Not your boring fund manager

The mutual fund industry has been much in the limelight for the past year or so but for the wrong reasons. With entry loads having been banned in August 2009, more money has moved out than in, leaving managements seriously short of assets. UK Sinha, who has just been elected chairman of the Association for Mutual Funds in India (AMFI), is probably better off than most others in the game because he heads the country’s oldest and the fourth-largest mutual fund. But it wasn’t always that way at UTI Mutual Fund and Sinha deserves much of the credit for having reinstated the fund to its current position after it almost went broke. The soft-spoken and ever so charming chairman and managing director, who can discuss Ghalib for hours and is something of a writer himself, tells me over lunch that he hopes he can succeed in bringing the industry and the regulator closer.

Unfortunately it’s that time of the year when Sinha becomes a ‘temporary vegetarian’ for three months and so, although both of us would have loved to try out the hilsa specialities at Oh! Calcutta, we’re reconciled to a simple vegetarian meal at Maya, the Indian restaurant at the Trident in Mumbai. The annual break that Sinha takes from non-vegetarian food has nothing to do with religion; it’s just good for the system. Otherwise he’s a hardcore non-vegetarian, characteristic to the Kayasthas from Bihar, who’s discovered, over the years, that prawns which spawn in fresh water at the confluence of the Sarayu and the Ganges taste far better than any catch from the sea. And so we agree to redo the lunch at either one of his favourite restaurants, Trishna or Mahesh, as soon as he’s ready to force the flesh out of crabs. Of course, there’s nothing to beat his wife’s fish curry, he quips, with a broad smile, when I ask whether he misses his mother’s cooking. But then Sinha’s been a bureaucrat and spent a lot of time in the home ministry.

We’re sipping on masala chaas, having got the ordering out of the way, and I learn that my guest enjoys resolving conflicts and disputes and dealing with people; his various assignments over the years have left him with invaluable experience, especially the time when the Naxalite movement was beginning to gain ground in Bihar. Sinha recalls how, as a young officer at 26, he was dealing with tribal issues in Jharkhand and other communally-sensitive areas and also trade unions; he’s “seen from close quarters how extremist movements form and can go out of hand,” which is probably what happened in the Bhagalpur riots that he witnessed.

Life in Delhi must have seemed mundane in contrast with the experiences of his early years I say, but Sinha had his work cut out. To begin with, he had a hard time convincing sceptics in the ministry that UTI needed to be bifurcated instead of being bailed out every now and then. Once he moved to UTI in 2005, he needed to restore the morale of employees and later convince them to switch to market-related pay scales and employment terms, which wasn’t easy. The toughest part was regaining the confidence of investors and stifling rumours that the fund was being sold. But Sinha has made it work. “What I liked most was the mechanics of change management, which can be very complicated and difficult to implement,” says the CEO who holds a master’s degree in physics. The UTI chief, who has rarely missed his morning walk in the last 25 years and does a bit of yoga too, is never stressed; he says the trick is to manage expectations, instill self-belief and create a positive environment in the workplace. And that’s probably why he’s prouder today of his “happening HR department and 100% ESOPs” than the fact that the fund’s assets have grown sixfold to Rs 80,000 crore from Rs 13,000 crore when he took over. If he hasn’t gone completely grey during this trying phase, it’s because he makes time for himself; even as he walks on Marine Drive he’s unwinding to either Shobha Gurtu or Gangubai Hangal and there are the evenings for ghazals.

As we help ourselves to a typical roti-bhaji kind of meal (baingan bharta, heeng jeere aloo, masoor palak dal, boondi raita and tandoori rotis), Sinha unveils his long-term plan for UTI which now has the US-based T Rowe Price as a 26% partner. As he sees it, UTI has already begun leveraging the foreign player’s fund management expertise in terms of separating research from fund management and reorienting fund managers so that they outperform over longer time periods rather than live from quarter to quarter. The bigger gameplan is to grow the fledgling $55 million UTI offshore fund to at least $300-400 million in a year or so and further to over $1 billion by attracting large foreign institutional investors like pension funds. Sinha’s already eyeing revenues from the fees, which he believes could be about one percentage point of the assets managed. Given that most mutual funds in India are backed by banks or large business houses, UTI, he’s clear, needs to develop its own niche and build a brand internationally. Also Indian investors, Sinha points out, will want to soon diversify their portfolios with an exposure to overseas markets and that’s where T Rowe Price would be of help.

