June 2009
Monthly Archive
June 30, 2009
Equity mutual funds are handing out dividends to investors like never before. Fund houses such as Franklin Templeton, SBI Mutual, HDFC MF, Reliance MF, Tata MF and UTI have announced dividends of 20-60% in their bid to encourage investors to retain money in existing schemes.
More than anything else, the near-80% market rise over the past four months has helped mutual funds to distribute surplus profits. Fund houses have seen a phenomenal AUM growth over the past six months. Even smaller fund houses, including Baroda Pioneer AMC, DBS Chola, Taurus Mutual Fund, Canara Robecco, DBS Chola and Religare MF, have seen a decent appreciation in their assets under management during this period.
“One of the reasons for handing out large dividends is to keep retail investors in good spirits,” said the fund manager of a joint venture (between Indian and foreign entities) mutual fund house. “A good dividend payout, especially in times of uncertain markets, will prompt them to stay invested in schemes.
Huge dividend payout will also help distributors sell the product more efficiently and bring in more money,” the fund manager added.
Adds Saurabh Nanavati, CEO, Religare Mutual Fund, “Retail investors — especially elderly investors — expect dividend payouts periodically. Fund houses could not pay dividends last year as a result of the market downturn. The market rise, this year, has yielded surplus profits that are now being distributed to the investors,” he said. Conventional fund management wisdom makes it imperative for fund managers to declare dividends as this is one of the few ways to take profits off the table.
This is more so in the case of overheated markets where there are not many good investment opportunities. Mutual funds pay dividends out of the surpluses (gains) they generate over a fixed period, say six months to one year.
“Dividend is only one of the evaluation parameters to be considered when investing in equity funds — focus being on consistency in dividend payout rather than the quantum of payout.
Typically, equity funds, which have a long-established track record and have built up strong surpluses are able to give consistent dividends through market cycles,” said Sukumar Rajah, CIO-equity, Franklin Templeton Investments.
The effect of dividend payout is that the fund size reduces by the amount of money distributed. This is also reflected in the decline in net asset value.
June 30, 2009
Equity mutual funds are handing out dividends to investors like never before. Fund houses such as Franklin Templeton, SBI Mutual, HDFC MF, Reliance MF, Tata MF and UTI have announced dividends of 20-60% in their bid to encourage investors to retain money in existing schemes.
More than anything else, the near-80% market rise over the past four months has helped mutual funds to distribute surplus profits. Fund houses have seen a phenomenal AUM growth over the past six months. Even smaller fund houses, including Baroda Pioneer AMC, DBS Chola, Taurus Mutual Fund, Canara Robecco, DBS Chola and Religare MF, have seen a decent appreciation in their assets under management during this period.
“One of the reasons for handing out large dividends is to keep retail investors in good spirits,” said the fund manager of a joint venture (between Indian and foreign entities) mutual fund house. “A good dividend payout, especially in times of uncertain markets, will prompt them to stay invested in schemes.
Huge dividend payout will also help distributors sell the product more efficiently and bring in more money,” the fund manager added.
Adds Saurabh Nanavati, CEO, Religare Mutual Fund, “Retail investors — especially elderly investors — expect dividend payouts periodically. Fund houses could not pay dividends last year as a result of the market downturn. The market rise, this year, has yielded surplus profits that are now being distributed to the investors,” he said. Conventional fund management wisdom makes it imperative for fund managers to declare dividends as this is one of the few ways to take profits off the table.
This is more so in the case of overheated markets where there are not many good investment opportunities. Mutual funds pay dividends out of the surpluses (gains) they generate over a fixed period, say six months to one year.
“Dividend is only one of the evaluation parameters to be considered when investing in equity funds — focus being on consistency in dividend payout rather than the quantum of payout.
Typically, equity funds, which have a long-established track record and have built up strong surpluses are able to give consistent dividends through market cycles,” said Sukumar Rajah, CIO-equity, Franklin Templeton Investments.
The effect of dividend payout is that the fund size reduces by the amount of money distributed. This is also reflected in the decline in net asset value.
June 30, 2009
With commissions likely to head down, independent distributors will have to diversify revenue streams by selling other financial products such as insurance, postal schemes and fixed deposits to offset the revenue losses.
