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

My comment on The Hindu Business Line
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.

Net MF outflows of Rs. 1,27,451 cr in Mar 11; Rs. 13,405 Cr outflow in Equity in FY 10-11

Despite the equity market closing in net positive in FY 2010-11, it failed to excite the Indian Mutual Fund Industry in FY 2010-11. In Jan-Mar 2011, Mutual Funds had been actively buying in Equity but it did not boost up the overall AUM in Equity. The total AUM in Equity sans ELSS, Balanced and Other ETFs in Mar 2011 stands at Rs. 1,69,754 crore compared to Rs. 1,74,054 in the same month last year. Overall, there has been a net outflow of Rs. 13,405 crore from Equity category, thus, making it as the highest absolute redemption in a particular year. Since the ban of entry loads in Mutual Funds in Aug 2009, the Mutual Fund Industry has been bleeding with constant outflows. However, it stabilized in Feb 2011 with the highest net inflow of Rs. 2,495 crore in last 20 months.

Net inflows in Mar 2011

In Mar 11, there has been a total outflow of Rs. 1,27,451 crore from Mutual Fund industry, a common phenomenon in every financial year end month. In Mar 10 and Mar 09, it witnessed a net outflow of Rs. 1,62,165 crore and Rs. 98,697 crore respectively. Generally, banks redeem their investments in March again to invest in the following month. In FY 2010-11, there has been a total outflow of Rs. 48,931 crore. Categorically, the Income and Liquid/Money Market saw an outflow of Rs. 30,612 crore and Rs. 98,255 crore respectively.

FMPs flooded in Mar 11

The liquidity deficit and the burgeoning inflation which have forced the policy makers to raise the interest rates have actively changed the dynamics of the market. The Certificate of Deposits, popularly known as CDs – a short term money market instrument used by banks to borrow from the market has been very active in Jan-Mar 2011, predominantly in Mar 2011. Banks have issued CDs even at higher rates (10 per cent plus) in order to inflate the balance sheet as the year end closes in. In Mar 11 alone, there has been a total of 132 FMPs launched garnering a total corpus of Rs. 27,912 crore. In Feb 11 and Jan 11, there have been a total of 65 FMPs and 48 FMPs collecting Rs. 17,232 crore and Rs. 12,713 crore respectively. With money market rates falling specially CDs’ rates, the FMP saga may not continue in coming months.

Other categories too saw inflows

The other equity categories such as ELSS, Balanced Funds and Other ETFs saw inflows to the tune of Rs. 576 crore, Rs. 231 crore and Rs. 107 crore respectively. March being the tax season month saw the flows in ELSS as investors invest to save taxes up to Rs. 1 lakh. The Gold ETFs continued its positive flows in last 23 months except in May 10 where it saw a marginal outflow of Rs. 6 crore. In Mar 2011 and FY 10-11, it saw an inflow of Rs. 648 crore and Rs. 2,250 crore respectively. The inflow in Mar was the highest inflow till date mainly on surge of commodities due to geo-political tensions in MENA region which made people lured towards gold.

New Funds enter into industry

In Equity category, there were two NFOs – IDFC Infra Fund and Mirae Asset India – China Consumption Fund collecting a total asset of Rs. 93 crore. In Income Fund category, there were 3 NFOs in Open-Ended category and 134 NFOs in Close-Ended Category. The month also saw two capital protection funds by Sundaram Mutual Fund and SBI Mutual Fund. In other ETF category, the in-house promoted NASDAQ-100 ETF collected Rs. 48 crore.

                                                                                                                               Soure: MOSL
Happy Investing!

Cricket let you dance; so with Financial Markets!

Generally I refrain from writing on issues not related to finance, but cricket is no longer unlinked to financial world. The industry bets high amount of money in ethical and unethical manners which helps both ways. After making a historic win over Men in Green, Men in Blue finally conquered the excitement and gifted a beautiful gift to all Indians who stood still on Mar 30, 2011 from their regular work. One Billion plus prayers worked for us. Now the focus shifts to India vs Sri Lanka. The online domains are already filled with slogans favoring India like Ram Sena on its way to conquer Ravan Sena, Lanka. Both the teams are at their best; India has to work on its negatives. It is just few hours away from 1983 historic day, after which we could not witness.