I can’t help remarking that right now small investors don’t seem to want to put in money even in their home market. Sinha agrees, saying that it’s the rest of the world’s investors who, through large institutions like a CalPERS, seem to be cashing in on the boom in the Indian market rather than small investors in India who’ve pretty much stayed away. Even in advanced countries, he points out, 80% of mutual fund scheme sales are load sales though regulators do give investors the option of not paying entry loads. “No industry can continue to survive if there’s negative growth and that’s what we’ve been seeing all these months,” he says, adding that players are stressed despite the fact that the markets are on a roll.

Coincidentally, T Rowe Price currently heads the Investment Company Institute, the US equivalent of AMFI and Sinha says he proposes to come up with a mutual fund policy for India. “It would be on the lines of a civil aviation policy—which allows airlines to run as many flights on the Delhi-Mumbai route but also requires them to service the northeast sector—or the telecom policy,” he explains, admitting that something needs to be done. Indeed, he points out that the objectives with which UTI was set up—to mobilise small savings—are not being met. “While UTI has been better off than others because we have a fairly strong branch network in the smaller towns, we also have evidence from McKinsey and BCG to show that sales of mutual funds units in the smaller towns are coming down,” Sinha asserts, adding that UTI is trying to motivate agents by paying some commission. As for sales in the metros, which originate largely from high net worth individuals, UTI’s tapping this pool by using banks as channel partners.

Neither of us wants dessert and prefer some tea and coffee instead. Sinha’s amused when I ask whether it’s true that he’s very particular about the milk in his tea. Sure enough, he measures out two spoons. The UTI chief doesn’t much care for management books, finding them somewhat simplistic and stopped reading fiction many years ago; what he does enjoy is philosophy, history and “anything to do with contemporary developments”. Right now Sinha’s halfway through Niall Ferguson, having thoroughly enjoyed Tony Blair’s biography. If there’s something that he can pick up any time, it’s the Gita. “It’s always by my side.” But Sinha’s real passion is Ghalib; he’s read every version he could lay his hands on and spends hours discussing the poet’s works with his wife and younger son, a lawyer. The CEO, who used to write prose once upon a time and also scripts for plays, recalls his days in the Lal Bahadur Shastri National Academy of Administration at Mussoorie where he was the editor of the house magazine. And he’s looking to get back to writing some day.

Source: http://www.financialexpress.com/news/not-your-boring-fund-manager/693023/0

Index funds race ahead in Sept surge

The markets may be on a roll but most diversified equity mutual funds (MFs) are struggling to catch up with the sudden spurt. Only index-based funds and banking-focused MFs have managed to post decent returns in September. Out of the 300-odd diversified equity funds, only one has managed to beat key indices such as sensex and nifty. But four index-based funds have made it to the top 10 list, giving double-digit returns for the month.

Many small and mid-cap funds — which gave stellar returns during the post-election rally in 2009 — have turned laggards. Many funds from the category are still at the bottom of the performance chart for the 33-month period that saw the markets fall after hitting a peak before staging a recovery. "The (September) rally was sharp and concentrated. Mid-caps (stocks) have undergone a correction," says Gopal Agrawal, head, equities, Mirae Asset Global Investments. "The (relative) out-performance of mid-caps vis-a-vis large caps has come down in the past 3-4 months."

While sensex and nifty gained 11.3% and 11.6% in September, the BSE mid-cap and small-cap indices moved up by 6% and 7.1% respectively. The BSE-100 index have jumped by 9.8%. "It is not a broad-based rally and it's very difficult to beat the indices when money moves into a very few large-cap stocks," says Mahesh Patil, head (equities, domestic assets), Birla Sun Life MF. "The portfolios (of funds) were not positioned for such a fast rally," says Sankaran Naren, CIO, equities, ICICI Prudential MF.

The discount in valuations between mid-caps and nifty has come down from 40-50% to around 15% now, say market observers. "It is on the lower side compared to historical averages," an observer says. Large-cap stocks and funds would do well as long as there is liquidity, say industry officials. The broader market and indices would catch up after a brief pause, they say.