The suspense over the issue of entry loads on mutual funds was finally resolved last week with the Securities and Exchange Board of India (SEBI) conveying its decision to scrap entry load for mutual fund schemes. The distributors, the backbone of the industry, are disappointed by the decision of the regulator with some even considering boycotting sale of mutual fund products as a mark of protest.
What distributors perceive
Under the new scheme, distributors and investors have to agree mutually to a fee structure for the service to be provided. Distributors fear that once investors know the service rendered, they may bargain hard and try to pitch one distributor against another to get a better deal.
It is also possible that investors, after taking advice from the distributor may proceed to invest directly in the funds recommended, to save the commission. Yet, distributors should also understand that in a free, competitive market, the quality of service offered by them is the best insurance against this eventuality.
With commissions likely to head down, the distributor will need to increase the volume of business drastically, to make up. Larger distributors may cut down costs by closing down offices, reducing marketing expenses and variable commissions paid to employees.
Independent distributors may have to look out for more diversified revenue streams by selling other financial products such as insurance, postal schemes and fixed deposits to offset the revenue losses. Independent financial advisors in tier 2 and tier 3 towns fear that they will find it very difficult to convince investors for a fee. Advisors in tier 3 cities have to travel 20-30 km at times, to procure business and the ticket size of such a business will not be remunerative if the fee is negotiated.
This will lead to a situation where the distributors may not provide service to small investors.
Unlike the insurance industry, mutual funds have neither the branch connectivity nor employee strength to entertain investors directly. Even if the investor goes directly to the fund house, one will not be sure of unbiased recommendation on the products based on the investor’s risk appetite.
Incidentally, last year SEBI has abolished entry load for direct applications yet only 10 per cent of fund investors since then have actually chosen to go directly to the funds. Distributors point to this saying that investors need the support of advisors to decide on the investment.
Existing system
In the current system, AMCs charge 2.25 per cent as entry load to investors. Smaller funds charge an entry load of 2.25 per cent for an investment value up to Rs 2 crore while the bigger ones charge load up to Rs 5 crore. Out of the 2.25 per cent entry load, AMCs usually part with a 2 percentage point commission to distributors, retaining the rest for other expenses.
Apart from the entry load commission, distributors also receive trail fee, an annual fee that is much smaller, pegged to the asset size they bring in. If the distributor is able to market Rs 2 crore worth of funds, he may earn commission of Rs 4 lakh less service tax of 10.3 per cent.
For an investment of Rs 25,000 he may earn commission of Rs 500 less service tax. In addition to this, is the trail feesof 0.40-0.50 per cent per annum. Managing the business on trail fees alone will not be viable unless the distributor manages a fairly large asset portfolio.
One option that funds have is to increase the trail fees to encourage distributors in the new milieu. This has to come from the recurring expense (2.5 per cent for load-based schemes currently) that funds charge, while computing the NAV. The recurring expenses now include investment management advisory fee charged by the AMC, registrar and transfer agents’ fee, marketing and selling costs, and so on.
There is a possibility that AMCs will approach SEBI to enhance this recurring charge; allowing them to pay distributors an extra trail fee to encourage them to bring in fresh business and try to expand the penetration in tier 2 and tier 3 cities.
Funds may well be forced to do this because their profitability is slipping already and they cannot bear the additional expense of a higher trail fee. According to the recent report published by KPMG, though the AUM of mutual funds has grown by CAGR of 35 per cent in the past five years, the profitability of the AMCs has slipped from 24 bps in FY04 to 14 bps in FY08.
Penetration level of mutual fund products is low in smaller towns and cities with the top 10 cities accounting for close to 80 per cent of assets under management. With the abolition of the incentive of entry loads that rewards distributors, achieving better spread may well turn out to be a tall order.
June 30, 2009
With commissions likely to head down, independent distributors will have to diversify revenue streams by selling other financial products such as insurance, postal schemes and fixed deposits to offset the revenue losses.
The suspense over the issue of entry loads on mutual funds was finally resolved last week with the Securities and Exchange Board of India (SEBI) conveying its decision to scrap entry load for mutual fund schemes. The distributors, the backbone of the industry, are disappointed by the decision of the regulator with some even considering boycotting sale of mutual fund products as a mark of protest.
What distributors perceive
Under the new scheme, distributors and investors have to agree mutually to a fee structure for the service to be provided. Distributors fear that once investors know the service rendered, they may bargain hard and try to pitch one distributor against another to get a better deal.
