RBI may hike repo by 25 bps, reverse repo by 50 bps: Mint

In an interview with CNBC-TV18, Tamal Bandyopadhyay, Deputy Managing Editor, Mint spoke about today’s RBI meet and his reading of the likely outcome from it.

Below is a verbatim transcript of the interview. Also watch the video.

Q: A poll conducted by us among bankers finds that a majority expect a 25 bps hike in the key policy rates tomorrow. Which camp are you part of?

A: I would also largely think on that line—25 bps at least. But where I differ with the bankers is when most of them are expecting a 25 bps each—both in reverse repo and repo—but I would think this is a time to narrow the corridor, which means 25 bps repo, but 50 bps for reverse repo. The logic behind this is repo is a rate at which RBI infuses liquidity in the system. So when you have tight liquidity repo the upper end becomes a rate but when the liquidity is ample or sufficient in the system then reverse repo rate becomes the policy rate.

If you are absolutely sure that from now on the liquidity will continue to be tight everyday then it makes sense to have an identical hike on both the policy front but if the liquidity returns for few days then the reverse repo becomes the rate and at that time you find reverse repo is too low a rate. Ideally, it should hike the reverse repo by a higher percentage points say by 50 bps and repo by 25 bps, I will not be surprise if that happens.

Q: If any of these possibilities happens would that lead to an immediate HIKE in lending rates by banks?

A: This will be a real test for the base that the banks introduced in the beginning of July. Ideally they should but many banks have been saying till not the credit growth has not been the kind of credit growth they were expecting which is quite surprising because overall the industry goes 21% odd but quite a few banks have been saying that credit growth is not been that much and on the other side of it the kind of indirect pressure that comes from government and other not to hike the rate immediately.

So if it’s a 25 bps hike maybe they would wait till according to them the credit actually picks up a few weeks before taking a call, there may not be any immediate hike, that’s possible.

Source: http://www.moneycontrol.com/news/economy/rbi-may-hike-repo-by-25-bps-reverse-repo-by-50-bps-mint-_472588.html

Sebi's good intentions crippled the Great Indian Mutual Fund

On August 1, 2009, nearly a year back, the Securities and Exchange Board of India (Sebi), the stock market regulator, banned mutual funds from charging entry loads.

Mutual funds used to typically charge an entry load of 2.25% of the net asset value of a schemeand use that money to pay agent commissions.

In the new regime Sebi wanted the agent and the investor to negotiate and arrive at a commission, which the investor could pay the agent by issuing a separate cheque.

At least that was the plan.

While this made it cheaper for retail investors to buy mutual funds, the fall in commissions for its agents and distributors effectively left few people to sell it to them.

Now nearly one year on, the effects continue to be felt. “The situation is still difficult. We are still seeing net redemptions,” said the head of a mid-sized mutual fund.

Assets under management for equity funds, which have the most amount of retail participation among the various segments have seen net redemptions in 8 out of 11 months since the ban on entry loads.

There have been net outflows of Rs 8,160 crore since August 2009 in case of equity mutual funds.

As one industry person said, unlike other products such as toothpaste or toilet paper nobody wakes up in the morning and feels a pressing need to buy a mutual fund.

The Ulip conundrum

With insurance products offering higher commissions, distributors are said to have dropped the mutual fund in lieu of a more expensive investment product-the unit linked insurance plan, whichis an investment plan with a dash of insurance.

Ulips have been paying significantly higher commissions than mutual funds over the years, though structurally they are more or less the same.

Between July 2009 and March 2010, for which the latest data was available, Ulips managed to raise Rs 108,803 crore in total. That clearly illustrates the power of commission in a country, which is gradually coming out of financial illiteracy.

There was an attempt to bring parity between Ulips and mutual funds when Sebi issued a circular asking Ulips to register with Sebi, but an ordinance that placed control definitively in the hands of the insurance regulator (Irda) and away from the hands of the market regulator put paid to a glimmer of hope for mutual funds.

Fund houses grappling with changes are said to be finding it difficult to engage the customer, said industry insiders.

“The change was brought about too fast, business models need time to re-align. As a result, engagement with end customer has gone down because everybody is focused internally,” said the head of a foreign mutual fund.

What also does not help is the fact that insurance companies are allowed to use celebrities to advertise while mutual funds are not.

So you have the likes of Sachin Tendulkar, Virender Sehwag and even super star Amitabh Bachchan advertising insurance. “Now how do you expect us to take on a me too product being advertised by Amitabh Bachchan, our superior performance not withstanding?” asks the head of sales of a mid sized mutual fund.

Long-term Ulips?

