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| September 26, 2014 |
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| Weekly Facts |
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Close |
Change |
%Change |
| BSE Sensex* |
26,626.32 |
-464.1 |
-1.71% |
| Re/US$ |
61.35 |
-0.5 |
-0.82% |
| Gold Rs/10g |
26,950.00 |
0 |
0.00% |
| Crude ($/barrel) |
95.06 |
-2.18 |
-2.24% |
| FD Rates (1-Yr) |
8.00% - 9.00% |
Weekly change as on September 25, 2014
*BSE Sensex as on September 26, 2014
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Impact 
With surging equity markets, equity assets with mutual fund houses rose to a new high in August 2014. As per the data released for August, mutual funds are collectively managing about Rs 2.6 lakh worth equity assets. You may think that rising asset base must have given mutual fund houses a reason to smile. However, ground realities would tell you something that you may not have anticipated.
Despite of weathering tough conditions in last 6 years, mutual fund houses are looking to exit businesses when things have just started turning better for the industry. Recently PineBridge Mutual Fund sold its business to Kotak Mutual Fund. Moreover, Morgan Stanley Mutual Fund and ING Mutual Fund exited over last 9 months. Fidelity Mutual Fund and Daiwa Mutual Fund exited in recent years.
It seems only big mutual fund houses are interested in carrying out businesses. It is irony that while one fund house (UTI Mutual Fund) has been considering listing its business, a few others want to sell off.
Why mutual funds are exiting?
- Incompetency against larger players
- Lack of Profits
- Dim prospects
- Unfavourable regulation
Smaller mutual fund houses have been finding it difficult to sustain their businesses as they have failed in outpacing larger players in gathering assets. They have limited resources to compensate brokers and run active marketing campaigns. To add to their worries, regulator, Securities and Exchange Board of India (SEBI) increased the minimum Net Worth criterionfor mutual funds from Rs 10 crore to Rs 50 crore. As half of mutual funds are yet to make money in their business, they are unconvinced with bringing in additional capital. Top 10 mutual fund houses have been managing nearly 80% of Asset under Management (AUM) at present.
How investors are affected?
Since mutual fund industry has entered a consolidation phase, investors are left with a fewer choices as same fund managers manage greater number of schemes. Existing investors of fund houses that are winding off their businesses have to make a choice whether to stay invested or pull out money.
PersonalFN is of the view that, competition is always healthy for the betterment of the industry and more often it serves in interest of investors.
PersonalFN believes, few players managing the whole chunk of assets gives rise to risk of concentration. Minimum net worth criterion set by SEBI favours bigger fund houses. PersonalFN has always expressed its concerns about such norms that discourage competition. Bigger fund houses can use their muscle power, pay brokers higher commissions for pushing their products and can throw smaller players out of business. Small size of a fund house tells little about its commitment to serving its customers. Considering recent exits, it has become clear that, fund houses don't see a very bright future for asset management business in India under given current framework.
PersonalFN has always believed that, commission driven nature of mutual fund industry has worked not only against investors but also against smaller players. PersonalFN is of the view that, investors need to assess the performance of fund houses closely and should not get carried away merely by their AUM size. To make your job simple, PersonalFN has recently released a comprehensive guide on 10 Steps to Select Winning Mutual Funds. Mutual funds remain a great choice for creating wealth but careful selection is important.
Do you think consolidation among mutual funds is good for investors? Share your views
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Impact
You might be aware that mutual fund houses offer direct plans but many of you may still prefer to invest through a broker. You can't be sure that your broker is recommending a right scheme to you. He might simply push the one where he gets the higher commission. After Securities and Exchange Board of India (SEBI) banned entry loads in 2009, fund houses started losing business. But in the current market rally, mutual funds have taken opportunity to launch a number of New Fund Offers (NFOs). Mutual funds pay higher commissions for promoting NFOs and pacify their agents and distributors. This goes straight from your pocket.
SEBI recently exposed 20 mutual fund houses which were reluctant to shift their investors from regular plans to direct plans. The regulator has also asked them to compensate investors for the loss investors incurred due to these delays.
SEBI also questioned mutual fund houses on discrepancies in the cost structure of two options of the same scheme. As per SEBI rationale, difference in the expense ratio of direct and the regular plan is usually 0.40% to 0.70%, however, half the expenses charged to regular plans are on account of commissions paid. So logically, investors should save more on direct plans.
Opposing this, mutual funds are arguing that, it is nowhere written that difference in the expenses ratio should be proportional to the commissions paid in regular plans.
PersonalFN is of the view that, it is possible that, mutual funds could be right in their argument. However, it would be imprudent to call such practices ethical. Although PersonalFN understands, there is a cost associated with serving even a client coming from the direct route, a full benefit of cost savings should be passed on to him. PersonalFN has highlighted from time to time the effectiveness of direct plans.