It is also possible that investors, after taking advice from the distributor may proceed to invest directly in the funds recommended, to save the commission. Yet, distributors should also understand that in a free, competitive market, the quality of service offered by them is the best insurance against this eventuality.
With commissions likely to head down, the distributor will need to increase the volume of business drastically, to make up. Larger distributors may cut down costs by closing down offices, reducing marketing expenses and variable commissions paid to employees.
Independent distributors may have to look out for more diversified revenue streams by selling other financial products such as insurance, postal schemes and fixed deposits to offset the revenue losses. Independent financial advisors in tier 2 and tier 3 towns fear that they will find it very difficult to convince investors for a fee. Advisors in tier 3 cities have to travel 20-30 km at times, to procure business and the ticket size of such a business will not be remunerative if the fee is negotiated.
This will lead to a situation where the distributors may not provide service to small investors.
Unlike the insurance industry, mutual funds have neither the branch connectivity nor employee strength to entertain investors directly. Even if the investor goes directly to the fund house, one will not be sure of unbiased recommendation on the products based on the investor’s risk appetite.
Incidentally, last year SEBI has abolished entry load for direct applications yet only 10 per cent of fund investors since then have actually chosen to go directly to the funds. Distributors point to this saying that investors need the support of advisors to decide on the investment.
Existing system
In the current system, AMCs charge 2.25 per cent as entry load to investors. Smaller funds charge an entry load of 2.25 per cent for an investment value up to Rs 2 crore while the bigger ones charge load up to Rs 5 crore. Out of the 2.25 per cent entry load, AMCs usually part with a 2 percentage point commission to distributors, retaining the rest for other expenses.
Apart from the entry load commission, distributors also receive trail fee, an annual fee that is much smaller, pegged to the asset size they bring in. If the distributor is able to market Rs 2 crore worth of funds, he may earn commission of Rs 4 lakh less service tax of 10.3 per cent.
For an investment of Rs 25,000 he may earn commission of Rs 500 less service tax. In addition to this, is the trail feesof 0.40-0.50 per cent per annum. Managing the business on trail fees alone will not be viable unless the distributor manages a fairly large asset portfolio.
One option that funds have is to increase the trail fees to encourage distributors in the new milieu. This has to come from the recurring expense (2.5 per cent for load-based schemes currently) that funds charge, while computing the NAV. The recurring expenses now include investment management advisory fee charged by the AMC, registrar and transfer agents’ fee, marketing and selling costs, and so on.
There is a possibility that AMCs will approach SEBI to enhance this recurring charge; allowing them to pay distributors an extra trail fee to encourage them to bring in fresh business and try to expand the penetration in tier 2 and tier 3 cities.
Funds may well be forced to do this because their profitability is slipping already and they cannot bear the additional expense of a higher trail fee. According to the recent report published by KPMG, though the AUM of mutual funds has grown by CAGR of 35 per cent in the past five years, the profitability of the AMCs has slipped from 24 bps in FY04 to 14 bps in FY08.
Penetration level of mutual fund products is low in smaller towns and cities with the top 10 cities accounting for close to 80 per cent of assets under management. With the abolition of the incentive of entry loads that rewards distributors, achieving better spread may well turn out to be a tall order.
June 30, 2009
UTI, SBI, Reliance MF promote SIPs with low threshold.
Savita Devi, a daily wage earner in Gujarat, is saving for her future through a mutual fund. And she has company. Around 150,000 small investors are putting Rs 50-200 per month in UTI Asset Management Company’s (AMC’s) Micro Pension Plan.
UTI AMC is not the only fund house targeting the bottom-of-the-pyramid investors to extend its presence. SBI Mutual Fund, an affiliate of State Bank of India (SBI), also launched a ‘Chota Systematic Investment Plan (SIP)’ in April.
Even Reliance Mutual Fund has ‘Reliance Common Man SIP’, in which one can invest a minimum of Rs 100 per month. Sahara Mutual Fund is awaiting approval from the market regulator, the Securities and Exchange Board of India (Sebi), for a scheme that will allow the investor to put in as little as Rs 10 per day.
‘Chota SIP’ is an equity-based SIP that offers long-term investment benefits to low-income households residing in rural and semi-urban areas. This product is being marketed by SBI. All these players have definite plans to promote these schemes. SBI, for example, is not only depending on its huge network of over 15,000 branches, but is also tapping self-help groups (SHGs), NGOs and micro credit/finance institutions.
