Savings rate wall has fallen-- Yes Bank offers more, giants who feasted wait

The last frontier of interest rate regulation crumbled today when banks were granted the freedom to fix the savings bank rate.

The savings bank rate —currently capped at 4 per cent — has been the only rate in the retail banking industry that the RBI has set since October 1997 when bank deposit rates were fully deregulated.

The rate revolution was announced even as the RBI raised its benchmark interest rate — the repo — by 25 basis points to 8.5 per cent.

Reserve Bank governor Duvvuri Subbarao also signalled the 13th rate increase since March 2010, which was widely anticipated, could be the last in the current rate cycle even as he trimmed the growth forecast for the Indian economy to 7.6 per cent from 8 per cent earlier.

But the big buzz of the day was the speculation over the possible reconfiguration of the banking landscape that the saving bank rate deregulation could bring about.

While deregulating the interest rate, the RBI stipulated that each bank would have to offer a uniform rate of interest on savings bank deposits up to Rs 1 lakh. They could offer a higher rate if the average cash balances in these accounts stay above Rs 1 lakh.

“If there’s any rate war, it will be to attract depositors who park more than Rs 1 lakh in their savings bank account,” said Amitabha Guha, non-executive chairman of South Indian Bank. “High net worth individuals on an average keep Rs 5 lakh to Rs 10 lakh in their savings bank accounts. All banks will now vie for this pool of depositors.”

Privately-owned Yes Bank grabbed the opportunity to ignite a rate war by offering 6 per cent interest in an effort to wean away accounts from established players like the SBI and HDFC Bank that have built up vast troves of cheap cash that reside in savings bank accounts.

“This path-breaking regulation will enhance and protect savings returns from the brunt of persistent inflation,” said Rana Kapoor, founder and managing director of Yes Bank. “The alignment of savings rate to the market rates will accelerate greater financial inclusion of the unbanked and under-banked population.”

Savings bank accounts have been one of the cheapest source of cash for the big boys of banking. The big players have over 25 per cent of their total deposits in the form of cash balances in savings accounts. Yes Bank – the latest rate warrior – has only about 2 per cent of its deposits in the form of cash balances in savings bank accounts.

Until the savings bank rate was revised to 4 per cent in May, banks forked out just 3.5 per cent on savings bank accounts — a rate that remained unchanged for eight years since March 2003.

The decision to deregulate the savings bank rate — an idea that was floated early this year in a discussion paper floated by the banking regulator – creates a situation where the humble savings bank account can give liquid mutual funds a run for their money at a time when the stock market returns have tumbled by over 15 per cent from year-ago levels.

Yes Bank’s sudden move appeared to fly in the face of several banking mavens who have been suggesting for some time that the deregulation of the savings bank rate won’t have a great impact on the industry.

They didn’t seem to have changed their views after Yes Bank’s rapier thrust.

“We are not in a hurry to raise the savings bank rate from the current level of 4 per cent,” said SBI chairman, Pratip Chaudhuri. “We will see how it (deregulation) plays out. Unless there are other competing pressures, the savings bank rate at SBI will continue at 4 per cent.”

Chanda Kochhar, managing director and CEO of ICICI Bank, said: “Some banks will rejig their rates. But we would prefer to watch its implications on customer behaviour before taking our next step.”

However, Aditya Puri, managing director of HDFC Bank, seems to have subtly revised his stand after the announcement. Recently, he had said the savings bank rate could even dip from the current level of 4 per cent after deregulation.

On Tuesday, Puri came up with a cryptic comment: “If there is a one per cent increase in the savings bank rate, banks’ margins could take a maximum hit of 0.25 percentage point.”

But not everyone seemed to agree with the top bankers in the country. “I expect the savings rate to rise to 6 per cent going forward,” said R.K. Bansal, executive director of IDBI Bank.

B.A. Prabhakar, executive director of Bank of India, said the rate would go up to 4.75 to 5.52 per cent and stabilise around those levels after a while.

Much will depend on whether the rate war sparks a churn in savings bank deposits.

