In an effort to soothe nerves of the country’s mutual funds (MFs) and the non-banking finance companies (NBFCs), the bankers today assured that they would come forward to support these financial institutions’ funding needs including liquidity to meet redemptions. With an access to additional Rs 40,000 crore of liquidity after the central bank’s slew of liquidity measures yesterday, the public sector banks today said that it is extremely comfortable for the banks to fund the MFs and NBFCs, and also to achieve a higher credit growth during the financial year.

“The Reserve Bank of India’s (RBI’s) recent measures will address the issues of the MFs and the NBFCs with a lot of ease. After assessing the whole situation and holding discussions with the Association of Mutual Funds in India (AMFI) on Friday, we are urging the MFs and the NBFCs to approach the banks and voice their problems. The fear of redemption pressure with the MFs will now be done away with,” said K Ramakrishnan, chief executive, IBA.

“Now we have Rs 60,000 crore of liquidity in the system, and the MFs and NBFCs could take advantage of this to meet their redemption needs,” said M V Nair, CMD, Union Bank of India.

About a month back, the mutual funds had raised concerns about meeting the redemption requirements, especially with the fixed maturity plans (FMPs) and the liquid funds, where the money is invested in the instruments like certificate of deposits (CDs) and commercial papers (CPs) issued by banks

In the last few months, both fixed maturity plans (FMPs) and fixed deposits (FDs) have been competing for investors’ attention. Mutual funds have come out with advertisements where they talk about the advantages of investing in FMPs, which include lower taxation and higher returns. Similarly, banks have been flashing hoardings declaring 10.5 per cent or 11 per cent returns. Here we take a look at both these products and how they work.

FMPs, launched by mutual funds, invest in certificates of deposit (CDs) of banks, commercial papers and bonds of companies and other similar instruments. They offer “indicative returns” to the investors. FDs are issued by banks and some non- banking finance companies (NBFCs) and offer “assured returns”. FMPs usually offer returns that are slightly higher, around 1percentage points, than FDs because of their exposure to other instruments. At present, FDs are offering around 10-11 per cent, while FMPs are offering 11-11.5 per cent.

However, the reputation of FMPs have taken a serious hit in recent times because of reports about the exposure of mutual funds to papers of real estate firms and NBFCs. Some funds were even forced to roll over because companies defaulted on their payments.

Capital market regulator, Sebi, is set to stop early or premature withdrawals by investors in Fixed Maturity Plans (FMPs) to be launched from now on.

The recent rush by large corporate investors in FMPs to redeem their investments, which resulted in considerable pressure on fund houses, has forced Sebi to review its norms relating to this product. The regulator has decided not to allow early withdrawals in new FMP offerings and to make it mandatory for new FMPs to be listed on exchanges, according to a person familiar with the issue. The aim is to prevent large scale premature redemption in a product, which is marketed as a fixed maturity plan.
Over the course of the past 12 months, FMPs had emerged as one of the most popular products offered by fund houses. Where it scored over fixed deposits was in terms of higher yields and post-tax returns, which helped draw in a lot of corporate money

UTI Mutual Fund today launched its unique scheme, “UTI Wealth Builder Fund-Series II” which combines the benefits of both equity and gold.

The new fund Offer closes on November 18, 2008. The scheme will re-open for purchase and redemption not later than 30 days from the closure of the NFO period, D Mohanty, Country-Head (Sales), UTI, told mediapersons.

UTI Wealth Builder Fund-Series II is an open ended equity oriented scheme. The investment objective of the Fund is to achieve long-term capital appreciation by investing predominantly in a diversified portfolio of equity and equity releated instruments alongwith investments in Gold ETFs and Debt and Money Market instruments.

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Selling shares or stopping SIPs is a common feature when markets are in a downturn. It can prove fatal for your wealth.

As the global markets go through a financial crisis, a sense of panic has taken over the stock markets across the world. The small investors, who have invested in mutual funds and stocks, have been feeling the heat as well for over ten months now.

As the mood swing deteriorates from despair to helplessness, investors would be rather worried about their money. During times like these, when panic takes over, investors have to keep their cool, lest they make decisions that might not be rational. There are some common indicators that will help to identify if you are panicking.

Stopping your regular investment plan: In case of a mutual fund systematic investment plan (SIP), investors put in money every month or quarter to take advantage of an upswing. However, the eagerness to invest goes down considerably when markets fall.

Many even stop their SIP. For instance, an investor who has invested Rs 2,000 a month for 19 months, finds out that the investment of Rs 38,000 is now worth around Rs 30,000. He may then feel that there is no point in carrying on with the regular investment. With only five instalments remaining, this sudden decision to stop investing will lead to a situation where the investor has bought units at a high cost, but does not get the benefit of the downturn. This eliminates the entire benefit of investing through an SIP.

Selling an MF investment: Making a decision to sell a fund when it is not performing is easy. But in a falling market, not many can buck the trend. When redemption takes place because of panic, an investor stands to lose out on good funds.

The best example is how investors are now moving away from mid-cap schemes that have been badly hit as mid-cap stocks have suffered the most in this downturn. In reality, when you invested in a mid-cap fund, it was with the knowledge that this is a sector that is very risky. And such investments are made with a view that they are of high risk, but give high returns as well.