Out of these hopes, the question arises – are there any relationships between cricket and financial world? What are the best chances that India would win? Exactly 28 years back i.e. in 1983, all the days and dates match with those of 2011. So, we have a strong chance we would repeat the history. Also, in 1983, the current finance minister Shri Pranab Mukherjee was the then finance minister under then Prime Minister Indira Gandhi. Though there does not emerge any correlations on these happenings, superstitions and astrological theories have always surrounded the game of cricket. Also, the current networking age or the age of Twitters, Facebook or Orkut, the positive correlations emerge like a rising sun in the east.

Cricket is considered as a religion in Indian sub-continent which boasts of world’s major population. Luckily, the ICC World Cup 2011 would have remained in this continent even if we had lost the match against Pakistan. Examining the relationships between Cricket and Stock Market, the events suggest that large sporting events do affect the sentiments of viewers which ultimately become investors. Depending upon their mood swings, stock prices move through crests and troughs.  Mishra and Smith (2010) have already shown that there is an asymmetric relationship between the performance of the Indian Cricket team and stock returns on the Indian Stock Market. While a win by the Indian cricket team has no statistically significant upward impact on stock market returns, a loss generates a significant downward movement in the stock market. When Sachin Tendulker, India's most popular cricketer plays, the size of the downward movement in returns is larger. However, in last few trading days, when the cricket fever is on, markets have moved upwards. Though there are reasons, the continuous wins support the correlations. This time, it has worked positively.

Even Aiyar and Ramcharan (2010) suggest that it is lucky for international cricketers to play their debut Test (international) match at home.

A good start may have a persistent, positive impact in other fields, too. Nonetheless, selection committees appear to systematically penalize both bowlers and batsmen for the misfortune of debuting abroad—and systematically penalize bowlers more than batsmen. It would therefore seem likely that similar biases are widespread among employers of all kinds, for whom performance metrics are more ambiguous, differences in initial conditions harder to judge, and the decision itself unlikely to be second-guessed by millions of opinionated fans around the globe.

Whatever the reasons be, Indians hype the situation beyond the limits and looks into all permutations and combinations. Why? The betting is on, boss! A large part of Indian financial market is conceptually linked to bettors. Let India play its natural game! Let them give 100% to win 110 crores hearts. Also, we stand united.

Enjoy the game!

Let the Cricket win! Let India win!

Probably by this time, Indians must have reworked their schedules for the deadliest fight between India and Pakistan; mind it – it is not a battle ground war but the craziness has gone beyond it, the craziness for Cricket. Welcome to the Semi-Final Cricket match of ICC world Cup 2011 between India and Pakistan. Until now, fans across the countries have started exchanging verbal feuds especially women of both countries. And everyone knows – when women fight, they forget the conclusions. All the social-networking sites have been fired with online campaigns in favor of India. Probably everyone is eyeing this world cup as the last world cup for cricket’s own god Sachin R. Tendulkar.

But are we just concerned to win this semi-final? Is lifting the World Cup not equally important? And the craziness has gone beyond limits; truly said India sleeps Cricket, speaks Cricket, drink Cricket et al.

Shaila Baghail, a cricket enthusiast rather an India enthusiast, an ex-navy officer, an entrepreneur and my Aerobics trainer walked down from Navy Nagar to Siddhivinayak Temple, covering a crazy distance of 19 km in scorching heat of Mumbai to offer prayers at the temple for India’s win in this crucial hotheaded fight. Should we call her a crazy fan or did she pour her blessings and mind to India wholeheartedly? The media reports that crazy fans have been lining through the days and night in Mohali outside the stadium to get tickets despite the officials claiming that they have been sold out. People luckier to get few tickets have been black-marketing after adding a single zero or double zeroes on the actual price of ticket. So, a ticket worth Rs. 5,000 has been selling at Rs. 50,000, even costlier than Olympics. India Inc. has gone beyond their rule books; while many companies have relaxed their employees to leave early in 2^nd half, some have arranged big-screen in their auditoriums. 

