MFs: SEBI's exit load redefinition raises hopes of more flexible commission regime

Less than a month after UK Sinha took charge as Sebi chief, the capital market regulator has taken the first step to liven up hopes among fund houses, which have been hit by a flight of investors following severe restrictions on broker commission.
In an innocuously-worded circular issued Wednesday, Sebi redefined the use of exit load by mutual funds, which will now have a little more liberty in the way they remunerate distributors. During former Sebi chairman CB Bhave’s tenure, the regulator had banned entry load—the up-front fee MFs charged investors to pay distributors—and restricted the use of exit load—another fee collected from investors who sell out prematurely. The rules were put into effect from August 1, 2009, amid bitter resistance from MFs and distributors.

The new circular gives funds more flexibility in the use of accumulated exit load corpus, known as load balance. Exit loads are normally charged when investors redeem before one year. While this will not make a dramatic impact on MFs, fund officials are hoping this may well be a beginning towards a more flexible commission regime. They, however, feel the entry load system—under which a generous commission structure helped MFs mop up money—will not return in a hurry.

Sebi, in the latest circular, said mutual funds should segregate the load balance into two accounts—one to reflect the balance on July 31, 2009, and the other to reflect accumulation since August 1, 2009. It said funds can use the exit load accumulated after July 31 to pay fees to distributors. The regulator, in an order on June 2009, had placed restrictions on the use of exit load proceeds.

Move to Improve Balance Sheets

We were allowed to use the load amount only for marketing expenses. But now Sebi has given fund houses the flexibility to use it for paying agent commission,” said the chief executive of a mutual fund, requesting anonymity. Sebi has also allowed use of a portion of the load balance till July 31, 2009. The regulator said mutual funds can use up to one-third of the load balance as on July 31, 2009, in any financial year to pay distributors.

“It is clarified that though the unutilised balances can be carried forward, yet in no financial year, the total spending can be more than one-third of the load balances on July 31, 2009,” the circular said. Mutual fund industry officials said the move would improve the balance sheets of asset management companies as they would not need to dip into their pockets to remunerate distributors. The financial impact of the revised rule would not be significant, but the circular has raised expectations of Sinha, who was previously the chief of UTI Mutual Fund, announcing more steps to allow funds remunerate distributors better.

The regulator had drawn flak from the mutual fund industry following the move to ban entry load. After this ban, the industry said distributors were no longer willing to sell equity funds, and blamed the slowdown in sales to this move.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/mfs-sebis-exit-load-redefinition-raises-hopes-of-more-flexible-commission-regime/articleshow/7668386.cms

Reliance gold fund scheme collects 5 bn rupees

Reliance Mutual Fund on Wednesday said it has so far collected 5 billion rupees ($111 million) from 200,000 investors under its gold fund of funds scheme.

"The large participation in the fund reaffirms our belief that gold will emerge as one of the largest asset classes for the Indian MF industry," said Sundeep Sikka , CEO, Reliance Mutual Fund.

The scheme will be open for trading from March 14, the fund house said in a statement.

India imported a record of over 900 tonnes of gold in 2010 as consumers expected a further rally in near-record prices.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/reliance-gold-fund-scheme-collects-5-bn-rupees/articleshow/7662655.cms

SEBI yet to decide on 25 MF licence applications

Mahindra and Mahindra Financial Services, India Infoline and India bulls Financial Services are among the 25 companies waiting for over three years for markets regulator SEBI to clear their applications to start a mutual fund business. There has been no communication to explain the delay, said two people familiar with the impasse.

The business plans of many of these companies are stuck since they can neither scrap the project nor proceed with it since they have invested capital and hired people, the two people said. An internal memo circulating within SEBI talks about the strengths and weaknesses of the various companies that have sought a licence to start an asset management company, but it does not specify if any of the companies should be given a licence, those people said.

An e-mail sent to SEBI executive director KN Vaidyanathan, in charge of mutual funds, seeking reasons for the delay in clearing applications made since 2008 was unanswered. Indiabulls did not respond to an e-mail sent by ET.

Union Bank of India (Feb 2009), Bajaj Finserv (July 09), and Enam Asset Management (Sept 09) are the others waiting for the regulatory nod, according to the SEBI's website. The site says these applications are "under process". Motilal Oswal, Mirae Asset and the state-run IDBI are some of recent entrants in the business.

"We have received SEBI's in-principle approval and are waiting for the final nod. We are very keen on starting our mutual fund business," said Harshad Apte, head of strategy at India Infoline. There is no specific time period for SEBI to grant a mutual fund licence. However, a company has to launch a scheme within six months of SEBI approving its schemes.

