Escorts Mutual Fund

Diversification of assets overseas is must for portfolio

By: Nikhil Walavalkar & Prashant Mahesh, ET Bureau

Nakul Karnik, an IIM graduate and an analyst with a knowledge processing outsourcing unit, tracks the Middle East and North Africa (MENA) markets.

He believes that there are strong growth opportunities there. Putting his money where his mouth is, Karnik has invested some of his savings in exchange-traded funds listed in the US. These funds track opportunities in the MENA markets and have made Karnik good money.

Unlike Karnik, not all investors have the resources to invest in global markets nor do they have access to US-listed exchange-traded funds. For such investors looking to diversify overseas, mutual funds provide the opportunity.

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MUMBAI: Average assets under management (AUM) of domestic mutual funds rose marginally in October from the previous month. Total assets under management in October stood at Rs 7,52,209 crore against Rs 7,43,696 crore in September, according to data on the Association of Mutual Funds of India (AMFI) website.

Most top fund houses registered a growth in assets this month. Fund managers said several fund houses sold off their equity assets as markets touched the year’s high earlier this month.

Many mutual funds are sitting on cash, fund managers said, in anticipation of a correction, they said. In fixed-income schemes, fund officials said there have been significant inflows into ultra short-term schemes.

Among leading fund houses, Reliance Mutual Fund’s AUM in October was at Rs 1,16,781 crore compared with Rs 1,18,251 crore in September. HDFC Mutual Fund’s assets during the month rose to Rs 93,316 crore against Rs 90,427 crore in the previous month.

ICICI Prudential Mutual Fund’a assets in October was almost flat over the previous month at Rs 80,524 crore. Birla SunLife Mutual Fund’s assets in the month rose to Rs 65,052 crore against Rs 63,055 crore last month.

Mutual funds are at a crossroads

For years,fund houses sold their schemes like white goods. One launch quickly followed another, helped by ads and a formidable network of distributors Investors — individuals as well as corporates and banks — lapped them up.

Just as consumers buying colour TVs or washing machines never bothered to find out the commission that the maker was paying to the shopkeeper, mutual fund investors rarely cared how much fund houses were paying brokers. The brokers, in turn, were not particularly interested how the commission was paid — whether the fund house paid it from its own pocket or made investors pay for it.

Life went on: investors poured in money, mutual fund CEOs collected their bonuses and brokers happily sold whatever fund houses churned out. Perhaps the only difference between an MF scheme and a colour TV was that while SRK or KatKaif could endorse a flat screen, they couldn’t feature in any promo displaying their preference for a particular new fund offering simply because Sebi does not permit that. While celebrity endorsement continues to be a no-no, a lot has changed in the way schemes are sold.

New Rules, New Game

A few months ago, the regulator told MFs that other than what’s allowed under a scheme’s recurring expense, investors can’t be charged for whatever is paid to brokers. Till then, funds invested Rs 97.75 of every Rs 100 put in by the investor while the difference of Rs 2.25, the so-called entry load, was used to meet marketing and distribution expenses.

The ban on this upfront payment of Rs 2.25 means that funds now invest the entire Rs 100. So, how are MFs paying the distributors? It’s through a trail commission that’s charged on a daily basis and linked to the length of the investment. This existed before and continues to prevail as part of a scheme’s recurring expense of 2.25%; this is different from the load and comprises a management fee, among other things.

There’s nothing, however, that stops fund houses from paying brokers out of their own resources. Sebi moved at a surprising pace, MFs saw their collections drop while brokers read the writing on the wall. Coming as it did a year after the Lehman collapse and a run on local funds, Sebi’s argument that ‘investors mattered more than intermediaries’ had instant takers.

The Twilight Zone

Fund managers immediately sensed that the industry they had known for decades would change forever while many small brokers feared they would go out of business. It was a business in which fund houses tried to beat each other, driving collections by paying higher commissions to distributors. The asset under management (AUM) numbers of various funds released every month were almost like a league table, tracked by the market and the media.

Clearly, size mattered.

