MUTUAL FUND

Ban on entry load may impact AMCs: McKinsey

The ban on entry load on mutual fund products could impact distributors and asset management companies (AMCs) in terms of profitability and reduce their reach beyond urban centres, according to a report by the management consulting firm, McKinsey & Company.
The Securities and Exchange Board of India (Sebi) has banned the entry load charge on mutual fund products from August 1. Now, distributors have to negotiate with customers for commission, which is to be paid through a different cheque.
During FY09, industry profitability dropped from approximately 22 basis points (bps) to 14 bps. One basis point is one-hundredth of one percentage point. "In short term, there will be a sharp decline in profits," the report said.
According to a chief executive officer of a foreign mutual fund, current profitability will certainly be around or below 10 bps. He further added that industry would have to work with a wafer-thin margin.
The commission paid by customers would depend on the channel of distribution, the report added. "The impact of the regulation may be the most severe on independent financial advisors (IFAs), especially the smaller ones, as they have the least ability to charge for advice. Unless compensated by higher volumes, IFAs may face a revenue loss of 30 per cent," it said.
Banks and national distributors, according to the report, might be better placed to charge customers approximately 100 bps for mutual fund transactions and advice. AMCs, to continue the sales push, might have to compensate distributors for reduced commissions to some extent.
The report also pointed out that a churn in equity assets was expected to come down with customers becoming completely aware of the commission to paid per transaction.
The recent regulatory changes were also likely to create potential for consolidation. "The industry is likely to witness consolidation as smaller AMCs may not be able to accommodate the acute profit and loss stress," said the report.
McKinsey has pointed out that various categories of mutual fund products might have differential growth. It said, "Within equity, the prevalence of closed-ended funds will increase, with AMCs driving for low churn ratios."
It added that the emergence of debt products within the retail segment might receive further impetus with the narrowing down of difference between equity and debt profitability due to higher payouts.
On poor penetration in the rural sector, the report said that with IFAs facing a major impact on profitability, penetration beyond top cities could slow down.
http://www.business-standard.com/india/news/banentry-load-may-impact-amcs-mckinsey/368431/

Indian mutual fund industry to revisit business model

India has 36 asset management companies (AMCs) and at least some of them are planning to start their own distribution business instead of selling funds through third-party distributors
Mumbai: The Rs7.2 trillion Indian mutual fund industry is revisiting its business model to be in sync with the new norms put in place by the capital market regulator, the Securities and Exchange Board of India, or Sebi.
India has 36 asset management companies (AMCs) and at least some of them are planning to start their own distribution business instead of selling funds through third-party distributors. Among other things, they plan to cut distributors’ commission by 25-30 basis points (bps) and shift their focus from frequent churning of funds to managing money for the longer term. One basis point is one-hundredth of a percentage point.
Sebi banned fund houses from charging investors an upfront fee of up to 2.25%, known as entry load, from 1 August. That encouraged fund houses to fine-tune the exit load, or the penalty they charge investors on premature redemptions, from six months to three years. In other words, fund houses have forced the investor to lock in their investment for three years if they do not want to pay the exit load.
The exit load is currently capped at 1% of investment. However, only retail investors are subjected to this and fund houses do not charge the exit load on any investment of Rs5 crore and above.
The plan was to use the exit load to take care of the commission paid to the distributors. The fund houses also announced a new incentive structure for distributors ranging between 0.5% and 1.25%. JM financial Asset Management Pvt. Ltd is offering 1.25%, UTI Asset Management Ltd 1% and HDFC Asset Management Ltd 70 bps, one of the lowest in the industry.
However, this move has not gone down well with the market regulator. It has directed fund houses to bring parity in the exit load for all class of investors, irrespective of the amount of investment.
It also said fund houses should follow a uniform exit load structure for all plans within a scheme. Normally each mutual fund scheme has different plans catering to different classes of investors.
Finally, on Tuesday, Sebi asked the fund houses to limit the lock-in period to one year. The three-year lock-in, planned by AMCs, would have covered a major portion of equity fund investments in the industry.
According to the industry lobby Association of Mutual Funds in India (Amfi), 57.23% of all the equity investments as of 31 March were less than two years old. The rest of the corpus was more than two years old, but Amfi does not specify the maturity profile.
According to Rajesh Krishnamoorthy, managing director of iFast Financial India Pvt. Ltd, a transaction intermediary, “a minuscule portion of assets would be more than three years old”.

