Tuesday, March 6, 2012

Lessons From Fidelity’s Slip-Ups

Fidelity Mutual Fund, a global fund managing assets worth $310 billion, has decided to exit its India operations. This comes as a shock to many industry analysts as its MD and country head Ashu Suyash had single-handedly defied the mutual fund industry by not choosing the traditional channels of distribution and yet managed to build a good reputation for the fund in a span of just seven years.

Apart from being the only woman at the top in the mutual fund industry, Suyash also happens to be one of the most ambitious business leaders. She was not really well-known when Fidelity, the second biggest fund house in the world (next only to Vanguard), hired her as the country head for its India operations in 2005.

In May 2010, she stated that she wanted to put Fidelity India among the top five mutual funds in the country. The fund was then ranked number 20 with assets worth Rs 7,400 crore. Within 18 months, the fund saw its assets move up 18 percent while all the top funds saw a fall. Overall, the industry fell by 25 percent.

But now, Fidelity plans to exit its India operations as it has accumulated losses of Rs 300 crore and the overall return on investment for the fund has not been sustainable. Mutual fund analysts feel that the real reason is not clear as the Rs 300 crore-loss for a seven-year fund, with the backing of an international giant like Fidelity, is actually not very high. Fidelity’s exit will, however, leaves a big blot on the industry as other international funds who want to enter the Indian market will rethink their decision.

Over the last three years, the Indian mutual fund industry has virtually stagnated and has grown only by around 5 percent annually. Much of this growth has happened in the fixed income assets which normally comprise low-margin products. So, even if there has been growth in assets, the same is not happening with the bottomline of the asset management companies (AMCs). Fidelity and other foreign funds would have ideally been able to ride all the issues had they not compromised on costs, distribution and operational freedom. Fidelity India declined to comment on this story.

Cost Management  
When Suyash was appointed to head Fidelity India, she decided to concentrate on equity assets that are considered to be profitable. Almost 70 percent of Fidelity’s assets are in equity, but recently the fund has also been looking at fixed income. Fidelity saw its business development expenses double over the last year as it was spending heavily on low-margin products.

The fund was also spending a lot on employees. Salaries of foreign funds operating in India need to be aligned with their international counterparts where employees are paid twice the amount compared with domestic funds.

Of its total expenses, Fidelity was spending half on employee salary and benefits. This is way above the 20-25 percent that Indian funds spend.

“Foreign players have higher costs. They pay higher salaries, and in most cases, they do not have a local in-house distribution agency which can promote their schemes. Domestic mutual funds are very cost conscious about the same,” says Nipun Mehta, a private banker who specialises in mutual funds.

Most domestic players also have strong affiliation to national distributors or they have their own distribution companies. This is not the case with foreign players. They try to sell their products through international banks—their global tie-ups—that are operational in India. Globally, banks are the biggest distribution channels for mutual funds. Foreign funds feel that whatever has worked in international markets will also work in India.

In India, foreign banks account for almost one-third of the overall distribution market. However, due to competition from private Indian banks like ICICI and HDFC, the foreign banks are losing their market share. Indian mutual funds use banks, independent financial advisors (IFAs) and national distributors, like Bajaj Capital, as their main channels for distribution.

According to a McKinsey study released last October, it is the IFAs and national distributors who have witnessed the majority of growth over the last two years. But many foreign funds like Fidelity have stayed away from these channels and, thus, were not able to scale up.
 
Foreign funds that are new entrants into the market are now beginning to realise that tying up with local partners who understand distribution in a country like India is the key to their survival.

In India, metros and tier 1 cities account for 80 percent of the assets of the mutual fund industry. While foreign funds are not exploring new territory, domestic funds realise that tier 2 and tier 3 cities hold the potential for the bulk of their growth. Furthermore, in smaller towns, Indians are more comfortable with domestic brands.

Another reason why Indian funds are doing better than foreign funds is that they do not take much time to react to market situations, especially when it comes to new product launches.

