However, if you are conservative and think that the safety of capital is paramount, but still want returns better than what fixed deposits can offer, debt MF’s is the right fund for you. You can diversify across debt paper of varied maturity periods which will ensure safety of capital as well as optimum returns.

Selecting the right fund according to your risk appetitive is a very important aspect of investing as you yourself are going to enjoy the profits earned.

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1. Mutual Fund page

2. Transaction charges on investing in Mutual Funds

3. Mutual Fund SIP: Long or Short Term

Stay tuned for more!

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It is a unique initiative and readers have called it an innovative product.

RupeeCamp is not just about education and financial literacy. It’s totally outcome oriented where you will take financial decisions and set up your financial plan. Check out the website for more details

RupeeCamp details are embedded below and you can download the details. I will be happy to answer questions.

I would be delighted if you decide to attend the first RupeeCamp at Mumbai. Please send me a mail to me on ranjan@ranjanvarma.com for a special discount coupon code. Thanks.

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Retail investors move to debt funds, equity folios slip by 150,000. There is some good news for the mutual fund industry. Despite the sharp drop in average assets under management (AAUM), the number of folios – a parameter for gauging the number of investors – has risen. And retail investors seem to be entering the market through the debt fund route. In June, the industry’s assets dipped 15.9 per cent to Rs 6.75 lakh crore. This was the sharpest decline in percentage terms since the October 2008 crisis. In absolute numbers, the assets fell by Rs 1.27 lakh crore, the highest ever.

The reason: Companies and high net worth individuals pulled out money to pay advance tax. Also, banks withdrew the money parked with mutual funds to fund 3G and BWA (broadband wireless access) requirements.

Despite this fall, the number of folios rose marginally by 21,350, according to data from the Association of Mutual Funds in India (Amfi). Quite a feat, if one considers that in the previous six months (between November to May-end), the number of folios rose a mere 49,153.

UTI Mutual Fund, the country’s oldest fund house and the fourth-largest in terms of assets, crossed the 10-million mark. It also added the largest number of folios during the period – almost 1.2 lakh.

Reliance Mutual Fund was the biggest loser among the top five funds. The number of folios for the country’s largest fund house (assets of over 1 lakh crore) fell by 28,324.

The rise in the number of folios was mainly due to the fact that investors shifted from equities to debt funds. The number of folios in debt funds rose by 190,000. This sharp rise offset the fall in all other categories – equities (147,000), balanced (13,437), exchange-traded funds (225) and fund of funds (7,530).

Fund houses said there was increased participation from retail investors during the month. Jaideep Bhattacharya, chief marketing officer, UTI Mutual Fund, said, “We observed a shift from equity schemes to debt schemes. A majority of our folios have come from retail investors who are investing in monthly income plans because of the safety they provide.”Investments have also taken place in short-term and fixed maturity plans. R S Srinivas Jain, chief marketing officer, SBI Mutual Fund, said investors were also looking at short-term funds.

However, the income fund category witnessed a net outflow of 1.34 lakh crore. Liquid and money market funds’ net collections were Rs 17,029 crore. But the run on equities continued. In terms of assets, there was a net fall by Rs 1,447 crore.

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Exchange Traded Funds (ETF) in India have not taken off in a big way as many actively managed funds continue to give superior returns when compared with key indices.

ETFs as an investment class have only mopped 0.19 per cent of the latest assets under management despite being in existence for almost a decade now.

Given this back drop, Motilal Oswal Asset Management Company has launched MOSt Shares M50 ETF, an open-ended equity ETF which tracks its in-house MOSt 50 basket.

Objective: MOSt 50 basket was introduced with the idea of earning higher returns for risk equivalent to the Nifty basket. It is a fundamentally weighted index with constituents of Nifty index getting weights based on the fundamentals rather than weights based on the market capitalisation (followed by the Nifty basket).

The ETF seeks to earn superior returns by giving preference to companies with reasonable valuations and consistently good fundamentals within the Nifty basket.

The illustration of the index shows 13 percentage points higher returns on an annualised basis for a little over a three-year period for MOSt 50 basket.