Short-term income funds outperform equity funds

Returns data
JM Short Term generates one-year return of 16.4%
Magnum NRI Investment Fund returns 0.6%
Falling interest rates and the liquidity crunch helps one-year returns on short-term income funds

Suresh Parthasarathy
Difficult to believe, but did you know short-term income funds have outperformed equity diversified funds over the past one year?
The category average of short-term income funds is 11 per cent for one year, a percentage point higher than equity funds. However, the return divergence is sizeable between the best in the category and the worst.
High yields
The top performing JM Short Term has generated one-year return of 16.4 per cent compared with Magnum NRI Investment Fund’s return of 0.6 per cent.
Falling interest rates and the liquidity crunch, which resulted in high yields on corporate debt, helped the one-year returns on short-term income funds.
However, short-term income funds have started to under-perform in the past month due to a steady increase in the yields of the government securities. Many funds have reduced the average maturity period of their portfolio in the last six months in reaction to this. Currently, debt instruments in the most of the portfolios are less than one year.
Mr Alok Singh, Head of Fixed Income and Structured Products at Fortis Mutual Fund, attributed the underperformance of short-term income funds over the past one month to the increasing market rates.
“Anticipating this rise we have moved out of the corporate debt to certificate of deposits to keep our portfolio more liquid,” he said.
Due to several factors, he said, short-term income fund may see lower returns than last year over the next few months, due to several factors.
With the economy showing sign of recovery, companies are likely to show better earnings and may repay the debt. The lower credit risk is likely to lead to a lower return, he said.
The spreads between corporate debt and gilts may also narrow for that reason.
Govt borrowings
With the major portion of Government borrowings completed, revival of the monsoon may also help in containing the rise in interest rates, along with high liquidity.
Mr Singh doesn’t foresee any major change in interest rates for next three to six months. The one-year return target of short-term income funds is likely to be in the band of eight to nine cent, he added.
http://publication.samachar.com

