Are MF houses right in charging exit loads, if you want to switch to Direct Plans?   Jan 04, 2013

January 04, 2013
In this issue

Weekly Facts
  Close Change %Change
BSE Sensex* 19,784.08 339.2 1.74%
Re/US$ 54.49 0.4 0.82%
Gold Rs/10g 30,795.00 360.0 1.18%
Crude ($/barrel) 112.32 0.9 0.79%
FD Rates (1-Yr) 7.50% - 9.00%
Weekly change as on January 03, 2013
*BSE Sensex as on January 04, 2013

A little over a couple of months back we wrote on how opting for "direct plans" offered by mutual funds could help you enhance your returns. We said that an extra mile travelled, could earn you an extra buck! It was certainly a good move by the Securities Exchange and Board of India (SEBI) intended to help long-term investors, as the direct plans enunciated for a lower expense ratio and no commissions to be paid for such plans.

But now it seems that mutual fund houses are aligning their business strategy, intended to protect themselves as well as their beloved mutual fund distributors, who help them win the race of garnering large Assets Under Management (AUM). Very recently some mutual fund houses have imposed steep charges on investors who wish to move on from their existing plan (i.e. distributor supported) to "direct plans" (which are effective from January 01, 2013). They have raised their "exit loads" as high as 3% for exits / switches made within six months, despite the SEBI circular (issued in September 2012) being silent or giving no direction on exit loads to be levied in cases of switch to direct plans. It is noteworthy that although the new rules do allow the amount charged as exit load to be credited to the scheme (thereby benefiting investors who have stayed put into a mutual fund scheme), it is impacting those who wish to exit and / or switch from their existing plan to a "direct plan".

We are of the view that, the loopholes in the circular issued by SEBI have been used some mutual fund houses to strategize the aforesaid move aligned to serve the interest of themselves as well as their mutual fund distributors. In order to really embolden investors’ participation in mutual funds, guidelines should be issued to protect the interest of investors which can give them an unhindered entry. With the present aforesaid practice resorted by some mutual fund houses, we believe that many mutual fund investors would be discouraged, and therefore SEBI should address to such a concern soon.


We are in 2013 already, and the year thus far has begun on a positive note. With the U.S. Senate approving the last minute deal to avert a fiscal cliff, confidence has been imbued into the global economy. In the Euro zone too with bailout package doled out for Greece (€40 billion, aimed at bringing an immediate 20% reduction to the country's debt) and Spanish bank loans restructuring approved (expected to inject around €37 billion into the Euro zone), worries over the Euro zone debt crisis too have receded for the time being. FIIs have exuded confidence thus far into our equity markets by being net buyers to the tune of Rs 1,689 crore until January 02, 2013, and the BSE Sensex too has ascended by about 1% in the first three days of January 2013.

FII Activity vs. MF Activity
FII Activity vs. MF Activity in 2012
Data from January 02, 2012 to December 31, 2012
(Source: ACE MF, PersonalFN Research)

In the year gone by, FIIs bought net to the tune of Rs 1,28,361 crore, although for most part of the year there was policy paralysis, reforms measures were delayed, tainted political canvas and an unfavourable investment climate. As seen in the above chart, it was only when reforms were pushed and P. Chidambaram took over as the Finance Minister in August 2012, the FIIs participated in rather a roaring manner.

But now it remains to be seen whether FIIs would continue to exude confidence in 2013 as well, because India’s current account deficit is widening (it was at a record high of 5.4% of GDP in the September 2012 quarter) and fiscal deficit could also breach its target of 5.3% GDP; although the Government is quite ambitious on its path of fiscal consolidation. Due to ballooning deficit, rating agencies have warned of axing India’s sovereign ratings and if this situation continues or worsens, it would not be too long before they rate India as "junk". India is also encountering a slowdown in economic growth rate due to negative ripples seen earlier from the global economy and to near to high policy rates seen so far. But sticky inflation over the comfort zone of the Reserve Bank of India (RBI) has induced the central bank too to maintain its anti-inflationary stance.

Seemingly worried about this situation of the economy, domestic mutual funds have been net sellers in the Indian equity markets in the year gone by to the tune of Rs 20,654 crore, and even in the new year they have so far been net sellers. With every intermediate high of the Indian equity markets, fund managers are encountering redemption pressures (as investors have preferred to either book profits, or are wary of the markets), although slew of reform measures have been announced by Government in the winter session of the Parliament.

