Amfi may seek self-regulatory powers

The Association of Mutual Funds in India (Amfi) may approach the Securities and Exchange Board of India (SEBI) to grant it some powers to regulate the mutual fund industry.

In a meeting last week, Amfi members, comprising mutual funds, discussed the possibility of seeking a self-regulatory organisation (SRO) status for the industry body, among some other issues including a recent proposal to raise the net worth for asset management companies (AMCs).

SEBI is the sole regulator for the 39-member-strong local mutual fund industry with assets under management worth over Rs 800,000 crore.

“It was just a discussion to see if there is any merit for Amfi to become an SRO,” said a person privy to the discussion. “The thought among members is that Amfi can handle the smaller functioning aspects of the industry, while SEBI can handle the larger policy issues,” he said.

This plan for the mutual fund industry, which was first floated in 2006, is similar to the one that stock broker members have sought from SEBI, but has been delayed because of differences between BSE brokers’ forum and Association of NSE Members of India.

“As an SRO, Amfi can look at issues such as irregularities happening at the individual mutual fund level and take corrective measures,” said a senior official with the mutual fund industry.

SEBI recently hauled select mutual funds for ‘unfair practices’, which evoked murmurs of protests in the industry. Mutual fund officials felt SEBI was getting involved in the ‘micro-management’ of the industry.

The Amfi meeting last week also discussed recent SEBI committee recommendation that the minimum net worth for AMCs should be increased to Rs 50 crore over three years from the existing Rs 10 crore. Many industry members, especially the smaller ones, felt the move would make the mutual fund business unviable for them.

“While hiking the net worth is to ensure that players are serious about the business, the general feeling among members is mutual funds are pass-through vehicles,” said the person, quoted above.

A senior official at a smaller mutual fund said the move will force many similar funds, which are equally serious about the business as their larger peers, to shut shop.

“This will reduce competition in the industry which is key to ensure better services to investors,” he said. The SEBI committee had also recommended hiking minimum net worth to brokers, rating agencies and merchant bankers.

Source: http://economictimes.indiatimes.com/articleshow/6052115.cms

Heavy Load on Mutual Funds

Mutual funds in India have a tall hurdle to cross. The Securities Exchange Board of India (SEBI) wants the net worth of companies that manage mutual funds to be five times larger than it currently is. Recently, the sub-group headed by Roopa Kudva, managing director and chief executive officer of credit rating agency CRISIL, has recommended that the net worth requirements of asset management companies (AMCs) be increased to Rs. 50 crore from Rs. 10 crore. According to the committee, this will signal the AMC’s seriousness of intent in setting up the business, and also bear the AMCs initial losses without facing serious financial strain.

The Issue

Naturally, this has not gone down well with AMCs having a low capital base. They fear these norms favour big mutual funds that are part of the committee and can easily meet the net worth requirement of Rs. 50 crore. The SEBI group, on its part, feels that a net worth requirement of Rs. 50 crore is just 0.33 percent of Rs. 15,000 crore, which is the average capital under management for Indian mutual funds. Hence, although the new norms will hurt small players, this number is not high enough to deter serious contenders.

Our Take

An AMC is not like a bank. A bank is in the business of taking and lending deposits. If the borrowers default then the bank has an obligation towards the deposit holders. An AMC works differently. It simply collects funds and buys stocks. If people want their money back, it can sell the stock and return the money. Investors in mutual funds know that the value of their investment can decrease. One key logic behind the SEBI proposal is that a higher net worth will enable AMCs to be better placed to obtain liquidity lines from banks, in case they suddenly need to draw cash to meet investor redemptions. This may not be the case.

