MUTUAL FUND

Shed dependence on corporate money, RBI tells mutual funds

BS Reporter / Mumbai August 28, 2009, 0:21 IST

Calls for need to regulate the number of schemes, increase penetration.
The Reserve Bank of India (RBI) today pointed out flaws in the business model adopted by mutual funds in India.
For starters, it said there was high dependence on corporate and institutional investors, which made them susceptible to short-notice withdrawals. “A high dependence on corporates for funds implies a lesser role for the retail investors,” it said in its Annual Report 2008-09.
Further, it said the share of equity schemes had risen in recent years, but it still accounted for less than 25 per cent of the industry’s assets. Most of the funds mobilised by mutual funds were through liquid schemes that were used by companies and banks with a short-term perspective, it said. According to the Association of Mutual Funds in India (AMFI), at the end of July, equity assets accounted for only 22 per cent of the industry’s assets of Rs 7,21,886 crore.
The chief executive of one of the largest fund houses in the country said RBI’s concerns were a little late in the day. In addition, he said, banks were parking large amounts in money-market schemes. This amount was estimated at Rs 139,619 crore at the end of July 2009. “While banks are not lending due to fear of defaults, they are passing the risk to mutual funds and still earning high returns. It’s time the regulator did something,” he said.
The report said there was a need for consolidation by linking the number of permitted schemes to the level of net-owned funds. RBI said there was a proliferation of schemes, which led to confusion. It said nearly 400,000 systematic investment plans (SIPs) had been shut down in recent months.
The report said mutual funds were largely dependent on a few urban centres and their penetration levels remained low in comparison with the funds in other countries.
“The government and the regulator should look at incentives to increase penetration. Insurance has penetration because it has product-pushers,” said UK Sinha, chairman and managing director, UTI Asset Management Company.
Assets under management in India as a percentage of GDP stand quite at 5 per cent as against 70 per cent in the US, 61 per cent in France and 37 per cent in Brazil. Investment in mutual funds in India comprised 7.7 per cent of the gross household financial savings in FY2008, a significant increase from 1.2 per cent in 2004, according to a KPMG report.
RBI’s comments came in the wake of the global financail turmoil, which created a scare in the domestic mutual fund market, prompting some unprecedented steps from regulators. On its part, the central bank had opened a special line of credit to ensure that there was adequate availability of funds and a systemic crisis was avoided. The Securities and Exchange Board of India, which regultes mutual funds, also cracked down on fixed-maturity plans and a put in place a set of revamped rules.
http://www.business-standard.com/india/news/shed-dependencecorporate-money-rbi-tells-mutual-funds/368295/

Fund houses witness drop in redemption level

In what can be termed as a relief for the battered domestic mutual fund industry, redemption pressure has eased considerably of late. And, fund managers attribute this trend to changing investor attitude following a steady rise in the stock market since March this year.
“There is a change in investor attitude towards the mutual fund industry. The risk appetite among investors has definitely gone up,” said the chief executive officer (CEO) of a domestic asset management company.
Some of the CEOs Business Standard spoke to termed the current redemption level as “substantially low”.
Head of equities at Fortis Mutual Fund, Sameer Narayan said, “There has not been large redemptions ever since the market has started going up. In fact, there has been a decline in the redemption level.”
The Rs 6.89 lakh crore mutual fund industry registered a marginal growth of 2.83 per cent in its average assets under management (AAUM) last month — the slowest growth so far in the current financial year. The growth rate in AAUM has been showing a declining trend over the last three months.
Gopal Agrawal, head of equity at Mirae Asset, said: “Since the net asset value has recovered, old investors are booking profits. But at the same time, it is being compensated with fresh inflows from new investors, resulting in a net match between inflows and outflows.”
Instead of coming into the market with bulk investments, more and more investors have chosen to come in a staggered manner with systematic investment plans in order to avoid losing money, said a CEO.
Market observers said that at a time when the Securities Exchange Board of India had banned entry load for distributors of mutual fund schemes, lower redemption level was a positive sign for the industry.
http://www.business-standard.com/india/news/fund-houses-witness-drop-in-redemption-level/368329/