Direct plans of mutual funds will go a long way in benefiting long term investors in mutual funds. Costs of distribution and commission will be eliminated from such plans of mutual funds thus, benefiting the investors in the long term. However, the investors should exercise such options only after they have thoroughly studied the different schemes of mutual funds. At present, there are more than 4,500 schemes to select from and so an investor who has not done his or her home-work may not be able to invest in the right mutual fund scheme depending on the risk appetite. This drawback of selecting the right mutual funds can turn out to be disastrous as not all schemes perform under different market conditions.
Thus, an investor who is unable to provide time and energy to study the different schemes offered by mutual funds, it becomes imperative for him or her to take professional help from experts in the mutual fund industry who provide unbiased service to the investors. Nonetheless, if an investor is able to make the right choices then he or she should go for direct plans and earn whatever extra, the mutual fund plan has to offer.
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Impact
You have a reason to smile if you are planning to buy gold jewellery this festive season. Gold has been under pressure and has made a 14-month low recently in India. Globally, the yellow metal has lost its sheen. Investors have been shunning gold and investing in stocks and other risky assets. If you too are worried about falling gold prices and planning to reduce your exposure, you might be missing a larger picture. Here's some food for thought which could change your decision.
Easy monetary policy and gold prices
You see, the Federal Reserve in the U.S. (Fed) has been adopting an easy monetary policy since the past 5-6 years. The Fed has pumped trillions of U.S. dollars through stimulus packages in measure to revive the U.S. economy which faced the aftermath of the U.S. sub-prime mortgage crises. Interest rates have been held near zero level for quite a long. And as the economy looked wobbly in the backdrop some weak macroeconomic variables, gold became bold. Even the central banks of the world took refuge under gold during such times. There was a rise in investment demand for gold and by 2011, gold prices skyrocketed.
Now that stimulus programme is in its withdrawal phase and the Fed is expected hike rates sooner or later (amid signs of economic vigour depicted by the U.S. economy), investors across the globe have started shunning away from gold. You see, the U.S. dollar is gaining strength against other major currencies of the world, bond yields in the U.S. are rising...and all these are indications that risk aversion that pushed gold prices up, is fading away. Global investors are taking aggressive bets on developed market stocks and also the emerging markets.
But has gold lost its sheen for long?
Data as on September 19, 2014
(Source: ACE MF, PersonalFN Research)
Where are gold prices headed?
Well, there are both, positive as well as negative cues for gold. For the time being, speculation that Fed may hike interest rates next year remains the single most negative cue for gold. However, weaker job data in the U.S. suggests that, how much the interest rates would actually move up is difficult to predict. Such an indecisive scenario and easy monetary policy adopted by the central banks in the developed economies would be supportive for gold. As you may know, recently the European Central Bank (ECB) cut policy rates keeping in mind a risk of deflation to the Eurozone economy. The growth indicators in Europe have been sagging. ECB has launched a new stimulus package for promoting growth in the region. Following the footsteps of ECB, the People's Bank of China (PBoC) has also planned to inject U.S. $81 billion (about Yuan 500 billion) in 5 largest banks of the nation. Easy money often flows in real assets such as gold. Moreover, geopolitical tensions may also keep the gold prices firm.
To read more about this and PersonalFN's view over it, please click here.
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Impact
A few obvious things happen when markets are near their all-time high. Interest of retail investors goes up, small and midcap stocks rise substantially in quick time and mutual funds launch New Fund Offers (NFOs) in a hurry. Initial Public Offers (IPOs) get tremendous response and shares list at huge premiums. There is one more thing that happens when the equity indices are scaling new highs. Brokerage houses, banks and NBFCs roll out structured products for High Net worth Individuals (HNIs). At various platforms, PersonalFN has taken initiative to educate investors and explain to them why they shouldn't fall for fancy investment choices. In this article, PersonalFN will share with you its views on structured products and possible impact they may have on your portfolio.
To read more about this news and PersonalFN's views on it, please click here.
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- PersonalFN has over and over again highlighted the importance of spreading financial literacy among children. National Stock Exchange (NSE) seems to be thinking on similar line. Taking excellent initiative, NSE recently tied up with state school boards of Tamil Nadu, Nagaland, Himachal Pradesh, Uttarakhand and Assam.
The programme outline suggests that schools will educate students on money management from 8th standard. Initially, they will be taught basic concepts of financial management and as they advance to next class, more advanced concepts would be introduced to them.
PersonalFN believes NSE has taken a very good initiative in educating students right from their early age. This will thus help in making students aware of the capital markets and how it functions. This initiative will also go a long way in moulding future of our country.
Also, PersonalFN is of the view that financial planning education should be imparted to young students as this exercise (of financial planning wherein your age, income, nearness to goal, etc.) is very important before allocating investments to various asset classes. Thus imparting such financial planning education will make our next gen investors smart enough not to be fooled by any agent, advisor or a distributor.
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Expansionary Policy: A macroeconomic policy that seeks to expand the money supply to encourage economic growth or combat inflation (price increases). One form of expansionary policy is fiscal policy, which comes in the form of tax cuts, rebates and increased government spending. Expansionary policies can also come from central banks, which focus on increasing the money supply in the economy.
(Source: Investopedia)
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Quote : "Don't look for the needle in the haystack. Just buy the haystack!" - John C. Bogle
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