Impact 
In its Annual Report 2010-2011 the Insurance Regulatory and Development Authority (IRDA) had issued guidelines for pension products whereby the insurance regulator had directed that ULPPs (Unit linked Pension Plans) and annuity products shall offer a minimum guaranteed return of 4.5% per annum or as specified by it (IRDA) from time to time. But succumbing to the insurer's pressure (to boost the sale of pension products) the IRDA is set to revise the guidelines whereby the 4.5% guaranteed return clause would be done away with and insurers will have to provide a capital guarantee only.
Though this is a major relief for life insurers, as pension products used to account for nearly 30% of their sales before the new regulations came into force, these revised guidelines will do more harm than good for investors.
In our view the IRDA has once again shown its ugly side of favouring the insurers to boost up their pension product sales at the cost of the policyholders. It indeed looks a very pro-industry proposal (rather than a pro-investor one) because; the industry was paining with the 4.5% guarantee clause for pension products. Moreover, the 4.5% guaranteed annual rate of return was conceptualised to be linked to reverse repo prevailing in September 2010, insurers were asked to provide 50 basis points more than the reverse repo rate. And thus going forward if they had to be linked with the present reverse repo rate (of 7.00%) it would have been a very daunting task for insurers to provide such guaranteed returns which in a way was understood by the insurance regulator.
In our opinion a pension fund should provide adequate returns in order to generate substantial annuity for the policyholder in his or her retirement period to suffice the day-to-day expenses. Only a capital guarantee works against the policyholder's benefit and gives a leeway to the insurers in managing the pension portfolio.
| Multibagger Stock Ideas
Claim this Free & Exclusive Guide Today. Act Now!
CLICK HERE to know more... | | 
Impact
As per the latest directives from the capital market regulator - Securities and Exchange Board of India (SEBI), new investors in mutual funds will have to pay an additional charge of  150 while investing a sum of 10,000 and above, while existing investors will have to bear 100 for any fresh investments made of the said amount.
It is noteworthy that these charges (know as transaction charges) will be over and above the expense ratio of the fund, and in SEBI's opinion the imposition of transaction charges will help mutual funds penetrate into retail segment in smaller towns, where the distributor would be allowed to charge 100 as transaction charge per subscription. However, there will be no charge for investments below 10,000. Also, the transaction charge would be imposed on transactions other than purchases/subscriptions relating to new inflows, and direct transactions with the mutual fund.
We believe that the transaction charges directed by the capital market regulator may not be enticing enough for distributors to advise more mutual fund schemes. Moreover, the penetration in the rural markets may not happen, primarily because there persist a lack of awareness about products and mutual fund distribution is rather fragmented.
In our opinion in order to revive the fortunes of the mutual fund industry (which is paining through redemption pressures and waning folios), SEBI along with AMFI should engage in investor education programmes, and encourage a fee based model, as this will preclude mis-selling along with distributors being made accountable for the advise. | |
Impact
In order to make mutual fund advertisements easy to understand for the investors, SEBI has mandated mutual fund houses to avoid giving compounded annualised growth rates (CAGR) - expressed percentage terms, and instead mention the amount in figures for better understanding.
"Many investors do not understand what CAGR means and what to make of it. Communication has to be done in a simple manner," said Mr. U.K. Sinha - Chairman of SEBI.
Moreover, SEBI has also mandated that the performances of schemes must be measured against the Sensex or the Nifty, the two most popularly followed equity indices in India or against a Government of India security in case of a debt fund. Also, any scheme's advertisement will need to be accompanied by the performance of all the schemes managed by the same fund manager.