Invest India Micro Pension Services (IIMPS) and UTI’s pension plan, a government notified plan jointly promoted by Sewa Bank, UTI AMC and some private individuals, is promoting these products through puppet shows and plays. It has already tied up with thousands of rickshaw pullers and the National Association of Street Vendors. It is in talks with panchayats to promote these products.
This plan will cover members who come under the Basix group’s programme for the poor. Basix is a livelihood promotion institution that works with over 1.5 million poor, 90 per cent of whom are from rural households. Most of them are women in villages of Andhra Pradesh, Karnataka, Bihar, Orissa, Jharkhand, Maharashtra, Madhya Pradesh, Tamil Nadu, Rajasthan, Chhattisgarh, West Bengal, Delhi, Uttarakhand, Sikkim and Assam.
Basix also works with over 100 non-government organisations (NGOs) and community-based microfinance institutions (MFIs) across the country. This network would help UTI tap the rural segment significantly.
“In Bihar, we collect money from doodhwalas (milkmen) at the state cooperative federation,” said Ashish Agarwal, chief executive officer and director, IIMPS.
As far as investing strategy goes, fund managers at UTI and SBI have decided to take the call themselves. Collections from the UTI Micro Pension Scheme would be invested in UTI Retirement Benefit Pension Fund. The mandate, initially, would be to invest 60 per cent of the corpus in fixed income securities and the remaining in equities. This could later change.
In case of SBI Mutual Fund, the fund manager will have the option of investing in Magnum Balanced Fund, MMPS 93, MSFU Contra Fund and SBI Blue Chip Fund. Collections from such schemes, however, have been reasonable. UTI has collected Rs 50 crore. “Collections from Gujarat have been just Rs 48,000,” said Agarwal.
SBI said that it has 30,000 customers. In an emailed reply, Reliance Mutual Fund said that on an average, they added up to 25,000-30,0000 SIP (count) per month. Out of this, micro SIPs make a substantial contribution.
Not roses all the wayHowever, there are several hurdles as well. For one, mutual fund investments require the investor to have a Permanent Account Number (PAN) – a big deterrent when it comes to tapping small and marginal investors. SBI Mutual Fund’s national head (sales & distribution), D P Singh, said, “We are not getting a good response at this stage. The absence of PAN cards with rural investors is the biggest hurdle.”
The problem can be resolved if Sebi agrees to do away with the PAN card requirement for investments up to Rs 50,000.
Then, marketing and promoting these products is also costly as not everybody has the distribution and financial muscle of SBI or UTI. No wonder, players do not expect to make money soon. “Promotion of these products is quite costly. But at this point of time, we are not looking to make any profit. It will take around four years to break even. Initially, the promotional cost is borne by the promoters,” IIMPS Director Gautam Bhardwaj said.
The chief executive officer (CEO) of one of the largest fund houses, which has so far avoided the micro SIP route, said that the business was not commercially viable because transaction costs were too high. He felt that the numbers were not in favour of fund houses. “Just for a Rs 10 SIP, the fund house has to convince a large number of people. As a result, this business will take a long time to generate profit,” he added. Also, fund houses will have to compete with the Life Insurance Corporation of India (LIC), which is a strong player in semi-urban and rural areas.
One of the main fears is that given the fickle nature of the stock market, rural investors might easily get scared when there is a downturn in the market. Fund houses also understand this. As a result, they are making early exits prohibitive. For instance, SBI charges an investor an exit load of 3 per cent for redemptions within three years and 2 per cent for redemptions between three and five years. UTI charges 1 per cent for exits before five years.
June 30, 2009
UTI, SBI, Reliance MF promote SIPs with low threshold.
Savita Devi, a daily wage earner in Gujarat, is saving for her future through a mutual fund. And she has company. Around 150,000 small investors are putting Rs 50-200 per month in UTI Asset Management Company’s (AMC’s) Micro Pension Plan.
UTI AMC is not the only fund house targeting the bottom-of-the-pyramid investors to extend its presence. SBI Mutual Fund, an affiliate of State Bank of India (SBI), also launched a ‘Chota Systematic Investment Plan (SIP)’ in April.
