Investor friendly

“If you want to understand the investor pulse, travel by Mumbai’s evening local trains.” That’s a statement that Nilesh Shah, the deputy managing director at ICICI Prudential Mutual Fund, often makes.

But Shah is the kind of man that walks the talk — or in this case rides it: Many recall him actually travelling by a local train when he headed fixed-income funds at Franklin Templeton to hear people’s take on the markets.

Shah is just as involved in issues that impact the MF industry as a whole. During the liquidity squeeze of October 2008, following the collapse of US financial services giant Lehman Brothers, the degree and pace at which investors withdrew money from financial instruments was so staggering, it shoved the domestic MF industry to verge of a collapse.

Shah then took the lead in convincing Reserve Bank of India to lend the industry a helping hand. For the first time on October 14 that year, RBI introduced a Rs 20,000-crore, 14-day credit window for fund houses. Shah's efforts at reasoning with the Securities & Exchange Board of India paid off, too.

Though not an effective stock picker, consistency and steady bets have been Shah’s mantra. This may not have resulted in high-yielding gains for his investors, but their losses too were contained. “I believe in protecting the downside for investors,” he says.

Usually soft-spoken, the 42-year-old fund manager is a much sought-after speaker. Though rarely annoyed at the volley of questions at these functions, on one occasion he asked a member of his audience to shut up. “People have come to hear me and not you,” he had said, snubbing the gentleman.

ICICI’s assets under management have risen to over Rs 70,000 crore in September, from around Rs 15,000 crore when Shah joined the fund house as a chief investment officer in June 2004. ICICI's Discovery, Dynamic and Infrastructure schemes under his watch have delivered higher-than-average returns in the past 3-5 years.

When Shah put in his papers last week, citing “personal reasons”, the industry was curious what he had planned next. His exit comes at a time when MFs are yet again grappling with the regulator on various issues.

Source: http://www.business-standard.com/taketwo/news/investor-friendly/419261/

The importance of retirement plan

P.V. Subramanyam’s maiden book on retirement is not about understanding how the financial market functions or how to time the market. Instead, it deals with the most unexplored issue of retirement planning. Clearly, the book seems to have hit the right chord as it is a bestseller having sold over 45,000 copies.

A trainer, columnist, blogger and now an author Subramanyam spends a few moments with Cafemutual to talk about retirement planning and how IFAs could incorporate this theme as groundwork for advising clients. Edited excerpts….

How did you get the idea of writing this book on Retirement Planning?

I was surprised to find many US based books on retirement planning, but nothing in the Indian context, hence the plunge. I was asked by my friends in Moneycontrol to write the way I speak. Around 70 per cent of the book was already written and stored electronically. So I just had to collate it.

Given the total absence of social security in India, is the vast majority aware of the importance of retirement planning?

Talking about Indians is wrong because there is a huge section of the population that leads a hand-to-mouth existence. But the educated and the upper middle class have earned more than what they would have expected, thanks to the booming economy. But most of their money is parked here and there. They never sat down to plan their retirement. In our culture, we are conditioned to think of life with our children forever, accepting the joint family, and pretending that everything is fine. It suits the government because people invest their money in products that offer around 8 per cent returns. There is no public debate happening on retirement planning.

While the rich and upper middle class are earning and saving enough for retirement, are the middle and lower middle classes prepared?

No. Many of them are not prepared but they will not accept it because they are happy with the feeling that they have much more wealth than their father. They are content saying 'My father had only Rs 20 lakh while I already have Rs 75 lakh. How much more will I need?'

What are the risks for the people who are 'under-prepared for retirement'?
Life expectancy has gone up compared to what it was in earlier days. So people live longer and are dependent on children. Medical expenses have gone through the roof. So, not being able to buy adequate medical cover and not having enough money to pay for medical expenses are a cause of concern. Children not having enough money to look after the parents can put the entire family in a tight spot.

What about the people in the unorganised and self-employed categories?

I do not really deal with this category and hence, not the right person to comment. It is very rare that such people can understand a NAV based product. The most important requirement is financial inclusion and financial education before they can be asked to do a long term SIP.

What are the key challenges according to you in retirement planning?

There are four key challenges. First is managing your money. People who claim that they can manage their money actually may muck it up. Second is asset allocation. Too much money is in debt and too little in equity, if there is something at all. The third challenge is rising life expectancy. There is a possibility that a person will outlive his or her savings. And the fourth challenge arises from the absence of long term care insurance in India. This could result in increase in medical expenses.

In helping their clients prepare for retirement, should advisors look at the so-called retirement products (Pension plans by life insurance companies, mutual funds)?

They should look at normal investment products and depending on the age of the customer, park a chunk of the money into equity plans. If a person is retiring in 2-3 years, there is an inherent risk in the aggressive portfolio. They should not consider pension plans from life insurance companies. The plans from mutual fund are slightly better. But the charge structure of the insurance plans offered by mutual funds might hurt.

What investment products in your opinion are best suited for retirement planning?

For any goal which is more than 10 years away, it is equity, equity and always equity. For a lesser duration goal, one can have a mix of equity and debt.

How can IFAs grow their business by helping clients save for retirement?

Almost all clients will want to save for their retirement. Younger clients should be asked to start with smaller amounts in SIPs and as they grow older, increase savings through SIPs in more number of funds. Even for older clients, the shift out of equity should happen only at an age of say 70 years! For the advisor, long term SIPs and long term SWPs will ensure a great trail commission and good leads.

Are IFAs using retirement planning as a theme to talk about retirement and investment products?

IFAs don’t have a product to sell other than the Templeton India Pension Plan which has a withdrawal lock-in. Even IFAs who are doing big ticket SIPs are not much focused. I don’t think earmarking for a goal based investment is happening.

As in the US, retirement planning is nowhere close to becoming a big business in India?

The growth in the mutual fund industry in the US happened because of 401k plus schemes (retirement schemes). There is no such plan in India. No mutual fund company in India ever went to the ministry of finance to demand a product which is 80C deductible and a pension plan. The only two firms who did it were Kothari Pioneer and UTI. There is no choice of how to get your money back in pension products of insurance companies. They decide how much money you will get back and you have to buy an annuity. I got an annuity of five per cent from an insurance company. Now that’s miniscule when I can get nine per cent return on a bond issued by leading banks! Buying a good equity fund from a mutual fund company is better than buying a pension plan from an insurance company.

What room do you think could be there for products that are sold as retirement solutions by mutual funds? How good are products offered by mutual funds which rebalance the portfolio after you reach a certain age?

I don’t know whether the market has the ability to sell such a product. There are very few people selling Templeton’s Pension Plan. The distribution system is still chasing AUM. Not many people are happy to doing an auto pilot mode for 20 years. People think that they can time the market in spite of empirical evidence to the contrary.

National Pension Scheme – how suitable is it?

It’s too complicated as of now. I am not sure about the fund management expertise. The rates are too fine but I guess it will surely change. If that is not done then good fund managers will not be willing to come in. I am willing to talk about it only after I see its performance for 4-5 years. Also I am not very sure how the annuity will be priced.

Your next book?

It is telling doctors about money - Wealth Prescription for Doctors.

Source: http://www.cafemutual.com/News/InnerNews.aspx?srno=29&MainType=Ana&NewsType=Interviews&id=43

We see financials as one of most promising sectors: Krishna Sanghvi

Krishna Sanghvi, Head of Equities, Kotak AMC in an exclusive interview with Harsha Jethmalani of Myiris.com, spoke about performance of his funds, FII inflow, sectors likely to emerge as star performers, etc.

