Distributors are keen to push MIPs due to upfront commissions offered by fund houses and the investor’s appetite for regular income
After market watchdog Securities and Exchange Board of India (SEBI) cracked down on upfront commissions, mutual funds (MFs) have started pushing monthly income plans (MIPs). Income funds recorded a huge Rs1.77 lakh crore of inflows in the month of April 2010 while equity schemes saw an outflow of Rs1,333 crore.
MIPs guarantee a regular flow of monthly income with minimal exposure towards equity. These schemes carry 1% exit load if redeemed before one year. These funds have 70%-90% exposure towards debt and 10%-30% in equity.
According to sources, fund houses are offering 1%-1.5% upfront commission under MIPs.
"There is an appetite for it. Since the equity markets have turned choppy there was a need for regular income products. There is a demand for such funds. So there is a pull factor. Commission is not an only factor. Even ELSS schemes offered as high as 2.50% commission but if you see the sale of ELSS schemes of all MFs it won't be more than Rs150 crore," said a top official from a leading fund house.
Fund houses were offering 2%-4% upfront commission under equity-linked saving schemes (ELSS). ELSS schemes usually have a lock-in period of three years. In the belief that an investor would stay invested in the fund for the entire period, fund houses were passing on the commission in advance.
Earlier, equity schemes offered 2.25% upfront commission and 0.25% was deducted as service tax.
Sources indicate that distributors are not offering any pass-backs to investors under MIPs. The reasoning is that there is no upfront commission granted now.
"Many distributors have sold MIPs from the last six to eight months very aggressively. Investors sometime compare MIPs to post office schemes but the returns can sometime be negative," said a Mumbai-based financial advisor.
The regulator had banned entry loads in August 2009. But fund houses had the leeway to offer commission from their own profit & loss accounts. SEBI in its circular dated 15 March 2010 had mandated fund houses not to deduct commissions from fund expenses. MIPs are currently allowed to charge a maximum of 2.5% as annual recurring expenses. AMCs were paying upfront commissions which included trail of either one to three years or after negotiating the terms with the distributor.
India Infoline had issued two different recommendations on Punj Lloyd to its clients on the same day
Have you ever come in contact with someone who advises you to buy and sell the same thing at the same time? No, then welcome to the world of Indian retail brokerages. One such brokerage, India Infoline, has come out with two different reports on Punj Lloyd Ltd on the same day but with opposite recommendations.
Both the reports, whose copies are with Moneylife, were published on 31 May 2010. In one report, India Infoline wanted institutional investors to 'sell' (which according to its recommendation structure meant, "Absolute-stock expected to fall by more than 10% over a 1-year horizon") shares of Punj Lloyd. It also gave a 12-month target price of Rs97 or 29% lower than the current trading price of Rs137 as on 28th May.
On the other hand, India Infoline's second report, issued on the same date and on the same company for its private client group recommended to 'buy' Punj Lloyd shares with a target price of Rs158 as against the closing price at the end of 28th May of Rs137. There was no time frame or limit mentioned for the target price in this report. According to India Infoline's recommendations parameters mentioned in this report, a 'buy' meant absolute return of over +10% (no time frame or limit mentioned).
For its private client group, the brokerage advised: "With a robust order book, the company is well covered for the next couple of years. The company does not have any legacy orders remaining to be executed and Punj Lloyd is shifting projects from Simon Carves to the parent entity. We expect the company's PBT to witness 74% CAGR over FY09-12E. We reduce our target price to Rs158 per share from Rs198 per share earlier to reflect concerns on extended period of non-billing its client and slow execution rate. However the recent correction in the price provides room for upside, hence we recommend high-risk investors to take exposure in the stock."
When contacted, Harshad Apte, India Infoline's vice president for corporate communications, said, "Both these reports are in fact, targeted and sent to two separate set of customers and also both these recommendations are for differing time horizons. One of the recommendations (IIFL Private Client Group) is for the retail clients and carries a shorter time horizon while the other one is meant for institutional clients and is for a longer time horizon."
There is no period mentioned in the report for the private client group. However, it is assumed that all brokerages use 12 months as standard period for target price.
So, the question still remains as to why the brokerage wants one group of its clients to sell and other to buy Punj Lloyd shares? Maybe the brokerage-and its clients-knew better.
Part of the laboured up-move is the occasional fall, that we witnessed today
The market was down today, taking cues from weak global indices due to the debt crisis in Hungary. The Sensex was down 336 points (1.9%), at 16,781 while the Nifty ended at 5,034, down by 101.5 points (1.9%). The indices started the day with a sharp plunge and traded in a narrow range throughout the session. However, the market recovered on reports of the arrival of the monsoon, but that didn't provide much relief and it finally closed in the red.
Asian stock markets were down on Monday after Wall Street on Friday closed at its lowest level since February 2010, on disappointing non-farms payroll data and Hungary's debt problems. Key benchmark indices in China, South Korea, Singapore, Japan, Indonesia, Hong Kong and Taiwan were down by 1.57% to 3.84%.
US stocks were down to their lowest close since February on Friday on low jobs rate and concern over Hungary's debt crisis. The Dow was down 323 points (3.1%) to 9,932. The S&P 500 was down 38 points (3.4%) to 1,065. The Nasdaq was down 84 points (3.6%) to 2,219. Hungary will stick to 3.8% gross domestic product (GDP) budget deficit target agreed with international lenders for this year and will cut expenditures to achieve it, said its economy minister.
Hungary's government also stressed that the nation is not facing any sovereign credit default. An announcement last week by the government official on the poor fiscal health of Hungary worried investors globally dragging down indices in various markets.
Back home, the monsoon has arrived after being halted by a cyclone, and it has reached Kerala, ahead of schedule. The monsoon is expected to cover more areas of southern Karnataka, a big producer of cane and corn, from Monday.
Montek Singh Ahluwalia, deputy chairman of the Planning Commission said that fuel prices must be increased. Oil minister Murli Deora made a strong pitch for raising fuel prices ahead of Monday's meeting, saying it was needed to cut losses of State-run oil companies. The oil ministry is in favour of a gradual increase in fuel price starting with a quick rise in the petrol price and gradual increase in the diesel price.
Foreign institutional investors were net buyers on Friday of Rs100 crore. Domestic institutional investors were the net sellers of Rs126 crore.
Reliance Communications' (RCom) (up 4.6%) board gave its approval to divest 26% in the company to a strategic or private equity investor and explore merger & acquisition opportunities. Maytas Infra (down 4%) has received a contract worth Rs185 crore to build part of the metro rail network in Gurgaon. Maytas will build an elevated viaduct and six stations within 21 months for ITNL ENSO Rail Systems.
Apollo Tyres (up 0.6%) is reportedly gearing up to supply tyres to German carmaker Volkswagen as it looks to expand its global footprint. Pipavav Shipyard (up 0.4%) has received a Rs2,600-crore contract from the Indian Navy to build offshore patrol vessels. The private shipyard will build five vessels, each with a displacement of about 2,000 tonnes.
Reliance Industries (down 2%) may foray into nuclear energy and has indicated to the government that it is keen on generation and distribution of nuclear power.
Bhushan Steel (down 3.4%) plans to raise about $500 million to finance its greenfield projects, which will be raised in one or more tranches from domestic or international markets and may involve one or more currencies.
Nagarjuna Construction Company (down 3.8%) is planning to foray into the hospitality sector through unit NCC Urban Infrastructure, which plans to invest Rs250 crore-Rs300 crore to add hotels, resorts and serviced apartments to its real-estate offerings.