Even Reliance Mutual Fund has ‘Reliance Common Man SIP’, in which one can invest a minimum of Rs 100 per month. Sahara Mutual Fund is awaiting approval from the market regulator, the Securities and Exchange Board of India (Sebi), for a scheme that will allow the investor to put in as little as Rs 10 per day.
‘Chota SIP’ is an equity-based SIP that offers long-term investment benefits to low-income households residing in rural and semi-urban areas. This product is being marketed by SBI. All these players have definite plans to promote these schemes. SBI, for example, is not only depending on its huge network of over 15,000 branches, but is also tapping self-help groups (SHGs), NGOs and micro credit/finance institutions.
Invest India Micro Pension Services (IIMPS) and UTI’s pension plan, a government notified plan jointly promoted by Sewa Bank, UTI AMC and some private individuals, is promoting these products through puppet shows and plays. It has already tied up with thousands of rickshaw pullers and the National Association of Street Vendors. It is in talks with panchayats to promote these products.
This plan will cover members who come under the Basix group’s programme for the poor. Basix is a livelihood promotion institution that works with over 1.5 million poor, 90 per cent of whom are from rural households. Most of them are women in villages of Andhra Pradesh, Karnataka, Bihar, Orissa, Jharkhand, Maharashtra, Madhya Pradesh, Tamil Nadu, Rajasthan, Chhattisgarh, West Bengal, Delhi, Uttarakhand, Sikkim and Assam.
Basix also works with over 100 non-government organisations (NGOs) and community-based microfinance institutions (MFIs) across the country. This network would help UTI tap the rural segment significantly.
“In Bihar, we collect money from doodhwalas (milkmen) at the state cooperative federation,” said Ashish Agarwal, chief executive officer and director, IIMPS.
As far as investing strategy goes, fund managers at UTI and SBI have decided to take the call themselves. Collections from the UTI Micro Pension Scheme would be invested in UTI Retirement Benefit Pension Fund. The mandate, initially, would be to invest 60 per cent of the corpus in fixed income securities and the remaining in equities. This could later change.
In case of SBI Mutual Fund, the fund manager will have the option of investing in Magnum Balanced Fund, MMPS 93, MSFU Contra Fund and SBI Blue Chip Fund. Collections from such schemes, however, have been reasonable. UTI has collected Rs 50 crore. “Collections from Gujarat have been just Rs 48,000,” said Agarwal.
SBI said that it has 30,000 customers. In an emailed reply, Reliance Mutual Fund said that on an average, they added up to 25,000-30,0000 SIP (count) per month. Out of this, micro SIPs make a substantial contribution.
Not roses all the wayHowever, there are several hurdles as well. For one, mutual fund investments require the investor to have a Permanent Account Number (PAN) – a big deterrent when it comes to tapping small and marginal investors. SBI Mutual Fund’s national head (sales & distribution), D P Singh, said, “We are not getting a good response at this stage. The absence of PAN cards with rural investors is the biggest hurdle.”
The problem can be resolved if Sebi agrees to do away with the PAN card requirement for investments up to Rs 50,000.
Then, marketing and promoting these products is also costly as not everybody has the distribution and financial muscle of SBI or UTI. No wonder, players do not expect to make money soon. “Promotion of these products is quite costly. But at this point of time, we are not looking to make any profit. It will take around four years to break even. Initially, the promotional cost is borne by the promoters,” IIMPS Director Gautam Bhardwaj said.
The chief executive officer (CEO) of one of the largest fund houses, which has so far avoided the micro SIP route, said that the business was not commercially viable because transaction costs were too high. He felt that the numbers were not in favour of fund houses. “Just for a Rs 10 SIP, the fund house has to convince a large number of people. As a result, this business will take a long time to generate profit,” he added. Also, fund houses will have to compete with the Life Insurance Corporation of India (LIC), which is a strong player in semi-urban and rural areas.
One of the main fears is that given the fickle nature of the stock market, rural investors might easily get scared when there is a downturn in the market. Fund houses also understand this. As a result, they are making early exits prohibitive. For instance, SBI charges an investor an exit load of 3 per cent for redemptions within three years and 2 per cent for redemptions between three and five years. UTI charges 1 per cent for exits before five years.
June 26, 2009
The manner of investing in mutual funds has changed over a period of time for individuals. This is likely to shift even more dramatically in the coming days.
