Indian funds are the cheapest and cleanest in the world

A fund will have three kinds of costs—entry, ongoing and exit. By banning entry loads, India has collapsed all costs into the annual cost and the exit load

Now that the dust has settled over last week’s announcements by the Securities and Exchange Board of India (Sebi) and the merits or otherwise of the hike in mutual fund costs have been chewed over, two issues have emerged that still need a comment. One, that Indian funds are the most expensive in the world. Two, that the changes are pro-big fund houses.

The 50 basis point (bps) hike (30 bps for non-metro penetration and 20 bps to take care of the exit load clawback getting ploughed back into the scheme) in expense ratios will bring the entry level cost of an equity fund to 3% a year. Funds are allowed to charge expense ratios on a sliding scale. The first Rs.100 crore of assets under management will now be charged 3% (2.5% earlier), the next Rs.300 crore 2.75%, the next Rs.300 crore 2.5% and all assets after Rs.700 crore will be charged 2.25%. If the average cost was 2% earlier, it will now be 2.5%. Let’s look at what the rest of the world charges: the median annual recurring cost in the US is 0.94%, in UK 1.67%, China 1.3% and South Africa 1.47%. Remember, we’re talking about managed funds and not passive index huggers. At 2.5% annual cost, India is indeed the most expensive. But that is only half the truth; to see the total impact of cost, we need to build in all other costs as well. A fund will have three kinds of costs—entry, ongoing and exit. By banning entry loads, India has collapsed all costs into the annual cost and the exit load. If we build in the 1% exit load on money that leaves an equity fund before 365 days, we get a total cost of 3.5%. Now look at what the US and UK charge. The US, with its three share classes, has costs that range from 1.18% to 7.1%. The UK funds cost an average of 6.67% a year.

Not only are Indian funds the cheapest, they are also the most transparent. Costs in other markets such as the UK and US are not so easy to define. The US, with its various share classes and cost sub-categories, is almost impossible to navigate for an average investor. The UK too seems not to define costs as well. Says financial planner Nick Cann, chief executive of the UK-based Institute of Financial Planning: “The annual management charge on mutual funds in UK varies quite a lot. There’s no set minimum and maximum, 1.5% per annum is pretty typical although 0.5% of that is usually paid away to the adviser (if there is one). Some charge more (specialist funds usually go upto about 2%), others charge less although few go below 1% per annum.” Maybe it’s time we stop beating ourselves up and look at mutual funds as the lowest cost, transparent vehicle for a variety of retail investment needs.

The second crib is around the smaller asset management companies (AMCs) getting short-changed by linking the hike in expense ratios to gathering non-metro business and for the exit load clawback rise in expense ratios. The argument is that this will benefit the larger fund houses. Two points here. One, smaller AMCs are represented on the mutual fund committee and need to use that forum to put their voices across. Two, when a business is started there are no guarantees getting handed out. What prevents a new AMC from coming in with a business plan that looks at focusing on a non-metro region rather than trying to replicate the high-cost 15-metro-heavy existing business model of the large AMCs? The mutual fund industry is more than 20 years old and those that have been there for those many years will have an advantage over the newcomers. I don’t understand why the regulator should give sops to the newbies to make their business profitable.

End note: Out of all the debate, there may emerge some things that may need a tweak. One example is the exit load calculation. The way the numbers are done right now, it seems that the fund houses’ benefit will be a multiplier to that of the investors. Exit load calculations need to be seen on incremental assets gathered by the fund and not on to the total corpus. An update a year later will also help in mapping out how this change has impacted the industry and the investor. Since we know what we are trying to map, possibly the data collection could happen on an ongoing basis rather than defining the data metrics a year later.

Source: http://www.livemint.com/2012/08/21213341/Indian-funds-are-the-cheapest.html

Small town financial advisors not enthused by Sebi's moves

Independent Financial Advisors seek higher trail commissions, mutual fund executives agree.

Independent Financial Advisors (IFAs), a strong link between asset management companies (AMCs) and potential investors, especially in the smaller cities of the country, are not excited with the tweaks made by the capital markets regulator, Securities and Exchange Board of India (Sebi) last week to increase penetration of mutual fund products. Rather, they termed the steps as a “drop in the ocean”.

