Thursday, November 17, 2011

For old age, pick mutual funds over retirement schemes

It is imperative that one accounts for inflation while building a retirement corpus. And, there are various instruments — slightly riskier than debt — that need to be accomodated in it, to earn good returns.

There are various mutual fund schemes to choose from, such as equity-diversified funds, mid- or small-cap funds, debt funds and so on. Alternatively, you can pick retirement-specific funds that some fund houses offer. At the moment, only UTI Mutual Fund, Franklin Templeton and Tata Mutual Fund offer retirement schemes.

However, as far as returns go, the retirement-specific schemes have offered lower returns than pure-equity schemes. According to data by Value Research, over a 10-year period, the Templeton India pension scheme has given returns of 13.62 per cent annually. The category average returns of equity-diversified funds, on the other hand, have been 20.84 per cent. Multi-cap equity funds have returned 28.19 per cent.

Returns from debt-fund categories such as income and hybrid debt-oriented funds have gone up between six and nine per cent. One should, however, have a judicious mix of both equity and debt in a portfolio and keep rebalancing it with advancing age.

Suresh Sadagopan, principal financial planner at Ladder7 FA, says retirement funds have given lesser returns, as they predominantly invest in debt right from the start. "It is important to have a good mix of both equity and debt in your portfolio. With the right combination, one can beat inflation, which is necessary when building a retirement corpus." With mutual fund schemes, one has the flexibility to alter the ratio of debt and equity according to need, unlike in a retirement fund where it is done by the fund house. Financial advisors say an exposure of between 10 and 20 per cent in equity is a necessity, even when planning for retirement.

On the cost front, too, retirement funds are more expensive. While mutual funds charge an annual management fee, retirement schemes charge an exit load, which at UTI is three per cent (withdrawal before the age of 58). Franklin Templeton charges five per cent on withdrawal before one year, three per cent after one year and one per cent after three years. Tata Mutual Fund's Retirement Savings Fund wants to discourage a mid-way exit and has imposed an exit load of five per cent in the first year. Thereafter, it climbs down and becomes one per cent in the fifth.

On the tax front, if one invests in a mutual fund scheme, the accumulated amount is tax-free because of zero long-term capital gains tax on equities. Experts advise investing in an equity-diversified fund via a systematic investment plan. They ask investors to shift money to a monthly income plan or a debt fund as they approach retirement.

On the other hand, retirement funds get taxed like debt funds (10 per cent with indexation benefits and 20 per cent without). By the time one starts to withdraw after retiring, the investment would be mainly in debt instruments.

Rajesh Saluja, CEO and managing partner at ASK Wealth Advisors, says a good mix of equity and debt is enough to build the mutual fund part of one’s retirement corpus than going for a retirement fund. He says the latter is nothing but a marketing gimmick.

Source: http://www.business-standard.com/india/news/for-old-age-pick-mutual-funds-over-retirement-schemes/455594/

Fund managers say some small-sized plans needed

They believe there still exists a niche market for thematic and sectoral funds despite their small size and merging such schemes should be avoided

Though the capital market regulator, Securities and Exchange Board of India (Sebi), has been nudging mutual funds (MFs) to consolidate their schemes, fund houses don’t seem to be rushing for it. Fund managers believe that though some of their schemes have tiny corpuses, they are used by large investors opportunistically.

Says Lalit Nambiar, senior fund manager, UTI Asset Management Co. Ltd: “In developed markets, sector funds capture a lot of mind share and fund allocation; especially from institutional investors and high networth individuals. This could be the way forward in India as well, though it will take maybe two-three years for that to happen.”

Fund managers say that there still exists a niche market for thematic and sector funds despite their small size. The Indian MF industry currently has nearly Rs. 6.4 trillion across around 1,000 schemes. A closer look shows that there are at least 200 schemes with assets under management (AUM) of less than Rs. 250 crore each.

The case for mergers
Typically, a small-sized scheme is a good candidate for mergers, especially if it is not much different in terms of its investment philosophy from its larger peer. Says A. Balasubramanian, chief executive officer, Birla Sun Life Asset Management Co. Ltd: “I check whether there is an overlap of objectives between two or more schemes in terms of portfolio construction and stock selection; if the fund manager is doing the same job or not. In this process, some investors lose out, but ultimately, long-term investors benefit.”

