In its bid to give boost to the mutual fund houses, the industry body – Association of Mutual Funds in India (AMFI) is lobbying with the capital market regulator – Securities & Exchange Board of India (SEBI) to weed service tax out of the expense ratio - the total annual fee that asset management companies (AMCs) charges its unit-holders.
The AMFI is pushing for SEBI's permission to charge the 10.03% service tax in addition to the 2.5% expense ratio. This move will increase the overall charges borne by unit-holders to 2.65%-2.70%.
It is noteworthy that, at present AMCs pay service tax from the 2.25% expense ratio they receive from unit-holders. In a presentation made to the capital market regulator, AMFI suggested increasing the expense ratio to 2.5% from 2.25%. The expense ratio includes management fees, administrative fees and other operating costs. The AMFI board has also asked SEBI to get rid of the slab system for calculating expense ratio. At present, expense ratio varies from one fund house to the other. Mutual funds with a lower asset base (assets under management) are allowed to charge a higher slab-rate while funds with a higher base are mandated to charge a lower expense ratio. The AMFI board has now asked the regulator to set a single expense ratio at 2.50% regardless of the size of AUM. AMFI has also asked the regulator to dissolve the 'usage bracket' within the expense ratio. Flexibility in use of the expenses will help asset managers to allocate costs better.
We believe that though AMFI is the industry body of mutual funds, it should not propose changes which are only industry centric and do not safeguard the interests’ of the investors. Increasing the expense ratio will further eat into the returns of the investors’ on their respective mutual fund scheme. This will not only result in redemption requests by the investors but will also dampen the mood for further investment in mutual funds.
AMFI should recognise that the survival of the mutual fund industry depends more on the investors and should undertake steps to empower the novice investors through education rather than increasing the cost for them and at the same time reducing them for the AMCs.
This Week's Poll !!!
Where are you investing in the present markets?
The Gross Domestic Product (GDP) growth of the Indian economy for the fourth quarter came in at 5.3% as against 6.1% in the previous quarter. Earlier even the IIP growth of -3.5% for the month of March 2012 and WPI inflation of 7.23% for the month of April 2012 displayed worrisome signs for the economy Indian economy. To add to the woes even the global economy has been reeling under overcast of debt-overhang situation – especially the Euro zone.
FIIs participation in the Indian Equity Markets
(Source: ACE MF, PersonalFN Research)
But interestingly, although the global economic outlook has been gloomy, FIIs seem to be exuding confidence towards India as an investment destination given still a better economic growth as compared to the developed economies. In the current, on a year-to-date basis (as on May 2012), FII flows have been Rs 42,494.7 crore. Moreover, over the past 11 years, the average FII flows in the country has been around Rs 38,600 crore despite several newsflashes.
Hence, although the Indian economy has seen negative ripples of the Euro zone crisis along with domestic concerns such as high fiscal deficit, high Current Account Deficit (CAD) and slumping economic growth; India has been on the radar of favourite investment destinations of FIIs. But going forward for the net FII inflow momentum to sustain, predictable stance on tax policies would be imperative, as that seems to be a concern to them.
In the world of financial exuberance, there are galore of investment avenues for you to select from. However, it is imperative that you exercise caution and act responsibly while selecting the right investment avenue for investing your hard earned money. But when these very options are made complicated or there exists lack of clarity as to how a particular investment avenue will function, the task of investing becomes a lot more difficult.
Similar is the case with the newly introduced (though not launched) Rajiv Gandhi Equity Savings Scheme (RGESS). With the Finance Ministry keeping mum on the functionality of the RGESS, there have been different options being spelt-out by different entity’s for the RGESS.
Let us see the options spelt-out by different entities through which the RGESS can be routed.
Please click here to read more.
Right from claim settlement to getting a cashless mediclaim, policyholders have to face a lot of problems in getting their dues under a health policy. Moreover, there are stringent deadlines to be met by the policyholders in filing their medical claims; which if they (insured) fail to meet, claims are declined by the insurers. Also, until now the insurers are not mandated to provide the reason for denial of claims to the insured.
Citing such problems faced by the insured or policyholders, the insurance regulator - Insurance Regulatory and Development Authority (IRDA) has laid out a slew of changes in the insurance industry under its draft guidelines.
Let us delve deeper into the sweeping changes brought about by the IRDA
Please click here to read more.
In an interview with the Financial Express, Mr Prashant Sharma, Chief Investment Offier of Max New York Life Insurance shared his views on the Indian equity markets.
Mr Sharma believes that the equity market rally in the early part of the year was due to the liquidity easing in the western world. He thinks that there was nothing that had significantly changed in the Indian equity markets to justify the rally. According to him, in the last few months, the market has corrected significantly and the valuations have become reasonable. “At this point, the market looks fairly priced because almost all the negatives have been factored in. So I don’t expect a significant downside for the market. The market will probably bottom out in the next three months. We could see a decent rally from those levels,” he added.
Explaining further on whether the bottom is imminent in the Indian equity markets, Mr Sharma is of the view that the Indian equity market has not given any returns in the last five years. “The market will form a bottom and start rallying much before the country’s economic environment actually starts improving. Markets typically price in an improvement six to nine months before the actual economic climate improves,” he added further.