The decision of the Securities and Exchange Board of India (SEBI) to abolish the entry load on schemes has been a big surprise for everyone. For investors this signals a possible change in theway they take their investment decisions.
There will be some benefit available, but at the same time there also has to be some element of care taken in the process so that it is completed properly.
Entry load
The entry load is the additional expense that has to be paid by the investor when they make an investment in the mutual fund. The entry load usually was in the range of 2-2.5 per cent of the investment and this was an extra burden for the investor.
The load is usually used to cover various selling expenses of the scheme like payment of distributors commission, miscellaneous expenses and so on. Till some time ago, there was an option for the investor to actually save the entry load by making their own investments directly and this ensured that the burden did not fall on them.
Now according to the new guidelines, the schemes should not charge any entry load at all so the investor would not have to pay anything extra. When an entry load is charged, the investor ends up getting a lesser number of units for the same investment.
So, if for example, the net asset value of the scheme is Rs 15 and the entry load is 2 per cent the investor will actually get the units at Rs 15.30 which means that for the same investment there will be a lesser number of units allotted to them.
Selection of scheme
Now with the abolition of the entry load, the investor has to concentrate on the process of selecting the right scheme. There are such a large number of options that need to be considered and this will require some element of work.
Investors will need to consider its performance more closely while making decisions. With no entry load present, the final returns that are coming in for the investor will be influenced largely by the performance or the returns that are generated by the scheme. In such a situation, the investor would do well to concentrate more on the potential returns that can be generated, so that this will help them in their decision-making.
The investor should also look at the fund manager, because this is an important factor that will play a role for their selection.
Exit load
The important point that investors will have to consider is that there could be an exit load that might make a strong re-appearance in the entire investment consideration. Mutual funds are likely to tighten the situation on the exit load front to ensure that the investor does not move in and out of the scheme very quickly.
The percentage figure of the exit load can also rise in the days to come and this can mean a bigger hit in case this has to be paid. The individual investor has to ensure that the exit load is considered while making their decision because this will reduce their returns. This factor has to be taken into consideration in the coming days.
Payment to distributor
The condition about how the investor goes about the entire investment process is important because this can give rise to another element of negotiation.
Under the new conditions, if you use the service of the distributor then there is no fixed fee for the distributor that will be paid by the mutual fund. Rather than this, you will have to pay the distributor, but this will have to be done after discussion and mutual agreement.
The figure will thus vary from person to person and hence there has to be a very clear idea about the manner in which this part of the transaction will actually take place.
The amount that you are willing to pay and how you actually make the decision and the points to consider will vary from person to person, so the right balance needs to be struck in deciding this issue.
Own efforts
There could be a lot of efforts that have to be done on their own by investors because of the entire change due to the fact that there could be a very low interest from the distributor to actually serve the customer.
With the financial incentive gone, there could be a reduction in the services and the only option for the investor is to ensure that they complete a lot of work on their own.
This will require some more time and effort along with the knowledge about the process. The effort could involve the issue of doing some amount of follow up or even communicating directly with the mutual fund, but this can vary depending upon the exact situation for the investor.
This factor has to be brought into the consideration, as it will impact the way in which the overall investment is done.
June 26, 2009
The manner of investing in mutual funds has changed over a period of time for individuals. This is likely to shift even more dramatically in the coming days.
The decision of the Securities and Exchange Board of India (SEBI) to abolish the entry load on schemes has been a big surprise for everyone. For investors this signals a possible change in theway they take their investment decisions.
There will be some benefit available, but at the same time there also has to be some element of care taken in the process so that it is completed properly.
Entry load
The entry load is the additional expense that has to be paid by the investor when they make an investment in the mutual fund. The entry load usually was in the range of 2-2.5 per cent of the investment and this was an extra burden for the investor.
The load is usually used to cover various selling expenses of the scheme like payment of distributors commission, miscellaneous expenses and so on. Till some time ago, there was an option for the investor to actually save the entry load by making their own investments directly and this ensured that the burden did not fall on them.
Now according to the new guidelines, the schemes should not charge any entry load at all so the investor would not have to pay anything extra. When an entry load is charged, the investor ends up getting a lesser number of units for the same investment.
So, if for example, the net asset value of the scheme is Rs 15 and the entry load is 2 per cent the investor will actually get the units at Rs 15.30 which means that for the same investment there will be a lesser number of units allotted to them.
