Ranking the PMs/Presidents on the basis of GDP

Floyd Norris, the Chief Financial Correspondent and a blogger on The New York Times has a very interesting analysis on G.D.P numbers in the United States (US). He states that the government has limited influence on the economy and the president can have limited influence on government policy.

He says that

Normal economic cycles mean that growth is likely to be less impressive for a president who enters office at the end of a boom, as George W. Bush did, and better for one who enters when growth is weak, as Bill Clinton and Ronald Reagan did. If normal cyclical factors return, and President Obama has a second term, his record should end up much better than it currently appears. If he loses, he could be like Gerald Ford, who also took office during a deep recession.

He also said that all the presidents except George W. Bush (Jr. Bush) and Barack Obama joining the office after World War II have done fairly well having a growth ranging from 2.2 per cent to 5.4 per cent. It is with George H. W. Bush (also called as Sr. Bush), the number started faltering. If Obama by any means gets nominated for a second term, the GDP growth may turn rosy and better than it currently appears as said by the theory of normal economic cycles. The table given below also reflects that Democratic Presidents performed better than Republican except under Reagan.

What does India’s GDP say under different Prime Ministers?

The table 2 depicts the picture which is entirely different. India boasts of multi-party system unlike in US where they are two major parties.  Post independence era, India was ruled mostly by Congress before given a break in 1977 to Janata Party, a party coming into existence after the famous Jay Prakash Aandolan. Immediately after independence under Pandit Nehru regime, the GDP grew at an average rate of 3.8 per cent which decreased marginally to 3.6 per cent under Mrs. Gandhi’s regime. Janata Party, a non-congress government came into ruling under Morarji Desai and didn’t disappoint the country. They delivered 6.5 per cent on an average before faltering to -5.2 per cent under Charan Singh regime. This is the first and only PM’s tenure in which India showed a negative GDP growth. Congress and Janata Dal swiftly changed powers and scored an average GDP score ranging from a low of 5.2 per cent to a high of 6.1 per cent.



Narasimha Rao government could not get much benefit after opening of Indian economy and could not score well in terms of numbers. The number nosedived further to 5.2 per cent. Janata Dal came to power for a short tenure and gave a comfortable growth of 8 per cent but faltered again to 4.3 per cent under H D Deve Gowda. Bhartiya Janta Party, a reformed version of Janata Party delivered an average GDP figure of 5.9 per cent. At the end of his tenure, the country GDP went as high as 10 per cent as he rationalized many reforms in the country. Dr. Manmohan Singh, the current Prime Minister and the then Finance Minister when India opened its economy scored an impressive figure of 8.6 per cent. However, India also witnessed many scandals and high level corruptions under his tenure, causing the country’s exchequer a loss of billions of dollars.

Overall, on an average, Congress gave an average GDP figure of 4.91 per cent during their tenures while non-Congress governments gave an average GDP figure of 4.42 per cent.

In India, the strong consumption story and Next’s Trillion Dollar opportunity has worked really well in recent years which helped Congress a lot. However, the figures also worsened in terms of increased deficits and borrowings as the government went for high spending on social measures schemes. Though interest rates are less now in comparison to 90s, the high interest rates (real  saving interest rate) are decelerating the growth and affecting the overall buildup of India a lot.

Hope we will get the best out of it and India will bounce back!

Happy Investing!

-          Amar Ranu



First Quarter Review of Monetary Policy 2011-12 - RBI stumps with 50-bps hike; Inflation target hiked to 7%

The RBI revealed its super hawkish monetary policy for the first quarter 2011-12 by raising the policy repo rate under the liquidity adjustment facility (LAF) by 50 bps.  The repo rate will now move to 8 per cent. This is 11^th successive hike since Mar 2010 and the fastest monetary accommodative uncovering in the world. Consequently, the reverse repo rate under the LAF, at a spread of repo rate minus 100 bps gets adjusted to 7 per cent. Similarly, the Marginal Standing Facility (MSF), determined at a spread of 100 bps above the repo rate will move up to 9 per cent.

