AMFI wants direct line with independent financial advisors

The Association of Mutual Funds in India (AMFI) has expressed its desire to open a proper communication channel with independent financial advisors.

The AMFI has asked independent financial advisors (IFA) to form a body of their own that can regularly interact with AMFI to air their grievances to address distribution-related concerns of fund houses.

“Distribution is a grey area for us,” said Mr H.N. Sinor, Chief Executive, AMFI, at CII's annual mutual fund summit on Wednesday. “We do not have any kind of structured interaction with banks or the IFA community.”

“Persistency is another challenge that the industry faces today,” said Mr Milind Barve, Chairman, AMFI, at the summit.

On the issues plaguing the mutual fund industry, Mr Barve said that what the industry needed foremost was an image change.

“A lot of things are being said about the industry today, but hardly any good word. There is hardly any notice of the positive contribution done by the fund houses,” said Mr Barve.

He clarified that fund houses had not built their institutional business at the cost of their retail business and hence the grouse was not valid.

The AMFI had decided that each fund house will conduct five investor awareness programmes every month, and 2,000 such events will be held in a year.

In 2010-11, 26 AMCs conducted 5,817 investor awareness programmes covering 280 cities and 3,40,383 participants. This fiscal, 19 AMCs have covered 115 cities, conducted 1,123 investor awareness programmes reaching 30,589 participants.

The AMFI is planning to launch a media campaign as a means of reaching the investor. “A film on investor awareness made on a budget of Rs 8 crore will start airing on television screens by mid-July,” said Mr Sinor.

Based on the response to the campaign, another educational series for investors will be launched.

The AMFI also plans to come out with voluntary guidelines for investor protection though it was too early to talk about it, said Mr Sinor.

Mr Barve said that too much dependence on regulation and ‘obsession' with SEBI was a concern.

“There are many things that we need to do ourselves. We need to see what we can do without regulatory intervention.”

Source: http://www.thehindubusinessline.com/markets/stock-markets/article2126413.ece

Top 5 fund houses increase their share in folio accounts

The top five mutual fund houses in the country saw their folio share increase by 6 per cent from 52 to 58 per cent in FY '11 despite the industry witnessing a decline in the number of folio accounts.

Only HDFC and ICICI Prudential saw an increase in folios.

However, despite a drop in folio accounts, fund houses such as UTI, Reliance MF and Birla Sunlife saw their share increase in the MF industry. UTI, with its strong retail presence, saw its folio share increase from 19.7 to 21 per cent. Reliance holds the second largest share at 15.8 per cent. It was 14.7 per cent at the end of FY '10. HDFC saw its share go from 7.7 to 9.9 per cent, ICICI Prudential from 5.4 to 5.9 per cent and Birla Sun Life from 4.8 to 5.1 per cent.

Consolidation is the way forward for the mutual fund industry as is obvious from the fact that the top five fund houses now account for a larger share of the folio numbers, say fund experts.

“Products are today sold on the basis of merit. For an investor the brand name and trust are more important than earlier. However, having said that, some smaller fund houses despite good performance lose out on investors because of lack of adequate advertising,” said Mr Rakesh Goyal, Senior Vice-President, Bonanza Portfolio.

Of the top five, only two fund houses saw an increase in their folio numbers. HDFC saw a 20 per cent increase, while ICICI Prudential saw an increase of 2.5 per cent. Fund analysts attribute this to the robust in-house distribution system of these fund houses, which is in the form of their own banks.

“Several individual distributors and other multi-national banks that were into mutual fund distribution have closed shops due to lowered investor response. This has impacted the sales of the smaller fund houses which do not have a strong distribution network,” said the head of a distribution firm.

The mutual fund industry lost close to 36 lakh folios in FY ‘11. The number of folios in the industry stood at 4.69 crore at the end of FY '11 as against 5.05 crore in FY10.

Folio numbers were not expected to rise anytime soon, say fund analysts, unless distributors are compensated well. “Margins are low and salary costs of distributors are high and continue to increase every year due to inflation. Most distributors are, therefore, shifting to other products,” said a mutual fund official.

Source: http://www.thehindubusinessline.com/markets/stock-markets/article2123954.ece

Fixed income ETFs may soon be available in India

Exchange-traded funds (ETFs) on fixed income, which manage $200 billion globally, may soon be available here, if the market regulator has its way. The Securities and Exchange Board of India (Sebi) wants fund houses to attract the untapped mass of risk-averse small investors through these low-risk and low-cost products.