In its quick check with small IFAs spread across the country, Business Standard, found out that majority of financial advisors have lost a significant chunk of their revenues from selling mutual funds. Though frustrated, they said they wanted a clear and concrete road-map for the industry.

Sanjeev Sharma, an Indore-based IFA, says, “Amfi aur Sebi ko cheezein clear rakhni chaahiye. Jab aap kuchh change karo to hamein samay lagta hai adjust karne mein. Ek saal beeta nahi ki fir se parivartan ho jata hai, jo sahi nahi hai (Amfi and Sebi should keep things clear. It takes time to adjust in a new business model, but rules get tweaked in a year which is not good).”

The sentiment is reflected by a Patna-based advisor Manu Mehrotra, who says, "I have upgraded my office and invested in technology to service my clients but people are used to free financial advice which is not helping us. By increasing 30 bps (basis points) in expense ratio, it's not going to increase penetration of mutual fund products." He adds that investors must pay as advisors need to be remunerated for their services.

Last week, Sebi allowed AMCs to charge an extra 30 bps as expense ratio provided the new fund flows from beyond the top 15 cities make up 30 per cent of the overall assets.

Though none of the AMCs have yet called upon IFAs about how they plan to take things further, the latter said they would prefer increment in their trail-commissions rather than a rise in upfront commissions.

Bikaner-based Suresh Modi, who lost more than 80 per cent of his mutual fund business over the last few years, says, "I get 5-10 basis points (bps) as upfront commission. But my trail commission is around 50 basis points. It would be better if AMCs increase the trail to 80 bps." Other advisors echo Modi's opinion. Moreover, they say that if trail goes up they would like to retain clients for a longer period of time, which will be good for all stakeholders.

Currently, on an average, upfront commissions to IFAs range between 10 bps to 50 bps (though in some cases it is as high as 1.5 per cent) while the trail stands in the range of 30 bps to 80 bps.

The demand by IFAs for higher trail has also found takers in the industry. Chief executives say they will be in a better position to take a call on the same once Sebi brings out the fineprint of the measures announced last week.

Sanjay Sachdev, chief executive officer (CEO) of Tata Mutual Fund, says, "I am in favour of higher trail-commission. Though, as of now, I cannot make any commitment till things get clear." Agrees Akshay Gupta, CEO of Peerless MF.

According to Dhirendra Kumar, chief executive of Delhi-based mutual fund tracking firm Value Research, "Higher trail-commission is quite a legitimate demand from IFAs. It will help retain funds for longer period. I believe, distributors should not only get higher trailing commissions on the new flows but also on the existing fund mobilisation."

Indore's Sharma, rightly points out, "We will keep trying to adjust with new norms and service our clients for longer-term if trail goes up."

Source: http://www.business-standard.com/india/news/small-town-financial-advisors-not-enthused-by-sebis-moves/483966/

Sebi’s new steps may ring in a Rs 775 crore windfall for mutual funds

While there has been wide criticism on plans to re-introduce entry load on mutual fund investments, a look at the steps taken by the Securities and Exchange Board of India (Sebi) in its board meeting on Thursday leads to the conclusion that even a “regressive” measure like the introduction of entry load of 1 per cent could have actually been better for investors than the proposal for the additional TER (Total Expense Ratio) of up to 50 basis points (bps) that finally passed muster.

Through the twin measures (additional TER of 30 basis points and 20 bps respectively) that is slated to push the expense ratio up by an aggregate of up to 50 bps, Asset Management Companies (AMCs) stand to make additional revenue of around Rs 775 crore per annum on the total outstanding equity assets under management of Rs 1,55,132 crore as on July 31, 2012. However, if Sebi had chosen to introduce an entry load of 1 per cent on the new sales during the year the burden on investors was likely to have been far lower.

According to the data available with AMFI (Association of Mutual Funds of India), total equity sales during the last 12 months stood at Rs 42,570 crore and a 1 per cent charge on that comes to Rs 425 crore, which is significantly lower than the Rs 775 crore that will go in the form of higher expense ratio from the entire equity AUM.

