MFs assets shrink further, but don’t blame the entry load ban

Assets under management by Indian mutual fund houses breached the Rs 6 lakh crore mark in March 2012 on the downside, plunging to Rs 5,87,217 crore, while investor folios registered a decline of 7.2 lakh over the  September 2011 -March 2012 period,  according to data released by the Association of Mutual Funds in India.

Many in the mutual fund industry have blamed Sebi’s 2009 ban on entry loads – the charge deducted from your investment to pay for distribution costs – as the prime reason for this shrinkage. With little incentive to push mutual funds, sales of new units have fallen.

According to Crisil Research, mutual funds have lost close to eight lakh folios in the last fiscal. Many retail investors stopped their systematic investment plans (SIPs) and have  redeemed their fund investments as the equity market declined over 11 percent last year. The Reserve Bank order restricting bank investments in mutual funds to 10  percent (of their respective net worth) resulted in a 77 percent drop in bank folios, said the report.

Against this backdrop, the industry is hoping Sebi will reintroduce the entry load. A Mint article list three reasons for entertaining this hope:

“First, the industry claims MF folios have reduced, indicating that investors have moved out. Second, asset management companies (AMCs) aren’t making enough money and Fidelity Worldwide Investment’s sale of its Indian arm is being seen as some sort of endorsement to what they claim has made the MF industry unviable. And third, MFs claim that inflows have fallen, which means that investors simply aren’t investing in MFs, especially equity funds.”

But can the blame for the industry’s recent woes be laid at the door of a single investor-friendly reform measure?

Many experts believe that restoring the industry’s fortunes by bringing back the entry load could be a miscalculation. The end of entry loads (which could go upto 2.25 percent) improved the investible corpus and initial net asset values of investors. If marketed well, this should have got mutual funds more investors, not less.

The example of no-commission airline ticketing is illustrative. “Take the example of Air Asia, which is doing phenomenally well even without middlemen and agencies like makemytrip.com or yatra.com. A few years ago travel agents were fat cats, getting a lot of commission for tickets. Then came e-commerce and now  tickets are mostly booked on the net wherein commission is cut out and tickets are priced cheaper.  The mutual fund industry works the same way. Cut out the middleman’s charges and the business will still flourish,” an investment advisor told Firstpost.

Agents should be compensated for marketing and distribution through a system called high trail commission. For example, if an investor holds a fund for 10 years, then the agent should be credited by the fund for holding on to that client folio. This Trail Commission ensures that agents provide service on a long-term basis to investors, which discourages fly-by-night operators whose basic intention is to sell a product on a one-time basis to earn higher commission, explained a broker, on condition of anonymity.

To resume entry loads will surely be seen as a retrograde step that eats into investors’ savings and fattens the wallets of AMCs and their distributors.  However, the ban should have been carried out in a phased  manner. HN Sinor, chief executive of the Association of Mutual Funds in India, recently said  that Sebi made a mistake by implementing the entry load ban in a ‘cut-and-dried manner.’

Moreover, MF folios have not fallen only because of the entry-load ban. High bank deposit rates, a volatile, range-bound equity market, and uncertainties over ELSS  ( equity-linked-saving scheme) funds  due to the Direct Tax Code overhang is what has actually led to a fall in inflows in the last one year. Further, tax-free infrastructure bonds, which offer assured returns at a fixed rate, turned out to be a major draw, attracting inflows from investors as opposed to ELSS schemes.

“Based on returns and uncertainty in the global and local markets, investors have switched from equity to debt and gold— all mostly with plans with the mutual industry itself. The current diminishing assets under management are mirroring global uncertainty,” an ICICI Bank wealth manager told Firstpost.

Also the mutual funds sector saw high net worth individuals (HNIs) pulling their money out of the equity schemes of mutual funds in 2011-12 due to the bear market scenario. Clearly when the market goes down, high net worth investors  (HNIs) shift money to safer havens like tax-free bonds and term deposits.These instruments bear a coupon rate exceeding 9-9.5 percent on an annualised basis, making them more attractive than equity funds.

