In your interest.
Online Personal Finance Magazine
No beating about the bush.
While banks indulge in mis-selling mutual funds, as Moneylife had warned 10 months ago, it is far-fetched to blame them for steady equity mutual funds outflows and not SEBI’s hasty and utopian rules on mutual fund selling
Almost 15 months after the Securities and Exchange Board of India (SEBI) set in motion extensive changes as to how mutual funds are sold, and well after the regulator's hasty changes started affecting both the fund industry and the investors, the media has started to get agitated against just one of the fallouts of the sweeping measures-how the national distributors are leading investors up the garden path. According to two business newspapers, banks are encouraging retail investors to churn their portfolio, which is leading to lower gains for investors.
Banks are motivated to do this because of SEBI's rules for selling funds. According to the rules, fund companies cannot pay upfront commission to distributors at the expense of fund investors. They can get upfront commission from fund companies and trail commission on assets that their customers have kept with the fund. Banks have discovered that they make more money from the asset management companies on fresh investment (upfront commission of around 1%) and make less if it is a continuing investment (around 0.5%). If banks can get customers to buy and sell three times a year (which is churning), they make 3%, whereas if they encourage investors to buy and hold over a year, they would get only 0.5%. This is what they seem to be doing.
Mis-selling by banks as a possible fallout, (one of the many, as a result of SEBI's changed regulations), may be a surprise to both the regulator and the media, but not for Moneylife, which documented this 10 months ago based on feedback from the Independent Financial Advisors (IFAs). But at that time, neither the fund companies nor the regulator (much less the media) seemed concerned. Now, the regulator seems to have woken up to this obvious consequence of its actions and is bleating that the Reserve Bank of India (RBI) should come down on banks to stop them from churning investors' portfolios.
The Mint wrote on Tuesday last week, "Retail investors, advised by large banks and distributors, exited mutual funds (MFs) after entry loads on these were removed and even as the stock markets continued to rise. Meanwhile, high net-worth investors (HNIs-those who invest more than Rs5 lakh per folio) and those who invest directly with fund houses have stayed invested, benefiting from rising equity markets. Bankers and wealth managers attribute this to the end of entry loads (costs charged to investors upfront at the time of investment, that were eventually passed on to agents as commission), which have meant that large sellers of MFs no longer have incentive to push the product." On Monday, The Economic Times reheated the same information and served it up with a comment: "The ingenuity of national-level distributors appears to be neutralising much of market regulator SEBI's efforts to curb mis-selling of mutual funds to investors."
These reports paint a picture of a well-meaning regulator being undermined by nasty and greedy banks. We had mentioned several times, based on the feedback from IFAs, that the series of actions SEBI took would lead to precisely this. In fact, we had pointed out in January how Axis Bank was charging Rs225 to investors without their consent to the New Fund Offer of Axis Mutual Fund, without the customers knowing about it. (Read http://www.moneylife.in/article/8/3717.html) When the Axis Bank practice came to light, Moneylife argued that "this puts a different light on the entire issue on how distributors can charge their customers." SEBI banned entry loads in August 2009, arguing that customers must have the option to negotiate and pay what they can to distributors. But the Axis Bank move underlined the fact that while it is laudable that customers must have the ability to decide for themselves what they are paying for and how, it is a utopian idea in practice. In reality, distributors who have a strong relationship with customers in some manner or the other and an ability to charge them, will get away by doing exactly that. Customers may neither notice nor protest. Since commercial banks enjoy a relationship of trust with their customers, they may misuse it. This is simply because, with long years of experience of watching both regulators and banks, Moneylife editors had pointed out that banks have often abused the trust in the past, when they have debited millions of customers for a service that they have not asked for. The most notable is the example of Citibank which debited some amount from its customers' accounts for an insurance policy, the Suraksha scheme, which they had not explicitly consented to buy.
We had pointed out that this practice would spread into fund selling and SEBI would not be able to regulate banks. Neither does it have a foolproof mechanism to regulate the distributors. SEBI regulates fund companies. However, funds would not exactly be bothered by any abuse of trust by banks; they would be keen to raise as much money as possible-no matter how a distributor sells a scheme, we had pointed out. Also, many mutual funds are sponsored by banks. We asked, way back in February: "Why would a fund complain about any malpractice? The Reserve Bank of India would also not be concerned."
This is exactly how it has played out to the utter surprise of SEBI, which had pushed a utopian regulation down the throat of the fund industry without thinking it through.
After SEBI implemented a series of changes governing the selling of mutual funds, and then tried to implement a patchwork of futile solutions, money continues to flow out of mutual funds. Between August 2009 and October 2010, Rs24,330 crore has gone out of mutual funds. All this, while SEBI and fund companies have argued that this haemorrhage has nothing to do with SEBI regulations, but investors booking profits. While this no longer washes, pro-SEBI commentators have now found another villain: banks encouraging churning.
