Archive for June, 2009

Entry Fee Removal May Slow Indian Mutual Fund Spread

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.

Jagannadham Thunuguntla, head of equity at SMC Capitals Ltd.

“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 SMC 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.


A monsoon hit to the economy!

A monsoon hit to the economy!

With every passing day, hopes of a normal monsoon are receding.

Along with poor rainfall, hopes of better economic performance in 2009, too, may suffer a washout.The situation is one of concern.

Everyone now has fingers crossed about the next crucial 20 days. Surely, instead of see-sawing between hope and despair each time rains play truant, India ought to deal with the problem of its monsoon-dependence scientifically.

Representing around 17 per cent of India’s GDP, agriculture has averaged nearly 4 per cent growth over five years.The sector was expected to buoy India’s overall growth, hit by the global crisis.

Manufacturing is down. Exports are down. If the monsoon does disappoint, farm production will fall at about the worst possible time.

Nearly 70 per cent of Indians depend on farming. Many handling summer-sown crops like rice, soybean, sugarcane and cotton would be impacted, as also dealers in food and cash crops.

Rural demand has been robust. A poor monsoon could change that. Food prices are already high. They could hit the roof. Within the WPI, the food articles inflation stood at 8.65%.  Inflation for sugar and sugar products stood at a whopping 33.29%.  Poor rainfall will ensure that this problem continues.

Irrespective of how the situation plays out, studies on monsoon patterns indicate a generally erratic and weakening trend.Yet India’s output of water-intensive crops is to grow exponentially in future, implying massive groundwater depletion in wheat and rice-growing states.

Managing water resources – harvesting, extraction, storage or recycling – can’t but be top priority. Woefully inadequate irrigation infrastructure needs overhaul.

India can learn a lot from technologically innovative Israel, a model of efficient water management. Consider drip irrigation, which avoids evaporation by keeping the soil moist underground.

Also, power subsidies encourage waste of water. Their calibrated rollback is required, as also strict use of water meters.

Finally, there’s need to boost manufacturing to meet growth targets and ease dependence on agriculture.

By World Bank estimates, our water demand will outstrip supply by 2020. Staving off such a scenario will require more than propitiating the rain gods.

It is Need of hour that India’s dependence on the monsoons has to be cut down and minimized.

PSU Divestment: Now is the best time news

As opportunities dry up in the recession-hit ‘advanced’ economies, foreign funds are increasingly looking at India. The government should seize the moment to accelerate disinvestment in PSUs, argues Jagannadham Thunuguntla

Jagannadham ThunuguntlaWhat a turnaround! The United States, long considered the ‘cradle of capitalism’, is now busy trying to nationalise its iconic brands such as AIG, Freddie Mac, Fannie Mae, General Motors and Chrysler, under various guises but using taxpayer money.

On the other hand India, long known for its close ties with the erstwhile USSR, and officially a ‘socialist’ republic under the Constitution, is now busy finalising the nuances of its disinvestment policy, giving the ownership of ‘public sector’ undertakings back to the public, at least in part. The economic world has thus been almost turned upside down.

A further indicator of this is the well-documented shifting of economic power from the West of Atlantic Ocean (the United States) to the East of Indian Ocean and particularly the Arabian Sea (the Asia). Global investors, including foreign institutional investors, are flocking to these parts, including India. This should help the country’s divestment policy.

Slow but steady disinvestment
India’s disinvestment process may be too slow for many people’s liking, but it has been fairly steady over recent years. The earlier UPA government which was in power from 2004 to 2009 could not pursue its disinvestment policy with full vigour due to opposition from its Left allies. Even then, during five year period the UPA government managed to complete 13 IPOs of public sector undertakings, garnering an amount of Rs27,385.21 crore.

The message from the election results 2009 is loud and clear: the Indians have changed their mindset from status quo to progress. Evolution is a continuous process in any country’s life and we have displayed it thoroughly this time. The ever-maturing Indians have taken note of the UPA’s efforts and given them a thumping win in this year’s elections. As the new government is free from ‘left’ load, now it can think of ‘right’ things.

