ELSS better than PPF, NSC: Crisil

Investment in an Equity-Linked Savings Scheme (ELSS) of a mutual fund can yield higher returns compared to other instruments like PPF and NSC, a report by Crisil has said

"Our analysis shows that ELSS gave 26 percent and 22 percent annualised returns over three and 10 years respectively vis-a-vis 8-9 percent offered by traditional tax saving investment products such as public provident fund (PPF) and national savings certificates (NSC)," Crisil said.

Crisil noted that interest on Employees Provident Fund (EPF) for 2011-12 was slashed to 8.25 percent from 9.5 percent in the previous year and thus ELSS can act as a strong alternative to investors.

Though the traditional debt products are considered to be relatively safer bet as they are not affected by volatility, they are unable to generate higher inflation-adjusted returns over the long run.

The PPF accounts fetched 8.12 percent over the last 10 years and in the similar period, the NSC gave an interest of 9.10 percent. The average inflation over the past 10 years stood at 6.05 percent.

"ELSS is not only an attractive option to save tax, but also helps create wealth over the long run. ELSS as a category has outperformed the Nifty 500 across three and 10 years. With average inflation around 7 percent over the past three years, top Crisil-ranked ELSS gave an inflation adjusted return of 14 percent, which is significantly higher than returns offered by other tax saving products," Crisil senior director Mukesh Agarwal said.

The rating agency, however, cautioned that the ELSS investment requires some amount of market risk and had to cherry pick those schemes which have performed consistently well.

"Since investments in ELSS are subject to market risks, investors must take into consideration their age and risk-taking abilities. The investment horizon should be more than five years for higher inflation-adjusted returns.

Further, investors must choose funds that have performed well both in good and bad times," Crisil head for Funds and fixed income research Jiju Vidyadharan said.

It said ELSS is not eligible for tax benefits under the DTC, but since the implementation of the new tax regime has been postponed, investors can park their funds in these equity schemes for now.

Source: http://www.indianexpress.com/news/elss-better-than-ppf-nsc-crisil/929093/0

L&T Finance acquires Fidelity's India mutual fund business

L&T Finance (LTF), a subsidiary of L&T Finance Holdings (LTFH), has acquired FIL Fund Management (Fidelity AMC) and FIL Trustee company, engaged in mutual fund business in India. However, the deal is yet to get regulatory approvals, the non-banking finance company said in a notice sent to stock exchanges.

"This acquisition provides L&T Mutual Fund the necessary scale, products and access to retail customers to grow profitably," Y. M. Deosthalee, CMD of L&T Finance Holdings was quoted saying.

"With this acquisition we are one step closer to achieving our vision of being among the top players in the Indian mutual fund industry. We remain committed to that goal and look forward to building one of India's most admired asset management businesses."

Incorporated in 2004 Fidelity AMC manages an average asset under management (AUM) of Rs 8,881 crore for the quarter ended December 2011. Majority of its asset (around 68%) are equity oriented. It has a market share of 1.3%.

"Its equity assets are the 10th largest in India with a market share of 3.1%. Further, in the past 3 years, the fund performance has resulted in 4 of its 5 equity funds being ranked amongst top 10 in their respective category," said the notice.

L&T Financial Services established its presence in the mutual fund industry through the acquisition of the mutual fund business of DBS Chola in January 2010. Since then, L&T Mutual Fund has grown its total average AUM by a CAGR in excess of 33% to Rs 4,616 crore (average AUM for the quarter ended December 2011).

Source: http://www.moneycontrol.com/news/business/lt-finance-acquires-fidelity%E2%80%99s-india-mutual-fund-business_685788.html

Hurdles to long-term investment

The mutual fund industry has failed in branding and marketing its products.

With returns of 15-30 per cent per annum during the last ten years, equity mutual funds have delivered the goods for investors who stayed wedded to them. Despite this, the industry has failed to convince investors that mutual funds are a good option for their long-term goals.

Ask an ordinary investor regarding this, and he will probably tell you that his ‘long-term' money is locked into an insurer's endowment plan or public provident fund. If he owns equity mutual funds at all, he plans to cash out in a couple of years' time. Data from the Association of Mutual funds of India shows that 48 per cent of all investors in equity mutual funds held their units for less than 2 years.

INFLATION IGNORED?

This investor behaviour defies logic. Why does an investor stay on patiently for ten years with a product that earns him 5-6 per cent a year, and yet shun one which delivers 15-20 per cent?