Incidentally, a vast majority of equity funds are yet to retrace the peaks scaled in January 2008. More than 110 out of the 220-odd diversified equity MFs, which have a more than 33-month record, are still in the red. Only 13 funds managed to post double-digit returns during the period, data shows

Source: http://timesofindia.indiatimes.com/business/india-business/Index-funds-race-ahead-in-Sept-surge/articleshow/6687417.cms

MFs must be happy with Sebi for strong profit rise: K N Vaidyanathan

He is seen as the new cop in town . K N Vaidyanathan , the executive director of the Securities and Exchange Board of India in charge of mutual funds and foreign institutional investors has been seen as an influential driver of policy changes in the mutual fund industry. In fact he was very much a part of the industry many years ago having worked with Morgan Stanley. Now on the other side of the table, Vaidyanathan has come to increasingly respect the work done by regulators. He spoke to Reena Zachariah and Shaji Vikraman recently. Excerpts.

For someone who has come from the mutual fund industry, you are seen as the new cop in town. There have been apprehensions in the way in which the changes were driven in the mutual fund industry. A year down the line, have those changes paid off.

The driver for the game changer change was to put it in one word - -the entry load, which reflected two payments--a payment by the manufacturer to the distributor and a payment by the customer to the distributor.The first is commission and the second is advisory fee. Both of which were consolidated and paid by the investor non-transparently and more importantly non-consciously.All we have tried to do is that who ever pays anything should pay it transparently and pay it consciously.So entry load abolishing is just that. We have not abolished asset management companies paying distributors directly. We have not abolished investors paying distributors directly. What we've said is all payments will be transparent and conscious. Thats been the game changer.

The mutual fund industry says that there isnt much left for the industry after the changes mandated by Sebi.

Now the biggest criticism that we are getting is that the changes we made has completely disincentivised the industry and the distributors from selling. I want to kind of factor this into two parts of data. We should not be looking at only outflows, Outflows are a function of market, of investor interest and many other things. So we should look at inflows, Inflows for mutual funds come from existing schemes and from new fund offerings(NFO). If you look at the 10 year period pre-entry loads, the inflow into existing schemes, the best year saw about Rs 6000-6500 crores per month. For the twelve month after entry load was abolished we saw Rs 5000 crores.

So in a ten year period, you've clocked the second best inflow in existing schemes post abolishing entry load. So if entry load was such a big determinant how come that didn't show up in the numbers, So obviously then we are missing something, So what we are missing is the true inflow net inflow for the industry came from something called NFO. Then you analyse NFO, you realise that NFO was a game beyond just entry load, NFO was a game where the fund paid 5-6 % commission, NFO was a game where funds were sold as Rs 10 facevalue, NFO was a game where products were launched to suit the flavour of the month and to suit distributor interest.

None of these three factors are in the long term interest of the fund industry so while a lot of people are barking the problem on entry load, actually the root if you analyse is that we have made NFOs more difficult. So in NFOs for example in 2006-07,you saw Rs 25,000-30,000 crores inflow, Post entry load abolishing that has come down to only Rs 5000 crore. So the real game changer behind the entry load is NFO is becoming more and more difficult for funds to come out and launch them. I think in the long term interest of the industry that is a very good thing.

There has been a tightening on the operational front also for mutual funds. What prompted the changes.

If you look at the mutual funds over a ten year period there were lot of delta X changes, each individual change actually looks very innocuous but if you look at where it started to where it is then you realise there was a big change. So what we have done in the last one year is picked up those things and reset the clock. I will give you an example. The funds used to pay dividend out of unit premium reserve.

Dividend reflects distribution out of profits and gains. Dividend can't be paid out of premium account â€" it is fundamentally flawed in accounting. But if you see the history of it you see that the changes were made to the regulations in delta X format, therefore when it culminated people were paying dividend out of premium reserve, So all that we have done is reset it to where it should belong that dividend can't be paid out of premium reserve. So it looks like a big change and yes it is a big change in operational tightening. We have tried to get tighter in disclosure norms, we have tried to get tighter in risk management areas.

How much have investors gained after the abolishment of entry load?

Since August 2009-August 2010,in thirteen months on existing schemes, the inflow is Rs 63,500 crore,at roughly 2% that translates into about Rs 1300 crores, which was given to investors which is now put productively in the investments. I don't think there are very many schemes in this country where a body of investors have gained Rs 1300 crores by a single regulatory action

At the end of all these regulatory induced changes, how have asset management companies coped with the reforms.

In fact in my view all the sponsors of asset management companies should be extremely happy with SEBI because two things have happened, One profits of AMCs have gone up and two on a risk adjusted basis they have gone up dramatically. Just think about it. In the past the AMC was almost like a quasi-guarantor in liquid-plus funds and I'm sure sponsors had sleepless nights and the 2008 crisis. We have kind of tightened it now.

