Equity mutual fund net outflow clamber Dec 11, 2009

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Dec 11, 2009

Weekly Facts
	Close	Change	%Change
BSE Sensex	17,189.31	3.6	0.02%
Re/US$	46.65	0.6	1.22%
Gold Rs/10g	17,075.00	1135.0	6.23%
Crude ($/barrel)	72.18	5.2	6.71%
FD Rates (1-Yr)	5.00%-6.50%

Weekly change as on Dec 10, 2009

Equity mutual fund net outflow clamber

Impact

The Stock markets have been on a bull run since March 9, 2009, but retail investors are being wary with this rally and are pulling out money at every high of the markets.

(Source: Crisil Fund Analyser)

(Source: SEBI)

As seen from the above chart during the period from September ’09 to November ’09, equity schemes saw a net outflow amounting to Rs 8,224 crore and interestingly the BSE Sensex has gained 51.79% during the period March 9, 2009 to Nov 30, 2009, thus indicating profit booking by investors.

In this context we recommend investors not to time the markets, but rather stay invested long term. However if the investment objectives are met, re-balance the portfolio by investing into another asset class.

Brokers’ biased on online mutual fund trading

Impact

Retail investors without an online banking facility are finding it difficult to transact in mutual fund units on the mutual fund trading platforms recently launched by NSE and BSE. Many well known brokers are servicing only those customers who can transfer the funds online and are not entertaining those who want to pay them using cheques. Some brokers are insisting on ‘clear accounts’, meaning that investors should pay for the units before the order is processed.

The pretext for doing so is that the settlement for the online trading platform takes place on T+1 basis; which means, when an investor buys mutual fund units, they (units) get credited to the client’s demat account the day after the orders are placed. However, the cheques (which clients write in brokers’ name) get cleared only after two days.

We believe that even though the practice followed by brokers is good from their risk management perspective, it will preclude the reach of mutual funds in small towns, where investors are unlikely to have online transfer facility. This thus brings in a bias towards online mutual fund trading service provided by brokers.

Teaser rates for home buyers’

Impact

The home loan market has been flooded with teaser rates offered by various banks and financial institution. SBI was the first to introduce these rates, followed by other banks and financial institution like HDFC. Teaser rate home loans mean, there is a low initial interest rate that is fixed for a specified period and the floating rate as specified becomes applicable thereafter. Hence, these teaser rates provide a cushion to the borrower at least for few years (1-5 years). The table below indicate the teaser rates offered.

Teaser rates for a home loan amount of Rs 30 lakh
Tenure: 20 years

Lender	Initial Interest Rate (%)	Effective Interest Rate (%)	Comments
Bank of Rajasthan	7.50	8.53	7.5% fixed for the 1st yr; 8.5% fixed for 2-3 yrs; 4th yr onwards applicable floating interest rate (currently 8.75%)
HDFC *	8.25	8.63	8.25% fixed till 31st March 2012, thereafter prevailing floating rate (currently 8.75%)
Axis Bank	8.00	8.65	8% fixed for the 1st yr; after 1 yrs MRR# (currently 12.25%) minus 3.5% = 8.75%
SBI	8.00	8.76	8% fixed for 1st yr; 8.5% fixed for 2-3 yrs; 4th yr onwards it is SBAR (currently 11.75%) minus 2.75% = 9%
ICICI	8.25	9.00	8.25% fixed for 2 years; 3^rd onwards it is FRR (currently 12.75%) minus 3.50% = 12.75% minus 3.50% = 9.25%
SBBJ	8.00	9.08	8% fixed for 1st yr; 9% fixed for 2-3 yrs; 4th yr onwards the rate is SBAR (currently 11.50%) minus 2% =9.5%
Canara Bank	8.00	9.33	8% fixed for 1st yr; 9% fixed for 2-5 yrs; above 5 yrs BPLR (currently 12.50%) minus 2.5% = 10%
Effective rates have been worked out assuming the floating rates will be what they are today
*HDFC effective rate worked out assuming lower teaser rates are applicable for 24 months # The MRR (Mortgage Reference Rate) is a benchmark rate fixed by the Competent Authority, after taking into consideration various components like cost of funds, interest rates prevailing in the market, cost of operations and provisioning requirements etc. among others.

(Source: Apnapaisa Research Bureau)

The above table distinctively indicates that the account opening charges itself are quite high (Rs 750). Similarly if an investor is a frequent portfolio churner, then apart from the exit load, the broking charges which he defrays would also pinch his pocket.

We reckon the ease and convenience which the online mutual fund trading platform provides, but conversely it will also pinch the investors’ pocket.

INTERVIEW

In an interview with Mint, Mr. K.V. Kamath, Chairman of ICICI Bank Ltd. shared his views on the Indian economy. He believes that India is in the early stage of the long boom that is perhaps going to be more powerful than what is captured in the usual economic data. He also believes that India’s growth rate is eminently sustainable.

He said that “India should use its growth momentum to innovate, create jobs and build infrastructure”. On the Indian corporate sector he said that “corporate sector has built up scale and companies are having strong cash flows”. He is also of the opinion that “Greenfield projects especially in infrastructure, cannot be funded through internal cash flows of the companies. They will need leverage of between one and three times”. He also said that infrastructure is the only area where banks are significantly lending.

He strongly affirms that the new growth paradigm will be driven by innovation in the 5-15 year horizon and innovation will play an important role in meeting consumer needs and driving economic growth.

AND OTHER NEWS...

Health Insurance Co. Ltd., a standalone health insurance company launched a health plan named ‘Maxima’, which provides policyholders a cover for outpatient consultations. Maxima comes with a flat sum insured of Rs. 3 lakh and offers optional critical riders. The first to give this facility was ICICI Lombard General Insurance Co. Ltd’s Health Advantage plan.

The players in Indian mutual fund industry are mushrooming. Peerless Fund Management Company, a wholly owned subsidiary of Peerless General Finance and Investment Company has received its approval from SEBI to launch its mutual fund business in India. The company aims to launch its first set of products in early 2010.

State Bank of India plans to launch a no-frill savings account, which can be operated through mobile phones in Mumbai & Punjab within next two months. A customer of the said mini-savings account can remit the money to his family using his mobile phone without visiting a bank branch or writing cheques and getting demand drafts made.

Investors will soon be able to transact in mutual funds using their java enabled cell phones. All what investors need to do is download the vendor application using their cell phones. The setting up of mobile digital platforms will enable mutual fund companies to be closer to the investors, thereby eliminating extra layers of distributors and brokers. HDFC Mutual Fund has already set up a cell-phone for its investors and other fund houses will follow suit soon.

After SEBI clampdown on commissions, mutual fund companies are now feeling the heat and are thus focusing on the revival of their Portfolio Management Services (PMS) business.

The year 2010 may bring in some good news for retail depositors, since the bank deposit rates may increase from January 2010 as banks try to correct the asset-liability mismatch.

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