How did equity fund sales for the retail investor category beyond the top 15 cities grow 16.38% in H1FY14 over H1FY13, when all other investor categories reported a decline?
Mutual fund houses have been consistently reporting the fall in gross sales of equity mutual funds over the past few months. Equity mutual fund sales fell by 8.48% to Rs16,544 crore in H1FY14 compared to Rs18,077 crore in H1FY13, according to CAMS MFDEx data. However, the gross sales for beyond the top 15 cities (B15 cities) rose a staggering 8.83% to Rs4,590 crore in H1FY14 from Rs3,942 crore in H1FY13, while equity mutual fund gross sales for the top 15 (T15) declined by 15.43% to Rs11,954 crore in H1FY14 compared to Rs14,135 crore in H1FY13. This leads us to the question we had asked a year back— Are some fund houses taking advantage of SEBI’s sloppiness to pick investors’ pockets? Here we had mentioned that some mutual fund houses are re-routing applications of the top 15 cities through other cities to claim the additional expense ratio at the expense of retail investors. On analysing the data further, it could also mean mutual fund houses are paying a higher upfront commission to national distributors for sales in B15 cities.
Retail equity mutual fund sales growth for the B15 cities rose an astonishing 16.38% for H1FY14 over H1FY13, while all other investor categories in the B15 cities reported a decline in equity mutual fund sales over the period analysed. All investor categories, even for the T15 citites, registered a decline in equity mutual fund sales. What led to a boost in mutual fund sales? Was it aggressive sales by the mutual fund houses? If it was, why did the sales of the other investor categories register a degrowth in sales. Effective marketing should lead to a growth in other categories as well. So is it true that mutual fund houses are rerouting applications? Is the regulator watching?
Is it possible to know which mutual fund distributor category led to a sharp increase in sales in the B15 cities? On analysing the mutual fund equity gross sales by distributor category we find that for the B15 cities national distributors reported a sharp 62% rise in sales. The category of other distributors reported a 59% growth in sales. Both these category of distributors reported a declined in sales in T15 cities.
We have mentioned in the past how mutual fund houses promote their schemes by paying a high upfront commission to distributors. Mutual fund houses usually pay 0.70% to 6.5% as upfront commission to distributors to push their equity schemes. This is an additional amount of money which mutual fund houses pay from their own pockets to distributors. After the new regulations, it has been reported that many mutual fund houses have revised their commission structure for distributors in B15 to incentivize them to get more retail investors. Influential mutual fund distributors are also said to get a far higher upfront commission than what a small mutual fund distributor gets. Is this a reason for the sharp increase in sales for national mutual fund distributors?
Before this regulation came in force from 1 October, Moneylife had mentioned that the calculation is complicated and there is low accountability. (Read: Mutual funds to be expensive from 1st October). The Association of Mutual Funds in India (AMFI) refused to divulge any information on this when we had contacted them last year.
It is also pertinent to note that sales of direct plans for both T15 and B15 cities more than doubled. For the T15 and B15 cities, direct plans brought in Rs1,678 crore and Rs424 crore respectively in H1FY14 compared to Rs771 crore and Rs198 crore in H1FY13.
Hybrid schemes in the past have delivered an inconsistent performance and offer no advantage for investors. Being closed-ended makes it worse
SBI Mutual Fund plans to launch a series of close ended hybrid schemes with tenures ranging from one year to five years. The exact duration of each series under the scheme shall be decided at the time of launch of the respective series. The scheme—SBI Dual Advantage Fund Series–(XX)—would invest over 65% in debt and money market instruments and the remaining part of the portfolio would be invested in units of equity oriented mutual funds and gold exchange traded schemes. Despite the high risk associated with the metal, many fund houses include gold as an asset class in such hybrid schemes.
In this scheme, the allocation to gold can go up to a maximum of 35% of the portfolio. The performance of the scheme would be dependent on the market-timing skills of the fund manager to actively move in and out of equities, bonds and gold. Predicting the movement of gold and interest rates are challenging tasks, even for the best of professionals. This will mean that the fund will most likely do a poor job of moving in and out of gold and debt products. That apart, how will an investor decide how much to put into such schemes when he already has money invested in equities, bank fixed deposits and gold separately?
In an article published a few months back (Read: Hybrid Gold Schemes: No Golden Touch), we analysed the performance of hybrid schemes investing in gold. Performance of these schemes has not been great over the past one year. Inflation has gone up by over 9% over the past year, but gold, which has always been considered a hedge against inflation, has declined in value. The recent sharp correction in the price of gold has not only come as a shock to many investors, it has also questioned many beliefs surrounding the asset. Out of the 24-odd schemes, as many as six schemes had an allocation of more than 25% to gold. All the six schemes have delivered a negative return over the past six-month period and were the worst performers among all the schemes. Just seven schemes have a track record of more than three years. But although gold has risen sharply compared to equity indices in this period, the returns of these schemes have ranged between 6% and 7%.
Similar schemes from SBI Mutual Fund have put up a mixed performance over the past one-year, three-year and five-year periods. Such inconsistent performance is one of the reasons hybrid schemes serve no additional value to investors. Below is the performance of the schemes:
Rajeev Radhakrishnan is the designated fund manager for the debt part of the portfolio. He has a total experience of 10 years in funds management with around 8 years in Fixed Income funds management and dealing. Richard D’souza, will be managing the equity portion of the portfolio. He has over 19 years of work experience in equities as a portfolio manager.
Other details of the scheme
Benchmark: Crisil MIP Blended Fund Index
Minimum Amount for Application in the NFO: Rs. 5,000/- and in multiples of Re. 1/- thereafter
Maximum total expense ratio (TER) permissible under Regulation 52(6)(c)(i) and (6)(a): Upto 2.25%
Additional expenses under regulation 52(6A)(c): Upto 0.20%
Additional expenses for gross new inflows from specified cities: Upto 0.30%
Exit load: NA as close-ended scheme
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