Offloading on market lows: This is a very common situation. The expectation from investors in such situations is: “I have to cut my losses.” This is something that has been noticed in stocks of financial services and the real estate sector in the last few weeks.

But it is almost impossible to know whether a certain level is at the lowest or there is potential for a further downside or upside. When you buy the stock of a good company, it is very important that you hold it at least for some time (between 3 and 5 years). Of course, it is a completely different issue if such sales have to be incurred to fund an immediate need for cash. But if stocks with strong fundamentals are offloaded in such a manner, such a person is surely a bad investor.

Any price acceptable: This is a classic case. Selling at any cost is common and it leads to an immediate hit. If it is a good stock, there will definitely be a lot of investors to buy at a low price. With swings of over 12-15 per cent in a single day, the sale may often go through at a price that is considerably lower. In this situation, the investor could end up losing even more than what he would have normally done. This is usually seen when liquidity starts drying up a bit.

Buying to sell for quick gains: Often, investors decide to buy a stock for quick gains or losses. This can be something like the launch of a new product in the market, resulting in better sales and profits or it could be an expansion plan in the future.

While this is a concrete reason for buying a share, it is sold quickly when such plans do not come through. There could be reasons for the delay, especially in a downturn like this, but it leads to selling at a loss. This happens when certain stocks are not a part of the portfolio for long-term gains.

There are times when investments are made in stocks or mutual funds and things do not work out because there is a change in the fund manager or the stock/sector?s fortunes may not look good in the long run. Any decision to move out of them could be considered valid. However, any knee-jerk reaction to get in/out of the market can prove to be very fatal for your wealth.

Investing in stock markets, whether through mutual funds or directly, requires a lot of discipline and heart. For ones, who get easily get swayed by a sharp fall or rise, are not able to reap returns when markets turn around.

There were some announcements recently by the Life Insurance Council, a lobbying body formed by life insurance companies. Broadly, these announcements appeared to say two things: that the terminology of unit-linked insurance plans (Ulips) would be made uniform and that insurance companies would refuse to underwrite insurance-linked schemes issued by mutual fund companies.

Behind these announcements is the ongoing struggle between life insurance companies and mutual funds. Mutual funds and life insurance are two distinct products, one intended as a savings vehicle and the other a safety net. However, this distinction has blurred over the last few years. Indeed, one gets a feeling the life insurance companies are also in the business of running mutual funds, categorised somewhat differently as unit-linked insurance plans (Ulips).

Ulips have a mix of characteristics of both insurance and mutual fund schemes.
Crucially, however, the mutual fund aspect of Ulips is regulated by the government under a very different set of rules compared with the real mutual funds.

From the investors’ point of view, the biggest difference between the two categories pertains to how much of his money is actually used for his insurance and his savings and how much is taken away to pay commissions to agents and towards the insurance company’s expenses. The second big difference is in the quality of the information he is given about his investments.
Mutual funds deduct less than 2.5% as the agent’s commission. And as per current norms, there is no deduction if investors don’t use an agent and go directly to a fund company.
In Ulips, on the other hand, the agent’s commission varies, but in the first year, it could be as high as 25% and more.

Next is the issue of transparency.

There is a vast difference between the meaning of net asset value (NAV) of Ulips and mutual funds.

In a mutual fund, the NAV announced is net of all expenses and charges the fund company deducts. If your investments were worth Rs 1 lakh when a fund’s NAV was Rs 22, then it will be worth Rs 2 lakh when the fund’s NAV is Rs 44. That’s it.
The arithmetic of insurance companies is different. NAVs of Ulips are effectively pre-deductions. The NAV may double, but your investments won’t double because the insurance company will reduce the number of units you hold to pay for expenses and commissions etc. This means the announced NAV has no clear and transparent relation to what the unit holders are actually earning.

However, Ulips have been the more successful of the two. News reports say that last year, a total of Rs 55,000 crore was invested (if invested is the right word) in Ulips. In the same period, around Rs 16,000 crore was invested in mutual funds.
We are often told by the insurance industry that this is because Ulips are a superior product. That’s complete rubbish. Ulips are successful because the ultra-high commissions and charges make insurance agents far more aggressive salesmen than those of any other financial products. These charges also enable insurance companies to spend far more on advertising, all from the unit holders’ money. The net result of high-pressure sales is that savings that would otherwise have ended up in mutual funds, bank FDs, PPF, post office deposits and many other asset types is ending up in Ulips, where a good proportion is diverted to pay commissions.

The direction India’s insurance industry has taken in the last few years amounts to regulatory failure. This industry was opened up to foreign capital and provided with a relatively lenient regulatory framework so that it could bring insurance to India’s under-insured masses. Instead, it has ended up focusing its energies (and capital) on selling expensive and opaque mutual funds dressed up as insurance.

It’s tragic that there is no move to even recognise that this problem exists. Indeed, even higher foreign ownership is on its way, supposedly because more capital is needed to Ulip the under-Uliped masses.

But, even the mutual funds don’t seem to be very interested in highlighting these issues, perhaps because many of them are part of financial conglomerates with flourishing insurance businesses.