Insurers have often stressed on the fact that Ulips are a long term product. In fact that claim also falls flat in lieu of the fact that over a period of five years, the average return of an equity mutual fund has beaten the average return of equity oriented Ulips by more than 20%.

The 25 best mutual funds on the other hand have given an absolute return of more than 80% in comparison to equity oriented Ulips.

Effective competition is supposed to act in the best interest of the consumers. But that does not seem to be happening in the context of the retail investor in India who can choose between the high commission paying Ulips and very low commission paying mutual funds.

The obvious reason as explained above is there are perverse incentives at work. But the truth is a little more complicated than that.

Let’s deviate a little into an interesting example that Sheena Iyengar gives in her book The Art of Choosing about bottled water brands.

“The two best-selling brands of bottled water in the U.S. are owned by Pepsi (Aquafina) and Coke (Dasani), you’d be... unlikely to see them aggressively advertising their health benefits relative to soft drinks, one of the few they could legitimately make.”

The moral of the story: A bottled water brand cannot say it is healthy to drink water if it happens to be owned by a company which also sells soft drinks.

Similar is the case with the Indian mutual fund industry. Not one mutual fund till date has made an effort to communicate its better performance over Ulips in the last five years. Not one mutual fund has made an effort to communicate its low commissions vis a vis Ulips.

If one side of the market cannot communicate what its strengths are then there is no way a market can function efficiently and people of course will continue to buy high commission paying Ulips.

And why is that? The biggest Indian mutual funds are all promoted by companies which have insurance subsidiaries. Be it Reliance, Birla, SBI, ICICI, HDFC, Kotak, Religare Bharti Axa, ING, Tata, HSBC, Canara or LIC.

All these promoters run both insurance companies as well mutual funds. So there is no way any of the mutual funds can come out and compare their performance with Ulips and say their performance is better. It is not in the interest of their promoters.

Over and above that some of these promoters also run banks.

And for banks, insurance commissions are lucrative and an easy way of boosting their other income.

In fact a recent survey titled the “India Bancassurance Benchmarking Survey 2010”, carried out by Rajagopalan Krishnamurthy of Towers Watson points out: “The responses to the survey confirm the assessment that bank distribution in the case of life insurance is currently highly skewed in favour of Ulips.

Ulip sales account for more than 85% of premiums generated by banks.”And since collecting these premiums pays high commissions, banks like to sell only Ulips.

So basically it’s not in the interest of any of the players in the market to disturb the current high commission paying set up. And you my dear investor are the least of their considerations.

The regulator’s perspective

The chairman of Sebi, C B Bhave expressed the regulator’s perspective at a mutual fund summit in June, saying that the regulator will prefer to put the investor before the industry.

The assets under management for the industry currently stands at Rs 6.75 lakh crore with Income funds accounting for Rs 3.28 lakh crore. The huge amount of money in income funds points out clearly to the oft repeated fact that the Indian mutual fund industry caters primarily to institutional investors.

There have been other attempts by the regulator to make the

mutual fund more “retail investor” friendly.

Recently Sebi has tried to bring in parity in the expenses charged to institutional and retail investors. Large institutional clients would be charged much lesser for their investments in debt funds

compared to retail clients. This, argued the regulator, amounts to the retail investor subsidising the institutional one.

Fund houses are said to have protested on the ground that the cost of servicing a retail investor too, is different from that of an institutional client.

Sale of mutual funds through exchanges began after Sebi’s November 13, 2009, circular stating that mutual fund schemes may be permitted to be transacted through registered stock brokers of recognised stock exchanges.

Despite points of presence inacross India, the initiative has so far failed to take off.On average, there have been 1,032 trades daily for the month of July, less even than one for every one of the 1500 cities that just the National Stock Exchange boasts a presence in.

A number of other mutual funds are also reportedly looking for banking partners to strengthen their distribution.

Some in the mid-sized segment are looking at selling a stake including one that is fond of gerunds and another which had tied up with a company known for its telecom operations.

Consolidation may not take place through acquisitions or mergers. “Consolidation in terms of AUMcould happen with more of the money going towards fewer of the players,” said the head of one of the largest AMCs.

Meanwhile, for many other mutual funds the ending does not seem as happy.

One mutual fund chief executive officer summed it up, late one night, after the passing of the ordinance which placed Ulips outside Sebi’s purview. “We are dying.”

Source: http://www.dnaindia.com/money/report_sebi-s-good-intentions-crippled-the-great-indian-mutual-fund_1415133-all

Mutual fund investors go demat, exchange volumes spurt in July

As executive director of the Securities and Exchange Board of India (Sebi) and later as chairman of National Securities Depository Ltd (NSDL) in the 1990s, C.B. Bhave dragged the Indian equity market into the paperless era.