INSURANCE

Micro-insurance needs technology push

Micro-insurance in rural India has not really taken off. Insurance companies can benefit by harnessing technology to leverage this under-explored market while doing their bit for all-inclusive development.
N. K. Kedia
Din Dayal owns two bighas of land in the suburbs of Mandla in Madhya Pradesh. Like others of his ilk, he waits for the monsoons every summer, prays that it will rain on time, neither too much nor too little. His livelihood — and hence, life — centres on the fickle weather. With a hand-to-mouth existence, Din and his family hover dangerously close to the poverty line. An illness, disability, death of cattle, floods or earthquake can send the whole family down th e poverty spiral. For millions of farmers like Din, ensuring their families a safe and happy future remains a distant dream.
It is thus ironical that this same low-income population in most developing countries has a global annual purchasing power of $5 trillion. The question is: how does the world, which is in the throes of a financial meltdown, capitalise on this enormous opportunity?
The requirement for sustainable financial structures at the bottom of the pyramid has spawned hundreds of cooperatives, microfinance institutes and NGOs. But amongst the many facets of microfinance, micro-insurance remains significantly under-penetrated; its growth restricted by challenges of reach and sustainability in India’s colossal hinterland. However, there’s a solution in sight; technology can turn the game around, transforming rural India into one of the most lucrative markets for micro-insurance.
Viability and Relevance
In the context of designing and marketing products, rural India is a different world altogether. First, companies need to design products that suit the lifestyle and needs of the target population. For instance, illness, weather insurance, livestock insurance and insurance against natural disasters will be more relevant than, say, insuring a house.
Second, companies need to solve the challenges of reach and sustainability. Rural India is one huge collection of villages, each a hub for a small population, but lacking proper connectivity with other villages or cities. Reaching people in such locations is a challenge as the cost of travel might itself exceed the transaction amount.
Even if companies can reach the rural interiors, the claims processing procedure would also need innovation. The claimant might not understand the policy conditions or the claim process, and might not have a bank account to receive the claim cheque. How can an insurance company overcome these unique challenges and, in turn, enable the marginalised millions to benefit from insurance?
Solution is in innovation
For any insurance company to be successful in this space, it must target large rural populations, design simple and flexible products and enable efficient administration. Technology can be a great enabler in this regard.
By negating factors such as distance and reach, and by bringing in transparency and accountability in all transactions, technology can open up hitherto unexplored markets and transform the financial picture at the bottom of the pyramid. A number of innovations that have already made headway into rural India are:
Web-based solutions: Web-based point-of-sale application enables instant policy issuance and receipt generation even in remote areas. This helps in not only enhancing customer satisfaction but also reducing the use of cover notes, which has always been riddled with large scale mis-use/frauds.
Alternatively, there is off-line point-of-sale application which allows policy generation with the help of a program residing in the point-of-sale computer instantly. As soon as connectivity is regained, the policy details are synchronised with the base server.
PDAs and Mobiles: Currently there is a considerable time lag between the actual collection of premium and the deposit made at the insurer’s office. This becomes an issue when there is a claim in the interim period. Technology could be an aid here in the form of PDAs and mobiles.
A PDA can be used to issue a receipt as and where the claimant makes a payment, while the SIM card could be used to transfer the details of the transaction immediately to the insurer’s server. Even the possibility of fraud decreases as the time and date are mentioned in all transactions.
Bio-metric cards: A bio-metric card is like a debit card that contains the insured’s name, age, identification number and thumb-print. Already made compulsory by the government under the Rashtriya Swasthya Bima Yojna (RSBY), such cards minimise the possibility of fraud and speed up the processing of claims.
In the event of a claim, all the insured needs to do is to swipe the card in the card-reader installed in the hospital and match the thumb print with the data base.
Upon discharge, the claim amount is debited from the claimant’s account and the balance is utilised in the next hospitalisation. Under the RSBY, about 5 lakh cards have been issued in 16 States and over 1,500 people have benefited from the scheme.
RFID tags for cattle: Currently cattle insurance is tracked using tagging on the ears of cattle. Since this is not a fraud-proof method, insurance companies have incurred huge losses. RFID (Radio Frequency Identification device) tags negate the possibility of fraud by implanting a microchip that has a unique identification number, near the ears of animals.
At the time of claim, the unique ID number in the chip is matched with the number in the records, negating the possibility of frauds.
Weather insurance: Modern automated weather stations calculate relative humidity and temperature apart from rain, and are better equipped to predict weather changes. However ‘basis risk’ – the risk of experienced loss being different from calculated loss is a matter of concern for underwriters.
To reduce this risk, Normalised Difference Vegetation Index (NDVI) is seen to be an improved way to design weather products. This is a hybrid weather-cum satellite imagery-based weather index, where claims settlement is done on the basis of satellite image of foliage, type of soil and moisture data from satellite image along with temperature and rainfall data from weather station.
Blue Ocean Strategy
There are two facts to be considered. First, urban insurance markets are already saturated. Second, micro-insurance in rural India hasn’t really taken off. Put together, it simply means that if companies want to grow, they need to harness technology to leverage the under-explored rural market.
Insurers must remember that, if assisted, the low-income policy holder of today can grow into the middle-class of tomorrow, and hence create a bigger market for the future. Therefore, the need to look beyond short-term gains, to leverage technology smartly, and reap profits patiently in the long run.
Doing well while doing good is indeed very possible. The time to implement a blue ocean strategy is now. All one needs is innovation, drive and an all-inclusive vision to grow together.

