Small is not bad; try these Mutual Fund houses

The Mutual Fund Industry in India is in glut of mutual fund schemes; in totality the industry boasts of around 2000 schemes, one of the largest numbers of schemes in world. For a large number of times, the industry veterans have been crying over the excessive number of schemes; even SEBI Ex-Chief C B Bhave has also called for reduction in number of mutual fund schemes. The whole concept of Mutual Fund – ideal product for retail investors is lost in its way of growth. However, there are some fund houses in India which have been offering products at reasonable costs.

Expense Ratio – Cost to manage Mutual Funds

Ask any investor how he decides a Mutual Fund scheme before investing into it; probably the answer will come in terms of ‘returns’ rather than ‘expense ratio’ which should be the prime factor in selecting the fund. Expense Ratio is a cost to measure what investment companies require run a fund. In simple word, it is defined as the ratio of mutual fund’s expense to total net assets.

Bigger the better – not always

The SEBI regulation stipulates that the mutual fund scheme can charge up to 2.5 per cent of total net assets (up to Rs. 100 crore) in equity category which reduces further as the corpus rises. For any amount above Rs. 700 crore, a total expense of 1.75 per cent can be charged. After the ban of entry loads, it became very difficult for fund houses to float new schemes and pay to the distributors from the fund. This is more applicable to new fund houses which have floated in recent past and have been charging 2.5 per cent as the corpuses remain low.

ETFs still rule the industry – an analysis

We analyzed all the fund houses in India in terms of average expenses charged by them for their equity schemes. For equity, we considered Equity Funds (all categories), Balanced, ELSS and ETFs (other than Gold ETFs). We took the latest available expense ratios and month end corpuses for all the sorted schemes. Since some of the fund houses don’t declare month-end AUM, we considered Quarterly Average AUM for them. Based on calculation, it emerged that the fund houses having ETFs predominantly emerged as the clear winners in terms of charging the least expenses. Benchmark and recently launched Motilal Oswal Mutual Fund top the chart with least average expense ratios of 0.65 per cent and 1 per cent respectively which clearly boast that ETFs are the ideal products for long term investors with least costs.

Surprisingly, Quantum Mutual Fund having a total equity corpus of Rs. 79 crore in Equity runs the least average expense ratio (1.48%) despite having active funds only in their portfolio; as per their policy, this Mutual Fund does not pay any brokerage to distributors and promotes their schemes directly. The others in the top category are IDBI Mutual Fund (1.5%), UTI Mutual Fund (1.76%), HDFC Mutual Fund (1.84%) etc.

Fund Houses which have been fully utilizing the expense ratio cap (2.5%) are Pramerica Mutual Fund, Daiwa Mutual Fund etc. Nonetheless, some old names which have been in the industry for quite a good time still feature in the list and are not able to reduce their expenses are Escorts Mutual Fund, L&T Mutual Fund, ING Mutual Fund, DWS Mutual Fund and BNP Paribas Mutual Fund (BNP Paribas demerged from Sundaram and merged with Fortis Mutual Fund). Other fund houses charge average expense ratios in the range of 2 to 2.5 per cent.

What is the loss for investors?

Let us take an example to understand the effect of expenses on funds’ performance. For two funds A and B, if an investment of Rs. 5 lakh is done for a period of 10 years and 20 years and having expense ratio of 2.5% and 1.5% which grow at 10 per cent,  the difference in maturity amount is astonishing. In 10-years and 20-years categories, the differences in returns are Rs. 4.82 lakh and Rs. 31.81 lakh respectively.

Where should an investor incline to?

The newly appointed chairman of SEBI U K Sinha rules out reintroduction of entry loads and emphasizes on increasing the retail participation in Mutual Funds. No doubt Mutual Funds can play a bigger role in doling out handsome returns and charging less in the name of expenses. Moreover, ETFs have been emerging as the best players in terms of lesser expenses. But it is still higher when compared to developed countries’ ETFs where expenses vary in the range of 0.15-0.5% only. Also, the expense ratio is one among many factors which need to be considered while choosing a mutual fund scheme. It should not be considered in isolation.

