Gains from paying for financial advice

The transparency that results when the investor pays for the advice directly would drive a shift towards professionalism in the industry.

There has recently been a lot of heat and noise about the abolition of the entry loads on mutual funds and the consequent pressure on retail investors to pay financial advisors for their services. Certain sections of the industry have been talking about the end of ‘free-advice' for consumers. The point being missed is that there never was any free lunch for consumers — they were always ‘paying'!

Earlier, the advisor was earning a commission from the fund house (out of the investment made by the consumer and referred to as the ‘entry load'), but today, following the ban on the entry load, the customer pays the advisor directly.

While the customer still pays, there are several reasons to say that the change in the mode of rewarding financial advisors is actually a customer friendly measure. And to that extent, this change should get a thumbs-up from all stake-holders, most importantly, the retail investor! When the investor pays for the advice directly, it helps bring about a significant level of transparency. Models of remunerating advisors that are non-transparent always have the potential to end up being costlier than models that are transparent.

Transparency also brings in a significant level of professionalism since it will take a professional to have the confidence and standing to be able to charge a fee for advice. We could thus be looking at a paradigm shift towards professionalism in the industry in line with what has happened in developed countries over the last few years.

Aligning Goals

Since the earlier regime was not transparent, it was always likely that the goals of the advisor and the investor would be at cross purposes. Since the advisor was getting commission irrespective of the service level and the quality of advice, there was seldom any pressure to deliver value. With different fund houses compensating differently there was also the likelihood of bias towards funds or companies that provided the best commission. Today, with the investor paying the fees, it gives them control and a right to expect better service and quality of advice. This aligns the goals of both the advisor and investor; resulting in rewarding advisors who provide better advice and service.

Broadly there are three types of models: Entry Load, Transaction based and AUM Based (AUM – Assets Under Management). Considering the drawbacks of the current entry load model, we believe that a model that charges based on the Funds Managed does align the goals of the customer and the investor in a better way. This will clearly ensure that good advice is rewarded and as the portfolio grows, the compensation of the advisor grows.

A larger return can result in significantly better monetary value for the investor even though this model would result in higher costs when the returns are significantly higher. Some advisors are also keenly looking at the profit sharing model.

Cost of Entry Load

Many distributors are today providing the Entry Load or AUM fee based pricing: One needs to note in the above table that AUM Fee is charged on the total assets where as entry loads are charged only on investments into equity in that year and therefore the above table may not provide an ‘apple to apple' comparison.

Entry loads will also be chargable on the switch made from debt to equity. For an investor who believes that it is a good idea to book profits in equities over a 2-3 year basis; when one eventually moves back to equity, this would result in an entry load again.

Hence, the entry load cost would depend on how much fresh investment and switches (debt to equity) happen in the portfolio in the long term.

Removal of the entry load structure and the requirement that the advisor directly charges fees from the customer is likely to bring about a paradigm shift in the Indian Mutual Fund Industry. It is likely to bring in professionalism into the industry as is evident from markets where this model has become operational. Of course, investors will need a change in mindset; paying for professional services rendered by financial advisors just as they pay for other professional services.

Source: http://www.thehindubusinessline.com/iw/2010/01/24/stories/2010012450911200.htm

Markets in a spin over Obama talk

Stocks, commodities, gold and crude oil tumbled on Friday as investors see the end of a great liquidity cycle coming to an end, as the US moves to rein in proprietary trading by banks, and central banks begin to roll back easy monetary policies to curb inflationary expectations.

Indian shares rebounded from their worst levels, but still ended near a month low. The S&P 500 Index was down 0.5%, the MSCI Emerging Markets Index declined 2.7%, oil, gold and aluminium fell by at least 1%.

“Comments from the US government on restraining banks’ investment activities weighed down sentiment because it is feared that any such move would hurt fund inflow,” said NK Garg, CEO, Sahara Mutual Fund.