Krishna Sanghvi joined the Kotak group in May 1997 in the Auto Finance subsidiary, Kotak Mahindra Primus, handling credit risk management. Post this; he moved on to Kotak Mahindra Old Mutual Life Insurance as an advisor to the Life insurance subsidiary, managing the debt and equity portfolios. He joined Kotak Mahindra AMC in February 2006 and has been handling equity schemes for Kotak Mutual fund since January 2007. He has over 13 years of experience in the financial markets of which 11 years are at Kotak Mahindra group.

Could you throw some light on the structure of your research team? What according to you goes into good portfolio construction?

We have a buy side research team with 8 research analysts and they cover more than 200 companies stocks across the sectors and across the market capitalization. Each analyst is tracking a sector(s) and stocks there in.

Portfolio construction involves a reasonable mix of sectors and stocks so that it offers diversification to investors and not make them exposed to individual themes / sectors / stocks. Portfolio construction considers the a healthy mix of some aggressive and some defensive stocks so that it generates returns and tries to minimize the downside risks.

How frequently do you churn portfolio for Kotak 30 Fund? The fund is betting on Financials, Energy, and Technology sectors what is outlook for these sectors?

We seek to manage the fund based on our views and outlook on markets and stocks and as such do not have any churn criteria.

We see financials as one of the most promising sectors in terms of growth in credit and earnings. A healthy economy growing at 8% will really provide this industry with the credit growth prospects of 20% and we still have a sizable population that needs to be covered under formal banking channels. Energy is again a promising sector led by de-regulation process announced by government as well as the view that considering global economic outlook (mainly USA & Europe) of a muted growth the crude oil is also likely to remain range bound. Technology is also interesting considering the offshoring opportunities available in western world.

How would you rate the performance of Kotak Opportunities Fund as against its peers? What is the highest individual stock and sector exposure you can take in this fund?

The fund has been performing reasonably well in terms of its track record vis a vis peers as well as the benchmark. The individual stock exposures are capped currently at 5% of the portfolios while sector exposures are capped currently at 25% of fund. We do review the limits based on the sector / stock weights in the underlying benchmark.

What is the general consensus on equity markets? Are money managers still underweight on equities now?

No we do not think money managers are underweight on Indian equities. The equity markets are clearly cheering the growth outlook for the Indian economy. The investor appetite especially of global investors has turned positive on relative growth for India as Indian economy is set to double in next 5-6 years. While valuations may appear a bit premium in near term, we believe that earnings growth will come in to support the valuations.

Market gains this year have been driven mainly by expanding PE multiples for stocks. Are you concerned that the market is too expensive today?

The PE expansion was bound to happen as a reaction to the PE contraction that was seen around 15-18 months back. While markets are getting into above average valuations zone, it is still lower than historic highs recorded on valuation perspective. Also, we think that valuations must be looked into with a forward perspective and on visibility of earnings growth and that`s where a comfort is in place that in the short term valuations may appear a bit premium but we believe that earnings growth will come in to support the valuations. We think the investor`s worry on Indian markets is mainly on account of markets having risen quickly in a reasonably short time.

Foreign fund houses have invested over Rs 710 billion (USD 15.6 billion) so far this year and analysts believe that FII investment in stock markets will cross the last year`s record level. What is your take on this?

We believe that investment flows usually reflect the investor`s faith in sustainability of GDP growth and earnings growth on a relative basis. At the current juncture of global economy. Indian economy - having demonstrated its resilience in past 2 years - ranks among the fastest growing economies in world. This has led to a reasonable investor attention and money; both short term as well as long term. We think this is quite healthy for the Indian economy and markets.

Given that mid and small-cap stocks are more sensitive to interest rates do you anticipate any slowdown in earnings due to increase in interest rate?

We do not anticipate any major impact on profitability due to increase in interest rates at present. The business growth can take care of interest costs. The only risk can be from any major hike in commodity prices that may impact the working capital and interest costs thereon.

What macro factors are you keeping an eye on?

GDP / IIP Growth, Fiscal Deficit, Current account deficit, inflation, interest rates, currency movements.

Source: http://www.myiris.com/shares/company/ceo/showDetailInt.php?filer=20101006153736707&sec=fm

Want investment advice? Ask for the menu card

Looking for advice on how and where to investin mutual funds?

First, order for the menu card.

Huh? Yes, it’s the result of new Securities and Exchange Board of India (Sebi) norms that require investors to pay up commission to agents directly, unlike earlier where a portion of the investment made used to be handed over to the distributor as commission directly.

It is learnt that a distributor incentral Mumbai is handing out pamphlets to people stating “Fee for mutual fund form — Rs 25, Investment only (cheque collection) — Rs 100, mutual fund advice — Rs 250 per investment. For monthly and yearly advice fees, contact us....”

Other independent financial advisors (IFAs) are forming groups and mulling a standard charge across the board. “Pursuant to the present Sebi regulatory issues and the need to charge

the clients for the advice and levels of services offered by us,

we are in the process of preparing a tariff card and notice to

investors based on Sebi notifications (on) the need/ practice to charge fee,” a mail sent to DNA Money by a group of IFAs said.

There are 63 IFAs who form this group.

Another network operating in Mumbai called MF Chain, which involves around 25-odd distributors in the city holding large chunks of assets under them too have decided on a fee structure.

“Location-wise the assets are segregated. So, a distributor servicing in Bandra will not service a client in Borivali as that area is serviced by another distributor,” said a source privy to the information.

“There is a price list that is formed. Because these distributors are operating all across the city it will not be possible for investors to negotiate,” said the source.

He claimed the entire idea to is just like other associations that are run by barbers, laundry operators in Mumbai. “The rates are fixed,” he said.

“As an IFA he can knock out 30% of his competition by fixing rates across. The competition will not be from IFAs, it will be from banks and national distributors,” he added.

Delhi too has a broker syndicate called DFDA, where leading independent financial advisors unite to earn asset under management muscle. “Their agenda is sangathan mey shakti hai (there is strength where there is unity),” a head of a mutual fund house said.

Other distributors too have started asking for yearly fee from investors. Kirit Nagda, who runs Relationship Life & Services, told DNA Money on an earlier occasion, “We have started charging a yearly fee of Rs 2,000 per family.”

Many have realised that when they ask for per transaction fee, they are not sure whether the client will come back to them the next time. “A yearly fee ensures that the client will come to me for each transaction during the year,” said a distributor.

There is another Vadodra-based advisor Durgesh Pandya, has now initiated a life-time advisory fee of Rs 40,000. “Some of my customers have agreed to pay up,” he claims. But asked aren’t people wary of him not continuing in the industry forever, he replies, “People trust me as they have been investing through me for the past five years now. They also invest crores in each transaction, so if you see on a per transaction basis the advisory for life-time turns out to be cheap for them.”

This fixing of fee is against the idea of Sebi. C B Bhave, chairman of Sebi had said while addressing the mutual fund summit last month, “Don’t tell the investor how much he has to pay. Investors should be able to negotiate a fee for the value that the advisor is providing.”

Source: http://www.dnaindia.com/money/report_want-investment-advice-ask-for-the-menu-card_1417988

Fund managers' reaction to RBI rate hike

RBI has raised key rates by up to 50 bps. Check out what the fund managers have to say.

Navneet Munot, chief investment officer, SBI Mutual Fund

The rate hikes underscore the strong demand in the economy. The investment cycle is showing strong signs of picking up, as there are capacity constraints in most sectors. Going forward, investment will be a bigger driver of growth than consumption.

Krishna Sanghavi, head of equities, Kotak Mahindra AMC

There is no doubt about the growth in the economy. And the rate hikes were very much in line with expectations. But from a stock perspective, the more crucial issue is whether the growth in corporate earnings will meet market expectations.