Happy Investing!

- Amar Ranu

Business Line : Dazzling returns whet investors' appetite for gold

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Business Line : Today's Paper News : Dazzling returns whet investors' appetite for gold

Outflows in Equity continued; Total MF AUM up by 32.61% to Rs. 7.85 lakh crore

The equity outflows continued in April 2011, following the market negative sentiments and the ongoing geopolitical tensions in MENA region which have skyrocketed the crude oil prices affecting the domestic inflation. In April 11, there has been an outflow of Rs. 1,076 crore for second month successively. In last one year, the equity category lost Rs. 13,348 crore. However, the total AUM in Equity grew to Rs. 1,70,406 crore, up marginally by 0.38 per cent. In other equity related categories – ELSS, Balanced and other ETFs, there were mixed signals. While ELSS showed an outflow of Rs. 289 crore, the other ETFs category showed an inflow of Rs. 510 crore. The Balance category also showed a marginal inflow of Rs. 17 crore.

Slowly and steadily, ETFs have been becoming the mass product as shown by large accumulation of assets in it. While Gold ETFs continue to grow by leap and bounds, other ETFs also grew drawing interests from retail investors. In last one year, the Gold ETFs saw an inflow of Rs. 2,319 crore while the AUM grew more than double. Its current AUM grew to Rs. 4,800 crore in Apr 2011 from Rs. 1,711 corre, up by 180.54 per cent. To some extent, the uptick in gold prices is also responsible for the growth in AUM. The gold prices rose 29 per cent in last one year.

Net Inflows in April 2011

On the comfort side, the Mutual Fund Industry AUM rose to Rs. 7.85 lakh crore, up by 32.61 per cent or Rs. 1.93 lakh crore mainly contributed by Liquid/Money Market and Income Fund Categories. In Mar 2011, the industry lost Rs. 1.15 lakh crore.  The Liquid/Money Market AUM grew to Rs. 2.22 lakh crore in April 2011 from Rs. 73,666 crore in Mar 2011, up by 201.9 per cent. There has been a net inflow of Rs. 1.47 lakh crore in this category. Similarly, the Income category also showed upward movement in net AUM including net inflow in April. The category AUM grew to Rs. 3.35 lakh crore, up by 14.63 per cent and the net inflows were Rs. 37,891 crore.

In a significant ruling to Mutual Funds in the recent monetary review, the RBI has mandated that banks should restrict their exposure to 10 per cent of their net worth as on last year in Liquid Mutual Funds. So, eventually, the investments around Rs. 50,000 crore will outflow in next 6 months.

FMPs still rule the inflows

The burgeoning interest rates on account of high inflation have made the FMP category conducive for the market. Moreover, the uncertainly in equity market which is expected to remain in near future have also led to demand from investors. In April 2011, there has been 22 FMPs collecting a total of Rs. 3,065 crore.

New Funds enter into industry; some exited

Apart from FMPs, there were three open ended Income Funds named as Axis Dynamic Bond Fund, Canara Robeco Yield Advantage Fund and Peerless Child Plan Fund which collected a total sum of Rs. 41 crore. In gilt category, Daiwa Govt. Securities Fund – Short Term Plan collected Rs. 57 crore. There were no other NFOs.

However, the number of total equity funds reduced with some AMCs merging the schemes with the other existing schemes. As against earlier of 328, the total equity funds stand at 318. JM Mutual Fund and ICICI Prudential Mutual Funds merged their schemes with other existing schemes.

Post Office or MF? Let Risk Appetite Decide Your Monthly Income Option

Planning QE-III? Think of Zimbabwe’s One Hundred Trillion Zimbabwe Dollar bill

For a long time and the history says that inflation, predominantly hyperinflation works against the country. The classic example is Zimbabwe which used to have a note of One Hundred Trillion Zimbabwe Dollar bill, which are 100 followed 12 zeroes. John B Taylor in his blog abstracted a great article from Patrick McGroarty and Farai Mutsaka and states that printing money beyond a limit can create conditions like this. He has been asking Fed to rethink on the idea of going beyond QE-III.