The 30-share Sensex fell 1.1%, or 191.46 points, to close at 16,859.6. The 50-share S&P CNX Nifty fell 1.1% to 5,036. In the broader market, losers outnumbered gainers by 2043 to 842 on BSE.

“Banks will no longer be allowed to own, invest in or sponsor hedge funds, private equity funds or proprietary trading operations for their own profit, unrelated to serving their customers,” US President Barack Obama said on Thursday.

Asset classes across the board lost value after Mr Obama unveiled a plan to limit trading by banks such as JPMorgan Chase and Bank of America to reduce the risk to financial system, which was propped up by taxpayers money last year after banks incurred losses of trillions of dollars. These banks’ trading was a major reason for the record performance of emerging markets last year, including India which gained 81%. So, any restriction on them could reduce investments from the West to emerging markets.

Foreign institutions net sold shares worth Rs 2,415.4 crore while their domestic counterparts net bought shares worth Rs 1,954 crore, according to provisional data from NSE.

Furthermore, central banks, at least in emerging markets, are expected to start raising interest from record lows, as accelerating economies threaten high inflation.

While China grew 10.7% in the latest quarter creating a fear of asset price bubbles, food price inflation in India -- above 15% -- is straining household budgets.

Even the Federal Reserve and the European Central Bank, which have the lowest policy rates, may start withdrawing some liquidity measures launched at the peak of the credit crisis, even as they hold on to low rates to avoid derailing a fragile economic recovery.

“The great liquidity cycle that began about a year ago is starting to draw to a close,” said Citigroup’s Asia equity strategist Markus Rosgen. “The Citi global excess liquidity indicator has already begun to roll over and is decelerating... Asia’s not immune,” Mr Rosgen said in a recent report.

Foreign institutions net bought Indian shares worth over $17 billion in 2009. The Reserve Bank of India in its January 29 meeting is expected to act to cool down prices and the finance minister Pranab Mukherjee may rollback tax cuts next month.

Source: http://economictimes.indiatimes.com/markets/stocks/market-news/Markets-in-a-spin-over-Obama-talk/articleshow/5490270.cms

Mkt must brace itself for near-term turbulence: Tata MF

Big boy Reliance posted strong third quarter numbers. The topline came in significantly higher than estimates at Rs 56,856 crore driven by strong volume growth. The big surprise came on the gross refining margin front, which came in at a robust USD 5.9 per barrel. Profits too were better than expected, rising 14.5% YoY.

Q3 earnings announcements from India Inc have largely been satisfactory with the exception of a few disappointments.

In an interview with CNBC-TV18, Ved Prakash Chaturvedi, MD, Tata Mutual Fund, gave a roundup of the earnings announcements so far, and his prognosis on the market in the run up to the budget.

Q: What have you made of the earnings announcements so far?
A: I cannot comment on individual earnings. But generally speaking from large companies particularly in IT and automobiles, and some midcap companies in the infrastructure sector, FMCG companies, by and large the feeling has been that there is strong recovery happening. Companies are more confident about the business that they are going to do. Largely, there has been a flavour of good cheer.

There have been some disappointments as well as it normally happens for example from some large companies in the construction and engineering space etc. The nature of that business is also very lumpy.

On the whole, I would say that the report card is positive. India Inc is looking at positive outlook for the economy and for incremental growth in the future. The earnings growth numbers at least justify that. By and large, a mood of good cheer which has been in the Indian equity markets seems to have been resting on sound foundations.

Q: What about global factors?
A: My feeling for some time is that we have seen a period of very good cheer, a long period of a sustained run, the dollar carry trade. I think there is some turbulence in the offing. We anticipate some tightening in China. We will have the credit policy at home on January 29.

The feeling is that there may be some action on mopping away of liquidity. Similarly in the US, if the dollar carry trade actually unwinds then what happens to the flows that happen globally. I think there is some turbulence ahead.

We should not forget that the good cheer in Indian equity markets has been based on sound foundations, on sound business, sound growth, numbers that companies are giving a very good outlook that business has in this country.