Repo rate is the rate at which RBI lends to banks and Reverse repo rate is the rate at which RBI borrows from banks. The new term Marginal Standing Facility (MSF) is the additional borrowing window for banks set up at 100 bps above repo rate and they can borrow overnight up to one per cent of their respective Net Demand and Time Liabilities (NDTL).

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SEBI Regulations - A cup of half-emply, half-filled

The SEBI board in its today meeting announced major decisions which are as mentioned below:

a)      Fees on Mutual Fund transactions: Healing the wounds of Mutual Fund Industry which had been almost killed since the ban of entry load in Aug 2009, SEBI imposed a fee of Rs. 100 per transaction on Mutual Fund investments for existing investors while new investors would have to cough up Rs. 150 on investment above Rs. 10,000. This is a break through decision for bleeding distributors’ community to compensate them to penetrate into retail segment.

The per transaction fee would be Rs. 100 for investments above Rs. 10,000 including Rs. 50 per new folio creation i.e. first time Mutual Fund investor. This may be deterrent to investors as distributors may promote new folio each time investors put money into Mutual Funds. For SIPs, the transaction charges can be recovered in 3 or 4 months. However, it is still not clear whether the new SIP transactions of less than Rs. 10,000 would have one-time fee of Rs. 150 only recoverable on 3 or 4 months. Investors investing directly through AMCs shall not require paying any transaction fee or folio creation fee.

This move is seen as back door imposition of entry load in Mutual Fund which has been banned in Aug 2009. The ruling had hit Mutual Fund inflows severely and had de-incentivized IFAs and distributors to promote Mutual Funds.  

The regulator also put onus on AMCs to do due diligence and regulate distributors alternatively. The diligence process would be applicable for those distributors satisfying one or more of the following criteria:

1)      Multiple point presence in more than 20 locations

2)      AUM raised over Rs. 100  crore across industry in the non-institutional category but high networth individuals (HNIs)

3)      Commission received of over Rs. 1 crore p.a. across industry

4)      Commission received of over Rs. 50 lakh from a single mutual fund

b)      New Takeover regulation: The regulator raised the initial trigger threshold to 25 per cent from the existing 15 per cent and also abolished the non-compete fees. All shareholders would be given exit at the same price. It also increased the minimum offer size from the existing 20 per cent of the total issued capital to 26 per cent of the total issued capital. This is a welcome move for institutional investors who were not able to put money in listed companies for more than 15 per cent of their issued capital in fear of mandatory requirement of additional 20 per cent open offer. Now, investors can buy up to 25 per cent stake without making an open offer.

c)       Guidelines for Infrastructure Debt Funds (IDF): The SEBI also allowed existing Mutual Funds to set up IDF. Existing companies in infrastructure financing for a period not less than five years can also set up Mutual Funds exclusively for the purpose of launching IDF scheme. As said in earlier document by the Finance Ministry, it would invest 90 per cent of its assets in the debt securities of infrastructure companies or SPVs across all infrastructure sectors. This new proposal may open a new financing window for the government who has been looking for a fund equivalent to $ 1 trillion to build the infrastructure in India.

d)      Reduction in no. of pages of IPO form: The SEBI allowed an approximate 50 per cent reduction in number of pages and asked for standardization of form and a single form for ASBA/Non-ASBA. It has also asked to put track record of lead managers in Bid-cum-Application Form and Abridged Prospectus. This would a boon for all investors who have to go through the pain of filling so many information in a larger sized form. 

The SEBI also announced various other regulations and guidelines related to simplifying and rationalizing trading account opening process and also harmonized the new KYC applicable for all transactions. The guidelines have been framed keeping the investors at benefit. Under former SEBI C B Bhave’s chairmanship, there had been a number of investors’ friendly steps but too many guidelines had been killing the industry especially Mutual Fund industry. The new chairman U K Sinha, an IAS veteran and the former Chairman of UTI Mutual Fund had promised some incentives to distributors/IFAs to sell Mutual Funds which to a large extent seemed justified in today guidelines. However, at the end, investors would be paying some additional charges on their Mutual Fund investments.

Happy Investing!

