Sebi wants more checks on MF expenses

The Securities and Exchange Board of India (Sebi) is preparing ground for a fresh set of mutual fund (MF) reforms to make the instrument more transparent and attractive for investors.

The MF advisory committee, comprising industry and Sebi representatives, is due to meet on Monday to discuss the proposals.

For a start, the regulator wants fund houses to keep promotional expenses, such as those on foreign trips and gifts to distributors, outside the ambit of the expense ratio. This ratio — it includes fees paid to fund managers, advertising, legal, record-keeping and accounting costs, custodial charges and taxes — is capped at six per cent for a scheme. In most cases, fund houses keep the expense ratio around 2.5 per cent, but include promotional costs in the calculation.

Sources familiar with the development said the regulator suspected that many costs passed off as advertising or promotional expenses were in reality paid to distributors for pushing sales.

The move comes when Sebi has been embroiled in a battle with the insurance regulator, Irda, for control over unit-linked insurance plans, seen as a rival to MF schemes. By reforming the commission structure for these schemes, the market regulator has put pressure on the insurance sector to opt for reforms.

Clearer performance measures

In addition, at the Monday meeting, the regulator would want to put in place a more investor-friendly performance review mechanism. At present, apart from the daily net asset value, fund houses put out monthly fact-sheets which provide mathematical calculations comparing and evaluating the schemes on offer. The regulator feels retail investors find this form of review complicated. Instead, it wants MFs to provide specific quantitative parameters for one to be able to judge the performance of a scheme.

The advisory committee is also to discuss issues like guidelines for MF investments in equity derivatives. This has become a contentious issue. Some members feel fund houses should not be allowed to invest in risky instruments like stock derivatives.

However, if a complete ban was not possible, there should be some specific guidelines, said an industry source.

The committee, whose earlier meeting was in November, was also likely to look at the issue of conflict of interest among trustees, asset management companys (AMCs) and managements of fund houses, sources said. The issue was discussed earlier and it was noted that there was an overlap in membership of these entities.

Sebi had addressed the issue by ordering that AMCs, trustees and managements should have different sets of individuals. The sources said the regulator wanted to ensure that no gaps remained in the regulations.

In the recent past, Sebi has used the MF advisory panel to usher in a lot of changes, such as in the entry and exit load structure, put in place last August.

Source: http://www.business-standard.com/india/storypage.php?autono=396301

Principal to launch pension fund in October

Principal Financial Group (PFG), the largest pension player in the United States, is looking to launch its pension business in India.

“We already have fairly advanced plans and will launch this programme in October,” said Norman Sorensen, president and chief executive officer of Principal International Group, a division of the Principal Financial Group.

Chances are that PFG will set up a separate company to launch pension plans. “We don’t know yet as the structure is yet to be defined. However, we believe the expertise that we have on a global basis in this area is so significant that we can bring to bear an independent company,” Sorensen said.

If PFC does set up a separate company to manage its pension fund business, it will be the first instance of a private pension fund company in India, soliciting as well managing money for building a retirement corpus.

Currently six pension fund managers manage money for the money raised under the New Pension Scheme. These are SBI Pension Funds, UTI Retirement Solutions, IDFC Pension Funds, ICICI Prudential Pension Funds, Kotak Mahindra Pension Fund and Reliance Capital Pension Fund.

These pension funds just manage the money raised under NPS, and have nothing to do with raising or soliciting that money from investors.

The other option is to launch the business through Principal Mutual Fund, a joint venture that Principal has with Punjab National Bank and Vijaya Bank.

On whether this business will be regulated by Securities and Exchange Board of India (Sebi), Sorensen said, “Sure. There is no reason to regulate it otherwise”.

Currently pension plans are offered by insurance companies, which are regulated by the Insurance and Regulatory Development Authority of India (Irda). However, Franklin Templeton Mutual Fund does offer a pension plan regulated by Sebi.

PFG manages $300 billion worldwide (The entire Indian mutual fund industry manages around $169 billion). “In Brazil we are the number two pension player and we manage $18 billion in pensions. In China, we manage only $6 billion. In Mexico and Malaysia we manage $5 billion and $6 billion, respectively,” said Sorensen.

So what exactly is PFG’s plan?

“We have something in the United States called target funds. We intend to introduce those funds in India,” said Sorensen. “Target funds basically target your age. A 25-year-old who has a target date of retirement of 2050, is likely to invest in target retirement fund 2050. And that’s why the name. The fund will probably begin with 80% investment into equity and with age the allocation to equity will come down. It basically increases the conservatism of the investment portfolio as your age grows,” he added.