Interestingly, it still does. Large mutual funds which have the wherewithal can still continue to pay decent commissions out of their own pocket to incentivise distributors. Today, there is no clarity on whether and how much fund houses can pay to distributors. So far, the regulator’s official communiqué simply says the investor will not be charged any entry load while up to 1% exit load can be introduced for investors making an early exit. That’s all the regulator has put down in black and white

http://economictimes.indiatimes.com/money-banking/Mutual-funds-are-at-a-crossroads/articleshow/5194200.cms

Mumbai, Nov. 3 Banks are expected to step up investment of their surplus funds in short-term debt instruments such as commercial papers, treasury bills, and government securities with one-two years residual maturity. This is to address the Reserve Bank of India’s concerns over circular movement of liquidity from banks to the liquid schemes of mutual funds (MFs) and vice-versa.
The central bank’s apprehension over circular movement of funds stems from the fact that should liquidity start drying up (on the back of improved credit pick-up) banks would redeem their mutual fund investments to shore up their funds position.
Faced with redemption pressure, MFs would then resort to heavy borrowing via Clearing Corporation of India Ltd’s collateralised borrowing and lending obligation (CBLO) facility, thereby putting upward pressure on CBLO as well as call money rates.
Bankers hold the view that the RBI’s “banks should lend directly to corporates and not through the intermediation of mutual funds” message implies that the central bank is anxious about the systemic implications of the circular movement of liquidity. According to Mr Arun Kaul, Executive Director, Central Bank of India, once the board approves internal prudential limits for investment in mutual fund schemes so as to mitigate risks, banks will actively invest in short-term debt to manage their short-term liquidity.
According to industry observers, a good chunk of the over Rs 1 lakh crore excess liquidity parked by banks in liquid schemes of mutual funds could find its way into short-term debt instruments. Tepid credit appetite in the economy in the financial year, so far, has forced banks to make large investments in government securities and also fairly sizeable investments in units of mutual funds.
Credit pick-up in the financial year up to October 9 at Rs 1,14,766 crore is less than half the off-take (Rs 2,47,775 crore) during the corresponding period last year. Hence, banks had no choice but to collectively channelise their daily surplus aggregating over Rs 1 lakh crore to the low-yielding RBI’s reverse repo window.
Further, banks also invested Rs 2,11,500 crore in the financial year up to October 9 in government securities (Rs 6,169 crore in the corresponding year ago period) and deployed Rs 1,28,772 crore in liquid scheme of mutual funds (Rs 9,079 crore).
As credit pick-up has been lacklustre, outstanding investments of banks in liquid schemes of mutual funds have been in excess of Rs 1 lakh crore since April. Ease of entry and exit as well as benefit of tax exemption on dividends and regulatory arbitrage have encouraged banks to plough excess liquidity into MFs.
Banks investment in liquid schemes of mutual funds currently fetches them a return of 4.0-4.5 per cent. Depending on rating, investment in commercial papers earns them a return of 5.0-7.0 per cent. Investment in Treasury Bills gets them a return of 3-4 per cent.

Our Bureau
Mumbai, Nov. 3 Assets under management of mutual funds rose marginally in October, partly on the back of inflows enjoyed by selected funds and lower redemptions, said fund managers.
The industry AUM amounted to Rs 7,51,477 crore as on end of October, against Rs 7,42,910 crore in end-September. Five fund houses are yet to report AUMs.
Even as Reliance Mutual Fund’s asset base fell by 1.24 per cent during October, the rest among the top five recorded marginal growth. They are HDFC MF (3.19 per cent), ICICI Prudential (0.5), UTI (4.4) and Birla Sun Life (3.16).
The average assets under management might have increased during the month, but the end-of-the-month data might reflect a different number as it is mainly during the tail-end of the month that MFs witness outflows, said the Chief Investment Officer of a fund house.
Equity schemes fetched poor inflows during the month, but asset base of the industry was more or less maintained as there were not much outflows either, said a fund manager.
Debt funds have got some inflows, which helped keep up the asset base, said another fund manager.

