Sensex, Nifty may go down further: Friday Closing Report

A higher high and higher low, which has not happened for the last four days, will be the first sign of reversal


The market closed in the red on the back of a slowdown in the country’s first quarter economic growth and continuing paralysis of the Parliament. Receding expectations of any new initiatives by the US Federal Reserve to spur growth also weighed on investors. Yesterday we mentioned that if the Nifty manages to close in the positive today it may bring some relief on the bourses. However, today the index made a lower high and a lower low and ended at the 50 day moving average. We may now see the index heading further down unless it manages to make a higher high and higher low. The National Stock Exchange (NSE) saw a higher volume of 60.24 crore shares and an advance-decline ratio of 701:950.
The market opened lower than yesterday ahead of the release of India’s GDP (gross domestic product) data for the June quarter. Subdued performance in the global markets also weighed on the sentiments. The Nifty slipped 15 points to open trade at 5,298 and the Sensex started off at 17,558, up 16 points over its previous close.
The opening figure on the Sensex was its intraday high while the Nifty scaled its high in late morning trade with the index touching 5,303. In the interim, trade was lacklustre with the indices staying in the negative on selling pressure in IT, power and realty stocks.
India’s GDP growth for the first quarter ended June 2012 stood at at.5%, from 8% in the corresponding quarter of the previous fiscal. The decline was on account of the subdued performance of manufacturing, mining and farm sectors, government data showed.
Political instability, as the standoff in Parliament entered the eighth day, added to investors’ woes in the second half of trade as well. Even the European market trading in the positive in early trade did not help matters.
The indices fell to their lows a few minutes after 2.00pm as selling got more intense. At the lows, the Nifty went back to 5,239 and the Sensex dropped to 17,338. 
The market closed off the lows on buying in select stocks towards the end of the session. The Nifty closed 57 points (1.06%) lower at 5,259 and the Sensex settled at 17,430, a cut of 112 points (0.64%) from its previous close.
The broader indices outperformed the Sensex as the BSE Mid-cap index added 0.07% and the BSE Small-cap index rose 0.07%.
The BSE Healthcare index (up 0.01%) was the lone gainer in the sectoral space. The top losers were BSE Metal (down 1.39%); BSE Power (down 1.33%); BSE Oil & Gas (down 1.31%); BSE Realty (down 1.27%) and BSE Auto (down 1.23%). 
Only five of the thirty Sensex ended in the positive today; they were Cipla (up 1.64%); HDFC (up 1.31%); Bharti Airtel (up 1.22%); State Bank of India (up 0.26%) and ONGC (up 0.16%.  The top losers on the index were Hindalco Industries (down 2.21%); Coal India (down 2.15%); BHEL (down2.10%); Hero MotoCorp (down 2.02%) and Sterlite Industries (down 1.99%).
The top two A Group gainers on the BSE were—Biocon (up 4.49%) and MMTC (up 3.92%).
The top two A Group losers on the BSE were—GMR Infrastructure (down 4.70%) and IFCI (down 4.04%).
The top two B Group gainers on the BSE were—DMC Education (up 18.11%) and Shalibhadra Finance (up 14.71%).
The top two B Group losers on the BSE were—Saboo Sodium Chloro (down 11.72%) and TCI Developers (down 10.45%).
The top gainers on the Nifty were Bharti Airtel (up 1.50%); Cipla (up 1.13%); SAIL (up 0.83%); HDFC (up 0.66%) and Ranbaxy Laboratories (up 0.64%). The key losers were Hero MotoCorp (down 3.88%); BPCL (down 3.74%); Kotak Mahindra Bank (down 3.27%); IDFC (down 3%) and BHEL (down 2.92%).
Markets in Asia closed mostly lower as expectations of new initiatives from the US Federal Reserve receded. Disappointment in corporate earning for the first half of the year pulled the Shanghai index lower.
The Shanghai Composite declined 0.25%; the Hang Seng dropped 0.36%; the Nikkei 225 tanked 1.60% and the Seoul Composite fell by 0.07%. Among the gainers, the Jakarta Composite climbed 0.86%; the Straits Times gained 0.45% and the Taiwan Weighted advanced 0.35%.
At the time of writing, the key European indices were up between 0.33% and 1.31% and the US stock futures were in the positive, indicating a firm start to the US markets on the day when Fed chief Ben Bernanke makes his speech at the central bankers’ meeting at Jackson Hole, Wyoming later today.
Back home, institutional investors—both foreign and domestic—were net buyers in the equities segment on Thursday. While foreign institutional investors pumped in a huge Rs2,306.10 crore, domestic institutional investors brought in Rs328.11 crore.
Vijaya Bank has slashed interest rates on MSME (Micro, Small and Medium Enterprises) loans by up to 1% across the board, effective from 1 September 2012. Also, in order to encourage MSME units to go in for rating by accredited external credit rating agencies, it has offered them incentives by way of a further reduction in the rate of interest ranging from 0.25% to 1% depending upon the ratings obtained. The bank settled at Rs46.35 on the NSE, down 1.38%.
Diamond and jewellery manufacturing firm Shrenuj & Company has drawn up a capital expenditure plan of Rs200 crore over three years until 2014-15. The company had projected a 25% growth in sales at the start of the financial year but has now revised it down to 15% mainly because of tardy growth in the first few months of the year. The stock jumped 4.36% to close at Rs57.50 on the NSE.