At a conference on ETFs last week, K N Vaidyanathan, executive director, Sebi, said, “We need to think about how to bring this vast majority of savers to get a little more productive in their investments. Initially, may be through the debt route or the liquid investment route. Why does the realm of ETFs stick to equities or gold? Why haven’t we thought of ETFs, say, around a liquid fund, which will make the concept very easy for anybody to relate to as a sweet product?”

Indians are among the most avid savers in the world, saving nearly one-third of their income every year. However, most of this saving is held in bank fixed deposits and other fixed income products. Even after 15 years of existence, mutual funds have not been able to increase their penetration beyond the big cities. Less than two per cent of the population invest in mutual funds, which have been focusing largely on selling high-risk equity products to small investors.

According to Vaidyanathan, the adage that ‘equities are for retail, debt is for institutions’ does not make sense.

“The highest risk product is for retail. The lowest risk product is for institutional investors. Somewhere, we got that mix wrong,” he said. “Do you want to make 50 basis points on a Rs 10,000-crore corpus or two per cent on a Rs 100-crore corpus?” he asked.

Fixed income ETFs have become a rage in West, especially after the collapse of Lehman Brothers in 2008, as investors put safety of capital before returns. However, in India, the concept is in its infancy. Fundhouses like Benchmark and Motilal Oswal AMC are looking at ways to break ground in this untapped segment in India.

“We are evaluating it,” said Nitin Rakesh, CEO, Motilal Oswal Asset Management, which is positioning itself as a ETF fund house. “Globally, fixed income ETFs are the fastest growing after the 2008 crisis. There are ETFs on money market, corporate bonds, etc. It’s a $200-billion market now,” he added.

According to him, several simple issues need to be figured out. Fund houses are looking for regulatory guidance on how ETFs would function, as there are no tradeable fixed income indices in India. If the fund is going to actively manage underlying securities in the absence of an index, then it may lose out on the transparency which is an USP of ETFs. Most Indian ETFs have a fixed basket of securities which they trade on, like the equity indices or gold.

Benchmark AMC, India’s largest AMC focusing on ETFs, has already filed offer documents for a Gilt ETF that will have 10-year government securities as underlying. It is waiting for clearances from Sebi. When asked if the public statement means the product will be cleared soon, Sanjiv Shah of Benchmark said, “I hope so.” But he was not very sure if ETFs can bring in huge number of retail investors. “Retail participation has traditionally been through bank deposits,” Shah said.

Source: http://www.business-standard.com/india/news/fixed-income-etfs-may-soon-be-available-in-india/439982/

COLUMN - Cracking the Direct Tax Code

(Rajan Ghotgalkar is Managing Director of Principal Pnb Asset Management Company. The views expressed in this column are his own and do not represent those of Reuters)

The new Direct Tax Code certainly lives up to its promise of being completely renovated. Although, I am not sure it has got any simpler for the ordinary tax payer.

Even the changes in personal tax seem to be a zero sum game with what has been given by one hand being taken away by the other. The savings from changes in tax rates and slabs are no where near the depreciation in our real incomes as a result of the unrelentingly high consumer inflation.

Anyway, Indians cannot whine too much considering our tax rates is now possibly as good as they can get when compared with other countries.

Eventually like the proof of every pudding is in its eating, the effectiveness of this Code will eventually test the regime’s political will to implement it in a manner keeping with its noble intentions.

Varied interpretations are already being gleefully bandied indicating there is enough scope for litigation. I for one have little doubt in my mind that, I am going to need a lot of help from my friends in the accounting profession to fully appreciate its impact.

Looking back through the discussion papers, I suspect that, the earlier harsh provisions may have been a mere bargaining ploy and the sighs of relief all round seem to indicate the tactic has indeed worked well.

Honestly, knowing our penchant for populism I had all along doubted our ability to push through so drastic a change especially when it would go against the high and mighty.

Only time will tell if the promise of stability in tax laws is actually delivered.

Anyway for now, the Code has caused a lot of instability in my small dwindling world of mutual funds. This even after the long term capital gains on equity oriented mutual fund units retained their tax free status.