This naturally gives a free hand to the new government to launch clear and relatively aggressive disinvestment policy taking into account the burden of fiscal deficit in India.

Opportunity to slash deficit
If the government plans to sell its stake in the listed PSUs while maintaining a controlling stake of at least 51 per cent as per the President’s inaugural speech in the 15th Lok Sabha in parliament, the total amount that can be raised is about $94.77 billion (Rs4,61,245 crore) based on the current market prices of listed PSUs. This works out to about 9.48 per cent of current GDP.

The current fiscal deficit of India is at $62.26 billion (Rs303020 crore), which is about 6.23 per cent of GDP. This means the deficit is much lower than the amount that the government has the potential to garner by selling up to 49 per cent stakes in listed PSUs alone. Besides listed PSUs, as per the disinvestment policy, the government is planning IPOs of several unlisted PSUs such as NHPC, OIL, Coal India, BSNL, RITES, IRCON International, etc.

This signifies that a clear and aggressive disinvestment policy would give the government a lot of cushion and headroom in its fiscal policy making. With an aggressive disinvestment policy, the fiscal deficit may be brought well under control, giving the government latitude to spend on the critical social sector.
On the other hand if the government goes slow on disinvestment, then it will be forced to fund projects vital for growth by raising taxes, which – particularly indirect taxes – are already at swingeing levels.

When the country as a whole owns assets such as BSNL, Coal India Limited and the Railways, and global money is eager to pay hefty valuations for these assets, how far is it reasonable not to accept that money, instead burdening the country with additional taxes?

Disinvestment means transparency
Besides that, disinvestment also helps to bring the financial condition and functioning of unlisted PSU companies into the public domain, where people can have an informed debate on the way several PSUs are operated. After all, the PSUs are pubic wealth and hence Indians have the right to know about the operations and financial health of these companies.

The listing of these companies would bring greater transparency and better corporate governance standards into these companies as they will be subjected to all the disclosure standards of the Securities and Exchange Board of India and the stock exchanges. Further, it could encourage more competitiveness in the operations of the PSUs.

Also, the listing of these companies provides the best opportunity for Indians to participate in the growth of Indian economy. Currently, even if investors believe in the Indian growth story, they have to essentially base investment plans on the private sector.

Hedge funds can finance growth
There is a lot of money with hedge funds, which are unregulated by nature. Also, they are free to invest in any asset class in any country, as long as they see a profit at the end. Now, due to the severe destruction to the assets in the developed economies, all that money is eagerly searching for good opportunities in the East. And India is very much on their radar.

So this is the perfect opportunity for India to create sufficient investment options to attract such money. When they are keen to invest, it would be wise to accept their money through disinvestment in PSUs.

To put it in terms that should appeal to the ever-hungry Indian government, the money that would be invested by these hedge funds in the PSUs will go directly into government’s coffers. Ideally, this could be deployed for infrastructure projects that are crucial to continuing and accelerating economic growth.

Finally, it should be noted that the Indian electorate has given a clear verdict favouring the pro-disinvestment UPA government. This essentially means the Indian voters have favoured disinvestment. Then, why should we argue with the collective wisdom of the Indian public?


Can India run ahead of China?

Can India run ahead of China?

Can India run ahead of China?

Indians have for long suffered from an advanced case of China envy. It has never been just a question of higher growth rates in China. Visitors from India have also inevitably come back with breathless tales about the new downtown Shanghai, the magnetic levitation trains or the new highways being built across that country.

However, the World Bank said on Monday that India is expected to grow at a slightly faster pace than China in 2010. And the two economies will expand at around the same rate in 2011.

Is this a turning point in the long race between the hare and the tortoise?

There is little doubt that the gap between the rates at which the two emerging giants are growing has started narrowing.

China used to grow around 3 percentage points faster than India earlier this decade. That gap has now narrowed to the point of insignificance in the past couple of years, even without discounting China’s dodgy macroeconomic numbers.