At the end of March, total savings deposits in the banking system stood at Rs 13,77,288 crore, or 26.5 per cent of total deposits. The household sector, which parks 13 per cent of its financial assets in savings bank accounts, is the largest contributor to the cheap source of funds for banks in the country.

Given the current rate (4 per cent calculated on a daily balance basis) prescribed by RBI, banks pay roughly Rs 48,000 crore a year as interest on savings bank deposits. In contrast, a one-year bank fixed deposit earns about 7 per cent interest.

Other bankers saw a flip side to the overture from the would-be rate warriors. They expected banks to offset some of the losses by asking customers to pay higher charges for banking facilities such as cheque books and money transfers. ATM withdrawals above a certain number of transactions could also invite charges.

“Service charges will go up as the cost of fund increases,” said Romesh Sobti, managing director and CEO of IndusInd Bank.

Source: http://telegraphindia.com/1111026/jsp/frontpage/story_14669880.jsp

Mutual Funds give Systematic Investment Plans the flexible edge to retain clients.

Systematic investment plans (SIPs), the cash cow for mutual fund companies, are witnessing a slew of features being added that provide flexibility to investors to time the market that prevents them from stopping subscriptions during bearish phases.

Edelweiss Mutual, ICICI Prudential MF, HDFC MF, Reliance Mutual and DSP Blackrock are others that have come out with flexible investment options in SIPs where they could choose various index levels at which their funds could be invested.

SIPs are mutual fund investment schemes where an investor contributes a regular sum of money every month like a recurring deposit of a bank. Since some investors stop adding to the corpus during times of downturn, asset management companies are evolving structures to keep investor interest alive.

Apart from trigger-based SIPs, DSP Blackrock, Axis Mutual Fund and ICICI Prudential have introduced 'SIP-by-debit card' facility which allow investors to pay online. DSP Blackrock MF has a 'Target value savings account', which allows investors to shift an equity fund investment into a relatively safer debt fund upon reaching a targeted value (or targeted portfolio return) in equity fund. ICICI Pru Mutual's Target Return Funds also work on a similar 'invest-redeem-invest' principle.

"Such options are encouraging people to invest more in equity funds,'' said Srikanth Meenakshi, director of Wealth India Financial Services. "Innovative features make fund investments more convenient, flexible and efficient."

Edelweiss Mutual Fund plans to launch its 'prepaid SIP' which will allow investors to time the market. Investors using this option will be initially required to invest from 25,000 to 2.5 lakh into Edelweiss MF's Absolute Return Fund, a balanced fund with a minimum equity exposure of 65%. The investor then chooses index triggers, say 1/2/3% correction in Nifty at which his funds could be invested.

Every time the index hits a pre-decided trigger level, 10% of the money invested in absolute return fund is released into select pure equity mutual funds.

Source: http://articles.economictimes.indiatimes.com/2011-10-22/news/30309872_1_systematic-investment-plans-equity-fund-edelweiss-mutual-fund

MFs curb pace of equity folio loss

Equity investors’ base shrinks only by 600,000 in Apr-Sept, compared to 1.7 million last year.

Retail investors accessing equities through mutual funds (MFs) have chosen to stay invested at a time when markets are showing no signs of upward movement.This has brought some relief to fund managers, who had lost 1.7 million investors last year.

Indian benchmark indices have seen an erosion of 15 per cent of value during the April-September period.

MF players have successfully applied firm brakes on the pace of losing their equity investor base. In the first half of the current financial year, the number of equity folios (including equity-linked-savings-schemes) have shrunk by less than 600,000. Fund managers see this as a commendable achievement, when seen against 1.7 million folio closures in the same period last year.

Rising investments through the systematic investment plan (SIP) route, which a Sebi official puts at Rs 1,300 crore every month, or a rise of 40 per cent; weak market scenario; and considerable increase in net inflows in equities; have all helped the industry bring the folio closures down.

Last year, during April-September, the industry had lost equity folios at an average of 300,000 a month.

Ajit Menon, executive vice-president, DSP BlackRock, says: “Normally, when the markets rise, the industry sees investors getting out. And, on the other hand, when markets are weak, investors tend to stay on. I believe, this is a major factor why folios have not shrunk this year.”

