Impact 
 In order to make mutual fund investments more attractive for investor community, the Securities and Exchange Board of India (SEBI) is mulling ways to lower the cap on the expense ratio on mutual funds to 1.50% - 1.75% from the current level of 2.50% of their Assets Under Management (AUMs).
Moreover, the SEBI is also likely to direct mutual fund houses to pay for the brokerage from their own pocket instead of charging to investors. At a recent meeting, SEBI's mutual fund (MF) advisory committee had proposed that brokerage charges incurred while acquiring shares for an equity scheme be accounted for in the expense ratio. Thus, if this proposal gets through investors will now be able to get more units to their credit as against earlier when the expense ratio was capped at 2.50%.
At present, mutual fund regulations permit equity funds to charge as expenses, up to 2.50% of their average daily net assets for an initial  100 crore of assets, 2.25% for the next 300 crore, 2.00% for the next 300 crore and 1.75% for higher amounts.
We believe that the proposal of imbibing brokerage into expense ratio may display a detrimental impact on the profitability of the mutual fund houses. But, going forward we may see mutual funds churning their portfolio less in an attempt to manage this (thereby reducing their brokerage costs), which in turn would be in the benefit of the investors as risk reduction may occur.
However, while investing you should keep in mind that lower expense ratio may not be the only criteria in selecting the right mutual funds for their portfolio. Remember always select mutual fund schemes from well established fund houses with good track record of the scheme and with a horizon of 3 to 5 years.
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Impact
 In order to revive the mutual fund (MF) industry which is reeling under redemption pressures along with slowdown in sales ever since the ban on entry loads (initiated in August 2009), the Association of Mutual Funds in India (AMFI) from August this year will embark on an advertisement blitz in an attempt to induce the TV audience to invest in mutual funds. This the first time an industry body such as AMFI will advertise.
Moreover, unlike usual MF advertisements that are shown on business channels, AMFI aims to showcase such ads on general entertainment channels, thus attempting to reach out to those individuals who are yet to invest. "Those who watch business channels would have typically already invested or at least know what MFs are. But we are trying to reach out to people who are yet to invest”, explained Mr. V. Ramesh – Deputy CEO of AMFI.
Further to ensure that these ads reach out to a large number of audiences, the ads will also be featured in Hindi along with seven other regional languages including Marathi, Tamil and Bengali.
In our opinion while this initiative is intended to revive the fortune of the mutual fund industry (by creating awareness amongst people about the benefit of investing in mutual fund), care should be taken to ensure that the ads are simple to understand, informative / educative, and should also aim at protecting investors against the atrocities of mis-selling. Because unless, the ads do not depict the benefits of investing in mutual funds along with safeguarding investors', steam may not be garnered for the Indian mutual fund industry. |
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Impact
In an effort to hit back the spiralling inflation monster hard, the Reserve Bank of India (RBI) at its first quarter review of monetary policy (held on July 26, 2011), raised key policy rates by 50 basis points (both on the repo rate as well as reverse repo rate), thus making it the 11th successive increase in policy rates since March 2010.
(Source :Office of the Economic Adivsor, PersonalFN Research)
Some of the reasons cited by the RBI behind this bold step are as follows:
- Demand-side pressures: The RBI stated in its review that the demand-side pressures remained strong. The sharp revision in the non-food manufactured products inflation during February 2011 – April 2011 justified the strong demand pressures. Also several indicators such as exports and imports, indirect tax collections, corporate sales and earnings and demand for bank credit suggested that demand is moderating, but only gradually.
- Crude oil: Prices of crude oil are expected to remain volatile due to uncertainty in the U.S. over its debt ceiling, the debt overhang in the Euro zone spreading across the globe and overall crude oil supply situation. The price of the Indian crude basket too, rose to US $114 per barrel as on July 21, 2011 up from US $110 per barrel in May 2011.
- Growth moderation, not a broad-based slowdown: Even though moderation in growth was observed in some of the interest sensitive sectors, there was no sign sharp or broad-based slowdown as demand-side inflationary pressures continued.
We believe that the RBI's 50 basis points hike in repo and reverse repo rates is justified taking into account the stickiness shown by the inflation numbers. As also inflation being more from the demand side, the interest rate hikes would help to ease those pressures amidst slow growth in the medium term. To know more on RBI's First Quarter Monetary Policy Review and now how you should invest in debt instruments click here.
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| Weekly Facts |
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Close |
Change |
%Change |
| BSE Sensex* |
18,197.20 |
(525.1) |
-2.80% |
| Re/US$ |
44.08 |
0.4  |
0.97% |
Gold /10g |
23,150.00 |
10.0 |
0.04% |
| Crude ($/barrel) |
117.11 |
(0.8) |
-0.71% |
| FD Rates (1-Yr) |
7.25% - 9.25% |
Weekly change as on July 28, 2011
*BSE Sensex as on July 29, 2011
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In this issue
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In an interview with the Economic Times, Mr. V. Phillip – Managing Director and Chief Executive Officer at Bajaj Allianz Life Insurance shared his views on growth in the life insurance business and bancassurance.
Mr. Phillip believes that the slowdown in the insurance industry will continue for some time and will take at least two more quarters to get to normal growth. Further explaining the situation in the insurance industry, he said, "There was a phase when traditional products were sold and then when ULIPs were sold. There have been significant changes in ULIPs. The revised ULIPs were launched 3-4 months after the guidelines came into force, which has taken sometime for distribution to adapt and understand real benefits of new ULIPs. This has hit growth. We are in the process of strengthening our distribution on the enhanced benefits of the new ULIP structure. Commissions have come down and agents can't look at it like a full-time career. We have to put efforts in retraining people. This is a long process and once it is completed, prevailing trends are expected to reverse."
On the subject of bancassurance, Mr. Phillip is of the view that it would be a good opportunity for us as it offers the bank customers more choices. Further he also mentioned that globally banks follow an open-architecture model.
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Tax Deducted at Source (TDS): A method of tax collection on income assessments in India. The tax collection can be affected if the income increases. The taxpayer pays tax on income from the preceding year. Tax collection is therefore delayed until the year has been completed. In order to prevent from hiding income, the government collects some amount of tax owed from the amount that is receivable by the tax payer.
(Source: BusinessDictionary.com)
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QUOTE OF THE WEEK
"The world does not pay for what a person knows, but it pays for what a person does with what he knows."
-Laurence Lee
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