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