Sebi sets about making MFs safer, more open, more accountable

Investors in mutual funds (MFs) have a lot of positives to look forward to. In the past three months, the Securities and Exchange Board of India (Sebi) has announced reforms that make MFs better investment vehicles and is working to curb mis-selling, too. A summary:

Dividends from profits: The accounting norm has been tweaked for dividends. This will result in fund houses having less for dividend payouts. The market regulator has ordered MFs to use only the realised profits to declare dividends in a scheme. Fund houses cannot use the unit premium account to pay out dividends.

An example. Assume an investor enters an existing scheme that has a net asset value (NAV) of Rs 18. For accounting purposes, an MF breaks this NAV into parts. Of the amount, Rs 10, the face value of the scheme, goes to an account called unit capital. The remaining Rs 8 goes to a separate account called a unit premium reserve.

Sebi has said the MF cannot use the money in the unit capital account, Rs 8 in the example, to pay dividends. Rather, dividends should be declared only when the NAV appreciates. In our example, say the NAV moves to Rs 20. Fund houses can only use Rs 2 to declare dividends.

Experts feel this step will curb MF mis-selling. “Agents have been pitching the dividends declared to mis-sell schemes. Many investors still don’t realise that an MF dividend is different from dividends received on a stock. In an MF, an investor gets back his own money,” said Manoj Kumar Vijai, executive director, KPMG.

“We will need to trade shares every time the dividend would need to be declared. Despite this drawback, there is no way we can look away from the fact that dividend payment itself is a much questioned practice,” said the head of a fund house.

MF houses use this dividend to woo customers in its monthly equity-linked savings schemes and hybrid funds like monthly income plans.

Further, the regulator has directed the fund houses to mention the dividends in rupee terms, rather than a percentage of the face value. Funds usually declare dividends as a percentage to the face value, mostly Rs 10, of the scheme. That’s why dividends seem magnanimous when a scheme declares it. For example, if a fund declares a dividend of Rs 10, it means 100 per cent dividend.

Derivatives exposure: To make investors aware of the risk involved in a fund, Sebi has also mandated fund houses to declare their exposure in equity derivatives. Futures and options are risky and can lead to unlimited losses if the bets go wrong. This will force MFs to take lesser exposure to equity derivatives.

Sebi’s Mutual Fund Advisory Committee (MFAC) has also proposed to cap the exposure of any scheme to derivatives at 100 per cent of its actual holding in stocks. This will not allow a fund house to excessively play in the futures and options market. The requirement of only margin money in derivatives allows them to have a much higher exposure.

Making agents responsible: MFAC has also come up with recommendations that would make agents more responsible for their advice to investors.

The committee has proposed that agents categorise investors based on their risk profile, investment objective and affordability before selling funds. Among other recommendations, the committee suggested that distributors maintain written records of all recommendations and transactions. The committee has also proposed that while advertising, fund houses should present the entire picture of the scheme’s performance. This is because ads invariably talk only about the period in which a scheme had outperformed, not the reverse. The committee want funds to give both.

Source: http://www.business-standard.com/india/news/sebi-sets-about-making-mfs-safer-more-open-more-accountable/399227/

Mutual fund ind needs common policy for governance: Sebi chairman

Mutual fund industry needs to streamline its product offerings and come up with proposals for a common policy on how to govern the industry, the head of India's market regulator said on Wednesday.

"Maybe it will be worthwhile for the AMFI (Association of Mutual Funds in India) to debate whether it can produce a policy paper. For the ball to start rolling the industry has to take the initiative," CB Bhave, chairman of the Securities & Exchange Board of India (SEBI) said at a CII Mutual Fund summit.

SEBI had banned entry fee charged by mutual funds from August last year, limiting their ability to pay distributors and raise assets.

Mutual fund firms face stiff competition from market-linked insurance products which are similar to mutual funds but are allowed to pay higher commissions to distributors.