A hike in expense ratio is more dangerous also because in the case of entry load, 1 per cent would have gone only on the investment amount during the year but in the case of higher expense ratio, it will go on both new and old investment, which will only compound the cost for investors every year. Since mutual fund is a long-term product for 5, 10 or 20 years, an investor will end up paying a far higher amount over the tenure of investment.

Consider this: If you invest Rs 1 lakh every year for 20 years and the investment grows at 10 per cent per annum, at an expense ratio of 2 per cent, your total outgo stands at Rs 8.6 lakh over 20 years but at an expense ratio of 2.5 per cent it will jump to 10.75 lakh. Thus the burden of this additional expense ratio of 50 basis points is not a few thousands but Rs 2.15 lakh over the tenure of investment.

A higher expense ratio guarantees an increase in revenue for mutual funds every year whether they take special efforts or not for penetration but an increase in entry load of 1 per cent for sales beyond 15 cities would have ensured that they take special efforts to earn more. Sebi’s action is also a blow for existing investors as they will be funding the AMCs for penetrating into smaller cities.

While Sebi has asked AMC’s to credit the exit load (charged on early withdrawal) back to the scheme, which is widely seen as a positive move, exiting investors of the scheme will have to hope that more than 20 per cent of the assets are redeemed within one year by certain investors in order to be able to benefit from the same.

For example: If the size of a scheme is Rs 1,000 crore and only 10 per cent of the assets (Rs 100 crore) are redeemed within one year of investment then Rs 1 crore (1 per cent exit load) is collected as exit load and will be added back to the scheme taking the AUM to Rs 901 crore. However, since AMC’s have been allowed to claw back an additional TER of 20 basis points on the entire scheme AUM, Rs 1.8 crore (0.2 per cent of Rs 901 crore) will be charged by AMC’s from the scheme which will bring the AUM down to Rs 899.2 crore. This is lower than Rs 900 crore that would have been as per old regulations and thus long- term investors in the scheme are at a loss.

However if 25 per cent of the assets are redeemed within one year of investment then with exit load coming back to the scheme, the AUM will stand at Rs 752.5 crore and even if 20 bps are taken out of the scheme by AMCs, the AUM will stand at Rs 751 crore, which is higher than Rs 750 crore as per the old regulations. This will benefit the long term investors.

Source: http://www.indianexpress.com/news/sebis-new-steps-may-ring-in-a-rs-775-crore-windfall-for-mutual-funds/990825/0

Good for industry, good for investors

Investors would be a tad disappointed with the Securities and Exchange Board of India’s (Sebi) latest measures to ‘re-energise’ the mutual fund industry. The market regulator has put the onus on them – by increasing some costs marginally– to provide more funds for the industry and distributors.

So, the expense fee is up 20 basis points. Then, there is another 30 basis points if the fund house collects 30 per cent of its money from smaller cities and the service tax incidence will be on the investors – all these will increase the costs for the investor.

While Sebi’s changes have received both bouquets and brickbrats, the exact manner in which they will play out, will only be known over a period of time.

On the face of it, the increase in the permissible total expense ration (TER) is a negative measure for investors and a positive one for the asset management companies (AMCs). However, it is not as bad as it seems. First of all it is not applicable on the entire corpus of the scheme. Only that portion which is procured from the smaller centres will be eligible. Hence, the TER will not rise by a uniform 30 basis points for everyone.

The weighted average will be much lower. This is a small price to pay if it achieves the objective of increasing penetration.

The introduction of a new plan for self directed investors plugs a gap which has been existing since January 1, 2008. Self-directed investors (such as ones who invest through a mutual fund’s website) have often asked why they should bear the trail commission component in their Net Asset Values when they are investing on their own, This change will remedy that unintended consequence. This will spur more investors in the top 15 cities to invest on their own. After all, they are the ones supposed to be more enlightened and more at ease with technology.

Easing the process for enrolling distributors should have a positive effect in terms of enrollment in the case of smaller centres in the long term. However, increasing the number of educated but ‘mutual-fund illiterate’ agents will actually increase the training costs for funds. After all, selling a relatively complex product like a mutual fund is different from selling Government guaranteed savings products such as National Savings Certificates.