Q: Do you think the markets are likely to stay rangebound or dip even further from now till the budget?
A: I think the upside is capped. But I don’t see a huge downside from here. There could be some downside especially if global indices come down and if there is outflow of money from India. I think earnings numbers are good and there is domestic liquidity that comes in the last quarter especially from the insurance segment. By and large there is a left out feeling among investors and could be an opportunity for entry.

So, I suspect money from different sources will come back into the market. Maybe the dollar carry trade will become the yen carry trade of tomorrow. The positive outlook for Indian equities will gradually resume. Yes, there would be a period of turbulence and we should brace for a period of turbulence in the very near future.

Source: http://www.moneycontrol.com/news/mf-interview/mkt-must-brace-itself-for-near-term-turbulence-tata-mf_437547.html

Brokerage, MF top bosses go places

Brokerage, MF top bosses go places Leading brokerages and mutual fund (MF) houses are busy churning their portfolios, with the markets coming back to life. But they are also seeing churning at the top.

Along with the market, a host of top-level executives at these firms are going places, literally, and have started responding to the call from headhunters like never before. The fallout has been predictable. In the last few months, high profile names such as Keshav Sanghi, Devesh Kumar and Krishnamurthy Vijayan have moved.

Kumar, till recently the managing director of Centrum Stock Broking, is joining Fortune Financial Services, a listed capital market intermediary. He is tipped to be the group CEO and would be responsible for expanding Fortune’s broking and investment banking operations.

Vijayan, who quit JPMorgan Asset Management as its executive chairman, will join IDBI Mutual Fund. When contacted, he declined to comment. Sanghi will join Citi. He was the CEO of Reliance Equity International. He could not be contacted.

Similarly, Ajay Bhatia recently moved from Macquarie to Indiabulls Securities as the president of its capital markets division. Jayesh Parekh, who was the head of sales at Motilal Oswal Securities has joined Abu Dhabi Investment Authority as fund manager. Four senior people have also joined the investment banking team of Emkay Global Financial Services. Fund managers Promodh Gupta and Pankaj Tiberwal have quit Principal Mutual Fund.

Market players said that while people movement has been on for some time now, it is only recently that even the top brass has started moving. They said the upsurge in the market sentiment has been the primary reason that has led to increased business volume for most brokerages.

“This is a good time to step on the gas and we, too, have been doing selective hiring to strengthen our capital market side,” said Abhay Bhalerao, director, Equirus Capital, a boutique investment bank operating in the mid-market segment. Equirus recently expanded its top brass by hiring Abhijeet Biswas as director focusing on industrial, energy, health care and FMCG.

Ruth Singh, who heads human resources at Emkay Global Financial Services, said that the firm was also beefing up its capital market division. “We are expanding our ECM (equity capital market) team and have recently got senior people on board for our investment banking division,” said Singh.

The growth in business volume is also seen from the impressive profit growth registered by some of the listed brokerage entities. India Infoline’s third quarter consolidated net profit has almost doubled to Rs 59.51 crore when compared to the corresponding quarter of the previous financial year. Meanwhile, the benchmark Sensex has nearly doubled in the last one year, moving from 9,000 levels to the current 17,000.


Source: http://www.business-standard.com/india/storypage.php?autono=383337

Bharti AXA MF's Infrastructure NFO

Bharti AXA Investment Managers has announced the launch of the Bharti AXA Focused Infrastructure Fund.

It is an open-ended equity fund that would invest in equity and equity-related securities of companies engaged in infrastructure and infrastructure-related sectors.

The reasoning behind the creation of the new fund, as per the fund house, is the opportunity that has been unveiled. According to the fund house, the CNX Infrastructure index has outperformed the broader CNX Nifty index over a period of 3 years. This trend is likely to continue owing to the increased outlay for infrastructure both from government and public-private partnerships.