He is now attempting an encore as chairman of Sebi, the capital markets regulator. In November, Bhave began a process to shred the paper in the mutual fund business through dematerialization, or demat.

Large distributors of mutual funds are now goading clients to hand over their paper certificates to NSDL, India’s largest depository, and hold them in electronic form instead. Industry experts say this would help distributors save postage, stationery and infrastructure costs.

There could be a long-term benefit as well: Demat of mutual funds could provide a big push to the trading of units on stock exchanges.

Ashu Suyash, managing director and country head, Fidelity Fund Management Pvt. Ltd, with Rs7,879 crore in assets, said, “This is the next part of the move to allow MFs (mutual funds) to be traded on exchanges. Without demat, the exchange platforms were not getting traction. This move will be an enablement.”

Krishnamurthy Vijayan, CEO, IDBI Asset Management Co. Ltd, with Rs1,300 crore in assets, said the demat process will help exchange platforms. “All capital market investments will be available in one statement, making life simple for investors,” he said.

Mutual fund buying on exchanges got off to a slow start, but activity has picked up in July. The daily average number of transactions grew more than 10-fold, to over 1,000 transactions worth nearly Rs6 crore in July.

In November 2009, Sebi floated the idea of trading units on exchanges to help the Rs6.75 trillion MF industry, which was on the back foot after a June 2009 Sebi order banning payment of agent fees from investor money.

However, till now only new purchases could be made through these platforms. With the introduction of demat, even old fund holdings can now be transacted on exchanges.

NSDL alone has over 10 million active demat accounts with assets worth Rs59.5 trillion. In comparison, the MF industry has over 40 million investor accounts with assets in excess of Rs6.75 trillion, most of it paper.

Surjit Mishra, executive vice-president and national head, mutual funds, Bajaj Capital Ltd, a financial products distributor, said that contrary to popular belief, a good number of MF investors already have demat accounts for their direct equity investments. “Roughly 50% of MF investors already own demat accounts. By converting their MF investments into demat form, they will get great ease in transaction and accounting.”

According to Mishra, this will improve further as people can now use the demat to sell and exit existing investments. “Without demat, only new (mutual fund) investments can be done and only those investments made through the exchange platform could be refunded. With the introduction of demat, existing investments can also be transacted. The number of transactions will go up,” he added.

Entities such as Integrated Enterprises India Ltd, a distributor and depository participant, are pushing dematerialization. “We are actively promoting the demat route,” said V. Krishnan, head of mutual funds at Integrated. According to him, the response has been good. “We have got very good response during the recent new fund offers of HDFC Asset Management Co. Ltd and ICICI Prudential Asset Management Co. Ltd. In June, we opened about 100 new demat accounts. This month the number has crossed 500 already and may cross 600 eventually.”

The growing popularity of exchange-traded funds, or ETFs, as an important class of funds is also driving home the importance of demat accounts. At least two new fund offers are for ETFs.

However, one major hitch is the direct transfer of units to client accounts. In share transactions, shares are first transferred to pool accounts of brokers before being moved to a client’s account. This gives the broker a chance to ensure that payment is received before the shares are transferred. But in a mutual fund transaction, the units are directly transferred to client account. “This puts the risk on the broker. Therefore, only pre-funded transactions are being executed at present. We have asked the regulator for the pooled account facility in mutual fund units also. Once this is allowed, most brokers would begin to show interest,” Krishnan.

Source: http://www.livemint.com/2010/07/26225314/Mutual-fund-investors-go-demat.html

‘Value can be found outside the index' : PRATEEK AGARWAL, HEAD-EQUITY, BHARTI AXA INVESTMENT MANAGERS

If the volatility in the market reduces, we expect to see the space outside the index perform significantly better than the indices themselves.

When markets remain range-bound, stock-picking increasingly becomes a challenge. While few sectors continue to outperform market, investors tend to move with majority and pick stocks within such sectors. In an interview with Business Line Mr Prateek Agarwal, Head-Equity, Bharti AXA Investment Managers, identifies sectors that hold potential to outperform and also sectors that lack sheen.

Healthcare and FMCG stocks outperformed the markets in the recent times. Do you anticipate the trend to continue?

In general, the healthcare and FMCG space is expensive but there can be exceptions in the mid-cap space. On account of high volatility in the market, premium was being paid for cash generating stable businesses and this benefited these sectors. As focus turns to growth, we expect this space to underperform. The pharma space also benefited on account of M&As which have taken place at valuations that are not otherwise justifiable. Hence, we believe that the chances of disappointment are high in this space.