After all, the basic intention of putting away money for the long term is to make sure your savings grow at a rate that beats inflation. During a ten-year period, stock market investments are more likely to deliver an inflation-beating return than debt products. In the short term, equity investments are more likely than any investment to sustain losses.

This quirky investor behaviour suggests three things.

We like predictability.

One, Indian investors prefer predictability compared to returns. They are so spooked by the ups and downs of the stock market that they would rather choose a guaranteed return product that barely preserves their capital, compared to a market-linked one.

If this is the problem, funds can address this by offering guaranteed return products. Insurers in India have always offered guaranteed return products (with such a small ‘guarantee' that it can be easily accomplished), but funds haven't, as the practice is frowned upon by the Securities and Exchange Board of India.

Guaranteed returns however, aren't expressly forbidden by Securities and Exchange Board of India. All the regulations say is that, if a fund makes a guarantee, it should have the resources to make good the shortfall, if the portfolio doesn't deliver the promised sum.

Lock-in is good.

Two, investors actually like the discipline that a lock-in period imposes. Insurance plans or the PPF require you to deposit money every year, and don't allow you to withdraw it too easily. Mutual funds, in contrast, have embraced the open-end structure. Investors unhappy with the fund's performance can pull out their money on any day of their choice. When markets do a yo-yo act, there is thus a strong temptation to pull out.

Finally, investors may willingly accept a locked-in equity investment, if they are given the feeling that the money is being set aside towards a noble goal. The old Unit Trust of India (UTI) had enormous success with its long-term schemes such as Rajalakshmi, Grihalakshmi, and so on. These specifically allowed savings towards a goal such as a daughter's marriage or education. Insurance companies successfully market children's plans to investors, though they call for long-term investing in equity instruments.

No branding please, we're the Funds.

This suggests that where the mutual fund industry has failed is in branding and marketing its products. By branding its offerings as ‘mid-cap funds', ‘infrastructure funds', ‘strategic sector funds', and so on, the industry has failed to strike a chord with its customers.

Information on where the fund plans to invest may be quite useful to an informed investor who dabbles daily in the stock market.

But to an ordinary person looking simply to save money to fund his daughter's college degree ten years hence, the stock market association may be quite disconcerting.

Overall, defining fund products in terms of the investor's requirements (say, a retirement fund, or a schooling fund) may be all that is needed to make sure that investors stay with equity funds for the long term.

Source: http://www.thehindubusinessline.com/features/investment-world/mutual-funds/article3220409.ece

Stay invested in equities to beat inflation

India and other Asian economies are known for high savings rates of its people (about 36%). However, due to lack of innovation and poor marketing by financial firms, these savings are not translated into investments, says Jaideep Bhattacharya, chief marketing officer of UTI Mutual Fund. He spoke to Neeraj Thakur on the sidelines of the World Marketing Summit (WMS) in Dhaka last week.

In your presentation at the WMS, you mentioned financial inclusion. Please elaborate.
I focused on what we have done in India. We have to see how we can get people at the bottom of the pyramid to also live a life of dignity in their sunset years. We have to make sure that poor people are able to finance their children’s higher education. This is possible only by following a disciplined approach. I have introduced the concept of ‘ICE’(innovation, collaboration and experience).

Innovation means that there are a lot of problems and you need to be innovative for your products to stand out. In a population of 1.2 billion, one has to come out with many products that are innovative.

The next couple of decades are going to be about collaboration. Unlike now, when a big corporation starts from bottom-up, big corporations will have to see how they can work with like-minded organisations that are already focused on the investors and the customers, and add value to the customers in a nice way. And we have also shown how the government, regulators and NGOs can come together and add value to the products and the industry.

Experience is required for the last mile connectivity with the customer. The person who talks to the end customer is of prime importance because through him or her, you can communicate the message and we feel that we need to find the way through which we strengthen the last-mile connectivity.

Where financial literacy is very low, how can you educate people about the financial products?
Yes, in South-East Asia, it takes a long time for people to understand financial products. What I have suggested is that we should use colours. For example: we can use traditional colours like red and green to warn the customers about the risk factors associated with, say, derivatives, insurance or debt products. So, if someone is signing on a red stripe or bar, then he is going to think twice before signing. In case of green, the person might sign immediately.