At Rs. 50 crore net worth, the mutual fund will perhaps get a Rs. 80 crore short term credit line from the banks. In reality, this is of very little use because a fund might have raised and deployed anywhere between Rs. 500 to Rs. 1,000 crore in the market. The recent crisis has shown that even the best run bank with the highest capital reserves cannot withstand a run without government guarantees. If customers lose confidence in a mutual fund scheme, even a net worth of Rs. 100 crore will be insufficient to stem the tide of customer redemptions. The cost of starting and managing an AMC is very low worldwide. The SEBI sub-group appointed for this task itself states that in the USA, an AMC can be started at as low as $100,000. In the Euro Zone, AMC capital is linked to assets under management.

Indian AMCs need a healthy environment to compete. Competition should be encouraged by allowing all kinds of players to get into the AMC market, else it will lead to a situation where three to four AMCs will dominate the entire mutual fund market and this will be a huge disservice to the investors. Thus, instead of concentrating on net worth criteria for AMCs, it is important to concentrate on investor protection and risk management systems without hurting the spirit of competition.

Source: http://business.in.com/article/resolution/heavy-load-on-mutual-funds/14182/1

Good, but don't go overboard

With the government planning to raise Rs 40,000 crore through divestment in public sector units (PSUs), retail investors have a good investment avenue. No wonder mutual funds want to attract them by launching PSU schemes.

When SBI Mutual Fund launched its PSU fund last month, the company’s Managing Director and CEO Achal Kumar Gupta said: “PSUs have tremendous growth potential. They have helped in creating a diversified industrial base for the country.”

SBI Mutual Fund’s new fund offer, which closes on June 14, will invest in stocks of domestic public sector undertakings and in debt and money market instruments issued by these companies.

UTI Mutual Fund, Religare Mutual Fund and Sundaram BNP Paribas Mutual Fund had launched similar funds last year.

Returns from these funds have been quite impressive. As on June 7, UTI Top 100 Funds had given 9 per cent returns in the last one year, against 11 per cent returns from the Bombay Stock Exchange (BSE) Sensex. This is even better than BSE’s PSU Index, which returned 7.41 per cent in the period.

Others like Religare PSU Equity Fund returned 3.38 and 3.27 per cent over three months and six months, respectively. Sundaram PSU Opportunities gave 0.5 per cent over three months.

There is a strong case for investing in PSU funds. V V Anand, executive vice-president, SBI Mutual Fund, said: “The PSU Index has outperformed the Sensex in the last 10 years. Therefore, we believe there is immense unlocked potential in these companies.” In the last 10 years, the PSU Index has returned over 805 per cent, while the Sensex has given almost 251 per cent returns.

Experts believe that given the scale, the size and the reasonable valuation of most PSUs, holding these stocks can be a good bet from a risk-reward perspective.

The PSU theme looks promising on the back of strong fundamentals of these companies, most being leaders in their sectors. During the economic slowdown, they showed greater resilience than their private sector counterparts.

The new norm of minimum 25 per cent public holding in all listed companies will help investors get a good value for money and choice of companies, say experts.

However, one should avoid investing directly in these stocks if he/she lacks the knowledge of the stock market. It is advisable to take the mutual fund route in such a case.

However, all PSU funds in the market do not have a proven track record, for they have been around for hardly three to six months.

Mukesh Dedhia, director, Ghalla Bhansali Stock Brokers, said: “Concentrate on equity diversified funds as most of these invest in government companies.”

For instance, HDFC Top 200 holds PSU heavyweights like State Bank of India (SBI), Punjab National Bank, GAIL, NTPC, ONGC and Oil India. Similarly, Reliance Regular Savings Equity Growth invests in SBI, ONGC, GAIL, HPCL, Indian Bank and Hindalco.

As an investor, if you have good equity funds, there is a strong likelihood that you already have exposure to most of these stocks. But, if you want to invest in the theme, it should not account for more than 20 per cent of your equity portfolio.

“Such funds are not meant for small portfolios (who invest up to Rs 10,000 by way of systematic investment plans), but help the bigger ones to diversify further,” said Pankaj Mathpal, a certified financial planner.

