Monday, October 31, 2011

October 2011

Retail investors are becoming more impatient in holding on to their equity fund investments if the recently released AMFI data is anything to go by. Retail investors held Rs. 96,855 crore in equity assets for more than 2 years as on September 2010 which has dropped to Rs. 78,572 crore in September 2011, a fall of 19%. As a percentage too, assets held for a period above two years now account for 62% as against 65% a year earlier. Consequently, retail equity holding in the period 6-12 months and 12-24 months as a percentage have seen an increase. The aggregate holding of retail equity assets has slipped to Rs. 1.27 lakh crore as on September 2011, down 15 % from Rs. 1.49 lakh crore compared to the corresponding period last year. Retail investors continue to hold the largest pie in equity assets at Rs. 1.27 lakh crore (65%) of the aggregate Rs. 1.96 lakh crore assets as on September 2011 followed by HNIs at Rs. 43,210 crore.

Rising inflation and consistent rate hikes have made debt funds popular among retail investors. Retail investor’s allocation in debt funds for a period ranging from 6 months to 12 months has jumped from Rs. 3,733 crore in September 2010 to Rs. 4,397 crore in September 2011. Similarly retail investors’ average age of holding in non-equity assets ranging from 1 month to 3 month and 6 months to 2 years has seen an increase in the last six months. However, there is a decline in the age of retail debt assets exceeding 2 years during the same period. HNIs are investing for a longer period in debt funds. HNI investment holding horizon between 6 months to 1 year has galloped 49% by Rs 10,821 crore from Rs. 22,209 crore (as on September 2010) to Rs. 33,030 crore in September 2011. On the other hand, there is a decline of Rs. 6,408 crore in equity assets held for more than 2 years by HNIs from Rs. 21,682 crore as on September 2011 to Rs. 15,274 crore during the corresponding period last year.

Piquante Parade

To gain popularity among investors and expand their reach, IFAs are joining hands with AMCs to hold investor education programs. This new trend is slowly picking up, as it is a win-win technique for both AMCs and IFAs. ICICI Prudential has been a pioneer in these tie-ups as they feel that IFAs need brand support for expanding their clientele. They usually hold 600 such seminars in a year where eminent speakers share important insights on mutual funds with investors. Reliance Mutual Fund believes in tying up with IFAs who share the same conviction for mutual funds. They have held 1750 such programs in various parts of the country. They feel that these seminars usually increase the penetration level for IFAs and also help investors to know more about their products. DSP BlackRock Mutual Fund arranges minimum six seminars in a month in association with IFAs. Fidelity Mutual Fund also arranges at least six investor education seminars along with IFAs. IDFC Mutual Fund does it a little differently. Any new IFA, who ties up with IDFC, is handed a movie called - ‘Bachat Nivesh Badhat’. This movie is based on a bollywood theme and showcases how investments lead to fulfillment of dreams. Therefore, rather than showing investors power point presentation they show their investors a bollywood masala short movie.

Mutual Fund houses have started disclosing geography and scheme wise break up of their assets to comply with SEBI’s recent diktat issued on August 22, 2011. SEBI had asked AMCs to bifurcate their AUM into debt/equity/balanced etc, and percentage of AUM by geography (i.e. top 5 cities, next 10 cities, next 20 cities, next 75 cities and others). Fund houses are required to put out this data on their websites. A few fund houses like Canara Robeco, DSP Black Rock, IDBI, HSBC, Franklin Templeton and Sundaram have disclosed their geography wise assets on their respective websites. In line with the popular belief, more than 50% of mutual fund industry’s AUM is concentrated in the top five cities while the next top 20 cities account for around 20% of the business. Fund houses will also start disclosing aggregate commission paid out to distributors at the end of this financial year.

Regulatory Rigmarole

SEBI released a concept paper on the proposed AIF norms, which would cover venture capital funds, private equity funds, debt funds, PMS, real estate funds and PIPE (private investment in public equity) funds, among others. It has proposed a minimum investment size of Rs 1 crore. The current norms allow a high net worth individual (HNI) to participate in a portfolio management scheme with as little as Rs 5 lakh. Mutual Funds would be the biggest beneficiary of the proposed norms, as a lot of HNIs with an investment corpus of less than Rs 1 crore would not be able to invest in PMS or other funds that come under the purview of AIF regulations.