We believe that such a move brought in by SEBI, will help in effective and easy dissemination of information (through advertisements) by most mutual fund houses. We agree (to SEBI's view) that it becomes difficult for investors to understand financial jargons, and thus the connect to common man is necessary. Moreover, the directive to measure the performance of the equity funds with BSE Sensex or the Nifty, is good as it will make evaluation of performance easy for a layman. | |
Impact 
The Indian equity markets completely washed out the marginal gains made in the month June 2011 as it slid by -3.4% in the month of July 2011 due to various domestic as well as global headwinds as mentioned below:
- WPI inflation remaining sticky (9.44% in June 2011 - data released in July 2011)
- Industrial growth slowing down (from 5.8% April 2011 to 5.6% in May 2011- data released in July 2011)
- Debt-overhang situation in the Euro zone (recently in last week of July 2011, Standard & Poor downgraded Greece ratings by two notches to CC, with a negative outlook)
(Source :ACE MF, PersonalFN Research)
But despite all the domestic and global uncertainties, the Foreign Institutional Investors (FIIs) continued to show confidence in the Indian equity markets as they were net buyers to the tune of 8,030 crore. They exuding confidence in the Indian equity markets can be attributed to the following points:
- Attractive valuations (markets have already corrected 13.4% from their last peak of 21,004.96 made on November 5, 2010)
- Gradual expansion of the Indian economy on a year on year basis (8.5% in FY11, while 8.0% in FY10)
- Robust gross capital formation (at 32.1% in Q4FY11)
- Achievable fiscal deficit target (FY12 target of 4.6%)
- Normal monsoon leading to better harvest (thus cooling food inflation)
- Expectation of WPI inflation to cool down gradually due to RBI's persistent anti-inflationary stance
We believe that fundamentally India's growth story is robust and provides immense investment opportunities. The RBI has shown resilience in shaping up the banking industry and supporting it during turbulent times. Even the quarterly earnings in quite a few sectors have been quite promising thus, providing good investment opportunities.
In our opinion these turbulent times should be seen as an opportunity to invest in Indian equity markets with a long term horizon. Investors not having the requisite capability to pick up good value stocks should adopt the mutual fund investment route to take the advantage of equity as an asset class. Remember, while investing adopt a prudent policy and select mutual fund schemes with a good track record and from a well established fund house having prudent investment systems and processes in place. Also, do not forget to adopt the Systematic Investment Plan (SIP) route to mutual fund investing to take the advantage of rupee cost averaging with time horizon of 3 to 5 years thereby taking advantage of the power of compounding. | | | Weekly Facts |
| Close | Change | %Change | | BSE Sensex* | 17,305.87 | (891.3) | -4.90% | | Re/US$ | 44.55 | (0.5) | -1.07% | Gold /10g | 24,025.00 | 875.0  | 3.78% | | Crude ($/barrel) | 112.95 | (4.2) | -3.55% | | FD Rates (1-Yr) | 7.25% - 9.25% | Weekly change as on August 04, 2011
*BSE Sensex as on August 05, 2011
| |
In this issue
| |
This Week's Poll !!!
************
Should the 4.5% guarantee on pension products be withdrawn?
To Vote Now! | |
In an interview with CNBC TV18, Mr. Milind Barve - Managing Director of HDFC Mutual Fund and Chairman of the Association of Mutual Funds in India (AMFI) shared his views on transaction fees brought in for mutual funds, KYC norms and distributor regulation.
Mr. Barve believes that the real challenge for the industry has been to attract small investors, not just in large cities and metros but also in smaller towns. In his opinion the transaction fees of 100 and 150 is enough as the move is to incentivise small distributors. He further explained by saying that, "The idea is indeed in the right direction because it is not the intention to increase the cost to the distributors, but at the same time, providing some sort of an incentive for a small distributor. Therefore, the 100, small as it may seem, will be effective because we are looking at small ticket deals and the industry has to focus on the small ticket deals. This is not about large ticket deals, whether it is incentive to sell or not."
As far as KYC norms are concerned, Mr. Barve feels that the move is an investor friendly and will really help the investor more than any particular industry. Explaining his stance he said, "Look at it this way, this is not about the fund industry, this is just investor friendly. It is just going to prevent him from repetitively going through the similar process to prove, as KYC does, who he is."
On the distributor regulation front, Mr. Barve thinks that the asset management companies (AMCs) will be expected to do some due diligence on a regular basis of distributors who meet any one of those three or four criteria as put by the SEBI in this regards. Explaining further he said, "You start from the people who have large share in distribution business, you start from large distributors and basically you would cover them through a due diligence process which is done regularly. You see that they meet the standards of good practices on selling, how to recommend funds, what is the commission structure earned or what are the standards of disclosures."
| |
Purchasing Manager's Index: An indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.
(Source: Investopedia) | |
QUOTE OF THE WEEK
"Successful people save in prosperous times so they have a financial cushion in times of recession."
-Brian Tracy
|  | |