4 lakh SIP accounts closed in recent months

Our Bureau
Mumbai, Aug. 27 Over four lakh systematic investment plan (SIP) accounts have been closed during the last few months, the RBI said in its annual report.
This would constitute over 10 per cent of the SIP accounts with the Indian mutual funds industry, which, according to Value Research, has an estimated 35 to 40 lakh SIP accounts.
The RBI, however, did not spell out the reasons for the closure of such a large number of SIP accounts.
“I have some reservations on such a high number of SIP accounts getting closed over the last few months,” Mr Dhirendra Kumar, CEO, Value Research, said. The Association of Mutual Funds in India does not furnish details on SIP accounts in its monthly mutual fund data.
“A downturn in the market and subdued NAV (net asset value) movement of the mutual fund units could have catalysed and accelerated the discontinuation of SIP accounts,” Mr Kumar said.

http://www.thehindubusinessline.com/2009/08/28/stories/2009082852040100.htm

MFs turn cautious in G-secs on fears yield may harden

Manish Basu
Kolkata, Aug. 27
Mutual fund companies will closely watch in coming months the impact of the introduction of cash management bills (CMB) on the yield cycle before deciding on further investments in government securities, according to industry experts.
With the recent notification by the Centre on CMBs, the yield on government securities, it is felt, may harden further, thus offsetting, to some extent, the move by the MF companies to reduce duration of investments in government bonds.
“The supply of government securities is already much higher than demand and, with the introduction of the CMBs, more liquidity would be absorbed pushing up the interest rates,” Mr Sujoy Kumar Das, the Head, Fixed Income, Bharti AXA Investment Managers, said, adding, “we expect the yields to get hardened by 50 to 75 basis points by March.”
CMBs would be issued for maturities of less than 91 days, according to the government notification.
Out of the total funds parked by the company in all fixed income instruments, nearly 25-30 per cent was currently in government securities, down from nearly 50 per cent in January, Mr Das said. Nearly 80 per cent of funds parked in government securities were in below one-year bonds, he added.
About 60-70 per cent of the government bonds on offer are now available in the five to seven year bracket.
“Further investments in securities may take place only if the interest cycle turns around,” he said, adding the projected five per cent inflation rate and expenditure schedule of the Centre were also to be closely monitored.
In case the tax collections were not satisfactory, the Centre and the State Governments might need to borrow further in the face of a drought situation, a fund manager in an asset management company said on condition of anonymity. The continuation of strong growth in Index of Industrial Production for the next two-three months and easing of key rates by RBI in the forthcoming credit policy would send out positive signals to fixed income investments, he added.
Mr Jaideep Bhattacharya, Chief Marketing Officer, UTI Mutual Fund, said the investments by MF companies in government bonds were mostly governed by customers’ participation in gilt funds. A bulk of the forthcoming investments could be in debt and hybrid funds, he added.

http://www.thehindubusinessline.com/2009/08/28/stories/2009082851411000.htm

MFs see pick up in SIP investments

Our Bureau
Mumbai, Aug. 27 Several mutual fund officials said there is currently a pick up in fresh systemic investment plan (SIP) accounts.
“Eight to ten per cent of SIP accounts have been closed over a longer period of time and not over a few months, but now there is reversal in trend, fresh SIP account applications have started coming,” said Mr Sudipto Roy, Business Head, Principal PNB Asset Management Company Private Ltd.
Too many schemes
In the light of a large number of mutual fund schemes floated by the individual asset management companies, the RBI has suggested that perhaps the number of schemes permitted to a fund house must be linked to the latter’s net-owned funds. “The proliferation of schemes (1,000 to 5,000 variants) leads to confusion among investors,” the RBI said.
The RBI also observed that mutual funds were highly dependent on corporations for funds; the lesser role played by retail investors made the funds more volatile, it said.
“SEBI is currently contemplating a more detailed disclosure norm for corporate investments,” the RBI said adding “attempts to ring-fence them in the form of segregation of schemes into institutional and retail have not worked so far.”
Low penetration level
Commenting on mutual fund industry’s level of penetration the RBI said, “Despite immense growth potential, limited involvement of the rural sector due to lack of awareness and limited banking services in rural regions, could prove to be a constraining factor.”

