Escorts Mutual Fund

MUMBAI: The recent rejig of the fee structure for mutual fund distributors could lead to a shake-out in the distribution business. While smaller distributors are hardly pushing mutual fund products and, instead, are focusing on selling insurance products, fixed deposits and even real estate nowadays, the larger players are seeing this as an opportunity to expand their footprint in the business.

Many of the top distributors, which have a national presence, see the absence of their small counterparts in the business as an opportunity to negotiate better with mutual funds for a higher commission. Distributors said some leading mutual funds are offering commissions as high as 0.75-1.0% to distributors to push some of their existing schemes, though this could not be independently verified with the fund houses.

“We are seeing mutual funds increasingly depend on larger distributors to sell their products and cash-rich fund houses are still doling out fees to get business, even at the expense of taking a hit on their P&L (profit and loss account),” said a top official at the wealth management arm of a brokerage.

In August, market regulator Sebi barred mutual funds from charging entry load — or initial fees — on any equity scheme and directed distributors to directly collect a fee from clients for their advisory services. Distributors, who used to pocket most of this entry load of 2.25%, which funds used to charge while collecting the applications, have been deprived of these fees, leaving them with little incentive to sell mutual fund products.

“While we see this situation as an opportunity, very few distributors can justify the fees they can charge for providing advice,” said Rajiv Bajaj, MD, Bajaj Capital. Mutual fund officials said it is the ‘form-pushers’ — a euphemism for distributors who thrived on churning of portfolio by clients prior to August — who have been forced out of the business. While the dominant distributors, who survived on ‘form-pushing’, have managed to shift to advisory, the smaller ones have been unable to cope with the new fee regime.

“Smaller distributors have shifted their business focus to insurance and FDs (fixed deposits),” said Rakesh Goyal, head-distribution at brokerage Bonanza Portfolio. Compared to mutual funds, insurance products continue to fetch distributors better fees. In 2007-08, insurance agents made about Rs15,000 crore as commissions by selling insurance policies, according to D Swarup, chairman of the Pension Fund Regulatory and Development Authority (PFRDA), and head of the Committee on Investor Awareness & Protection.

The heavy redemption in debt schemes of mutual funds (MFs) in September should get reversed soon and MFs are expected to get back the entire outflow in the current month. Historical evidence suggests that debt funds face redemption pressure at the end of every quarter. This pressure is considerably higher at the end of the first as well as the second half of the financial year.For example, MFs witnessed a net outflow of Rs 98,980 crore in March 2009 in debt schemes. In the following month, April, inflows were Rs 154,507 crore. A similar trend was seen at the end of all quarters, except in September 2008, when the redemption pressure on debt funds continued in October.
According to Sundeep Sikka, chief executive officer, Reliance MF, corporate houses withdrew a lot of money last month to meet advance tax liabilities, something they do at the end of every half year. A part of the money withdrawn is invested in other debt schemes and so money doesn’t flow out completely.
Banks invested Rs 180,000 crore in MFs between April and September. They withdrew a part of this last month to show profits in their books, which caused a lot of redemption pressure. However, a considerable part of this was reinvested in the first week of October, said Surajit Misra, national head (mutual funds), Bajaj Capital.
September 2008 was exceptionally bad for the MF industry as the entire financial sector faced redemption pressure after four US banks filed for bankruptcy. Indian banks faced cash withdrawals from account holders while the corporate sector faced a liquidity crunch. As a result, banks and the corporate sector withdrew money to remain liquid.
With MFs floating time-bound fixed maturity plans (FMPs) to attract investments from the corporate sector and banks, the maturity of such schemes also increases outflows. For example, data compiled by MutualFundsIndia.com show that in September 2009, FMPs worth Rs 11,648 crore went under compulsory redemption.
Companies also periodically withdraw large amounts to show cash in their balance sheets and for future investments. It was a normal trend and there was no need for investors to panic as there was ample liquidity with the industry, said Lakshmi Iyer head (fixed income and Products), Kotak Mutual Fund.