Also, the investment for these pension plans is so carried out thatit is better than average performance. “It does not intend to at any point be number one in the market. Why? Because then you take more risk,” said Swanson.

And what will happen to the accumulated money on retirement? Well it all depends on the individual who invests in the pension plan. “This is absolutely retirement money but it is up to you what you do with that money afterwards,” said Sorensen.

“The idea behind the retirement plan is to provide income until you pass away. The money can be put into an immediate annuity, so that it provides fixed income or it can be invested in some very conservative fund. And we would not recommend equity of course,” he explained.

How is this product different from pension plans offered by insurance companies?

“There is no restriction on withdrawal unlike some of these pension plans,” said Sorensen. “Some people decide to take out some money before retirement, (which is) not necessarily a wise thing because the money seizes to accumulate,” he added.

Pension plans of insurance companies come with a lock in of 5 years. Over and above this, at maturity, an individual who is holding a pension plan from an insurance company has to necessarily buy immediate annuities using two third of the corpus. The remaining one-third can be withdrawn.

Source: http://www.dnaindia.com/money/report_principal-to-launch-pension-fund-in-october_1388270

Mutual funds play it safe, increase cash holdings

Sensex tanks on worries over euro, Korea.

Amid renewed global uncertainty, cash levels in the mutual fund industry are on the rise. While data will be available only next month, fund managers Business Standard spoke to said cash holdings were expected to go up.

This month, the benchmark CNX Nifty has fallen 8.94 per cent, or 472.65 points, to 4,806.75. The Bombay Stock Exchange Sensex has plunged 1,514 points, or 8.64 per cent. The lessons learnt at the height of the financial crisis in October 2008 are still fresh in the mind, say market experts. Then, fund houses had witnessed massive redemptions amid crashing global markets, prompting the Reserve Bank of India to come to the rescue.

In January 2009, the MF industry was holding 11.46 per cent of its average assets under management (AAUM), estimated at Rs 9,729 crore, in cash. This was the highest in over a year.

In April, according to Edelweiss Capital, total cash balance of asset management companies (AMCs) in equity schemes was 5.2 per cent of the total corpus — Rs 10,100 crore as against Rs 9,100 crore in March. At the end of March, AAUM of the MF industry were estimated at Rs 7,47,525 crore, which rose 2.89 per cent to Rs 7,69,165 crore at the end of April.

Uneasiness at stock movements

But, for some fund houses, cash levels are higher than in January 2009. For instance, a smaller-sized domestic fund house has a cash holding of around 13 per cent, against 10 per cent in the middle of April. “Once stocks moved beyond our comfortable zone, we decided to sell,” said the equity head of a fund house which holds 75 per cent of its assets in equity.

“It makes sense to increase cash levels, as it will provide a cushion in an event of a drastic fall in the markets. We have increased our cash holding by three-four per cent and it currently stands at nine per cent,” said the equity head of a mid-sized MF.

According to the Securities and Exchange Board of India (Sebi) data, available till May 21, fund houses were net sellers in the equity segment.

Redemption worries

Tarun Bhatia, director (capital markets) at Crisil Research, said, “Due to a significant correction and volatility in the markets, fund houses want to keep cash. AMCs would like to have cash in hand, as volatility and corrections put redemption pressure. So, a mix of global uncertainty and redemption pressure is likely to lead to higher cash levels in May.”

“During May, cash levels may have increased in the industry. In certain segments which have seen more volatility, such as mid-cap funds, there may be higher cash holdings. In our case, mid-cap funds’ cash levels are around 10 per cent from seven-eight per cent earlier,” added the chief investment officer of one of the largest fund houses.

N K Garg, chief executive officer of Sahara MF, said it was always a good strategy to increase cash levels in anticipation of volatility in the markets. “Cash levels will definitely go up in such a situation. In our case, the cash holding is in higher single-digits, higher in comparison to last month. However, we have also used the volatility as an opportunity to get into the market,” he added.

Equity heads maintained the crisis in the European and US markets was not over. “They are simply being postponed with packages. We need to be ready with substantial cash in our pockets,” they said.

Sweta Sinha, senior research analyst at Icra Online, said there was a possibility of rising cash holdings in May. “If the market turns stable, then only will investment come in,” she added.

“Relatively smaller and new fund houses may not have large cash but top players are likely to sit on high cash levels,” said Crisil’s Bhatia.

