Impact 
In a bid to revive the fortunes of the mutual fund industry, a committee headed by Mr. Prashant Saran has proposed a fixed ‘transaction fee’ on fresh mutual fund investments, which has the potential to be dubbed as revival of ‘entry load’ with a different name.
According to the committee a transaction fee of  100 could be imposed on investors for every new investment made, to help distributors cover costs. In the initial phase, the transaction fee would be only for agents catering to middle and lower-income investors. In order to preclude distributor-induced portfolio churning, the committee has also recommended limited the number of transactions in a SIP folio to six per year. Moreover, the committee has also proposed a ‘tied agent’ concept, which would exclusively market products of one mutual fund.
We believe that the proposal of introducing transaction fee may not be accepted by the present SEBI, Chairman - Mr. U.K. Sinha, as he had earlier ruled out rolling back the entry load ban imposed by his predecessor Mr. C.B. Bhave. And if even if they do that, it would be a distinct case of SEBI turning pro-distributors in order to revive the fortune of the mutual fund industry, but again that may not lure mutual fund distributors as it did back when entry loads were in force. However, having said that it would hurt investor sentiments as they credit the good doings of SEBI’s predecessor Mr. C.B. Bhave.
Moreover, investors enrolling for a Systematic Investment Plan (SIP) would face the brunt of a 100 transaction fee. This is because say for example an investor starts a 1,000 SIP in a mutual fund scheme, he would be charged 100 which accounts to 10% of the initial investment; which is much more than what was charged when the entry loads were in force. This thus reveals that retail investors contributing a lower amount for a SIP would feel the pinch the most.
In our opinion, SEBI should act in a pro-investor manner and should not resort to the imposition of a transaction fee to revive the fortunes of mutual fund industry. Instead they should encourage fee-based advisory model which will help both the investor as well as distributors. Bringing awareness amongst the investors is very important for the mutual fund industry to flourish.
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Insurance behemoth - the Life Insurance Corporation of India (LIC) will be saddled with growing annuity payouts due to increase in life expectancy. This will increase the risk burden on the LIC, something which the IRDA (Insurance Regulatory and Development Authority) is planning to reduce. As a step in this direction, the IRDA may make it mandatory for the private insurers to sell annuity plans to their customers.
The immediate concern is about the future demand for annuities from subscribers of the New Pension Scheme (NPS). A subscriber to the NPS is required to invest at least 40% of the pension corpus to buy an annuity at the vesting stage. And since, the State-owned LIC is a leader in annuity business with a 95% market share (as it offers far more attractive returns (fixed returns) compared to private insurers), its (LIC’s) annuity payout burden going forward also increases.
We believe that this prudent and conscious decision taken by the IRDA to safeguard country’s largest insurer -LIC. Moreover, making it mandatory for private insurers to sell annuity plans will make them responsible and accountable players, also help to broaden (with more players) the annuity market in India..But in our opinion while doing this IRDA should also strive and make annuity market a level playing field. | |
Impact
The Indian equity market is among the top three equity markets in the world when assessed on a 10-Yr return (Compounded Average Growth Rate - CAGR) basis. India’s - BSE Sensex during this time frame has delivered a luring 18.17% CAGR, thus ranking third in the league of popular world indices, after Indonesia’s - Jakarta Composite index and Russia’s - RTS (which ranks number 1 and 2 respectively).