The domestic mutual fund industry has appreciated the Security and Exchange Board of India’s (Sebi’s) move on clearing and settlement of trades in corporate bonds through clearing corporations. Fund houses believe the step will bring transparency in the bond market and enhance liquidity.
Sundeep Sikka, chief executive officer of Reliance Capital Asset Management, said: “It is a welcome move which will help in right price discovery. So far, we had the counter-party risk involved in corporate bond trading, which will no more be an issue once a clearing corporation comes into place. This will, therefore, help improve volumes.”
The market regulator, in a recent notification, had announced that all trades in corporate bonds between mutual funds, foreign institutional investors, venture capital funds and RBI-regulated entities would necessarily be cleared and settled through the National Securities Clearing Corporation or the Indian Clearing Corporation effective from December 1.
At present, mutual fund houses are either dealing in corporate bonds directly or through a broker. It involves settlement risks that makes the bond market a bit illiquid and not as attractive as the equity market. N K Garg, CEO of Sahara Mutual Fund, said the move would be healthy for the overall debt market. “It will ensure transparency, leading to liquidity in the market, and will improve efficiency. One would know who is the buyer or seller, as in the case of equity space,” said Garg.
However, fund managers also maintained that only one such move may not be enough. Killol Pandya, head (fixed income) at Shinsei Investments, said: “Though such a measure will make the bond market vibrant, as well as broaden and deepen its reach, more is needed.”
In agreement with this, Rajiv Anand, CEO of the new Axis Mutual Fund, said: “Counter-party risk is not the key issue. I think, though positive, the measure will have limited benefits.”

Cash holdings of diversified equity funds averaged 5-6% of total assets in September, according to data compiled by mutual funds tracker, Morningstar India

Mumbai: Indian fund managers are sitting on less money than they have at any point in time in the past 20 months—an indication that they have invested heavily in stocks and, to a lesser extent, that the market may be close to peaking.
Cash holdings of diversified equity funds averaged 5-6% of total assets in September, according to data compiled by mutual funds tracker, Morningstar India. These levels were last seen during December 2007 and January 2008, when the markets were at their peaks.
With stock valuations well above historical averages, more fresh equity issues waiting in the wings (thereby sucking money from the system), and economic recovery in the Western world not stabilizing, voices calling a correction in the market rally and predicting a so-called double dip, or W-shaped recovery, are growing louder.
Billionaire investor Rakesh Jhunjhunwala talked about this two weeks ago at a private equity conference. And two recent reports from international research houses, too, have raised concerns about this liquidity-led rally.
“This could possibly be one indicator, but it shouldn’t be read alone” said V. Anantha Nageswaran, chief investment officer of wealth management firm Julius Baer Group in Singapore, referring to the decline in cash holdings. Due to government stimulus and a policy of easy liquidity, “money is chasing all kinds of risky assets. Markets have overshot fair valuations,” added Anantha Nageswaran, who is also a Mint columnist.
After toxic debt choked credit and global markets last year, governments and central banks across the world moved to an easy money policy. Some part of the liquidity that subsequently flooded the system found its way to emerging market equities. Globally, fund flows to emerging markets have exceeded the inflows of 2007. In India, foreign institutional investors have pumped in $14.24 billion (Rs66,074 crore) since January after pulling out $12.18 billion last year.
The Sensex, India’s most tracked index, climbed at least 108% since the lows of March, a rate of growth surpassed only during its rise in the early 1990s during a stock market scam engineered by the late trader Harshad Mehta. The index is trading at 20.96 times the estimated earnings for fiscal 2010. The average range of valuation for the index has traditionally been 14-17 times earnings.
A large part of the rally has been fuelled by institutional investors—both foreign and domestic.
A recent Bank of America-Merrill Lynch report said that there could be an imminent correction of up to 10% ahead of a second rally. Similarly, a 20 October report from the research arm of Australian Bank the Macquarie Group noted that “based on valuations alone, the risk/reward trade-off for Asian equities is poor”. According to this report, there is a greater than 60% chance that markets will be lower in three months’ time “if history is a guide”.
To be sure, the conditions between December 2007 and now are different in some ways, as Nilesh Shah, deputy managing director of ICICI Prudential Asset Management Co. Ltd, which manages Rs80,000 crore worth of assets, pointed out.
“Investor behaviour is different now,” Shah said. “In the last quarter of 2007, we were seeing large inflows. That’s not the case now.”
Indeed, equity funds saw net outflows of Rs1,756 crore in September, which is just over 1% of the Rs1.7 trillion of assets under management in that category. India’s 36-firm mutual fund industry had Rs7.4 trillion assets under management in September. A larger portion of money is routed into the market through insurance plans called Ulips.
“These low cash levels reflect the optimism of fund managers. It has gone up in the past six months,” said Ved Prakash Chaturvedi, CEO of Tata Asset Management Ltd, which manages Rs20,200 crore worth of assets. “But independent of cash levels, there’s an expectation of a correction. When and how it will happen, it is difficult to predict.”
Bank of America-Merrill Lynch’s Jyotivardhan Jaipuria and Anand Kumar listed some of the reasons why a correction is on the cards.
In a 15 October report, they noted that while “earnings will beat estimates, market expectations are running much higher. We expect markets to sell on good news”.
The pace of analyst upgrades is starting to slow, which could be negative for markets, they said.
Besides, the large number of fresh issues through initial public offerings (IPOs) and other instruments will suck up liquidity. IPOs and qualified institutional placements, when firms offer shares only to institutions, have mopped up some Rs34,200 crore till September. Merrill estimates this number to increase by $10 billion in the next six months.
Analysts are also worried by a withdrawal of the government’s fiscal stimulus packages worth 3% of India’s gross domestic product that were announced late last fiscal year and which are responsible for some part of India’s sharp recovery.
Local brokerage Enam Securities Pvt. Ltd listed “roll-back of excise and service tax reduction” as a risk factor.
Another worrying factor is the slow recovery in the developed world. India is dependent on capital inflows—both portfolio and direct investment. A weak US and Europe would mean no demand for exports, already under pressure from an appreciating rupee. The local currency has appreciated 8.27% against the dollar in the current fiscal year. A strong local currency brings down the value of dollar earnings of exporters in rupee term.