Source: http://www.business-standard.com/india/news/gooddon/t-go-overboard/398221/

India delivered better returns than most: Madhusudan Kela, Head-Equities, Reliance Mutual Fund

His rise within the organisation as well as in the fund management industry has been dramatic. But for the past few months, there has beenspeculation that Madhusudan Kela, head-equities, Reliance Mutual Fund, is quitting. Untrue, insists Mr Kela. In an interview with ET, he says that he is still bullish on the big picture India story. However, in the short term, global sentiment will prevail, he cautions.

How do you see the market playing out near term in light of global developments?

In the next 6-12 months, the market will still be ruled by global sentiment. The ongoing debt crisis in Europe can have a meaningful impact on markets globally as in India, if the situation worsens. If one or two Eurozone countries were to default or the euro as a currency breaks down, there will be chaos.

Similarly, if there is slowdown in China, the Indian market will be impacted. Currently, the Indian market is trading at a 25% premium to China. If China’s earnings multiple contracts, there could be a valuation challenge for India as well. However, we have seen over the past six years that the market has produced significantly better returns than most countries in the world. The India story is getting stronger.

For instance, this year, you will see a significant fiscal consolidation, which was a major worry for the market. Over the next 2-3 years, the gas and oil reserves will materialise and this will further improve our fiscal position. And the real dark horse could be the UID project which can significantly prune the subsidies and improve tax collection. And hopefully, the pilferage will reduce. I believe a 8-9% growth with more reforms from the government looks real in the next five years.

How steep do you expect the correction, if it does come through, to be?

If the situation in global markets worsens, we could even see a 15-20% correction in Indian shares. But since India’s fundamentals are only getting better, and viewed in the global context, overseas fund managers will be compelled to increase their exposure to India. Any meaningful correction will be a great buying opportunity for retail investors with a long-term view on equities.

Which are the sectors that interest you?

We continue to remain overweight on the pharma sector. We are bullish on companies which will benefit from the domestic consumption story in India. We like public sector banks. They have underperformed the market for a while due to concerns over rising bond yields and hence marked-to-market losses on the bond portfolio.

Our view is that PSU banks can grow their loan books 25% for each of the next three years, and they have the capital adequacy to meet the loan demand. The stocks are available at 1.2-1.5 times their book value, and you can’t go wrong if you have a 2-3-year perspective.

There is a lot of pessimism about the telecom sector, more so after the recent 3G bids. Would you take a contrarian view?

Much of the bad news in the sector is behind us. If these stocks see any sharp correction, we would definitely buy them. The stock prices may have underperformed over the past couple of years, but the customer base has more than doubled during the same period.

What about mid-cap stocks in general? Would you still go for them in current market conditions?

Yes, if there are opportunities, we will continue to invest in companies with scalable business models, with earnings growth faster than large-caps, and available relatively cheaper to large-caps.

Your strategy of betting on mid-caps in a big way has been criticised by your peers. They accuse you of boosting portfolio returns by buying into firms with low-floating stock.

Companies like Siemens and Jindal Steel & Power were mid-caps when we first bought them. Not only have they delivered better returns, but are now ranked among the large caps. But I must admit that there have been some wrong bets as well. We have tweaked our mid-cap strategy a bit. We will not buy into very small companies, and would focus on companies with a minimum m-cap of Rs 1,000-1,500 crore.

Locally, what are the factors that could dampen sentiment for stocks?

Below average monsoon would rank high on that list. The reforms process needs to be accelerated. The government has shown resolve, but it needs to build on it, especially in terms of attracting more FDI flows. Rising instances of Maoist and Naxalite attacks could make foreign fund managers nervous. We are highly dependent on inflows at this stage, because there is not much money coming in locally.

How much cash on an average would you be keeping in your portfolio? Your strategy of aggressive cash positions last year was criticised in industry circles.

We will use it more as a tool to improve the portfolio mix. We will not shy away from keeping a higher cash level than our peers if market conditions warrant. But it will not be as high (25%) as was the case last year.