We have made everything mark-to- market beyond 90 days so it is there in the net asset value. The risk is being borne by the investor, And you have a four-fold increase in profits in absolute terms, In risk-adjusted terms it may be even 40-fold. So I think sponsors of mutual funds should be extremely happy. They are making lot of money that they now a business model which on a risk-adjusted basis delivers very good numbers. So from a regulatory framework all our tightening has been to improve the quality of operations, quality of disclosures, quality of risk management, quality of accounting standards.

How is Sebi planning to address other challenges such as ensuring that the number of investors in mutual fund go up, there is a wide dispersal of investors and that investors are not confused by the array of products sold by AMCs.

In my view going forward will be function of three challenges, The first is we have to figure out a way to simplify products, the industry has far too many products, At an industry level if you look at schemes, plans, options that number is 3000-4000. If you limit it to pure equity schemes that itself is about 400-500. For the size of the industry at the retail level is about 3 lakh crore, It is just far too many products.

What it does is you've transferred the decision making problem from the fund manager to the investor. Our view - again this is coming from having run an asset management company -asset management business is a business of scale, If you look globally either people run large index funds like Vanguard or large diversified funds like Fidelity’s Magellan. There will be one huge product and there could be some niche products around it but the main ballast of the asset management business will be a huge scaled product. We need to go to that.

So the industry's first challenge to me is how do you reduce this number of products into something more meaningful, into something easier to understand because at the end of the day if you see it is retail business and the value proposition has to be simple. I will give you an example the HSBC India fund from offshore investing to India attracts retail money and that fund is over $7 billion a single fund is about Rs 30000 crore plus.

There is not a single equity scheme of any fund house of that size. JP Morgan India fund is huge fund but you don't have so the business is business of scale. Now the value proposition is simple, What are they saying that the country-region is a great growth story. This fund will capture that growth. Now why shouldn't fund managers in India make the same value proposition to the Indian investors that everybody is betting on growth buy this fund to capture India growth.

The second challenge is technology, The current back-bone for investor service quite frankly cannot scale, the industry talks in folios â€" actually you should look at number of investors. In our view the number of unique investors is 75-85 lakhs - thats less then the number of equity investors in the country .If you want this number to grow four fold, is the existing investor servicing infrastructure geared for it?

Is there a better technology available out there that we can embrace, People thought that we were trying to push trading of mutual funds in stock exchanges. Actually what we are pushing is the technology of the secondary market to mutual funds, We want the technology of clearing and settlement and we want the technology of electronic holding(demat). We would be very happy if all institutional distributors go to the electronic platform. It will actually de-risk the system, So we would be very happy with that.

The third challenge is marketing and communication. If you look at the insurance business the private sector insurance business started after mutual funds but they have at least ten times the field force, which is an investment by the manufacturer and half that field force represents tied agents so there is some kind of loyalty to the manufacturer. The mutual fund has built a model around the distributor because it suited the distributor, It never suited the manufacturer. It certainly never suited the investor. So we have to break the egg and make the omelette and say this is not working, so let me look at other avenues. To me if we can address the issue of product consolidation, if we can create a technology robust to scale up investor service and if we can rework the communication and marketing mechanism, the oppurtunity to scale then to add an extra zero to the retail number is not difficult at all. But if you add zero that is 27 lakh more crores of AUM of the retail sector.

India has over 40 AMCS with a relatively small investor base concentrated in ten major cities. Everyone in the industry talks of consolidation but on one is willing to shut shop. Do you see a shake-out ahead.

The number of players in the game, I would leave it to the sponsors to address it. I believe that there is no khazanah which is infinite, Every sponsor is running a business I'm sure in their mind they have their finite tolerance limit on how much they will sustain losses. At a point they will stop. So the number of funds is not something that I need to worry that’s all a business issue. We need to worry about reach and penetration. So in fact one of the reasons why the stock exchange platform is helpful is automatically to enhance the reach. That doesn't mean you have to go to a broker to buy but it means there is a reach in the platform get your IFA to jump onto that platform either directly or through the AMC acting as an intermediary or through an existing broker. Reach is challenge and that can be done using technology and we have the technology in the country today. Product consolidation - people need to have a plan, it will be at least a 2-3 year task for every AMC. there is no short cut.

Given the number of products, will the regulator now be choosy about approving new products.