Again, different levels of certifications will not be of much help if the consumers / investors are unable to discern one from another. This is only going to help the cause of educational institutes who provide coaching for such certifications. A reduction in the fees for the exams and registration, is a good, albeit, not critical proposal. After all, serious distributors will keep their registration alive, despite the fees and the ones who are not serious will not continue even if there are no charges.

The service tax and brokerage aspect is not such a big issue as it is being made out to be. Across industries providers are passing on the service tax to consumers, who are paying up without a murmur. To top that, here the tax is levied only on the fund management charges and not on the entire expense ratio. Hence, the final impact on the investor should not be significant. To offset this, the cap on brokerage that a scheme pays, is bound to help the cause of investors.

The relaxation in the requirement for PAN card for applying for mutual funds, appears to be a cosmetic move. It is unlikely to result in hordes of farmers queuing up to purchase units by paying in cash. But more pertinent, there is no clarity on how the redemption proceeds will be processed. It is highly unlikely that it will be in cash. This may be a bigger impediment than the PAN Card for such prospective investors.

Mis-selling and churning are widespread evils. However, as in the case of insider trading, it is difficult to pin down offenders who mis-sell. Usually, agents make clients sign on undertakings that they have understood the features and are cognisance of the various risks involved. If at all, push-comes-to-shove, agents could always hold up that document as evidence that they were in compliance.

The additional 20 basis points towards penalty for early redemptions may not really deter inveterate traders, as the figure is fairly insignificant. However, it is a non-event for investors who remain invested.

A slew of measures have been proposed, aimed at safeguarding the investor against wolves in sheep’s clothing. Unfortunately, there are so many stratifications available within the proposals, that virtually everyone will be eligible to serve as an advisor. Ultimately, investors will go to the ones they trust, irrespective of whether the Regulator believes they are eligible or not. The only puzzling thing is the point which states that people who give advice in good faith are exempt. This could be the Achilles heel of this section.

In a nutshell, the proposals are a step forward. However, revival of the industry may depend as much on market sentiment, as on regulatory forbearance. I only hope retail investors do not flock to mutual funds after the stock market has already enjoyed a stellar run. In that case, no amount of regulation could prevent them from suffering loses whenever the markets undergo the next bout of correction.

But given the thrust of Sebi, it proves that the low retail penetration is the effect of the apathy of funds and distributors and not the effect of the ban on entry loads.

As mutual funds had limited personnel, there was an over-reliance on distributors to garner retail and High Net Worth (HNI) monies. The distributors, in turn, concentrated on the easier pickings (read top cities) which in turn led to sub-optimal nationwide penetration. These moves will hopefully make things simpler.

Source: http://www.business-standard.com/india/news/good-for-industry-good-for-investors/483643/

All you need to know about Sebi's market reforms

In a move to boost the capital market and the mutual fund industry, the Securities and Exchange Board of India (Sebi) has come up with a slew of measures to increase retail participation, give more flexibility to mutual funds and companies issuing initial public offers and encourage distributors.

After days of speculation, the regulator finally announced steps to get the mutual fund industry out of the woods by allowing higher charges towards expenses and better cost management. Some of these steps may, however, result in higher cost for mutual fund investors.

Fund houses can now charge a 0.20 percentage point higher fee (also called expense ratio) towards different expenses. This is to compensate them for forgoing the exit load, which was earlier used to pay for distribution and other costs.

The entire exit load will now be ploughed back into the scheme. Exit load is usually charged for redemptions within a year of investment. But some funds charge it for a longer period.

Mutual funds can also charge an additional 0.30 percentage point expense ratio for new inflows from Tier II and Tier III cities (other than top 15 cities) if 30 per cent new inflows come from these cities.  This is aimed at promoting mutual fund penetration in smaller towns and cities.

At present, mutual funds can charge up to 2.5 per cent expense ratio.

Sebi has also removed the sub-limits on expenses under different heads. At present, mutual funds can allocate a maximum of 1.25 per cent as fund management charge, 0.5 per cent as distribution charge, etc. However, with no sub-limits, they will be free to allocate the 2.5 per cent expense ratio the way they want to.

This is a pragmatic move, says Waqar Naqvi, chief executive officer, Taurus Mutual Fund.