Going by the trend seen in the first half of the previous financial year, this holds true. When the domestic benchmark indices inched towards their peak till October before slipping last year, MF players found themselves helpless in applying brakes on the trend of investors moving out. In the next half, when equity markets slipped, pace of folio losses came under control.

According to Dhruva Chatterji, senior analyst at fund tracker MorningStar India, “In such a market, investors cannot book profits on their investments and are staying on. Moreover, of late there is meaningful inflows coming into the fund houses’ equity schemes.”

So far this year, equity-related schemes have seen net inflows of Rs 2,510 crore, against net outflows of Rs 15,361 crore in the period last year. It was only in April this year that the industry witnessed an mass exodus of over 300,000 equity folios only to see situation improve in the coming months.

According to the Securities and Exchange Board of India, the overall folios as on September 30 stood at 47.1 million, a fall of around 62,000. The major addition of folios came in the income schemes at close to 400,000 followed by 130,000 in gold and other Exchange-Traded Funds (ETFs). Rise in folios in income funds and ETFs helped the industry to some extent to compensate the losses it suffered in equity asset class.

During the period, the industry’s assets under management grew marginally to Rs 7.12 lakh crore from Rs 7 lakh crore.

Source: http://business-standard.com/india/news/mfs-curb-paceequity-folio-loss-/453231/

Foreign MFs continue to gain grounds in Indian market

Foreign fund houses seem to be gaining ground in the Indian mutual fund industry, which is dominated by local players. At a time when growth in the industry’s asset under management is mostly stagnant, players abroad have put up a better show, managing a steady growth in gathering assets.

So far this year, foreign asset managers have registered a relatively high growth, owing to a low asset base, improvement in performance ratings and recognition of brands among investors. Not only have they seen a better growth rate than the overall industry, but the managers have also outpaced domestic fund houses by registering a more-than-three-times faster rate in building assets during the first half (April-September) of the current financial year. This has helped foreign houses increase their market share by 30 basis points to 10.86 per cent in the domestic fund market.

Puneet Chaddha, chief executive officer of HSBC AMC, says, “This tilt in growth towards global funds gives a clear sense that investors’ acceptance and comfort with global players is on the rise.”

Consider this: in the first half of the current financial year, assets of foreign fund managers grew by 4.56 per cent to Rs 77,412 crore from Rs 74,037 crore. The same period saw the industry adding 1.74 per cent more assets to Rs 7,12,742 crore, while domestic players — they control a lion’s share in the market —could grow their assets by a meagre 1.4 per cent.

Interestingly, the previous financial year saw the contribution of local fund managers in the overall fall of industry’s assets at a whopping 97 per cent or Rs 45,724 crore. The industry had lost Rs 46,987 crore of assets in the year. So far this fiscal, global players contributed around 28 per cent in adding fresh assets. The rest came from local fund houses.

In terms of ratings too, global players’ schemes have made their presence felt among the top performers. According to data available from Value Research Online, some of the schemes of Franklin Templeton, Fidelity, Mirae Assets, ING, AIG, Principal, BNP Paribas, JP Morgan have made it to the top slot in different asset categories.

According to experts, a possible reason, apart from low asset base of foreign players, for less growth rate in domestic fund houses’ growth could be the new guidelines from the Reserve Bank of India that banks should put only 10 per cent of their net worth as investment with Mutual Funds.

Generally, they say, domestic players tend to focus more on liquid schemes (where banks put in money). “This may have contributed in reduction of assets of local fund houses,” adds Chaddha.

Domestic majors like Reliance Mutual Fund lost around 11 per cent of its assets in the first half, while UTI saw an erosion of 6.86 per cent. Whereas, assets of Birla Sun Life AMC grew less than one per cent, ICICI Pru and HDFC MF reported a growth of 2.39 per cent and 6.4 per cent respectively.

Among the foreign players, assets of JP Morgan AMC grew by 39 per cent, while that of Baroda Pioneer scaled up by 31 per cent followed by Goldman Sachs (28 per cent), BNP Parbas (12 per cent) and HSBC (11 per cent).