http://www.thehindubusinessline.com/2009/08/28/stories/2009082851281000.htm

 Household funds in equities dip

Domestic demand may have kept the Indian economy afloat in the second half of 2008-09 when the full impact of the global meltdown was felt on the country, but equities bore the brunt of the turmoil as both domestic and foreign money stayed away from the markets, says the Reserve Bank of India.
Both foreign institutional investors (FIIs) and domestic retail investors chose to stay away from equities preferring to invest in safer avenues such as deposits and insurance funds, the RBI said in its annual report released on Thursday.
The central bank has also pointed out that financial savings of a household in equities dropped from 12.4 per cent of total financial household savings in 2007-08 to 2.6 per cent in 2008-09 with mutual funds as well as savings invested in Unit Trust of India (UTI) showing a negative trend as people preferred to withdraw their money from these instruments.
Public sector bonds emerged as the surprise package in the equities market as 0.10 per cent of financial savings in equities went into this instrument compared with nil last year.
The report observed that primary markets had been mauled since January 2008.
“Resource mobilisation through public issues, private placements, Euro issues and mutual funds witnessed a sharp decline due mainly to postponement of resource raising plans by corporates,” the RBI report said.

http://www.hindustantimes.com/business-news/markets/Household-funds-in-equities-dip/Article1-447766.aspx

Gold ETFs emerge as best performers

CHENNAI: If you are one of those who invested in gold exchange traded funds (GETFs) a year ago, the yellow metal has not only turned out to be a  great asset protector but also a solid wealth generator. GETFs have given a stellar 28% gains in the last 12 months when the other 26 fund categories — debt, equity and hybrid — have struggled to break the average 20% mark.

What's made gold ETFs more safer is that all of them have same returns (since all the ETFs are tracking the same commodity), while there is huge divergence in the other fund categories — sometimes as high as 40-50 % between the best and worst schemes.

With gold as an asset coming into limelight as the world went into a slump, ETFs tracking metal price rose in tandem as stocks fell.  The gains logged by gold ETFs come in a period when equity funds focussed on banking and FMCG have delivered around 18-19 % returns, GILT (medium and long-term ) schemes have given 13% returns , monthly income plans posted 12% gains and sensex rose 9%, data from fund tracker ValueResearch shows.

Currently there are five gold ETFs such as Gold Benchmark ETF, Kotak Gold ETF, Quantum Gold, Reliance Gold ETF and UTI Gold ETF with more than 1 year history . SBI MF launched its Gold ETF in April this year. With Chinese consumers buying gold aggressively, coupled with onset of the festive season in India, experts predict gold prices will rise further.

"For the last 15 years, dollar has depreciated while gold prices have inched up. For the record, gold has delivered 16-17 % compounded annual growth rate (CAGR) for the past 9 years. If high crude prices continue to push inflation , making gold more attractive as an inflation hedge," Amar Shah, Head of Research (Commodities), Angel Broking, said.

Gold prices in New Delhi market currently trade around Rs 15,200 per 10 grams. Investors have clearly identified gold as a part of their asset allocation strategy , feels Krishnan Sitaraman, director — Crisil FundServices . "Gold's allure lies in the fact that it has proven its mettle during down times.

http://economictimes.indiatimes.com/Mutual-Funds/Gold-ETFs-emerge-as-best-performers/articleshow/4939018.cms

INSURANCE

Non-life premium collection up, courtesy rising auto sales

Riding on the back of rising auto sales last month, the non-life insurance industry has recorded a marginal rise in premium collection.
According to data collated from companies, the general insurance industry recorded a growth of 6.72 per cent in premium collection to the tune of Rs 11,684 crore in April-July 2009 as against Rs 10,947.8 crore in the corresponding period last year. The industry has grown at 4.57 per cent during the April-June 2009.
In the current financial year, while private players grew at 4.21 per cent in April-July compared to 1.21 per cent in April-June, the public sector ones reported a 8.52 per cent growth in April-July as against 7.01 per cent in April-June.
In July, auto sales zoomed 24.3 per cent. While domestic car sales were up 31 per cent and commercial vehicles witnessed a 9.6 per cent increase in sales.
“Insurers see a surge in collection when auto sales go up. Although vehicle sales have risen, the unfortunate part is that premium collection has not shot up in line. Insurers are pricing more aggressively, which is bringing down their overall collection,” said Iffco Tokio Chief Executive Officer S Narayan.
Private players such as ICICI Lombard and Bajaj Allianz General Insurance have reported a decline of 18.3 per cent and 12.61 per cent, respectively, in premium collection. The third largest public sector insurer also recorded a marginal 0.13 per cent drop in collection.
ICICI Lombard General Insurance’s CFO and Director Rakesh Jain said, “There is one-month lag between consumers taking possession and booking a vehicle. Insurance comes into effect only after the vehicle comes on road. We can see the impact of robust auto sales in August collections. Market prices have bottomed out and we want some bit of correction and are writing business prudently.”
During the beginning of the financial year, insurers had expected that the industry to grow at below 10 per cent during 2009-10.