The regulator has also exempted mutual funds from paying service tax. Now, the service tax (12.36 per cent) will be borne by investors.

However, to encourage direct investments, a lower expense ratio is proposed for direct investors.

In another important move, Sebi has proposed that units will be allotted at the net asset value of the day on which the payment is realised. This is for investments above Rs 2 lakh.

"Corporate investors usually make pay through cheques, which take at least a day to be encashed. However, they are allotted units at the NAV of the day on which the request is made, thus allowing them an extra day's benefit, at the cost of existing investors," explains Surjit Mishra, executive vice-president and national head, mutual funds, Bajaj Capital.

RETAIL PARTICIPATION IN IPOs
The capital market regulator has also announced measures to increase retail participation in the primary/IPO market.

Now, investors can apply for initial public offers (IPOs) through electronic mode as well. Stock exchanges have been asked to make application forms available on their websites. Brokers uploading the electronic applications form will be compensated by the companies.

To ensure allotment to more investors , it has been proposed that retail investors get a minimum number of shares irrespective of their application size. The minimum application size for all investors has also been increased to Rs 10,000-15,000 from the existing Rs 5,000-Rs 7,000.

"After the IPO application, retail investors were unsure of the allotment. As the minimum application size has been increased along with assurance that allotment will happen to the extent possible for all investors, interest in the primary market may be rekindled as many investors had turned cynical towards applying for good issues," says P Phani Sekhar, fund manager, PMS, Angel Broking.

To allow investors take more informed decisions, the regulator has said that the company issuing IPOs must announce the price band of the issue at least five working days before the issue opens as against two working days at present.

Easing the norms for follow-on public offers (FPO), Sebi has reduced the requirement of average free-float market capitalisation from Rs 5,000 crore to Rs 3,000 crore. Besides, to help companies comply with the 25 per cent minimum public shareholding norm, Sebi has allowed companies to do so through rights and bonus issues.

Change in issue size to the extent of 20 per cent of the original issue can be made without the need for re-filing with Sebi. This will save a lot of time and resources in mobilising IPO proceeds.

Source: http://businesstoday.intoday.in/story/sebis-mutual-fund-ipo-reforms-all-you-need-to-know/1/187300.html

Garnering 30% assets from smaller cities a tough task, say MFs

The permission to charge an additional 30 basis points (bps) as total expense ratio (TER) on sales beyond the top 15 cities may look attractive, but mutual fund industry executives have taken it with a pinch of salt.

“It’s an uphill task which demands concerted and sustained efforts,” say officials.

In its statement, the Securities and Exchange Board of India (Sebi) had said: “AMCs (asset management companies) will be able to charge 30 bps if the new inflows from these cities/ towns are minimum 30 per cent of the total inflows. In case of lesser inflows the proportionate amount will be allowed as additional TER.”

Barring a few top fund houses, most others do not enjoy widespread presence outside the top 10 cities. Moreover, according to the latest statistics, close to three-fourths of the overall industry’s assets pour in from the top five cities—Mumbai, Delhi, Bangalore, Kolkata and Chennai. And after including the next top 10 cities, the industry gets a whopping 87 per cent of its assets. (see table)

A day after Sebi made its announcements, industry executives said this was no big relief for the industry. Rather, they term measures “half-baked”.

According to Akshay Gupta, chief executive officer, Peerless MF: “Arguably, they (Sebi) could have done better. Present situation warrants well-defined steps to revive the sagging fortunes of the industry.”

Executives told Business Standard it was unlikely that fund houses immediately start opening branches or point of sales across the country to “push” mutual fund products. Potential investors in small towns are still interested in real estate and gold, they say. “What we can do is leverage on our tie-ups with national distributors, mainly banks. Fund houses may go ahead for tie-ups with banks to strengthen their distribution channels,” explained the chief marketing officer of a mid-sized fund house.

Jaideep Bhattacharya, managing director, Baroda Pioneer MF, says: “It’s not going to be easy going beyond the top 15 cities. It will take time as the industry needs to build up infrastructure and distribution networks, which require concerted efforts and continuous investor awareness. To start with, one may not have volumes, but the important factor is money inflow from the hinterland is stickier.”

