MFs fear loss of tax advantage in debt

A veild threat from the banking regulator has left many mutual fund managers with worry lines. They are beginning to fear that at the advice of the Reserve Bank of India, the government may take the fizz out of certain debt schemes that have helped them fatten their asset book as well as served as a quick money parking zone for corporates and banks.

At a recent conference with money market dealers, RBI deputy governor Shyamala Gopinath hinted that “since MF fixed income products enjoy certain tax exemptions not available to banks”, there may be a case to address this through regulations.

The remark did not go unnoticed in the financial market. Ms Gopinath was referring to the liquid plus MF schemes that give investors a higher return and a clear tax advantage over bank fixed deposits (FDs). For instance, while bank FDs, for a minimum period of seven days, would fetch about 3-3.25% per annum, the return on liquid-plus scheme could be 4.5-5%. Besides, interest income on FDs would be taxed at 33% like any other income, but the dividend distribution tax (DDT) — which fund houses deduct before giving investors the dividend — is at 22% for corporates and 14% for individuals. Dividends can be paid by MFs on either a daily, or weekly, or fortnightly, or monthly basis.

Out of the Rs 7-lakh crore MF corpus, around Rs 2.5-Rs 3 lakh crore would be in various liquid-plus scheme. The central bank’s concern emanates from a crunch that financial markets and the thinly capitalised fund houses may face, if there are rapid withdrawals by large investors as it happened in the weeks after the Lehman collapse. A tax advantage has only deepened the concentration of funds in such schemes.

“It’s a matter that’s more and more catching the attention in recent times,” said Phani Shankar, head of financial markets, ING. But any tinkering on the tax front may have a significant impact on the sector. According to Sunil Jhaveri, who heads MSJ Capital & Corporate Services, a leading MF advisor, “The liquid/liquid plus category will get impacted by almost 15-20% over a period of time. At least individuals will prefer bank deposits (for longer periods) over liquid schemes as there will be certainty of returns and no tax advantage for parking funds in liquid schemes.”

Sensing that the tax arbitrage window may be shut in future, fund houses are preparing their counter-argument. “You can’t compare between FDs and debt schemes. A higher tax on FD interest may be justified since there is an implicit guarantee from the government and RBI that banks won’t fail,” said the CEO of a large asset management company.
‘Liquid plus’, as a product, was designed by the MF industry to overcome the disadvantage in liquid schemes where the DDT was hiked to 28%. While in liquid schemes, the investment happens in money market instruments and the average maturity is 90 to 120 days, liquid-plus schemes hold even more than one-year papers and the average maturity is 170-180 days (which explains the higher return).

Under the present tax regime, all debt schemes, such as short-term and long-term income fund, monthly income, balance fund, gilt and floating rate fund, enjoy a DDT of 22%. But wholesale investors prefer liquid-plus schemes as these generate a higher return.

The MF industry, which is already under strain due to the recent Sebi notification of not charging any upfront load on equity schemes, is closely watching the development. After the adverse impact on sales and distribution of equity-related products, a hike in DDT, they feel, could deal a body blow to the industry. Interestingly, even if the tax rate does not go up, Sebi can make liquid-plus schemes unattractive by making it mandatory for funds to mark-to-market all debt securities with more than 90-day maturity.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/MFs-fear-loss-of-tax-advantage-in-debt/articleshow/5460717.cms

Insurance and investments are not replaceable

The year 2009 was one of the toughest in recent times for distributors of financial products, with challenges ranging from a whimsical market to tightening regulations on commissions. Business Line spoke to the Mr Rajiv Deep Bajaj, Vice-Chairman & Managing Director of Bajaj Capital, one of the leading Indian distributors, to understand how business has coped with the changed rules of the game.

Excerpts from the interview:

With abolition of entry load, as a leading distributor of MF products, have your revenues suffered and how are you coping with the trend?
With the abolition of entry load, we had to change our commission-based model to one based on both commissions and fees.

Though the fee sign-ups have not been numerous enough to make up for the fall in commission revenue, our revenue gap has been temporarily filled up by investors showing greater preference for fixed-income products. Products such as insurance have started contributing more.

We are working hard and are seeing a gradual pick-up in mutual fund volumes. It will be some time before the revenue gap created by the removal of entry load is filled.

Your investors were allowed to buy and sell MF products through your online platform. With both BSE and NSE allowing investors to transact in MFs through their platforms, which route are you asking your clients to take?
We see the exchange platform picking up really soon because of two reasons — convenience (operational convenience) and cost considerations. Out of the total investor population, 20 per cent already prefer using the online platform.