MUMBAI: When Meghna Apparao, a senior executive with a private sector conglomerate, decided to buy a child plan, the heightened security concerns post the gory 26/11 terror attacks in Mumbai were playing on her mind. This, coupled with the desire to provide financially for her five-year-old daughter’s higher education, prompted her to opt for a child education plan from a private life insurer.

“Being an MBA graduate myself, I understand the importance of quality education, which I know is going to be expensive in the future. Unless we start making provisions now, it will be difficult to arrange for such a large corpus later. Hence, we decided on this scheme,” she explains.

She represents the growing tribe of parents who are opting for child plans — unit-linked insurance plans (ulips) that promise continuity in providing for the goal even in the event of the parent’s death — as tool to arrange for the funding of their children’s education. With the cost of higher education expected to increase manifold in the coming years, every parent’s concern today is saving adequately towards this goal, and child ulips seek to cater to this segment of parents anxious to ensure the best for their children.

Life insurers, who have been promoting these schemes aggressively, say this is the ideal instrument for the purpose. “As a parent, you want to put aside a certain amount of money to fund your financial goal — be it your child’s education or marriage. What a child plan does is that it ensures that you get the desired amount at the desired point in time, irrespective of whether you are around or not. Other investment avenues too help you achieve this goal but they assume that the parent is able to invest throughout the term of the investment,” reckons Vishal Gupta, director, marketing, Aviva Life Insurance.

In addition to the sum assured that is paid at the time of the policyholder’s demise, future premiums are waived off, with the insurance companies taking care of the same and the fund value is made available to the child on maturity. Riders providing for loss of income arising out of the parent’s (the insured) death or disability are also touted as one of the reasons why child plans have an upper hand over other investment options.

“As a parent, one needs to analyse the existing investment options

on the basis of various parameters such as ability to meet the children’s needs, beating inflation, decent return-earning capability to increase corpus, security of investment and financial security for the child in the event of disability or death of the parent.

http://economictimes.indiatimes.com/personal-finance/insurance/analysis/Ulips-can-secure-your-childrens-future/articleshow/5147287.cms

MUMBAI: The Insurance Regulatory and Development Authority’s (Irda) decision to cap charges on unit-linked insurance plans (Ulips) has had an unintended consequence. The cap on charges has made Ulips out-of-reach for the lower, middle-classes as insurers are withdrawing low-value plans, which are unviable under the new charge structure.

Life Insurance Corporation (LIC) of India and SBI Life Insurance have both decided to withdraw their low-value plans. In the case of SBI Life Maha Anand, allowed monthly contributions as low as Rs 500 is being rejigged by increasing the minimum premium. Similarly, LIC is withdrawing an option where it was allowing minimum investments of up to Rs 5,000 per year. Speaking to ET, MN Rao, MD, SBI Life, said that the minimum ticket size of this product is being reviewed in the light of the cap on charges.

Following the decision by the Pension Fund Regulatory and Development Authority (PFRDA) to introduce a pension scheme to the public with a very low charge structure, Irda had been under pressure to reduce charges in Ulips. The regulator had come out with a cap whereby the difference between the gross yield (the returns provided by the policy had there been no charges) and the net yield (percentage returns after adjusting for charges) is not more than 300 basis points for policies up to 10 years.