Source: http://www.business-standard.com/india/news/garnering-30-assetssmaller-citiestough-task-say-mfs/483578/

UTI AMC shortlists 3 names for Chairman and MD position

UTI AMC, India's oldest asset management company with assets of around Rs 61,000 crore, could finally have a permanent boss after being headless for the last 18 months.

The AMC's board has recommended to its shareholders names of three candidates for the position of chairman and managing director, two persons familiar with the development told ET. The shortlisted candidates are AIG India chief executive and country head Sunil Mehta, senior advisor at McKinsey & Co in India Leo Puri, and Punita Kumar Sinha, former senior managing director of Blackstone Group's India-focused mutual fund.

A final decision will be taken by the five shareholders of UTI AMC - LIC, State Bank of India, Punjab National Bank, Bank of Baroda and T Rowe Price. The four Indian shareholders hold 18.5% each while the US-based T Rowe Price owns a 26% stake.

The board has also recommended the name of an internal UTI AMC executive as a fallback option if the shareholders do not agree on the three external candidates.

UTI Mutual Fund director Sachit Jain, who is part of the three-member search committee constituted by the board, said the board had sent the names of shortlisted candidates to the shareholders but declined to disclose their names. The UTI board chairman, PR Khanna, refused to comment and the three candidates, Puri, Mehta and Sinha, too, declined to comment.

Puri, the former head of McKinsey India, rejoined the consulting firm in December 2011 as senior advisor after serving a four-and-a-half-year stint as managing director of private equity major Warburg Pincus. He serves on the boards of Max India and Max Healthcare.

Mehta has been the country head and chief executive of AIG India and is responsible for all of its Indian businesses, including life and general insurance, financial services and investments. Prior to joining AIG, he was with Citibank for over 18 years.

Sinha, the daughter-in-law of former finance minister Yashwant Sinha, was in-charge of Oppenheimer's India-focused fund which was subsequently taken over by Blackstone. The fund with asset under management of about $1.22 billion was sold to Aberdeen Asset Management in December 2011.

UTI AMC, which runs India's fifth largest mutual fund, has not had a full-fledged chairman since UK Sinha left UTI to become the head of market regulator, Securities and Exchange Board of India in February 2011.

Sinha's departure was followed by an unseemly row between the finance ministry and T Rowe Price over the choice of his successor. While the finance ministry pushed for the appointment of Jitesh Khosla, a 1979 batch IAS officer and brother of Omita Paul, the powerful advisor of former finance minister Pranab Mukherjee, as the UTI AMC chairman, T Rowe Price insisted that a professional should be appointed.

Several permutations and combinations, including splitting the CMD's post into two, were discussed, but the deadlock could not be broken. A few board members also quit as UTI AMC slipped from fourth to fifth position in the mutual fund league table. Finally, earlier this year, Imtaiyazur Rahman was appointed interim CEO.

Once shareholders select and approve the name of the CMD, it will be ratified by the trustees of UTI.

Source: http://timesofindia.indiatimes.com/business/india-business/UTI-AMC-shortlists-3-names-for-Chairman-and-MD-position/articleshow/15400783.cms

Shriram Ramanathan to head L&T MF's Investment, Fixed Income

L&T Mutual Fund, offering services across the corporate, retail and infrastructure finance sectors, today said it has appointed Shriram Ramanathan as Head, Investment - Fixed Income. "I am pleased to welcome Ramanathan as the Head - Investment - Fixed Income at L&T Mutual Fund. He brings rich experience of over a decade in fixed income across both domestic and international markets. His appointment positions us well for future growth," L&T Finance Holdings Chairman and Managing Director Y M Deosthalee said. 

Prior to joining L&T Mutual Fund, Ramanathan was Portfolio Manager Fixed Income with Fidelity Worldwide Investment's India business. "Fixed income is a key asset class in India, and one of the central planks of L&T Mutual Fund's growth strategy. Current investment interest is high given the global macro environment, and the structural story seems to be excellent one given low penetration rates of fixed income investment products in India. I am delighted at the opportunity to be able to contribute to the expansion of the business here," Ramanathan said.

Source: http://ibnlive.in.com/generalnewsfeed/news/shriram-ramanathan-to-head-lt-mfs-investment-fixed-income/1037342.html