Source: http://www.business-standard.com/india/news/mutual-funds-play-it-safe-increase-cash-holdings/396057/

MFs oppose Sebi plan to tighten derivative investment norms

Sebi’s proposal to tighten the norms for investment in derivatives has run into opposition from mutual funds with the industry lobby arguing that fund managers need access to some of the products the regulator wants to ban.

The Association of Mutual Funds in India (Amfi), the industry lobby, has sent its detailed response to the mutual funds advisory committee of the Sebi, which will take up the proposal at its next meeting on May 31.

Amfi said funds should be allowed to sell index futures, and write option subject to some safeguards.

When contacted Amfi chairman A P Kurian said: “We are compiling views of all our members and will soon send them to Sebi”.

The investment management department of the stock market watchdog has proposed that mutual funds not be allowed to write options or purchase instruments with embedded written options while recommending limits on the gross exposure on equity, debt and derivative positions.

It said that any derivative instrument used to hedge a risk must have the same underlying security as the investment being hedged. Effectively, the proposal rules out index derivatives, used by fund managers to hedge their portfolio.

Amfi has said since covered options are returns-enhancement strategy with risk reduction, they should be permitted with some limits. For instance, option exposure in a particular stock could be limited to 10% of net asset value.

It also wants market regulator to allow mutual funds to sell index futures against a stock portfolio, as it is the most efficient and cost effective way of managing market risk of the underlying stock portfolio.

It has suggested that a limit could be defined for such a hedge position as a percentage to the total stock portfolio.

The association has also opposed disclosure by way of trade summary and instead suggested that fund houses be mandated to disclose the outstanding derivative positions on a given date in a defined format.

Source:http://economictimes.indiatimes.com/Market-News/articleshow/5974880.cms

Mirae Asset launches Emerging Bluechip Fund

Mirae Asset announced the launch of the Mirae Asset Emerging Bluechip Fund, an open-ended equity fund, today.

The fund is primarily a mid-cap fund that invests in Indian equities and equity-related securities of companies that are not a part of the top 100 stocks by market capitalisation, but have a market cap of at least Rs 100 crore at the time of investment, a release said.

Though the fund does not have any theme bias, it will invest in securities with the objective of generating income and long-term capital appreciation.

Mirae Asset Emerging Bluechip Fund's NFO will run from May 24 to June 22, the release said, adding that the units will be available at Rs 10 each during the period.

Mirae Asset Global Investments (India) CEO Arindam Ghosh said, "With the launch of Mirae Asset Emerging Bluechip Fund, we're expanding our portfolio by offering a mid-cap equity fund. We believe that today's mid-cap stocks have the potential to be tomorrow's large-caps and a right amount of mid-caps in the portfolio can help investors optimise their risk-adjusted returns."

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/Mirae-Asset-launches-emerging-bluechip-fund/articleshow/5969234.cms

Combination of gold and liquid fund will let you have your cake and eat it too

Gold has been in the news lately.

Prices are close to all-time highs in both dollar and rupee terms: international prices are above $1,200 an ounce, and domestic prices are approaching Rs 18,000 per 10 grams.

The high prices have not deterred investors — the holdings of New York-listed SPDR Gold Trust, the world’s largest gold exchange-traded fund, touched a record high of over 1,192 tonnes on May 10.

For perspective, that’s close to double the gold holdings of the Reserve Bank of India (which itself bought 200 tonnes of gold from the IMF in November 2009 at the cost of Rs 30,000 crore). John Paulson, the famous investor who made billions by correctly predicting the US subprime crisis, recently started a hedge fund focused exclusively on gold.

So why is the smart money betting that gold prices could go even higher? The answer lies in the many different aspects of gold as an investment.

- Gold is a scarce commodity and a luxury good. Strong economic growth in India and other important consuming nations has buoyed demand for jewellery. Simultaneously, supply has been stagnating, constrained by falling production from new mines

- Gold is an inflation hedge, a store of value whose purchasing power will not diminish even if governments are forced to debase their currencies by printing money to bail out banks or indebted borrowers. The purchasing power of a kilo of gold has stayed fairly constant over decades despite steady inflation

- When markets are seized by panic and equity markets crash, investors flock to gold as the ultimate safe-haven asset because it carries no risk of credit default.

These advantages have long been known to Indian investors. India consistently ranks as one of the world’s largest importers and consumers of gold, and international prices are strongly influenced by the Indian festival and wedding seasons, when retail demand for gold and gold jewellery rises.