Speaking to ET, TS Vijayan, chairman, LIC, said small-ticket Ulip policies of less than Rs 10,000 might be difficult to sustain. This is because there is a fixed component of cost for each policy, such as stamp duty, and whatever be the ticket size, the fixed cost will remain. This will make small policies unviable. We have not exactly calculated at what ticket size will Ulips become viable but small policies will vanish.”

A higher ticket size would mean that Ulips would be largely restricted to cities where the ticket size is much larger. Insurance companies are required to meet rural obligation targets where close to one-fifth of their policies have to be sold in rural areas. Insurance companies will now have to meet their rural obligation targets from the sales of traditional policies.

Although the new pension scheme has a much lower charge structure, participants have to pay fixed charges to become members of the scheme. While these charges do not matter much on large investments, they do reduce the yield on small-ticket investments.

Irda has said that after December 2009, all Ulip products should comply with the new charge structure. The guidelines on the new charge structure states that for insurance contracts, which are of a tenor of less than or equal to 10 years, the difference between gross and net yields shall not exceed 300 basis points, of which fund management charges shall not exceed 150 basis points. For other contracts, i.e., those whose contract period is above 10 years , the difference between gross and net yields shall not exceed 225 basis points, of which the fund management charges shall not exceed 125 basis points.

MUMBAI: After the success of State Bank of India’s (SBI) $750 million overseas bond issue, other lenders, such as Axis Bank, Bank of Baroda and IDBI Bank, are said to be looking at hitting the market with issue sizes of around $500 million each. SBI’s bond is the first issue from an Indian bank in the past couple of years.

“We plan to mobilise money from overseas market, but we have not yet finalised the timing and the amount. Considering the current interest rate scenario in the overseas market, it would be a good opportunity for banks to tap that markets,” said MD Mallya, chairman of Bank of Baroda, which merchant bankers said is looking at a $500 million bond issuance. The bank had last tapped the overseas loan market in July 2008 with a $300 million offering.

Investment bankers also talked about IDBI Bank considering an issue in the range of $300-500 million. When contacted, RK Bansal, chief financial officer, IDBI Bank, said: “We had signed the MTN document earlier with our expansion into the overseas markets in mind. As of now, we do not have any overseas presence, but we are hopeful of getting an approval for a branch in Dubai next month.” He added that the bank has not taken any decision on an MTN issue and its future course of action on the bonds would depend on the overseas approvals or any special clearances.

Axis Bank is also said to be looking at over a $500 million issue in the next few weeks depending on market conditions. The bank is already in talks with bankers on the issue. Bank officials were not available for comment. A couple of other PSU banks could also look at an issue.

This week, SBI managed to raise $750 million offering an yield of around 4.55%, a spread of 226.4 bps over US Treasuries. European investors accounted for 58%, Asia 33% with the rest were from the US. The book runners to the issue were Barclays Capital, Citigroup, HSBC, JP Morgan and UBS. SBI is the first financial firm to hit the dollar bond market this year from Asia, outside of Japan and Korea.

“The money will be used for growing the asset book in the overseas market. This will give SBI opportunity to provide long term finance for corporates in the overseas market and also support Indian corporates which are looking at raising money through the ECB route. After raising $750 million, SBI has the headroom to raise $1.7 billion from the overseas market, although there is no immediate plan to raise more money now,” said P Chaudhari, deputy MD of SBI.

“A sum of $400 million bond will mature in December this year, but the money we have just raised will not be used for repayment but it will aim at growing our asset book,” he said. SBI had filed for a medium-term note (MTN) programme of $5 billion of which it has raised $3.3 billion so far (including $ 750 million). The recent borrowing of $750 million comes after a gap of over two years. It had last raised $ 300 million bonds in February 2007. MTNs is like an umbrella prospectus where a corporate can do a series of bond issuance and are preferred by those with long-term fund needs.

“SBI was looking to raise anywhere around $500-$750 million. This is an inaugural issue from India in the bond market after a hiatus of over a year and will be a benchmark for other Indian deals. The total demand was near $5.5 billion and there was strong demand from Europe, Asia and the US, too. The demand came in from large fund managers, fixed income funds and also from private clients including NRIs. The deal was initially launched at 200-215 over mid swaps.

