Shape of distribution market in years to come

Distribution will not die. It is an integral part of the handshake between consumers and product manufacturers.

This year will go down as one in which a fog of confusion enveloped consumers and distributors of financial products. While mutual fund agents feel as if the regulations are trying to kill their business, insurance agents are protesting reform that is yet to be announced.

Consumers are confused about what to pay, to whom and how much. I have been tracking this change fairly closely and have written frequently on it. Mails and comments on previous columns and off-line views tell me that there is much confusion out there on what the distribution market will look like once this second wave of financial sector reforms is over.

The first wave opened up the gates to financial products that an average Indian needs—mutual funds, insurance products, pensions, home loans—and they are all there in a largely usable form. The consumers are all there as well. But the conversion of demand to supply is not happening. Issues of trust, access and transaction ease are holding back the demand and supply from meeting.

If we read the spirit of the regulatory changes in 2009, the second wave of reform is aimed at clearing the way for easier, swifter and more transparent transactions. I’ll take a shot at what the financial product distribution will look like in 2015.

Distribution will not die. It is an integral part of the handshake between consumers and product manufacturers. And distribution will not be free. It cannot be. But the manner of the distribution, and its compensation, will change. From a largely low-value-add agency business, a structure that has compensation linked to the service provided will emerge. The biggest, in terms of numbers, will be the bank distribution network vending funds, insurance and pension products, at a small transaction cost to its customers. At the mass level for the financially included population, the banks will be the biggest beneficiaries of the regulatory changes we’ve seen so far. The banks have the trust, the distribution reach and the customers to most efficiently sell products across the country. In addition to the banks, there will be a few large retail distribution powerhouses, not unlike the Charles Schwab model of the US. Those that have the money to invest in technology and building a distribution chain will put in place a pure vending plus advisory service system. The key reason for this corporatization and streamlining will be economies of scale since one of the key costs will be technology and a centralized system driven by administrative needs.

The small agent, who today just collects signatures and forms and has neither the knowledge nor the intent to advise, will either become an employee of one of the large distribution powerhouses or upgrade his services to become a higher value-added financial advisor or planner. These will be boutique services by financial advisors and planners, and will be serviced by centralized administrative service providers like the platform that is already being put in place. There will be greater reliance on some form of certification to allow this market segment to distinguish itself from the pure vendors.

The third part will be the small (and in India, even small has many zeros) do-it-yourself population who will choose products and transact on their own. Most transactions will be online or through large clearing houses, such as stock exchanges. They will like the virtual comparison shopping and delivery modules and will be willing to pay a small transaction cost to avail of these services.

While this takes care of the financially included population (those who have a bank account), there is yet the issue of distribution to those outside the banking system. Expect mobile banking and the microfinance pipeline to transform this space. The banking regulator is already removing many roadblocks to mobile transactions and some microfinance initiatives are already moving beyond credit delivery. A uni-product distribution system is high-cost waste. Expect micro insurance, mutual funds, pensions all flowing through this pipeline in the times to come.

While some reform has got underway in 2009, there are still roadblocks to this world view. The direct stocks, mutual funds and pension pieces of the market are largely in place for this changeover to begin. What holds this process back is the blinker-wearing insurance regulatory system. The Indian insurance industry is a textbook case of regulatory capture by a small group of deep pockets. If this were not true, how would we have insurance products that are designed like investor traps? But 2010 should see some big-bang regulatory changes in insurance, with either the regulator finally understanding that it is not an industry association that they run in Hyderabad or change coming anyway to the industry.

2010 will be a year of much more change and uncertainty for the distribution industry. But some smart companies are already preparing for 2015 and putting in customer-friendly business models that aim at cutting cost, easing transaction efficiency and significantly enhancing transparency in financial products and services.

Source: http://www.livemint.com/2009/12/29222835/Shape-of-distribution-market-i.html

KARVY, CAMS launch `FINNET`

Computer Age Management Services (CAMS) & Karvy Computershare (KCPL), the two largest service providers of the mutual fund industry have joined hands to launch `FINNET`.

