In your interest.
Online Personal Finance Magazine
No beating about the bush.
Fidelity Mutual Fund is reportedly looking for a suitor for its mutual fund business. The blame for forcing out a solid long-term investor lies with two successive SEBI chairmen
Fidelity Mutual Fund, the Indian arm of Fidelity Worldwide Investment and one of the most storied funds in the United States, is supposedly looking for a buyer for its Indian asset management business. Why would Fidelity think of exiting India? Is India breaking up, with prospects of deep recession and debt default staring at us all indefinitely? It is only in such dire economic conditions that a solid long-term investor would think of completely packing up. On the contrary, foreign direct investment (FDI) into India is booming and many multinationals see India just as not a strategic location but one that delivers huge cash flows that boost their global balance sheets. So what is the reason for Fidelity’s exit? It is simply harebrained experiments and draconian regulations by the Securities and Exchange Board of India (SEBI) which has been cheered by everyone in the media since 2009 except Moneylife.
The foolish regulations that killed all incentives to sell mutual funds started under former SEBI chairman CB Bhave’s tenure and has been taken to new depths, ironically by someone who was running a large mutual fund - the current SEBI chairman UK Sinha. Two years before the media reporting Fidelity’s exit, we had reported that SEBI might have shot the industry in the back by banning entry load without thinking through the implications. (http://www.moneylife.in/article/mutal-fund-turmoil-can-sebi-be-held-accountable/3204.html ). 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. 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. Mr Bhave singe-handedly killed the only route of average savers to grow their wealth in the long-term to beat inflation. For this capricious and patently anti-investor move, some managing directors of asset management companies supported Mr Bhave and he was uniformly hailed as the messiah of the small investor by the mainstream media.
When the decline in fund flows was obvious, SEBI started tinkering such as allowing stock brokers to sell funds, which was another foolish move as we had predicted. Sure enough, mutual fund sales through stockbrokers have amounted to nothing. Clearly nothing made any difference to the fund management industry.
In February last year UK Sinha took over as SEBI chief. There was a lot of hope among distributors that a man who has actually run mutual funds would now bring out some sensible policies. Instead, his policies turned out to be even more useless. (http://www.moneylife.in/article/will-inives-to-mutual-fund-distributors-have-much-of-an-effect-on-fund-inflows/17541.html)
In fact, SEBI went on to push Mr Bhave’s agenda further by brining in all sorts of funny advisor regulations. (http://www.moneylife.in/article/investment-advisor-regulation-i-sebis-ideas-are-as-usual-far-from-reality-may-increase-mis-selling/20109.html). At a time when most of them are slowly moving to a fees-only model, SEBI is hell-bent on cutting them off. This will further impact distribution. When this happens, distribution business will fall on players who can afford them—the banks. But is it in the interest of the average saver?
Sebi's actions have pushed smaller distributors out of the business leaving investors at the mercy of bank relationship managers. But relationship managers are well-known for their unscrupulous and pushy ways, and tend to operate purely on commissions and rarely on customer interests. By having bank relationship managers double as distributors, they will be able to peddle their own mutual fund products, albeit unethically, to consumers. In lieu of an entry load, they are paid a professional fee (http://www.moneylife.in/article/what-is-a-professional-fee-you-pay-a-bank-for-buying-mutual-funds/3802.html). Also the information they give will be biased and not in consumers’ best interest. We had also written about this earlier. (http://www.moneylife.in/article/best-mutual-fund-schemes-please-dont-ask-your-banker-about-it/21551.html). The last thing the consumers need is relationship managers banging on their doors every week.
Apparently, SEBI hasn’t learned any lessons and refuses to do so. If the regulator does indeed go ahead with the implementation of the concept paper, it will not only be a death knell for the mutual fund industry but also for consumers as well as they will be starved of quality products.
The mutual fund business model solely rests on the quantum of assets managed. According to industry sources, Rs10,000 crore is the ball-park quantum of assets required to break even. Therefore, sale of fund products is paramount to the survival of a fund house. Fidelity, after years of systematic planning and execution, has Rs8,800 crore of assets, and incurred losses of Rs62.39 crore in FY10-11 against a loss of Rs27.56 crore in the previous financial year. Clearly, thanks to SEBI’s successive moves, Fidelity sees no hope.
This marks the first time a big-name mutual fund is a victim and has succumbed to the sudden change in environment. If this is any indicator of the current state of the mutual fund industry, it will only get worse unless massive consolidation takes place.
Distributors and advisors are responsible for pushing and increasing penetration of financial products. Their income depends on this and without this there is not much point in selling an unprofitable product the same way as it is not worthwhile to continue with unprofitable businesses. For years SEBI failed to pay heed to the investors. Under the last two chairmen it did not pay heed to market players either. It has been on its own trip at the cost of hapless retail investors and the fund industry. But with the mainstream media unable to see or hear any evil, Sebi bosses will get away by making guinea pigs out of us. Please offer your feedback here, even if Sebi prefers to remain indifferent to hard facts on the ground.