Though there is no relation with this piece of junk dollar vs QE-III, but the situation may arise. The QE-I and QE-II have created conditions conducive to US growth story but not to a large extent. The 10-year US Bond note has reached to 3 per cent range where it stood before QE-II and also, the GDP growth slowed down to 1.8 per cent, much below the market expectation.

Perhaps US must think again and again before committing to QE-III as the world dynamics are also dependent on it. Funds may again move to Emerging Market Economies (EMEs) creating the nightmare of volatile capital flows for these nations creating a unbalance on their deficits.

Note: Zimbabwe bank notes have already been discontinued with new series of notes. This blog has already reported a story on it – here.

New Pension Scheme – Is it the ideal pension scheme?

India does not boast of any permanent Social Security Scheme unlike in developed countries. In May 2009, the GoI announced a new investment avenue for its citizens to plan for retirement in the form of New Pension Scheme (NPS) on a voluntary basis. On May 01, 2009, the launch of NPS paved the way for common people to secure their retirement and make their pension management easier. Till then, this pension scheme was available only to the central and state government employees. It is the single biggest initiative in pensions’ reforms story as it works on IT enabled infrastructure to extend social security cover to the citizens.

The NPS Trust created by its regulator PFRDA (Pension Fund Regulatory and Development Authority) has been authorised to oversee and review the investment of the pension corpus.

What is unique about NPS over other Pension Schemes?

India didn’t have any forced pension scheme for its citizens unlike EPF (Employees Provident Fund) where employers deduct a certain portion from employees’ salary. The PPF (Public Provident Fund) also provide an additional opportunity to persons not employed; however, the investment tenure is for a maximum period of 15 years extendable by 5 years and the investible amount is also limited to Rs. 70,000 p.a. Also, the returns in these two pension schemes are fixed – EPF (9.5 percent) and PPF (8 per cent). Some insurance companies have Pension Schemes but they are costly and eat major of investors’ money.

NPS fills both the gaps. It is open for all citizens (aged between 18 years to 55 years) in India and it is categorized as one of the cheapest pension scheme in India – the lowest Fund Management Charges and Administrative charges in the market, with FMC capped at 0.0009 per cent and custodian charges in the range of 0.0075 per cent to 0.05 per cent. It also provides an opportunity to participate in equity which can let your corpus grow at higher rate. Currently, the NPS trust has appointed seven independent fund managers which manage the NPS corpus. You have the choice to select any of these fund managers based on their expertise, track record et al. In NPS, the individual invests a certain amount (minimum of Rs. 500 per month or Rs. 6,000 a year), no upper limit in a pension scheme till he retires.

What are the Options available?

Currently there are two options available under NPS – Tier I and Tier II. Under Tier I, the investible amount can be withdrawn only at the retirement period i.e. 60 years. On retirement, 60 per cent of the corpus can be withdrawn as lump sum and remaining 40 per cent has to be invested in an annuity from an insurance company to generate a regular income. Currently, the lump sum withdrawn amount is taxable in the hand of investors (EET – Exempt, Exempt, Tax) but with the force of DTC (Direct Tax Code), the corpus would be tax-free for investors (EEE – Exempt, Exempt, Exempt).

However, in Tier II option, one can withdraw his investible amount at any point of time. However, your contributions and savings will not enjoy any tax advantages.

In addition, NPS Lite caters to small investors i.e. low income earners and it works on a ‘group’ model. In budget 2010-11, the government also announced the “Swavalamban Scheme” for NPS Lite investors under which the government will contribute Rs. 1,000 to each NPS account. Currently, this benefit would be available for another three years.

NPS comparison with existing retirement saving plans

Currently there are seven Fund Managers who have been managing NPS corpuses. The Pension Fund Managers (PFM) manage 3 separate schemes, each investing in different asset classes. The table 1 describes the different available schemes of NPS Funds.