Expense Ratio: Questionable practices of mutual funds

Recently, the Securities & Exchange Board of India allowed fund companies to charge more to investors through a convoluted formula. The practices of fund companies, anyways, were to charge more, not less because investors are usually blind to fund charges, being focused more on returns

The new rules announced by the Securities and Exchange Board of India (SEBI) at its recent board meeting allow asset management companies (AMCs) to charge a higher total expense ratio (TER) in order to increase the penetration of mutual funds. Investors, on the other hand, would have to sacrifice a portion of their returns for the business expansion, or rather benefit, of the asset management companies. According to the SEBI circular, “AMCs will be able to charge 30 basis points (bps) if the new inflows from these cities/towns are minimum 30% of the total inflows. In case of lesser inflows the proportionate amount will be allowed as additional TER.” The additional TER will be on the full fund corpus and not just only the fresh inflows. Instead for focusing on reducing costs SEBI has rather given AMCs the leeway to charge more from the investors.

But what has been the practice of fund houses when it comes to charging TER? As per the existing regulation, the TER which includes the management charges, marketing and selling expenses, brokerage costs and costs related to investor communications, audit fees, etc, cannot exceed 2.5% for equity schemes and 2.25% for debt schemes. In case of an index scheme or exchange traded fund, the total expenses of the scheme should not exceed 1.50%.

As per the new rules, AMCs would be able to charge up to a maximum of 30 bps additional. Fund companies usually disclose the maximum TER they would charge in the scheme information document and more often than not they quote the maximum permissible. Many fund companies charge much lower than the maximum suggested but it does not mean that what they charge for a particular month will be the same a few months down the line.

In fact, the maximum TER charged is already too high for debt and index schemes. Fixed income assets barely deliver returns slightly above inflation and from that if 2.25% is deducted it makes these schemes no better than bank fixed deposits. And the TER charged for index schemes is a total rip-off. All the fund manger needs to do is to invest blindly in the stocks according to their weightage in the index.

For liquid schemes; nearly 80% of the schemes charge a TER between 0.15% and 1%, which is a wide range by itself, but there are still a few schemes that have a TER above 1% and going up to 2.25%. Imagine for a scheme which returns just around 6%-8% per annum and out of that 1% to 2% is deducted by the fund company. For such schemes the return would work out much lower than a bank fixed deposit. Does it make sense to pay for such performance?

The actual TER of a scheme varies considerably and the fund company has to make a notification just two days prior before changing the TER. In fact a couple of years back SEBI observed that fund houses were frequently changing the expense ratios of liquid and short-term debt schemes. Most of the schemes highlighted by SEBI were of debt and liquid fund category. But since then nothing much has changed.

Since the start of the year as many 87 out of 211 equity schemes have changed their TER. 29 out of 74 income schemes have changed their TER and nearly half of the 57 liquid schemes have made changes to the TER.

One should not get fooled if the TER is much lower than the norm. There are many schemes which have had an initial TER which was substantially low but they have only gone to increase it a few months later. And this has been the case in all types of schemes. Edelweiss Equity Enhancer Fund from September 2009 to January 2011 had a TER around 1%. However from June 2011 onwards the TER has been as high as 2.49%. Imagine schemes from LIC Nomura MF, HSBC MF and JM Financial all of which run poorly managed schemes which have delivered substandard returns are charging the maximum TER of 2.5%. And some of the better managed schemes are charging a much lower TER.