However, Most 50 index basket has tracked the Nifty basket from April 2007 to the lows of March 2009. It is only from March 2009 that MOSt 50 index gained multiple times that of Nifty.

Strategy: The Motilal Oswal AMC has designed this proprietary basket, which attributes weights to companies depending on pre-defined metrics such as return on equity, net worth, retained earnings and price.

The financial measures are taken on a historic basis. Then an algorithm classifies stocks into one of the three categories: over-weight, under-weight or equal weight, depending on their financial performance and valuations.

This weight would be different from that of the Nifty basket. For instance, while the Nifty 50 index has 15.8 per cent weight on the oil sector, MOSt 50 has given only a 2.4 per cent weight to this segment. While the ETF is passively managed to the extent that tracks the stocks in the index, it will be dynamically re-balanced periodically, based on changing fundamentals and whenever the constituents of Nifty index are changed.

Review: The unique concept of having both active and passive features may help investors to earn returns higher (called alpha returns) than what is commensurate with the risk of the basket. In addition ETFs have a low-cost structure and don’t entail any exit load, as they are traded like any other stock on the bourses.

Risks: As the fund considers historic data for evaluating fundamentals, any new development may not be factored into the rebalancing right away and, often, the market’s response by way of , re-rating/de-rating happens very quickly.

For instance, oil price de-regulation would not tend to reflect in the performance of MOSt basket, as against the Nifty 50 basket, given the low weights in the former.

The active strategy to a set basket of stocks also poses certain other risks. At times, higher weight to stocks that are under-valued for long (on expectations of re-rating), may affect the performance of the ETF, when compared with the Nifty index.

Weights based on pre-defined rules, lack of human intervention inability to diversify outside of the Nifty universe to boost performance may also heighten risks.

Besides, the MOSt 50 index still has to hold all the Nifty stocks, irrespective of their valuations. The NFO closes on July 19.

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This changed on April 4, 2006. It was then that Sebi mandated that while open-ended funds could charge only ‘entry fees’, closed-ended funds could charge only ‘initial issue expenses’. Both entry fees and issue expenses had a ceiling of 6%, but with an important difference.While entry loads were to be charged in one go, and showed up in the very first monthly statement of the fund, the initial issue expenses could be amortised, that is,spread out, over the life of a fund—typically three years in India, after which most closed-ended funds convert to open-ended funds.

This difference was eliminated about 22 months later,on January 31, 2008, after which the closed-ended funds could no longer charge initial issue expenses but had to move over to entry loads like their open-ended counterparts.

These 22 months of fee differentials between open-ended and closed-ended funds produced interesting results in terms of both fund flows and the start of new funds. For equity funds, closed-ended funds registered an average monthly inflow going up from virtually zero prior to 2006 to over $14 billion a month in 2006, doubling to over $28 billion in 2007 and exceeding $20 billion in 2008, before going back to zero once again in 2009.

In the two latter years,these figures exceeded those for the open-ended equity counterparts.For equity funds at least, the closed-ended funds seemed to owe their existence only to their ability to give the fee a different name and to amortise it, something openended funds could not.

Clearly then, investors were hoodwinked by the simple fact that they did not have to pay the fees in a single painful instalment but could just spread it out. Is this rational? No way.

The discount factor necessary to justify this would be close to 800% a year! This is clear evidence of a perception error driving the entire industry . The error is compounded when one recalls that the closed-ended funds usually charged the full 6% of issue expenses allowed, while open-ended funds generally charged either a much lower 2.25% or, in many cases, waived the entry fee altogether, bringing the average entry fee to only 1.75%.

Closedended funds also performed considerably worse than openended funds in terms of returns.

Did fund companies realise this and step in to cash out from this opportunity? You bet. Closedended funds really came to life during those 22 months of opportunity .

Before 2006 and after February 2008, there were practically no new closed-ended funds at all. But during the period of fee differential, over two new closed-ended funds were being started every month. In the last month, just before the window of opportunity closed, more than 10 funds were floated–the maximum fund starts in all times!

It took just a different name for the fee and spreading it over time to get Indian investors to believe they were getting a better deal when they were actually paying more for their investments.

