Celebrate - All your hard earned money will be invested now Jul 03, 2009

Celebrate - All your hard earned money will be invested now

July 03, 2009

Weekly Facts
	Close	Change	%Change
BSE Sensex	14,658.5	312.9	2.2%
Re/US$	48.0	0.7	1.4%
Gold Rs/10g	14,490.0	190.0	1.3%
Crude ($/barrel)	67.1	0.7	1.0%
FD Rates (1-Yr)	5.75% - 7.25%

Weekly change as onJuly 02, 2009

Celebrate - All your hard earned money will be invested now

Impact

The Securities and Exchange Board of India (SEBI) has finally gone ahead and scrapped the entry load in mutual funds. As per the new guidelines by SEBI on entry loads, from August 1, 2009, fund houses will not deduct the entry load from the amount invested (i.e. all the money will be invested). Rather, investors will have to pay the upfront commission directly to the distributor. Investors will now have the freedom to negotiate the fee that they have to pay for advisory services rendered by distributors or brokers, while purchasing mutual funds.

Moreover, SEBI has also made it clear that not more than 1% of the exit load can be used towards paying commissions to distributors, and other marketing and selling expenses. Any balance amount has to be credited to the scheme immediately. It has also made it mandatory for the distributors to disclose all commission, trail or other benefits received by them (from the fund house) for advising a particular scheme to investor.

negotiating with the investors.

Getting more bang for your buck

With Entry Load Without Entry Load

Investments (Rs) 100,000 100,000

Entry Load 2.25% Nil

Net Investments (Rs) 97,750 100,000

Tenure (Years) 5 5

Return (CAGR) 15% 15%

Value of investments after 5 years (Rs) 196,107 201,136

Excess return (Rs) 5,028

As we have mentioned in our earlier Financial News. Simplified, this move is going to change the way mutual funds are being currently distributed. Most importantly, fund houses, distributors or any other entity involved in the mutual fund distribution business will now have to closely look at their business model and strategy. However, this will certainly empower investors as they will have the right to negotiate the fees for receiving services or advice from distributors.

Economic survey calls for sweeping reforms - But will that ever happen?

Impact

The Economic Survey for the year 2008-09 is out, and it pitches for some big-bang reforms. The survey predicts GDP growth at a healthy 7.75% in 2009-10 if the global economy shoots up. Even if the global recession drags, it predicts a decent 6.25% GDP growth. However, the highlight of the survey is the flurry of reforms that it suggests should take place. Some of the key suggestions are:

Limit LPG subsidy to 6 to 8 cylinders a year per household
Rationalise dividend distribution tax
Phase out surcharges, cess and transaction taxes such as securities transaction tax and fringe benefit tax
All financial market regulation under SEBI
De-control petrol and diesel prices
Raise FDI limit in insurance and defence

The above suggestions are a part of the survey which may or may not form the part of this year's Union Budget. As far as the implications of these reforms on individuals are concerned, it may affect the finances either ways. While some reforms such as phasing out surcharges and cess may ease the burden; de-controlling petrol and diesel prices may worsen them. Going forward it will be interesting to see how and in what way the government implements these reforms.

Entry load abolished - Or is it the distributor?

Impact

Good news is not always good for all. Scrapping of entry load is one such classic example. While it has bought a lot of cheers for investors, at the same time it has compounded concerns for the distributor community. A few days back several distributors demonstrated in front of SEBI's office against the scrapping of entry load. But now since SEBI has gone ahead and scrapped the entry load, the question is - is every thing lost for the distributors? We certainly don't think so. But yes, to survive now, all distributors need to have a deeper look at their business model and revise it to adapt to the changing scenario.

It should be well understood that the focus will now be more on the quality of advice and services rendered. And given the fees will now be decided between the distributors and the investors, it will be pertinent for the distributors to justify the fees they charge. And the only way to do that is by providing unbiased advice and best in class services. At PersonalFN, it has been business as usual. This is exactly what we have been doing and will continue to do i.e. giving our clients unbiased advice backed by solid research and best in class services.

Mutual Fund dividends galore - But don't get carried away

Impact

Mutual funds are on a dividend declaring spree like never before. Dividends from mutual fund schemes, which almost became extinct last year, are now being declared galore (some are as high as 60%). This is due to the significant rise of nearly 62% in the stock markets in the last 4 months. As a result, equity mutual funds, which have made surplus profits, are doling out huge dividends from these profits. The intention is to encourage investors to stay invested in the scheme.

Its raining dividends

Funds	Date of Dividend	Dividend (%)
Franklin India Prima Fund	26-Jun-09	60%
Principal Emerging Bluechip Fund	22-Jun-09	40%
Franklin India Bluechip Fund	23-Jan-09	30%
HDFC Equity Fund	19-Mar-09	30%
HDFC Top 200 Fund	5-Mar-09	30%
Franklin India Prima Plus	27-Feb-09	25%
HDFC Growth Fund	26-Feb-09	23%
Reliance Growth Fund	23-Mar-09	20%
Reliance Vision Fund	23-Mar-09	20%
Tata Pure Equity Fund	20-Apr-09	20%
UTI Thematic - Mid Cap Fund	15-Jun-09	20%
UTI Master Plus Unit Scheme	9-Jan-09	20%
UTI Master Value Fund	15-Jun-09	20%
HDFC Capital Builder Fund	5-Mar-09	20%

Source: Crisil Fund Analyser

The sole purpose of investing in a dividend option is to have liquidity. Also, dividends on equity-oriented funds are tax-free in the hands of investors. Hence, investors who are invested in these funds are set to benefit. Having said that, declaring dividends or the quantum of dividends does not indicate anything about the fund's quality. Investors should not invest in the fund simply because it declares dividends at regular intervals. Rather they should invest in funds that could add value to their portfolio over the long-term. The key is to stay invested in well-managed and established mutual fund schemes.

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