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Dipayan
Ghose never knew too much about the stock markets; that there
was money to be made in the nooks and crannies of Dalal Street.
Then the benchmark index, the 30-share Sensex, hit 8,500, and
Ghose suddenly realised that all those around him were rolling
in the moolah. Determined not to be left out, he picked up one
of those tip-sheets from his neighbourhood vendor, where he came
across this gem of advice: "If you're a newcomer to equities,
your best bet is to take the mutual fund route." That equity
mutual funds have been clocking handsome double-digit returns,
reinforced Ghose's belief that this was the most prudent way for
him to pile up a hoard. He managed to lay his hands on an application
form for a new fund offering of an equity scheme from a fund that
boasted annualised 66 per cent returns as on September 30 on its
other older stock offerings. Ghose filled up the form, opted for
the growth option (who wants dividends, he shrugged), tore out
a cheque for Rs 50,000 and put in his application at the authorised
collection centre in the first week of October. By the end of
the second week, the Sensex was in freefall, down some 500 points,
and equity schemes were in the red by 3 per cent. Ghose was worried.
Ghose (not his real name), and thousands
like him, would have had ample reason to be concerned last fortnight.
For, as the indices continued to hurtle downwards -at the time
of writing the Sensex had fallen to 8,201.73, a slump of 620.11
points from its peak-a good number of them who invested in equity
schemes would have realised that their (plummeting) stash was
locked in for three years. Only after that period could they ponder
redemption. But if Ghose and his ilk are sporting furrowed foreheads,
the Indian mutual fund industry isn't complaining at all. Reason?
Assets managed by the Indian mutual fund industry grew 30 per
cent in the first eight months of 2005, over the entire of 2004.
Even better news: Assets of equity schemes managed by mutual funds
jumped 67.5 per cent to Rs 55,743 crore in the same period. Inflows
via equity new fund offers (NFOs) in the April-September period
have already hit 16,500 crore (as against Rs 13,250 crore in the
entire 2004-05 fiscal), and to top that, there are at least 16
more nfos in the pipeline (including four new tax-saver funds).
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Investors are knocking
the doors of mutual funds for investing in equity markets
Pankaj Razdan
CEO, Prudential ICICI AMC |
Because of lack of
depth in the market, Sachdev is focussing only on the top
100-200 stocks
Sanjay Sachdev
MD & CEO, Principal PNB AMC |
Says Sanjay Sachdev, MD & CEO, Principal
PNB AMC: "Lower assured returns due to falling interest rates
and the lack of investing opportunities in other asset classes
have resulted in investors getting attracted towards equity-and
they are taking the mutual fund route." Adds A.K. Sridhar,
Chief Investment Officer, UTI AMC: "New investors are tapping
the equity markets through mutual funds." Sure enough, if
investors are queuing up for application forms, it's also because
they've been voyeuristically viewing the returns being dished
out by the equity fund bunch. For the first eight months of 2005,
equity schemes recorded a weighted average return of 24.4 per
cent, in the process outperforming the returns of the Sensex and
the bse-500 (which recorded an absolute return of 18 per cent
each). The increasing thrust on equity-as of December, equity
schemes accounted for 22.11 per cent of mutual fund-managed assets;
by August that figure had shot up to 28.47 per cent-has also resulted
in MFs accounting for 4 per cent of the turnover on the BSE and
the NSE, as against 2.5 per cent six months ago.
The anxiety that prevailed last fortnight,
however, revolved around whether the new flock of mf investors
had got their timing all wrong. After all, if the stock markets
slip into a deep correction, it will wash away a chunk of the
gains of the newly-launched schemes. Points out Rajiv Shastri,
CEO, Sahara Mutual Funds: "Investors who are rushing in to
capitalise on the rising market and investing big money in NFOs
(new fund offers) are carrying an immense risk in their portfolio."
That's the investor's headache. Shastri adds
that the fund manager, too, comes under a lot of pressure at such
times, and that's when "the discipline of investing in equity
markets is lost". To be sure, most funds are sitting on an
average of 10 per cent cash (see So Where Will the Cash Go?),
with some like Deutsche Alpha Equity Fund and Birla Index fund
cushioned by 46.24 per cent and 40.14 per cent, respectively.
In a correcting market scenario, fund mangers typically use up
these funds to buy stocks at lower prices, thereby lending support
to the markets.
SCHEMES IN THE PIPELINE |
ABN Amro - ELSS
Benchmark Exchange-Traded Funds linked to Sectoral Indices
Chola ELSS
Deutsche Flagship Equity Fund
Deutsche Infrastructure Fund
Deutsche Stable Growth Fund
DSP ML Small & Midcap Fund
Fidelity Tax Advantage Fund
Franklin India Smaller Companies Fund
HSBC Incredible India Fund
ING Vysya Contra Fund
Kotak ELSS
Principal PNB Large Cap
Prudential ICICI Services Fund
Standard Chartered Imperial Equity Fund
Tata Contra
Source: SEBI
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But if inflows from the foreign institutional
investor (FII) brigade dry up-in the current month till October
13, the FIIs had sold Rs 964 crore of equities on the Indian markets-can
we expect mutual funds to fill in the breach? The FII stash is
bigger, but mutual funds aren't far behind: Foreign investors
in the January-October period have poured Rs 36,500 crore on Dalal
Street. Mutual funds meantime have mobilised Rs 24,000 crore through
new equity offers in 2005, with nearly 60 per cent, or Rs 14,300
crore being fresh money (the rest can be accounted for by investors
churning their portfolios and mark-to-market gains from equity
schemes). Sahara's Shastri explains that even if 25 per cent of
those fresh inflows are retail monies, it's a significant number.