“Our internal research has indicated that core Infrastructure stocks amongst the companies forming the BSE 100 index has outperformed the BSE 100 index by 19% CAGR over a period of 3 years. By having a focused portfolio of such sectors, we expect to derive the best for our investors through this fund,” said Prateek Agrawal, Head, Equity, Bharti AXA Investment Managers.

The fund’s performance will be benchmarked against the BSE 100 Index.

“India, amongst all developing countries, has the need to invest most on infrastructure development. The government is cognizant of this fact and has taken significant steps towards meeting infrastructure needs. This provides for a very good opportunity for investor participation and deriving benefit,” said Vikaas M Sachdeva, Country Head – Business Development, Bharti AXA Investment Managers.

The new fund offer (NFO) commences January 20, 2010 and closes on February 15.

The fund offers both growth option for capital appreciation as well as dividend options.

The face value is Rs 10 per unit.

The minimum investment amount is Rs 5,000, while the additional investment amount is Rs 1,000. Investments may be made in multiples of Re 1 subject to minimum investment amount.

One per cent exit load would be applicable if redeemed within one year.

The SIP/STP route is also available to investors.

Note: Bharti AXA Investment Managers is a joint venture between Bharti Ventures Ltd, AXA Investment Managers (AXA IM) and AXA Asia Pacific Holdings (AXA APH, through its wholly owned subsidiary National Mutual International Pty. Limited).

Bharti AXA Mutual Fund has been set up as a Trust (under the Indian Trust Act, 1882) by AXA Investment Managers, sponsor of the fund.

Source: http://new.valueresearchonline.com/story/h2_storyView.asp?str=101192

No bringing back MF entry load: SEBI

The Securities and Exchange Board of India has virtually ruled out a re-think on its move to do away with entry load on Mutual Fund (MF) products.

Delivering his address at the Assocham Mutual Fund Summit on Wednesday, Mr K.N. Vaidyanathan, Executive Director, SEBI, said the distributors of MF units and other such agents should stop complaining and stay focused to enable retail investors have maximum return on their investments and stop thinking in terms of their commission.

This is necessary because with reasonable commission, the distributors and agents will be able to generate volumes of scale to enable them to earn money, which they cannot envisage in the initial phases, he said.

Source: http://www.thehindubusinessline.com/2010/01/22/stories/2010012251251500.htm

DLF to Exit Mutual Fund JV With Prudential Financial

DLF Ltd., India's biggest realty company by sales, will exit a mutual fund joint venture in the country with Prudential Financial Inc. because of a proposed regulatory change, a person with direct knowledge of the matter said Monday.

"The move is prompted by a proposed regulatory change, which makes it mandatory for a company to have five years of experience before selling mutual funds," the person, who didn't wish to be named, told Dow Jones Newswires.

The move is also in line with the New Delhi-based company's strategy to focus on real estate development, the person added.

DLF currently owns 39% in the joint venture--DLF Pramerica Asset Managers Pvt. Ltd.--while Prudential owns the remaining 61%.

"DLF will sell its 39% stake to Prudential," the person said, without disclosing details of the likely valuation of DLF's stake in the venture.

Spokespeople from Prudential weren't immediately available for comment.

The person said also that the time frame for DLF's exit from the joint venture is yet to be decided.

In November 2008, DLF and Prudential had received an approval from the markets regulator, the Securities & Exchange Board of India, to jointly sell mutual funds and said they will jointly invest $45 million in DLF Pramerica.

DLF Pramerica was planning to start selling mutual funds in 2009.

Earlier Monday, The Economic Times newspaper reported that DLF plans to exit the venture to reduce its debt of nearly 120 billion rupees ($2.6 billion).

DLF has been exiting its non-core businesses as part of its strategy to focus more on property development. The company's founders recently sold its multiplex-chain, DT Cinemas, to Indian multiplex operator PVR Ltd. The real estate developer also previously announced plans to sell its wind power business.