Source: http://economictimes.indiatimes.com/opinion/interviews/India-delivered-better-returns-than-most-Madhusudan-Kela-Head-Equities-Reliance-Mutual-Fund/articleshow/6044698.cms

Mutual funds hit a hurdle on regulatory changes

The past one year has been trying times for the mutual fund industry. Mutual funds, on the path of recovery from the ills of economicdownturn, were hit by a barrage of regulatory changes, a good number of them limiting the operational scope of mutual funds.

Just when the industry was coming to terms with the clampdown on fixed maturity plans (FMPs) and inter-scheme transfers , the Securities and Exchange Board Of India (Sebi) dealt another blow in the form of entry-load ban.

Despite serious protests from mutual fund distributors — numbering over 70,000, the regulator imposed the ban from August 1. Sebi further asked fund houses to disclose all commission, trail or other benefits received by them (from asset management companies) for advising a particular scheme to an investor.

Almost a year into the entry load ban, mutual fund distributors are still unsure as to how they go about doing their business. According to independent financial advisors (IFAs), generous investors pay 0.5-1 % as fee for selling a mutual fund scheme. If the investor makes an investment worth Rs 50,000, the distributor gets just around Rs 250 (at 0.5%) as their commission.

“It is not worth our effort to sell funds at such low commission payouts,” said a Mumbai-based distributor. There are also worries of cheques (given by investors) getting bounced (that increases the cost of recovery) or not being remunerated at all by investors. The Sebi mandate to disclose commission, trail or other benefits received by the distributor/advisor is also not in the right spirit.

Large-size distributors are still offering “extra toppings” to recommend schemes. These include small cash incentives, event sponsorships, advertisements in in-house magazines (of the distributor), expensive gifts and sponsored tours.

Lack of proper incentives for distributing equity mutual funds are prompting distributors to hard-sell insurance policies, company deposits and portfolio management schemes.

After distributors, Sebi has now trained its guns on fund houses; the first step was to discourage fund houses from raising exit load on mutual funds. It dealt another blow to fund houses asking them to pay upfront commission to distributors from their own profits and not from the expense pool.

In a ‘confidential’ email communique, the regulator directed fund houses not to charge upfront commissions to the overall 2.5% expense charges, which until recently was split in equal proportions to meet asset management charges and expenses (including upfront commission, transfer agent charges and marketing expenses).

Just a week ago, at the board meet on mutual funds, the regulator told asset management companies (AMCs) not to indulge in ‘dynamic pricing’ while managing debt funds. Fund houses, in their bid to attract more investments, do not levy asset management charges on institutional investors when portfolio yields come off sharply.

Likewise, when yields go up significantly , fund houses charge a higher expense ratio on institutional portfolios, making good the loss (of fund management charges) they have suffered when yields go down. The market regulator has told fund houses to stop this practice and limit changes in fees to 5 basis points on a daily basis (or 0.05%), or 0.5% in a year.

According to sources, this is not a good move for the industry. “The competitive edge of debt funds, which are striving hard to get institutional money, can only be maintained if pricing strategies are left to the fund house,” said the marketing head of a bank-promoted fund house.

“We maintain our competitive edge by discounting expense charges to institutional investors. If dynamic prices are taken away, there will be nothing to differentiate among fund houses, at least for the bulk investor,” the marketing head said.

The regulator also quashed the mutual fund industry’s demand to allow flexibility in the use of the expense ratio of 2.25%, which mutual funds deduct annually from investors’ net assets value (NAV). Mutual funds made a proposal to Sebi to do away with all cost bifurcations within the expense ratio charged on equity funds.

The regulator agreed to remove all cost bifurcations, but wanted mutual funds to reduce the expense ratio to 1.5% (from 2.25%). This was not acceptable to AMFI and members of participating mutual funds. The Sebi mutual fund panel decided to maintain status quo on expense ratio at 2.25%.