Today, the match got politically involved too after the Pakistan PM accepted Indian counterpart invitation to watch this fierce fighting live at Mohali, very near to Lahore, once a part of India pre-1947.

Let the craziness remain! All Indians would owe to their team if India manages to win. But the question arises – are we close to ICC World Cup 2011, a feat unachieved since 1983. Let the spirit of game prevail!

Innovation reaches to Indian Investors – Try MOSt Shares NASDAQ-100 ETF

Imagine some of the most innovative companies on the globe; probably you would name Google, Apple, Ebay, Amazon or others etc. They have presence almost all over the globe. Now, if you want to buy these companies, you need to find an Indian broker who offers the facility to buy foreign shares. Probably there are very few brokers in India who offer to buy foreign shares; and that too comes at high cost ranging 1 - 4 per cent. Moreover, your investment will fall under the foreign investment limit of        $ 2,00,000. So, as an individual, you can’t invest more than US $ 2,00,000.

Here come your solutions – Invest in MOSt Shares NASDAQ-100 ETF

Motilal Oswal Mutual Fund, after trying the domestic innovations in the form of M50 (a large cap oriented fund) and M100 (a mid cap oriented fund) – these funds got wide acceptance from investors – launched MOSt Shares NASDAQ-100 ETF, India’s first US Equity ETF providing exposure to US and International firms on NASDAQ Index.

Why MOSt Shares N100?

·         The fund provides unique access to World’s most innovative firms; all non-financials including some market leaders like Google, Apple, Cisco, Baidu and many more.

·         It is Rupee dominated investment and does not fall under the foreign investment cap of US $ 200,000.

·         It is a passive investing with no discretion to Fund Manager; that too comes at a lower cost (relatively at 1 per cent).

·         Very low-correlation of NASDAQ-100 with India’s major indices – around 0.29 with Sensex and Nifty – thus, providing the ideal diversification option for domestic investors.

·         The NASDAQ-100 has a healthy mix of all sectors – Technology, Consumer Services, Health Care, Industrials, Telecommunications, Consumer Goods, Oil & Gas and Basic Materials – with around 60 per cent of holdings falling under Technology.

·         The NFO being treated as Other than Equity Product (since the investment is made outside India) will offer Double Indexation Benefit as the AMC claims that the allotment would happen before March 31, 2011.

Why NASDAQ-100 Index?

·         No doubt NASDAQ-100 Index® (NDX) is one of the widely watched indices in the world. It includes 100 of the largest domestic and international non-financial securities listed on The NASDAQ Stock Market based on market capitalization.

·         NASDAQ-100 comprises the A (Apple) to Y (Yahoo) of innovation. Comparatively, the index has sound fundamentals, low valuation, low correlation with Indian markets and global spread of innovation.

Performance Analysis (NASDAQ-100 vs Nifty)

One can suspect why an investor needs to diversify beyond India if he is getting better returns in India only. It is imperative to state that the decoupling story no longer holds true in India vis-à-vis to developed economies. However, the low correlation of NASDAQ-100 against major Indian indices makes a strong case on the performance of NASDAQ-100. The long term growth story of NASDAQ-100 is still intact as relevant from the historical performance of NASDAQ-100 vs Nifty.

While in 1-year and 3-years category, NASDQ-100 has beaten Nifty by good margin, in other categories, it lagged Nifty. However, in 15-years category, (In India, hardly any investor keeps his money locked for 15 years), the NASDAQ-100 has bitten Nifty by almost 300bps.

Why MOSt Shares N100 at this juncture?

