reliance Capital, is raising money for a new infrastructure offering, while rival Tata Mutual Fund sought approval this month to launch its fourth such fund.
SBI Funds Management, French insurer AXA, Sundaram BNP Paribas, Franklin Templeton and Deutsche Bank have also sought approval for infrastructure funds in June.
Fund managers are excited by the prospects for reforms after India gave the Congress-led coalition the most decisive election mandate in two decades, freeing it from the support of the Left and communist parties, which had stalled planned reforms.
India estimates it needs $500 billion over the five years to 2012 to upgrade its overwhelmed airports, potholed roads and inadequate utilities but has lagged in making critical reforms needed to do so, holding back potential gains for investors.
The sector suffered a blow last year as the economy slowed from 9 per cent in 2007/08 to less than 7 per cent and a global credit crunch starved infrastructure firms of funds.
But the gloom seems to be diminishing.
India is expected to expand at 8 per cent in 2010, the fastest among major economies in the world, and 8.5 per cent the year after, matching China’s growth rate, according to a World Bank report released on Monday.
An improvement in growth prospects is likely to boost fund flows, especially to the high-beta infrastructure sector.
The sector could also get a lift later this week when the S&P CNX Nifty index shifts to a free-float market cap methodology, giving higher weight to some infrastructure stocks.
However, India faces plenty of execution risk.
“While there is always a fear of disappointment when expectations are very high, in our view, the government could focus on low hanging fruit and still deliver a lot,” JPMorgan’s domestic fund unit said in its latest fact sheet.
HUGE POTENTIAL
Few would doubt the opportunity in domestic infrastructure.
India’s peak power capacity is nearly 14 per cent short of demand, while its transmission and distribution losses are a staggering 40 per cent, according to Planning Commission data.
Only 2 per cent, or 65,590 kilometres, of roads are national highways but carry 40 per cent of traffic, while less than half of agricultural land is irrigated, it said.
Ports are running at 95 per cent of capacity with demand rising at 10 per cent annually, Tata Asset Management data showed.
But to grow at 9 per cent India needs to invest 9 per cent of its GDP to boost infrastructure from less than 6 per cent now.
For a graphic on planned investment by sector, click here
“Achievements in the past five years will pale in comparison with what we will see in the next five years because of the scale at which these activities are going to be happening,” said Sanjay Sinha, chief executive of DBS Cholamandalam Asset Management.
Infrastructure funds are the most popular in India by sector, with 18 of them managing nearly Rs 16000 crore ($3.3 billion) at the end of May, according to fund tracker ICRA Online.
“This is a 10 to 20-year catch-up story, years of servicing and supplying, and then another cycle of upgrading and replacing,” said Seth R. Freeman, chief investment officer of US money manager EM Capital Management.

Source: http://nseguide.com/stock-views/infrastructure-shares-are-hot-commodities-for-mfs-in-india/

Mutual funds in buying mode

Mutual funds (MFs) bought shares worth a net Rs 81.90 crore on Tuesday, 23 June 2009, lower than Rs 120.80 crore on Monday, 22 June 2009.
MFs' net inflow of Rs 81.90 crore on 23 June 2009 was a result of gross purchases Rs 1,032.60 crore and gross sales Rs 950.70 crore. The BSE Sensex fell 2.21 points or 0.02% to 14,324.01 on that day.
MFs were net sellers of shares worth Rs 506.50 crore in June 2009 (till 23 June 2009). The selling by mutual funds was despite fresh inflows into equity schemes. Net inflows into domestic equity mutual funds rose to Rs 1,930 crore in May 2009, the highest in 14 months, and more than twice the amount in the first four months of 2009, according to data from the Association of Mutual Funds in India.

Mr. N. Sethuram, Chief Investment Officer, Shinsei Investments

Shinsei Investments, a new player in Mutual fund industry plans to launch its first two mutual fund products in the country before end-July. Japan's Shinsei Bank holds a 75 % stake in the mutual fund house, with investor Rakesh Jhunjhunwala and Freedom Financial, 15 % and 10 % respectively.

Mr. N. Sethuram, Chief Investment Officer, Shinsei Investments, prior to his current assignment, he was CIO with SBI Funds Management Pvt. Ltd. He started his career in State Bank of India 1976 and has over 31 years of banking experience in diverse fields like Credit, Forex and Investments. Of his diverse assignments with SBI, he was also posted as Senior Vice President (Credit and Investments) at the Bank's Tokyo Branch.
Speaking with Anil Mascarenhas and Fahima Shaikh of India Infoline, N. Sethuram says, “When market surges, logic is lost and these surges are not supported by fundamentals and valuations tend to get distorted”

What are your expectations from the Union Budget?

We are not expecting any big-bang announcements in the budget that would impact the equity markets. The budget would have to look at avenues for raising revenues. It would also be too early to expect any drastic reforms measures from the upcoming budget.
On the disinvestment front, we don’t expect large scale disinvestments to be announced. The government may opt for some small size divestments initially before looking at some big ticket ones in the next couple of years. Overall, we feel that the government would need to focus more on reining in the fiscal deficit, which is very vital.