http://publication.samachar.com

BANK

RBI to ensure regular supply of fresh bank notes

Our Bureau
Coimbatore, Aug. 28 Besides examining options to enhance the life of bank notes, the Reserve Bank of India has initiated a multi pronged approach involving regular supply of fresh bank notes, speedier disposal of soiled bank notes and extended mechanisation of cash processing activity to ensure that good quality bank notes are in circulation in the system.
The Bank has in its Annual Report stated that during 2008-09, the value of bank notes increased by 17.1 per cent and by 10.7 per cent in volume terms.
The total supply of bank notes by the Bharatiya Reserve Bank Note Mudran (P) Ltd during 2008-09 (July-June) was 8,501 million pieces as compared with 8,488 million pieces during 2007-08.
The Government-owned Security Printing and Minting Corporation of India supplied 5,160 million pieces of notes in 2008-09 compared with 5,442 million pieces in 2007-08.
“The challenges to managing currency have increased over time given the expansion of the economy and the growing needs for bank notes, the task of currency management has become increasingly complex,” the report notes. The report also took note of the decline in the share of currency in broad money in 2008-09 from 39.7 per cent as at end-March 1971 to 16 per cent in 2001 and gradually thereafter to 14 per cent as at March 2009, reflecting financial deepening, increased use of credit and debit cards and liquid financial markets.
Notwithstanding the decline in the share of currency in broad money, detection of counterfeit bank notes was observed to be on the rise. A total of 3,98,111 counterfeit bank notes were detected at the Reserve Bank’s offices and bank branches during 2008-09 compared with 1,95,811 in the previous year.

http://publication.samachar.com

SEBI

SAT clears hurdle to Bharti-MTN match

The Securities Appellate Tribunal, or SAT, today dismissed a petition filed by a Bharti Airtel shareholder opposing an informal guidance by the Securities & Exchange Board of India (Sebi) exempting South African telecom major MTN Group from having to make an open offer to Bharti shareholders in the event of a merger of the two.

The two companies are talking a merger that will have MTN acquiring a chunk of Bharti shares, which, according to the petition, should necessitate an open offer under the takeover norms.
Sebi, the market regulator, had said on June 22 that MTN need not make an open offer as its holding in the Sunil Mittal-promoted company would be through Global Depository Receipts, or GDRs. MTN would be required to make an open offer only if GDRs issued to MTN and its shareholders were converted into equity shares with voting rights.
A bench consisting of Justices N K Sodhi and Samar Ray observed that the appeal was "premature" and dismissed it as "infructous". Under the regulations, SAT can overturn orders passed by Sebi.
SAT’s dismissal of the petition removes a hurdle to the merger well before the new deadline of September 30 that the two companies have set for their exclusive talks. The proposed $23 billion merger would create one of the largest telecom companies in the world in terms of revenues and subscribers.
When contacted, a Bharti Airtel spokesperson confirmed the development and said: “We learn that the appeal has been dismissed. We are awaiting the contents of the full order."
Deepak Mehra, the shareholder who challenged Sebi’s order, could not be reached for comments. He holds 200 shares of Bharti.
Earlier, the finance ministry said it did not expect the deal to face any impediments due to Press Notes 2 and 4, both of which were introduced in February this year to redefine the policy on foreign direct investment.
On August 11, a two-member SAT bench had observed that both Bharti Airtel and MTN could be made parties to the petition, which was primarily against the market regulator.
According to sources, in their replies to the petition, Bharti Airtel and MTN stated that the petition has been filed to “create an impediment to the transaction”.
http://www.business-standard.com/india/news/sat-clears-hurdle-to-bharti-mtn-match/368445/