Wouldn’t colour-coding make it difficult for companies to sell risky products coded in red?
First of all, we have to educate, because every product has a risk attached to it, whether it is a banking product or an insurance product or a mutual fund. What is important from an investor’s perspective is that he should know what is the risk factor in the product.

When you and I sign on a home loan paper, there are about 40 papers that we are supposed to read. Do any of us read those 40 papers? I have never read them. So, someone has to look into the interests of the customers. Companies should look at the customers from a life-time value perspective. For a company, an investor should be for a lifetime, not just for one transaction.

Do you see opportunity for Indian companies in the rest of Asia?
From the people’s perspective and the topography, we understand each other better. A lot of time, we are using the same language. Our cultures are the same; our values are the same. In all the countries of this region, the savings rates are very high. People understand that the social security net is not very strong. Unless you save for tomorrow, you would be in difficulty. If you look at the trade in this region, it is less than 5% of the total global trade. If you look at Europe, it is one-fifth to two-third of the trade. So, we need to find a way through which we can collaborate to learn from each other in different fields. For example, Indians understand micro-pensions because India has been doing it for quite some time. But in microfinance, Bangladesh is so far ahead that Indian can learn from it.

How can the problem of unethical marketing of financial products be tackled?
Sometimes, telling a person not to buy a financial product is also good marketing. If you think this is not the right product for your customer, you should tell him so upfront, even if he wants that product. Corporations should look to add to their business. And values and profits are not something that cannot co-exist. You need to provide value to your customers and investors and in return they will reward you by giving larger percentage of business to you.

What is your advice for retail investors?
After the 2008 crash, there’s a lot of maturity among investors; they have learnt that investment is about achieving long-term goals and not about trading goals. There is no good time for investing, every time is a good time for investing. Valuations are attractive now. Investors should enter the market and stay invested.I believe in the next three to five years, they will make substantial wealth in their portfolios that they would be investing in now.
 

No matter how much we try, we cannot time the market. But, the way India is poised, over the next few years, it’ll grow at over 6%. And anyone will give his right hand for this growth rate. I am sure even the markets will do well. If we look at the last 25 years, the stock markets in India have given returns between 14% and 16%. This means, as an asset class, equity markets will beat most of the other asset classes. India is a high inflation economy. Any asset class with a fixed rate of return can’t meet the deficit created by inflation. So, we need to stay invested in the equity markets to beat inflation.

What is your outlook on debt funds?
With respect to bond funds and short-term interval funds, we expect that with falling interest rates, these two types of funds will perform. If you look at the liquid category of funds, we feel, it depends upon the liquidity in the market. You know that last week, there have been `1.80 lakh crore of borrowings from the market. So, I feel that unless the corporates have liquidity in the market to borrow, we might not see substantial growth.

What impact will the recent stock market uptrend have on systematic investment plans (SIPs)?
Well, the purpose of investing in SIPs is to diversify the risk. Otherwise, someone could invest directly in the equity market. And people invest in SIPs with specific financial goals. So such goals are long term and they do not change. We will definitely see a spike in SIP sales. But ideally, people should buy SIPs with long-term goals, irrespective of the fluctuation in the market in the short term.

Source: http://www.dnaindia.com/money/interview_stay-invested-in-equities-to-beat-inflation_1666586

Reliance Mutual, HDFC, State Street Corp & seven other funds in final lap for Fidelity's India mutual fund business.

About ten funds, including Reliance Mutual, HDFC, and State Street Corp, have been shortlisted to buy Fidelity's India mutual fund business, people close to the transaction said. The winner is expected to be selected some time in April from a second shortlist of five, they added.

JP Morgan, which is advising Fidelity on the transaction, is said to have compiled a shortlist of ten from the 22 funds, who submitted expressions of interest. Of these ten, Fidelity India will recommend the five "best names" to its parent to take the transaction forward, a person close to the development said.

The shortlisted asset management companies include Reliance Mutual Fund, HDFC Mutual, ICICI Prudential, Birla Sunlife Mutual Fund, Invesco, Mitsubishi UFJ, Mizhuo Asset, Pramerica and State Street Corp.

Almost all these institutions have bid for Rs 350-Rs 500 crore, another highly-placed official at Fidelity told this paper. The price values the mutual fund at 4-5.8% of its total assets under management of Rs 8,700 crore, lower than Fidelity's expectation of 6.5%.

A Fidelity spokesperson declined comment on speculations or rumours. Spokespersons of all the domestic mutual funds declined comment to an email questionnaire from ET.