Also, we see 20 per cent of the total business in the next couple of years happening on the exchange platform. There are a few points where NSE/BSE platforms are still to improve — the SIP mode is missing and switch in/switch out is yet to get effective and large transactions (more than Rs 1 crore) are yet to be introduced.

For the above reasons, some investors still prefer to go through online platforms, but with the addition of these features on the NSE/BSE platforms, we hope to see substantial increase in volumes on the same.

What is your outlook for the stock market in 2010? On which sectors are you bullish and what valuation metrics support your view?
The equity market in 2010 is likely to be volatile. The first half of the year is expected to be bullish and the second half would be volatile with a downward bias. Also, foreign fund flows will continue coming to India. US dollar will appreciate, but only in the last quarter of 2010.

We are bullish on disinvestment as a theme. Value investing will outperform growth investing in the next two years.

In terms of sectors, we are bullish on infrastructure, Public Sector Undertakings (PSUs), pharmaceuticals, banking and captive power generation.

The mutual fund top brass claim that, with upfront commissions gone, agents and distributors prefer to sell insurance rather than MFs. What is Bajaj Capital's stance?
Bajaj Capital has always been engaged in providing need-based advice to clients. The need of the client determines what products should go in their portfolio.

Though, in the current scenario, insurance has started contributing more to the revenues we believe that insurance and investment (MFs) are not replaceable, and we try to include both in our clients' portfolios.

What is your advice in MFs and insurance (premium collected)?
Our assets under management in MFs is Rs 6,000 crore. In the coming financial year, the annual insurance premium routed through us will be more than Rs 250 crore. On the Mutual Fund assets side, the average age does speak for our long-term investment philosophy, it is comparatively higher than most players in the market.

With the stock market already at a yearly high what funds do you recommend to your investors?
We recommend that our clients have a balanced portfolio consisting of equity, debt, cash, real-estate, etc, i.e. all asset classes should be included.

Depending on the market levels, the mix of these assets undergoes a change. Presently, we are neutral on cash and gold, underweight on debt and commodities and overweight on equity.

If investors want to invest in MF and come to you for advice do you charge them, if so on what basis?

On August 1, we had rolled out our four fee packages out of which one — the transaction package — is free of cost and the other three are fee-based packages costing Rs 2,500, Rs 5,000, and Rs 7,500. In the transaction package, there is no charge for buying, selling and switching.

Thus, it is virtually free for the investor. In paying Rs 2,500 (Advisory Package), the client receives consolidated portfolio statement once a month, tele advice, other statements once a year.

In case one pays Rs 5,000 (Premium Package) as fees, apart from the above mentioned services, there will be portfolio construction as well as quarterly portfolio review.

If one pays Rs 7,500 (Financial Planning Services), apart from the above services, a personalised Financial Plan will be prepared, presented and implemented and will be regularly reviewed once in a half year.

Alternatively, customers can pay us a percentage of their portfolio.

This ranges from 0.25 per cent to 1 per cent, depending on the assets that a client maintains with us.


Bajaj Capital talks about financial planning as a concept. Have clients taken to this?
There are approximately a lakh investors who have availed our financial planning services. Now after the changed regime in Mutual Funds, accountability on the part of advisor has definitely increased and clients also have become demanding. We do not limit our Financial Planning to products only. Our recommendations relate to the goals, needs and wants of the client, thus non-investment related issues such as pre/postponement of goals, loans, emotional attachment to goals, also form part of the discussion. In terms of investment products, we cover mostly all products under our Financial Planning — such as Mutual Funds, Life Insurance, Asset Insurance, Health Insurance, disability & accidental insurance, fixed return instruments, equity share investments, facilitating property purchase at major locations in India, etc. We anticipate a very good growth for this business over the next few years. At Bajaj Capital, 60 per cent of our revenues are from clients who have used financial planning services.

Source: http://www.thehindubusinessline.com/iw/2010/01/17/stories/2010011750150500.htm

Sahara Banking & Financial Services Fund declares dividend

Sahara Mutual Fund has declared a dividend of 40% (Rs 4.00 per unit on a face value of Rs 10), under Sahara Banking & Financial Services Fund. The record date for the purpose of dividend payout is January 19, 2010.

All investors registered under the dividend option of Sahara Banking & Financial Services Fund as on record date January 19, 2010 will receive this dividend. The NAV under the dividend plan of the scheme as on January 14, 2009 is Rs 18.9493. (Check out - Recent MF Dividends)

Announcing the dividend Mr. Naresh Kumar Garg, CEO mentioned that Indian economy is on the high growth path and Indian banking & financial system has proven its robustness in the economic crisis faced by economies across the globe over the last two years. The Indian Banking system which is the backbone of our economy is poised for better performance over medium to long term.


