Archive for August 27th, 2009

To set 25 pct public equity float is tough task for India

equity

India faces an uphill task to reimpose a rule requiring listed companies to have at least a 25 percent public float, with resistance seen from controlling shareholders in private sector firms.

The finance ministry’s effort to bring in a uniform public float minimum comes after a similar push by the capital markets regulator was waylaid by the collapse in markets last year.

Market players say reimposing a minimum float is a good idea but would work only if it were rolled out gradually in order to prevent flooding the market with shares.

A total of 174 firms would need to offload stakes worth roughly 1.61 trillion rupees ($33 billion) if the minimum float rule was imposed, a study by deal tracking firm SMC Capitals showed. Of that, 28 state-run firms, primarily in energy, steel and banks, account for 83 percent.

By comparison, Indian firms have raised $10 billion in share sales so far this year, surpassing the $7.2 billion raised in all of 2008, according to Thomson Reuters data.

PROPOSAL TO HELP PLUG SHORTFALL

India, facing its highest fiscal deficit in 16 years, can use the sale of stakes in government companies to meet the shortfall. A minimum float rule would mean the sale of larger stakes in state firms than might otherwise be considered.

The mandatory share of huge blocks of stock could also be a boon to investment banks managing the sales.

Finance Minister Pranab Mukherjee noted in his July 6 budget speech that the average public float in Indian firms was less than 15 percent.

“Deep, non-manipulable markets require larger and diversified public shareholdings. This requirement should be uniformly applied to the private sector as well as public sector companies,” he said.

Recent media reports have said the finance minister has approved a minimum public float plan in phases from 2010/11.

There will be pulls and pressures especially from some private sector firms but this time the authorities are banking on pulling it off given the government finances,” said Arun Kejriwal, director at research firm KRIS.

However, several market insiders were sceptical of the plan’s success, given the huge amount of stock the market would need to absorb, as well as the reluctance of controlling shareholders to trim their stakes.

“It is just impractical from an execution point of view. India just does not have the capacity,” said a top executive at a foreign investment bank. He did not want to be named given the sensitivity of the matter.

The Securities and Exchange Board of India tried implementing the 25 percent rule in phases from 2006 on firms with a market value of under 10 billion rupees ($204 million).

How to choose a Mutual Fund?

mutualfunds

Mutual funds are the best investment tool for the retail investor as it offers the twin benefits of good returns and safety as compared with other avenues such as bank deposits or stock investing.

Choose the wrong fund and you would have been better off keeping money in a bank fixed deposit. Keep in mind the points listed below and you could at least marginalise your investment risk:

1) Past performance –

While past performance is not an indicator of the future it does throw some light on the investment philosophies of the fund, how it has performed in the past and the kind of returns it is offering to the investor over a period of time.

Also check out the two-year and one-year returns for consistency.

How did these funds perform in the bull and bear markets of the immediate past?

Tracking the performance in the bear market is particularly important because the true test of a portfolio is often revealed in how little it falls in a bad market.

2) Know your fund manager

The success of a fund to a great extent depends on the fund manager.

The same fund managers manage most successful funds. Ask before investing, has the fund manager or strategy changed recently?

For instance, the portfolio manager who generated the fund’s successful performance may no longer be managing the fund.

3) Does it suit your risk profile?

Certain sector-specific schemes come with a high-risk high-return tag. Such plans are suspect to crashes in case the industry loses the marketmen’s fancy.

If the investor is totally risk averse he can opt for pure debt schemes with little or no risk. Most prefer the balanced schemes which invest in the equity and debt markets. Growth and pure equity plans give greater returns than pure debt plans but their risk is higher.

4) Read the prospectus

The prospectus says a lot about the fund. A reading of the fund’s prospectus is a must to learn about its investment strategy and the risk that it will expose you to.
Funds with higher rates of return may take risks that are beyond your comfort level and are inconsistent with your financial goals.

But remember that all funds carry some level of risk. Just because a fund invests in does not mean it does not have significant risk.

Thinking about your long-term investment strategies and tolerance for risk can help you decide what type of fund is
best suited for you.

5) How will the fund affect the diversification of your portfolio?

When choosing a mutual fund, you should consider how your interest in that fund affects the overall diversification of your investment portfolio. Maintaining a diversified and balanced portfolio is key to maintaining an acceptable level of risk.

6) What it costs you?

A fund with high costs must perform better than a low-cost fund to generate the same returns for you.

Even small differences in fees can translate into large differences in returns over time.

Finally, don’t pick a fund simply because it has shown a spurt in value in the current rally.

Ferret out information of a fund for atleast three years. The one thing to remember while investing in equity funds
is that it makes no sense to get in and out of a fund with each turn of the market.

Like stocks, the right equity mutual fund will pay off big — if you have the patience.Similarly, it makes little sense to hold on to a fund that lags behind the total market year after year.