Adds Kalpen Parikh, deputy chief executive officer, IDFC Asset Management Co. Ltd: “Sebi is guiding in the right direction; it talks about clear-cut mandate for one scheme rather than having three-four schemes with the same mandate. So the trend (for rationalization) is rising.”

Once the board of trustees of an AMC zeroes in on the schemes that need to be merged, they approach the regulator for approval. After Sebi approves, the fund houses send letters to the investors of schemes that are to be merged providing them an exit option in case they disagree with the fund house’s decision. After the exit option period gets over, the smaller scheme get merged with the bigger one.

The case for tactical investment
However, fund houses largely avoid merging thematic and sectoral funds into other funds such as a diversified fund.

Take the case of ICICI Prudential Asset Management Co. Ltd. The fund house launched ICICI Prudential FMCG Fund and ICICI Prudential Technology Fund in years 1999 and 2000, respectively.

On average, the corpuses of these funds have been in the range of Rs. 65 crore to Rs. 95 crore for at least the last four years. “These funds are largely used as tactical positions by most investors. But we have an in-house person who looks at these two sectors,” says S. Naren, chief investment officer (equity), ICICI Prudential AMC.

A dedicated analyst in fund management can double up as a fund manager for a scheme that tracks the analyst’s sector.

For instance, in 2007 Goldman Sachs Bank BeES’—an exchange-traded fund that tracks the CNX Banking index—corpus size crossed Rs. 7,000 crore at the start of the year and averaged at least Rs. 5,000 crore, pitching it among India’s largest equity schemes in those few months. In 2010, its average AUM dropped to about Rs. 64 crore; latest data available at Value Research, an MF tracker, shows its size at Rs. 140 crore.

In 2006, foreign institutional investors were big investors in this scheme as many had reportedly reached a ceiling on the direct stock they could own and were looking for alternative means to get exposure to the sector.

Hence, investors chase performance and sector funds feed into that need.

Different voices: Not all agree though. Says Balasubramanian: “I don’t think many people use these funds for strategic purposes. In any case, consolidation is not mandatory, it is only advisable.” Within Birla AMC’s bouquet of funds, there is Birla MNC Fund, a Rs. 250 crore (the fund house has total assets in excess of Rs. 64,000 crore) scheme which the fund house claims is an unique theme.

This fund invests only in multinational companies. Balasubramanian says that there are some investors who prefer to invest in “well-managed multinational companies who have free cash flows or where the international parent is very strong”. For its unique theme, the fund house wants to retain this scheme and asserts that demand is there.

Clearly, merging schemes is not as simple as it sounds. But as long as duplication doesn’t happen and every scheme has a purpose, retaining small-sized schemes is fine.

Source: http://www.livemint.com/2011/11/16201910/Fund-managers-say-some-smalls.html

Headless UTI AMC struggles to retain investors

Fund house sees assets fall by about 7% since U.K. Sinha’s departure even as mutual fund industry’s assets grow.
UTI Asset Management Co. Ltd (UTI AMC), an offshoot of the now defunct Unit Trust of India, the county’s oldest fund house, is seeing a sharp erosion of assets under management (AUM) and investor base as the search continues for a chairman and managing director to replace U.K. Sinha, who took over as chairman of the capital market regulator in mid-February.

A successor for Sinha has proved to be elusive. Since his departure, UTI AMC’s assets have declined by about 7%, to Rs.62,580 crore from Rs.67,189 crore, pulling it one notch down to fifth place in the pecking order of Indian money managers, after HDFC Asset Management Co. Ltd, Reliance Capital Asset Management Ltd, ICICI Prudential Asset Management Co. Ltd and Birla Sun Life Asset Management Co. Ltd.

Between March and October, India’s benchmark equity index Sensex dropped 4% and the mutual fund industry’s assets grew by at least Rs.12,000 crore to Rs.7.12 trillion. Equities account for roughly 40% of the industry’s assets.