As far as Euro zone crisis are concerned, Mr Sharma is confident that a crisis in the Euro zone will not derail the market totally. In his opinion, markets will correct if there is negative news flow, but the pain will mostly be short-lived as market participants have been expecting an escalation in crisis in the euro zone for some time now.
Pointing towards the positives for the Indian markets, Mr Sharma explicated that interest rates have peaked out, gold imports have reduced and global crude oil prices have corrected quite a bit. According to him, though the rupee has seen 20% erosion this year and is likely to slip no further than Rs 57 - Rs 58 levels, it will settle at the Rs 50 – Rs 52 levels in the next six to nine months, which will become the new normal for our currency. Furthermore, the way out for the Indian economy, according to Mr Sharma, is to see some action on the policy front and hopefully, the policy makers will get their act together in the next six months. “Even if no big bang reforms are executed, small remedial measures ought to get underway. Also, I expect the RBI to cut rates because growth has slowed down and global crude oil prices have corrected significantly. We expect another 50-100 bps rate cut over the next six-nine months,” he said.
We have parallel views as expressed by Mr Sharma and believe as far as policy measures are concerned, and think that that only prudent policy measures followed by implementation in a time bound manner will place our country once again on the high growth trajectory. Myopic opposition as seen in the past would simply derail the reform process and do no good the economy.
At present although the street does expect reduction in policy rates from the RBI, in our view we think that RBI may take a mere muted stance as the Indian rupee continues to confront weakness and inflation has inched up a tad a above the comfort range (6.0% to 7.0%) of RBI. Monsoons are progressing in a very sluggish manner, and with scientist and Indian Meteorological Department expecting “El Nino” phenomenon developing in August 2012 along with weak anti-cyclonic upper circulation, it could suppress rainfall. Farmers are already anxious, because pre-monsoon showers have been inadequate which is resulting in unusually parched fields, which thus can have an adverse effect on food inflation and can build inflationary pressures. Hence, although RBI may be induced to reduce rates to revive economic growth, in veracity it may not help much. Thus although Brent crude oil prices have cooled down near $100 per barrel and gold imports have lowered, it is not going to make it very comfortable for the RBI to cut rates aggressively.
As far as the Indian equity markets are concerned, if Euro zone crisis escalates we do not expect decoupling to occur for India, and thus we too could correct 5% - 10% from the current levels, although the Government is prepared with a contingency plan.
- After four months of drought the Indian Mutual Fund industry received positive inflows in the month of May 2012, as retail investors pumped Rs 506 crore in fresh investments in equity categories.
- Inputs from the Qualified Depository Participants (QDPs) , through which Qualified Foreign Investors (QFIs) would be allowed to invest suggest that the Indian capital markets could witness $20-$25 billion inflows on the pessimistic side and $80-$90 billion on the optimistic side in the next two years, from the newly announced category of QFIs route. QFIs include foreign individuals, groups and associations.
However, the sum on the optimistic side is much higher than recent inflows from Foreign Institutional Investors (FIIs) into the Indian equity markets. Till June 7, 2012 FIIs have net invested $12.30 billion in the capital markets. They had invested a net of $8.29 billion in 2011, $39.47 billion in 2010 and $8.65 billion in 2009.
- Morgan Stanley, the global investment bank has slashed India’s growth forecast for FY 13 to 5.8%, the lowest estimate so far. Moreover, it has blamed a misguided policy approach, focused on consumption for the steep fall in the growth momentum. Explaining the 'bad growth mix', bank's chief economist for Asia Pacific Chetan Ahya said the much-talked about consumption story is being supported by a high fiscal deficit, while elevated rates have resulted in a decline in private investments, which is not sustainable.
Mr Ahya also argued that the high growth phase between 2003 and 2007, which saw the economy growing at over 9% annually, was made possible only because it was private investment-led, unlike the consumption-led growth which the country is relying on right now.
- Aviva Life Insurance launched an online health plan, Aviva Health Secure, which provides the policyholder with a lumpsum amount on diagnosis of any of the 12 critical illness covered by the policy. The minimum sum assured is Rs 5 lakh, and extends to a maximum of up to Rs 50 lakh. The age limit ranges from 18-55 years for a minimum policy term of 10 years and a maximum of 30 years.
- The HSBC India Services PMI rose to 54.7 in May 2012 from 52.8 in the previous month. As a result, India’s services sector grew at its fastest pace in three months during May 2012, with strong expansion in new business improving expectations for the next one year, according to a private sector survey of purchasing managers.
- Direct tax collections net of refunds rose to 87% to Rs 20,511 crore in May 2012 compared with Rs 10,964 crore in the corresponding period of the previous year. Total net direct collections for the April-May 2012 period rose 172% to Rs 35,323 crore, compared with Rs 12,956 crore in the year-ago period.
Stagflation: A condition of slow economic growth and relatively high unemployment - a time of stagnation - accompanied by a rise in prices, or inflation.
QUOTE OF THE WEEK
"Wealth consists not in having great possessions, but in having few wants."