The mutual funds industry currently gets 74 per cent of its business from the top ten cities in India. The risk profile of a large section of India's population was still not suitable for the capital markets and people with small savings would rather invest in banks for more security, he added.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/Mutual-fund-ind-needs-common-policy-for-governance-Sebi-chairman/articleshow/6081999.cms

SIPs turn 'safe' bet for retail investors

Nearly 80% of all redemption made by retail investors — even during adverse market conditions — are profitable. Systematic investment plans, or SIPs, are gaining popularity with about 22.5 lakh live SIPs in 2010 against 7 lakh in 2003. The first quarter of 2010 witnessed SIP subscriptions accounting for 19% of total inflows into equity mutual funds, compared with 2% in 2005, said a Boston Consulting Group (BCG) and Computer Age Management Systems (CAMS) report on equity mutual funds.

According to the BCG-CAMS report, equity MFs are increasingly gaining acceptance as a financial savings instrument by retail investors. MF investments as a percentage of gross household savings have increased from 1.1% in 1994 to a significant 7.9% in 2008. The growth in equity AUM has not, however, been backed by truly differentiated products from fund houses. Sectoral and mid-cap funds have lost significant market share and now represent only around 13% of total AUM. Large-cap and multi-cap funds have grown rapidly and now account for 87% of total AUM, the report said.

Retail customers continue to dominate equity MFs with over 90% of the investment volume coming from ticket sizes of less than Rs 1 lakh; nearly 99% of investment volume is in ticket sizes of less than Rs 5 lakh. Currently, there are nearly 40 lakh active SIPs with an average ticket size of Rs 2,300 every month and 97% of all retail SIP transactions are electronic, the report adds.

The BCG-CAMS report states that average tenure of equity money staying invested in one scheme is about 30 months; nearly 50% of the AUM has an investment tenure greater than two years. And nearly 70% of equity money has investment tenure exceeding 12 months. Only 30% of the equity asset base has a tenure of less than 12 months. “Going forward, retail consumers will continue to play an essential role in the equity fund space. The focus of fund houses should be to develope a plan that will bring in more retail money,” said Alpesh Shah, Partner & Director, BCG. “The focus of fund houses should be to support small distributors and strengthen the PSU bank network for widening distribution reach,” Mr Shah added.

The concentration of equity AUM in top cities is fast diminishing, the BCG-CAMS report says. The share of AUM beyond top-10 cities has shot up from about 10% in March 2003 to around 26% in March 2010. Mumbai and Delhi together account for nearly 45% of total equity AUM, and the top-30 cities account for around 90% of total equity AUM. “There has to be a focus on defining a geographic footprint strategy. Fund houses will have to move out of top-10 cities to cater to more investors,” said NK Prasad, president & CEO, CAMS.

The share of bank ranges from 19% to 38%; the share of IFAs has gone up to 34% from 20% and distributors’ share has gone up to 42% from 29% earlier.

While large-sized distributors, including large and well-networked IFAs, are gaining in market share, small IFAs are losing out the battle to larger players; the trend is more relevant post-entry load ban, notes the study,

The total share of small IFAs has fallen to less than 1% in 2010 from about 6% in 2004. Further analysis indicates that small IFAs are largely inactive, with no sales recorded. On an average, nearly 80% of all small IFAs are inactive every month, the BCG-CAMS report added.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/SIPs-turn-safe-bet-for-retail-investors/articleshow/6076871.cms

Principal Large Cap Fund declares dividend

Principal Mutual Fund has declared a dividend of 15% (i.e. Rs 1.50 per unit on the face value of Rs 10) under the dividend option Principal Large Cap Fund. The record date for dividend is June 24, 2010.

All investors registered under the dividend option of Principal Large Cap Fund as on record date June 24, 2010, will receive this dividend. The NAV under the dividend plan of the scheme as on June 18, 2010 was Rs 19.970.

Principal Large Cap Fund, is an open-ended equity scheme. The investment objective of the scheme is to provide capital appreciation and/or dividend distribution by predominantly investing in companies having a large market capitalization.