Source: http://business-standard.com/india/news/foreign-mfs-continue-to-gain-grounds-in-indian-market/453108/

Well diversified, superior returns

UTI Equity Fund, launched in April 1992, is a diversified equity fund with average assets under management (AUM) of Rs 1,953 crore as of quarter ended September 2011. The fund has a mandate to invest at least 80 per cent of in equity and equity-related instruments and up to 20 per cent in debt and money market instruments.

The fund is ranked CRISIL Fund Rank 1 (top 10 percentile of the peer set) in the Diversified Equity Funds category as per the Crisil Mutual Fund Ranking for the quarter ended June 2011. The fund has been ranked in the top 30 percentile of the peer group for 10 out of the past 13 quarters (exceptions were March, June, September 2010). The consistency in fund performance indicates a blend of superior performance and efficient portfolio management. It is managed by Anoop Bhaskar, who is the Head of Equity at UTI Asset Management Company (AMC).

PERFORMANCE
The fund has delivered superior returns and outperformed its benchmark (BSE 100) and category average over longer time frames of 3 and 5 years. Over the last 1 year, too, the fund has given considerably lower negative returns (-11 per cent) as compared to its benchmark (-19 per cent) and category average (-17 per cent) indicating that the fund managed to limit its downside better vis-à-vis its category. Likewise, it has done better (-16.6 per cent) during the six months period ending September 30, 2011 as compared to the category average (-20.3 per cent) and BSE 100 index (-28 per cent). Over a 5 years period, the fund posted a compounded annualised growth rate (CAGR) of over 10 per cent vis-à-vis 6 per cent and 8 per cent, respectively of the BSE 100 and the category.

An investment of Rs 1,000 over a 10-year period since August 2001 would have appreciated to Rs 7,669 (CAGR of 22.19 per cent) as on September 30, 2011. The same amount invested in the benchmark and S&P CNX Nifty would have returned Rs 5,531 (CAGR of 18.32 per cent) and Rs 4,649 (CAGR of 16.32 per cent), respectively. In a monthly systematic investment plan (SIP) of Rs 1,000 for 10 years, the total invested amount of Rs 1,20,000 would have grown to Rs 3,33,297 as on 30th September, 2011 yielding an annualised return of close to 20 per cent. A similar monthly SIP in the BSE 100 would have grown to Rs 2,76,601 yielding over 16 per cent annualised returns.

LARGE CAP BIAS
The fund has diversified its holdings across market capitalisations but has shown bias towards large cap stocks. The fund’s exposure in CRISIL defined large cap stocks (top 100 stocks based on 6-month daily average market capitalisation on the National Stock Exchange) has never been less than 60 per cent over the past 2 years. As of August 2011, 69 per cent of the fund had exposure to large cap stocks followed by 30 per cent to midcap stocks and a less than 1 per cent exposure to small cap stocks.

INVESTMENT STYLE
Active cash calls during various market phases, is an important characteristic of UTI Equity fund’s investment style. This strategy benefited the fund when markets were going through a bear phase. Between June 2008 and May 2009, the fund’s average equity exposure stood at 79 per cent as compared to its category average of 86 per cent. The fund manager increased average exposure to cash and cash equivalents to approximately 13 per cent during this period. When the markets started recovering post May 2009, the fund manager increased average equity exposure to 92 per cent and reduced exposure to cash & cash equivalents to 6 per cent for the same time period.

PORTFOLIO DIVERSIFICATION
The fund held an average of 73 stocks over a period of 3 years indicating a well diversified portfolio. The top 5 stocks of the fund has accounted for only 17 per cent of the portfolio over the last three years.

As on August 2011, the top 5 stocks overweight vis-à-vis its benchmark are TCS, Sun Pharmaceutical, Nestle India, Axis Bank and Cairn India and underweight stocks are Reliance Industries, Infosys, Larsen & Toubro, Mahindra & Mahindra and Tata Steel. At the industry level, banking has been the most favoured sector over the last three years, with an average 16 per cent exposure followed by consumer non durables and software constituting 13 per cent and 8 per cent, respectively.

For the last three years, the fund has increased exposure to software and pharmaceuticals which have outperformed the benchmark (BSE 100) for the same period.

Source: http://business-standard.com/india/news/well-diversified-superior-returns/452989/