Though Fidelity has drawn a shortlist, it is not clear whether the deal will also include the equity fund management team, which the fund house was not very keen to sell when the bids opened in February.

In its "request for proposal" document, Fidelity had stated that it is not keen on making the equity fund management team headed by Alexander Treves, the Mumbai-based CIO, as part of the sale.

The fund house intended to retain the team to manage its offshore investment advisory business, which again is not a part of the "assets-to-be-sold" list.

"We've not been told anything of their investment team till now; we're not really keen to acquire them also. We've our own team to manage funds," said the senior official of a domestic fund house, shortlisted by Fidelity.

Fidelity insiders said the board's meeting in Boston will seal the fate of the deal. If the board is not happy with the bids or conditions placed by the bidders, it may decide to defer the stake sale for a later date, sources said.

Domestic fund houses that have bid for Fidelity's assets have another problem with respect to absorbing their workforce. In its "request for proposal" document, Fidelity expected the acquirer to give jobs to all members of business management team consisting of marketing and sales personnel.

Fund houses such as ICICI, HDFC, Reliance and Birla have full-sized business management teams. These fund houses are still not sure how many Fidelity staffers will they be able to take on their rolls.

Source: http://articles.economictimes.indiatimes.com/2012-03-22/news/31225274_1_fund-business-fidelity-s-india-fidelity-india

MFs eye Rajiv Gandhi Equity Savings Scheme

Indian fund managers want the proposed Rajiv Gandhi Equity Savings Scheme (RGESS) to be routed through mutual funds (MFs). Though there is no clarity yet on how the scheme would operate to attract retail investors into the equity markets, industry executives and experts say there is no other vehicle best suited for the proposed initiative except MFs, provided the product is structured well.

But, would mutual fund investments qualify for the scheme, ask market experts. “Often, new investors would prefer to come through the MF route as they may have little knowledge about investing directly in equity markets,” says Rajiv Bajaj, managing director of Bajaj Capital.

In his Budget speech the finance minister made his intentions clear that he wanted to encourage the flow of savings into financial instruments and improve depth of the domestic equity markets. He proposed to introduce RGESS, which would allow new retail investors investing up to Rs 50,000 directly in equities, an income tax deduction of 50 per cent. The scheme would have a lock-in period of three years. Investors with annual income of below Rs 10 lakh would be eligible to reap the benefits of the scheme.

But there are problem areas too, in the proposal. “Who is a new retail investor, and why investments have to be directly in equities?” asks Dhruva Chatterji, senior research analyst at Morningstar India.

Dhirendra Kumar, chief executive officer (CEO) of Value Research, says, “The proposal of RGESS has huge potential to attract funds from retail investors. But it could prove disastrous if new investors put in money directly into equities because of their inexperience. I hope that details emerge, mutual funds are made part of it.”

According to experts, the country’s stock markets could get up to Rs 50,000 crore of retail inflows per annum of long-term funds, which would exceed the funds brought in by foreign investors. The money would not only boost India’s capital markets, but also bring stability as these funds will be stickier.

Sanjay Sachdev, CEO of Tata Mutual Fund, agrees, “If MFs are made vehicles for RGESS, it will be easier and faster as the industry has an established system. This could be a variant of the existing equity-linked saving schemes (ELSS).” There are many takers for this suggestion. In post-Budget conversations with Business Standard, industry chief executives said government has chosen a good time for this product.

If further guidelines favour the MF industry as a vehicle, fund houses would roll out appropriate products, (such as Tata Mutual Fund RGESS or ICICI MF RGESS), they added. With the Direct Taxes Code (DTC) set to come into play soon, ELSS will lose its edge as tax saving havens. “Operationally, it is possible to have the existing ELSS under RGESS,” says Nimesh Shah, CEO of ICICI Prudential Mutual Fund. Moreover, if MFs are made vehicles for the new scheme, investors would have a variety of options to chose from out of the existing ELSS, depending on the schemes’ track record.

Equity mutual funds have the largest investor base in terms of folios. As per statistics from the Securities and Exchange Board of India (Sebi), in January overall equity folios stood at 38.4 million.

Of this, ELSS constitured over eight million.

According to industry officials, since there is a substantial investor-base in ELSS, the proposed scheme should be moulded in a way that existing retail investors in tax-saving equity products can continue under a new name of RGESS.

Source: http://www.business-standard.com/india/news/mfs-eye-rajiv-gandhi-equity-savings-scheme/468301/