-         Amar Ranu

Mutual Funds’ Net Assets dwindled in June; Equity saw a marginal inflow

After seeing few positives in recent months, Equity saw a good dip in net inflow in the month of June. The net inflows in Equity Mutual Funds dwindled to Rs. 20 crore in June 2011 from Rs. 1,546 crore in May 2011. This is the massive fall in inflows in Equity in recent months.

The uncertain domestic equity market coupled with the bleak global factors predominantly emanating from Euro region also caused Indian investors to redeem their investments out of Equity Mutual Funds and allocate to fixed income products. The domestic equity market remained in bear mood in most of trading days in June before given a boost by FIIs in the last week; thus, letting the broader indices Sensex and Nifty 50 to end in positive.

In addition, the overall Mutual Fund assets fell to Rs. 673,176 crore in June 2011 from Rs. 731,448 crore in May 2011, a fall of Rs. 58,272 crore or 7.97 per cent. Also, the industry saw a total outflow of Rs. 62,442 crore which was mainly caused by outflows in short term debt category – Liquid Funds and Ultra Short Term Funds. In total, these two categories had an outflow of Rs. 62,378 crore. Other categories which saw a net outflow are Gilt (Rs. 88 crore), ELSS (Rs. 80 crore), FOF Investing Overseas (Rs. 42 crore) and Other ETFs (Rs. 210 Crore). Only Balanced Fund, Equity Fund and Gold ETF categories saw a net inflow of Rs. 84 crore, Rs. 20 crore and Rs. 252 crore respectively.

Banks continue to reduce their investments in Mutual Funds; as on June 17, 2011, the net investments stand at Rs. 84,034 crore from over Rs. 1 lakh crore on May 20, 2011. Recently, the RBI has instructed all banks to cap their investments in Mutual Funds up to 10 per cent of their net worth as on Mar 31, 2011. Earlier, the deadline had been as on Oct 2011 which has been extended by another six months. It is being expected that investments worth Rs. 50,000-55,000 crore would flow out of the system in next six months.

Net Outflows in June 2011

The outflows continued in June 2011; barring categories like Equity, Balanced and Gold ETFs, all other categories saw a net outflow. The equity category saw a net inflow of Rs. 20 crore on standalone basis; however, if we consolidate Equity with Balances and ELSS, there has been a net outflow in totality.

On net asset basis, the MF industry AUM also came down to Rs. 673,176 crore, a fall of 7.97 per cent. The other categories which saw a major fall in assets are Liquid/Money Market (-22.36 per cent), Other ETFs (-8.25 per cent), FOF Investing Overseas (-6.2 per cent), Income (-5.49 per cent), Balanced (-4.45 per cent) and others.

Gold ETF continues to see inflow and increase in AUM too. In last 26 months, it did not see any outflow except at one occasion when it saw a marginal outflow of Rs. 6 crore. In totality, it saw a total inflow of Rs. 4,000 crore in last 26 months. In June 2011, it saw a total inflow of Rs. 252 crore; also its net assets increased to Rs. 5,568 crore in June 2011 from Rs. 5,463 crore in May 2011. 

FMPs still rule the inflows

We continue seeing new FMPs in the street. A total of 74 FMPs has been launched collecting a total AUM of Rs. 7,747 crore. The new fund house Union KBC Mutual Fund launched its maiden Equity Fund, Union KBC Equity Fund which collected a total AUM of Rs. 167 crore. It also launched a liquid fund, Union KBC Liquid Fund.

Happy Reading!

- Amar Ranu

RBI’s Policymaking – Is the transmission happening?

Post Lehman Crisis, the world scenario changed drastically forcing many nations to follow the accommodative measures so as to ease the liquidity deficit in the financial system. India, too, remained coupled to global events and remained unscathed from a global slowdown because of its increased integration with the global economy.

In India, the Central Bank, Reserve Bank of India took a series of accommodative measures to support the economy. Soon, the world scenario changed with confidence winning and improved numbers. However, the ease of liquidity put pressure on pricing which led to burgeoning of inflation. In real practice, India’s economy gets driven by two factors – first, domestic consumption story which, in recent years, improved on account of increased purchasing power due to various government sponsored initiatives and other factors and second, direct government aids to different sectors/industries in the form of duty cuts or other aids. The multiple factors also put pressure on inflation which also got imported, thanks to high commodity prices including crude oil, to a certain extent due to our large dependency on them.