UTI AMC has been losing investor accounts in the thousands every month. It lost at least 83,350 folios, or investor accounts, since September 2010 with the overall figure dropping from 99,71,036 to 98,87,686 in September 2011.

During this period, UTI AMC’s peers have significantly augmented their investor base. For instance, HDFC Mutual Fund saw its folio count growing by 4,80,000 to 46,80,610 and Reliance Mutual Fund by 1,80,000 to 74,30,653.

While most mutual funds raised money selling fixed maturity products, or FMPs, in a high interest rate scenario, UTI AMC’s market share has fallen because it could not launch any new fund since mid-February as the Securities and Exchange Board of India, or Sebi, requires a CMD to be in place for this.

In the first 10 months of this year, some 551 schemes have been launched by the industry, garnering Rs.90,212 crore and of these, 503 are FMPs.

Investors prefer debt instruments in a rising interest scenario as they earn reasonably high returns while the equity market is falling. The Reserve Bank of India has raised its policy rate seven times by 2.25 percentage points since January this year. Sensex has lost about 18% since January.

“We have expressed our concerns over UTI AMC due to the absence of a chief,” Sinha told Mint last week.

Along with the erosion in AUM and profit, the fund house is also grappling with rising labour trouble. Besides this, two of its board members—Prithvi Haldea and Anita Ramachandran—have quit.
UTI AMC’s net profit for fiscal 2011 fell by 19.24% to Rs.137.5 crore, from Rs.170.27 crore in fiscal 2010.

The company currently does not have an adequate number of independent directors on its board. Following the resignations of Haldea and Ramachandran, its single largest shareholder, US-based asset management firm T. Rowe Price Global Investment Services Ltd, has two representatives on the board.
P.R. Khanna, Sachit Jain and Pradeep Gupta are the other board members.

Several newspapers and television channels have reported that two senior executives of the firm, who are part of a panel that is overseeing the fund house in the absence of a helmsman, are in the race for the top post at a rival fund. But UTI AMC denied the report, saying none of its senior management members, including members of the committee of executives that is running the fund, has been looking for a change.

A four-member committee of executives, consisting of Jaideep Bhattacharya, chief marketing officer; Imtiyazur Rehman, chief financial officer; Anoop Bhaskar, head of equity; and Amandeep Chopra, head of fixed income business, is running its day-to-day operations.

The crux of the issue is: who will become the next chairman and managing director of UTI AMC?
Before Sinha left for Sebi, UTI AMC’s five shareholders—Life Insurance Corp. of India (LIC), State Bank of India (SBI), Punjab National Bank, Bank of Baroda and T. Rowe Price—converted the human resource and compensation committee of the board into a search committee.

Haldea, Ramchandran and James Sellers Riepe were members of this committee.

The board also appointed executive search firm Egon Zehnder to recommend a suitable candidate for the top job to this panel.

After screening close to three dozen candidates, the firm zeroed in on two names— the managing director and country head of a US asset management firm, and the country head and chief executive of a US insurer, which runs a bouquet of businesses in India.

But the government, which owns the majority stake in the firm indirectly through the three state-owned banks and LIC, backed Jitesh Khosla, an Indian Administrative Service (IAS) officer of the Assam cadre.
Khosla also happens to be the brother of Omita Paul, adviser to finance minister Pranab Mukherjee. Until a few months back, Khosla was an officer on special duty in the Indian Institute of Corporate Affairs.

The banks and LIC stepped in as sponsors in 2002 when Unit Trust of India crumbled under the burden of assured return schemes and was split into two separate entities—UTI AMC and the Special Undertaking of UTI. The four new shareholders picked up stakes in equal proportion and UTI AMC came under regulations of Sebi. Now, they hold 18.5% each and T. Rowe Price 26%.
There has been speculation in the media about Khosla’s appointment.

A person with knowledge of the situation said on condition of anonymity that although the search committee did not find him suitable initially, he will become the next UTI AMC chief as the shareholders have shed their inhibitions about accepting him.

There was speculation, too, that the top post would be split into two with Khosla being appointed chairman and another executive as managing director, but the government is not willing to accept that.