It takes about six weeks for an Indian fund to launch a new product. For a foreign fund, this can extend beyond a year because of various processes and approvals from the global headquarters.

Freedom of Operations     
The last, but not the least part, is the performance of fund houses. Foreign fund managers have to adhere to international philosophies when it comes to fund management. Often, these do not allow fund managers to pick and choose stocks to beat the markets. They have to stick to the rules dictated by the global headquarters. This is not the case with domestic fund houses. Most domestic fund houses allow fund managers to be flexible and invest heavily in mid- and small-cap segments.

“Investment processes of wholly or dominantly MNC-owned AMCs are quite inflexible. Domestic fund houses, in comparison, appear to be flexible in their choice of mid-cap and small-cap stocks within the framework of the guidelines laid down for the schemes. This often helps in better performance of select schemes,” says Mehta.

Source: http://forbesindia.com/article/boardroom/lessons-from-fidelitys-slipups/32388/1

Investment with judicious tax planning

Asset allocation is a simple yet powerful strategy to balance risk and return of a portfolio by diversifying investments across asset classes.

Asset allocation is unique to each individual and one needs to take a holistic view of his/her situation to arrive at an optimal allocation. This includes considerations like return expectation, risk appetite, time horizon, taxes applicable, liquidity requirements etc.

Establishing your asset allocation is both a science and art. While sophisticated software/psychometric tests can assist in understanding your profile, the ideal optimal allocation includes subjective factors like risk tolerance and willingness to take risk.

In order to ensure long-term portfolio success, investors need to have a disciplined strategic asset allocation in place wherein the weightages are clearly defined. However, tactical changes to the strategic allocation can be implemented based on market opportunities.

Tax Efficiency & Financial Instruments

The tax structure in India is clearly in favour of long-term investments. Indian capital markets offer investors plenty of investment choices across asset classes. Within equity, investors can choose from stocks, equity mutual funds, portfolio management schemes and private equity. Long-term capital gains and dividend from equities are tax free in the hands of investors.

Similarly, under fixed income, investors can opt for fixed maturity plans, other bond funds, government and corporate sector bonds as well as fixed deposits. Indexation is allowed for debt mutual funds held for more than one year thereby enhancing post tax returns. Within debt, taxation in mutual funds is lower compared to interest income.

While interest income from fixed deposits and bonds is fully taxable, regulation do allow for long-term capital gains and losses from debt to be set off against each other. For example, investors having eligible carry forward long-term losses can offset long-term capital gains from debt investments under the growth option.

Fixed Income

Take the case of the recent issuance of tax-free bonds by NHAI and Power Finance Corporation. On a ten-year bond, these offer a tax-free return of 8.2%. To earn a similar post-tax return, an investor in the highest tax bracket needs to invest in a bank fixed deposit giving pre-tax return of more than 12%. Presently, bank fixed deposit rates are hovering around 10%. Such tax-free bonds are not regularly available; hence, investors should grab these opportunities as and when they arise.

An alternative to fixed deposits can be investment in bond funds or fixed maturity plans. In case the investment tenure exceeds 12 months, the appreciation is treated as capital gain which is more tax efficient when compared to interest income.

Equity
Investment costs/taxation tends to be higher in portfolio management schemes when compared to equity mutual funds. In a mutual fund, investors hold units of a fund and have no tax impact for changes in the fund's underlying holdings. However, in a portfolio management scheme, the stocks are purchased/sold in the investor's name thereby making them liable for short-term gains tax if sold at a profit within a year.

Under the present tax regulations, gains from transactions in futures & options (derivatives) are categorised under the head of speculative income. It is advisable for investors to keep F&O and regular capital market investments in separate books. Higher transaction costs and tax are a drag on long-term portfolio returns. Investors therefore need to be careful in selecting the right avenues with a long-term horizon in mind.