However, despite the many excellent reasons for buying gold, some sceptical investors stay away from it because it does not generate a steady income stream.

In this respect, gold differs from stocks (which bear dividends), bonds or fixed deposits (which generate interest income) and real estate (which can be rented out). All traditional forms of gold investing — via coins or jewellery, ETFs and gold futures — suffer from this drawback.

If a strategy could be specifically designed to overcome this drawback while simultaneously reaping the rewards of investing in gold, we would have the proverbial option to ‘Have your cake and eat it too’.

So the way out is to form a portfolio and invest in a combination of gold exchange-traded funds (ETFs) and the dividend option of a liquid fund which invests in short-term debt.

The debt portion of the portfolio would have to be administered to generate a steady stream of interest income with a low level of risk. And that can be accomplished by investing in the dividend option of a liquid fund.

Such an accrual strategy is particularly attractive in an environment where interest rates are low but expected to rise — precisely the environment prevalent in India today.

The RBI has acted twice this year already to tighten monetary policy, and is expected to adhere to a tightening course going forward. In such an environment, holding longer-term bonds exposes the investor to duration risk, the risk that interest rates will go up causing existing bond holdings to decline in price. By holding short-term instruments, the accrual strategy would explicitly avoid duration risk. Also, by investing only in safe, highly rated instruments, it would minimise the credit risk of its portfolio.

To sum up, a risk-averse investor looking for a steady stream of income with an added bonus of capital appreciation would be well served by this strategy.

The writer is head - fixed income, Canara Robeco Mutual Fund

Source: http://www.dnaindia.com/money/report_combination-of-gold-and-liquid-fund-will-let-you-have-your-cake-and-eat-it-too_1387289

Sahara MF declare 40% dividend

Sahara Mutual Fund has declared 40% dividend under Sahara Midcap Fund. The dividend is taxfree for the investors. The record date for the purpose of dividend is May 28, 2010. All such investors under dividend option of Sahara Midcap Fund, whose name appear in the register of the unitholder’s book as on the record date, would be eligible for it.

Source: http://www.financialexpress.com/news/quick-view/623035/

Secure your retirement- NPS

Pension regulations have been long awaited for the Indian populace. With the setting up of the PFRDA (Pension Fund Regulatory and Development Authority) and the New Pension Scheme, this has now become a reality. The major aim that NPS seeks to achieve is to bring people from the unorganised sector into the pension fold. Pension space in India has been dominated by employer-sponsored plans with contribution from the employee to a certain extent. In addition to the superannuation plans offered by employers, mutual funds and insurance companies also offer voluntary pension schemes. With the NPS, the government is able to offer flexible, growth-oriented scheme that has the potential to generate by far the best returns compared with the products that are available in the market today. The NPS the most effective tool to accumulate wealth for the life post retirement.

Why do you need NPS?

The conventional retirement options like the Employee Provident Fund (EPF) and the EPS (Employee Pension Scheme) give fixed returns but do not offer sufficient flexibility to the employees during their working and post-retirement years. In these schemes, the neither the subscriber nor the employee can choose how his or her money is invested. Also, the amount collected through all schemes administered by the Employees' Provident Fund Organisation including the two mentioned above may not be adequate for individuals' future. The major change that the NPS brings in is the shift from a defined benefit to a defined contribution regime for the government employees.

Structure

The unique option that the NPS gives to subscribers is a selection of fund managers with whom they wish to entrust their funds' management. Thus, this flexibility and a competitive environment would push the PFMs (pension fund managers) to work for better returns. The scheme currently has six pension fund managers:

*ICICI Prudential Pension Funds Management Company

*IDFC Pension Fund Management Company

*Kotak Mahindra Pension Fund

*Reliance Capital Pension Fund

*SBI Pension Funds Private

*UTI Retirement Solutions

Subscription types

To apply for the voluntary pension scheme, there are two types of accounts:

Non-Withdraw-able account: The tier 1 account is the basic NPS account that is non-withdrawable till retirement or in the case of death of the subscriber. In this type of account, the total corpus at the retirement age is split, whereby a minimum of 40 per cent of the final corpus has to be compulsorily used to buy an annuity while the subscriber is free to withdraw the remaining 60 per cent as a lump sum or in installments.

Withdraw-able Account: A tier 2 account is available to only those who are existing subscribers of the tier 1 account. The unique selling point of the tier 2 account is that money contributed into this account can be freely withdrawn as and when the subscriber wishes except for a minimum balance that needs to be maintained at the end of each financial year.