This change is likely to be enduring for several reasons.

First, China is more exposed to the vagaries of the world market because of its high trade intensity. A Japan-style secular slowdown in the US and Europe over the next decade will hurt China more than India unless China moved beyond its admittedly successful mercantilism.

Second, the foreign direct investment boom in China since the mid-1990s pushed up its investment rate, enabled technology transfer and plugged the nation into global supply chains. All this took China closer to the global efficiency frontier, but it now seems that diminishing returns are setting in. Future growth will have to depend more on domestic demand and local innovation, which means that China will have to change its growth model.

Third, China is a fast ageing society, thanks to a one-child policy. This demographic change will increase dependency ratios and social costs.

India seems to be on a stronger wicket right now, thanks to its higher dependence on domestic demand, its vibrant entrepreneurial culture and a young population. But that should not mean that catching up or overtaking China is inevitable.

The joker in the pack is the quality of national leadership.

India needs to do several things if it has to realistically overtake China in the next decade: economic reforms, better infrastructure, internal security check, less bureaucracy and intensive skill development, for example.

Companies Go Slow on Share Buy-Backs.

Companies go slow on share buy-backs

Companies go slow on share buy-backs

In a tight money market, companies that have moved to buy back their shares are going slow on these efforts either because they do not have the money or are saving it for a better use, according to analysts and executives at some of the firms.

Currently, 22 companies have ongoing offers to buy back their own shares and, according to SMC Capitals Ltd, the merchant banking arm of New Delhi-based financial services house SMC Global Securities Ltd, they have spent less than 25% of the aggregate Rs 4,559.47 crore they would have to spend if they bought back all the shares they set out to at the maximum buy-back price.

To be sure, buy-back offers are typically open for several months and many of the 22 companies still have time to repurchase their shares.

Companies buy back shares in an effort to boost investor sentiment and prop up the share price, and increase the return on equity (money for the buy-back usually comes from reserves which is part of the shareholders’ funds or equity) and earnings per share (the shares bought back are destroyed, leaving fewer shares among which the earnings have to be shared).

No companies launched buy-back programmes in 2007, when the equity markets were on a roll. Several companies, however, announced such programmes as the markets started melting last year.

India’s benchmark equity index, Sensex, has lost nearly 50% of its value since January 2008, in the wake of the global credit crunch and an economic slowdown.

Delhi-based real estate firm DLF Ltd, which had announced one of the biggest buy-back plans last year at a total maximum cost of Rs1,100 crore, has thus far repurchased shares worth only Rs 51.3 crore, according to SMC. The offer closes on 9 July.

“The money we have deployed in the buy-back is a reflection of the general market conditions and the liquidity crisis worldwide,” said Saurabh Chawla, executive director, finance, DLF.

Similarly, Reliance Infrastructure Ltd, owned by the Reliance Anil Dhirubhai Ambani Group (R-Adag), has bought back shares worth Rs806 crore in an offer capped at Rs2,000 crore, according to SMC data.

“At a time when cash is king, many companies may not be as committed to their buy-backs as they would have been otherwise,” said Jagannadham Thunuguntla, head of equity at SMC Capitals.

Jagannadham Thunuguntla, head of equity at SMC Capitals

Usually, a firm specifies a maximum price for the buy-back and a maximum amount it will utilize for the buy-back.

But it doesn’t necessarily use this amount, and the buy-back happens at the prevailing market price.

“If the maximum buy-back price is Rs600, but the current market price is only Rs 300, the firm will naturally buy back at Rs 300,” said Thunuguntla of SMC Capitals.

A buy-back gives investors the option of liquidating their position in a market that doesn’t have too many buyers.
More read on SMC Capitals :

India had no role in shifting 2011 WC matches from Pak: ICC

ICC Chief Haroon Lorgat stressed on the fact that India had no role in shifting 2011 WC matches from Pak

ICC Chief Haroon Lorgat stressed on the fact that India had no role in shifting 2011 WC matches from Pak

ICC on Thursday dismissed Pakistan’s claims that India was behind the shifting of their 2011 World Cup matches and said the decision could have been avoided if the security apprehensions in the strife-torn country were responsibly addressed during the ICC Executive Board meeting.