Anoop Bhaskar, head-equity, UTI Mutual Fund

The rate hikes don’t change our view on (shares of) interest rate-sensitive sectors. In India, demand for consumer loans is influenced more by availability, rather than cost of funds. As long as income visibility is good, there will be strong demand for retail loans

Anand Shah, head-equities, Canara Robeco AMC

The message from the RBI to banks is clear: be less aggressive in lending. Banks with a better CASA ratio and strong branch network will benefit in a scenario, where cost of funds increases. At the same time, NBFCs could be adversely hit.

Vetri Subramanium, head-equity, Funds Religare AMC

The monetary policy clearly signals that RBI is more worried about containing inflation at the moment. We expect more rate hikes — 75-100 bps — over the next nine months. The net interest margin of banks could shrink due to flattening of the yield curve

Source: http://economictimes.indiatimes.com/news/economy/policy/Fund-managers-reaction-to-RBI-rate-hike/articleshow/6225237.cms

MFs: Where are the investors?

There are just 10 mn MF investors compared to 60 mn homes with life insurance.

For an industry boasting 38 active players spread across 150 cities, with over Rs 6.7 lakh crore of average assets under management (AAUM) in June, mutual funds in this country have barely 10 million investors. Perhaps, even less.

The data till June-end available on the website of the Association for Mutual Funds in India (Amfi) showed the MF industry had almost 48 million folios. Amfi started publishing data of the number of folios with fund houses in November last year.

One folio is equivalent to investing in a single scheme. Industry experts admit most MF investors have at least four-five schemes, which translates into four-five folios per person. In many cases, this number is much more. In fact, there are customers with 100-150 schemes.

“The MF industry, as a whole, has been unable to convey the message to investors about its attractiveness,” said Rajeev Deep Bajaj, vice-chairman and managing director, Bajaj Capital, adding that the number of investors has stayed static for almost six months. Between November 2009 and June-end, the industry added only 70,503 folios.

If one looks at numbers from the Centre for Monitoring Indian Economy (CMIE), the number of MF investors is even lower. As on December 2009, CMIE’s Consumer Pyramids estimated that out of 235 million households, only two million invested in MFs. CMIE assumes one household has five members, but it’s unrealistic to assume all five would have invested in MFs.

In comparison, 87.66 million households invest in gold. The life insurance industry has 59.7 million households covered by insurance policies. Close to 46.06 million households have fixed deposits. Only 0.39 per cent, or 920,000, households directly invest in equities, according to CMIE.

Though there are 17 million demat accounts with NSDL and CDSL, only a handful seem active. Among the top five fund houses, UTI Mutual Fund, which has been there for over four decades, had slightly over 10 million folios, the highest. The other four are Reliance MF with 7.40 million; HDFC MF with 4.04 million; ICICI Prudential MF with 2.94 million; and Birla SunLife MF with 2.47 million folios.

Both distributors and fund houses are fighting to attract the same customer.

The good part is that though a large part of the money – almost 75 per cent – is in the debt segment, a bulk of retail folios are for equities and balanced funds – 43.56 million. This implies that investors are willing to put money in equities.

Hemant Rustagi, CEO, Wiseinvest Advisors, said, “There have been limitations, in terms of operations, lack of advisors in numbers and quality and phases of extreme volatility in stock markets. Still, the highest growth has been there in equities.” The lack of penetration is mainly due to the fact that MFs need to be pushed, aggressively sometimes. “Many investors still find MFs complex. There should be an industry association platform to promote them,” added Bajaj.

Though new players have entered the market, they have been not been able to add many new investors. Look at one new player, Axis Mutual Fund. In November, it had 491 folios in income/debt schemes. At present, the number of folios is 158,694. At the same time, the total number of folios between November and May rose by only 70,000 (from 47.87 million to 47.94 million). And, many other players gained folios as well. For example, HDFC Mutual Fund’s folios rose by almost 400,000 in the same period. Clearly, the same investor has multiple folios.

Source: http://www.business-standard.com/india/news/mfsareinvestors/402204/

MFs now don't find it economical to service small retail investors

It’s now getting close to a year since the SEBI’s abolition of entry load on mutual fund loads. Over this year, much has been said and written about how an old business model will have to change and how people will transition to a new one and so on.

But looking at what has happened, one negative impact of SEBI’s directive is very clear. It is now utterly uneconomic for anyone in the mutual fund industry to serve smaller retail investors. Unless some unforeseen miracle happens, from now on, mutual fund investment is an activity that will be entirely limited to wealthy individuals.

Let’s see why this is so. Consider an investor who is a typical starting small saver in my experience. He would probably invest something in the range of Rs 10,000. If he’s figured things out a bit better, he would also start an SIP (systematic investment plan), probably about Rs 2,000 a month for a period of one year, to begin with. As things stand now, the advisor who has done the job of convincing this investor to invest stands to get about remunerated with about Rs 75, to begin with. Later, after a year, he starts getting a continuous commission of about Rs 25 a month, likely paid quarterly.

This is the trail commission for the total accumulated investment of Rs 34,000 as well as an estimated gain of 10% a year. Eventually, the customer might invest more and the money will accumulate. However, that requires a certain period of customer support and hand-holding and contact. The question is, is there money in the system to pay for these services?

If you multiply the above numbers by five or ten, then there is. A rich investor — the word rich is now taboo, so, we now use the awkward euphemism high net worth individual — who puts in Rs 1 lakh and then Rs 10,000 or 20,000 a month would be a customer who would not find any problem in being serviced well. However, at the basic level, there isn’t.

Is there no way that a customer can be serviced at lower investment levels? There is, but only if that customer already has some other financial connection with the service provider and the cost of customer contact and acquisition can be amortised over a larger business. In practice, this means banks. It’s only your bank that could find it economic to sell you a mutual fund for a small amount. Unfortunately, that’s not a great solution for the customer. Of all the various kinds of entities that distribute mutual funds, banks have the worst track record of systematic mis-selling. In any case, banks are far more interested in guiding all possible customers towards products with the highest possible commissions.

In effect, that’s the situation now. Simple business economics, combined with the way mutual fund regulations have evolved, has ensured that the small investor is unlikely to become a mutual fund customer.

Mind you, this is not an argument for creating upfront incentives. No matter what today’s problems are, it must not be forgotten that the root of all mis-selling in all financial products is distorted incentives.

Therefore, higher upfront commissions — or any upfront commissions at all — are certainly not a solution. From the investor’s point of view, the best outcome is a long period of good returns and the only solution is a compensation system that rewards the intermediary for that.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/analysis/MFs-now-dont-find-it-economical-to-service-small-retail-investors/articleshow/6157209.cms

Fund Flows into India hit highest levels in 11 weeks

Investors cheer arrival of monsoon, says EPFR Global.

Global flows into India hit their highest levels in 11 weeks, as investors responded to the arrival of monsoon in the country, according to EPFR Global. Overall, going into the second week of July, global equity markets were staging a modest recovery, as investors shrugged off fears of a double-dip recession and went bargain-hunting.

“In case of Asia ex-Japan equity funds, investors responded to the arrival of India’s monsoon and also to the signing of an Economic Cooperation Framework Agreement by Taiwan and China, which could open doors for a $100-billion increase in cross-straits trade,” said the latest release from EPFR Global. Flows into India hit their highest in 11 weeks, while Taiwan equity funds enjoyed their second-best week year-to-date, more than offsetting the modest outflows from China equity funds, it added.

Japan equity funds also posted outflows, the seventh time in the past nine weeks, as a dip in domestic capital spending, questions about the effect of the yen’s appreciation on exports and uncertainty about the new administration’s economic policy made investors cautious.