Market regulator, Securities and Exchange Board of India, has proposed to regulate the activity of investment advisors in the country through a self-regulatory organisation (SRO). The proposed regulatory framework, which will cover independent financial advisors, banks, distributors, fund managers among others, will mandate the person who will interface with the customer to declare upfront whether he is a financial advisor or an agent of the AMC. The regulator said an advisor would be required to have a much higher level of qualification like CA or MBA and would receive all payments from the investor. However, agents who are associated with the AMC and receive their remuneration from them will be prevented from claiming they are financial advisors. Besides, they will also have to maintain records of all forms of communication made with investors for at least five years. Since investment advisors advice on a range of products such as mutual funds, insurance, bonds, fixed deposits, commodities and stocks, their activities come under multiple regulators including SEBI, RBI, IRDA and PFRDA.

About 39,000 of the 45,000 AMFI-registered fund distributors will not levy transactional charge on investors. Distributors, who have opted out of transactional charges, will continue charging advisory fees mutually agreed between fund sellers and investors. In July 2011, SEBI had imposed a transactional charge of Rs 100 on existing mutual fund investors and Rs 150 on first-time investors - an attempt by the regulator to incentivise distributors.

The mutual fund advisory committee has shot down the proposal to raise the capital base of asset management companies to Rs 50 crore from Rs 10 crore to ward off 'non-serious players' and to ensure higher safety for investors.

Fitch Ratings has changed its Indian mutual fund rating scales in line with the guidelines issued by the Securities and Exchange Board of India dated June 15, 2011. Prior to this change, Fitch had two different rating scales in keeping with its global practices. First, a money market fund (MMF) rating scale (with an ‘mmf’ suffix) - applicable to funds whose objectives are capital preservation and investor liquidity. Secondly, a bond fund rating scale, where credit and volatility ratings are assigned together to reflect credit and market risks. Fitch will therefore rate short-term funds whose market and liquidity risks are considered extremely low by the agency, notably Indian liquid funds, on the short-term scale. As such, the outstanding Indian MMF rating of ‘AAA (mmf)(ind)’, applicable to liquid funds, will be converted to ‘A1+mfs(ind)’ under the new scale. Short-term funds with marginally higher risk profiles - in terms of liquidity, maturity and credit quality - will be rated ‘A1mfs (ind)’. As such, the ratings of short-term funds will be capped at ‘A1mfs (ind)’ unless the asset management company manages liquidity and market risks at a level comparable to a liquid fund. Fitch will continue to rate long-term bond funds on the long-term scale.

With an aim to strengthen its market oversight and policymaking capabilities in the wake of fast-changing market dynamics, SEBI has begun the process of an overhaul of its own functions and organisational structure. The capital market watchdog is of the view that a turmoil in the global financial markets in recent years and emergence of a number of new market segments have brought to the fore newer challenges and the need for a stronger regulatory mechanism. To start with, the regulator has decided to strengthen its research and economic policy teams with the appointment of a Chief Economist. This would be followed by SEBI engaging an external consultant to recommend changes in its roles, functions, vision and organisational structure. Subsequently, SEBI aims to set up an International Advisory Board to guide it while framing policies to meet the challenges emerging from various global market developments. The Advisory Board could meet twice a year to assess the trends in global markets and to guide the activities towards meeting the emerging challenges. Besides, SEBI also plans to organise brainstorming sessions with international and domestic experts, including its own past chairmen. After the external advisor makes recommendations on changes in SEBI’s organisational structure, human resources, technology and its regulatory and oversight roles, those would be taken up with the central government agencies for further implementation. The areas where SEBI is looking up for major changes include use of latest available technologies, incentives to attract and retain talent and acquiring expertise for dealing with complexities associated with various market segments. SEBI last went through an organisational restructuring in 2003 and the market has gone through a sea change since then.

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