Hdfc Trustee company has been fined Rs. 55 lakhs.

The structure of an amc is such that the Trustees are responsible to certify that the internal processes are fine and working. Obviously it was not working, and this equities dealer was caught. Is it a systemic failure? I think yes.

Did it bother the fund house? Well maybe a little bit, but not too much. The investors just went on investing saying ‘these days morals have come down’ or some such bull. Fines should be a huge deterrent for the company. The word ‘Trustee’ means a person who can be trusted and the standards set by the courts is quite high. See the English decisions or even the Indian decisions if you are in doubt!

Sebi should have taken action against the trustees (they have a personal liability in case of fraud, and this is fraud) – there should have been personal fines. Clearly the internal audit, internal control systems, compliance, operations, Trustees have all failed….and there is no mention of all this. Levying a piddly fine of Rs. 55 lakhs (remember this industry has seen Million US dollar bonuses) is like a joke.

The worst thing of course there is no attempt to quantify the loss incurred by the schemes under the management of Hdfc. Having a good fund management team cannot be an excuse for leakages elsewhere.

My friend said : “why does it matter to you…if you are not happy with the returns, WALK. ”

Walk I will, not sure when. The worry is I have no clue what is happening in other fund houses. This one off incident seems to have come out as an accident, not as a pattern or an investigation or tracking…and that is scary, very scary indeed!!

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

The average return on equity investments (without reinvestment of dividends) is about 18% over the past 31 years. Does it mean that every year you got 19%? The answer is no. Such ‘zero standard deviation return’ is possible only in CERTAIN debt instruments. In equity investments there have been years of +242% as well as -46%.

When you see years in which the stock market returns are say 90% – you know that immediately following that or in a couple of years you HAVE TO GET A NEGATIVE return, because the 90% return HAS TO REVERT TO 19% – REVERSION to the mean.

However there is no pattern of 38%, 0%, 19%….it can even be -242%, 29%, 45%, -32%…and slowly catch up with 19%. The theory says a given return (value) will continue to return to an average (return) value over time. It may happen that over a period of time the average itself will increase or decrease, but the impact will be far more gradual.   This statistical measure can be applied to any measurable value, including interest rates, cricket scores of a team, batting and bowling averages as well as the return on a certain investment.

This theory is extended to a bunch of good fund managers too. Suppose you own A,….E five funds. There is a good chance that suddenly one fund may not be doing well. Do a lot of detailed research and then pump some extra money into it.

Of course you need to remember the old maxim ‘Winners rotate, losers remain at the bottom’ – so be careful!

Very funny how people use average returns when it comes to investing. They have no clue what will be the future returns. Neither does the fund manager, the agent, the RBI governor or the Prime Minister. So they end up seeing the past returns. This is like ‘I cannot see in front, so I will look in the rear view mirror and drive’. This works fine if you are driving in a desert or even a long road. You only hope you are not in choppy markets. Unfortunately, markets are choppy ALWAYS!!

In case of say gold the last 3 years average return is 32%p.a. – and so channels are urging a buy. The average return over a 30 year period is say 7%p.a. in rupee terms.

when you watch television channels urging you to buy gold remember the returns figure and the ‘mean reversion’ story..that is all..

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

Answer: In such turbulent times you should not invest in an equity scheme. So please invest this money in a clutch of balanced fund – Franklin Templeton Balanced fund, Reliance..fund (do not remember which), Hdfc Prudence fund, and DSP Blackrock balanced fund.

I would have done it as follows:

My take: What is your age? and how long can you not worry about this and what is the amount of fluctuation that you can take.

If you can take a 25% fall look at equities – be ready for a 4500 nifty. Do a SIP for 6 months – not 2 years. Then relax. And it better be an equity fund like Franklin India Bluechip, Icici prudential discovery, Hdfc Top 200 or Hdfc Equity fund.

If you think this is too confusing, put in Templeton India Index fund.

Second question

Is Franklin India Bluechip a good fund to invest?

Answer: Yes, it is a good fund and it has given a return of 84% last year. It has fallen less than the index during bad times and has given a 25% return over the life of the fund.

My take:

I can swear that when it was under-performing, it was touted as a bad performer and another business channel was saying ‘it is now not a good fund, come out of it’. Luckily one editor and I discussed this particular scheme – and she said ‘I am happy with its performance why is this channel saying sell?’

She was then a kid…I said ‘Hey kid welcome to the world of financial journalism’..I will not name her here…but I hope she comes and comments, she is a regular blog reader anyway!!

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

Fund manager: Hello, today we are going to talk about debt funds

‘Debt funds have done extremely well over the past few years….’

Journalist: Why is there no retail participation?

FM: Oh! the distributor has not been selling it…

Journalist: Yes, yes, we heard that the distributor sells only funds which they like or which pays them well..

FM: yes! See the table – how well we have done…

Journalist: Sir, can I have a copy of the presentation please?

FM: of course…can we move towards drinks and dinner please?

