Mutual Funds
New equity mutual fund offers hit a 9-year low

 In the last 12 months nine new equity fund offers (NFOs) have been launched. This is the lowest for any 12-month period since March 2003

In the last three months when the Sensex rallied from around 15,000 points to 18,000 points, equity funds witnessed a net outflow of Rs2,717 crore and there was just two NFOs (New Fund Offers) which included one ELSS (Equity Linked Savings Scheme). This is the lowest NFOs in any 12 month period since 2003.

Moneylife has constantly been reporting that the investor population has been declining and much of this is due to poor and half thought-of regulatory changes. SEBI’s new chairman, UK Sinha, has perpetuated this. We have analysed two similar periods. From January 2006 to December 2007 and from January 2009 to December 2010 the Sensex rallied from around 9,500 points to around 20,000 points in both periods. In the first period there were 87 equity NFOs launched bringing in a total of Rs66,025 crore which was around 32% of the total sales which totalled Rs2.08 lakh crore. Existing schemes gathered the remaining 62% with around Rs1.42 lakh crore. However in contrast, in the period from January 2009 to December 2010, there were just 40 NFOs launched, picking up just Rs9,070 crore which was a minor 8% of the total inflows which amounted to Rs1.18 lakh crore. The sales made a serious impact to the net equity fund flows where in the period Jan’06-Dec’07 witnessed a net inflow of Rs63,786 crore and the period Jan’09-Dec’10 saw a net outflow of Rs14,475 crore. Had the sales been what were in the earlier period we would have seen some inflows into equity mutual funds.

Fund companies have to shell out commissions to distributors and the various expenses incurred when they launch an NFO from their own pockets. All they can charge an investor is a fee of Rs100 if the investment is above Rs10,000 or if it is a new investor, Rs150 would be charged. This amount is insufficient to cover the cost of advertising, etc, to promote their product. With the lack of investor interest and huge costs, most fund companies would have chosen to avoid new fund offers to avoid losses. Only those fund companies with a large fund corpus would be able to survive. Fund companies would find it unviable to promote existing products as well for the same reason. Just last month we saw a nascent fund company Indiabulls launch Indiabulls Blue Chip fund—an equity fund, which managed to rake in just Rs13 crore, whereas an older company Franklin Templeton through its NFO—FT India Feeder-Franklin US Opportunities Fund—an overseas fund of funds, managed to bring in as much as Rs104 crore.

What could be a major reason for this decline? In August 2009, then SEBI chief, CB Bhave, introduced the ban on entry load. The entry load for mutual funds was banned in order to make it fairer. The move was intended to reduce the cost for investors. But, was the cost for starting investing the only reason for the lack of retail participation? Unfortunately, SEBI board failed to look at other factors. Among some of the other factors that deter retail investors from putting money in the markets are the unexplained volatility in the market, manipulation of IPOs, poor performance of 40% of funds, several counts of mis-selling, lethargic complaint redressal and lack of financial awareness.

It is this foolish regulation that killed all incentives to sell mutual funds. With the banning of entry load, the distributors’ margins have been completely squeezed and they have been exiting the business of selling mutual fund in droves. We have recently seen Fidelity exiting the business. Bank-sponsored fund companies have their own relationship mangers; it is the other fund companies which would find it difficult to survive. Bank relationship managers are well-known for their unscrupulous and pushy ways and tend to operate purely on commissions and rarely on customer interests. In February last year UK Sinha took over as SEBI chief, he made a futile effort to incentivise distributors. (Read: http://www.moneylife.in/article/will-inives-to-mutual-fund-distributors-have-much-of-an-effect-on-fund-inflows/17541.html). In fact sales have fallen 25% in the last 12 months compared to that of the previous year.

Distributors and advisors are responsible for pushing and increasing penetration of financial products. Their income depends on this and they would choose more profitable products over others. The only option for distributors to earn some income has been to make investors churn their portfolios. This earns them a 1% exit load and while it has been an incentive for brokers to make investors churn more frequently, it is a loss for investors. Along with this, the low incentive to sell mutual funds has led many distributors to sell ULIPs, which is terrible for investors. Insurance currently pays the highest commissions. Therefore most distributors have moved on to selling ULIPs. Moneylife has received so many complaints where savers have been mis-sold ULIPs. Investors who need hand-holding and cannot decide without the help of market intermediaries, ended up buying harmful products that was pushed at them or preferred to keep the money in the bank. 

Unless the regulators create a proper structure to sell financial products distributors, agents would continue to sell products earning them the highest commission and it is the investors who would be at a loss.

 

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COMMENTS

K M Rao

5 years ago

Entire emphasis of the article is on less margins to the distributors for declining number of new MFs. Only in one para, there is a cursory reference to some of the other reasons for poor participation of investors in MFs.
Most of the MFs have performed badly in the last 3 to 5 years. Either all "good" fund managers have "disappeared" from the MF companies or all their "expertise" in money markets has been lost!!. The reality is that the general public are fooled by the finance magazines and fund managers who managed to show some positive results when the markets were raising about 5 to 6 years ago. The real "expertise" of the fund managers is exposed in the last couple of years when markets are sluggish and therefore the public have become wiser. Had the funds performed well, people would have come to MFs in large numbers. This is the most important reason for decline in the new offerings.

pravsemilo

5 years ago

Very well written and explained.

Thank you very much for clearing the wrong notion that I had. I had incorrectly commented at Equity Mutual Funds: Massive net outflows in February.

This further reinforces the cause you have been propagating.

REPLY

pravsemilo

In Reply to pravsemilo 5 years ago

Looks like HTML tags don't work in comments. Anyway here is the link
http://www.moneylife.in/article/81/24233...