“Some shareholders wanted a person with adequate experience in the industry and not an IAS officer to be appointed as the chief,” said a senior UTI AMC official on condition of anonymity. “T. Rowe Price, too, was concerned about the appointment process, but the government hinted that it could buy out its stake through one of UTI AMC’s existing shareholders.”

In an email response to Mint, T. Rowe Price said: “As we have stated, the process for selecting a new CMD is ongoing, and we continue to have faith in the board of UTI and the board-led search process. We respectfully decline any further comment at this time.”

People with knowledge of developments in UTI AMC said another contentious issue is Khosla’s unwillingness to quit the IAS cadre to take the top job at the fund house. Under the norms, an IAS officer needs to quit the service to join a regulatory entity. But previous UTI chief M. Damodaran, who later headed Sebi, did not quit the IAS. Sinha too quit long after he took over as boss.

Dhirendra Kumar, CEO of Value Research Online Ltd, a Delhi-based mutual fund tracker, criticized the idea of appointing an IAS officer as the chief of a fund house where a foreign entity is the single biggest stakeholder.

“There are multiple issues. A big loss for the fund house over the past eight-nine months is its inability to launch FMPs which is the flavour of the season,” Kumar added.

Khosla is likely to be appointed CEO after the company’s board meets later this month, said two persons with direct knowledge of the matter.

“We have written to the shareholders that having a CMD immediately is most important at the moment. We have conveyed our concerns to the shareholders. We have requested them to reply early and they will do it soon,” said one of the directors on the board of UTI AMC who did not want to be named.

If the shareholders want to reopen the selection process, there will be further delays, leading to demoralization of UTI employees and loss of business.

Three people familiar with UTI AMC’s functions—two of them are employees—said the fund house has been plagued by multiple issues since the split of the erstwhile Unit Trust of India.

The fund house planned an initial public offering, or IPO, in 2008 but the plan was scrapped. They (the three people mentioned above) also alleged that the firm has violated norms by not mentioning employees stock option, or ESOP, schemes in its audited balance sheets.

In the IPO prospectus filed with Sebi, UTI AMC mentioned ESOPs.

The scheme was approved by the shareholders in the general meetings in 2007 and the company has since granted stock options to its employees, the prospectus said.

But the company’s financial statements, auditor’s reports and balance sheets do not mention the status of ESOPs.

Going by the guidance note on accounting for employee share-based payments of Institute of Chartered Accountants in India, it is mandatory for every company to disclose the status of ESOPs in such reports.
A spokesperson for UTI AMC declined to comment on the issue.

The money manager’s trade union has been raising uncomfortable questions about its recruitment policies and selective pay hikes and promotions and opaque performance appraisal process. UTI declined comment on these aspects too.

In 2009, T. Rowe Price bought a 26% stake in UTI AMC for $140 million (around Rs.652 crore), valuing the fund house at around Rs.2,500 crore. According to UTI AMC officials, SBI wanted to buy the stake and was willing to offer a better price, but management was not willing to hand over the AMC to one of its existing promoters. The officials didn’t want to be named.

The fall in UTI AMC’s AUM and investor folio count will lower its valuation, but the four sponsors will not be hugely affected—they have their own fund houses that stand to gain from UTI AMC’s loss. Besides, they have partially recovered their investment in UTI.

In 2003-04, the four sponsor-shareholders bought equal stakes in the fund house for nearly Rs.1,300 crore. For selling a 6.25% stake to T. Rowe Price each shareholder received Rs.163 crore, double what they had paid (Rs. 81.25 crore) when they took over as sponsors of UTI AMC in 2003-04.

Management has been trying to bolster morale at the fund house and woo new investors through initiatives like Swatantra but the void at the top has for long paralyzed the firm.

Swatantra is an initiative for creating awareness about the concepts of financial planning and benefits of investing in mutual funds.

All UTI AMC’s campaigns have a common punch line— Kisne sikhai India ko investment ki bhasha? (Who taught India the language of investment?).

Going by the steady erosion of assets and investor base, UTI AMC’s boast doesn’t seem to be impressing customers.

Source: http://www.livemint.com/2011/11/16220900/Headless-UTI-AMC-struggles-to.html?atype=tp

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