It is therefore left to the investor to understand the issues and do what he thinks is in his best interest.

Cross posted on Insurance Blog

Gold exchange-traded funds (ETFs) are back in the limelight. After a dull three-month period, a sudden slump in the US stock market last week has investors flocking to buy gold. In the past one week alone, gold prices have increased nearly 15 per cent in the international market.

As a result, investors, who invested in gold ETFs in the first half of this year, have reaped benefits. In the past one year, the average returns have been a stunning 31.42 per cent. In the last month alone, returns have been an impressive 13 per cent. The Bombay Stock Exchange?s Sensex, on the other hand, fell 3.45 per cent in the same period. Returns from equity diversified funds dropped by 4.72 per cent.

Gold ETFs track the spot price of gold and are listed on stock exchanges. Benchmark Mutual Fund launched the first gold ETF. At present, there are five players in the market, namely, Benchmark, Kotak, Quantum, Reliance and UTI.

Market experts, however, feel those who have missed the bus in the earlier part of the year will do well to wait till the festival season in India gets over. ?Gold ETFs have reached attractive valuations, but prices may fall as we expect the dollar to strengthen further,? said Sriram Venkatasubramanian, head, FCH Centrum Wealth Management.

According to Nipun Mehta, the executive director and head of Societe Generale Private Banking, gold ETFs should be a part of any portfolio as it gives stability as a hedge against inflation and is usually seen to be inversely correlated with other asset classes such as stocks, fixed-income securities and commodities. The sudden price rise is a just a temporary phenomenon, Mehta says.

The ideal route for the investor, who wants to invest in gold with a long-term view (three years or more), the person needs to follow the systematic investment plan (SIP) through gold ETFs.

Investing in gold ETFs will give the investor all the advantages of investing in gold while eliminating drawbacks of physical gold such as cost of storage, liquidity and purity. SIP investment enables the investor to accumulate units over time and average out the value of purchase through highs and lows. The units of gold ETFs can be redeemed either from the fund directly or from the market.

As far as the asset allocation goes, they should form only 5 per cent of the entire portfolio. ?Gold ETFs should form a smaller part of the portfolio. Ideally, it should not exceed 10 per cent of the entire investments,? added Venkatasubramanian.

There are a large number of tax advantages in investing through ETFs vis-a-vis holding physical gold. For instance, if an investor holds gold ETF units for more than a year, he qualifies for the long-term capital gains tax at 10 per cent (without indexation) and 20 per cent (with indexation). In case, the investor sells within a year, the transaction will attract the short-term capital gains tax, depending on the person?s income bracket.

On the other hand, investors have to hold physical gold for three years to qualify for the long-term capital gains tax. For less than three years, the short-term capital gains tax is charged at 30 per cent.

The Mutual Fund industry is concerned about insurance firms’ unilateral decision to prevent asset management companies from bundling insurance products with their own fund offers.

The Life Insurance Council, the apex body of the insurance industry, fired a fresh salvo on Thursday after its members decided not to offer any of its products to be bundled with mutual fund products from October 1.

Mutual fund houses said the move provided an unfair advantage to insurance firms.

“This move is anti-investor and is a move that creates monopoly of the insurance players to offer insurance,” said the head of a fund house on condition of anonymity Companies such as Reliance Capital AMC and Birla Sunlife AMC have been bundling insurance cover with their equity schemes.

Such schemes worked on the same princip1es on which an organisation buys a term plan for its employees.

The latest salvo by the insurance companies, mutual fund houses said, will deprive the investors to get a term plan on their mutual fund scheme.

AMFI had earlier made a proposal with the Sebi that mutual funds should be allowed to offer insurance Coler to the investors along with their mutual ftmd schemes. Industry sources, however, said that till the time mutual funds receive a formal communication, they could continue to offer the term insurance product along with their saving and imvstment schemes.

It is not just retail investors who are convinced about the power of the mutual fund (MF) as a vehicle of long-term wealth creation; many charitable organisations and trusts too seem to think so. According to industry sources, these groups have been steadily increasing their exposure to equities through mutual funds. There are many religious and nonreligious trusts out there which are deploying 60-80% of their long-term funds in equity schemes, fund industry experts say.

Swaminarayan Trust, Ahmedabad, Gujarat Cancer Society, Ramkrishna Mission, Tirumala Tirupati Devasthanam, Missionaries of Charity, Ram Janambhoomi Nyas, Ayodhya, Dyal Singh College Trust, Charities Aid Foundation India, Environment Support Group, Shwetambar Trust, International Centre for Entrepreneurship and Career Development, Birla Kalyan Nidhi Trust, Hindustan Charity Trust and Bombay Hospital Trust are some of the more prominent trusts which have been investing in mutual funds.

Many charities have surplus funds not needed to fund their immediate charitable activities; often, the trustees invest some or all of this surplus in order to generate extra income to fund future activities,? says the distribution head of a fund house that claims to have a handful of trust-focussed mutual fund schemes.

As per Indian Trust laws, religious organisations, charitable trusts, Wakf boards and registered societies are allowed to invest in mutual funds.