Many companies want to enter the mutual funds market to benefit from the rising income of the Indian middle class due to the near 9% economic growth. The mutual funds industry has grown by 9% in the last five years. It now has assets of 6.2 lakh crore under management. The industry has been complaining that fund inflows have dwindled due to the abolition of entry loads, but a Morgan Stanley research found that was not the case. Many funds with small initial capital have been profitable, while the new ones are struggling.

The difficultly in reaching out to investors in the far-flung areas of the vast nation and the downturn in 2008-09 had deterred some applicants from pursuing their plan, the people said. For others, the delay could be because they had faced charges of regulatory violations in the past.

SEBI had fined Indiabulls Securities 15 lakh in 2007 for unfair trade practices in the derivatives segment. Karvy Stock Broking and Indiabulls were accused in the 2006 initial public offering scandals, but Indiabulls was given a clean chit later. Karvy was banned for three months from trading. First Global Financial Services, too, was banned from trading for a year in 2009. India Infoline was penalised 25 lakh.

SEBI is right in restricting "people" it thinks are not eligible, since in mutual funds, people's money is involved, Jagannadham Thunuguntla of SMC Global Securities said. Karvy and First Global could not be reached for comments.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/sebi-yet-to-decide-on-25-mf-licence-applications/articleshow/7659546.cms

Mirae launches India-China Consumption Fund

Mirae Asset Global Investments (India) today announced the launch of Mirae Asset India-China Consumption Fund, an open-ended, equity-oriented scheme.

The scheme, the first-of-its-kind in India, will focus on sectors and companies benefiting from the consumption-led demand that is driving the world's fastest-growing economies, India and China, a press release issued here stated.

The new fund will open on March 9 and close on March 23.

It will pursue a flavour of Indian and Chinese consumer stocks, providing Indian investors with the opportunity to benefit from the long-term structural growth trends in consumption and consumption-led sectors, the release said.

Mirae Asset Global Investments (India)'s CEO, Arindam Ghosh, said, "Domestic consumption is the primary driver of the strong growth seen in India and China in recent years. Going forward, the consumption theme will be the engine of sustainable growth made possible by higher per capita income, disposable surplus and growing urbanisation."

In terms of asset allocation, the fund will seek to invest 65-90 per cent of its assets in Indian equities and equity-related securities of companies that are likely to benefit either directly or indirectly from consumption-led demand.

The fund will also invest 10-35% of its portfolio in Chinese equities and equity-related securities of companies that are likely to benefit either directly or indirectly from consumption-led demand, the release said.

The fund may take up to 25 per cent exposure in money market instruments (including CBLO)/debt securities instruments in India and/or units of debt/liquid schemes of domestic mutual funds.

The scheme will use a customised benchmark index that constitutes MSCI India Consumption Index (65%) and MSCI China Consumption Index (35%). The scheme does not guarantee or secure any returns, the release said.

Mirae Asset Global Investments (India) is a wholly-owned subsidiary of Mirae Asset Global Investments Group.

In less than a decade, Mirae Asset Global Investments has become one of the world's largest investors in emerging market equities, managing total assets of over $54 billion as of February.

Source: http://www.business-standard.com/india/news/mirae-launches-india-china-consumption-fund/128224/on

Bank of India set to buy 51% in Bharti AXA MF

Public sector Bank of India (BoI) is set to re-enter the mutual fund business. It is close to buying a 51 per cent stake in Bharti AXA Investment Managers.

Senior bank officials confirmed this. “We are in an advanced stage of negotiations with Bharti Axa for picking up a majority stake in their asset management company (AMC),” said an official.

Sandeep Dasgupta, chief executive, Bharti Axa Investment Managers, refused comment. The company has been looking for a partner for some time.

BoI sources said talks were continuing on the terms and conditions, especially pricing. “Things have more or less fallen in place. We are just awaiting the final contours of the deal. The deal is likely to be closed by the end of this month,” said the official.

Sources said the talks were prolonged because besides the valuation, the bank was also working on the fresh capital infusion that the company might need after the acquisition.

BoI says it works on a universal banking model and so wants to provide as many financial products under one roof as possible. “The AMC business stands to gain from our branch network,” said the official.

Bharti Axa has been looking to rope in an Indian bank as a partner for some time. In its annual report for 2009-10, the company said it was scouting for a joint venture partner, preferably a bank, to increase its distribution reach.

“In a large country like India, it is not feasible or desirable to rely solely on proprietary distribution infrastructure,” the report said. The company posted a loss of Rs 42.14 crore in 2009-10, down from Rs 45.6 crore in 2008-09.

BoI had started a mutual fund business in 1990. However, it exited in 2004. Of the six schemes launched by the fund, four were redeemed. The other two were sold to Taurus Mutual Fund in 2004 after giving an exit option to investors.

While the valuation is not known, mutual fund industry sources say that given the 60 per cent debt component in Bharti Axa’s portfolio, the value of the deal is likely to be two-three per cent of the assets under management. In December-end, Bharti Axa was managing Rs 412 crore.