SEBI issues guidelines for interest rate futures

 Mumbai, Aug 28 (PTI) Market regulator SEBI today issued guidelines for trading in interest rate futures under which the 10-year government securities can be traded on bourses, a development that will deepen the debt market. As per the guidelines, the contract size for futures trading would be Rs 2 lakh with a maximum maturity period of 12 months.
The contract cycle, it added, would consist of four fixed quarterly contracts expiring in March, June, September and December. The notional coupon rate for such trade, the guidelines said, would be 7 per cent to be compounded every six months.
Welcoming the move SMC Capitals Equity Head Jagannadham Thunuguntla said, "It is a right step by SEBI. This will activate the debt market in the country." The guidelines further said stock exchanges will have to seek approval of the SEBI before starting trading in interest rate futures in their currency derivative segment.
The clearing system for the interest rate futures, it added, would be the same as for the currency derivatives segment. The exchanges will also be required to disclose upfront the composition of the basket of deliverable grade securities and the associated conversion factors for each of the quarterly contract.
http://in.news.yahoo.com/20/20090828/372/tbs-sebi-issues-guidelines-for-interest.html

OTHERS

Now, your gas cylinder is just an SMS away

NEW DELHI: No more visiting your cooking gas dealer for booking a refill. Or having to endlessly try the dealer’s phone which always seems to be busy From Monday, you can simply book a refill cylinder by sending an SMS from your mobile to a five-digit toll-free number. You can also register your complaints by dialling a six-digit easy-to-remember number that will be common to consumers of all LPG companies.

The service, part of junior oil minister Jitin Prasada’s efforts at cutting delays and improving service, will kick off in Delhi and will start in other cities across the country in phases. The new system will be simple and somewhat similar to the railway inquiry or phone-banking services. Some dealers may not be covered by the system in the beginning but will come under the plan in a few days.

From Monday, consumer can simply book an LPG refill cylinder by sending an SMS from mobile to a five-digit toll-free number.

For booking through SMS, a consumer will have to first register the cell number. This will have to be done by ringing up the five-digit toll-free number of the service provider and feeding the dealer’s telephone number and consumer number, in that order . Once this process is complete , a consumer can make a booking by simply sending an SMS to the five-digit toll-free number saying ‘LPG’ .

Your mobile number can also be registered through SMS. For this, you will need to send an SMS to *501# with the dealer’s phone number and consumer number in case of Indane, the cooking gas brand from IndianOil Corporation . For consumers of BharatGas, the SMS will have to be sent to *502#. Subsequently , a refill can be booked by simply sending an SMS to 501 for Indane and 502 for BharatGas, saying ‘LPG’ .

The mobile number will become a consumer’s unique identification for wireless booking. Whichever way a refill is booked, a consumer will receive an SMS giving confirmation of the booking, the order number, date and time. Once the refill is dispatched, another SMS will follow informing that the cylinder has been dispatched. This will help consumers to promptly find out in case the refill is diverted by an unscrupulous dealer or delivery boy.

The system will be a little different for consumers of Hindustan Petroleum’s HP Gas. The company will have an exclusive 10-digit number which will take a consumer to a 24X7 internet voice recording system. Refills can be booked by placing a call and recording the order by giving the consumer number and dealer name etc. In this case too, the consumer will get an SMS confirming a booking and another alert on delivery.

A six-digit complaint number will also come into existence simultaneously with the SMS booking regime. The number will be common for consumers of all cooking gas brands. This will be a call centre number which will be attended by a customer relations executive for registering complaints or queries between 8am to 8pm. Callers will be led to an IVRS system — much like phone banking — where consumers can record a complaint. TOI had first reported on July 10 the move to launch these services.

Ever since he took over, junior oild minister Jitin Prasada has been pushing state-run oil marketing companies to improve the quality of service. ‘‘ Consumers are unhappy with the service. One big problem is lack of awareness about things like helpline or complaint centres. The oil companies are making only mechanical effort and not communicating with people... they have to deliver on what is promised by the government... we need to make people aware of that,’’ Prasada said.
http://economictimes.indiatimes.com/Now-your-gas-cylinder-is-just-an-SMS-away-/articleshow/4947163.cms