Most emerging markets have dramatically come out of the global financial crisis since the fall of Lehman Brothers at faster pace in comparison to its developed counterparts; however, the inflationary pressure kept on building too, thanks to hike in commodities’ prices around the globe, supply-side issues including demand related factors. Also, there had been geo-political tensions arising from Tunisia spreading to Egypt, then Libya and now Bahrain. The natural catastrophe in Japan colliding with the man-made catastrophe (Nuclear Plants blast and leakage) has further worsened the situation. The global crude prices have gone beyond US $ 111 per barrel and it is estimated if the similar trends continue, it can touch US $ 200 per barrel.

Moreover, the developed countries followed the Tortoise race in ‘Hare and Tortoise’ race and have started recovering from the financial crisis recently. They have been showing signs of increased employment, higher productivity and increasing economic growth. So, in a nutshell, the United States is expected to re-emerge as an engine driving global growth.

Words of Caution

Diversification is the key to investors’ portfolio to minimize the losses and the N100 fits in due to low correlations with Indian indices. However, any uneven and significant movement of rupee-dollar exchange rate against can have a bearing on returns. Also, in the long run, Indian equities may outperform US equities as the strong domestic consumption story still remains intact.

Happy Investing!

Inflows to Equity continued; total inflows upped by Rs. 25,757 cr

The growth saga in Equity continues with a net inflow in Equity categories – Equity, ELSS and Balanced. The Equity category saw a net inflow of Rs. 2,495 crore, the highest inflow since July 2009. This positive figure is also for the third time in a row month-wise. However, the net assets of Equity dwindled due to fall in broader markets and outflows of foreign ‘hot moneys’. While the FIIs were the net sellers to the tune of Rs. 4,584 crore in Equity, Mutual Funds were the net investors to the tune of Rs. 1,477 crore. In totality, the Equity AUM nosedived to Rs. 1.59 lakh crore in Feb 2011 from Rs. 1.65 lakh crore in Jan 2011.

Total AUM also upped

The total industry AUM also rose to Rs. 7,07,412 crore in Feb 2011 from Rs. 6,91,080 crore in Jan 2011, a gain of 2.36 per cent. Also the total inflows were Rs. 25,757 crore in Feb 2011. The industry witnessed a strong inflow in Income Funds specially closed ended FMPs which saw 65 NFOs collecting a total sum of Rs. 17,232 crore in Feb 2011. The banks also upped its investment in Mutual Fund instruments predominantly in Income Funds and Liquid/Money Market Funds which saw inflows of Rs. 13,708 crore and Rs. 8,770 crore during the month. As on Feb 11, 2011, the banks’ combined investment reached to Rs. 95,018 crore compared to Rs. 13,483 crore in Dec 31, 2010.

New FMPs continued pouring in

The high interest rate scenario and tight liquidity in the financial system prompted Mutual Fund houses to launch FMPs which have become investors’ favorites. The tight liquidity has sent the CD/CP rates haywire crossing 10 per cent. Moreover, banks have also been building its balance sheets through subscription in Certificate of Deposits (CDs) as the financial year closes in. During the month, a total of 65 FMPs and Hybrids Funds were launched.

Other categories too saw inflows

The other equity categories such as ELSS, Balanced Funds and Other ETFs saw inflows to the tune of Rs. Rs. 348 crore, Rs. 216 crore and Rs. 480 crore respectively. The Gold ETF category also witnessed its successive positive inflows to the tune of Rs. 25 crore; lower than the last month figure of Rs. 125 crore. However, the gilt fund category and FOF investing overseas saw outflows to the tune of Rs. 271 crore and Rs. 14 crore respectively.

New Funds enter into industry

A total of 5 funds came into existence in open end category with 3 funds in Income category and 2 funds in Equity category. In close-ended category, 65 funds were launched in Feb 2011 which mostly consisted of FMPs and Hybrid Funds.

- Happy Investing!