Under the regulatory framework it's so important that we don't start saying that this product don't do this product do. Yes we have ability to ask people to explain why this new product is required and how is it different from everything else because the regulatory framework is not about saying just a binary yes and no, It is for saying these are rules comply with it. But we have done everything to curb the NFOs. I will tell you what we have started doing we met with a bunch of trustees, I gave them example about there is a fund house with 20 equity schemes. if I cut out the sectoral schemes they still have about 15 equity schemes. If you accept my argument a lot of them were mimicking each other with small differences but the difference in performance was huge so as a trustee they need to worry about is the AMC treating everybody fairly. So I'm saying that these are the things you need to do so that then people will say hey do I need 15 schemes or can I manage this better with 3 schemes. So we are trying to get people to get sensitive to these matters and revisit some of their business model to consolidate. I think we can play a role of a facilitator, of a conscience and of a crusader but we can't play a role of a controller.

There is a feeling that trustees of fund houses have not quite fulfilled their responsibilities. Is Sebi reviewing the role of trustees .

The model we have is a brilliant model, it delinks the people who have to guard the money, which is the trustee from the people who manage the money. The issue comes when you feel that trustees have not exercised enough gravitas and that’s all what we are trying. All we are trying to do is get trustees to recognise that they have a major responsibility here and reach out say it is easy to manage and facilitate that process through a combination of one-one meetings and workshops that we have.

The response from Trustees has been terrific. So we want to retain the model but we want to feel their presence more and we will do everything for that. For example we made them the centre piece of the audit process, we said before we get to see the audit report we want the trustee to see. We want trustees to be the centre piece of investor servicing standards, we want the trustee to be the centre piece of new products. All that we want is wherever anything touches the investor,we want trustees to clear it.We have some terrific trustees, these are men and women who had fantastic first innings, So you just need to nudge them and tell them to throw their weight here.

And I can see that they have started making their presence felt.

How does Sebi plan to de-risk high investments by banks into MFs, which are like flighty deposits.

As far as banks investments into mutual funds is concerned I will leave that to RBI on whether they should or should not and I'm sure RBI through various means have send messages to them because we have seen that the total bank investments in absolute figures have come down by 50-60%. In fact in the last twelve months it has come down by 70%. The second part you raised was how do we de-risk the system. The big risk in liquid plus is, you provided liquidity on the basis on net asset value and that the NAV had no way to reflect reality because it was rarely marked-to market, only a very small component was marked-to market and that was the risk. If I give you assurance to redeem an asset but I'm not able to realise that value or somewhere thereabout, then I'm being so unfair to the remaining investors.

That was the single biggest risk point of liquid plus, we have addressed that by bringing down mark-to market exemptions which earlier used to be under 1 year, now we have made it under 90 days. Up to 90 days you dont need to mark-to-market. We have put in lot more requirements in asset diversification, we have told people that you have to disclose where ever you invest by asset category and the risks attached to each category. So I think from a systemic stand point what we have basically done is put in valuations so that the reflects a far better sense of reality than amortisation.

Sebi has progressively tightened rules for funs houses. How has it worked so far.

This is part of tightening overall regualtory framework regime. The spirit of FII was always that we want broadbase investors and the test of broadbase was that minimum 20 investors and no single investor with more than 49%. Over time what we had observed is that people had come out with various structures, where you maintain this compliance in lip service at the surface and underneath that there is absolutely no compliance and that is not the spirit of the FII framework in this. So that is what we are trying to fix and again in keeping with our philosophy as I said all regulatory tightening is prospective so We gave them time in April till this month end to come up and file the declarations so that what we are trying to do. If you look at the entrire universe of FIIs and sub-accounts 5 in 6 have complied that is 85%. If I look at the universe of active FIIs and sub-accounts 90% plus have complied. Contrary to perception, the reality is there is a 10% piece and of course in that 10% piece people may be in transit that I have send the papers and have not reached that we will look at it.

What happens to that 10%.

I think we have been extremely fair. What we have told them is there is no impact on their registration, there is no impact on their current position. Yes, they can retain it or they can sell down and unwind it so nothing is impacted to what they have done to date. Yes going forward they can't take new positions. we will not entertain, MCV if they have a commom portfolio we will entertain.

A contentious issue for long has been that of issuance of participatory notes (PNs) and the problems in identifying the ultimate investor. With regulatory tightening it is becoming tough for foreign funds to invest through the back door. When will PNs be done away with ?