Despite the rate hike concern, auto retail sales continue to be robust. What is your outlook for the sector?

We continue to be positive on the space. While interest rates have a bearing on the total cost of ownership, for most buyers, fuel may be a larger cost. While both of these costs may go up over the medium term, we expect sales to remain buoyant because the income levels are growing at rates faster than the increase in cost of ownership of a vehicle. One sense of increase in incomes is the growth in the nominal GDP which is running in excess of 15 per cent.

Given that mid and small-cap stocks are more sensitive to interest rates do you anticipate any slowdown in earnings due to increase in interest rate?

While mid and small cap stocks have a larger leverage than large cap stocks, and hence, may be affected more due to an increase in interest rates, they would also benefit on operating leverage. Spare capacities would be put to use as the economic growth strengthens. Hence, the mid-cap part of the market may actually deliver earnings growth in excess of the large-cap part of the market.

Residential property demand is still below the peak levels even as interest rate concerns loom large. Do you think the current valuation of the sector holds potential to deliver market return over one-two years?

We are positive on the real estate sector outlook. We are already witnessing buoyancy in absorption rates across the country and prices have moved up significantly from the bottom and volumes are sustaining at higher price levels also. While housing market has recovered, the commercial space is yet to fully recover and may take time.

However, with economic growth expected in excess of eight per cent, it is only a matter of time before the commercial space sees demand. We believe that the stocks in this space offer significant value.

After being hit by competition and regulations, telecom stocks are slowly back in action. Do you anticipate a bounce back in the sector?

The focus on the telecom sector was on account of M&A activity. While such news flow would continue to make the stocks volatile and may present trading opportunities, we believe that the competitive intensity would remain high. Hence, we believe that it may underperform the market in the near term.

Market has been range bound over the past six months, do you believe the current valuation will see fresh investment?

We believe that the valuations are now at the top end of the comfort zone, and hence, we do not expect a very significant move in the index and expect the index performance to trail the earnings growth trajectory. However, while the index is not cheap, value can be found outside of the index. If the volatility in the market reduces, we expect to see the space outside the index perform significantly better than the indices themselves.

Source: http://www.thehindubusinessline.com/iw/2010/07/25/stories/2010072550711000.htm

'Opportunities aplenty, but dig deep for value' : Arindam Ghosh, CEO, Mirae Asset

Financial services shares are likely to outperform in the near-to-medium term, feels Arindam Ghosh, CEO Mirae Asset. In a chat with ET, Mr Ghosh Financial services shares are likely to outperform in the near-to-medium term, feels Arindam Ghosh, CEO Mirae Asset. In a chat with ET, Mr Ghosh says that the risk-reward premium has narrowed down considerably, and that investors will have to hunt deeper to spot values. Excerpts:

The market has been grappling with the volatility arising from the debt crisis in Europe. The recent upswing apart, where do you see the market headed?

The Indian economy is chugging along well, with GDP growing at about 8% plus. The recent trend in monsoon, too, is satisfactory, although the overall picture would be clearer after a few weeks. The results from Q1 earnings are reasonably impressive so far and we are on track for a 17-18% growth year-on-year this quarter, which is actually one of the leanest quarters of the year.

It is a well-recognised fact that today, India offers a unique combination of strong demographics, rising incomes, low consumption and favourable government policies, factors that allow India to be among the preferred economies in terms of the potential to deliver high return on equity (RoE) to investors. Given these aspects, we remain positive on the market and are confident that the market will continue its upward stride albeit for a few hiccups resulting from any adverse news on the global front.

What would be your investment approach in the current market?

The risk-reward premium has narrowed compared with the past year’s lows, as the market has moved to the reasonably-priced zone. Concerns relating to the possibility of a double-dip recession in the developed world and hard-landing due to inflation may persist for some time. Having said that, there are many investment opportunities to hunt deep to spot values.

We continue to remain positive on the financial sector, which has the largest component of the index at about 25%. Financials, in our opinion, will be among the leading sectors for the market. Besides, we are positive on large-cap IT firms and, on a selective basis, on stocks in pharma and consumer segments.

Why are retail investors shying away from mutual funds? Do you feel it largely has to do with distribution issues, following the removal of entry load?

While the industry has faced challenges in the recent past, we believe that the changes will eventually benefit all stakeholders in the long term. Also, it won’t be prudent to assign reasons for relatively low inflows entirely to this factor since other headwinds — market levels, global news and sovereign debt concerns — have also played a part.