Finally, introduction of the Direct Tax Code may lead to certain changes. One should take them into account before making investment decisions.

Source: http://economictimes.indiatimes.com/personal-finance/savings-centre/analysis/investment-with-judicious-tax-planning/articleshow/12154939.cms

ICICI Bank, Citi, BoB, LIC sign MoU to set up India's first Infrastructure Debt Fund

Union Finance Minister Pranab Mukherjee today said that setting up of Infrastructure Debt Funds (IDF) through public-private partnership (PPP) would meet the long-term need of infrastructure funding in the country. 

Speaking after a memorandum of understanding (MoU) was signed here in his presence for setting up India's first IDF, Mukherjee said he was confident that the stablishment of such funds in the PPP mode would be a guiding principle for future activities in this area.

According to him, funds to the tune of $ 1 trillion would be required for infrastructure sector funding in India in the next five years, out of which 50 per cent would come from the private sector through the PPP mode.

The MoU for the new IDF, structured as a non-banking finance company (IDF-NBFC), was signed by Chanda Kochar, Managing Director, ICICI Bank, Pramit Jhaveri, CEO, Citibank, M.D. Mallaya, CMD, Bank of Baroda and Sushobhan Sarkar, MD, Life Insurance Corporation (LIC).

Others present on the occasion included Planning Commission Deputy Chairman Montek Singh Ahluwalia, Planning Commission Member Gajendra Haldia, Finance Secretary R.S. Gujral, Economic Affairs Secretary R. Gopalan, Expenditure Secretary Sumit Bose, Disinvestment Secretary Haleem M. Khan, Secretary, Disinvestment and Bimal Julka, Additional Secretary cum Director General, (Currency), Ministry of Finance.

The Finance Minister in his Budget Speech for 2011-12 had announced setting-up of IDFs in order to accelerate and enhance the flow of long-term debt in infrastructure projects for funding the government’s ambitious programme of infrastructure development. To attract off-shore funds into IDFs, he had also announced that withholding tax on interest payments on the borrowings by the IDFs would be reduced from 20% to 5%. Income of the IDFs has also been exempt from income tax.

The framework for establishment of IDFs was announced by the Ministry of Finance in June, 2011 wherein IDFs were allowed to be set up either structured as an NBFC or as a mutual fund. Reserve Bank of India (RBI) issued the regulations for IDFs to be set up as a NBFC in November, 2011 and Securities Exchange Board of India (SEBI) issued the regulations governing an IDF structured as a mutual fund in August, 2011.

ICICI Bank (together with a wholly-owned subsidiary), Bank of Baroda, Citi and LIC will hold 31%, 30%, 29% and 10% shareholding, respectively, in the IDF-NBFC. The IDF would seek to raise debt capital from domestic as well as foreign resources and would invest in infrastructure projects under the PPP model that have completed one year of operations. The IDF will expand and diversify the domestic and international sources of debt funding to meet the large financing needs of the infrastructure sector, thereby giving an impetus to the creation of the infrastructure necessary to drive India’s growth, an official press release added.

Source: http://netindian.in/news/2012/03/05/00019123/icici-bank-citi-bob-lic-sign-mou-set-indias-first-infrastructure-debt-fund

New clearing houses for OTC debt instruments

SEBI has directed all SEBI-regulated entities — FIIs, foreign venture capital investors and mutual funds to shift the clearing and settlement of the over-the-counter-trades in debt instruments, commercial paper (CP) and certificates of deposits (CD) to National Securities Clearing Corporation Ltd and Indian Clearing Corporation Ltd with effect from April 1.

“Debt instruments contribute more than two thirds of the industry assets under management (AUM). Considering the overall debt AUM as on January 31 at Rs 4.45 lakh crore, the shift would be significant,” said a CEO of a mutual fund.

Source: http://www.thehindubusinessline.com/markets/stock-markets/article2964402.ece?homepage=true&ref=wl_home

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