You can actually connect the dots. What we have done is actually addressed a common problem to PN and FII, the invisible investor that irritated us and we have addressed that in both PN and FIIs. If you recall the orders on barclays and SocGen since then all PN issuers came to our office and they have reworked that entire model they will do KYC for the end investor and that information will be made available to SEBI whenever we ask.

Source: http://economictimes.indiatimes.com/opinion/interviews/MFs-must-be-happy-with-Sebi-for-strong-profit-rise-K-N-Vaidyanathan/articleshow/6686286.cms?curpg=4

Manavendra Prasad: Mutual funds are still the best bet

Though there are more than 3,000 mutual fund schemes, these are well classified across the risk-return spectrum

In an article “Who cares for mutual funds” (Business Standard, September 1), Subir Roy takes what participants in the stock markets call a contra view — an approach contrary to popular belief and understanding to get the best results for the investor.

Let us look at what Mr Roy says while restricting himself to discussing investments in equity-focused schemes.

There are more than 3,000 mutual fund schemes compared to some 500 actively traded shares and, therefore, it is difficult to select the right mutual fund scheme. If one can research mutual fund schemes, it is possible to research stocks too.

The questions are: what is the right tenure of the investment and how does the churn get affected by the performance of the scheme? The performance of the scheme can be affected by a change in fund managers. Choosing stocks of the 20 best-known companies and holding them for a long term are more likely to give handsome returns compared to returns from mutual funds.

This is a crude way of looking at mutual funds, which is arguably the simplest, cheapest and the most regulated way of creating wealth. Let us see why.

Researching mutual funds is a very simple thing: pick up five or six of the most well-known fund houses and you can be confident of robust system and processes with well-defined products with a consistent performance.

Compare this with picking stocks: it involves numerous variables from understanding financial ratios, to the business franchise, to the global macroeconomic environment. It is not possible for a lay investor do so. After all, even equity research analysts specialise in a limited number of adjacent industries.

Though there are more than 3,000 mutual fund schemes, these are well classified across the risk-return spectrum. Choosing two or three different schemes in each category from the well-known fund houses is far simpler than choosing the top 20 companies that will best negotiate vagaries of economic change over the next five to seven years. Unlike stocks, good mutual fund schemes come at no extra cost. On the contrary, they have the wherewithal to keep costs in check.

Organisations with well-established processes, which India’s better-known fund houses can now claim to have, do not let their investment performance suffer because of a change in personnel. Such organisations neither create nor promote rock-star fund managers.

Investing in index funds is a passive way of participating in the market and they are judged by how closely they track the respective index. However, the better performing schemes have for the larger part of the last few years outperformed the market. Therefore, passive investments are yet to become attractive in the domestic markets.

A lay investor should arrive at an asset allocation for her investment portfolio depending on her risk profile and returns requirement. Some model asset allocations suggest a 70 per cent exposure to equity and the rest to debt for an investor in her late twenties or early thirties. The allocation to equities reduces progressively as one grows old.

The investor should review her asset allocation once every quarter and rebalance her portfolio to the model asset allocation. This approach helps book profits and enables higher investments when equity markets are doing badly. This discipline frees one of the decisions of the tenure of investments and insulates one from any mis-selling.

Fortunately, the Indian mutual fund industry has evolved greatly in the last few years and the regulator has pushed it to become more transparent and investor-friendly. This ensures that many investor misgivings are addressed. Though there have been quite a few cases of miss-selling, expected regulations and guidelines for mutual fund advisors will largely address this issue.

Investment is a science, it cannot be done on the basis of one’s perceptions of companies or the economic environment. It needs expert advice and holding directly held securities in ones portfolio is for the high-net-worth individuals who can afford it.

For lay investors, mutual funds are the best vehicle to participate in the capital markets. Mutual funds bring with them the advantages of professional management. They offer high liquidity and reduced costs because of economies of scale and most importantly, reduce risk through adequate diversification. For small investors, a systematic investment plan while sticking to the discipline of reviewing and realigning the asset allocation is the best way to create wealth.

Source: http://www.business-standard.com/india/storypage.php?autono=409893

Companies offer more fixed income options for retail investors

If you are scouting for safe investment options, here's some good news. The universe of fixed income options, which was restricted mainly to bank deposits for quite some time, is set to expand, with better rates on offer as well.

Tight liquidity conditions are prompting more companies to raise public deposits from retail investors. Mutual fund houses, seeing an opportunity in the current regime of rising interest rates, are rolling out a slew of fixed maturity plans (FMPs). And topping this off, financial institutions such as IDFC, REC and Life Insurance Corporation are preparing to make public offers of 10-year ‘infrastructure' bonds which offer tax benefits.