http://www.business-standard.com/india/news/non-life-premium-collection-up-courtesy-rising-auto-sales/368099/

 BANK

Banks may take 3 months to cap free 3rd-party ATM deals

Customers can avail themselves of unhindered, free third-party ATM transactions for some more time despite the Reserve Bank of India (RBI) capping such deals at a maximum of five per month. Reason: To implement the cap, banks will need to make various technological changes in the machines and that will take quite some time.
Sources said the Indian Banks’ Association (IBA) had tentatively decided to bring the modified rules into force from October 15 this year. However, bankers said they would require at least two-three months to prepare for the modifications. The matter is likely to be taken up tomorrow at the managing committee meeting of IBA in Mumbai.
“Banks will have to make modifications in their ATM operations so that every time a user exceeds his quota of five transactions, an alert is conveyed to him. For subsequent transactions, the interchange fee will be debited from the user’s account. Banks are not yet ready for these modifications and will take some time to make the necessary technological changes,” said a senior executive of a bank.
Technically, banks are allowed to impose the cap on free third-party transactions since they have the permission of RBI. But they will only do so once IBA finalises guidelines for the same.
“A lot of preparations will have to be made. Apart from the technological changes, customers will have to be intimated at least one month in advance. Banks will take a minimum of two-three months to implement these rules,” said a senior executive of a private sector bank.
From April 1 this year, RBI had allowed free use of third-party ATMs. However, following a surge in third-party transactions, banks had petitioned RBI to put a cap on the number of such deals, which the central bank recently agreed to.
Accordingly, RBI capped free third-party ATM withdrawals to five per month and fixed an upper withdrawal limit of Rs 10,000 per transactions. It also agreed to banks imposing a charge on withdrawals carried out through current accounts. However, a suggestion from IBA to put a floor on third-party transactions was struck down by RBI.

http://www.business-standard.com/india/news/banks-may-take-3-months-to-cap-free-3rd-party-atm-deals/368320/

Weak monsoon could stoke inflation, dampen growth: RBI

Our Bureau
Mumbai, Aug. 27 The Reserve Bank of India on Thursday set the alarm bells ringing that a deficient monsoon could affect the inflation outlook for the country more than growth prospects for the economy.
It also underscored the fact that large borrowing programmes (the Centre’s budgeted gross market borrowing in FY-2010 is Rs 4,91,044 crore) and a high fiscal deficit (the estimate for FY-10 is 6.8 per cent of GDP) could worsen the actual inflation situation over time, while also putting upward pressure on interest rates.
Trends in global commodity prices in the first quarter of 2009-10, according to the RBI’s annual report for 2008-09, indicate that an upside risk to inflation could persist from a rebound in global commodity prices ahead of the global recovery.
“Increase in minimum support price that may be seen as a measure to support farmers in a below monsoon year, could stoke inflation,” the report warned.
The first quarter review of the Monetary Policy revised the inflation projection for the end of the year to 5 per cent from 4 per cent projected in April and placed the GDP growth at ‘6 per cent with an upward bias’.
Rainfall deficiency during the kharif season could affect the growth and inflation outlook, besides rural disposable income. Despite positive growth and signs of recovery in the first quarter of 2009-10, the growth outlook for the industrial sector remains mixed, the report said.
The RBI is faced with the dilemma with regard to its Monetary Policy stance — while monetary tightening will result in weakening of recovery impulses, an easy Monetary Policy stance could stoke inflation in the future.
“A major challenge for the RBI is to deal with the unpleasant combination of subdued growth with emerging risk of high inflation, which poses a complex dilemma on the appropriate stance of the Monetary Policy,” the report said.