EPFR global-tracked bond funds absorbed $3.64 billion and money market funds another $33.5 billion (a 78-week high), while equity funds posted combined net redemptions of $11.25 billion.

Meanwhile, two of the four major EPFR global-tracked emerging markets fund groups managed to post inflows during the week ended July 7, with GEM equity funds taking in $517 million and Asia ex-Japan equity funds $124 million, while EMEA (Emerging Europe, Middle-east and Africa) and Latin America Funds recorded modest outflows.

Redemptions from Latin America equity funds, which have recorded 13 consecutive weeks of outflows, were driven by concerns that the region’s second-largest economy, Mexico, might stumble due to a faltering US recovery.

Meanwhile, EMEA equity funds saw their modest three-week inflow streak getting snapped, as investors pulled more money out of funds with Russian and Emerging Europe mandates than they committed to ones with an African, Middle Eastern or Turkish focus. Africa regional funds absorbed fresh money for the 44th straight week.

However, worse-than-expected US labour and housing market data and fear of what stress tests of major European banks will reveal continued to weigh on the sentiment towards major developed markets.

Europe equity funds were the only major EPFR global-tracked developed markets equity funds to post inflows during the week, snapping a four-week outflow streak, as investors continued to shift from regional funds to ones investing in individual markets. The UK, Germany and France equity funds accounted for the lion’s share of the $387 million flowed into this fund group.

Global equity funds kicked off July by recording outflows for the ninth time in 10 weeks. Pacific equity funds, the other major diversified developed markets fund group, suffered net redemptions for the third straight week.

The lure of gold and precious metals, as a hedge against uncertainty, helped commodity sector funds top the list of EPFR global-tracked sector funds once again, with investors committing $419 million to this fund group in early July, helping the year-to-date inflows to cross the $11-billion mark.

The defensively-perceived consumer goods sector funds were the second-biggest absorbers of fresh money, pulling in $226 million.

Most other sector fund groups, however, posted outflows. Real estate sector funds surrendered over $500 million, as commercial and residential sales in the US struggled to overcome the drag caused by high unemployment and unwinding of key stimulus measures. Technology sector funds saw year-to-date flows sink into the negative territory on concerns over demand in the second half of CY10, while regulatory uncertainties kept financial sector funds under pressure.

Source: http://www.business-standard.com/india/news/fund-flows-into-india-hit-highest-levels-in-11-weeks/401021/

Sebi wants MFs to charge single levy

Fund houses may soon have to stop charging variable fees, a move that could benefit retail investors

The Securities and Exchange Board of India, or Sebi, is set to ban asset management companies (AMCs) from launching multiple investment plans catering separately to different classes of investors under a single scheme, in a move that could alter the country’s investment landscape.

A Sebi official, who did not want to be named as he’s not authorized to talk to the media, toldMint that the regulator will not allow any AMC to launch such multiple plans under one fund going forward, to ensure that fund houses give up the practice of levying different expense structures for different categories of investors.

Liquid funds and liquid-plus funds (later renamed ultra short-term funds) typically have separate plans under single schemes. The charges are different under different plans, though the portfolio under the scheme remains the same.

The move may administer another shock to the Rs6.75 trillion mutual fund industry, already reeling from the ban on entry loads imposed in August. Nearly Rs3.5 trillion, or 50% of the industry’s assets, are managed under liquid and liquid-plus schemes.

“Sebi wants AMCs to stop launching different plans with non-uniform expense structures under a single scheme,” the official said. “Single-plan schemes with single expense structures are required to ensure that there is no discrimination between small and big investors.”

Recently, the regulator sent letters to the AMCs, saying, “It is observed that some mutual fund schemes have different expense structures for different investor classes, e.g. retail/institutional/super-institutional plans, while there are other schemes that charge a single expense structure for the scheme. This practice has led to concerns of subsidization of one investor class by another and charging of different fees for managing the same portfolio of securities.”

The letter adds, “In light of these concerns, we are in process of reviewing different expenses charged within the same scheme with same portfolio.”

Experts said Sebi’s move will hurt the profitability of fund houses, significantly impact the commissions of distributors, and may also disincentivize large institutional clients who have parked money across hundreds of liquid and liquid-plus schemes.

Liquid and liquid-plus schemes are those where the corpus is allocated in short-term papers and money market instruments such as certificates of deposit, commercial paper, pass-through certificates, and collateralized borrowing and lending obligations. Maturities range from overnight to 90 days, and give 3.75-5% returns. Institutional investors park money in such schemes to benefit from tax arbitrage.

Officials at three AMCs said that Sebi restrained them from launching separate plans under ultra short-term funds when they approached the regulator in recent months for filing offer documents.

“Sebi refused to approve multiple plans under a single scheme when we approached them with offer documents for a liquid fund and an ultra-short term fund. So, we’ve launched the liquid scheme with a single plan,” said the official at one of the three AMCs. Officials at the other two AMCs said, “Sebi wants single plans with single expense structure under a given scheme.”

All existing schemes with multiple plans will also be required to conform to the new norms, and do away with varying expense ratios.

According to the CEO of a foreign AMC, if fund houses are forced to launch single plans under single schemes, all class of investors will be required to pay the same expense ratio under a given scheme. “To have a single expense ratio structure, retail investors will be required to pay much lower than what they are paying now and large institutional investors will be required to pay higher than what they are paying now,” he said on condition of anonymity.

If institutional investors are required to pay higher expenses, it may lead to huge outflows of institutional money parked in liquid and liquid-plus schemes. On the flip side, it may attract more retail investors as they will be paying lower expense fees.

With average maturities narrowing after 1 August when new valuation norms for debt funds come into force, a lower expense ratio will bode well for retail investors. Following Sebi’s move, AMCs may hike the minimum investment for such schemes to avoid paying high distribution commission for small ticket-size plans. Also, exit loads may be imposed for ultra short-term funds to attract long-term money from the investors.

“Sebi wants us to bring more retail investors into such liquid and liquid-plus schemes. Lower expense ratio will ensure this,” said the chief marketing officer at a domestic fund house. Most of the officials did not want to be identified as the matter involves the regulator and is sensitive.

Typically, AMCs launch liquid and liquid-plus schemes with three different plans—retail, institutional and super-institutional. While retail plans cater to the small investor who can invest as low as Rs5,000, institutional plans cater to large investors that can invest Rs50 lakh to Rs5 crore. Super-institutional plans cater to those who can invest over Rs5 crore.

These three plans have three different expense ratios, the charge that AMCs levy on investors, on an annual basis, for managing their money as well as other costs such as brokerage, fees paid to the fund’s registrar and transfer agent (RTA), bank charges, custody charges, trustee fee, distributor charges, etc.

Sebi’s concern is over the practice of charging retail investors more than large investors. While retail plans typically charge an expense ratio of 60-70 basis points (one basis point is one-hundredth of a percentage point) annually, the institutional plan levies a charge of only 40-50 bps. Investors in super-institutional plans pay only 25-30 bps.

Most of the liquid and liquid-plus or ultra short-term schemes have a large difference in the cost structures of retail and super-institutional plans. For instance, in the HSBC Ultra Short Term Bond Fund, the institutional-plus plan charges an expense ratio of 0.4%, as against 1.05% under scheme’s institutional plan, and 1.3% under the retail plan.

Under all such schemes, only about 10 bps account for expenses against RTAs, bank charges, custody and trustee fees combined. The rest is shared between the AMC and its distributors, with most of the money going to the distributors.

The regulator may issue new norms banning multiple plans under a single scheme shortly after gathering feedback from the industry.