The product, designed for mutual fund distributors, will enhance the services to stakeholders in increasing geographical footprints, improve operational efficiencies and most importantly reduce cost significantly.

This is the first time that two the biggest registrar and transfer agents, who between them service 95% of the MF industry, have come together to offer a unified product. FINNET `is an all in one engine` product which facilitates transacting (order placement), execution and customer service on an integrated system. It will empower the distributors and individual financial advisors (IFAs) to cut across geographic barriers, access information relating to and transact on the schemes of nearly all the mutual funds through an internet enabled user interface.

Speaking at the launch, V Ganesh, country head, KCPL said, ``We are delighted to launch `FINNET` which will help create a strong value proposition amongst the distributors and eliminate duplicated efforts by distributors as well as investors. Distributors can aggregate their customer portfolio and provide a number of value added services with embedded CRM tools available in the product.``

The new model will facilitate multi-manager funds service support across mutual funds and better access to information than ever before. It will also empower the distributors to transact up to 3 pm from their offices without any geographical limitations. It will enable the distributors to generate consolidated account statements across all funds, thereby further strengthening client engagement and boosting customer service.

NK Prasad, executive director & chief operating officer CAMS said, ``This partnership will extend an all embracing management reporting and decision support ensuing better customer service at a fraction of cost and negligible risk.``

This initiative will go a long way in achieving substantial market penetration and in bringing in additional retail investors to participate in mutual funds.

CAMS is the largest service provider to Indian mutual fund industry providing comprehensive package of transaction processing and customer care.

KCPL is the largest integrated registrar and transfer agent in the country servicing more than 350 corporates and 23 domestic mutual funds.

Source: http://www.myiris.com/newsCentre/storyShow.php?fileR=20091229184401194&dir=2009/12/29&secID=livenews

Diversify and assess risk when building portfolio

People think and react differently when there is talk about investing. Some do not even allot much time to think and plan their investments. Financial advisors say investment planning is as important as earning. It's basically putting your money to work or at places where you might need it someday. There are various investment instruments available in the markets and one should give a serious thought to planned and informed investment decision-making. You should look at various investment instruments according to your needs and allocate funds accordingly.
These are some of the broad categories of instruments available in the markets:

Tax-savings instruments
Taxes drain a significant portion of an individual's hard-earned money. Therefore, one should look at using all possible ways to save taxes, especially those in the higher tax bracket. There are provisions for investments in various instruments which qualify for tax rebates. For example, one can invest in PPF, National Savings Certificate or tax-saving bonds. Getting into the last quarter, investors should look at various schemes and reduce their tax liabilities.

Insurance instruments
The thumb rule regarding investments in insurance is that an investor should have an insurance cover of at least five times of his annual income. One should also look at a balance between term plans and endowment plans to optimise the funds outgo and risk cover. It is advisable to take insurance cover during the early part of life to ensure lesser premium and higher risk cover. Health insurance is another area which should be seriously considered by investors who do not have appropriate health cover for themselves and their family.

Debt instruments
Debt-based instruments usually guarantee principal security. There are various classes of debt-based investment instruments available in the market. For example, deposit schemes (bank fixed deposits, post office deposits, company deposits), debt mutual funds, saving schemes (PPF, NSC) and liquid funds. Debt instruments should be part of every investor's investment portfolio. Inclusion of debt-based investment instruments provides stability to a portfolio and reduces the overall risk. However, the percentage allocation towards equity and debt-based instruments should depend on the risk profile of the investor and prevailing market conditions.

Equity-based instruments
There are various schemes and investment instruments available in the market in this category. There are two broad categories - direct investments in stocks or indirect investments by way of mutual funds. Those who have time and adequate understanding of the markets should look at the direct investment method. Others should look at investments through mutual funds. Investors should look at diversification by investing in many mutual funds and the investment decision should not be driven by past statistics only as they might be misleading at times.

