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Showing posts with label Mutual Funds. Show all posts
Showing posts with label Mutual Funds. Show all posts

March 23, 2013

SEBI plays ‘HOLI’; introduces color labels for Mutual Funds


If you ask a retail investor if he has made money in the last 5 years despite the broader indices hovering in the range of 19,000 to 20,000, the answer would be no and in fact they would swear not to touch the capital market again. So, the question arises, “Have the Mutual Funds lost the charm” or “Have they been mis-sold which investors have realized and vowed to give a pass”? Probably these questions must be the pondering in the mind of SEBI, India’s Capital Market Regulator while zeroing in a way to make Mutual Fund a simpler investment product. And they played ‘HOLI’ by assigning Color Labels to different categories of Mutual Funds to define the level of risks – High, Medium or Low. But the product labeling comes with a disclaimer “Investors should consult their financial advisers if in doubt about whether the product is suitable for them” for investors who are still not able to decide the fund based on their objectives and investment risks. Since ‘Red’ invites a bad rapport and somehow gives a negative signal, SEBI played safe by assigning a Brown Color for high risk products so that investors should not disown those products at all. So, they assigned colors – Brown, Yellow and Green for High Risk, Medium Risk and Low Risk products respectively.

So, the funds would be labeled based on the parameters as given below:
1)      Nature of Scheme such as to create wealth or provide regular income in an indicative time horizon (short, medium or long term)

2)      A brief about the investment objective i.e. the product aims to invest in equity or equity related securities of, say, top 200 companies by Market Capitalization.

3)      It will also label the level of risk by assigning the respective color box along with the narration of risk i.e. High, Low or Medium
The SEBI also mandated that these labeling should also be disclosed in front pages of all related documents like Common Application Form and NFO Forms, Scheme Information Documents (SIDs) and Key Information Memorandum (KIM) and in all kind of advertisements wherever displayed be it print, tv or online.
The ruling would be applicable with effect from July 01, 2013 to all existing schemes and all future schemes to be launched. Fund Houses may choose to follow the provisions before the effective date.
Will it help first time investors?
If a grocery buyer goes to the market to buy an edible product, he selects the product based on the green veg label or red non-veg label based on his requirement. However, he may not be able to understand its constituents if he is not literate. Ditto may be the case with retail investors with these MF labels; they may end up buying the mutual fund depending upon his risk appetite but the product may not be really suitable for them. So, they must seek help from the Financial Advisor who will help them in selecting the right product.

So, will the advisor get away even if he has recommended a wrong product? It does not seem easy in the current given scenario. Recently AMFI introduced an Employee Unique Identification Number (EUIN) where the advisor needs to mention this unique id in the application form and would be answerable for the logic of investment irrespective of wherever he moves as the code remains unique to him/her only.

Moreover, it is also suggested that investors must undergo risk profiling taking into account of their income, age, assets, liabilities and other goals and then reach on their risk appetite. Apart from the performance, portfolio philosophy and fund management style, one should also look into costs which are measured by expense ratio and exit loads.

What turns off?
Though SEBI tried keeping three simple colors – Brown, Yellow and Green, it failed to answer for the vast product varieties within the same categories.
Exempli Gratia - Within equity category, there are many sub categories like Large Cap, Small Cap or Thematic. Though they all have equity as common constituents, the constituents differ in their inherent risk which may deviate very high. A pure FMCG fund and a Pure Diversified Equity Fund would be labeled as Brown Box with High Risk; however, both have separate set of risks defined internally.
Also AMFI must market the new labeling actively and position it in a way that investors don’t end up in same hassles of selecting the wrong Mutual Fund which does not align with the investment objective and horizon.

Laudable ground work; confidence still shaken
Though it is a laudable effort by SEBI to educate investors and help them take an informed decision, the time will say whether it really helps to bring back the lost charm in Mutual Funds. Or will the product labels lose its spark despite a colorful mix? Despite all these measures, it is very important to instill the confidence wobbled in recent past which is leading to continuous outflows of retail money from the Mutual Fund industry. Constructive Investors’ Education is the mother of all steps. Hope the SEBI’s new ‘HOLI’ colors make a colorful impact in investors’ life. Happy Holi!

Happy Investing!

May 12, 2012

Cash is not king for Mutual Fund Schemes


Self-featured article in Business Standard on "Cash is not king for Schemes"; Holding more than 10% in cash for too long  may hurt returns and increase chances of missing a rally.

Source Link: http://www.business-standard.com/india/news/cash-is-not-king-for-schemes-/474186/
Happy Reading!

October 27, 2009

RBI exits from expansionary policies







The domestic economy has started experiencing its feel-good factor with the encouraging numbers from all ends. However, the global economic outlook scripts a different picture. The abundance liquidity, inflationary pressures and week credit off-take forced the central bank to initiate some precautionary steps.



Keeping in mind to provide a balanced approach to our coupled economy, the Reserve Bank of India (RBI) in its second-quarter review of monetary policy 2009-10 maintained its status-quo on its lending and borrowing rates by keeping repo and reverse-repo rates unchanged at 4.75 per cent and 3.25 per cent respectively. It has also kept the Cash Reserve Ratio (CRR), the portion of deposits which the commercial banks need to keep with the RBI unchanged at 5 per cent. However, the bank has hiked the Statutory Liquidity Ratio (SLR), the amount which the commercial banks need to maintain in the form of cash, government approved securities (G-Secs) and/or gold before providing credit to the borrowers, to 25 per cent from 24 per cent effective from Nov 07, 2009 which will suck up over Rs 30,000 crore from the system. The central bank also aims to reduce the surplus liquidity and fight the higher inflationary expectations, which have been building up following a deficit monsoon (22% deficit) causing an increase in prices of food articles and food products.

The RBI has also revised the inflation target from 5 per cent to 6.5 per cent. The inflation has increased from -0.12 per cent to 1.21 per cent within a span of six weeks, thus, reflecting a rise of more than 1 per cent. It has also kept the GDP target unchanged at 6 per cent with an upward bias.



The RBI has responded in a way so that its growth and inflationary targets are met well within their target limits as set and also bridge the fiscal gap by initiating the first phase of its exit from expansionary policy. It has ended the forex swap facility for banks and cut the export credit refinance facility to 15 per cent, the level seen in pre-crisis time from the current level of 50 per cent. It has also ended the special repurchase window for banks, mutual funds and NBFCs with immediate effect.



Following the announcements by RBI, the domestic markets have responded negatively. The barometer Sensex tanked 386 points on profit booking across all sectors except IT companies. The BSE realty index and metals were heavily battered slipping 6.24 per cent and 5.43 per cent respectively. On the debt front, the ten year G-Sec yield slipped from 7.41 per cent to 7.31 per cent, a gain of 0.1 per cent or 10 basis points.