Mutual Funds
Online MF trading bane for distributors

Allowing trading in mutual funds through exchanges will benefit brokers as they can charge commissions from both buyers and sellers; but it may put small distributors out of business

Online trading of mutual fund (MF) units, which is expected to be implemented by January 2010, is likely to change the nature of MFs from long-term investments into short-term trading opportunities, just like equities. An online trading platform will mean less paperwork and investors can buy or sell MF units with just a mouse click or phone call. However, the new system is likely to benefit brokers more than investors, as they can charge brokerage from both buyers and sellers. It will also encourage brokers to entice investors to trade on a short-term basis. Moreover, investors who exit before the lock-in period will be charged an exit load which will benefit asset management companies (AMCs) and MF distributors.

“SEBI wants to allow more than Rs5 lakh crore of assets (under management of MFs) to be traded on the NSE to increase its turnover,” said an Individual Financial Advisor (IFA) who did not wish to be named. “While SEBI has provided brokers a platform to increase MF investments, distributors have been left in the lurch because SEBI has banned the levy of entry load on MFs. Now, there is no incentive for small IFAs like us to sell MFs.”

According to industry sources, many IFAs have started to exit the MF business as it is no longer profitable. Small distributors used to provide door-to-door service to investors but after the ban on entry load, the commissions received by them does not even cover their travelling expenses. The number of small IFAs has already declined drastically since the ban on entry load. These IFAs get only around Rs25 for an investment application worth of Rs 1 lakh, plus Rs50 if the investor stays invested for a period of at least one year. They are now getting together as a group to negotiate higher commissions from AMCs.

According to industry sources, if an investor stays invested in a particular fund for more than a year, the brokers will get only 0.75% or 1% as commission; so he is more likely to encourage the investor to exit in a bull run and earn his commission both from the buy and sell side.

“Mutual fund is still a product which requires a lot of concept-selling. Only 5%-6% of investors are investing in MFs; the rest are either not aware about MFs or have misconceptions in their mind,” said Hemant Rustogi of Wealthwise.

Online trading will increase the reach of MFs to 1,500 towns and cities through over 200,000 stock exchange terminals, but it is certainly not good news for distributors who are struggling to find new ways to market MF products.
 —Ravi Samalad


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Sensex sheds 344 points, closes at 16,855

Weak Asian cues, sustained buying pressure impact Indian bourses

Indian markets crumbled on the back of sell-offs across all sectors after a setback from Asian markets. The Sensex declined 344 points from the previous day’s close, ending the day at 16,855 while the Nifty closed at 5,006; down 102 points. As per reports, at the end of Wednesday, 25 November 2009, trading rollover of Nifty positions was about 64% while the market wide rollover stood at 66%.

During the day, Balaji Amines was up 4% after the company announced commercial production of a niche product, Polyvinylpyrrolidone (PVP K-30), under the brand name ‘Bolidone’. The product PYP K-30 is an ingredient binder for granules & tablets, used in many pharmaceutical formulations.

Gujarat Fluorochemicals has planned a total investment of about Rs500 crore to increase the installed capacity of its plants at Dahej in Gujarat to meet increased product demand for domestic and international markets and for captive power consumption. The stock was down 1%.

Tata Steel slumped 3% as the company revealed its consolidated financials for the September 2009 quarter. The company posted net sales of Rs25,270 crore compared to Rs44,050 crore in the September 2008 quarter. It posted an operating profit of Rs371.80 crore compared to Rs8,226.80 crore in the September 2008 quarter.

As per data released by the government, the food price index rose 15.58% and primary article index rose 11.04% in 12 months to 14 November 2009. The fuel price index declined 1.51%.

Meanwhile, in a bid to converge Indian accounting norms with International Financial Reporting Standards (IFRS) by 2011, the Indian government said all concerns of the industry would be addressed before convergence takes place.

However, the industry fears that there are ambiguous issues which demand more clarity. The Institute of Chartered Accountants of India has still not legally notified the syllabus containing IFRS and the tax implications of the convergence are still not known.

Meanwhile, the government is likely to postpone a plan to recapitalise State-owned banks to the next financial year, as some key approvals to the process are yet to come about. The World Bank had sanctioned a loan of $2 billion to the Indian government to recapitalise 15-16 State-owned banks.

Another set of reports indicated that the government plans to move a Bill early next year to amend a banking law for allowing foreign investors in private banks to have voting rights in proportion to their shareholdings. Currently, voting rights of foreign investors are capped at 10%.

During the day, Asia’s key benchmark indices in China, Hong Kong, Singapore, Japan, South Korea and Taiwan were down by between 0.22%- 3.62%. The markets slipped on concerns that the Chinese government may lift capital adequacy ratios or reserve requirements for larger State lenders next year after a lending boom.

As per reports, China needs far-reaching structural reforms to root out industrial overcapacity, which is doing untold damage to domestic growth and the global economy. According to the study by the European Union Chamber of Commerce in China, excess capacity is a long-standing scourge in China, but its impact has become ever more destructive as a result of the global financial meltdown.

On Wednesday, 25 November 2009, the Dow Jones Industrial Average gained 31 points while the S&P 500 and Nasdaq Composite rose five and seven points respectively as investors welcomed a bigger-than-expected drop in weekly jobless claims.

As per US economic data, the new claims for unemployment posted the biggest drop last week, falling to 466,000—a 14-month low—whereas new home sales were up 6.2% in October 2009 to an annualised rate of 430,000, at a 1-year high. Personal income for October 2009 increased 0.2% and personal spending for October 2009 increased 0.7%.

On Thursday, 26 November 2009, US markets were closed for the Thanksgiving holiday.
— Swapnil Suvarna [email protected]


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