And not just HNIs, even domestic institutional investors  have opted to park money in gold funds ( these have gone up almost 30 percent in one year) as returns from equity have been negative for the last two years now.  Hence, even if equity markets have fallen, retail investors have found solace in fixed maturity plans that usually give a positive return of 9 percent plus on an annual basis. According to this Mint study, FMPs have almost doubled since September 2009.

Many asset management companies  that run mutual fund schemes merged their schemes last year, which was also one of the major reasons for decline in the number of folios. The mutual fund industry witnessed around 45 mergers in 2011-12 compared to only 58 mergers between 2006 and 2010.

Hence, a boost to the mutual fund industry can only come when equities start delivering superior, risk-adjusted returns. The current gloom suggests one might be better off holding on to cash, gold or property.

Source: http://www.firstpost.com/investing/mfs-assets-shrink-further-but-dont-blame-the-entry-load-ban-310103.html

Fund Performance: Worst Equity Funds

Schemes from JM Financial, LIC Nomura and HSBC have done disastrously

In the three-year period ending March 2012, the Sensex went up from a low of 9,708 to 17,404, providing an impressive 21.48% annual compounded return. Equity funds may or may not do well in a sideways market, but if they have not made good money in a bull market, it is a huge disappointment. Which are these laggards?

In the list of the bottom 15 mutual fund schemes, there are three schemes each from HSBC Mutual Fund, JM Financial Mutual Fund and LIC Nomura Mutual Fund. HSBC has been a horrendous performer. None of its seven equity schemes was able to beat the benchmark. HSBC Progressive Themes Fund, which invests in predominantly mid-cap and small-cap stocks, managed to deliver just 10.80% returns, less than half of its benchmark BSE 200 which returned 23.68% in the same period. HSBC Dynamic Fund and HSBC Equity Fund fared poorly as well.

LIC Nomura Mutual Fund has often figured in our list of underperformers. Four of its five equity schemes have underperformed; three of these are present in the bottom 15. Only LIC Nomura MF Growth gave a return of 21.72% compared to its benchmark S&P Nifty which returned 20.57%.

All the four funds of JM Financial Mutual Fund, which we had labelled as the worst Indian fund house, have grossly underperformed as well. JM Multi Strategy Fund and JM Basic Fund underperformed their benchmarks by around 10 percentage points each.

Reliance Mutual Fund’s schemes were top performers at one time. Some schemes are doing well but Reliance Equity Fund made it to the bottom of the list with a return of just 10.93%. Three of Reliance’s 10 schemes underperformed the benchmarks. Reliance Top 200 Fund returned 21.93% and Reliance Natural Resources Fund returned 17.50% while BSE 200 which is the benchmark for these funds gained 23.68%.

Another disappointing performer is IDFC Mutual Fund. IDFC Premier Equity Fund has been among the top performers since its launch in September 2005. However, in the last three-year period, just three of IDFC’s seven funds managed to beat the benchmark. IDFC 50:50 Strategic Sector Equity Fund made it to the bottom of the list with a return of just 15.67%. The other three funds which underperformed their benchmarks include IDFC Classic Equity Fund, IDFC Imperial Equity and IDFC India GDP Growth, all of which returned 17%-18% in the three-year period.

The funds of Religare Mutual Fund, most of which were launched in 2007, have not been consistent performers. However, two schemes, Religare Mid N Small Cap Fund and Religare Mid Cap Fund, made it to the top 10 performers’ list with returns of 40.63% and 38.89%, respectively. At the same time, Religare AGILE Fund, a large-cap oriented fund, returned just 14.21% and came at the bottom of the list.

When UTI Contra Fund was launched in March 2006, we had said that it was a marketing gimmick and, hence, asked you to stay away. It mopped up a huge Rs1,200 crore from nearly 270,000 investors. Investors who are still invested would be sad to see the Fund in the bottom 15 list having returned just 16.14%. Out of the 13 funds of UTI Mutual Fund, five have underperformed their benchmark.

ING OptiMix Multi Manager Equity Fund managed to return just 16.80%. The other four funds from the fund house managed to give an average return of 28%. DWS Alpha Equity Fund returned just 16.13% and the only other fund from Deutsche Mutual Fund, DWS Investment Opportunity Fund returned 17.26%

Source: http://www.moneylife.in/article/fund-performance-worst-equity-funds/25715.html