Also, read – FIIs’ rave party in India; Economic indicators are at loggerheads

In series of steps, the RBI hiked policy rates ten times successively, effectively by a total of 425 points since Mar 2010 in order to tame inflation which had been due to structural reasons too. Every time, RBI raises policy rates, it remains firm in taming the inflation which has become a toy of political storm too.

To support the fast transmission of policymaking, the central bank also made some changes in policy decisions – (1) introduction of base rate (2) the new Marginal Standing Facility (MSF) to support additional lending (3) restrictions on cross-lending between banks and mutual funds which have been rampant till some time ago. However, the RBI expressed its annoyance over the quality of data on which they have been operating the monetary policy. No doubt, the transmission of monetary policy has improved and to a large extent, the hiking of rates have slowed down the demand and also affected the economy growth, thanks to increased interest rates which have raised the average cost of capital. It has affected the capex investment too. In recent times, the RBI questioned the quality of data on Index of Industrial Production (IIP) which measures the industrial growth and Wholesale Price Index (WPI) which is also called as Headline Inflation; these data do not reflect the real economic activity. Volatility still persists in IIP and WPI. Even the recent improvements in IIP and WPI as per 2004-05 series have not helped the central bank; the data get revised by a wider spread on subsequent months. As evident, even the 10 rate hikes, one after another in the past 15 months have not dampened the demand effectively. In the last 2 years, economic forecasts from all government institutions, from Central Statistical Organisation (CSO) to RBI to Planning Commission have been questioned as they turned inaccurate. The high fiscal deficit and continuous gilt supply also kept RBI at bay in effective transmission of monetary policy.

Also, read – Price Hikes – Are we really ready?

Does it say RBI has failed?

Not really! In the past, RBI had been instrumental in taking the country out of the century worst financial crisis; so, it won’t be good to comment on their effectiveness. Their hands are also tied in terms of data availability, political interference (though it is said that RBI is not under the government interference but not in real sense) and dynamic nature of the situation. The various structural issues including supply-related factors also waned the effectiveness of policy transmission. The persistently high food inflation in the last two years has migrated to manufacturing inflation too.

The RBI says that they are handicapped by the reliability of some of the basic data that they need to use in policy calculations which remains true to a large extent. In a nut-shell, India’s inflation must drop before it eats the economy; hope the government must be listening to improve the effectiveness of policy making which are indirectly linked to them.

Happy Reading!

-          Amar Ranu

FIIs’ rave party in India; Economic indicators are at loggerheads

From bleak to bright – the markets suddenly turned positive ending its successive falls, thanks to strong FIIs inflows and short covering. In a swift movement, the bellwether Sensex added over 1300 points in a span of nine working days ending all the bearish sentiments which had been prevalent across the punters. The favorable factors emanating were from Greece whose parliament approved stark austerity measures; thus, paved the way for international financial aid and it would bail out the country. In India, FIIs joined in the rave party after a brief lull with a total inflow of Rs. 5,084 crore in the last week of June. Markets across the world moved up.

What the other indicators say?

While the equity moved up on favorable news emanating from European sub-region, the manufacturing has slackened across the world. In the latest Purchasing Managers’ Index (PMI) by HSBC and Markit Economics, the figures dropped across the countries. As per the latest figures, the manufacturing growth is slowing from China to Europe, thus, sending the dilemma to all central bankers whether to increase the interest rates to combat inflation despite high prices. While China’s factory index fell to its lowest level since Feb 2009, Europe’s index dropped to 18-month low. Across Europe i.e. Italy, Ireland, Spain, Greece, Germany and others reported contraction. The UK also reported a fall in PMI in June. In India too, manufacturing growth loses steam in June 2011. The PMI drops two per cent to 55.3 per cent in June, its lowest level since Sept 2010. The PMI is considered a good indicator of manufacturing activity across the world, but in India, the large contribution from the unorganized sector yields a low correlation with industrial growth.