Selection of scheme
Now with the abolition of the entry load, the investor has to concentrate on the process of selecting the right scheme. There are such a large number of options that need to be considered and this will require some element of work.
Investors will need to consider its performance more closely while making decisions. With no entry load present, the final returns that are coming in for the investor will be influenced largely by the performance or the returns that are generated by the scheme. In such a situation, the investor would do well to concentrate more on the potential returns that can be generated, so that this will help them in their decision-making.
The investor should also look at the fund manager, because this is an important factor that will play a role for their selection.
Exit load
The important point that investors will have to consider is that there could be an exit load that might make a strong re-appearance in the entire investment consideration. Mutual funds are likely to tighten the situation on the exit load front to ensure that the investor does not move in and out of the scheme very quickly.
The percentage figure of the exit load can also rise in the days to come and this can mean a bigger hit in case this has to be paid. The individual investor has to ensure that the exit load is considered while making their decision because this will reduce their returns. This factor has to be taken into consideration in the coming days.
Payment to distributor
The condition about how the investor goes about the entire investment process is important because this can give rise to another element of negotiation.
Under the new conditions, if you use the service of the distributor then there is no fixed fee for the distributor that will be paid by the mutual fund. Rather than this, you will have to pay the distributor, but this will have to be done after discussion and mutual agreement.
The figure will thus vary from person to person and hence there has to be a very clear idea about the manner in which this part of the transaction will actually take place.
The amount that you are willing to pay and how you actually make the decision and the points to consider will vary from person to person, so the right balance needs to be struck in deciding this issue.
Own efforts
There could be a lot of efforts that have to be done on their own by investors because of the entire change due to the fact that there could be a very low interest from the distributor to actually serve the customer.
With the financial incentive gone, there could be a reduction in the services and the only option for the investor is to ensure that they complete a lot of work on their own.
This will require some more time and effort along with the knowledge about the process. The effort could involve the issue of doing some amount of follow up or even communicating directly with the mutual fund, but this can vary depending upon the exact situation for the investor.
This factor has to be brought into the consideration, as it will impact the way in which the overall investment is done.
June 26, 2009
The manner of investing in mutual funds has changed over a period of time for individuals. This is likely to shift even more dramatically in the coming days.
The decision of the Securities and Exchange Board of India (SEBI) to abolish the entry load on schemes has been a big surprise for everyone. For investors this signals a possible change in theway they take their investment decisions.
There will be some benefit available, but at the same time there also has to be some element of care taken in the process so that it is completed properly.
Entry load
The entry load is the additional expense that has to be paid by the investor when they make an investment in the mutual fund. The entry load usually was in the range of 2-2.5 per cent of the investment and this was an extra burden for the investor.
The load is usually used to cover various selling expenses of the scheme like payment of distributors commission, miscellaneous expenses and so on. Till some time ago, there was an option for the investor to actually save the entry load by making their own investments directly and this ensured that the burden did not fall on them.
Now according to the new guidelines, the schemes should not charge any entry load at all so the investor would not have to pay anything extra. When an entry load is charged, the investor ends up getting a lesser number of units for the same investment.
So, if for example, the net asset value of the scheme is Rs 15 and the entry load is 2 per cent the investor will actually get the units at Rs 15.30 which means that for the same investment there will be a lesser number of units allotted to them.
Selection of scheme
Now with the abolition of the entry load, the investor has to concentrate on the process of selecting the right scheme. There are such a large number of options that need to be considered and this will require some element of work.
Investors will need to consider its performance more closely while making decisions. With no entry load present, the final returns that are coming in for the investor will be influenced largely by the performance or the returns that are generated by the scheme. In such a situation, the investor would do well to concentrate more on the potential returns that can be generated, so that this will help them in their decision-making.
The investor should also look at the fund manager, because this is an important factor that will play a role for their selection.
Exit load
The important point that investors will have to consider is that there could be an exit load that might make a strong re-appearance in the entire investment consideration. Mutual funds are likely to tighten the situation on the exit load front to ensure that the investor does not move in and out of the scheme very quickly.
The percentage figure of the exit load can also rise in the days to come and this can mean a bigger hit in case this has to be paid. The individual investor has to ensure that the exit load is considered while making their decision because this will reduce their returns. This factor has to be taken into consideration in the coming days.