The investors can choose either of investment options – Active Choice (decided by individuals to invest in any class) and Auto Choice (predetermined asset allocation based on age of investors)

The table 2 shows the comparative performance of some existing NPS Funds and other retirement fund options. For period between May 01, 09 to April 06, 11, NPS Pension Funds have returned in the range of 9.29 per cent to 18.72 per cent in Class E category (it comprises exposures in Equity up to 50%), while Pension Funds by Mutual Fund – UTI Retirement Benefit Plan and Templeton India Pension Plan returned 14.43 per cent and 86.11 per cent respectively. These funds have 30 to 40 per cent exposures in equity.

On the other hand, pension schemes sponsored by the government – PPF and EPF have fixed returns i.e. 8 per cent and 9.5 per cent respectively; however, they differ from time to time. Both these schemes provide only lump sum withdrawal and chances remain high that after withdrawal, majority of the corpus might be squandered away due to lack of human behaviour.

NPS still not picking up

Despite being a low cost product, NPS has not found many takers. In India, people are not used to invest for a longer period if it is defined contribution as in EPF where the employer deducts a portion of your salary. The number of subscribers in NPS still counts in thousands.

The low cost determines the uniqueness of NPS. However, the low distribution cost (Rs. 20 per transaction along with one-time registration fee of Rs. 40) is the main deterrent which discourages brokers/distributors/agents in advising NPS. They contend that the amount hardly covers their sales costs. At some Point of Presence (PoPs) like Banks, the employees prefer to push their own pension products when asked for the NPS form. So, there is mis-selling even at the PoP level.

Moreover, the NPS is still costly product for entry level depositors.  An investor depositing Rs. 500 per month, or Rs. 6,000 a year, will have to shell out Rs. 800 (considering transaction happens at RBI locations else additional Rs. 180 p.a. would be charged), or 13 per cent, as charges in the first year and Rs. 400 p.a. thereafter. The government claims that the charges would be reduced once the number of subscribers crosses 1 million.  Refer the chart 1 for different expense ratio for different subscription amount in NPS.

Moreover, the current tax status i.e. EET (Exempt – Exempt – Tax) also acts as a dampener in comparison to other pension products i.e. the maturity proceeds would be taxed in the hand of investors. However, the new Direct Tax Code (DTC) to be implemented from FY 2012-13 has put it in EEE mode i.e. the maturity amount won’t be taxed at the hand of investors. The table 3 gives the current status of tax liability on on different pension products.

 

What should be done to make NPS acceptable among investors?

Though the government is not leaving any stone unturned in order to improve the spread of NPS, a lot still needs to be done. To start with, the PFRDA must tie with Online Brokers where there is minimum involvement of manual interference; also, the government must work into giving targets to PoPs and they should also incentivise the PoPs with bigger margins if they bring a certain number of subscribers. Also, the financial advertising and education would be important factors where the government can look into. Private employers should also encourage their employees to subscribe to the low-cost NPS.

At micro-levels, the government must also tie-up with NGOs, SHGs and other community centres in order to promote NPS Lite. In order to encourage the low-earning investors to subscribe to NPS, the government also introduced the “Swavalamban Scheme” for NPS Lite investors under which the government will contribute Rs. 1,000 to each NPS account for the next 3 years. The ongoing Aadhar-linked programme can also be a booster for NPS.

Is the NPS justified?

The future is undecided especially the retirement period. People must invest to protect its future at the minimal cost of investment expenses. Also, in the absence of any permanent social benefit plan in India and where a majority of the population depends on daily wages, the current NPS fits the wall. Moreover, the low cost of NPS describes its uniqueness, the lowest till date for an investor investing a particular limit. In a nutshell, the NPS gives the subscriber a portable account, simple choices (unlike complex investment products), nationwide access, and much needed pension coverage. So, the NPS experiment is worth the trouble taken.