IDFC, REC, L&T Infra, SREI Infra, IFCI and PTC India Financial are your current options. Check the interest rate, rating and buyback terms to help make a decision. There is less chance of higher interest rate offers in this financial year
Depending on your tax bracket you can save maximum of Rs6,180 by investing Rs20,000 in infrastructure bonds qualifying for Section 80CCF deduction. Make a decision based on current offerings of interest rates, ratings and buyback terms. There are variations for these three parameters in all the offers. Don’t pin much hope of better interest rates offered in March. The trend of interest rate is down.
The offers with ‘AAA’ rating are IDFC (Infrastructure Development Finance Company) and REC (Rural Electrification Corporation). IDFC (Tranche2) offers interest rate of 8.70% per annum (p.a.) for 10-year bonds, while REC will give 8.95% p.a. for the same tenure. The difference in the interest paid every year is only Rs50 for investment of Rs20,000. Going for either of the two is a good option, but REC is s better offer at this time for those looking for both safety and returns.
Both the bonds offer buyback option after five years. It means that in case market interest rates are higher than what these bonds currently offer, the customer can sell the bonds back to the company and reinvest the money in another investment earning higher interest. If the market interest rates after five years are down, the customer can remain invested in these bonds till the end of its term.
REC also offers 9.15% p.a. for tenure of 15 years with a buyback option after seven years. IDFC closes for subscription on 25 February 2012 while REC issue closes on 10 February 2012.
SREI Infrastructure Finance (SREI Infra) offers a coupon rate of 8.90% p.a. and 9.15% p.a. for 10 and 15-year term, respectively. Both the terms offers buyback after five years which is an advantage for customers going for a 15-year term. The subscription closes on 31 January 2012 and it enjoys a rating of ‘AA’. While most of these bonds offer minimum investment of Rs5,000, SREI Infra has a Rs1,000 bond and hence is helpful if someone wants to invest less than Rs5,000.
IFCI pays the highest interest amongst all of them. It pays 9.09% p.a. and 9.16% p.a. for 10 and 15 years, respectively. It offers buyback at the end of 5th and 7th year for tenures of 10 years and 5th and 10th year for 15-year bonds. Giving two options for buyback for each of the terms is an incentive for customers. IFCI bonds have rating of ‘A+’. The issue had closing date of 16 January 2012, but it has been extended to 8 February 2012.
PTC India Financial Services (PFS) offers 8.93% p.a. and 9.15% p.a. for 10 and 15 years, respectively. It offers buyback every year after completion of five years for 10 years bond tenure and every year after completion of seven years for 15 years bond tenure. The buyback terms are certainly flexible. Even though the parent company PTC is a government promoted public-private partnership, PFS has been assigned only ‘an A+’ rating. The issue closes on 2 February 2012.
Even though these bonds appear in a demat account, there are restrictions for selling them in the secondary market within the lock-in period of five years.
HSBC plans to launch another Fund of Funds scheme investing in foreign equities— another global fund with no track record
HSBC Mutual Fund plans to launch an open-ended Fund of Funds (FOF) scheme—HSBC China Consumer Opportunities Fund. The scheme would invest 95%-100% in its overseas fund—HSBC Global Investment Funds (HGIF) China Consumer Opportunities Fund. The rest would be invested in money market instruments and units of domestic mutual funds. The investment objective of the underlying fund is to invest for long-term total return in a diversified portfolio of investments in equity and equity equivalent securities of mid to large cap companies around the world, positioned to benefit from the growing middle class and changing consumer behaviour in China. The rationale behind the fund is that the growing population of middle class, gifting culture and liberalisation of tourism are upholding demand for international and local consumer goods. The fund does not have any track record as it has just been launched in September 2011. As on December 2011, the fund had invested in companies of 10 different countries. Around 51.2% of the investments are in stocks of United States, France and Switzerland; just 17% is invested in companies located in Hong Kong and China. Some of the companies in the top ten holdings include: Adidas, Louis Vuitton, Swatch, L’Oreal and Henkel.
This is the third FOF launched by HSBC which invests in its overseas fund. The other two funds are—HSBC Brazil Fund and HSBC Emerging Market Fund. (Read about what we said here: Avoid HSBC Brazil Fund new fund offer , Faith Investing ) There have been many such funds launched in the past by fund companies, inviting Indian investors to park money in their overseas fund. Apparently, most of these overseas funds do not have a long and proven track record of good performance. Moneylife has constantly been writing about such funds in the past years. These funds are pure fads.
We have had similar funds like the recent Mirae Asset India-China Consumption fund, which invests as much as 35% in companies from China and the rest in Indian equities and debt instruments. There are also FOF schemes like JPMorgan JF Greater China Equity Offshore Fund and Mirae Asset China Advantage Fund which invest in funds that primarily invest in companies domiciled in China. Here again, there is no long-term performance available for these funds. In the last two years these funds have returned around 2% whereas the Sensex was down by 2%, but in the last one year the returns have more or less tracked the Sensex.
Even if investing in such a fund tends to diversify one’s portfolio, how much should one plan to allocate to these funds? One needs to study the investment strategy and analyse the portfolio of the foreign fund. It’s clear these funds are not meant for individuals who do not even have a significant portion of his investments in Indian equity funds.