Why PMIs are falling?

In the state of higher interest rates, central banks are tightening the interest rates, thus, hurting the economic growth. The average cost of borrowing has increased which are hurting the investment. In India, the investment growth in the latest GDP growth has grown flat. Gross fixed capital formation for Q4FY11 stood at 0.4 per cent compared to 7.8 per cent and 8.6 per cent in Q3FY11 and FY 2011 respectively.

Market punters are blaming the global economic scenario for the current headwinds. But the tailwinds still exist. We expect that the domestic companies’ performances in the first quarter of FY 12 would also decide the movement of markets as the internal consumption growth story remains intact. The natural historical corrections are also certain and the future looks promising. So, let us be hopeful.

Happy Investing!

-          Amar Ranu

Price Hikes - Are we really ready?

The shock and anger ran through the nerves of billions of Indians when Indian government hiked the diesel prices, kerosene and LPG by Rs. 3, Rs. 2 and Rs. 50 respectively. With these rate hikes, the government targeted all sections of the economy – poor people would have to bear the kerosene prices’ hike, middle men would be poorer Rs. 50 every time they buy a cylinder of Liquified Petroleum Gas (LPG) and transporters would have to shell out more for filling their oil tanks. Most likely, they would pass the buck to end consumers; thus, biting them even harder. And, affluent riders especially of Sports Utility Vehicles (SUVs) would also face the wrath; but this would hardly be any game changer for them.

We call it as a life cycle – Consumer to Consumer riding across the circle of life and reaching the same destination.

Is the price hike justified?

No doubt the international crude oil prices have gone off the roofs, thanks to unrest in MENA regions and growing demands across the world. In India, the oil prices are administered and decided by the government. The freeing of Petrol prices has already sent the petrol price beyond the affordability. The hike of other dependent fuels was long awaited and now it is being passed.

In a situation where the country has been going through various governance issues including series of scandals which have hurt India’s image internationally, the recent price hike would hurt the domestic consumers. The ‘aam aadmi’ is being targeted. While the various social security programmes have increased the purchasing power of end users, the recent hikes would empty their pockets. So, the question arises – is it justified for the Government of India to dole out various employment related sops during various elections’ times and increasing the price of basic needs of Indians. The government must answer – why the policy is towards benefitting private companies? Are we moving towards a capitalist economy? We have already killed the maharajas of India – Air India by doling out the lucrative destinations to private airlines and ditto with oil companies where lot many sops have been provided.

Cost-benefit analysis

It is estimated that roughly Rs. 21,000 crore would be added to state coffers in one swift. Most likely, the public transport, truckers, retail manufacturers using road transport in a large, railways et al would pass the buck to retail consumers, thus, bending the consumers’ backbone further.

We are going through a very rough phase of our life – a series of scandals have already dented India’s image plus common persons are already overburdened with the wrath of various government policies which have benefitted more to private capitalists instead of social consumers. Hope India would rise! We would eagerly wait for the FTD (Fast till Death) on Aug 16; no need to mention why this date is very important to all Indians!

Good Luck Indians!

Happy Reading!

End of an era – 25 paisa or 4-Anna or Chawanni

All the living/non-living things have got a life cycle; some has longer survival period and some has shorter existence. Imagine the time when we were bound by “Barter System”. People used to exchange their belongings to get things of their choice – so some of the transactions used to be rice-animal, vegetables-wheat and many more. Then came the era of coin system which streamlined the trading activity and people understood the power of money circulation. The initial coins in India used to be 1-paisa, 1-anna, 2-anna, 4-anna, 8-anna and many other denominations. While 1-anna and 2-anna became inexistent with the passage of time, 4-anna is still in circulation.

Now go back to your early school life or ask your grandparents how important coins used to be in our life; the kind of achievement, fulfillment and purpose it used to serve. In fact it evoked nostalgia among old timers. The power of 4-anna – hire a bicycle for an hour, a breakfast of idlis, postal envelopes, postcards, stamps and many more for not much old timers; however, ask an old timer in late 60s or early 70s who will tell how a 4-anna coin used to bring a long day planning with their friends – watching movie in nearby theatre in the front rows and making delightful comments in the theatre, a full party with delicious meals and many more.