Gold
Investments in commodities, especially gold, have found favour in recent times. The gold-based investments add another dimension to a portfolio. It acts as a debt instrument and usually provides good returns during uncertain economic conditions. The investments in gold can be through various gold funds or buying gold bars from the market. Buying gold ornaments should be treated as consumption rather than an investment.

Source:http://economictimes.indiatimes.com/features/financial-times/Diversify-and-assess-risk-when-building-portfolio/articleshow/5382176.cms

Time to review your portfolio

New Year eve always brings in hope in addition to excitement. It is time for retrospection, resolutions and perhaps making new road maps. Among other things in life this is true for your investments too. It is time to review your portfolio and plan for the new year ahead to achieve even higher ground.

Tax planning investments
The first quarter of the calendar is incidentally the last one for the financial year and hence it is usually heavy with investments in tax-saving instruments such as specified mutual funds, provident funds, tax-saving bonds etc. However, if you are going to do most of your tax-related investments in the last three months then you should resolve for the change in this habit next year.

It is prudent to plan your tax-related investments right from the start of the financial year. For instance, provident fund investments should be made before fifth of every month to reap maximum interest and compounding benefit. In the same way, mutual fund investments can be made through a systematic investment plan (SIP) to average out the market ups and down and keep the cost low. Hence, doing it evenly throughout the year not only keeps you off the last minute burden but also helps you reap much higher returns.

With the economy showing signs of revival, there is definitely going to be lot of buzz in the stock markets. We are most likely at crossroads when change in due. But, change is always uncertain and slow to occur. All you need to do is to stick to the basics with this asset class in these times.

What this means is that you will have to work harder to dig deep, do your due diligence to find the value picks. Prudence would demand that you stick to core sectors such as infrastructure, auto and pharma where you can monitor the growth and all you need to do is spot the value picks in the sectors.

A lot would depend upon how factors such as the monetary policy, union budget, monsoons, and inflation here, as well as the US interest rates and foreign institutional investor (FII) inflows behave, and that will determine the direction of the markets. So watch these windows as the action unfolds in the next 12 months.

One good thing about mutual funds is the fundamental advice of sticking to the systematic investment route remains unchanged irrespective of the investment climate and time. So, it is the advice this time too - to stick to this fundamental principal to reap the best benefit of this asset class.

However, stay away from any exotic theme funds and even the new fund offers unless they provide good reasons. There is a plethora of existing funds to choose from.

All that glittered in the past few months was indeed gold. However, it may not continue to do so forever. One must treat investments in gold primarily as hedging simply because of its impeccable track record of over 2,000 years as a store of value.

Any attempt to go overboard and treat the asset like equity to make money in the short term would be a hasty move. Do not forget that it has given good returns in the past few months because other assets haven't , and that is its primary job as a hedge in your portfolio.

Any move to divert higher funds to gold at the expense of other assets would also mean bigger opportunity loss. Hence, resist the temptation and stick to the basic rule of keeping gold to about 15 percent of your portfolio.

Source: http://economictimes.indiatimes.com/quickiearticleshow/5384346.cms

A year for all asset classes

The Indian investor would have generated healthy portfolio gains this year; with no asset class acting as a drag on the other.

The year witnessed a rise in valuations across asset classes such as equities, gold and realty.

If 2008 was a year when most asset classes failed to perform, 2009 was one when almost every popular asset class provided an opportunity to build wealth. Be it equities, debt, gold or real estate, the Indian investor would have generated healthy portfolio gains this year; with no asset class acting as a drag on the other.

Surprised? Well, here's how you would have made a quick buck by just staying invested round the year, across asset classes.

Debt for all seasons

Take the simple time-tested debt option; fixed deposits with banks. Looking back, you would be surprised to know that these fixed return investment havens lured investors with interest rates as high as 12 per cent in end of 2008. Of course, the beginning of any lucrative offer or rally is often overlooked.

Even if you had been a late entrant and missed the 12 per cent rates, locking in to fixed deposits in January 2009 would have still guaranteed an 11 per cent interest rate.