“India had nothing to do with the decision. The decision was taken after consulting all the member nations. There are all together 16 member nation’s in ICC and India is just one of them,” ICC Chief Executive Officer Haroon Lorgat , who belongs to Pakistan himself, said.

Had Pakistan done half as they are doing right now before the ICC meeting, the decision could have been avoided.

We know many countries won’t tour Pakistan. Pakistan is now trying to defend their own position,” he told reporters.

On the possibility of shifting Pakistan’s share of World Cup matches to neutral venues like Abu Dhabi and Dubai, Lorgat said the ICC had not received any such proposal from the PCB.

“We have received no such proposal on neutral venue,” he said.

But Lorgat said in the coming days more security checks would be carried out in the venues of India, Sri Lanka and Bangladesh.

“It’s a normal part of our process. We will still review the security in the other three host countries,” he said.

The ICC CEO also denied Indian Premier League (IPL) Commissioner Lalit Modi’s claims that Champions League Twenty20 and other domestic tournaments would be a part of ICC’s Future Tour Programmes.

Asked about ICC’s plans on organising the much talked about Day and Night Tests, Lorgat said, “It’s still early dates for Day and Night Tests, but we encourage the concept. We are conducting thorogh research on the concept at the moment.”

The ICC CEO announced that as per the new contract signed between the two parties, LG would remain ICC Global Partner for all ICC events till 2015.

Source: PTI

What are ULIPs? How is it different from Mutual funds ?

ULIPs are a mix of investment and insurance

ULIPs are a mix of investment and insurance

At almost every investor mind a question is generally cropped up: “What is the difference between a ULIP and a Mutual Fund?”

The reason, perhaps for the wide extent of confusion, lies largely in the way ULIPs have been sold by agents. As just another mutual fund.

Unit Linked Insurance Policies (ULIPs) as an investment avenue are closest to mutual funds in terms of their structure and functioning.

As is the case with mutual funds, investors in ULIPs is allotted units by the insurance company and a net asset value (NAV) is declared for the same on a daily basis.

Similarly ULIP investors have the option of investing across various schemes similar to the ones found in the mutual funds domain, i.e. diversified equity funds, balanced funds and debt funds to name a few.

Generally speaking, ULIPs can be termed as mutual fund schemes with an insurance component.

And as you would be aware about Mutual Fund, it is a body corporate that pools the money from individual/corporate investors and invests the same on behalf of the investors /unit holders, in various investment avenues like equity shares, Government securities, Bonds, Call money markets etc., as per the pre-specified objective and distributes the profits earned from such investment.

In India, Mutual Funds are registered with the Securities and Exchange Board of India (SEBI).

ULIPs vs Mutual Funds


Mutual Funds

Investment amounts

Determined by the investor and can be modified as well

Minimum investment amounts are determined by the fund house


No upper limits, expenses determined by the insurance company

Upper limits for expenses chargeable to investors have been set by the regulator

Portfolio disclosure

Not mandatory*

Quarterly disclosures are mandatory

Modifying asset allocation

Generally permitted for free or at a nominal cost

Entry/exit loads have to be borne by the investor

Tax benefits

Section 80C benefits are available on all ULIP investments

Section 80C benefits are available only on investments in tax-saving funds

ULIPs are a mix of investment and insurance. But very long term investment, not even medium term.Insurance companies themselves admit, that if your investment horizon is anything less than 7 years, don’t even consider a ULIP.

Charge structure in a ULIP is vastly different from a mutual fund.

ULIPs invest for the long term, as they expect investors to stay for the long term. And the purpose of a ULIP is also different build assets through a pension plan, retirement plan or child plan. All of which, need very long term investing, say 10-15 years or even more.

ULIP investors also have the flexibility to alter the premium amounts during the policy’s tenure.