But this 4-anna is going to be a history; may be it would find place among hobbyists. From June 30 onwards, the RBI has banned the circulation of 4-anna and it would no longer be legal tender. It is being phased out as it is unviable to produce coin because of rising metal costs. The metal scrapper nerds had been hoarding the coins to melt and sell it in scrap to earn arbitrage on the metals used in coins.

The era has come to an end; the chavanni era which many must have cherished would find solace in collectors’ item. All thanks to rising metal costs, global inflation and big demand out of industrialization which increased the demand for metals making them unviable for making small denomination coins.

Miss you naal-anna!

Net inflows dwindled by Rs. 48,850 Cr in May 11; Equity shows a net inflow after a lull

The lull in Equity in the month of May 11 didn’t deter Mutual Fund investors from investing in Equity Mutual Funds which showed an inflow after a brief lull. The broader indices Sensex and Nifty 50 which nosedived by 3.30 per cent approximately affected the diversified Equity AUM too which lost 1.72 per cent to Rs. 1,67,470 crore in May 2011 vis-à-vis Rs. 1,70,406 crore in April 2011. However, there has been a net inflow of Rs. 1,546 crore in Equity category in May 2011, much to the reprieve of Mutual Fund Industry which has been witnessing outflows continuously except for few occasions since the ban of entry loads in Aug 2009. In debt and other categories, net outflows were reported. The recent regulation of RBI to cap the banks’ investment in Mutual Fund up to 10 per cent of total banks’ net worth as on Mar 31 has started affecting the Liquid/Money Market category which saw an outflow of Rs. 39,603 crore in May 2011. Moreover, the Income category also reported an outflow of Rs. 11,141 crore. As on May 20, 2011, the banks’ net investment in Mutual Funds stood at Rs. 106,233 crore. It is estimated that the total net worth of the banking system stands at Rs. 3.13 which essentially means that the current investment of Rs. 1.06 lakh crore will drop to Rs. 30,000 – 35,000 crore in next six months which may impact the net flows in Income/Liquid categories.

Net Outflows in May 2011

In totality, the MF Industry AUM dropped by Rs. 53,926 crore or 6.87 per cent to Rs. 7.31 lakh crore in May 2011 from Rs. 7.85 lakh crore in Apr 2011. The categories which saw major fall are Other ETFs (-25.09 per cent), Liquid/Money Market Instruments (-17.43 per cent), Income Funds (-3.39 per cent), ELSS (-2.86 per cent), Gilt (-2.37 per cent) and Equity (-1.72 per cent). However, Gold ETF and FOF Investing Overseas lapped the AUM with a gain of 13.81 per cent and 10.83 per cent respectively. The trends of gold price continue to head for a bull run which prompts investors to invest in Gold ETFs. The table below shows the comparative flows and AUM of all major categories of Mutual Fund industry.

FMPs still rule the inflows

Perhaps FMP (Close ended Income Fund) is the only category which has been showing continuous inflows. In May 2011, there were 37 NFOs which collected a total of Rs. 7,416 crore. The burgeoning interest rates and tight liquidity in the financial system seem to remain in place; moreover, it is more likely that RBI may go for additional policy rate hike in upcoming mid-quarter review as on June 16, 2011.

New Funds enter into industry

Apart from FMPs, there were four open ended Funds in Income, Equity and Gold ETF category. While ICICI Prudential MIP 5 collected a total AUM of Rs. 27 crore, Sundaram Equity Plus garnered Rs. 134 crore in their NFOs. First of its kind, HSBC Brazil Fund collected a total amount of Rs. 313 crore in May 2011.

Unique Investors

For the first time, AMFI declared the unique investors data which clearly shows that Equity investors rule the industry. There are a total of 3.77 crore unique investors out of which 2.43 crore (65 per cent) investors belong to Equity, 72.65 lakh (19 per cent) to ELSS, 30 lakh (8 per cent) to Income, 22.29 lakh (6 per cent) to Balanced and remaining to other categories. In Gold ETFs, there are 3.87 lakh unique investors.

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.