Still, DLF has a separate life insurance venture with Prudential, DLF Pramerica Life Insurance Co. Ltd., in which the Indian realty firm owns a majority 74% stake, while the remaining stake is held by the U.S.-based insurance company.

"The life insurance business is continuing and is doing very well for DLF," the person said.

The life insurance business began operations in September 2008 with an equity base of 1.1 billion rupees. In November 2008, DLF had said that the companies will jointly infuse 10 billion rupees of capital over next five to six years in the life insurance venture.

Source: http://online.wsj.com/article/SB10001424052748703569004575010112446094370.html

Things to know before investing in Tax Saving Funds

Equity Linked Saving Schemes (ELSS) or tax saving mutual fund schemes as they are otherwise known as, are a popular tax saving investment. The major reason for this popularity has been the introduction of Section 80C of the Income Tax Act, from April 1, 2005. This section allows the investor to invest up to Rs 1 lakh in various investment products and get a tax deduction for the same. The list of investment products also includes ELSS. Earlier, till March 31, 2005, investment in these tax saving schemes only allowed for a tax deduction of up to Rs 10,000 under Section 88.

However, that being said, there are various things an investor needs to keep in mind before deciding to jump into an ELSS investment.

Section 80 C spoils you for choice: As has been mentioned above, ELSS is not the only investment avenue that comes under Section 80C. Other investments such as Life Insurance, Public Provident Fund (PPF), National Savings Certificates (NSCs), Senior Citizen Savings Scheme (SCSS), Post Office Monthly Income Scheme (POMIS) etc also offer a similar tax benefit. Then there are mandatory payments such as your PF, tuition fees of children and even housing loan repayments that are covered under Sec. 80C. Let us say an individual contributes Rs 40,000 to the PPF every year and Rs 30,000 is his provident fund deduction. So for him it makes sense to invest only the remaining Rs 30,000 [Rs 1 lakh – (Rs 40,000 + Rs 30,000) = Rs 30,000] for tax deduction under Sec. 80C. This is primarily because if he invests more than Rs 30,000, he will cross the overall level of Rs 1 lakh and the deduction is limited to Rs 1 lakh.

Lock-in of three years: Like all investment avenues under Section 80C, ELSS funds also involve a certain lock in. In this case the lock in is for three years. Hence an ELSS investment cannot be withdrawn for a period of three years from the date of investment. This lock-in is like a double-edged sword. On the one hand, it fosters long-term investment, which is very essential while investing in equity. And on the other, if you find yourself in a situation where you require funds in an emergency, you will have to resort to other means / investments --- the ELSS fund will be closed to you for three years. Withdrawals are just not allowed, not even with a penalty.

Tax saving schemes carry the risk of investing in equity: ELSS funds are promoted as good investments as they enable the fund manager to take long-term calls on account of the enforced three year lock-in. In other words, the fund manager doesn’t have to worry about keeping funds liquid to cater to daily redemptions that can happen in normal open ended schemes. However, it has to be kept in mind that ELSS funds for all practical purposes are similar to normal diversified equity mutual fund schemes. The funds in these schemes are invested in the stock market. Hence the returns these schemes generate depend on the kind of stocks the fund manager invests in and the overall state of the market. So if an investor invests in a tax saving scheme, and three years down the line, when the lock-in ends and the markets are not doing well, his total returns will take a beating. Yes, this has not happened in the past as the Indian market is in a lateral bull phase (barring the occasional hiccups). However, the potential of capital loss is very much there and it has to be considered. So investors need to consider their risk taking ability in terms of age and responsibility before deciding on investing in ELSS.

The bottom line? Whether ELSS or any other investment, do not invest because the investment offers a tax benefit. Ask yourself whether you would have invested in the particular instrument per se --- the tax benefit should be the incidental icing on the cake. This will ensure that all your investments will be as per your risk profile and goal oriented and not only on for the temporary purpose of saving tax.

Source: http://www.moneycontrol.com/news/mf-experts/things-to-know-before-investingtax-saving-funds_436668.html