Source: http://www.moneycontrol.com/news/mf-news/principal-large-cap-fund-declares-dividend_465271.html

Correction prompts MFs to raise equity exposure

Mutual funds have stepped up their equity investments over the past one month, and have been net buyers of shares, after being net sellers for the past nine consecutive months.

While a section of the fund industry is still sceptical about the future course of market, the rise in equity allocation is being attributed to a mix of value buying, short-term trading bets and deployment of new fund offer (NFO) money.

Domestic mutual funds net-bought shares worth Rs 98 crore in May. In June, the figures have risen to Rs 523 crore. Before this, mutual funds had been net buyers of equities on a monthly basis was in August 2009, when they bought Rs 570 crore of equities. Mutual funds were heavy sellers, in October ’09 and March ’10, worth Rs 5,194 crore and Rs 4,082 crore, respectively. However, absolute cash proportion rose in May to Rs 10,200 crore from Rs 9,500 crore. This could be because of several NFOs launched during the period, industry experts said.

“There is a sense of optimism that the infrastructure story will induce momentum in stocks along with an offtake in credit disbursals and industrial growth. Apart from a small rise in operating margins, which could lift the bottomlines of companies, this is a good time for investment,” said Satish Ramanathan, head of equity, Sundaram BNP Paribas Asset Management.

According to institutional brokers, fund buying has shifted from mid-cap stocks to large-caps over the past one month. Fund managers are nibbling at mid-caps, post-correction in May. Mid-cap stocks, which are highly volatile, are currently commanding an average price-to-earnings multiple of 21 times.

Going by industry sources, fund managers are increasing exposures to power, FMCG, mid-segment and commercial automobile manufacturers, pharma and two-wheeler companies.

Mutual funds are pulling out money from cement (because of waning demand for cement during rainy season), telecom, steel and banks, which are currently trading at expensive levels.

According to fund managers, the European credit crisis, which resulted in the markets correcting by a good measure, helped funds buy quality stocks at low price-levels. Bearish trends in the market over the past two months had prompted funds to remain in cash all the while. The opportunity to “bottom-fish” stocks came in mid-May, when the broader market was trading at 16,400 levels (on the Sensex). The market has gained 10% since then.

“The near 1000-point momentum over the past one month gave us some chance to churn our portfolios. We got in some of the sure-fire high-beta groups and scalped some profits. Currently, we’ve moved out of these stocks and have taken refuge, partly in slow-moving stocks and large-caps,” said the fund manager of a corporate-promoted fund house.

Another reason for the rise in mutual fund investments in the market could be the line-up of NFOs that mobilised money over the past two months. Mutual funds are in a race to launch new schemes before July 1, after which new offerings (NFOs) will be required to complete the issue within 15 days of opening for subscription.

Top fund houses like Reliance MF, HDFC Mutual, Birla Sunlife MF, UTI Asset Management, SBI Mutual, Tata MF and Axis Mutual Fund, among others had approached investors in May (and even in June) with their NFOs. As on May 31, total average AUM of equity MFs stood at Rs 2,07,162 crore, logging a 4% rise from April. While there is optimism all around, a section of the market is still cautious.

“Data from Europe and US are still bad. China is witnessing a slowdown in real estate and Japan is nursing its huge fiscal deficit. It is difficult to believe, equity funds will do well over the next few months,” said Anand Shah, head-equities, Canara Robeco Mutual Fund.

“All said, the Indian market could witness some short-term blips on account of excess liquidity (in the system) and decent corporate earnings. We are adopting a defensive strategy and are reducing our exposure to high-beta stocks,” Mr Shah added.

Source: http://economictimes.indiatimes.com/Personal-Finance/Mutual-Funds/MF-News/Correction-prompts-MFs-to-raise-equity-exposure/articleshow/6076842.cms?curpg=2

Sebi panel to look into conflict of interest in MFs

Capital market regulator the Securities and Exchange Board of India (Sebi) will form a panel to examine conflict of interests in mutual funds (MFs) between different investor classes such as retail and wealthy, said a person familiar with the plan.