Even if the TER is constant over a period, this does not mean the mean that the fund company cannot increase it. Take the case of Axis Equity Fund, it scheme was charging a TER of 1.79% in March 2010, over the next two years the TER has increased to 2.20%. Same has been the case with HSBC Unique Opportunities fund—in December 2008 the TER was around 2% and over the year it has increased to 2.5%. Over time one would expect their assets under management to increase and the TER would come down. But this has not been the case and the TER has increased over time.

These are just a couple of examples from equity schemes. For debt and liquid schemes it has been much worse. The fluctuation in the TER is much more and the fact that it can go up to 2.25% is a scary thought.

What can an investor do in such cases? Not much. It is the regulator’s job to resolve such discrepancies. The TER should be based on the performance of the scheme as well and not only the fund corpus. And the maximum TER charged should be made reasonable for the investor in the liquid and debt schemes. In order to revive the fund industry the regulator would consider increasing expense ratio, but this may mean greater leeway for the fund company to play around.

Take the example of index schemes—here the maximum TER allowed is 1.50% a percentage lower than that equity diversified schemes. Considering the low limit, fund companies do not play around much with the TER and it is usually around 1% to 1.5%. Therefore putting a reasonable limit fund companies either charge the maximum or a little lower. Hence, there is not much variance for the investor to get worried about.



Kolhe Jitendra Punjaram

5 years ago

I think it is enough talking about new reform. SEBI is not going to think on investor’s ways. Just focus on the existing regulation and take strong stance to follow them. Certainly the competitive advantages lead survivor of the performing AMC.

Prakash Chhotulal Patel

5 years ago

SEBI and AMC's think that mutual fund investors are fool.They ,themself are to blame for the diminishing interest of retail investors in MF's.After insurance companies which misled investors by ULIPs now is the turn of MF industry to face the scene of investors deserting MF

Harish Nagpal

5 years ago

It is quite strange that mutual funds are paying brokerage more than a normal Investors.Sebi has told them that they cannot pay more brokerge than .12% it means they are already paying more than that.It is quite intresting that a entry load was costing less to retail than the current as entry load of 2% amortised over five years is .40% in 5 years.But the incremental .30% on portfolio year on year will be much higher than 2% rather much much as if mkt doubles then it have very big affect.Further As per my understanding AMC charges are deducted on daily basis while they pay after one month .The float of money is so huge the income from that float should go to investors .

Sweena Jain

5 years ago

SEBI instead of taking care of INVESTORS is keen to take care of AMC's.SEBI always helps AMC's Brokers or other market intermediary.BUT NEVER FOR INVESTORS.


5 years ago

Sebi has only helped Mutual funds rip off investors even more

India’s GDP growth marginally higher in June quarter, says Nomura

The positive surprise in the Indian economy was mainly due to a higher agricultural GDP growth (bumper winter crop) and higher construction sector growth, says Nomura Economics Research about the second quarter of the year 2012

Real GDP growth rose marginally to 5.5% in second quarter of the calendar year 2012, from 5.3% in the first (March) quarter, which is above expectations (consensus: 5.2%, Nomura: 5.4%). The positive surprise was mainly due to a higher agricultural GDP growth (bumper winter crop) and higher construction sector growth (at 10.9% y-o-y), says a Nomura Economics Research Report on the subject.


Nomura warns however, that underlying demand remained weak. Fixed investment growth weakened (0.7% y-o-y in Q2 versus 3.6% in Q1) and export growth moderated (10.1% from 18.1%). By contrast, import growth picked up (7.9% from 2.0%). Government spending also accelerated (9%)—a mirror of the ongoing fiscal slippage which is clearly crowding out private investment, says Nomura. Private consumption growth weakened sharply to 4% y-o-y in Q2 from 6.1% in Q1, likely because of sluggish income growth and still-elevated inflation, says Nomura.


On the supply side, apart from the positive surprise in agriculture, services GDP slowed sharply to 6.9% in Q2 from 7.9% in Q1, which reflects lagged effects of the industrial slowdown, observes Nomura.


Overall, despite today’s slightly higher GDP, Nomura believes that the underlying growth momentum remained weak with three critical drivers: private consumption, investment and exports leading the slowdown.


Early data for the third quarter such as the manufacturing PMI (purchase managers’ index) and exports suggest no pick up in sight.


Nomura expects real GDP growth to remain around 5.5% in the third quarter, with overall growth of 5.8% in FY13 (year ending March 2013), lower than 6.5% in FY12.


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