Score card for Indices
| Equity market indices | Country | 10-Yr Returns
CAGR (%)
| Standard
Deviation
| Sharpe Ratio | | Jakarta Composite | Indonesia | 25.5 | 7.58 | 0.23 | | RTS Index | Russia | 24.2 | 11.00 | 0.18 | | BSE SENSEX | India | 18.2 | 8.01 | 0.14 | | Bovespa | Brazil | 15.4 | 8.26 | 0.12 | | Straits Times | Singapore | 6.5 | 6.24 | 0.04 | | Hang Seng | Hong Kong | 5.5 | 6.93 | 0.03 | | Dow Jones | USA | 0.9 | 15.31 | 0.03 | | Nasdaq | USA | 2.0 | 6.57 | -0.01 | | Shanghai Composite | China | 2.0 | 8.64 | 0.01 | | DAX | Germany | 1.3 | 6.86 | -0.02 | | FTSE 100 | UK | -0.1 | 5.05 | -0.08 | | Nikkei 225 | Japan | -3.2 | 15.82 | -0.02 | | CAC 40 | France | -3.4 | 6.05 | -0.11 | (Source :ACE MF, PersonalFN Research)
Moreover from a risk-return point of view too, the Indian equity market - BSE Sensex has fairly compensated its investors by controlling the risk well by clocking an appealing Sharpe Ratio. Comparatively indices like Dow Jones Composite Index and Nikkei 225 have not been able to compensate their investors with the levels of risk they are exposed to.
We believe that the Indian equity markets are quite resilient and fundamentally strong. Though from a short-term point of view India, like the other emerging nations would have to face the fury of inflation, long term prospects of our country looks robust. Also, the expectation of good monsoon would go a long way in bringing down the spiralling prices of food articles and also boost exports.
Yes, volatility will always remain in the Indian equity markets. But for you to take the long-term advantage of the promising economic prospects offered by our country, you need to keep in investing in the Indian equity markets with a long-term perspective. Ideally you should opt for SIP route for mutual fund investing as this enable you to manage the volatility of the equity markets well (through rupee-cost averaging offered by SIP) and also power your portfolio with the compounding effect. While investing mutual funds, prefer the diversified equity schemes which have a good track record and those adopting prudent investment processes and systems.
| | | Weekly Facts |
| Close | Change | %Change | | BSE Sensex* | 18,268.54 | (107.9) | -0.59% | | Re/US$ | 44.74 | 0.1  | 0.20% | Gold /10g | 22,355.00 | (160.0) | -0.71% | | Crude ($/barrel) | 117.43 | 3.1 | 2.73% | | FD Rates (1-Yr) | 7.25% - 9.25% | Weekly change as on June 09, 2011
*BSE Sensex as on June 10, 2011
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This Week's Poll !!!
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In an interview with DNA Money, Mr. Jonathan Garner - Managing Director and Chief Asian and Emerging Market Equity Strategist at Morgan Stanley Asia shared his views on rising inflation in Asia and its effect on earnings and India in relation to other emerging markets.
Mr. Garner believes that the Consumer Price Index (CPI) Inflation in Asia is nearing 2008 peak but the worrisome part is that core CPI is rising much faster than consumer part of inflation, which may put further pressure on corporate margins. He also cautions that the corporate earnings growth in Asia has been de-accelerating and particularly for India there has been a consistent downward revision in earnings over the last two years. Moreover, he sees downward revision in corporate earnings elsewhere in Asia Pacific countries, too. On the whole, he thinks that the Asian markets are currently trading at quite low price-to-earnings multiples in relation to average historical levels, but considering the slowdown in profitability and margin pressures, the markets may not give very high returns this year.
Considering the fact that India is looking expensive relative to other emerging markets, Mr. Garner is underweight on India. While explaining his stance he says, "India is trading at 35% premium to other emerging markets (EMs) in terms of price-to-earnings multiples, even though the ROE (return on equity) for India has been declining and it’s now just at a 5% premium to other EMs. Till the time the ROE or earnings catch up with the P/E multiples, we expect Indian markets to underperform. However, the interesting thing is that dedicated emerging market funds are still overweight on India relative to emerging markets, which may lead to range-bound movement for Indian markets this year." Citing areas of major concern for India, Mr. Garner points out that crude oil and inflationary pressures remain as big worries for India.
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Annuity: A financial product sold by financial institutions that is designed to accept and grow funds from an individual and then, upon annuitization, pay out a stream of payments to the individual at a later point in time. Annuities are primarily used as a means of securing a steady cash flow for an individual during their retirement years.
(Source: Investopedia) | |
QUOTE OF THE WEEK
"Wealth is not his who has it, but his who enjoys it."
- Benjamin Franklin | |