Source: http://www.livemint.com/2010/07/11224332/Sebi-wants-MFs-to-charge-singl.html

FDs can be hazardous for your wealth creation plan

Do you know of anyone who has become wealthy by leaving his or her money in the bank or a fixed deposit (FD)? If you want to create wealth and fulfill your financial goals over a long period of time, you must shun that pure conservative way of investment. A lot of people in India think that a savings account or an fixed deposit is the best home for money. According to a report, only 11 per cent of the household savings are channelised in our equity markets. Majority of the savings are still lying idle in our banks’ savings accounts or probably earning a measly interest in a fixed deposit. Despite being among the best saving class in the world, we have not the smarted investors yet.

Much has been made of the so-called comparison between mutual funds and unit-linked insurance products (Ulips) in the recent past few months. Our opinion is that the public debate on these two investment options misses the bigger point.

The reality is that the bulk of the household savings for Indian families is tied up in bank accounts earning 3.5 per cent interest and in FDs — both of which are highly inefficient investment options for wealth creation.

Add to this the rising inflation that has touched double digit, and therefore, it becomes even more scarier that most of us still prefer to leave our money in a bank, rather than in instruments that give higher returns — be it equity mutual funds or ulips or probably direct investment in equity markets.

So the real debate should be whether families in their effort to create wealth are making a mistake in leaving their money in the bank while they should be penciling in on other investment instruments like mutual funds and ulips that offer a reasonable prospect of better long-term returns.

Mutual Funds v/s ULIPs - no big deal

Call it a turf war or clash of regulators, frankly in the long run it's not a big deal from the end customer's perspective. Whether its SEBI or IRDA, consumers should feel comfortable and secure that there is a regulator who is mandated to look after their interests.

Every investment instrument has pros and cons. We challenge you to find one that is perfect. So, there will always be promoters or detractors of both mutual funds and Ulips.

Objectively speaking, however, there is a better chance of you being able to meet your long-term financial goals through equity mutual funds and/or a Ulip than the default option for most Indians, which is to leave money in the bank.

Almost every one of us will have one of the following goals that will require a substantial amount of money in the future: funding our graduate education, marriage, house purchase, taking care of children's financial needs, funding their education and marriage, being adequately funded towards our own retirement.

Experience from all over the world has shown that our salaries are not enough to fund these goals. We need to invest into the capital markets, subject to our risk taking capacity, to take advantage of the compounding of capital, i.e., money that creates more money. No lesser authority than Albert Einstein remarked, "compounding is the eighth wonder of the world because it allows for the systematic accumulation of wealth".

The advantage of equity mutual funds and Ulips is that they are instruments that offer you a better rate of compounding for your capital than cash lying in the bank, and thereby provide a better chance of creating wealth in the long run.

Savings accounts and FD - bad dosage for financial health

Let's make ourselves clear. Savings accounts and FDs have a purpose and we cannot over generalise and make a blanket statement that they are bad instruments. However, when it comes to wealth creation they are not good instruments for you to invest through. We will show you why.

First of all, a savings account earns you a mere 3.5 per cent interest rate, a level that is fixed arbitrarily. Similarly, a fixed deposit contractually fixes the rate of return at the start date of your deposit, and you cannot earn more than what you signed up for, even if interest rates in the markets were to rise.

Compare this to a return that the equity market can earn you. History and experience of equity markets from around the world suggests that in the long-term equity markets are likely to "compound your capital" at approximately 12 per cent per annum. Compared to this, a 3.5 per cent savings account return just does not match up.

Secondly, savings accounts and FDs are highly tax inefficient. Any interest you earn through these will be taxable in your hands as income, and you will be liable to pay tax on this income.

Compare this to equity mutual funds and Ulips where at least for the time being until the new direct tax code is implemented you pay zero taxes on your gains if you hold these instruments for the long-term. And, if you invest into an equity linked savings scheme of mutual funds, you might find this an even more tax efficient investment than a regular mutual fund.

Finally, and perhaps most crucially, by leaving your money in a bank or an FD, you are losing the purchasing power of that money. Because you are earning a fixed return through these instruments, these instruments cannot offset the corrosive effect of inflation or rising prices within the economy.

If one's bank account returns only 3.5 per cent pre-tax, but the level of prices is rising at 10 per cent, one doesn't have to be a mathematical genius to figure out that in the long run one's standard of living will suffer. You will hardly be able to create any wealth, because whatever returns you earn does not even help you keep pace with the rising prices in the economy, let alone give you a surplus that can earn you further returns.

If you are already wealthy then FDs might be a good wealth preservation instrument, but please don't use them to create wealth for yourself.

Don't sit idle, invest actively

Putting your money into a savings account of an fixed deposit is almost akin to sitting idle. India is going through an inflection, which is likely to last for a few decades, where the equity capital markets will be the best avenue for long-term investment and a good way to build an alternate and legitimate source of wealth. If you believe in India's economic growth potential, then move at least some of your money from your bank account into a higher yielding instrument to give yourself a fair chance to create long-term wealth.

Source: http://www.expressindia.com/latest-news/FDs-can-be-hazardous-for-your-wealth-creation-plan/642271/

‘Sustained growth, post stimulus rollback, justifies valuations'

The moving variable to look for is whether growth exists in the system and how profitable the growth is. You will get that from a smattering of large companies and the gigantic listed universe of small and medium enterprises.

There are no defensive businesses, says the contrarian Mr Kenneth Andrade, Chief Investment Officer, IDFC Mutual. There are only shifts in capital allocation based on the earnings growth of sectors vis-à-vis the index. Not wanting to view opportunities based on market-cap segments alone, Mr Andrade, throws up quite a few interesting ideas for investment based on global changes in an interview with Business Line.

Excerpts from the interview:

Indian markets have outperformed most global peers on a year-to-date basis. Are markets taking less note of global risks?

Markets are not less concerned about the global risks that exist except for the fact that, if you look at a couple of trends that have been happening in India and in a significant part of the emerging market, it is contrary to what's happening in the West.

So, that resilience itself is holding out. When I say contrary trends, you've got the US and probably Europe heading into stagflation while you still have inflation in the emerging part of the world. And that, by itself, attracts a reasonable amount of money because inflation is a derivative of growth. So that will hold out in the near term.

What do you make of the current Indian market valuations compared with peers?

We are not expensive; we are not cheap. We are very close to the long-term median line. Added to this, stimulus withdrawal has been happening across the world. In a way India has already had a roll-back of some parts of the excise duties and now the realignment of petrol prices to some market-driven formula.

These are all very good from a macro-point of view as it helps the fisc significantly. And, if growth still does not stop then somewhere you will justify the premium valuations that you trade at.

But we have been seen growth moderation in sectors such as cement or telecom with profit margins too compressing. Could that extend to other sectors?

That will always happen in any industry where there is fragmentation of capacity or introduction of new players. When capacity grows significantly faster than the demand, you would see near-term contraction in margins. The contraction is also essential to make sure the strongest survive.

It's very prevalent in real estate and in some phases in infrastructure where the pricing power just does not exist with the contractor anymore because there is so much of fragmentation. You will start seeing it in the commercial vehicle and automobile market because India has moved from duopoly to probably 10 companies manufacturing four-wheelers andwe have more lined up.

Going forward we will see more segments actually fragmenting and that will lead to contraction in margins, competitive price points and product innovation to stay ahead of the curve.

In the recent rally we saw the traditional defensives pharma and consumer goods outperform. Are we seeing a shift in the classification of defensives?