Missed the bus there and watched bank interest rates sadly dwindle? Never mind, a series of non-convertible debentures issued by companies such as Tata Capital, Shriram Transport Finance and L&T Finance at various time periods between February and August offered interest rates between 10 and 12 per cent. It's not just the interest rates that made these offers noteworthy. These non-convertible debentures (NCDs) are traded in the stock exchanges and can be sold anytime.

Take the case of Tata Capital NCD offered in February. It currently trades 22 per cent above its offer price. A rather neat return from a debt option.

And as if that was not enough, corporate deposits – tagged risky in the initial part of the year given the high leverage of their underlying companies – soon provided comfort with improving financials. Interest rates of 9-12 per cent offered (and still on offer) by many creditworthy finance companies such as Sundaram Finance or Mahindra Finance followed by a number of corporates ensured that investors were not short of good debt options for most part of the year.

Debt mutual funds too, played their part well in ensuring that investors were not disappointed.

Rich, richer …

If debt was not exactly your idea of building wealth, then let's move on the most-loved and at times the most-hated asset class – equities.

Returns of 120 per cent from the March lows would only have been a dream for many as few could have timed their entry in to equities in March, given the undercurrent of pessimism then. However, even if you had waited a while and invested sometime during May (when mutual funds too derived conviction to move fully in equities from their deep cash positions), chances are that you would have made a neat returns of about 50 per cent (returns generated by the broad market index CNX 500, during this period). And had you taken the mutual fund route, your returns could have been much higher.

Real opportunity

Not often do you get a real deal – when a reasonable property price and low home loan rates are offered at the same time. Well, 2009 is one such year.

While it would be hard to generalise, property prices were available at a bargain beginning February and extending up to June-July. To enable you to purchase at bargains, interest rates offered by banks also dipped to as low as 8 per cent (and still remains so). However, property prices, especially in the middle income offerings, were not available at discounts for too long as select areas across cities witnessed appreciation.

Between June and September alone capital values of residential properties in key cities such as Mumbai, Gurgaon and select parts of Chennai and Bangalore have seen a rise of between 10 and 25 per cent. Had you been among the smart investors who bought a property before June, you may already be sitting on substantial gains.

Not just property prices, homes loans with interest rates kept fixed for 3-5 years at 8-9 per cent could certainly be called some deal. And to think, a home loan would have cost you as much as 12 per cent a year ago. If that does not make an impact sample the difference in terms of EMI: A Rs 20-lakh, 15-year home loan at 12 per cent would have resulted in an EMI of about Rs 23,000 a month. At 8 per cent, there is a drastic reduction by Rs 4,000 a month to Rs 19,000.

The gold rush

Besides debt, if there was one asset class that endowed multiple opportunities to earn returns in 2009, it would have to be gold. Had you invested in gold (through exchange-traded funds) as early as January, this asset class would have yielded a good 20 per cent profit. Had you delayed your purchase to, say, June, the returns would have been 10 per cent – not too lucrative but nevertheless attractive for a safe asset class like gold that does not always generate returns that beat inflation.

So 2009 would certainly go down in history as one of those singular years where every asset class held by you added to your portfolio wealth; that is only if you had invested those cash holdings in to some of these options.

Source: http://www.thehindubusinessline.com/iw/2009/12/27/stories/2009122751081100.htm

PFRDA may take up SBI employees pension corpus

Country's largest lender State Bank of India's (SBI) pension corpus could be regulated by the Pension Fund Regulatory and Development Authority (PFRDA), opening a new area for the interim regulator.

"We have given approval to SBI for management of its pension corpus by our fund managers and now they are talking with its trust," a PFRDA official told PTI.

Regulating the corpus of companies is a new area for the interim regulator. Till now, PFRDA-appointed fund managers, under the New Pension System (NPS), were handling only the corpus of individuals.

Six PFRDA-appointed fund managers —IDFC Mutual Fund, Kotak Mahindra, SBI, UTI Asset Management, ICICI Prudential Life Insurance and Reliance MF— are handling the corpus under the NPS, which was thrown open to all citizens from May 1 this year.