He further mentioned that Sahara Banking & Financial Services Fund has shown remarkable performance ever since its launch in September 2008. It regularly feature among the Top performing funds. Based on its excellent performance, the Fund has declared two back to back dividends in the last 6 months.

Sahara Banking & Financial Services Fund is an Open-Ended Sectoral Growth scheme that aims to provide long term capital appreciation through investment in equities and equities related securities of companies engaged in Banking / Financial services, either whole or in part.

Source: http://www.moneycontrol.com/news/mf-news/sahara-bankingfinancial-services-fund-declares-dividend_435942.html

Shinsei, Jhunjhunwala sell MF business to Daiwa

Japan’s troubled Shinsei Bank and billionaire investor Rakesh Jhunjhunwala are said to be selling out their Indian mutual fund joint venture to Daiwa for about $10 million, as industry profitability erodes on rising competition and regulatory restrictions, two senior bankers familiar with the matter told ET.

The two-year old venture could provide Daiwa, a cross-town rival of Shinsei, a platform to expand in the financial services in a nation of fast-growing middle class. For Shinsei, which sold real estate in Japan to shore up its finances after losses, it may free up resources from a tiny venture to focus on merging with Aozora Bank.

Daiwa Capital Markets, which had raised funds for Indian mutual funds from Japanese investors, can now offer asset management services on its own. Recently, it hired bankers from Credit Suisse and YES Bank to raise business in equity capital markets, private equity and M&A. It plans to double the investment banking team to 18.

“The deal is almost done, it has to now receive regulatory approvals,” said a person privy to the development. Indian mutual fund industry has been losing charm in the past few months, as regulators are cracking down on what is considered unfair practices to get funds.

The Securities & Exchange Board of India, or Sebi, abolished entry loads on mutual fund investments, slowing inflows for asset management companies. Banks, a major source of assets for mutual funds, have been asked to withdraw their money by the Reserve Bank of India.

Aditya Rattan, country head of Daiwa Capital Markets India, declined comment. “We have no comment on this matter,” said James Seddon, group IR & corporate communications division, Shinsei Bank, in an email response.

If the deal goes through, Shinsei, which manages Rs 448 crore of assets in debt and equity schemes, will be valued at about 10% of assets, comparable with previous deals. L&T Finance last December paid Rs 45 crore to buy DBS Cholamandalam Asset Management, a joint venture between Singapore’s DBS and the Chennai-based Cholamandalam.

T Rowe Price bought 26% in UTI Asset Management Company for $135 million, 3.6% of assets. These valuations are a far cry from what Eton Park Capital paid for Reliance Mutual Fund in 2007. Eton paid 13% of assets in December 2007 when equity markets were roaring.

Although the benchmark indices have recouped most of their losses in 2009, the retail investor is yet to hang on to the optimism. New regulations provide no incentive for middlemen to sell mutual fund products, either. Hence, mutual funds have been losing assets.

Outflow from equity schemes continued for the fifth consecutive month, totalling Rs 7,300 crore since August after Sebi’s fiat on entry loads. Banks reportedly withdrew more than one-lakh crore from mutual funds recently.

Freedom Financial, founded by Sanjay Sachdev, the founder CEO of the Principal Group in India, would also sell its stake, but Sachdev would remain with Daiwa. Shinsei, part-owned by investor Christopher Flowers, holds 75% in the asset management company, Mr Jhunjhunwala 15% and Freedom Financial the rest. N Sethuram, former chief investment officer of SBI MF, who had served in Japan for many years as an employee of SBI, is the CIO of the mutual fund.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/Shinsei-Jhunjhunwala-may-sell-MF-business-to-Daiwa/articleshow/5451004.cms

Exchange platform unattractive for MFs & investors: UK Sinha

With a majority of people going for traditional instruments that are easily available and simple to understand, the investor population is shrinking, says UK Sinha, chairman and managing director, UTI Asset Management Co, in an exclusive interview with Sucheta Dalal. This is the first part of a two-part series

Sucheta Dalal (ML): You were among the first to join the effort to introduce exchange based trading, after the scrapping of entry loads on mutual fund schemes. In your view, how is it working?
UK Sinha (UKS): There is no alignment of interest. I don't see this move being successful. We were hopeful that it would succeed, but now we are discovering that the interests of the brokers, the stock exchanges, the depositories, the mutual funds and the investors are not aligned.