The aim is to lower losses from risks underwritten by them.
The four public sector insurance companies are in for a makeover as part of a drive to lower losses from risks underwritten by them.
The four, New India Assurance, National Insurance, United India Insurance and Oriental Insurance, are first dealing with legacy issues. They are reconciling the list of claims with those that have been paid but not reflected in their books.
“There are a number of cases in which insurers have paid the claims but provisions, some of which are in excess of the amount paid, are still sitting on the books,” said a source privy to the revamp exercise, being pushed by the Union finance ministry.
In addition, a business process re-engineering (BPR), which will include implementation of core insurance solutions and centralising claims’ settlement, is being been undertaken.
Business will be reorganised into divisions focusing on different segments — bancassurance, large companies and agency. Besides, a performance-linked incentive scheme for employees will be introduced.
As a precursor, the companies have started measuring performance of employees on a regular basis in terms of the business generated, the commission paid on the risk underwritten and the claims incurred. “Earlier, performance used to be measured only after annual accounts were finalised, which was sometime in July-August. But now, the companies are trying to measure performance on a monthly basis so that mid-course correction can take place,” said a source.
A finance ministry official said the move initiated by the four general insurance companies was like an exercise undertaken by banks in mid- and late 90s. But the government does not have to shell out capital here.
The ministry had recently asked public sector general insurers to implement core insurance solutions (CIS) in line with the experience of public sector banks, where the move has helped customers transact from across the country.
While Oriental Insurance, the smallest of the four, had implemented CIS, the other three would follow over the next 12-18 months, a source said.
New India, Oriental and United India appointed Boston Consulting Group, while National hired PricewaterhouseCoopers, for the restructuring. The exercise is expected to be over by September 2010.
“Technology is the cutting edge and we expect to implement 100 per cent CIS by 2010. We are focusing on better underwriting practices by adding an element of incentive to performance,” said United India Insurance Chairman and Managing Director G Srinivasan.
United India has divided strategic business units into bancassurance, motor dealer, large corporates, and agency offices, while Oriental has segmented the market into four groups — agency, corporates, brokers and bancassurance. On servicing claims, United India is strengthening settlement offices and speeding up claim settlement by third-party administrators (TPAs). Oriental is offering more business to TPAs who have given a good account.
“As part of re-engineering, we have added an element of incentive linked to the performance of branches which will be based on the number of claims settled and the number of claims incurred. Branches which have a low combined ratio will be given incentives,” Srinivasan added.
A combined ratio of less than 100 per cent indicates underwriting profitability on the amount placed at risk; above 100 indicates a loss. The combined loss ratio of the four companies is 123-130 per cent. The ration is calculated by adding the loss ratio and the expense ratio. The loss ratio is calculated by dividing the amount of losses by the amount of premium earned. The expense ratio is calculated by dividing operational expenses by the amount of premium earned. The expense ratio of general insurance companies is around 20 per cent.
“We appointed consultants as we were losing market share. The ministry has asked the other three insurance companies to implement CIS as we had already started the process in 2005. We expect to bring down our combined ratio by 10 per cent from 135 per cent at present,” said Oriental Insurance Chairman and Managing Director M Ramadoss.
“Re-engineering is a continuous process and we are implementing it in different stages. This will improve our productivity. Thereby, our bottom line will improve,” said New India Assurance in-charge AR Sekar.
“Ours is an IT-led business process re-engineering. We will initially roll out CIS in March 2010, the costliest among the four insurers, at around Rs 200 crore,” said National India General Manager RK Kaul.

MUMBAI: India’s largest bank — State Bank of India, which launched a special home loan scheme in February this year to woo home buyers by offering the lowest rates in the industry will soon decide on whether to extend the scheme beyond November 7, when it is set to expire.

As part of the scheme, which received a good response, the bank offered a fixed rate of 8% for loans up to Rs 5 lakh for five years, while loans up to Rs 50 lakh were priced at 8% for the first year, 8.5% for the second and the third year and in subsequent years it would be linked to the prime lending rate.

SBI chief general manager in charge of retail loans P Nanda Kumaran told ET: “The bank has not taken any decision as yet on extending the deadline.” He said that the decision will be based on the view that SBI’s asset-liability committee (ALCO) takes on interest rate movement. The ALCO is scheduled to meet before November 7.

Bank officials, on condition of anonymity, said that SBI will take into account the the overall loan growth in corporate and the SME segment. “If there is a pick-up in corporate and SME loans, it may prefer to focus on this segment. However, if the growth in the corporate loan book is slow, the bank may consider extending the special home loan scheme,” a senior SBI official said.