Open letter to Shri O P Bhatt, Chairman, State Bank of India

Dear Mr. O P Bhatt, Chairman, SBI

I admire you as the great democratic runner of India’s oldest banking group, the State Bank of India which takes pride in serving its citizens during many disasters, wars and good times too for long 200 years. The bank has positioned itself as the real bank of India reaching to every nook and corner of India, shown by its massive network of more than 14,000 branches.

Your bank always have the first mover advantage and it also takes pride in being adjudged largest/biggest/longest/worthiest for common people like us. Even today, the common people reliability lies on you and your services which benefit us in building assets including easing our lives in financial complications.

But my thinking stops at one point and forces me to think whether your bank is really interested in helping common man, especially living in rural areas and want to build financial assets. You have come up with a public issue of Lower Tier II Bonds to garner Rs. 1,000 crore along with a green-shoe option of Rs. 1,000 crore, totaling Rs. 2,000 crore which you intend to deploy the issue proceeds to augment your capital base in line with your future growth story. The returns offered are good, in fact so good that it may provide trading opportunities on listing. The reservation for retail applicants is no doubt very good i.e. 50% of total issue. Bravo!

However, I fail to understand why you have limited the number of application collection branches to meager 126 out of 14,000 SBI branches. Very judiciously, you have covered 24 states and 80 cities and you have also given greater jurisdiction in major commercial centers. Just to add, you have given One branch each in Patna and Guwahati to cover the population of 8.3 crore and 4.8 crore respectively (as per Census 2001, India) covering 8 states. Even in Siliguri allocated branch, there have been incidences of not accepting the forms without their home branch cheque. It is very heartening to know that Indian banks have become so proficient that 2 branches can handle 13.1 crore residents as per your predictions. But did you figure out what the common people lost out of it?

By doing this, you have thwarted the majority class of retail investors who wanted to invest in these bonds. They are the genuine investors who wanted to take a pie of the high interest rates offered (still they don’t understand how to link it with the current macroeconomic scenario in the country). Thanks to your “First Come, First Serve” policy, the responses have been substantial. However, the bond issue has given trading opportunities which have increased the grey market actions. Brokers have been dolling out as high as Rs. 15,000 on each retail application. My grandfather including all senior citizens is also not happy with you as they could not avail the issue because of non-availability of collection centres in their cities. Also they won’t get these rates on other investment products for 10-15 years. I don’t know whether we should rejoice or groan over your step behavior towards India’s common residents. I believe the bank has forgotten its tag of “The Banker to Every Indian”.

Sincerely Yours,

An unbanked Proud Indian

From financial crisis to financial reforms? Implementation of the Dodd-Frank Act

From financial crisis to financial reforms? Perhaps the Federal Reserve of United States completed its cycle with the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act).

Chairman Ben S. Bernanke released its testimony on the Implementation of the Dodd-Frank Act.

The Bernank’s testimony says that

One of the Federal Reserve's most important Dodd-Frank implementation projects is to develop more-stringent prudential standards for all large banking organizations and nonbank firms designated by the council. Besides capital, liquidity, and resolution plans, these standards will include Federal Reserve- and firm-conducted stress tests, new counterparty credit limits, and risk-management requirements. We are working to produce a well-integrated set of rules that will significantly strengthen the prudential framework for large, complex financial firms and the financial system.

Good! This will put checks on their market participants’ risk taking measures and lending practices.

The testimony also says that

Complementing these efforts under Dodd-Frank, the Federal Reserve has been working for some time with other regulatory agencies and central banks around the world to design and implement a stronger set of prudential requirements for internationally active banking firms. These efforts resulted in the adoption in the summer of 2009 of more-stringent regulatory capital standards for trading activities and securitization exposures. And, of course, it also includes the agreements reached in the past couple of months on the major elements of the new Basel III prudential framework for globally active banks. Basel III should make the financial system more stable and reduce the likelihood of future financial crises by requiring these banks to hold more and better-quality capital and more-robust liquidity buffers. We are committed to adopting the Basel III framework in a timely manner.