What is happening is that each broker who is a member of this system is participating in it, not because of the small income he gets from the investor but because he is negotiating a separate rate with the mutual fund. And that rate is the best possible rate that the mutual fund can offer. So to think that trading is happening because of the availability of the platform and is easy to access is not correct. What is also happening is that each large broker has his own mutual fund distribution platform where he has an arrangement with the mutual fund. So if he is charging, for example, 1.25% or even 1.5% in some cases on his distribution platform, why should he charge any less here? After all, it is part of the same family. So there is no compromise on fees or the commission that is paid by the AMC. What they are expecting is that they will also charge something from the investor in the bargain. They hope to charge around 50 basis points (which is the amount paid for delivery-based trades).

The whole culture in the secondary markets is to encourage trading and churning, but to encourage an investor to come to buy and hold is not the culture in a majority of the cases. So unless there is some incentive to the investor through this platform it will not work. There is no advisory service, because the broker has no time to even offer a choice of five or ten schemes which the investor can select.

ML: But many brokers have joined the platform; what persuaded them to do so?
UKS: What happened was that everybody decided to take a chance and join this bandwagon because if it succeeded, they would be left out. There is a gradual realisation that this is not going to work. There is also a worry about future fees. Stock exchanges are not charging any fee right now, but they have said that they will not charge a fee only for the first few months—they will start charging a fee sometime. Depositories too are not charging a fee today; they too will begin to charge some time. Then there is the issue of Securities Transaction Tax (STT). It is not clear if that is applicable or not.

ML: So an investor is not charged STT today, but may have to pay if it is charged later?
UKS: Yes, he could be asked to pay, because there are two different interpretations. The stamp duty implication is yet another issue. One view is that stamp duty could be charged because trading is on the secondary market platform. All this has led to a situation where nobody wants to push for exchange trading because there is no clarity on several issues.

ML: But when the exchange traded platform was created, should at least tax implications like STT and stamp duty have been clarified?
UKS: Yes, they should have been done, but it was not.

ML: We hear that the exit load of 1% that is still permitted may be an incentive to encourage investors to churn, is that a possibility?
UKS: Not really, because brokers are already negotiating 1.5% as an incentive from the AMC includes a trail commission, so that eliminates the incentive to an extent. It is very simple. Mutual funds today earn just 1%; if they pay more than that, they will make a loss. But they are promising 1.5% hoping that the money will stay with them. This means that the 1.5% will be paid, provided the money stays with them for a year or longer. If the money goes away earlier, the broker loses the trail commission and that is a disincentive of sorts.

Source: http://www.moneylife.in/article/8/3225.html

MF turmoil: Can SEBI be held accountable?

SEBI's move to scrap entry loads on mutual funds may have been well intentioned, but it tripped badly in failing to assess the ground realities and the consequences of its actions

Five months after the Securities and Exchange Board of India (SEBI) scrapped entry loads on mutual fund (MF) schemes, the industry continues to be on the decline with further ill-conceived band-aid like trading through stock exchanges failing to attract investors. In the five months after the SEBI move, Rs7,200 crore of funds have moved out of equity schemes and flown, almost entirely, to Unit Linked Insurance Plans (ULIPs).

SEBI's move may have been well intentioned, but it tripped badly in failing to assess the ground realities and the consequences of its actions. It failed to visualise that sharply higher commissions paid by the insurance industry will suck money out of MFs. It also failed to ensure the availability of inexpensive alternative distribution channels. Consequently, investors continue to pay commissions, but only to other intermediaries such as banks or others in the exchange traded system. The question is, when will the regulator admit its mistake and initiate corrective action?

If SEBI had attempted to seek feedback before bringing in the regulation, it would have highlighted the impact of a hasty scrapping of entry loads on the fund industry and cautioned it against blundering ahead. A report by McKinsey & Co, the leading global consultancy firm, had enumerated some key issues even in August 2009, when the SEBI order came into effect. Even then, the fund industry was in turmoil and assets under management (AUM), which had been growing at 50% on a year-on-year basis, had declined by a sharp 17%.

McKinsey had pointed out that bank and national distributors who have control over the "customer's wallet" would be in a position to charge. That is exactly what is happening today. Banks were blamed for extorting huge paybacks from Asset Management Companies (AMCs), they have smoothly switched to debiting customer accounts for advisory fees.

McKinsey had also said that AMCs would have to continue compensating distributors (mainly banks) from their reduced fees. They may also increase exit loads for customers across holding periods—but this would be restricted to 100 bps. Here is what else McKinsey had predicted for the industry.