SBI chairman OP Bhatt had told the media on Saturday that his bank was facing a huge liquidity overhang in the region of Rs 50,000 crore on a daily basis and of this about Rs 20,000 crore is being parked with the Reserve Bank of India. This implies that only if demand for corporate loans picks up sharply will SBI withdraw the scheme.

Although, the bank has seen good demand for loans in the second quarter ended September 2009, of Rs 30,000 crore against Rs 1,200 crore in the preceding quarter, given the huge base of SBI (Rs 5,80,237 crore), the incremental credit growth (April to September) is only 5.6%.

At the same time, its home loan book has grown 40% in the first six months of current year over the comparable period last year. The net home loan disbursement between February to September 2009 stood at Rs 8,274 crore against Rs 5,892 crore in the corresponding period last year. “Every month we have seen sanctions worth Rs 2,000 crore,” said Mr Kumaran.

SBI initially floated the special home loan scheme in February and in August in reduced rates further. It has approved 1,69,174 application for home loans and sanctioned loans amounting to Rs 17,537 crore since February.

Banking industry officials said that SBI may extend the scheme to December end since many state-owned banks such as Canara Bank and Bank of Maharashtra are offering similar competitive rates on home loans till December 31.

Central banks plan to raise gold holdings in view of dollar’s fall.
The Reserve Bank of India (RBI) today said it had bought 200 tonnes of gold from the International Monetary Fund (IMF) for around $6.7 billion. The deal would take RBI’s gold holding to the 10th largest among central banks.
India bought nearly half the 403.3 tonnes gold that the IMF decided to sell in September to raise resources for lending to low-income countries. Over the next five years, the multilateral body intends to provide an additional assistance of $17 billion to such countries.
The transaction, which was in the process of being settled, involved daily sales by the IMF between October 19 and 30, with each sale conducted at a price set on the basis of the market price prevailing that day.
The purchase will increase RBI’s stock of the precious metal by 56 per cent to 557 tonnes from 357 tonnes.
The deal comes 18 years after India pledged gold with the Bank of England to meet external obligations.
The deal represented one-eighth of the IMF’s total gold stock. This is the first time since 2000 that the IMF has sold gold to a central bank. Between December 1999 and April 2000, in separate transactions, the IMF had sold 12.9 million ounces of gold to Brazil and Mexico.
“The fall in the US dollar seems to be pushing all central banks to strengthen their portfolio with gold,” said NR Bhanumurthy, professor at the National Institute of Public Finance and Policy. “Gold is a safe store of value compared to the US dollar,” he told Bloomberg.
India’s foreign exchange reserves were $285.5 billion on October 23, of which gold accounted for just over $10 billion. The purchase will lift the share of gold from near 4 per cent to about 6 per cent, much less than most of the developed world but four times China’s.
“This is an important step toward achieving the objectives of the IMF’s limited gold sales programme, which are to help put the fund’s finances on a sound long-term footing and enable us to step up concessional lending to the poorest countries,” IMF Managing Director, Dominique Strauss-Kahn said in a statement on Monday

MUMBAI: The Securities and Exchange Board of India (Sebi) is considering a flexible tenure for stock lending and borrowing (SLB) contracts. At present, the tenure for a SLB contract is 30 days, which means that the investor who has borrowed shares will have to return them to the lender on the thirtieth day from the transaction. If the fixed tenure is done away with, lenders and borrowers can decide on the date of repayment, among themselves.

Two persons familiar with the development told ET that the regulator has decided to review the tenure of SLB contracts, as the lending and borrowing schemes have failed to take off 18 months after it was introduced in April last year. The SLB mechanism is designed to help the borrower sell the shares he feels are overpriced, but not in his possession.

The lender benefits by way of an interest charge on idle shares in his account. The borrower is betting that the price of the shares will decline, and that he will be able to buy them back at a lower price and return them to the lender.

The borrower’s profit is the difference at the price which he has sold the shares and the price at which he buys them back. However, he will incur a loss if the stock price moves up, as he will now have to buy them back at a higher price.

A group comprising foreign institutional investors (FIIs), custodians, some large mutual funds and a few brokers had made a representation to the market regulator on the issue recently. Some institutional investors had even met finance minister Pranab Mukherjee a few weeks ago, highlighting, among other issues, the absence of an effective SLB mechanism.