What is defensive and what is offensive! Let me put this in perspective. You had an FMCG business at the turn of the century which was steadily growing at 15 per cent per annum and then there was this sector that turned up — technology — which grew at 50 per cent per annum. So you simply had a capital allocation choice. So you took that money and allocated it to technology. And yet the FMCG businesses continued to grow at 15 per cent per annum.

At the turn of the century, technology collapsed and FMCG grew at 15 per cent per annum. And so, FMCG was a defensive. But you have to remember one thing, when technology contracted, your index earnings contracted and the (index) growth levels went below the FMCG earnings growth levels. Then the investment economy picked up. You had the same scenario – FMCGs grew 10-15 per cent, while capital goods grew at 30 per cent. Again, there was a capital allocation choice and everything went into capital goods. You had polarisation of capital, so FMCG was overlooked.

Today you have a scenario where the index earnings is significantly below the earnings of the FMCG companies. So you now have a capital allocation which is moving steadily towards the consumer part of the economy as the latter is now growing faster than the investment economy and probably faster than even the outsourcing economy.

And that's playing itself out in the index. So I don't think there are any defensive businesses, expect that while growth has always been there, they trailed the markets; the growth has actually stepped up now. This is true of pharma as well. While domestic formulations businesses have stepped up in growth , the export-driven businesses suddenly have flush, large tie-ups coming from MNC companies, wanting to take the manufacturing capabilities of the local companies to their countries.

The valuation gap between mid and large-caps has shrunk. Where does the opportunity lie for investors? I would not want to go with the bias of market capitalisation. The moving variable that we need to look for is whether growth exists in the system and how profitable the growth is. You will get that from smattering of large companies and since you have such a gigantic small and medium enterprise universe that is listed, you would also get it from some part of that market. So you just have to look at opportunities and there are plenty of them out there.

The consumer story is probably one of the biggest that's setting itself in India. And when we talk about the consumer story we are not saying it in isolation because all emerging market economies are focussing on the fact that they would try to get the consumer back to revive their economies. So, China is no longer looking at the American consumer, it is looking at its own for growth. India or Latin America or some parts of Asia are all doing the same thing.

Two, on the outsourcing front we still enjoy the arbitrage in the standards of living between the West and this part of the world. But, more importantly, with wage inflation between 20-30 per cent in China this year, our economy would tend to be a little more competitive in this space. So we will take market share in some of the low value-added items, such as textiles.

Three, there will also be a shift in technology, in the sense that we are moving away from the desktops and networks are getting increasingly more bandwidth-intensive. So you will see a lot of capex happening on the technology part, which does not necessarily mean just software.

Four, Europe is more competitive than China now because Euro has depreciated vis-à-vis the dollar and China is going to peg vis-à-vis the dollar. So Europe goes into being one of the largest (manufactured) exporters in the world all over again. And they have got a very large ancillary base out of India. So, these are all opportunities that exist in the entire system.

Now you can play it through the engineering companies of the foreign MNCs in India, which are large-caps. Or you can play the outsourcing stories on some players in the technology space which are large-caps.

In manufacturing if we need to go back to textiles, which are low value-added, it can be through mid-caps. If we need to play with the entire consumer gamut, we get them through discretionary spends, such as automobiles, which are large-caps, or through domestic appliances, that are either mid- or small-caps or FMCGs, which are available across the entire spectrum.

So, look at the opportunity and if there are large and mid-caps, then they both should go together.

However, small and mid-sized companies carry the risks of being hit by any hike in borrowing costs. Does that make them less attractive?

What is relevant here is to note that the mid-caps are actually much better financed than the large companies. Not too many of them are actually over-leveraged. A lot of them are setting capacities; despite flat top-line they have not made losses.

Some of the very large companies are completely over-leveraged. So, on a structural basis, I think the smaller part of India is a little more resilient than its larger peers. Again, by definition, this does not mean that the smaller part is going to overtake the larger part. All the large companies that we know of are in commodities, engineering, banking and some part of technology.

Of the four, technology is the only one that is deleveraged. On the other hand, if you look at mid-caps, you've got contractors, which are working-capital intensive, so no significant leverage; which is the case in the engineering space as well. Then you have consumers, who are free cash-flow and then pharma companies, that do not need very high cash.

Q. Would the recent deregulation call for a re-rating of stocks of OMCs?

See there is an opportunity in the entire space and the opportunity is that this sector is the largest part of India's GDP and of all them fall in the services part of the GDP. Now, if you look at that and say that private sector does not realise that there is a huge opportunity in addressing this space I think it is very wrong. So I would not put these companies at a significant premium to the existing petrol stocks or oil marketing companies listed elsewhere in the world or in India. Sure they have got depreciated assets, to that extent it is fair, over and above that I am not too sure we will have a sustained re-rating over the next 12-15 months.

Q. One more topical issue is the introduction of base rate – would it impact borrowing costs of corporates?

You may see a hike in short term financing costs but let me also qualify that statement. There has not been a very large build-up of inventories in India. And working capital is probably the largest part of any company's balance sheet. Project finance is relatively a smaller part. So I would not say that the increase in cost would dramatically affect the P&L account of companies. In some cases, you might see an increase by 1-2 percentage points. That's the range in which a lot of companies may report an increase in borrowing costs. But at the same time it also increases the opportunity of creating a very vibrant bond market. It also means that Corporate India would look at alternative sources of funding which includes going overseas.

Source: http://www.thehindubusinessline.com/iw/2010/07/04/stories/2010070450950500.htm

SEBI chief calls MF industry's bluff as members pour out grievances

A forum by an industry body on mutual funds on Wednesday, where fund houses intended to pour out their woes to the Securities and Exchange Board of India or Sebi, hardly had any effect on the market regulator. On the contrary, Sebi chairman CB Bhave launched a scathing attack on the practices of the mutual fund industry.

Mr Bhave was critical of the way fund houses do business and reiterated the need for them to focus on investors to grow.

“If you (mutual funds) are producing better returns than what an average investor investing himself in the stock market gets, then why is it that you are unable to convince investors that you are giving them better returns,” said Mr Bhave, at a mutual fund summit organised by the Confederation of Indian Industry (CII). “I mean, are investors so dumb as not to understand that they are getting better returns here (mutual funds) and yet would invest somewhere they would get lesser returns,” he said.

Sales of equity schemes of mutual funds have been hit, after Sebi banned mutual funds from charging investors to pay fees to distributors.

Mr Bhave said that mutual funds needed to look at how investors benefit from investing in their products, rather than create an incentive structure that suits them.

“Somehow the focus goes to short-term incentives and that ultimately results in a great loss for investors. And finally, when investors lose money, the whole industry also comes tumbling down. I think, this lesson needs to be internalised by all of us,” he said.

The Sebi chief said that mutual funds have to streamline their 3,000-odd product offerings to make it more investor-friendly.

“Even if you put before me 3,000 investment products, I won’t know how to choose from those products. I’ll have no idea of which scheme is good for me,” Mr Bhave said. “If you really want to reach to the so-called small investors in whose name you do everything, does he need 3,000 options? Is there really so much of innovation that is going on? Are these schemes really so different from each other or were there incentives operating in the market that made us generate these 3,000 options?” he said.

In an earlier speech during the conference, UTI AMC chief UK Sinha remarked that about 60% of the schemes are sub-optimal and the investments in them will not be able to help mutual funds justify their claims that they are giving investors the benefits of aggregation of savings.

Mr Bhave slammed the mutual fund industry for relying more on short-term money to boost their assets under management. “You are becoming a shock absorber because you are taking short-term money ... now who asked you to take short-term money ... because you see that the neighbour (rival fund house) is taking short-term money and his AUM has gone up, so I need to compete,” he said.