There are 22 contact and collection centres-- Points of Presence-- including State Bank of India, ICICI Bank, the Postal Department, IDBI Bank, Oriental Bank of Commerce, Axis Bank and Union Bank of India for all citizens' scheme.

Source: http://www.business-standard.com/india/news/pfrda-may-takesbi-employees-pension-corpus/81770/on

Do it yourself: get the agent and charges right

You can now decide the fee of your adviser, but do you know how much is enough? There are three levels of service available, pay only for what you get.

It’s confusing time for mutual fund (MF) investors. The way to buy and sell funds changed drastically in the last half of 2009 and the industry as well as the investors are still trying to make sense of how to deal with a no-load world.

On 1 August, the Securities and Exchange Board of India (Sebi) became the first capital market regulator in the world to make mutual funds a no-load product. Mutual funds in India will now invest the full Rs100 that you put in instead of Rs97.75 that they earlier did.

You will now have to compensate your agent for the service you think he provides. You get transparency because you can evaluate service and pay accordingly. But here’s where you run into the first roadblock: how do you know what to pay? But before we get to the money bit, a look at the various levels of service in the market.

Who does what?
Essentially, there are three levels of service in the market.

At the base level, you get an agent who can be likened to a chemist. A chemist is a person who does not, and should not, have a view on the medicine you buy. His job is to follow the prescription written by the doctor or to sell you the non-prescription medicine you have chosen yourself. This chemist is the agent or the seller of a mutual fund. He is the foot soldier who simply gives you a form, gets a signature and completes the transaction. He used to earn commissions, but will now be compensated by you directly.

At the next level is an adviser. His job is to help you choose a mutual fund from over 1,000 schemes that are on offer in India. His expertise is to match funds that have consistent good performance with your needs and then manage your investments over time. What you would pay this person is higher than what you would pay the agent.

Higher in the pecking order than an adviser is a financial planner. He does not just advise you on investments, but also helps you zero in on the best loan deals, restructures and keeps in place your borrowings, plans your finances, does your risk management for you, helps you lower your tax outgo and even follows up the entire process of estate planning to ensure a smooth transfer of all your assets to your legal heirs after your death.

A financial planner is a qualified guide having a universally accepted certification. Currently, in India, the Certified Financial Planner (CFP) is the most credible stamp that qualifies a person to manage your financial life.

What to pay?
The mutual fund industry is in a flux given the slew of changes announced by Sebi in 2009. Intermediaries are confused as to what to charge and investors are unsure of how to value services.

Since Sebi has allowed mutual funds to list on stock exchanges, there is a basic level of charges that we can now benchmark ourselves to. A retail investor needs to pay 20 to 40 basis points (a basis point is one-hundredth of a percentage point) or around 20 to 40 paise for every Rs100 to buy shares on an exchange. The same is true when selling shares.

Agent: Your MF agent may charge a bit more because, unlike shares, transactions where you pick up your phone and call up to place orders, your MF agent would still need to visit your home or office to pick up the forms and deliver them to the fund houses. It’s a courier service for which he’ll charge marginally more.

However, with little or no advice on offer, there is no reason why agents should charge you more than 50 basis points on the investment, specially because there is a trail commission on the money that stays invested. That is what you should pay any entity (individual, bank, distribution house) who simply vends the product you have chosen to you.

Adviser: The adviser helps you choose, maintain and redeem your funds. He has no view on the rest of your finances. Many such advisers these days charge no fees from you; they earn from the trail commission (typically around 40 to 50 basis points) MFs pay them for as long as you stay invested. Some advisers do charge around 0.50-1% of your transaction amount as an upfront fee.

Planner: The financial planner is the qualified doctor who runs his dispensary as well as his own chemist shop. So, you need to pay for all of this. Broadly speaking, CFPs today in India charge you anything between Rs5,000 and Rs20,000 for the first financial plan. Subsequently, the charges can go up to Rs15,000-30,000, or even upwards every year. This, typically, includes one or few reviews of your financial planning every year to ensure you’re on track. Note that these are ballpark figures and financial planners charge you depending on how much effort they need to put in to set your house in order.

