April outflows could be around Rs1,500 crore, estimates a fund industry CEO
For three months in a row, equity funds have recorded net inflows after many months of continuous outflows. After inflows of around Rs800 crore-Rs900 crore in December 2010 and January 2011, in February 2011 inflows jumped to a massive Rs2,495 crore. In one of our articles on this issue we asked whether there was a turnaround in the fortunes of the fund industry which has been suffering massive erosion since August 2009. (Read, "Money flowing back into mutual funds: is there a trend change?") Our view was that it would take a few months more before we could say that a sustainable trend of inflows has started. Well, here comes the answer; though it's not the official one. In April 2011, around Rs1,500 crore in cash has probably flowed out of the equity funds, according to the CEO of a fund house. He sees no hope of money flowing back into equity funds in a major way.
According to sources in the fund industry, there could be two reasons for the resumption of outflows-a realisation that the equity market has not been a great place for returns over the past four years, and distributors' greed to earn more commission that has led to churning and no fresh inflows.
Money is partly flowing out because of investor behaviour. When a particular investment goes down sharply and then comes up to the purchase price after many months, investors tend to sell and get out. This is one of the reasons fund companies have cited for investors redeeming units and taking money out. Over the past three years, from 2008, the Sensex is actually down, which is not considered justifiable for the risk taken. Investors would rather prefer risk-free bank FDs which would fetch them around 9% with certainty.
However, distributors' greed for more commission is a major factor. After the ban on entry load from 1 August 2009, the mutual fund (MF) industry has seen a massive outflow of investments even as the bull market has continued. The truth is that the ban on entry load had dried up distributors' revenues, which led them to recommend unit-linked insurance plans (ULIPs) and company fixed deposits as the next best investment opportunities.
With desperate fund companies offering upfront commissions from their own fees, distributors have hit upon the idea of making customers churn, so as to get more of these upfront commissions. "As soon as one year and one day of any investment is completed and it qualifies for the long- term they try to convince clients to make an exit from the particular fund and invest in another fund, generating another round of commissions for themselves," says a CEO.
"If this is so, fund inflows won't turn anytime soon. Neither are market returns attractive, nor is the investor base widening," says a fund industry expert.
The additional limit has been raised to $25 billion, taking the maximum limit of FII investment in bonds and non-convertible debentures issued by infrastructure companies to $40 billion, the RBI said in a notification
Mumbai: In a bid to boost investment in the infrastructure sector, the Reserve Bank of India on Friday hiked the limit on foreign institutional investor (FII) investment in listed non-convertible debentures and bonds issued by core segment companies by $20 billion, reports PTI.
Till now, the limit for such investment was $15 billion in corporate debt, with an additional limit of $5 billion in bonds with a residual maturity of over five years.
This additional limit has been raised to $25 billion, taking the maximum limit of FII investment in bonds and non-convertible debentures issued by infrastructure companies to $40 billion, the RBI said in a notification.
The apex bank added that such investments by FIIs would have a minimum lock-in period of three years. However, the FIIs can trade among themselves during the lock-in period.
The relaxation in the limit comes at a time when the government has announced plans to double investments in the infrastructure sector to $1 trillion during the 12th Plan (2012-17).
It wants the private sector to contribute at least half of the intended investment. The raising of the limit is likely to boost efforts in that direction.
Meanwhile in a separate notification, the RBI said that custodian banks could issue irrevocable payment commitments (IPC) on behalf of FIIs to stock exchanges and clearing houses for purchase of shares under portfolio investment scheme.
IPC is a kind of instrument used to provide financial guarantee.