There is little to suggest that such errors in treating fund fees are universal. In fact, experiments conducted by other researchers on American subjects have often demonstrated that framing effects on fund fees have little role in determining fund choice. Other evidence in the literature is open to alternative explanations. The current paper makes use of the policy changes to present the case in sharp relief. Investors, at least in India, cannot read the fine print when deciding on fund choices.

Whatever Sebi’s rationale for these policy changes may have been, this almost incontrovertible lesson is certainly a positive outcome. One can only wonder if it balances the millions inadvertently lost in fees by the closed-ended fund investors.

* Anagol, Santosh and Hugh Kim, 2010, “The Impact of Shrouded Fees: Evidence from a Natural Experiment”, Working Paper , The Wharton School, University of Pennsylvania The author teaches finance at the Indian School of Business, Hyderabad

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Yes, it make sense. For example, if you have an investment time horizon of over 5 years and the exit loads are charged for redemption before 5 years, you don’t have to fear. In a way, the other members of the fund who have redeemed their funds before 5 years have paid for the sales expenses of the fund on your behalf!

So you need not really worry about the exit loads!

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The report has pointed out that in 2007-08 only 7.7 per cent of the country’s total savings was allocated to mutual funds, thus leaving scope for growth of the industry.

Besides, it also said that the retail participation in mutual funds, which stands at 15 per cent at present, is expected to increase in the years to come as availability of products and investor education improve and the industry takes steps towards transparency and sound corporate governance practices to generate investor confidence.

The report has specially mentioned the turnaround witnessed in the performance of mutual fund industry, which had remained subdued in 2008. The report said mutual fund investments (net) in equity markets turned positive in March 2009 and were Rs 2,320 crore during April-May 2009, while they invested Rs 36,791 crore in debt instruments during the same period.

Mr Sandeep Sikka, CEO of Reliance Mutual Fund, said mutual fund penetration in India is just around 3 per cent and there indeed is a lot of scope to improve that figure. On increasing retail participation, he said it is a slow process and mutual fund houses need to increase their focus on investors’ education.

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In fact, mutual fund industry managers and watchers expect the superior performance of index funds to continue, going ahead, as the stock market turns more efficient and funds grow big enough to identify sufficient
‘multi-baggers’.

Index funds are passively managed and comprises a portfolio, which tracks and mirrors the components of an index. Diversified equity schemes are actively managed by fund managers. They argued that active fund management had the scope for outperformance because the relatively inefficient market gave them enough opportunities to gain from aberrations. In the bull market, the identification of a ‘multi-bagger’ — mostly a mid-cap stock, which doubled or trebled over a period — usually gave them that edge to perform better. But as recent market conditions were not conducive for picking a multibagger, returns from diversified equity funds lagged the index schemes.

An analysis by Benchmark Asset Management of 60 large-cap diversified schemes shows only 5-7 schemes have been able to perform better than index or exchange-traded funds. According to Value Research, a New Delhi-based mutual fund tracker, equity diversified schemes returned 9.19% over the past three years, while the Sensex and Nifty returned 11.71% and 12.25% in the period.

“This trend will continue because even as market evolves the skills of fund managers, relatives to markets are deteriorating,” said Benchmark AMC ED Sanjiv Shah.

The outperformance of index funds vis-à-vis actively-managed funds is a global trend, especially in developed markets like the US. In fact, several investors there are shifting a chunk of their money to passively-managed funds.

Domestic fund managers said the constant churn in equity schemes by investors is one of the constraining factor for the performance of actively-managed funds.

“If we were to follow the Warren Buffet style of investing (sell at higher levels, hold cash and invest at lower levels), then there is scope,” said a fund manager with a leading private mutual fund.
Benchmark believes controlling of costs (index funds — 0.5% a year and active fund — 2.5%) can partly reduce the level of underperformance of equity schemes.

“This difference of 2% per annum can balloon into huge difference over a number of years because of compounding. In the moderate return environment, it becomes a significant portion of your returns,” the Benchmark analysis said.