An important factor is that a sizeable number of investors have been waiting for a correction to invest, given the swift uptrend in the market recently. Amid all this, one should not forget that mutual fund as a product is the most cost-competitive, transparent and affordable tool for retail participation in equities in the Indian market. We are confident that in the long term, the inherent advantages of this product would ensure that retail investors in large numbers recognise this aspect and join the mutual fund bandwagon.

Where would you advise retail investors to invest — equity, debt or SIPs?

Investors need to have confidence in India’s growth prospects and thereby invest in equities since this asset class offers the best returns in the long term. For retail investors, we would advise them to invest in equities through the SIP mode, since this is an affordable and time-tested strategy. Also, investors need to judiciously plan their asset allocation to ensure that they have a well-diversified portfolio.

Source: http://economictimes.indiatimes.com/Opinion/Interviews/Opportunities-aplenty-but-dig-deep-for-value/articleshow/6216810.cms?curpg=1

Mahindra Finance expects to enter mutual fund biz by Mar 2011

Mahindra Finance, the financial services arm of auto major Mahindra and Mahindra, today said it expects regulatory approval for entering into the asset management business during the fiscal.

"We have applied for asset management company and we hope to get SEBI (Securities and Exchange Board of India) approval during the year," Mahindra Finance Managing Director Ramesh Iyer told PTI.

Following the approval, the company would launch mutual fund schemes, he said.

The company is planning to go on its own, he said, adding that for setting up the business, the company will hire specialised people with domain knowledge.

Currently, there are 39 mutual fund players in the country with total average assets under management of more than Rs 6.75 lakh crore at the end of June.

The total average assets under management of the 39 fund houses in the country plunged by Rs 1.27 lakh crore, or 16 per cent, in June.

Mahindra Finance, a non-banking finance company, is into vehicle finance, insurance brokerage, rural housing finance and refinance of old vehicles.

At present, the company has a network of 487 offices spread across the country, which will touch 500 by the end of September this year, Iyer said.

Meanwhile, Mahindra Finance recorded 85 per cent jump in net profit for the first quarter ended June 30 to Rs 80 crore compared to Rs 43.13 crore in the same quarter a year ago.

The company also reported a growth of 23.51 per cent in income from operations during the first quarter to Rs 404.46 crore, as against Rs 327.48 crore in the year-ago period.

The company's gross disbursement registered a growth of 76 per cent to Rs 2,854 crore at the end of June 30, compared to Rs 1,617 crore in the same period of the previous year.

The company maintained its quality of assets through continued focus on NPA reduction, coupled with buoyant rural cash flow, Iyer said.

Source: http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/finance/Mahindra-Finance-expects-to-enter-mutual-fund-biz-by-Mar-2011/articleshow/6216024.cms

Mutual funds step up selling

Mutual funds (MFs) sold shares worth a net Rs 298.10 crore on Thursday, 22 July 2010, higher than Rs 201.20 crore on Wednesday, 21 July 2010.

The net outflow of Rs 298.10 crore on 22 July 2010 was a result of gross purchases Rs 596.30 crore and gross sales Rs 894.40 crore. The BSE Sensex surged 135.92 points or 0.76% to 18,113.15 on that day.

MFs sold shares worth net Rs 2276.60 crore in July 2010 (till 22 July 2010). Mutual funds had sold equities worth a net Rs 1093.10 crore in June 2010.

Source: http://www.apollosindhoori.cmlinks.com/MutualFund/MFSnapShot.aspx?opt=9&SecId=10&SubSecId=22,24

Franklin Templeton MF Announces Change in Fundamental Attributes of Templeton Monthly Income Plan

Franklin Templeton Mutual Fund has announced change in Fundamental Attributes of Templeton Monthly Income Plan with effect from 26 July 2010. The following are the proposed changes.

Revised Name of the Scheme: Templeton India Low Duration Fund

Type of Plan Introduced: Growth Plan.

Asset Allocation Pattern: The scheme would allocate upto 100% of assets in debt including corporate debt, PSU, Gilts and Securitized debt with low to medium risk, upto 20% in Money Market instruments with low risk profile and up to 15% in Equity and Equity linked schemes with medium to high risk profile.

Load Structure: Entry load charge will be nil for the scheme. Exit load charge will be 0.50% of the NAV if investors who redeem/switch out such investments within 3 months from the date of allotment.

Minimum Application/Redemption Amount: Minimum investment Rs 10000 additional/redemption amount of Rs 1000.

This addendum forms an integral part of the Scheme Information Document. All the other terms and conditions will remain unchanged.

Source: http://www.apollosindhoori.cmlinks.com/MutualFund/MFSnapShot.aspx?opt=9&SecId=10&SubSecId=22,24