When we saw the demand, we bought down the price range to 190-200 and finally closed it at 190 over mid swap,” said Ravi Kapoor, MD, head of South Asia Capital Markets Origination, Citi.

ICICI Bank had last raised $2 billion through a five-year fixed rate note. The notes were sold under 144A/Reg S format in which the bank was able to tap qualified US investors through this route. Even though SBI has been able to get a fine pricing through this issue, the pricing is still around 100 basis points wider than pre-crisis.

http://economictimes.indiatimes.com/markets/bonds/After-SBI-Axis-BoB-to-raise-funds-abroad/articleshow/5147075.cms

The proposal is to create 8-10 large banks.
The finance ministry is set to push for consolidation in the public sector banking space and has started work on a road map to create eight to 10 large entities.According to sources close to the development, Finance Secretary Ashok Chawla, who is driving the process, is working on a concept note to provide the framework for consolidation.
While the ministry was in favour of such a consolidation for the last few years, it could not push the process due to opposition from the employee unions and the Left parties, which were the United Progressive Alliance’s (UPA’s) ally till June. With the Left no more a part of the UPA, the government is seeking to again push its agenda.
In addition, 10 bank chiefs are due to retire in 2010, which will make it easier for the government and bank managements to work out the process.
The sources, however, said the government was not keen to create four-five large public sector banks as this could lead to a concentration of risks. Instead, the idea was to create eight to 10 large entities, they added.
“State Bank of India and its associates account for almost a quarter of the banking business in India and then there is Punjab National Bank. There is a huge gap between the two that needs to be filled,” said a source privy to the discussions.
Sources said the decision would be left to individual managements.
A few weeks ago, Chawla had suggested that mid-sized banks should explore the possibility of merging over the next five to 10 years. The sources said the road map would plan for the next few years.
The government and chiefs of some banks such as Union Bank of India and Bank of India have in the past explored the option of merging. However, the process could not be completed.
As a result, public sector players have had to be content with acquiring weak players in alliances pushed by the government and the Reserve Bank of India. For instance, Oriental Bank of Commerce acquired Global Trust Bank while IDBI Bank took over United Western Bank a couple of years ago.
State Bank of India has, however, managed to merge State Bank of Saurashtra with itself and is in the process of merging another subsidiary, State Bank of Indore.

Foreign banks record 7.6% drop in credit flow, private players see 3.7% growth.
Private and foreign banks continued to lose market share in recent months despite their claims of resumption of lending.
According to the latest bank groupwise data released by the Reserve Bank of India today, public sector players increased their share of the bank credit business by 2.2 percentage points between June 2008 and June this year while the share of private and foreign banks dropped by 1.9 percentage points and 1.4 percentage points, respectively. For the quarter ended June 2009, public sector players, including SBI, accounted for 73.9 per cent of bank credit, as against 70.7 per cent a year ago.

The story for bank deposits is the same. The public sector players accounted for 73.9 per cent of the total deposits for the quarter ended June this year, compared with 71.2 per cent a year ago. The shift, bankers said, was on account “flight to safety” as depositors felt public sector banks were safer. These banks also offered higher interest rates.
According to the RBI data, despite the central bank’s repeated advisories to step up lending, foreign banks recorded a drop of 7.6 per cent in outstanding credit during April-June 2009 as against an increase of 34.4 per cent in the corresponding period last year. Following the credit crisis, which intensified in September 2008 and forced foreign and private players to go slow due to higher delinquency levels, the growth rate dropped to 3.5 per cent during January-March 2009.
“Foreign banks were cautious in lending during the first quarter. Demand for credit was also low as companies used internal resources to fund whatever little funding they needed,” said a senior executive with a foreign bank.
In case of deposits, however, foreign banks saw a higher growth of 18.6 per cent during April-June 2009, as against 12.7 per cent in the previous quarter. During April-June 2008, deposits had grown by 19.3 per cent.
The foreign bank executive said banks had increased the flow of deposits from retail investors in recent months.
Private banks recorded 3.5 per cent growth in credit during April-June this year as against 22 per cent a year ago. During January-March 2009, the growth rate was 10.7 per cent.
Executives of private banks attributed the drop in credit growth to lack of demand in the system. “The real demand in the system was missing. The impact of revival will be felt gradually and we expect the credit growth to improve from December,” said Parthasarathi Mukherji, president, corporate banking, Axis Bank. Low credit demand resulted in a growth of 16.2 per cent in lending by SBI and its associate during the June quarter as compared to 26.1 per cent a year ago.