Payment to distributor
The condition about how the investor goes about the entire investment process is important because this can give rise to another element of negotiation.
Under the new conditions, if you use the service of the distributor then there is no fixed fee for the distributor that will be paid by the mutual fund. Rather than this, you will have to pay the distributor, but this will have to be done after discussion and mutual agreement.
The figure will thus vary from person to person and hence there has to be a very clear idea about the manner in which this part of the transaction will actually take place.
The amount that you are willing to pay and how you actually make the decision and the points to consider will vary from person to person, so the right balance needs to be struck in deciding this issue.
Own efforts
There could be a lot of efforts that have to be done on their own by investors because of the entire change due to the fact that there could be a very low interest from the distributor to actually serve the customer.
With the financial incentive gone, there could be a reduction in the services and the only option for the investor is to ensure that they complete a lot of work on their own.
This will require some more time and effort along with the knowledge about the process. The effort could involve the issue of doing some amount of follow up or even communicating directly with the mutual fund, but this can vary depending upon the exact situation for the investor.
This factor has to be brought into the consideration, as it will impact the way in which the overall investment is done.
June 25, 2009
Indian capital market regulators’ move to scrap an entry fee on mutual funds is expected to bring more transparency in the growing industry even though it may temporarily hurt mutual fund penetration as distributors will lose the incentive to sell funds.
In the long run, the move should bring down the cost of investing in mutual funds, attracting more investors and helping the industry grow, experts said.
“The idea behind the SEBI move is to make mutual fund schemes available to the investor at the lowest cost possible,” said Anil Chopra, group chief executive and director, Bajaj Capital Ltd.
The so-called entry load is a fee that asset management companies, or AMCs, deduct from the amount of money an investor puts in a scheme to pay for marketing and distribution expenses, most of which is an upfront payment to distributors as commission.
Last week, C.B. Bhave, chairman of the Securities & Exchange Board of India, said the upfront commission shall now be paid by the investor to the distributor directly, adding that distributors will have to disclose the commission received for their services.
The benefit for investors would be that they now get to negotiate the amount of commission payable.
Also, the removal of the entry load can actually increase the compounded return for investors as the entire amount they wish to put in a fund would get invested.
For example, earlier, if an investor paid 100,000 rupees for a fund investment, he was allotted units only worth 97,750 rupees-97,500 rupees after deducting the entry load.
At present, equity funds typically impose an entry load of 2.25% to 2.50% on their schemes.
Also, distributors will now be more accountable to investors.
“This is a path-breaking change, and one which would check mis-selling of mutual fund schemes by distributors,” said Jagannadham Thunuguntla, head of equity at Nexgen Capitals Ltd.
Mr. Thunuguntla said distributors could now look at turning into advisers who educate investors on the prospects of a fund and its potential performance by demanding an advisory fee in return.
“The taste of easy money (by just selling a scheme) would be gone…the distributors will have to make sure they give the best advice to the investors in order to ensure regular income,” he said.
The SEBI move comes at a time when fund managers are looking to make the most of the revival in Indian markets.
Total assets under management for fund houses in India rose 16% in May to a record 6.39 trillion rupees ($135.90 billion), compared with 5.51 trillion rupees in April, as the benchmark Sensex has soared over 50% since the start of 2009.
Mutual fund penetration in India is still a low 3% of total household savings, and the industry is banking on tapping investors in tier II and tier III cities for growth.
But the SEBI move may limit these efforts in the short-term as the industry may see a fall in the number of distributors, and consequently a fall in business volumes, say analysts.
Experts say distributors might look at other business opportunities as they would now cease to receive the fixed commission from the AMCs for selling mutual funds.
“Selling mutual funds will become much less attractive,” said Dhirendra Kumar, chief executive, Value Research – an independent provider of investment information on mutual funds.
Manish Sonthalia, a fund manager at Motilal Oswal Securities Ltd. said, “(Fund) mobilization would tend to slow down and, even if profitability does not get impacted directly, volumes at AMCs would be hit.”
In the short term, distributors may opt to sell other investment products like unit-linked insurance plans, or ULIPs, pension schemes and post-office savings certificates, which could hurt the asset management industry.
An option out for fund houses is to distribute their products directly, Mr. Kumar of Value Research said.
However, analysts say this is unlikely as setting up distribution centers at several locations across the vast Indian subcontinent would be costly and time-consuming for AMCs.
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