Which are the sectors likely to benefit from the budget?

The government is very clear about the role infrastructure will play in order to give a thrust to the economy. Companies related to this sector will obviously be the beneficiaries. Having said that, I believe one need to very specific at picking up stocks as the prices have run up significantly and so have valuations.
The market has surged post the election verdict. Hardly anyone could participate in the first 2000 points rise in the Sensex after the elections results were announced. Typically, when such surges happen, logic is lost. These upswings are not supported by fundamentals and valuations. Valuation re-rating has taken place in a major way. Whether markets can sustain these levels and whether current valuations are justified would be the question in the minds of most investors. The current valuations are to be viewed in the backdrop of poor earnings growth by the corporates last year. Even in the current year, the earnings growth is expected to be subdued. To that extend current market valuation don’t seem to be justified. However, we expect earnings growth to rebound in the next year, with expectations of return to high GDP growth pattern of over 8%. If the current market levels are valued discounting the earnings expectations of the next year, the market valuations would look reasonably attractive.
These are times when most people are keen on investing in the equity markets and to an extent feel that they have missed out on the opportunity to invest at lower levels. While selective buying is taking place, we are also seeing profit booking happening as the markets have run up significantly by almost 80%-90% from its lows. One can expect to see some cooling in the equity markets by around 10-15/% from the recent highs.
We are very positive on the prospects of the equity markets over the medium to long term. Our optimism stems from the fact that the Indian economy would regain 8% plus GDP growth as soon as the conditions in the US starts improving and this growth can be sustained over a long period. One can certainly hope to get good returns on equity investments over the next three to five years.

What is your view on Real Estate as a sector?

We have seen some improvement in the fortunes of the real estate sector. There would be selective opportunities to invest in this sector. This is a market where we have to be stock-specific rather than sector specific.

You mentioned about the launch of Shinsei Industry Leaders Fund. Generally, the leaders in the industry would already have had a good run. How would you be able to outperform by buying these companies?

We are looking to launch the Shinsei Industry Leaders Fund shortly, which would be a diversified equity fund. In our definition of ‘leaders’, apart from companies which have the largest market share in the respective sectors, we have also included companies which have achieved the highest growth in sales as also the companies with the highest profitability. The selection of the companies which are leaders in their respective sectors would be based on their performance in their core business over the last three to five years. There are 43 sectors as classified by AMFI and we would identify 3 to 5 companies as leaders in each sector. We would typically have a universe of around 120 companies to select from. Our portfolio would have around 25 – 35 stocks.
Most mutual fund houses follow a top down policy for selecting sectors to invest in and then a bottom up approach for individual stock selection. In our proposed Shinsei Industry Leaders Fund, we would first identify the leaders among various sectors. Once we identify the leaders we would do a bottom up stock picking from among the leaders in the sectors that we feel would perform well.
Typically, it is the mid-cap companies which have the highest growth rates in sales and profits in their respective sectors, while it is the large market cap companies which tend to have the largest market share. Our portfolio would therefore be a blended portfolio of large and mid-cap companies. We have observed that in most market conditions, it would be the leaders that outperform. An investor in our fund can hope to get a portfolio comprising of leading companies giving good market relative returns.
The Japanese are symbolized by their quality discipline and precision. Considering the fact that we are the first mutual fund in India sponsored by a Japanese financial services group, we would endeavor to imbibe these qualities in our funds.

The debt market has recently seen increased volatility. What is your view on the 10-year-bond?

The proposal in the interim budget has thrown up a large deficit and has put a lot of pressure on the government’s borrowing calendar. We don’t know how much more would be added to the same in the coming regular budget. The supply of papers on account of the large government borrowing has placed an upward pressure on the interest yields in gilts. This is going to be a negative factor until the government is able to address the budget deficit issue. It is our house view that the benchmark 10-yr-bond would move between 6.5% - 7.25% in the short to medium term.
Last year, we witnessed a rally in the debt market when the yield on the 10 year gilts moved from around 9.5% to 4.90%. However, since then the yields have tended to move upwards and are currently at around 6.9%.

So do you see any further rate cuts?

There is a small possibility of one further rate cut announcement by RBI. However, we feel that this can at best be to the extent of 0.25%.

India has grown by 5.8% in the third and fourth quarters of the last fiscal year, which I believe is an excellent growth rate considering the fact that most parts of the developed world were in the grip of a severe recession. We believe that once the recessionary phase is over in the rest of the world, we can regain growth rates of over 8%. While the stimulus announced by the government have been aimed at kick starting the slowing economy, we think that the priority should now shift to tackling the large fiscal deficit. Problems exist in many sectors, especially export-oriented sectors like diamond and textiles. But I believe providing stimulus packages to these export oriented sectors would not benefit these sectors much unless the global economy recovers.
From October 2009, with the base effect wearing out, we are likely to witness higher inflation numbers. We are particularly worried about the period from January to April next year, when the inflation could see a steep rise because of the low base effect of the earlier year. If the inflation climbs to uncomfortable levels then, the RBI may then be forced to reverse their current stance of maintaining high liquidity and low interest rates.