As a start, the Equity Linked Savings Schemes (ELSS) and Unit Linked Insurance Plans (ULIPs) too, have lost their special status as tax benefit vehicles.

However, the EEE status has been retained for all long term savings schemes used to accumulate for retirement monies like provident and super annuation funds along with the New Pension scheme will be deductible up to Rs 1 lac (not Rs 3 lacs as mentioned earlier). More on personal taxation later.

Thankfully, the income earned by a mutual fund retains its exemption in keeping with it being classified as a pass through investment vehicle.

The Securities Transaction Tax (STT) will continue to be applicable at existing rates considering the Code does not otherwise provide specific rates. STT continues to be payable by a mutual fund when it sells its units and buys/sells equity shares.

It seems we have lost the opportunity to save mutual funds from this double taxation especially when the STT on the sale of units cannot be passed to the corpus.

The impact of the Code on mutual funds is best understood when looked at separately for equity oriented mutual funds (wherein at least 65% of the corpus is deployed in equity) and all other type of mutual funds, including liquid and debt schemes.

Dividend Distribution Tax (DDT) will now be payable @ 5%, on income distributed by equity oriented mutual fund schemes. This tax will also be levied on ULIPs. However, the income distributed thereafter will continue to remain tax free in the hands of the unit holders.

On the other hand, the DDT which is currently payable on income distributed by other mutual fund schemes will not be levied under the Code. This means the tax arbitrage on account of differential DDT applicable to Liquid and Debt schemes; and between individuals and non-individuals has been eliminated.

The bad news is that, income distributed by non-equity oriented mutual fund schemes like, liquid, debt and hybrid schemes like MIPs will now be subjected to tax in the hands of the unit holders at the rate applicable to them (based on the slab applicable as per their total income).

Mutual Funds will now have to deduct tax at source (TDS) but only when the ‘total amount of income paid to an unit holder exceeds Rs. 10,000 in that, financial year (the Code has given up the term previous year for financial year i.e. 12 months beginning 1st April).

This TDS will be deducted @ 10% for individuals and HUF; and at @ 20% for others which includes Non residents.

I seem to however, have completely missed the point in making this change. After all how significant could the 5% DDT be to the exchequer, unless of course it is only to open the door for a gradual escalation of this rate in the coming years.

Also the continuation of DDT on debt schemes, albeit unified across liquid and debt categories would have saved mutual funds from this increased administrative burden resulting from the TDS regime.

These funds usually are highly transaction oriented with money moved in and out by investors to maximise their return on short term funds. Mutual funds may now have to retain TDS records for providing year end certificates, etc.

There is also a change in the way Capital Gains will be taxed on equity and units of equity oriented mutual funds.

These assets held for 12 months or more will not be taxed. However, the Code makes a subtle but what time could prove to be a significant change. Instead of the earlier ‘exemption’ these gains remain tax free as a result of a 100% ‘deduction’ from these capital gains.

I wonder if the need for recasting an ‘exemption’ as a ‘deduction’ is only to retain the flexibility to gradually bring it down so that, such gains will eventually get taxed as intended in the original version of the Code.

Similarly, other capital gains (short term) in equity and units of equity mutual funds would get a deduction of 50%. The rest is taxed at the rate applicable to the investor. Therefore the maximum effective tax rate stays at 15% although smaller investors will benefit.

In the case of ‘non-equity funds’ those held over 12 months, will be eligible for indexation benefits but on a base of April 2000. The gains post indexation will be taxed at the rates applicable to the investor. There may therefore, still be an opportunity for ‘double indexation’ benefits.

This means the gains could be taxed at 30% instead of the earlier 20%. The 10% rate applicable when indexation benefit was not availed of has been withdrawn. This change could again benefit the smaller investors.

Short term gains in this category will continue to get taxed at the rates applicable to investors based on their total taxable income.

It needs to be noted that, the period of 12 months will begin from the end of the financial year during which the relevant asset was purchased.

The Code seems to be greatly preoccupied with expanding its net to meet the challenges posed by non residents, cross border transactions, transfer pricing and foreign control over companies. The impact of these investments will have to be seen.

However, the Code does not seem to have done much to expand the domestic tax base. Like in the past, it continues to try and squeeze more juice out of the same old orange being the employed class which is already reeling from ruthless depletion of its real income.