Railway minister Dinesh Trivedi decides to quit

 Dinesh Trivedi’s decision came as an anti-climax as he put up a stiff defiance in the last five days refusing to quit unless asked for specifically in writing by TMC chief Mamata Banerjee. He said he had a constitutional duty to pilot the budget he had presented in Parliament

Kolkata: Dinesh Trivedi Sunday night decided to resign as railway minister bringing the curtain down on the five-day drama after he incurred the wrath of Trinamool Congress for hiking passenger fares in the Railway Budget, reports PTI.

“He (Mr Trivedi) called me and he told me that he will abide by the party decision and send his resignation,” Trinamool Congress supremo and West Bengal chief minister Mamata Banerjee told PTI before she left for Delhi.

She also said that Mr Trivedi told him that he will remain with the party.

Mr Trivedi’s decision came as an anti-climax as he put up a stiff defiance in the last five days refusing to quit unless asked for specifically in writing by Ms Banerjee. He said he had a constitutional duty to pilot the budget he had presented in Parliament.

Angered by his budget hiking passenger fares, Ms Banerjee wrote to prime minister Manmohan Singh on Wednesday night and demanded his replacement with another party nominee and minister of state for shipping Mukul Roy.

As she mounted pressure, the prime minister and Congress leadership assured her that Mr Trivedi will be replaced in a couple of days after the presentation of general budget on Friday last.

61-year-old Mr Trivedi, who represents Barrackpore in the Lok Sabha, had even gone to Rail Bhavan yesterday and presided over a meeting of board members.

When party’s chief whip in the Lok Sabha Kalyan Banerjee asked him over telephone to quit as minister, Mr Trivedi told him that he will not do so unless the directive came in writing from Ms Banerjee.

Even as the stalemate continued, Ms Banerjee decided to fly to Delhi for attending the Trinamool Congress parliamentary party meeting and use the visit for a meeting with the prime minister to apparently urge him to take her party’s concerns on board on not going ahead with the NCTC.

She wants a chief ministers’ meeting to be called on the issue.

Earlier, Trinamool Congress sources said the party expected the Congress leadership to keep its ‘word’ on removal of Mr Trivedi.

During the day, Mr Trivedi said the railway ministry was not anybody’s personal fiefdom.

“I do not want to stick to the ministry. But I also do not want to run away. The prime minister has to decide on it (his resignation). There should not be any politics with the ministry. Railway kisi ka jagir nahin hai (the Railways are nobody’s fiefdom).” Mr Trivedi told reporters outside his house in the national capital.

Mr Trivedi, who has insisted that Ms Banerjee should give it in writing that he should resign, said, “I have high regards for her. She is a good human being.”

 

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Retrospective amendments should be avoided: Plan panel deputy chairman

“I am aware that there has been a very negative reaction. I am sure the finance minister is also aware of it... So as I said, most people tend to regard retroactive amendment as undesirable,” Planning Commission deputy chairman Montek Singh Ahluwalia told a business TV channel

New Delhi: Planning Commission deputy chairman Montek Singh Ahluwalia on Sunday opined that finance ministry not reopening the Vodafone case based on amending the I-T Act would give assuring signals and said generally changes to laws should not be done retrospectively, reports PTI.

When asked in Karan Thapar’s Devil's Advocate programme on CNN-IBN whether it would not help the situation if the finance ministry were to announce that they will not reopen the Vodafone case on the basis of amending the law, Mr Ahluwalia said, “I am sure, it would.”

Mr Ahluwalia further said, “I think what they (finance ministry) have done is, dominantly, to change the law. And I think objectively that particular change is not only an appropriate one, it is something they have signalled in the DTC.”

“... as a general rule I agree with you one should avoid retrospective amendment (in laws),” he added.

Finance minister Pranab Mukherjee in his Budget has proposed amendments in the Income Tax Act with retrospective effect from 1962 to bring into net overseas deals concerning domestic assets.

As per the proposed amendments, all persons, whether residents or non-residents, having business connection in India, will have to deduct tax at source and pay it to the government even if the transaction is executed on a foreign soil.

The amendments, once carried out, will have implications on Vodafone which won the Rs11,000 crore tax dispute case against tax authorities in the Supreme Court. It will also impact other similar cases involving taxes to the tune of about Rs30,000 crore. 

Meanwhile, the finance ministry today allayed fears of negative impact of the proposed amendments on foreign direct investments.

“The apprehension that the retrospective amendments would create negative sentiment for FDI is not correct. FDI comes when there is profitability, FDI does not come only on account of zero tax,” finance secretary RS Gujral told industry leaders here.

About the impact of the proposed amendment on Vodafone case, Mr Ahluwalia said, “I do not want to comment on the impact on any particular company. I think ... it is not only appropriate one, but something we have signalled in the proposed DTC. We are going to do that anyway.”

In the Vodafone case, the Supreme Court of India had held that the Income Tax Department does not have the jurisdiction to levy withholding tax for its $11 billion acquisition deal with Hutchison Essar in 2007.

When pointed about HDFC chairman Deepak Parekh’s criticism of the proposed amendment, Mr Ahluwalia said, “I am aware that there has been a very negative reaction. I am sure the finance minister is also aware of it... So as I said, most people tend to regard retroactive amendment as undesirable”.

On the impact of this move on foreign investment flows, he said, “Whenever you have retrospective amendment which affects an individual, he will certainly feel that he has been treated unfairly.”

However, he allayed fears that this will impact the flow of foreign funds into the country. “I think that foreign investors should have absolutely no doubt in their mind that the government does not intend to change some of the basic conditions retrospectively.”

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