For example an individual with access to surplus funds can enhance the contribution thereby ensuring that his surplus funds are gainfully invested; conversely an individual faced with a liquidity crunch has the option of paying a lower amount (the difference being adjusted in the accumulated value of his ULIP).

The freedom to modify premium payments at one’s convenience clearly gives ULIP investors an edge over their mutual fund counterparts.

In mutual fund investments, expenses charged for various activities like fund management, sales and marketing, administration among others are subject to pre-determined upper limits as prescribed by the Securities and Exchange Board of India. Insurance companies have a free hand in levying expenses on their ULIP products with no upper limits being prescribed by the regulator, i.e. the Insurance Regulatory and Development Authority.

Mutual fund houses are required to statutorily declare their portfolios on a quarterly basis, albeit most fund houses do so on a monthly basis. Investors get the opportunity to see where their monies are being invested and how they have been managed by studying the portfolio.

*There is lack of consensus on whether ULIPs are required to disclose their portfolios. While some insurers claim that disclosing portfolios on a quarterly basis is mandatory, others state that there is no legal obligation to do so.

ULIPs also allow you to switch from debt to equity within the same scheme, at no extra charge. So if you want to get the benefits of long term investment and risk cover in one single product, ULIP is the product for you.

So it is not an issue, of whether a mutual fund is better or a ULIP. It is about your need.

Both can co-exist in your basket of needs.

So identify your needs with a financial planner and then pick the product suitable for you.

Fiscal Deficit will not be in Double Digits: Montek Singh Ahluwalia

Fiscal Deficit will not be in Double Digits: Montek

Fiscal Deficit will not be in Double Digits: Montek

Seeking to mollify the fears of banks that high government borrowing would not allow interest rate to come down, the Planning Commission on Sunday said the fiscal deficit will be high but not in “double digits”.

“Bankers are always concerned about the size of the government’s borrowing. Because it is very very large, many of them think that the interest rate on government debt will rise and they would rather retain liquidity now in order to invest in high-yielding government bonds,” Planning Commission Deputy Chairman Montek Singh Ahluwalia said.

He, however, advised bankers to wait as nobody knows what the government borrowing would be till the Budget and added that “I feel it will be possible to accommodate a reasonable fiscal deficit.”

He stressed, “should not look for a return this year to the normal fiscal deficit, which used to be 3 per cent. It should be significantly higher.”

Fiscal deficit, which is roughly the difference between total expenditure and total receipts, is an indicator of government borrowing.

On account of various stimulus packages announced by the government to arrest the impact of the global financial meltdown on the country, the fiscal deficit during 2008-09 shot up to over 6 per cent of gross domestic product (GDP) as against the original estimate of 2.5 per cent.

He pointed out that all over the world countries are running high fiscal deficits.
Admitting that the monetary policy stance does have a bearing on interest rates, he said, “I am sure the Finance Ministry and the RBI are in close contact on this issue.”

India Telecom to cross 30bn revenue by 2013.

India telecom to cross 30bn revenue by 2013.

India telecom to cross 30bn revenue by 2013.

India will continue its robust telecom story with the revenue of the sector expected to be more than $30 billion by 2013, according to a global IT research and advisory firm.

”Total mobile services revenue in India is projected to grow at a compound annual growth rate (CAGR) of 12.5 percent during 2009-2013 to exceed $30 billion,”” the US-based Gartner Inc said in a statement.

The study also found that the growth will be triggered by the increased adoption of value-added services.

The mobile market penetration is projected to grew to 63.5 percent in 2013 from 38.7 percent in 2009 on the back of increased focus on the rural market as well as entry of consumer durable and electronic companies into the mobile handset segment, and cheaper handsets.

Moreover, the number of people with prepaid connections will continue to swell to exceed 96 percent by 2013.

Along with this, the postpaid subscriber base will exceed 29 million subscribers by 2013 growing 2.5 percent from 2008, Gartner said.

The Indian mobile industry has now moved out of its hyper growth mode, but it will continue to grow at double-digit rates for next three years as operators focus on rural parts of the country