In 2009, L&T Finance bought DBS Chola AMC for Rs 45 crore, valuing the company at 1.56 per cent of the assets under management.

Last year, the Daiwa Group bought Shinsei’s mutual fund arm for Rs 48.6 crore, or 11 per cent of the assets under management. However, industry sources said the high valuation was because Daiwa acquired the licence to immediately do business in India.

Explaining the rationale for the deal, the BoI official said, “While the Indian mutual fund industry is facing challenges in terms of inflows and financial health, we look at this as a temporary phase.”

Recently, a number of top executives quit Bharti Axa. They included equity head Prateek Agrawal. Human resources head Debraj Sinha, fixed-income head Sujoy Kumar Das and country head, business development, Vikaas M Sachdeva, have also left the company in recent months.

There are many mutual funds either fully or partly owned by banks, along with foreign partners. These are Baroda Pioneer Mutual Fund, Canara Robeco Mutual Fund, ICICI Prudential Mutual Fund, Principal Mutual Fund and SBI Mutual Fund, Axis Mutual Fund and IDBI Mutual Fund.

Another public sector lender, Union Bank of India. has floated an asset management company in partnership with the KBC Group of Belgium.

Source: http://www.business-standard.com/india/news/bankindia-set-to-buy-51-in-bharti-axa-mf/427389/

Kotak Mahindra Mutual Fund launches 'Kotak Gold Fund'

Kotak Mahindra Asset Management Company on 25th February, 2011 announced the launch of its latest fund-of-fund named 'Kotak Gold Fund'. It is an open ended fund of fund scheme which will enable investors to take exposure to gold without having a demat account. In addition to this, scheme offers investors the option to invest as little as Rs 1000 per month through the SIP route.

The Kotak Gold Fund will be open for subscription from March 4 to March 18, 2011 and its performance will be benchmarked against the prices of physical gold.

Speaking about the need for this product, Mr. Sandesh Kirkire chief Executive Officer, Kotak Mahindra Asset Management Company said, "We see a lot of potential with Kotak Gold Fund primarily because of two significant factors. One by providing a platform to investors to invest in gold without a demat account and also create a discipline by systematically investing in Gold as an asset class." Mr Kirkire also elaborated, ' In recent times, gold has shown a low correlation with other asset classes while at the same time its returns potential has been similar to equity assets performance. As a result allocation into gold improves portfolio diversification and can minimize the downside risk of the portfolio.'

Source: http://articles.economictimes.indiatimes.com/2011-03-07/news/28666066_1_money-market-liquid-schemes-asset-classes

Comeback for FMPs indicative yields?

Fixed Maturity Plans (FMPs) which are attracting huge inflows in the last few months, might once again be able to declare indicative yields (returns),at least in a range, if market regulator Securities and Exchange Board of India (Sebi) gives the go ahead. Mutual Fund industry body, Association of Mutual Funds in India (Amfi) plans to take up the matter with new Sebi chief, UK Sinha.

In 2009, Sebi had instructed all fund houses to stop declaring indicative yields on FMPs and had made it compulsory for these schemes to be listed on the stock exchanges. Industry players feel that, Sebi should allow them to declare indicative yields as many fund houses are anyways informally declaring yields to their distributors.

FMPs are passively managed income schemes, which invest in corporate and government debt papers, thereby earning interest, which is then given back to investors on its closure. They are so called because they have a fixed tenure ranging from three months to three years and are close-ended in nature. A senior official from the leading fund house on condition of anonymity said, “there are many investors who won’t invest until one tells them about its return giving. So now there are many distributors who are secretly telling yields and selling the products.”

According to some market participants, Amfi is taking up the issue when they meet the new Sebi chief for the first time. “We hope Sebi might look in the matter; it is very difficult to convince a retail investor without giving them yields. We are just asking regulator to allow us to indicate yields in some range, which will be useful for us in selling the product.”

However Amfi official declined to comment on the issue. In the month of January alone over 12,700 crore were raised from 48 FMPs

Dhirendra Kumar, CEO of Value Research says, “For the regulator, giving indicating yields (for FMPs) hints at protection of capital, which is actually not the case with FMPs (afterall, there could be default on bond repayments). Also post 2008 crises, with industry facing severe liquidity crises, regulator has taken several steps to prevent an encore.”

Source: http://www.financialexpress.com/news/comeback-for-fmps-indicative-yields/759126/0

Why not to compare SIP and lump sum returns

A question that is frequently asked by Mint Money readers is whether a lump sum investment in an equity mutual fund (MF) or a staggered outlay through a systematic investment plan (SIP) will fetch a better return.