It is good to know that the Federal Reserve has been serious in implementing Basel III framework for their banks. The good quality assets and high liquidity buffers by these banks will help in preventing the financial crisis further.

What the act says?

The nice brief summary of the Dodd-Frank Act compiled by United States Senate Committee on Banking, Housing and Urban Affairs is mentioned here. It aims to create a sound economic foundation to grow jobs, protect consumers, rein in wall street and big bonuses, end bailouts and too big to fail and most important, prevent another Financial Crisis.

In testimony words,

The act also requires supervisors to take a macro-prudential approach; that is, the Federal Reserve and other financial regulatory agencies are expected to supervise financial institutions and critical infrastructures with an eye toward not only the safety and soundness of each individual firm, but also taking into account risks to overall financial stability.

To conclude, the Dodd-Frank Act is a major step forward for financial regulation in the United States which may provide a starting step for others to follow.

Happy Reading!

-       Amar Ranu

Has Interest Rate peaked out?

We are in a very peculiar situation; equity market is down but gold prices are picking up. Inflation has not been budging down; the liquidity deficit along with the RBI’s ‘calibrated’ turned ‘aggressive’ monetary policies has been driving short term rates. While the Industrial production as measured by IIP nosedived drastically to 1.6 per cent for Dec 2010 from 18 per cent in Dec 2009 mainly due of high base effect and slowdown in industrial activity, the headline inflation cooled marginally to 8.23 per cent, higher than the street expectation of 8.1 per cent. This extreme slowdown in industrial growth may not prevent the central bank RBI to hike the policy rates for another time as the inflation remains stubbornly high.

What other indicators say?

·         10-year G-Sec Bond movement

The G-Sec 10-year yield, an indicator of long-term interest rate scenario in India has been trading below its July 2008 peak when the world markets had been reeling under the immense economic upheavals.  In July 2008, the yield on 10-year note went as high as 9.4 per cent. Due to various accommodative measures announced by RBI, the 10-year note touched to its low of 5.2-5.3 per cent. However, with improved market scenario and increased government borrowing which led to wide gap in fiscal deficit, the bond yield inched upwards to the level 8.23 per cent, but still below the July 2008 level.

·         Short Term rates at its 26-month peak

The interest rates on 3 Months and 12 Months Certificate of Deposits (CDs) – these are short term deposits raised by banks from fellow participants; unlike normal term deposits, these are traded in secondary market – have reached to its 26-month peak on tight liquidity in the system. The liquidity deficit since 3G and WIMAX auctions which led to outflows of over Rs. 1 lakh crore coupled with the government’s high cash balances with RBI and sluggish deposit-credit ratio have led banks tap this market. Short-term rates have continued their upward movement after the RBI started hiking policy rates. The 3M and 12M CD rates have crossed 10 per cent albeit below the level of 2008 economic crisis as given in the graph.

Which is bigger risk for India – Interest rate or inflation?

Many think-tanks say that inflation is a bigger risk in India because the economy becomes haywire because of it. However, this can be dealt with tighter monetary policies albeit in India, the structural and frictional issues are dominant factors in building up the inflation. To a large extent, the RBI has taken protective measures but few more hikes are imminent. The global commodity prices have also been roaring for which the US’s QE II should be blamed. This has affected the local domestic prices too to a large extent.

Moreover, the high fiscal deficit has been worsening. Though in the current financial year, the government has been successful in narrowing down the deficit, thanks to one-time big inflows from spectrum auctions. They might not be successful in future too.

What is expected in future?

The market participants expect massive government borrowing in the next fiscal year to be announced in the upcoming budget in last Feb to meet the increased expenditures which will lead to more bond supply. This will put upward pressure on yields. Also the liquidity deficit which will worsen further on account of advance tax outflows in the current quarter will take the short term rates high further. Moreover, banks have been issuing CDs aggressively to build their large balance sheet size, another reason to boost up the interest rates. Hence, an expected gradual rise in interest rates, given sticky inflation would add to hardening of bond yields.

- Happy Investing!

- Amar Ranu