More FD windows

With their expansion plans taking off again, more Indian companies are tapping the fixed deposit market to raise funds from retail investors. Companies from the realty and infrastructure space with high fund requirements such as Jaypee Infratech, Jaiprakash Associates, Ansal Properties and Unitech have been inviting retail deposits at high interest rates that start from 10-10.5 per cent for one year and go up to 11.50-12.50 per cent for a three year term. Large deposit takers such as Tata Motors, HUDCO, Jaiprakash Associates and Sundaram Finance, in fact, saw a doubling of their fixed deposit outstanding (Rs 8,000 crore) in 2009-10, compared to the preceding year.

Mr Anil Chopra, Group CEO for Bajaj Capital, explains: “Fixed deposits help companies manage liquidity and working capital requirements. It is relatively simpler than borrowing from banks and is unsecured. More companies are tapping the fixed deposit route; however, not all are blue-chip companies.”

Traditional deposit-takers such as Fenner India, Wheels India and Sundaram Industries, too, have re-opened deposit windows, offering more moderate rates of 7.5-8 per cent for 1-3 years.

FMPs popular again

Another debt category that is seeing a lot of action is FMPs – closed end debt funds that invest in short term instruments such as commercial paper, bank certificates of deposit and company bonds for fixed terms of 3 months to one year. Mutual funds have mopped up Rs 14,600 crore through 60 such launches since June.

Attractive yields of 7-8 per cent on short term debt, tax efficiency and top-notch credit quality are the reasons why FMPs are proving popular with affluent retail investors who have surpluses to park, says fund managers.

“In the last three months, since June, yields on three-month paper have gone up from about 4.50 per cent to nearly 7 per cent. Yields on one-year paper have gone up from about 6 per cent to 8 per cent. The hike in repo and reverse repo rates and the fact that we have moved from a surplus to a deficit liquidity situation, has attracted investors to FMPs”, says Mr Dhawal Dalal, Senior Vice-President and Head- Fixed Income, DSP BlackRock Mutual Fund.

Mr R. Sivakumar, Head of Fixed Income at Axis Mutual Fund, points out that investors who seek predictability with diversification come to FMPs.

“FMPs offer better post-tax yields than bank deposits. They also allow you to invest in a diversified pool of corporate issuers rather than just one issuer. The other factor is that the kind of companies that have access to the bond or commercial paper markets are very different in credit quality from the ones that borrow in the deposit market; the former are typically rated AAA or P1+”.

Infrastructure bonds

Then, for investors who would like to take advantage of additional tax exemptions (up to Rs 20,000) under section 80CCF of the Income-Tax act, there is the new breed of infrastructure bonds. IDFC has plans to raise over Rs 3,400 crore through its 10-year infrastructure bond issue which opened last week. The bonds offer a coupon rate of 8 per cent with a 10-year lock in period. For investors who would like a ‘buyback' option after five years, the interest rate would be 7.5 per cent.

Source: http://www.thehindubusinessline.com/2010/10/04/stories/2010100451830100.htm

MFs' assets under management up 4% in Sept

The average Assets Under Management (AUM) of the mutual fund industry saw a nearly 4 per cent increase in September due to the rally in the market but redemptions continue to plague the industry, say experts.

The monthly AUM data for September, posted on the Association of Mutual Funds of India's Web site, may have gone up due to an increase in the Net Asset Values and not necessarily because of an increase in investor numbers, they say.

The AUM of the industry for September stood at Rs 7.12 lakh crore, up from Rs 6.87 lakh crore in August.

“Overall, the markets have done really well and that is reflected in the data. The global markets are stabilising and there have been fresh inflows, which will continue to come. The investors are also getting confident.

“However, redemptions still continue to exist and there could be some reason for concern there. But going forward, we are expecting some positive trends in the industry,” said Mr Gopal Agrawal, Deputy C.I.O and Head – Equity, Mirae Asset Global Investments (India) Pvt Ltd.

Liquidity situation

Experts have noted an improvement in the liquidity situation in the markets which has led to better numbers in September.

“The reason for increase in AUM this month has been two-fold. Compared to August, September saw a rise in the money market funds and also an increase in the mark-to-market values in equity funds,” said Mr Akshay Gupta, Chief Executive Officer, Peerless Funds Management Company Ltd.