http://www.thehindubusinessline.com/2009/08/28/stories/2009082852030100.htm

SEBI

Small-, mid-cap indices outperform Sensex
The Bombay Stock Exchange (BSE) small- and mid-cap indices have outperformed the benchmark equity index, Sensex, in the past one year. Both the indices are currently hovering around their 52-week highs and both have given over 25 per cent higher return than the Sensex.
The BSE Mid-cap index, which comprises stocks of 222 companies, rose 127 per cent from its 52-week low of 2,547 on March 9 to its current level of 5,794. The 52-week high of the index is 5,888, hit in September last year.
The BSE Small-cap index, with 466 company stocks, gained 141 per cent from its 52-week low of 2,864 on March 9 to its current level of 6,907. It had touched a 52-week high of 7,033 on September 8 last year.
Mid-cap and small-cap indices track the performance of companies with smaller market capitalisation compared to those whose stocks comprise the Sensex.
The 30-share Sensex, meanwhile, has risen 105 per cent from its 52-week low of 7,697 on October 27 last year to its current level of 15,781. The index had touched its 52-week high of 16,002 on August 4 this year.
According to market players, small- and mid-cap stocks often gather momentum after the Sensex, and a sharper rally than the key benchmark is an indication that most of the forntline stocks are near the peaks of their ongoing rally.
“It has been noticed in the last few days that Sensex shares are in a consolidation phase and that punters are playing in the cheaper small- and mid-cap stocks,” said the research head of a leading Mumbai-based brokerage.
Analysts pointed out that while some of the stocks were genuine value buying, some counters were pure operator play. Another important reason for a pause in the momentum of the frontline stocks was the absence of active foreign institutional buying in August.
According to the BSE data, foreign institutional investors (FIIs) had been net sellers in the cash segment of the equity market to the tune of Rs 4,050. 47 crore, they said.
This week so far, while the Small-cap index has risen 4 per cent and the Mid-cap index 2.06 per cent, the Sensex has managed to gain only 1 per cent.
FIIs, however, have been active players in the forntline stocks and have net purchases of nearly $4 billion so far this year.
http://www.business-standard.com/india/news/smallmid-cap-indices-outperform-sensex/368296/

OTHERS

Satyam was India Inc's biggest fraud, it won't be the last

If it is a fraud to conceal fraud, consider this a sincere effort to shed some light. With 697 cases of fraud filed under the Companies Act and 70 complaints logged in with Indian Penal Code, corporate India is under a cloud. The slowdown has only turned the canter to a trot, with more and more cases of fraud being reported as companies tighten their purse strings and resort to cutting costs.

The 26/11 terror strikes in South Mumbai, the Mecca of corporate India, coupled with the infamous Satyam saga at the beginning of this year were the other catalysts that have woken up India Inc. from its growth slumber and take notice of systemic faults. There are cracks in the wall and a whole new breed of forensic experts, detectives and lawyers are now out there to fill the gaps.

Move over Frank Abagnale Jr. (the infamous US impostor and the inspiration behind Catch Me If You Can), Nick Leeson and Charles Ponzi (father of the Ponzi scheme). Even Wall Street fund operator Bernie Madoff's defrauding investors to the tune of $65 billion looks distant compared to the enemy within. The overstating of financial accounts by former Satyam chairman and promoter Ramalinga Raju has sent shockwaves across India Inc. and zapped the rest of the world.

He has admitted to overstating the IT firm's cash reserves to the tune of $1.5 billion and the tech-savvy Raju family made full use of technology to conceal the fraud. In its turn, the Serious Fraud Investigating Office (SFIO) of the Ministry of Company Affairs (MCA) got the mandate to investigate the Satyam case on January 13 this year.

"It's the most difficult case we have received till date and nearly 30-35 people worked on it daily for almost 24 hours for 90 days at a stretch before submitting the report to MCA on April 13," admits SK Sharma, Jt. Director , SFIO. "It took time and resources to crack Satyam as the Rajus used technology to the hilt."

Sharma doesn't stop there. He points to a spike in promoter-related frauds corroborated by many others. "Promoters mostly put public or the bank's money into projects and try to jack up its cost...they use the margin for personal gains," he claims. Forensic experts couldn't agree more.

"Windowdressing of accounts is where the big play happens because if the company's share price can be jacked up, so will its valuations, and promoters and the top management benefit the most," says Deepankar Sanwalka, Executive Director, Advisory Head-Forensic Services, KPMG, who now heads a team of 350 people having started out solo 14 years ago. In the value pie, Sanwalka claims that window-dressing of accounts contributes to as much as 50% of the total frauds committed in the country.

Downturns usually see a spike in frauds. Why? Because of three conditions that a downturn presents, explains criminologist Dr Donald Cressey. The perpetrators experience incentive or pressure to engage in misconduct; there is an opportunity to commit frauds; and perpetrators are often able to rationalise or justify their actions. For some, desperate times call for desperate measures.
http://economictimes.indiatimes.com/Ongoing-recession-may-trigger-more-Satyam-like-frauds/articleshow/4943248.cms