Ved Prakash Chaturvedi, Managing Director, Tata Mutual Fund, is
more sanguine. He estimates that 80-85 per cent of the increase
in mutual fund assets is courtesy of fresh flows. "Of this,
retail inflows (including high-net worth clients) account for
65-70 per cent of the inflow in equity schemes," he adds.
The interest from retail investors is clearly
visible in the increase in the number of applications for new
NFOs. For instance, in June, Principal Junior Cap Fund received
75,000 applications and mobilised around Rs 440 crore. The latest
NFO to close, SBIMF's Multicap Fund, received 3.75 lakh applications
and mobilised Rs 2,100 crore. And Tata Mutual's Chaturvedi says
he's expecting nearly 3.5 lakh applications for the Tata Contra
Fund.
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The lack
of opportunities in other asset classes is prompting new investors
to tap equity markets via mutual funds
A.K. Sridhar
CIO/UTI AMC |
Fund
managers are advising investors to have a three-four year
horizon. Chaturvedi discourages investors even against one-year
investment horizon
Ved Prakash Chaturvedi
MD/Tata Mutual Fund |
That projection may just go a bit awry if
investors tighten the purse strings, sensing (yet another) bull
run going bust. The funds, for their part, might have an ideal
product for such a situation: The Systematic Investment Plan (SIP)
option, which not just reduces exposure to high-risk (by nature)
equities, it also helps the investor garner more units when the
market tanks. The sip operates like a recurring deposit of bank,
with the investor parking upwards of Rs 500 per month with the
fund, for which he gets in return his units. If he has Rs 5,000
to invest per month, he can divide that amount into five parts,
and invest at five different dates, thereby allowing him to take
advantage of market volatility.
Yet, sips on their own are inadequate protection
for fund investors, many of whom tend to join the party at the
peak of a rally. Realising the disastrous consequences these could
have on their schemes-by way of large-scale redemptions-fund managers
are advising investors to have a three-four year horizon. Says
Principal's Sachdev: "We do not want money for the short
term. Secondly with lack of depth in the market, we are focussing
only on the top 100-200 stocks. The long-term trend is intact,
but at current levels, stability in a stock is crucial and most
of the funds are not comfortable with small stock." Tata's
Chaturvedi says he's been discouraging investors with even a one-year
investment horizon during the Tata Contra Fund roadshows.
Of course, there will always be investors
looking to make quick profits, which results in them flitting
from one fund to the other, resulting in a heavy churn factor,
as high as 20-25 per cent. To deal with this, funds like SBIMF
and Kotak AMC have introduced entry as well as exit load for their
new and its existing funds. "We have introduced entry and
exit load in our schemes mainly to cap our investors and to restrict
churning," says Nitin Jain, Fund Manager at SBI AMC, who
adds that excessive churning spoils the investment pattern in
the fund. However, there are industry insiders who disapprove
of such a move that makes short-term exits costlier. One such
senior official at a state-run AMC accuses such funds of profiteering,
as they receive a 2.25 per cent load on entry and a 1 per cent
load on exit.
DISTRIBUTORS' DAY OUT |
Almost Rs 1,000
crore-that's how much distributors of mutual funds have raked
in by way of commissions in 2005. here's how we arrived at
the figure: So far in 2005, the top 50 distributors, on an
average, have pocketed a brokerage of 4 per cent. Mutual funds
have in this period mobilised over Rs 24,000 crore from NFOs.
Exact figure: Rs 960 crore. A senior official at a MF distribution
arm reveals that in some cases the brokerage inches up to
as high as 8 per cent. SBIMF recently garnered Rs 21,000 crore
for one of its schemes. According to industry sources, the
secret of its success: The 4.75 per cent average commission
it paid to its top 50 distributors. You have to wonder: Don't
higher distribution commissions translate into lower investor
returns? That's not the way to see it, frowns Ved Prakash
Chaturvedi, Managing Director, Tata Mutual Fund: "Compared
to insurance companies, our commissions are still low. If
we do not pay higher commission, they do not show any interest
in selling our products. Secondly, distributors are also expanding
and have been mobilising huge retail money from Tier-II cities." |
Such controversies notwithstanding, it would
appear that the Indian mutual fund industry has hit an inflexion
point-or at least the equity schemes have. As Pankaj Razdan, CEO,
Prudential ICICI AMC, explains: "This time round, for the
first time, investors are knocking the doors of the mutual fund
for investing in the equity markets. And the inflows are also
coming into existing schemes. Leaving aside the top five metros,
35 per cent incremental inflows into funds are coming from Tier-II
cities." In the US in the nineties, huge money poured into
mutual funds from us households, even as they became even bigger
net sellers of stock (from sources other than mutual funds). If
Indian mutual funds are able to ride out the current short-term
blip, and dish out handsome returns to investors over the next
2-3 years, those rewards would go a long way in introducing many
more domestic households to the mutual fund cult.
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