Consider this: If Rs5,000 was invested every month through an SIP in HDFC Equity Fund (HEF) since 1 January 2008, when equity markets were skyrocketing before it tanked, you would have got a return of 39.2% by end-2010. However, if you had invested the entire Rs1.80 lakh as a lump sum, you would have earned just 11%. A similar SIP, however, started on 15 March 2009 when markets started to rise, would have yielded 43% till date compared with 69% if you had invested the entire amount as a lump sum. We compared SIP and lump sum returns for a couple of large-cap-oriented equity funds, HEF and Templeton India Growth Fund, and a mid-cap-oriented fund, IDFC Premier Equity Fund, over the past five years and the difference in returns were negligible.

Getting down to basics

An SIP is a mechanism of investing in equity funds in a periodic manner, either every month or quarter. Many fund houses also offer daily SIPs. In a typical SIP, you choose an amount that you want to invest periodically. Once the amount is chosen, it remains constant irrespective of whether markets go up or down. Say, you choose to invest Rs5,000. In the first month when the net asset value (NAV) was Rs10, you would get 500 units (Rs5,000/ Rs10). In the next month if the NAV goes up to Rs12, then you would get 416.67 units but if the NAV goes down to Rs8, you would get 625 units. There are flexible SIPs too—a new entrant in the Indian MF industry which has gained popularity since last year—whereby instalments can be changed depending on the market levels. So when the markets drop, the instalment amount automatically goes up (that also leads you to buy more units). A lump sum investment, however, entails that the entire amount is invested up front.

More units

There are two reasons for the deviation of performances, especially in the short run, between SIPs and lump sum. Firstly, market direction determines how much money you make. An SIP in choppy markets would accumulate more units when markets drop and less units when markets rise. For instance, if you had invested Rs5,000 every month through an SIP in HEF starting 1 January 2008 and stayed invested till 31 December 2008, you would have accumulated 1,036 units for a total investment of Rs1.80 lakh. However, if you would had invested the same amount as a lump sum on 1 January 2008, you would have got only 818 units. “An SIP is devised in such a way that you don’t time the market; it does the work for you irrespective of where the market levels are”, says Anil Rego, chief executive officer, Right Horizons, a Bangalore-based financial planning firm.

For the same reason, the “number of units” phenomenon works against an SIP in rising markets. If you had put Rs5,000 every month through an SIP in HEF starting 15 March 2009 and held the investment till date, you would have earned a return of 20% against 50% through a lump-sum investment, assuming you invested the entire corpus on 15 March. Reason: The SIP investment would have got you 529 units against 949 units in the lump sum investment.

The other reason behind the difference in performance is the tenor. If you opt for an SIP for a year or so, SIPs would typically underperform lump-sum performance. An SIP of Rs5,000 made in Birla Sun Life Frontline Equity fund would have made a loss of 1.6% against a return of 8.4% through lump sum investment. Says Akshay Gupta, managing director, Peerless Funds Management Co. Ltd: “The best way to make SIP work is to opt for long-term monthly SIP and allow it to grow for a period of 10-15 years.”

What you should do

Look at your cash flows and tenor. “If I have a monthly income, SIP makes more sense. This also means I wouldn’t have the entire lump-sum money at my disposal right at the start; hence it doesn’t work in this case”, says Amit Trivedi, CEO, Karmayog Knowledge Academy, a Mumbai-based MF training institute.

But SIP has bigger benefits. You don’t have to think about timing the market. When markets reached their peak in January 2008, financial planners say many investors invested lump sum only to panic later and withdrew when markets started to fall. If, on the other hand, you had started off with your SIP during that time, you would have benefited despite markets falling 52.5% in 2008 and then rising 114% between March 2009 and December 2009. An SIP of Rs5,000 in Templeton India Growth fund from 1 January 2008 till 31 December 2010 would have yielded 31.8%. If, on the other hand, you had invested the entire amount (Rs1.80 lakh) as lump sum, it would have returned only 7.8%. “SIPs not only give you better returns but also allow you to take advantage of volatility which is a inherent risk in equities”, says Kapil Mokashi, assistant manager-equity advisory, Sharekhan Ltd.

Rego claims that most investors invest lump sum at higher market levels. “An SIP does the opposite. It buys more units when markets are down and lesser units when markets are at a high.”

Tip: Remember to continue SIP in volatile markets, even if markets drop. Mokashi says that people go wrong in SIPs (they stop their SIPs in turbulent markets) because they do not understand the concept. Rego adds: “Increasing tenor of SIP helps as it negates volatility. The probability of making a loss in, say, a 10-year SIP is half of what it is if you do a lump sum investment.”

Does that mean lump sum doesn’t work? “It works”, says Mokashi, “but only if you have a long-term horizon and would look at returns after five years”. The choice is yours.

Source: http://www.livemint.com/2011/03/06195218/Why-not-to-compare-SIP-and-lum.html?h=A2