• Higher exit loads and transparent commissions would reduce the propensity to churn investments.
• Portfolio management services and alternate products will grow faster. AMCs and distributors will push higher margin products, especially debt products. This has indeed played out as predicted.
• The industry will undergo consolidation since smaller AMCs would find it difficult to manage the stress on their finances. Entry barriers will increase and it may even be difficult for new schemes to find distribution partners. However, the fact that SEBI has over 12 to 14 pending applications seems to suggest that the financial sector is not giving up on the mutual fund industry as yet.
• Most pertinently, the report had pointed out that it is IFAs (independent financial advisors) who help in geographic penetration of financial products. With IFAs, especially the smaller ones losing the incentive to sell mutual funds, the geographic penetration of the industry was bound to slow down. McKinsey's data shows that beyond the top eight cities, IFAs are the dominant distribution channel accounting for just under 50% of the market.

Source: http://www.moneylife.in/article/8/3204.html

Canara Robeco AUM crosses Rs 10,000-cr mark

Canara Robeco Asset Management Company, a joint venture between Canara Bank and Robeco, today said its assets under management (AUM) has crossed the Rs 10,000-crore mark as on January 8.

This is a growth of over 370 per cent in its AUM since the JV was formed in September 2007, a company statement said here today.

The growth in the AUM can be attributed to the consistent top quartile performance of its equity and fixed income funds across categories as well as the growing acceptance of Canara Robeco products amongst distributors and investors.

"The Rs 10,000-crore AUM mark achievement has been accomplished at a time which witnessed a fair degree of volatility in the markets and thus crossing this milestone in such challenging market conditions speaks volumes about the trust reposed in us by our investors and distributors," Canara Robeco Asset Management chief executive Rajnish Narula said.

"We will continue to invest significantly into our business and look forward to launching world class investment products in the near future to augment our growth," Narula said.


Source: http://www.business-standard.com/india/news/canara-robeco-aum-crosses-rs-10000-cr-mark/83046/on

Equity funds come on top in 2009

Equity-oriented funds were the strongest performers across all fund categories in 2009, said a report released by credit rating agency Crisil.

These funds registered a one-year return of over 80 per cent, driven by the sharp up-tick in equity markets with mid- and small-cap stocks outperforming large caps.

The year also witnessed a near two-fold rise in the assets under management (AUM) of the mutual fund (MF) industry. However, December was a dampener for the industry, which suffered the highest monthly net outflows due to withdrawals by companies and banks.

The Crisil Fund~eX (which tracks diversified equity funds) was up 81 per cent in 2009, reflecting the highest growth among all MF categories. This was better than the 76 per cent growth registered by the S&P CNX Nifty index.

The performance of diversified equity funds was supported by strong performance by the mid- and small-cap stocks with the respective indices showing growth in excess of 100 per cent in 2009. Balanced funds also rode the rising equity markets with the Crisil Fund~bX (which tracks balanced funds) returning 70 per cent in 2009. Most debt categories gave single-digit returns with gilt funds giving negative returns on account of rising interest rates witnessed in the year, especially in the second half.

Overall, 2009 was positive for the MF industry on the AUM front, with average AUM almost doubling to Rs 7.96 lakh crore in December 2009 from Rs 4.21 lakh crore a year ago. Month-end AUM on the other hand saw a 60 per cent growth on a year-on-year basis.

Krishnan Sitaraman, director at Crisil FundServices, said, “This growth was primarily due to high liquidity in the system, which saw large inflows into liquid and ultra short-term debt schemes.”

The buoyant equity markets, which grew sharply in 2009, gave a similar boost to equity fund AUM. While AUM of debt-oriented funds saw a 55 per cent growth over the year, equity fund AUM saw a much higher 77 per cent growth mainly due to mark-to-market gains.”

At the same time, December proved to be a dampener for the MF industry, as it witnessed the highest ever monthly net outflows of Rs 1.57 lakh crore. Most of the net outflow was from ultra-short debt schemes and liquid funds. Accordingly, average AUM fell 1.6 per cent or Rs 13,000 crore to Rs 7.96 trillion in December. Month-end AUM witnessed a steeper fall of 19 per cent to Rs 6.7 lakh crore.

The fall in AUM in December was on expected lines due to quarter-end withdrawals by companies and banks from ultra-short debt and liquid schemes. A similar trend is also seen in March and September. Companies withdraw their investments to meet advance tax payments, while banks prune mutual fund investments to meet their quarter-end balance sheet requirements on capital adequacy. However, equity-oriented funds witnessed a rise in AUM of Rs 5,600 crore on mark-to-market gains.


Source: http://www.business-standard.com/india/news/equity-funds-cometop-in-2009/382587/