Does the decoupling theory remain just a theory?

I don’t think India would be completely decoupled from the world anymore. Having said that, India has the potential to grow at a much faster pace than the developed world over the next few decades. We have already seen last year India grew by 6.7%, when the US and Euro Zone were at zero or negative growth. So to an extent we were decoupled from the developed countries, but moved in the same direction. As we get increasingly integrated into the global economic system, we would tend to move in the same trend as the global economy. India’s growth story is also based on domestic core sector development and consumption and we believe that these two factors along with our favourable demographic profile would drive growth over the next few decades. India can sustain higher growth rate than the rest of the world.

What impact do you see with the oil prices fluctuating?

We all know oil prices have been going up steadily and reaching uncomfortable levels, especially for India, as it increases our import bill. This in turn adds up to our trade and Current Account deficits. Oil marketing companies have again reached a stage where they would incur losses unless fuel product prices are revised. India would be happy at a price of crude being below $50 per barrel.

What is your advice to equity investors?

Investors have been complaining about missing the recent rally as many expected the Sensex to correct post the election as they were expecting a hung parliament. Most investors would have planned to make an entry once there was clarity on the government formation at the Center. The market charted its own course to touch 14,000 immediately after the election results were announced and moved up further thereafter.
We are very optimistic about India’s future. Investors, who want to invest in equity, need to have a longer term view. If we believe India can sustain high growth rates over the medium to long term, then investing into equity and equity mutual funds can certainly give good returns over a three to five year horizon. Investors could look at making at entry at current levels and invest in a phased manner. Markets have a tendency to run up significantly once the economy recovers and the momentum sets in.

Being a new player, what is your approach to the market?

Apart from the Shinsei Industry Leaders Fund, which will be our first equity fund, our first debt fund launch would be the Shinsei PSU Bond Fund, which would predominantly invest in high quality papers of public sector entities. The fund would also be rated with the highest credit quality rating by a leading rating agency.
Initially, we are establishing our offices in the major metros and will have a presence in six centers viz. Bangalore, Ahmedabad, Mumbai, Delhi, Kolkota and Chennai. At a later stage, we would look at expanding our presence in other centers.

Source: http://www.indiainfoline.com/news/showleader.asp?storyId=780&lmn=1

Advisories to benefit from MF entry load removal

With SEBI removing the entry load from mutual fund unit buying, wealth
advisory firms find reason to rejoice such a decision foreseeing huge market potential for them. Going forward, such a decision is expected to give “big push” to the wealth management services which is still at a nascent stage in India.
Wealth managers believe that this move may lead to a dominant emergence of advisory services considering the virtual end of distribution services in mutual fund schemes. They are of the opinion that investors will not desist from seeking investment advice and portfolio services. If they deliver quality advisory backed by strong independent research, retail investors would not hesitate to accept wealth management services at a nominal cost of 1-2 per cent advisory fees. After all, selection among 300-400 equity schemes is no joke!
Earlier, major distributors were selling MF schemes charging around 2.25 per cent entry load – which was deducted from investors’ money. There were cases of large scale “push selling” in a pass back system wherein an independent financial advisor shares a part of his commission with the investor by pushing a particular mutual fund scheme, which may not be worth buying, according to the wealth managers.
“The mantle of power is going to shift from product pushers into a holistic financial planning model wherein any wealth advisory service with a strong research background is bound to witness triple digit growth, provided MF industry grows by 30 per cent CAGR,” said Kaustav Majumdar, Dy. CEO & Executive Director, SMC Wealth Management Services.
“SEBI’s new regulation has opened a new dimension for all such people who take up financial planning services,” added SMC Wealth’s Majumdar.
The entry load payment also acted as a deterrent for wealth services, which were hesitant to disclose its advisory charges to the investors at the first instance. Earlier, investors who already paid the entry load for mutual fund schemes were averse of paying any advisory fees. Wealth services used to take a beating on account of this.
Expecting to double their business volumes in less than a year, Vikas Agnihotri, CEO Religare Macquarie Wealth Management, said, “We plan to capitalize on Religare’s network to reach out to investors in Tier I and Tier II cities. From being subjected to a product push environment, Indian investors are being introduced by select players to quality advisory services. In our experience, customers are ready to pay for quality and holistic advice backed by qualitative and quantitative research.”
“SEBI’s decision is both in the interest of investors and wealth managers. It leads to transparency with no involvement of hidden cost like load structure. Under this scenario, advisory is the only way forward,” mentioned Rajesh Saluja, CEO and Managing Partner, ASK Wealth Advisors; who feels, wealth advisory firms need to concentrate in educating the customer about the benefits of advisory services.
According to market grape vine, the situation is enticing enough to float new wealth management advisories.

Source: http://economictimes.indiatimes.com/Personal-Finance/Mutual-Funds/Advisories-to-benefit-from-MF-entry-load-removal/articleshow/4691674.cms