How to choose
There isn’t one way that works the best. What seems to work is to look at what other people are doing.

Rajesh Krishnamoorthy, managing director, iFast Financial India Pvt. Ltd, an online portal that offers MF schemes, feels it’s also a good idea to ask around and check out what your friends are up to. He says: “It’s a good idea to ask them about their financial planner or distributor and their experiences. It’s a great way to get to know the adviser’s track record if your friends or close circle can corroborate.”

Agrees Lovaii Navlakhi, CEO, International Money Matters, a Bangalore-based financial advisory company: “Read the newspapers and look out for any financial planners. If what they’re saying makes sense to you, get in touch with them.”

But, remember to ask some basic questions even if the intermediary comes with a reference. You should know what is his qualification, how long has he been in business and how many clients he has. How much time he spends with you and what sort of questions he asks is also important.

For instance, if he is trying to sell you just any product to hit and run, he is unlikely to be very concerned about your needs and goals. Try asking questions in areas of help you’re looking for. “If you are looking for taxation advice, try asking him tax-related questions to check his knowledge,” adds Navlakhi.

One red flag that should warn you of a hit-and-run salesperson is: “How much do you have to invest?” It would be much better, if you hear: “What do you want your money to do?”

Source: http://www.livemint.com/2009/12/27231502/Do-it-yourself-get-the-agent.html?pg=2

A 10-minute guide for alert investors

Hope, fear and greed are three basic elements that constitute our capital market. In the past 24 months, the market has been in strong grips of one or the other of the three elements.

Year 2010 is starting on a note of hope; hope that the Indian market is going to have another year of strong outperformance.

Compare this with the start of 2009, when fear was the overriding factor in the minds of investors as financial markets were coming to terms with one of the worst crisis after the Great Depression of 1929.

Go back a little further, at the beginning of 2008, greed was all over the Street. Everyone was taking to the street, the number of new demat accounts opened between late December 2007 and early January 2008 were more than the total opened in the preceding 12 months.

Now, look at the sentiments at the end of the each year. In December 2008, everyone was counting his or her losses. At the end of 2009, everyone is wondering why didn’t they buy stock when the market had hit rock bottom in March. So, what will be feeling on the Street at the end of 2010? Will it be euphoria or will hopes be dashed to ground once again after the indices peak in mid-2010? Or it could be the exact opposite?

Whatever the mood might be at the end of 2010, some rules, if followed in letter and spirit, will help investor make money in the coming months. First, don’t invest in an index fund at present level. What could be the best-case scenario for the index performance in 2010? A rise of 20 per cent from the present level will make Nifty cross its all-time high and even the biggest bull on the Street is not expecting that to happen.

So, if you are one who invests through mutual funds, stick to mid-cap funds. There is a high probability that some of the mid-cap companies are going perform well on the bourses, making mid-cap schemes a better bet. Among the plethora of mid-cap funds, investors should choose those where commodities companies don’t figure prominently in the portfolio. The scheme should be well diversified in terms of sectoral exposure, and there should not be any doubt over corporate governance of the companies that figure in their portfolios.

Also, avoid mutual fund schemes where cash levels were very high in March, 2009. This will be an indication that the fund manger of that scheme was as confused and fearful as the retail investor when the indices were quoting close to their lowest valuation bands in which they move.

Secondly, keep a watch on the US dollar. Any strength on the greenback can play spoilsport in the Dalal Street party. The easy money that some of the hedge funds have invested in emerging markets is going to flow out at the slightest rise in the dollar.

In order to hedge against any possible decline in the rupee, have some stocks of IT, textile exporters and oil PSUs in your portfolio. The rise in the US dollar will lead to a decline in oil prices, which should help the Oil PSUs reduce their cash losses and also their dependence on government bonds.

There will be a phase of underperformance for Indian equities even if the news flow on the companies front is good. But that phase of underperformance will be only for a short duration. Investors should utilise this phase.

Source: http://www.mydigitalfc.com/stock-market/10-minute-guide-alert-investors-664