As far as redemptions are concerned, there will be no respite from it, say analysts. “But these redemptions are now market-led,” said Mr Gupta.

“Valuations in the market are very high. So, those who had invested in 2007-08 and had seen a massive drop of 50-80 per cent in 2008-09, will now want to get out of the market. These redemptions are more of opportunist selling and profit-booking,” he added.

SIP route

While high redemptions and net outflows on the equity side continue to be cause for anxiety, there has been good news from the Systematic Investment Plan (SIP) side.

“The retail participation is seen happening here. At our retail counters, we have experienced high investor interest in the SIP route,” said Mr K. Venkitesh, National Head – Distribution, Geojit Financial Services.

Looking forward, industry experts say that AUMs will continue to increase, albeit in small doses, and that there will not be in any dramatic increase, as was experienced earlier.

The credit off take, all-time high interest rates and high market valuations have ensured that there will be no dramatic increase either in the debt/fixed income or the equity side of the industry, they said.

Source: http://www.thehindubusinessline.com/2010/10/03/stories/2010100352030300.htm

AIG to sell India MF biz

US insurer American International Group Inc., or AIG, is in talks with potential buyers to sell its mutual fund business in India, valuing the unit at 4-5% of the assets it has under management, according to three officials familiar with the development.

Bank of America Merrill-Lynch has been appointed as the investment banker to broker a sale of AIG Global Investment Group Mutual Fund, which has Rs1,019.77 crore of assets under management (AUM), said the three officials.

All three officials declined to be identified. Two of them are with companies that are in the fray to buy the mutual fund.

US insurer American International Group Inc., or AIG, is in talks with potential buyers to sell its mutual fund business in India, valuing the unit at 4-5% of the assets it has under management, according to three officials familiar with the development.

Bank of America Merrill-Lynch has been appointed as the investment banker to broker a sale of AIG Global Investment Group Mutual Fund, which has Rs1,019.77 crore of assets under management (AUM), said the three officials.

All three officials declined to be identified. Two of them are with companies that are in the fray to buy the mutual fund.

Source: http://www.livemint.com/2010/10/03235320/AIG-to-sell-India-MF-biz.html?h=A1

Sebi says no crisis in mutual funds; industry agrees

The market regulator said the mutual fund industry was doing fine and industry representatives agreed. That was the overriding theme at the Business Standard Fund Café, organised here today.

K N Vaidyanathan, executive director of the Securities and Exchange Board of India, who was the chief guest, said the average of assets under management (AUM) reached a record level in 2009-10. Referring to the perception that equity AUMs were doing badly, Vaidyanathan said these actually went up to Rs 177,000 crore in the year from Rs 150,000 crore in 2008-09. Of every four asset management companies, three made profits in the period.

“The regulator’s focus is on investors, nobody else,” he said. Defending Sebi’s decision to ban entry load, Vaidyanathan said distributors were gaining at the expense of investors. The top 10 distributors cornered around 30 per cent of the commissions and they earned profits which were 25 times what the industry as a whole generated in 2008.

On the general criticism about Sebi’s tough measures, he quipped that the man who first said the world is round was beheaded.

Speaking on ‘Mutual Funds: the strategies for survival’, he complimented the industry for “standing like a man” during the slowdown of the 2008 financial crisis. Vaidyanathan said the industry should now concentrate on building trust, scale (“few products, but real big ones”) and infrastructure in terms of reach and distribution. “The cost of investment in the secondary market is less than half basis points, compared to 8 basis points in the mutual fund industry. That’s 16 times more expensive,: he said.

The industry agreed with Sebi’s views that almost all was well and that mutual funds were doing well. Sundeep Sikka, CEO of Reliance Capital Asset Management Company, said: “Direction is important and not speed. Fifteen months is a short period to adjust to regulatory changes.”

Sandeep Dasgupta, CEO, Bharti AXA Investment Managers, felt the industry needed to build sticky assets so that it could serve investors better. “We have to gain investor confidence,” he added.

While there was consensus that the new guidelines would strengthen the industry in the long run, some felt there was a need to take another look at some of these. “The regulator should take a relook at some regulations to see if there is a need for some course correction,” said A Balasubramanian, CEO of Birla Sun Life AMC.

Rajan Mehta, executive director with Benchmark Asset Management Company, said there were ways of reaching out to the masses through the exchange platform and offering low cost services.

Source: http://www.business-standard.com/india/news/sebi-says-no-crisis-in-mutual-funds-industry-agrees/409841/