The panel will review a rule permitting MFs to offer advisory services and manage different investment products under different categories, the person said. Sebi is yet to announce the formation of the panel. The latest attempt to review MF operations is part of a regulatory attempt to address complaints that retail investors in some cases are given a raw deal. MFs, besides managing retail investors’ investments, offer portfolio management services to rich clients and corporates. They also manage and advise offshore funds, pension funds, provident funds, venture capital funds, insurance funds and exchange research, creating conflict of interest.

These businesses provide income to MF houses at different rates. So, the prospects of higher income from corporates or wealthy individuals may make the asset management company (AMC) compromise the interests of retail investors. An AMC earns 1.75-2.5% as fees on its equity schemes, while in portfolio management services, it gets a share of the profit in addition to fund management fees.

“Possible conflict of interest is inherent and intrinsic to the asset management business,” says a Sebi discussion paper. “These potential conflicts may manifest themselves in many forms, including front-running, insider trading and unfair treatment to select investors.”

The regulator has been cleaning up the mutual fund business, which, despite a two-decade history, is concentrated in cities and is dependent on corporate and rich clients’ money.

It did away with the entry loads and scrapped the commissions to intermediaries.

Last week, it penalised HDFC Mutual Fund dealer Nilesh Kapadia and others for front-running in a few shares and causing notional losses.

The committee will also deliberate whether AMCs should be granted registration as a separate intermediary, without linking their registration to a particular mutual fund.

Current rules allow AMCs to offer many services if key personnel, systems, back-office, bank and securities accounts are segregated activity-wise. The current regulations have created Chinese walls, verticals across products, says the discussion paper. But conflicts can’t be resolved with separate divisions, it says. They arise not due to common people or common system, but due to conflicts at group and institutional levels. Also, many fund houses sell investment products in the name of celebrity fund managers, though they may not be involved in its management. Employees of different divisions reporting to one person also create conflict despite segregation. The committee will discuss if fair treatment, best execution and trade allocation can be ensured to all investors.

Of the 48 mutual funds, 31 offer portfolio management services, 12 have venture capital funds, five manage offshore funds. Many of the group companies of MFs are registered with Sebi as foreign institutional investors. Out of 74 India-dedicated foreign funds, 36 are managed by 22 Indian MF arms.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/Sebi-panel-to-look-into-conflict-of-interest-in-MFs/articleshow/6076834.cms

Mumbai, Delhi account for 45 pc of total equity AUM

Mumbai and Delhi together account for about 45 per cent of the total equity mutual fund assets under management (AUM), the Boston Consulting Group (BCG) and Computer Age Management Systems' (CAMS) report on the Equity Mutual Funds industry said.

India's mutual fund industry's average assets under management (AUM) is pegged at Rs 8,05,239-crore in June 2010.

According to the report, the concentration of equity AUM in the top cities is fast diminishing. The share of AUM beyond the top ten cities increased rapidly from about 10 per cent in March 2003 to about 26 per cent in March 2010.

Mumbai and Delhi together account for about 45 per cent of total equity AUM, and the top 30 cities account for about 90 per cent of total equity AUM, the report said.

"We believe that the Indian equity mutual funds industry is likely to continue growing rapidly for the next five to six years given many favourable factors such as under penetration, high economic growth rate, tax benefits such as equity linked savings schemes, and enhanced presence in household savings products," the report said.

"The mutual fund asset under management is expected to grow by 20-30 per cent over the next five year period, as compared to 35 per cent growth registered in last five years," BCG's Partner & Director, Alpesh Shah told reporters here.

Source: http://economictimes.indiatimes.com/articleshow/6075258.cms

'Large-caps may be a safer bet now'

Better safe than sorry is Anoop Bhaskar’s strategy to ride out the volatility he foresees in the market over the next three months. Mr Bhaskar, who is the head of equity at UTI Asset Management Company, expects the market to be driven by liquidity more than anything else in the short term. But he will avoid the high beta stocks, and position his portfolio defensively. In an interview with ET, he says that any upswing in major indices will be driven by large-caps that have underperformed so far.