Source: http://economictimes.indiatimes.com/Features/Financial-Times/Mutual-funds-hit-a-hurdle-on-regulatory-changes/articleshow/6042494.cms?curpg=1

Right selling vs mis-selling in MFs

In mutual funds, intrinsic complexity and the absence of a physical product make it that much more imperative for institutions to be cognizant about potential mis-selling and implement a mechanism that would rest on the principles of right selling

Do I have to be like Ceasar’s wife and be above suspicion,” said a bank CEO on the subject of mis-selling. Instinctively, I felt that the point was missed. If you ask a banker about prevention of fraud or cash being stolen, the response would include charts, drawings, tables and process flows to impress you how robust the system is. However, on the question of right selling vs mis-selling, beyond the cliched “moral high-ground” and waxing eloquence, there is no attempt to implement a systemic solution.

Given the dominance of banks and other institutions distributing mutual funds in India, is there an institutional mechanism possible to guard against mis-selling? And, if so, what should it look like?

In mutual funds, intrinsic complexity and the absence of a physical product make it that much more imperative for institutions to be cognizant about potential mis-selling and implement a mechanism that would rest on the principles of right selling, the violation of which could result in mis-selling. For this, there would have to be some basic steps. One, each customer has to be profiled based on his risk appetite and investment objectives. Two, each product has to be profiled to reflect the customer category it is suited for. Three, there are potential conflicts in mapping the profiles of the products and customers. Four, it is the responsibility of the intermediary to recognize the potential conflicts and implement checks to ensure that these do not become real conflicts to the disadvantage of the investors. Five, it warrants an organizational mechanism to recognize these different roles and responsibilities and build in checks through a stringent compliance process. Six, it warrants a management oversight to ensure integrity for such systems to work efficiently and effectively.

To implement this framework, it is necessary to label roles and responsibilities. These include managers handling sales/relationship management, products, customer profiling, compliance, management, audit and board. Once that is done, it is important to identify and analyse potential areas of mis-selling and build preventive mechanisms.

Taking the customer on board: This should include implementation of know your customer norms, obtaining sufficient and accurate information to assess the customer, look at his risk profile and investment objectives, categorize him, putting in place mechanisms for feedback on efficacy, and ensuring that information about customers is reviewed periodically.

Product evaluation: The institution should create a universe of products that are evaluated and are investment worthy. The products should be reviewed for its risk level and should be assigned to a pre-defined customer risk profile category. Also, there should be a written record of the suitability of the product to that particular customer category.

Transaction: The institution should provide documentation to every client covering two aspects: one, product recommendation indicating its appropriateness for that customer category and two, a statement of the fees (one-time and ongoing) earned by that institution from that product. Further, it should obtain the client’s acknowledgement. When the product is sold from a client’s portfolio or switched to another product, the institution should document the reasons—was it the client’s requirement, or was the product taken off the approved list or was there a need to realign his portfolio.

When a customer buys a product that is not in the universe of recommended products, then the client should acknowledge and confirm that the decision is the customer’s and that he does not seek advice from the institution. It would help the institution to receive no fees—other than reimbursement of transacting costs—for such investments.

Compliance process: The difference between right selling and mis-selling is the difference between compliance in spirit versus form. The process is challenging here due to many conflicts—between the institution’s objectives for business and profit against that of the client and the conflict between the investment worthiness of a product and attractiveness of the commission structure. The key, therefore, is in recognizing that these potential conflicts of interests exist and putting in place review processes.

A sales/relationship manager should neither determine the customer profile nor the product profile. This role should be monitored for correctness in matching products to customers. Further, there should be no freedom to undertake “execution only” transactions. Under the principles of “maker–checker”, compliance should ensure that any discretionary authority is one level removed from customer engagement.