“Currently, SLB has a fixed tenure. It has to be flexible whereby both the borrower/lender can choose the period of lending and can close out the transaction at their convenience,” said an institutional investor on condition of anonymity. SLB is largely used by institutional investors while writing complex option contracts.

Apart from the tenure, foreign brokers are not motivated to borrow/lend stock onshore since they pay higher taxes on profits made. “If you do SLB offshore like in Hong Kong etc, you are paying less,” said the head-equity at a foreign bank. Under the existing SLB scheme, a person who owns securities can lend them through an approved intermediary, which also acts as the central counterparty. Sebi-approved intermediaries are NSCCL and BOICL, the clearing house of the Bombay Stock Exchange (BSE).

Sebi made SLB operational in April 2008 with a seven-day tenure, but there were few takers for this. The regulator had extended the tenure for SLB to 30 days in November 2008 in the backdrop of heavy short-selling of Indian shares through lending of shares maintained in participatory notes (P-notes) by FIIs.

In a circular in October 2008, Sebi had expressed its disapproval to FIIs lending shares for the purpose of short sales in overseas markets. However, that still doesn’t draw investors to the Sebi-approved SLB mechanism.

The Securities and Exchange Board of India (Sebi) proposed a new set of norms to minimise misuse of powers of attorney (PoA) that clients execute.
In a discussion paper released for public comments, the regulator said it wanted to put restrictions on a franchisee or a representative of the broker to use a client’s account. Sebi said the PoA would be executed only in the name of a brokerage and not in favour of a sub-broker or an employee.
To ensure that the customer was aware of the terms of the PoA, Sebi has suggested that brokers and depository participants either send the original agreement or a certified copy to the client. The regulator also said that brokers and depository participants would need to send SMS alerts regarding transactions of shares and transfer of money.
Besides, Sebi wanted the PoA document to also include a clause for settling disputes arising out of the operations of the document. Also, PoAs should be specific to recover money related to margin or delivery obligations out of trades executed by the client, the discussion paper proposed. Such PoAs are called restricted PoAs. According to market sources, brokers get their clients to sign general PoAs (also called full PoA).
A general agreement allows brokers to sell shares in the open market and transfer cash in the trading account to pay mark-to-market margins for derivatives. Further, in the event of a merger or demerger of a stock broker or a depository participant, the new entity would need a written confirmation from the client to continue using the PoA.
Sebi received several complaints about franchisee or sub-brokers using clients’ account without their permission, sources said. “The client only gets to know when he sees the losses,” said an executive at a brokerage.
Franchisees and sub-brokers earn commission based on the number of trades. To meet the targets, these intermediaries often used clients’ accounts.
Most of the investors were not even aware that they had signed on a paper that authorised broker or the franchisees to trade on their behalf.
“While opening an account, a person is required to sign on at least 50 different papers. In some cases it can be as high as 75,” said Praveen Malik, head of compliance at Centrum, a brokerage firm. Often, investors signed without reading.

Kanpur-based business conglomerate Rohit Surfactants Private Limited (RSPL) is planning to launch an Initial Public Offer (IPO) in the next fiscal year. The group has commercial interests in surfactants, leatherwear and wind energy generation.
The company is planning to engage a number of investment bankers for the public issue, whereby it will evaluate the amount of capital expected from the proposal apart from the draft proposal to be submitted to Securities and Exchange Board of India (SEBI).
“Once the draft prospectus is ready, hopefully by end of this fiscal year, we will file it with the SEBI and float the issue when the situation seems opportune in consultation with our bankers,” RSPL corporate affairs president, S.K. Bajpai told Business Standard.
The group seemed to be readying for the plan as it has recently merged its various entities like Kanpur Trading Company (KTC), Ghari Detergents Private Limited and Kolkata Detergents among others under the flagship of RSPL to save double taxation and build a stronger, integrated brand presence.
“We aimed at reducing the administrative hurdles and expenses by merging these entities apart from offering a more appealing bid for our prospective investors,” Bajpai added.
The company has recently relaunched its toilet soap and a premium category washing powder, apart from planning to foray into homecare products like shampoos, toiler cleaners and shaving creams.