How do you see the market playing out over the next three months?

The US economic data signals a slower recovery than expected. And, therefore, earnings growth may not be as strong as expected. Then, there are the (sovereign debt) problems in Europe. In this context, current equity valuations appear rich. However, there is a significant pool of money sloshing around the world, and that liquidity doesn’t seem to be drying up in a hurry. If you were to be a sane investor and stay in cash, you are practically getting no return for it.

It is the riskier assets — commodities — emerging market equities that are providing the kind of returns that investors expect. That money flow still has not reduced. It gets reduced whenever there are fears of a systemic breakdown. As soon as those fears subside, that money again starts looking out for riskier avenues to generate returns that satisfy investors. So, we are in a phase where valuations are neither expensive nor cheap; they are being driven by liquidity. And the flow of liquidity will determine the movement of the market and valuations.

Locally, what are the factors you would be worried of?

The three risks always in the stock market are valuations, macro-economics and liquidity. In terms of valuations, we are in a zone of neither comfort nor discomfort. In terms of liquidity, it is slightly lower because of the recent 3G auction. Globally, it remains high, despite the huge withdrawals (from Indian shares) in May and patchy inflows in June. So, liquidity doesn’t look very promising for the next one month or so. Interest rates over a 6-12-month horizon look to be trending lower. But over a 1-3-month period... it’s uncertain because of the liquidity that has been sucked out due to the 3G auction and advance tax payments. Once that money returns, liquidity should not be much of a problem.

What strategy would you follow to ride out the short-term volatility in the market?

In times like these, it’s best to be closer to the benchmarks, and move up the market-cap scale. Between a small-cap and a large-cap in the sector, we would go for the company with a larger market cap. They will be more stable and if the market falls, they will not be as volatile as small-caps.

If liquidity were to take the market higher, which set of stocks or sectors do you think are best placed to gain from it?

If you look at Nifty large-caps, the only ones that have not been able to breach their highs made in May last year are Larsen & Toubro, NTPC, Reliance Industries (RIL) and Bharti Airtel. Of these, L&T has just about managed to break that peak last week. These stocks together have around 20-22% weightage in the Nifty, and have been underperforming their peers for the past 12 months. Most other Nifty large-caps are fairly valued. So, if the Nifty has to move up in a big way, these four stocks will have to perform. They are under-owned and available at reasonable valuations.

Which are the stocks and sectors you like in this market?

On the defensive side, we like pharmaceuticals and FMCGs. For a contrarian call, we would buy Bharti at times, because everyone is really underweight on it. On the infrastructure side, construction companies have shown that they are improving their balance sheets, and with the kind of order visibility and sales visibility they would have, there will be less negative surprises on that side. As for banks, there are concerns that rising interest rates could upset the apple cart. But because of the huge weightage of banks in major indices, we would be neutral or very close to neutral on banks. IT would also be a good defensive bet, if there is an inflation scare or high interest rates. In such a scenario, the rupee would depreciate, and that would give a natural protection to IT stocks.

Which are the stocks or sectors you would steer clear of in the short term?

Many of the high beta stocks of 2008-09 are losing steam and investors are becoming wary of them. Some of the traditional high beta stocks like Suzlon, Punj Lloyd, RCom, which even professional investors would take a short-term bet on, are the stocks we would avoid, as they are showing a lot of fatigue and the risk-reward ratio is not favourable at the moment. We would look at buying large-cap cement stocks like Grasim and Ambuja, if they fall 10%., but not at current prices. We would be light on state-owned banks for the next month or two. These are all tactical calls for a short period of time.

What about the cash levels in your portfolio?

We are sitting on less than 7-8% of cash on an average across our portfolios. It could be higher in a few schemes, but that’s because those schemes could be announcing dividends shortly. We are not taking any cash calls at the moment.

Source: http://economictimes.indiatimes.com/Opinion/Interviews/Large-caps-may-be-a-safer-bet-now/articleshow/6072723.cms?curpg=2