Management process: The key areas that influence the behaviour and outcome of team members are the incentive structure and compensation oriented towards customer retention. There should be no emphasis on transaction revenue as it encourages portfolio churn and conflicts with customer interest. It is also important to create an environment that encourages transparency in relationships with customers as well as fund houses. Customer franchise is built over the long term—building a system that encourages doing the right things daily certainly helps.

Source: http://www.livemint.com/2010/06/02212527/Right-selling-vs-misselling-i.html

Retail investors' holding period in MF equity schemes improves

Those holding up to one year has grown marginally.

Retail investors are taking a longer term view of mutual fund equity schemes than more informed institutional investors.

Data published by the Association of Mutual Funds in India (AMFI) show that the holding period of retail investors in equity schemes is becoming longer than that of high net-worth individuals (HNIs), foreign institutional investors (FIIs), banks or financial institutions and companies.

The numbers released by AMFI on holding periods for March indicates that number of retail investors holding equity mutual funds for more than 24 months has witnessed substantial improvement. Of the total retail investors, 62.5 per cent preferred to hold on to their MF investment for longer period in stark contrast to 46 per cent reported in March 2009.

The change in attitude could be due to two reasons. One, it could be on account of MF agents not advising their clients to churn their portfolio, on account of waning interest due to lower commission payable on new business. Two, those who invested in late 2007 are yet to see substantial appreciation in their investment (in the last 30 months the BSE Sensex has gained just 10 per cent). Similar trend is seen in the holdings of HNIs. The number of HNIs holding equity schemes for more than 24 months has recorded an increase.

Fewer number of retail investors held on to their investments between 12 and 24 months. Only 16 per cent of the retail investors-held their equity assets for this duration. This is 19 percentage lower compared with the corresponding period last year. Similar trend was witnessed in HNIs holdings. Of their total investment, 10 per cent or Rs 4,493 crore was held for 12-24 months against 37.9 per cent or Rs 10,606 crore reported last year.

The number of those holding up to one year period has grown marginally. This low growth is surprising given the steep appreciation in NAV in this period. Twenty-one per cent of the retail investors held on to their investment for a year against 18 per cent in the previous year. 21 per cent of HNIs held on to their investment for this period as opposed to 25 per cent reported last year.

Investor's folio and AUM

In the last one year MF investors closed 7,75,980 folios (accounts), of this retail investors accounted for 6,12,694 folios. According to the March report, retail investors folios stood at 4,02,93,410 compared with 4,09,06,104 folios reported in March 2009.

The number of account closures is unexpected given the market rally, MF equity assets moved up by 82 per cent or Rs 90,298 crore in the past year. For the same corresponding period, BSE Sensex moved up by 80 per cent. Of the change in AUM, retail investment accounted for 69 per cent or Rs 62,286 crore.

Source: http://www.thehindubusinessline.com/2010/06/10/stories/2010061053581200.htm

Pramerica Asset Managers appoints R Gopalakrishnan as head of equities

Pramerica Asset Managers Pvt Ltd, the Indian asset management venture of US-based Prudential Financial, Inc (PFI), on Tuesday announced that Ravi Gopalakrishnan has been appointed as head of equities.

As the head of equities, Ravi will report to Vijai Mantri, managing director and CEO of Pramerica Asset Managers Pvt Ltd. In this role, he will be responsible for managing the equity portfolios and the equity research function.

Ravi brings to this position more than 19 years of experience in the Indian asset management industry and has participated in its evolution and explosive growth over the last few years. Prior to this position, Ravi worked with UTI Investment Advisory Services, UBS, Sun F&C, Tata AMC, Principal PNB AMC and Hudson Fairfax Group, a US-based hedge fund Company. In June 2007, Ravi was named one of the 20 Rising Stars of Hedge Funds by Institutional Investor. He holds a Master of Science in Finance from Drexel University, USA and Master of Business Administration from Bradley University, USA.

Source: http://economictimes.indiatimes.com/Corporate-Announcement//articleshow/6023144.cms