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There shall be no entry load for the schemes, existing or new, of a mutual fund. The upfront commission to distributors shall be paid by the investor to the distributor directly. The distributors shall disclose the commission, trail or otherwise, received by them for different schemes/mutual funds which they are distributing or advising the investors (on).”

The short 55-word decision from the capital market regulator, the Securities and Exchange Board of India (Sebi), that abolished the upfront agent commission (currently you pay up to Rs2.25 on every Rs100 invested in a mutual fund) has created havoc in the market. Breast beating or the clink of bubbly glasses depends on who you are—a mutual fund or an insurance agent

Commission bearing financial products, such as mutual fund schemes and insurance policies, run the risk of misselling by vendors who push products that maximise their incomes, rather than client welfare.

By taking away the incentive to push the fund that gives the most commission, Sebi’s decision will nudge the market to eventually split into chemists and doctors. The chemist will simply vend mutual fund schemes and offer no opinion on what you should buy. You will probably come to him for ease of transaction and for that, not unlike the payment to your stock broker, you will pay anything between 20 paise and 40 paise on every Rs100 of transaction

Undiverted by the din of the new fund offer sales spiel that threw money at distributors to sell their new fund offers (there are stories of large distribution houses not even taking calls from new fund houses unless a 4% commission was on the table), you will now look very carefully at past performance, track records and annual fund management fees before you buy

And no, you will not cut a cheque for 20 bucks each month you buy, as some fear, you will probably pay for this through an annual cheque for the service or an on-line payas-you-go system, not unlike the stock broking model that you are used to

What if you don’t want to do the homework and would rather have advice from a professional? To get this, you will not go to a chemist (like you do currently) but to an entity that has the ability to offer financial advice. Which means, the adviser has a set of attributes in terms of a basic level of education and certification and is in a regulatory framework that allows you to trust his credentials. For this, you must be willing to pay an annual fee to the financial adviser, who may also vend the products himself or have tieups with pure vendors.

The adviser will be a tracked entity with a paper trail on the advice he gives, and will not be able to suggest a unit-linked insurance policy to a person seeking a pension product and get away with it.

He will run the risk of his livelihood—his licence— being cancelled
With this 55-word decision, we are closer to this superior way of managing the retail flow of money into the markets

A key reason that India remains stuck at low levels of household participation in financial instruments and invests still in low real return bank deposits, is the lack of trust in the product vendor – and rightly so
You make smart choices—if you can’t trust the guy selling, you simply don’t buy the product.

For this market to work, there is yet a couple of missing links. The separation of advice from vending or of a doctor from a chemist is yet to happen. Given the fact that any product bearing a load (cost or commission) has advice embedded in it, the surgery to separate the two must happen. Sebi has done it

But one part of the market is so much in the dark ages that unless the winds of reform blow in Hyderabad (where the insurance regulator resides), you will continue to be mis-sold products and the retail market will remain small, under-developed and inefficient. The insurance regulator, compared with its capital market counterpart, is still grappling with the past. Not only are commissions embedded in the product, but are actually pushed together and collected from you in the first three years, on a product that is supposed to live for at least 15

Some of these agent com- missions are hidden away in a head called “administrative costs” that you don’t even see

So, you pay for the joy of buying a 15-year product (that you may be encouraged to churn after three years) and pay up to Rs40 on Rs100 invested, (remember we are now talking of 20-40 paise in funds for the same investment!) and worse, you continue to pay the agent a commission over the life of the product that is unlinked to the service you get. In the new post-Sebi no-load decision that is asking you to evaluate the service and pay for it, the contrast seems even starker

Where we go from here will depend on what the insurance regulator does now. The need is for drastic reform and to separate advice from product vending, and of course, to not fall back on either the limitations of Insurance Act or the global precedents of the life insurance industry

And also throw out the glib story that some smart insurance chief executive officer gave it eight years ago that the industry needs leg room to innovate hence the non-standardization of costs, lack of benchmarks and lack of control of the customer to evaluate and pay for the service of the agent
If freedom was what it took, then surely after more than 50 years of insurance vending in the country, penetration would be higher than the current under 5%. The move is now from Hyderabad and the Indian retail investor is hoping that it plays ball

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