Soon after the conference, Mr Bhave spoke to reporters about his take on the recent verdict over the regulation of unit-linked insurance plans (Ulips). Last week, the government had said that IRDA would continue to be the regulator for ULIPs, quashing Sebi’s order that the investment component in the product should get its approval. “I don’t agree with the description of war — between IRDA and Sebi. We must remember that we all operate under the law as it exists. So, the law has changed now, there is no question of happiness or anything like that,” Mr Bhave said.

Source: http://economictimes.indiatimes.com/Personal-Finance/Mutual-Funds/Analysis/SEBI-chief-calls-MF-industrys-bluff-as-members-pour-out-grievances/articleshow/6084287.cms?curpg=2

Sebi sets about making MFs safer, more open, more accountable

Investors in mutual funds (MFs) have a lot of positives to look forward to. In the past three months, the Securities and Exchange Board of India (Sebi) has announced reforms that make MFs better investment vehicles and is working to curb mis-selling, too. A summary:

Dividends from profits: The accounting norm has been tweaked for dividends. This will result in fund houses having less for dividend payouts. The market regulator has ordered MFs to use only the realised profits to declare dividends in a scheme. Fund houses cannot use the unit premium account to pay out dividends.

An example. Assume an investor enters an existing scheme that has a net asset value (NAV) of Rs 18. For accounting purposes, an MF breaks this NAV into parts. Of the amount, Rs 10, the face value of the scheme, goes to an account called unit capital. The remaining Rs 8 goes to a separate account called a unit premium reserve.

Sebi has said the MF cannot use the money in the unit capital account, Rs 8 in the example, to pay dividends. Rather, dividends should be declared only when the NAV appreciates. In our example, say the NAV moves to Rs 20. Fund houses can only use Rs 2 to declare dividends.

Experts feel this step will curb MF mis-selling. “Agents have been pitching the dividends declared to mis-sell schemes. Many investors still don’t realise that an MF dividend is different from dividends received on a stock. In an MF, an investor gets back his own money,” said Manoj Kumar Vijai, executive director, KPMG.

“We will need to trade shares every time the dividend would need to be declared. Despite this drawback, there is no way we can look away from the fact that dividend payment itself is a much questioned practice,” said the head of a fund house.

MF houses use this dividend to woo customers in its monthly equity-linked savings schemes and hybrid funds like monthly income plans.

Further, the regulator has directed the fund houses to mention the dividends in rupee terms, rather than a percentage of the face value. Funds usually declare dividends as a percentage to the face value, mostly Rs 10, of the scheme. That’s why dividends seem magnanimous when a scheme declares it. For example, if a fund declares a dividend of Rs 10, it means 100 per cent dividend.

Derivatives exposure: To make investors aware of the risk involved in a fund, Sebi has also mandated fund houses to declare their exposure in equity derivatives. Futures and options are risky and can lead to unlimited losses if the bets go wrong. This will force MFs to take lesser exposure to equity derivatives.

Sebi’s Mutual Fund Advisory Committee (MFAC) has also proposed to cap the exposure of any scheme to derivatives at 100 per cent of its actual holding in stocks. This will not allow a fund house to excessively play in the futures and options market. The requirement of only margin money in derivatives allows them to have a much higher exposure.

Making agents responsible: MFAC has also come up with recommendations that would make agents more responsible for their advice to investors.

The committee has proposed that agents categorise investors based on their risk profile, investment objective and affordability before selling funds. Among other recommendations, the committee suggested that distributors maintain written records of all recommendations and transactions. The committee has also proposed that while advertising, fund houses should present the entire picture of the scheme’s performance. This is because ads invariably talk only about the period in which a scheme had outperformed, not the reverse. The committee want funds to give both.

Source: http://www.business-standard.com/india/news/sebi-sets-about-making-mfs-safer-more-open-more-accountable/399227/

Ulips, equity MFs to lose tax cover in new-look Code

Unit-linked insurance plans (Ulips), equity-oriented mutual fund schemes and a number of other popular savings and investment instruments will lose their tax immunity, and with it, their attractiveness when the Direct Taxes Code (DTC) comes into operation.

The Central Board of Direct Taxes (CBDT) plans to reduce the number of instruments that qualify for tax deductions to only about half a dozen, its chairman SSN Moorty said, as the government overhauls the direct tax regime to try and make it simpler, boost revenues and encourage long-term savings. The Rs 3-lakh tax deduction limit proposed in the draft DTC will also be lowered.

Revised proposals for a new Direct Taxes Code to replace the nearly 50-year-old Income-Tax Act were unveiled on Tuesday. The government has said it hopes to operationalise the code by April 2011.

Ulips, which are hybrid products incorporating investment and insurance cover as traits, are particularly popular. In the 2009-10 fiscal, such products accounted for more than four-fifths of the total insurance premium of around Rs 2.60 lakh crore that was collected. They are controversial too: capital market regulator Sebi and insurance regulator Irda are involved in a tug-of-war over who has the right to regulate Ulip products.

“Ulips will be out of the exempt, exempt, exempt (EEE) tax regime,” said a senior finance ministry official, referring to the different stages at which financial instruments may be taxed.

At present, individuals who invest in Ulips do not pay tax at any stage—at the time of investment or contribution, during the tenure of investment, or at maturity. It qualifies for tax deduction along with a host of other savings schemes, including bank deposits, equity-oriented mutual funds, national savings certificate deposits and principal repayment on home loans. Taxpayers can claim a deduction of up to Rs 1 lakh a year on these instruments.

“Tax benefits are a key driver for insurance penetration and dilution of any benefits will have an impact on penetration,” said GV Nageswara Rao, MD and CEO, IDBI Fortis Life insurance.

The revised proposals make it clear that only six schemes—public provident fund (PPF), the pension scheme administered by the Pension Fund Development Regulatory Authority, general provident fund, recognised provident funds and pure life insurance and annuity schemes—will be tax-free. Tax will not be levied at any stage on these schemes.

The new pension scheme will also be covered by the EEE method of taxation and withdrawals will not be taxed at maturity.

However, investments made before the DTC comes into force will continue to be eligible for the EEE method of tax treatment for the full duration of the financial instrument. This means an investor who buys a Ulip before the DTC comes into force will not be taxed at any stage during the full tenure.

Ulips could be taxed at the time of maturity, but the government has not clarified yet the tax treatment of the products.

“The existing tax treatment of Ulips is beneficial as it helps in the flow of funds to the infrastructure sector, besides contributing significantly to the capital market”, said R Kannan, member-actuary, Irda.

The original code had proposed the concept of savings intermediaries that would invest the amounts deposited with them in Ulips, equity-linked mutual fund schemes, debt-oriented mutual fund schemes or other financial products depending on investors’ choice. Withdrawals would be taxed, but not a rollover.

CBDT has dropped the proposal to tax savings instruments at maturity in the absence of a social security system.

The aim now is to encourage taxpayers to invest in long-term savings schemes. PPF, for instance, has a 15-year tenure, although partial withdrawals are allowed after the sixth year. The revised discussion paper has said the rules for contribution and withdrawal will be harmonised and made uniform so that savings are made by the taxpayer for the long term.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/Ulips-equity-MFs-to-lose-tax-cover-in-new-look-Code/articleshow/6056607.cms

India delivered better returns than most: Madhusudan Kela, Head-Equities, Reliance Mutual Fund

His rise within the organisation as well as in the fund management industry has been dramatic. But for the past few months, there has beenspeculation that Madhusudan Kela, head-equities, Reliance Mutual Fund, is quitting. Untrue, insists Mr Kela. In an interview with ET, he says that he is still bullish on the big picture India story. However, in the short term, global sentiment will prevail, he cautions.