One would have liked to see liberal inflation linked deductions on expenses incurred directly for employment. I would have liked to see this Code eventually bell the agriculture income cat.

After all, if corporates can be subjected to the MAT and there could be suggestions to tax income from house property on an irrational presumptive basis why then do our lawmakers studiously and consistently skip any discussion on taxing say the incomes from land holdings over say 2 hectares which is estimated to be about 20% of rich farming community.

It seems the Code has been a tremendous opportunity foregone.

Source: http://in.reuters.com/article/2010/09/18/idINIndia-51589720100918

Gilt Edge

The 25 basis points increase in the policy rate by the Reserve Bank of India on June 16, which was the 10th hike since March last year, has sent a signal that the interest rate cycle has more or less peaked and is expected to taper off as headline inflation starts trending down. Investors who have taken the debt route will have to look for instruments that yield more than bank or corporate fixed deposits.

Analysts say that with equity markets showing range-bound movement, gilt funds of mutual funds that predominantly invest in government bonds (G-secs) can be a better bet. While debt funds invest in various corporate and government debt paper, gilt funds invest in government securities, which tend to rise when interest rates fall and vice-versa. G-secs’ maturity varies as the government issues paper of various tenor and can be short, medium and long term. The credit risk is next to nil as the government has zero risk of defaulting, but the interest rate risk rises as the market price of debt security varies with fluctuating interest rates.

Sanjiv Mehta, founder of financedoctor.in, a wealth management firm, and author of Winning the Wealth Game says a long-term gilt fund is useful for capital gains in a declining interest rate environment. “Gilt funds are a very important part of asset allocation with their inverse correlation to stocks and they could contribute significantly to the yield enhancement of a portfolio,” he says.

During the global financial crisis, when the central bank reduced the policy rate by 275 basis points between December 8, 2008, and April 21, 2009, to infuse liquidity in the banking system, prices of long-term bonds and G-secs appreciated and funds that were invested in such securities benefited. Funds houses also promote gilt funds by emphasising their risk-free returns, but they cannot give any assured returns because of the interest rate risks.

Analysts say G-secs with higher maturity are more sensitive to interest rates and investors have to look for the tenor in which the fund house is investing their money. Gilt funds are not as liquid as other funds as G-secs are not actively traded, and if there is a sudden redemption pressure, fund houses will have no other means but resort to distress sale. Analysts also say that investors must avoid those gilt funds that have a small corpus, as they will not be able to perform well in case of sudden volatility in interest rates.

Performance of both medium- and long-term gilt funds shows that on an annualised basis, they gave a return of around 4.5% last year and 7% in the last three years. This indicates that the funds have been be able to give similar returns that other fixed-income instruments like bank deposits yielded. “Retail investors must look at gilt funds with a trading perspective of more than two years and their inverse correlation to stocks could contribute significantly to the yield enhancement of an investor’s portfolio,” says Sanjiv Mehta of financedoctor.com.

Ashish Kapur, chief executive officer of Investshoppe.com, a Delhi-based wealth management company, says gilt funds suit conservative investors with a long-term perspective. “Gilt funds become a good investment option when inflation is near its peak and the Reserve Bank of India is not likely to raise interest rates in the immediate future. Since interest rates are likely to peak out in the near future, it is a good time to consider investing in gilt funds now with a horizon of staying in the find of at least two years,” he says.

Investors also have to consider certain global economic factors that could suddenly spike the interest rate in the domestic market. For example, any further quantitative easing in the US can increase the price of oil and other industrial commodities. This will push up inflation even in India as we import a large quantity of crude.

Interestingly, the ministry of labour has included gilt mutual funds in the permitted asset allocation for exempted provident funds and it provides provident fund trustees an opportunity to construct an interest rate hedge in their portfolios. The central bank also provides liquidity support and other facilities such as access to the call money market to dedicated gilt funds. These facilities encourage gilt funds to create a wider investor base for government securities market.

Analysts say the central bank’s next monetary policy will give a clear direction on the movement of gilt funds and economic data like index of industrial production, core sector data, export numbers and credit growth trend will determine the movement of interest rate. However, analysts say the interest rate cycle has more or less peaked and being invested in gilt funds will be a wise call.

Source: http://www.indianexpress.com/news/gilt-edge/806338/0