We are of view that, while so far (in 2013) the start for the markets has been well supported by positive FII participation due to conducive news flows from the global economy and a better economic growth rate of India as compared to developed economies; the aforesaid domestic macroeconomic worries yet remain. Moreover, before we head for general elections in 2014 political turbulence may occur. The Budget 2013 could be populist, but that may worsen our fiscal position.

Also if China recovers (which they have shown signs of), FIIs may not shy away from turning their focus on Chinese equity markets. Moreover recovery in China could also stoke-up commodity prices leading to inflation in India.

Thus in the background of the above, we recommend investor to stagger their investments to mitigate risk. While in investing in equity mutual funds, we recommend one to opt for the SIP (Systematic Investment Plan) mode of investing, as it will enable you to mitigate the volatility through rupee-cost averaging and power your portfolio with the benefit of compounding. However while selecting mutual funds for your portfolio, prefer the diversified equity funds which follow strong investment processes and systems, and invest with a long-term horizon of at least 5 years.

Gold will continue to do well in the backdrop of an uncertain global economic environment yet. Smart investor would continue to take refuge under gold, and therefore demand too would pick-up. We recommend that you should have a minimum of 10% -15% allocation to gold and invest in it with a long term perspective, with a time horizon of 10 to 20 years.


All of us always long to buy our dream home within our means. But today escalating property prices are making this primary need difficult to achieve. While there are banks and housing finance companies offering you loans to fulfil this dream, high borrowing cost (i.e. high interest rates) are acting as a deterrent. While many prospective buyers do hope that there would be some correction that could make housing affordable; rise in input costs (such as prices of land prices, cement, metals, and construction cost) is making it difficult for property developers to reduce prices and turnover their inventory. And it appears that going forward too, things could be worse for both – property developers as well as those planning to buy their dream home, especially in Mumbai the city of dreams or any other place in Maharashtra. To know more about this news and our view over it, please click here.


You may have encountered instances where a company which you invested in, during the exuberance of the primary market has utilised the money raised from you for a purpose other than that stated objects, but you did not have enough legal recourse to safeguard your interest.

But now you could be protect under the company law. The recently, introduced new Companies Bill 2011 passed in both houses of the Parliament (the Lok Sabha as well as the Rajya Sabha) specifically provides an opportunity to the shareholders to exit from a company in case of change in its objects or in its offer document. According to the said Bill, a company cannot vary the terms of a contract referred to in the prospectus or objects for which it was issued except by way of special resolution. Moreover it provides recourse to the dissenting shareholders by givingthem an exit offer by the promoters or controlling shareholders. To know more about this news and our view over it, please click here.

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  • Many of you of may be aware that India is the largest consumer of gold. But this insatiable for the precious yellow is jeopardising our economic stability. The high current account deficit is something to be worry about and it is noteworthy that gold is the biggest contributor to India's import bill after crude oil.

    Recently, Finance Minister Mr P. Chidambaram said, the Government is considering steps to make imports expensive. "We may be left with no choice but to make it more expensive to import gold," he said. A panel constituted by the Reserve Bank of India (RBI) is also of the view that there is a need to moderate the demand for gold imports, as ensuring the external sector's stability is critical.

    We are of the view that, intentions to increase import duty on gold seem to be evident. With hopes of better rabi harvest, it is perceived that farmers may flock towards the precious yellow metal, as prices too have retreated from their record levels. Moreover with the on-going wedding season demand is like be potent. Thus in order to curb this potent demand for the precious yellow metal, we may witness that the Government could increase import duty on gold, which indeed could help India to control its widening current account deficit.

  • The capital market regulator - SEBI has proposed guidelines for share buyback which could now protect your interest as shareholders in listed companies. As per the proposed norms in case if a company wishes to buy-back its shares, it must purchase a minimum 50% of the targeted number of shares and complete the process in three months from the launch of the repurchase. Once these norms are implemented, companies will have to park 25% of the maximum amount proposed for the buyback in an escrow account.

    Currently merchant bankers are advised by the regulator to ensure that a minimum of 25% of the maximum buyback proposed/disclosed is bought back over one year.

    We are of view that if the proposed guidelines are indeed implemented, it would infuse certainty over the number of shares to be bought-back by a company. It is noteworthy that the existing framework leaves the minimum size of shares to be repurchased to the discretion of the buyer (i.e the company). Also by reducing the completion time to three months, SEBI has attempted to remove the leeway promoters have for pricing the buyback.

Buyback: The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies will buy back shares either to increase the value of shares still available (reducing supply), or to eliminate any threats by shareholders who may be looking for a controlling stake.

Source: Investopedia

Quote : "Owning stocks is like having children - don't get involved with more than you can handle."   - Peter Lynch