How do you see the market playing out near term in light of global developments?

In the next 6-12 months, the market will still be ruled by global sentiment. The ongoing debt crisis in Europe can have a meaningful impact on markets globally as in India, if the situation worsens. If one or two Eurozone countries were to default or the euro as a currency breaks down, there will be chaos.

Similarly, if there is slowdown in China, the Indian market will be impacted. Currently, the Indian market is trading at a 25% premium to China. If China’s earnings multiple contracts, there could be a valuation challenge for India as well. However, we have seen over the past six years that the market has produced significantly better returns than most countries in the world. The India story is getting stronger.

For instance, this year, you will see a significant fiscal consolidation, which was a major worry for the market. Over the next 2-3 years, the gas and oil reserves will materialise and this will further improve our fiscal position. And the real dark horse could be the UID project which can significantly prune the subsidies and improve tax collection. And hopefully, the pilferage will reduce. I believe a 8-9% growth with more reforms from the government looks real in the next five years.

How steep do you expect the correction, if it does come through, to be?

If the situation in global markets worsens, we could even see a 15-20% correction in Indian shares. But since India’s fundamentals are only getting better, and viewed in the global context, overseas fund managers will be compelled to increase their exposure to India. Any meaningful correction will be a great buying opportunity for retail investors with a long-term view on equities.

Which are the sectors that interest you?

We continue to remain overweight on the pharma sector. We are bullish on companies which will benefit from the domestic consumption story in India. We like public sector banks. They have underperformed the market for a while due to concerns over rising bond yields and hence marked-to-market losses on the bond portfolio.

Our view is that PSU banks can grow their loan books 25% for each of the next three years, and they have the capital adequacy to meet the loan demand. The stocks are available at 1.2-1.5 times their book value, and you can’t go wrong if you have a 2-3-year perspective.

There is a lot of pessimism about the telecom sector, more so after the recent 3G bids. Would you take a contrarian view?

Much of the bad news in the sector is behind us. If these stocks see any sharp correction, we would definitely buy them. The stock prices may have underperformed over the past couple of years, but the customer base has more than doubled during the same period.

What about mid-cap stocks in general? Would you still go for them in current market conditions?

Yes, if there are opportunities, we will continue to invest in companies with scalable business models, with earnings growth faster than large-caps, and available relatively cheaper to large-caps.

Your strategy of betting on mid-caps in a big way has been criticised by your peers. They accuse you of boosting portfolio returns by buying into firms with low-floating stock.

Companies like Siemens and Jindal Steel & Power were mid-caps when we first bought them. Not only have they delivered better returns, but are now ranked among the large caps. But I must admit that there have been some wrong bets as well. We have tweaked our mid-cap strategy a bit. We will not buy into very small companies, and would focus on companies with a minimum m-cap of Rs 1,000-1,500 crore.

Locally, what are the factors that could dampen sentiment for stocks?

Below average monsoon would rank high on that list. The reforms process needs to be accelerated. The government has shown resolve, but it needs to build on it, especially in terms of attracting more FDI flows. Rising instances of Maoist and Naxalite attacks could make foreign fund managers nervous. We are highly dependent on inflows at this stage, because there is not much money coming in locally.

How much cash on an average would you be keeping in your portfolio? Your strategy of aggressive cash positions last year was criticised in industry circles.

We will use it more as a tool to improve the portfolio mix. We will not shy away from keeping a higher cash level than our peers if market conditions warrant. But it will not be as high (25%) as was the case last year.

Source: http://economictimes.indiatimes.com/opinion/interviews/India-delivered-better-returns-than-most-Madhusudan-Kela-Head-Equities-Reliance-Mutual-Fund/articleshow/6044698.cms

Right selling vs mis-selling in MFs

In mutual funds, intrinsic complexity and the absence of a physical product make it that much more imperative for institutions to be cognizant about potential mis-selling and implement a mechanism that would rest on the principles of right selling

Do I have to be like Ceasar’s wife and be above suspicion,” said a bank CEO on the subject of mis-selling. Instinctively, I felt that the point was missed. If you ask a banker about prevention of fraud or cash being stolen, the response would include charts, drawings, tables and process flows to impress you how robust the system is. However, on the question of right selling vs mis-selling, beyond the cliched “moral high-ground” and waxing eloquence, there is no attempt to implement a systemic solution.

Given the dominance of banks and other institutions distributing mutual funds in India, is there an institutional mechanism possible to guard against mis-selling? And, if so, what should it look like?

In mutual funds, intrinsic complexity and the absence of a physical product make it that much more imperative for institutions to be cognizant about potential mis-selling and implement a mechanism that would rest on the principles of right selling, the violation of which could result in mis-selling. For this, there would have to be some basic steps. One, each customer has to be profiled based on his risk appetite and investment objectives. Two, each product has to be profiled to reflect the customer category it is suited for. Three, there are potential conflicts in mapping the profiles of the products and customers. Four, it is the responsibility of the intermediary to recognize the potential conflicts and implement checks to ensure that these do not become real conflicts to the disadvantage of the investors. Five, it warrants an organizational mechanism to recognize these different roles and responsibilities and build in checks through a stringent compliance process. Six, it warrants a management oversight to ensure integrity for such systems to work efficiently and effectively.

To implement this framework, it is necessary to label roles and responsibilities. These include managers handling sales/relationship management, products, customer profiling, compliance, management, audit and board. Once that is done, it is important to identify and analyse potential areas of mis-selling and build preventive mechanisms.

Taking the customer on board: This should include implementation of know your customer norms, obtaining sufficient and accurate information to assess the customer, look at his risk profile and investment objectives, categorize him, putting in place mechanisms for feedback on efficacy, and ensuring that information about customers is reviewed periodically.

Product evaluation: The institution should create a universe of products that are evaluated and are investment worthy. The products should be reviewed for its risk level and should be assigned to a pre-defined customer risk profile category. Also, there should be a written record of the suitability of the product to that particular customer category.

Transaction: The institution should provide documentation to every client covering two aspects: one, product recommendation indicating its appropriateness for that customer category and two, a statement of the fees (one-time and ongoing) earned by that institution from that product. Further, it should obtain the client’s acknowledgement. When the product is sold from a client’s portfolio or switched to another product, the institution should document the reasons—was it the client’s requirement, or was the product taken off the approved list or was there a need to realign his portfolio.

When a customer buys a product that is not in the universe of recommended products, then the client should acknowledge and confirm that the decision is the customer’s and that he does not seek advice from the institution. It would help the institution to receive no fees—other than reimbursement of transacting costs—for such investments.

Compliance process: The difference between right selling and mis-selling is the difference between compliance in spirit versus form. The process is challenging here due to many conflicts—between the institution’s objectives for business and profit against that of the client and the conflict between the investment worthiness of a product and attractiveness of the commission structure. The key, therefore, is in recognizing that these potential conflicts of interests exist and putting in place review processes.

A sales/relationship manager should neither determine the customer profile nor the product profile. This role should be monitored for correctness in matching products to customers. Further, there should be no freedom to undertake “execution only” transactions. Under the principles of “maker–checker”, compliance should ensure that any discretionary authority is one level removed from customer engagement.

Management process: The key areas that influence the behaviour and outcome of team members are the incentive structure and compensation oriented towards customer retention. There should be no emphasis on transaction revenue as it encourages portfolio churn and conflicts with customer interest. It is also important to create an environment that encourages transparency in relationships with customers as well as fund houses. Customer franchise is built over the long term—building a system that encourages doing the right things daily certainly helps.

Source: http://www.livemint.com/2010/06/02212527/Right-selling-vs-misselling-i.html