Unfortunately, even this does not explain why churning by banks should lead to large continuous net outflows from funds. Unless SEBI admits that it has forced a set of regulations without thinking through the consequences, healthy growth of the mutual fund industry seems a remote possibility.
Meanwhile, let's hope that a trigger-happy SEBI does not try to cure the disease by attacking the symptom and banning distributors from churning more than once a year, as another of its pro-investor moves!
Even as LIC Mutual Fund faces the heat over heavy losses in liquid and money market investments, its equity schemes and index funds continue to be among the worst performers in their categories
Life Insurance Corporation of India's (LIC) mutual fund company has fallen on troubled times, according to a report in a leading business daily. With questionable investments in liquid and money market schemes, LIC Mutual Fund has notched up losses to the tune of Rs120 crore in its half-yearly earnings report. This hardly comes as a surprise given the pathetic track record across the spectrum of mutual fund schemes launched by the subsidiary of the country's largest financial institution.
LIC enjoys the trust of millions of insurance policyholders in the country, who bank on its safe image and clean record for settling claims. Unfortunately, this has not been the case with LIC MF. For long now, a majority of LIC MF's schemes have been among the worst performers in their category and have earned a notorious reputation for underperformance and average returns.
Here are some bare facts. Be it equity diversified funds, index funds or debt funds, LIC's schemes figure at the bottom of the performance charts in all categories. It would be hard for any fund house and its schemes to be such consistent underperformers. Among the 20 worst-performing equity funds over the past five years, as many as five schemes are from LIC. All these schemes have grossly underperformed their respective benchmarks. These include the LIC MF Tax Plan (11%), LIC MF Opportunities (12%), LIC MF Sensex Advantage (12%), LIC MF Growth (13%) and LIC MF Equity (14%).
LIC MF has two index funds in its portfolio-LIC Index Sensex and LIC Index Nifty. It has, somehow, managed to make a mockery of the passive investing concept too. Launched in November 2002, the LIC Index Sensex has returned 15.77% over the past five years, while its benchmark, the Sensex, has gained 19% in the same period. Meanwhile, the LIC Index Nifty has delivered 14.6% returns over the past five years, compared to 19% gains by the S&P CNX Nifty over the same period. This humungous tracking error shows that fund managers have tried to time the market at their own peril. If fund managers make a hash of even passive investing, what hope would investors have of getting decent returns from its actively managed funds?
It is easy to see that LIC's expertise does not in any way lie with mutual funds. Its performance so far has been only marginally better than JM Mutual Fund, which we identified as being the worst performing fund house in the country. (Read more about JM Mutual Fund in "Worst Fund House" at http://www.moneylife.in/article/6696.html)
Even as equity markets and gold have enjoyed a similar rally since March this year, investors have shown much more appetite for the allure of gold ETFs than equity mutual funds
It is a tale of two asset classes that have evinced contrasting interest from investors. Both equities and gold have enjoyed a remarkable run since March this year, recording around a 20% jump each till now. But while the rally in stock markets has failed to enthuse equity mutual fund investors, gold ETFs have enjoyed phenomenal patronage from the investor community.
Clearly, the equity market is no longer the preferred destination for investors here. Since March this year, the Sensex has surged almost 19% from 17,528 to 21,000 now and is now hovering around a new all-time high. Meanwhile, equity mutual funds have witnessed a torrid time. The number of equity folios has gone down an alarming 4% from 402 lakh to 386 lakh. Equity MFs have witnessed outflows to the tune of Rs21,200 crore over this period.
In sharp contrast, gold exchange traded funds (ETFs) have been attracting investor money by the buckets, on the back of a phenomenal surge in the price of the yellow metal. Since March this year, gold prices have risen by around 21% from Rs16,232 to Rs19,970 now. The popularity of gold ETFs has soared as a result, with retail folios in gold ETFs jumping by a massive 65% from 142,270 to 235,218 over this period. Inflows into gold ETFs have surged 80% over the same period.
Heads of various asset management companies (AMCs) have attributed the waning interest in equity mutual funds to the stretched valuations in equity markets. Investors are booking profits and getting out of the market, they argue. However, as Moneylife has been pointing out regularly, this is not entirely true as equity MFs have witnessed a steady leakage of cash for more than a year now - which has little to do with the stock markets. The ban on entry load in August 2009 has had far-reaching consequences on the industry, which has found it difficult to cope up with many of the whirlwind changes introduced by the regulator, the Securities and Exchange Board of India (SEBI).
At the same time, gold ETFs have emerged as the favoured investment avenue for the retail population, seduced by the relentless rise in gold prices. Many investors have accepted the continuing rally in gold as a foregone conclusion and put their savings in this asset, cheered on by AMCs and their distributors.