Investment options

In NPS, there are two types of fund management options available and the contributions can be invested in various ways. The investment decision should be guided by two factors -risk appetite and ability to actively manage money. This makes NPS flexible for the subscribers whereby they can customise returns.

Auto choice - lifecycle fund. Under this option, contributions made by the subscriber are pooled into a lifecycle fund and then invested as per pre-defined asset allocations that change over the life cycle of the subscriber. Up to 35 years of age of the investor, 50 per cent of the assets will be invested in equity index funds and the rest will be in debt instruments. As the person gets older, investment in equities will taper off by a certain percentage every year and get diverted to debt instruments. By the time the investor turns 55, his assets in equity instruments will be contained to 10 per cent and a major chunk (around 80 per cent) will be invested in government securities.

Active choice. Under this facility, investors have the right to choose the investment pattern as well as the pension fund manager. Investors are also allowed to revise their choices once every year in May.

Asset allocation class options:

Asset Class E. Growth option under the NPS that invests in equity (index funds). The cap for equity investment is 50% of the investment corpus.

Asset Class C. Medium-risk option with investments in fixed-income instruments but not necessarily in government securities.

Asset Class G. Low-risk option whereby investments are made only in government securities.

NPS - The cheaper option

Our calculations show that an investment of Rs 1 lakh per annum over the next 30 years yields the maximum returns if invested in NPS when compared with a unit-linked pension plan or pension plan offered by a mutual fund company. This is considering that all three options give similar returns at the rate of 10 per cent per annum. For the sake of this projection, we have considered funds that would match the asset allocation pattern followed by the aggressive portfolio under NPS.

NPS has the lowest set of charges and therefore delivers the highest returns. The table (Your retirement kitty) shows how the progression of the invested amount happens over 30 years. From the initial period, wealth under the new pension scheme grows faster and owing to the low charges levied, the difference between NPS and other products is almost to the tune of Rs 50 lakh towards the end of the 30-year period. For retail investors looking to invest around Rs 1,000 or so monthly, NPS is clearly a better option because it comes with low charges and flexible fund management options. Due to higher charges levied in ulip-based pension plans during the initial years, the difference in the corpus at the end of the tenure is also substantial. In case of maximum allowable lump sum to a pensioner, the mutual fund pension plan would pay out less in comparison to insurance-based plans as they have the advantage of tax-free lump sum. The mutual fund pension plan is taxed at the rate of 20 per cent (without indexation) and 10 per cent (with indexation).

Taxation

NPS allows subscribers to grow their retirement corpus in the most cost effective way possible. However, NPS is taxed under the EET (Exempt-Exempt-Tax) regime. This means that the investment gets tax exemption and so do the returns on investment. However, all withdrawals are taxed under the applicable tax slabs and so is the annuity interest. Even under the current scenario, i.e. the EET regime, NPS competes on an even field with other instruments. With ULIP based schemes there is the advantage that the withdrawn lump sum is tax-free. Even taking into account this loss of money to tax, NPS returns are higher.

When the Direct Tax Code is introduced it would be interesting to see how it changes the game for the NPS. It could well make or break the market for NPS.

Challenges

The major challenge for the NPS remains its distribution. When the NPS was opened for the unorganised sector, it was expected to be profitable to its fund managers by cornering high volumes of subscribers. However, with not so many distributors and barely 4,000 odd subscribers, in the voluntary (non-government) sector, it has been a major disappointment.

The largest pie of investments in this space is cornered by unit-linked retirement plans offered by insurance companies. Comparing insurance based retirement solutions to NPS shows one major point where the NPS scores. The NPS is a savings and retirement security product and as such, it does not burn a hole in the pockets of the subscribers by the charges it levies. ULIP based pension schemes, on the other hand, are in between, they are inefficient routes for buying insurance and as investment. The investment corpus in ULIP based pension schemes takes a major hit especially in the early years with high charges of around 10 per cent in the first five years. There are and have been ULIP based plans with low charges but distributors have not actively promoted them because of lower commissions.

Conclusion

NPS is a safe and effective post-retirement tool. With its lowest charges, it also is the cheapest way to get an exposure to the market. For thousands and lakhs of employees in the unorganised sector, who have negligible or no postretirement social security benefits, NPS is a boon and greater awareness and marketing will not only increase NPS accounts but also make them available to this immense market, this new and yet ignored tool called the NPS.

Source: http://in.biz.yahoo.com/100524/50/bavngz.html