My take: Debt funds have not done well over a 5 or 8 year period. In fact they have not done well at all. Only at times when interest rates fall, there is a good MTM which allows the returns to look good. For example income funds would have given returns of more than 6% in 2009, 2010 and 2011! This is a joke if you consider tax – even just the dividend distribution tax will take you to NEGATIVE REAL  RETURNS over the past few years. There is no logic at all for the retail investor to invest in debt fund – except as a small time temporary measure. It is also fine to keep money in a liquid fund so that you can do a STP into an equity fund.

The gap between a well performing debt fund (Canara Robeco I think) and a JM mutual fund is so HUGE, that it looks like a joke. SBI has such a shoddy performance in its dynamic debt fund, you will not believe it. The best fund managers are quitting the industry, the mediocre ones are s….ing your portfolio.

There is no index fund among debt funds , so the fund manager risk is too high.

The only logic in keeping money in debt funds for long periods of time is – to save the income tax. If you keep the money in say a debt fund (which gives same returns as a bank) you save the Income tax – you pay it at the end of 15 years instead of paying it every year. This saves you a lot of tax and the impact of compounding is superb. However one fund performing well over a 15 year period is like Santa Claus – a myth!

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

However the biggest change which has hurt – has hurt the distributor, not the fund houses. That is the crux of the change. Did the AMFI protest ? The answer is NO. Why?

Simply because it was hurting only the distributor, not the manufacturer. So the association of manufacturers did not bother!

Now let us take a case of a mutual fund buying shares worth Rs. 100, and let us say they pay 1% as BROKERAGE (they actually pay 0.1% or less) – what do you think happens to the brokerage?

It gets treated as expense…correct? Hell, no. It gets added to the cost of the asset – so the NAV will go up by Re 1. So the nav in this case will go up by Rs. 101. This actually means the MUTUAL FUND could not care about how much brokerage that they pay….sad, but the accountants will tell you that it is the way it is!

Now if suppose SEBI says that brokerage paid should be treated as an expense (and within the cap of 1.5%!)….

the industry will SCREAM…and the manufacturer’s association will also scream….and all hell will break loose…ha ha what fun!!

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

Looking at ratings to invest in a mutual fund is pretty foolish. Also when the number of funds in a category increase, there will by definition be a lot of 5* funds. This is obvious is it not? If  I were running a rating agency and I decide that the top 10% will be called 5* it is good for the business. So if there are say 500 equity funds, you will have 50 funds that will get a 5* rating. Now how will you pick 2 funds (investing in more than 4 funds is a waste of time) given the fact that you have 50 funds from which to choose. However it is good for the rating agency – all the schemes will advertise, put an asterik and say ‘Subramoney has rated us 5*’ – clearly I will be the biggest beneficiary. L O L

Rating is a difficult business, done by overqualified people with impossible assumptions. Why they even rated many junk bonds as AAA, and then in 6 months down graded them to junk!

So does rating make sense? No. Not for mutual funds. For banks, company fixed deposits, etc. it may still make sense…but not for mutual funds. Frankly rating agencies should be above board, and above suspicion. Next big blunder will come from…?? Read on.

http://www.fool.com/investing/general/2010/05/21/put-the-rating-agencies-out-of-their-misery-before.aspx

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

I have written enough about SIP – and I strongly believe it requires a brilliant mind to understand simple things – and Providence to help them actually do it.

It is very easy for me to take the full credit for the accolades that I have got for SIP, but I thought I should share the credit with the man who introduced me to SIP. It was Suraj Kealey. At the time I met him he was the head of Marketing (not sure if he headed Sales too, I think he did). I think the year was 1999 or 2000. When he said ‘good for the investor, good for the distributor, good for the fund manager’ – the saying just stuck. Not sure who christened him ‘SIP Suraj’ – but I was one of the earliest users of the term! Maybe I christened him? Not sure.

Suraj spoke sense (he did even when he was in Metlife – and that must have been difficult, I guess!) – he still is a sane voice in the financial services industry (esp in the sales side). He made sure that Templeton was the thought leader…well that is another story.

I was amused when 2 channels thought that there was no story to do about the amazing increase in SIPs (I heard that there are 55 lakh SIPs averaging Rs. 2500 per month per SIP). Well channels are channels, are they not?
ET has done a story on the growing popularity of SIPs (once upon a time the incentive to do a SIP was to save the entry load, now there is no load anyway!).

So what Suraj taught me in 1999, banks have discovered in 2011 (not bad) and they are planning to sell SIPs in a big way. SBI plans to sell 25,00,000 SIPs, Axis bank proposes to sell 5,00,000, Canara 200,000. Making an assumption that Hdfc, Icici, Kotak, banks, the national distributors, the IFAs all sell SIPs – I guess the number will reach about 70,00,000 SIPs. The bad thing is each bank will sell its own scheme – so the best performing fund will not be the best garnering fund. That is not an issue at all.

If all this information is true and you wish to make money on this info, just start your SIP – stick to the tried and tested names (and pray for the fund manager’s long life – metaphorically, on earth and in the fund house!). If you are confused stick to a good index fund. Like Franklin Templeton Index fund. If you like this article ask for my ARN code. Suddenly it looks attractive to do business in Index funds. Though personally I think the Sensex and the Nifty are poorly crafted. But that is another story na?

On page 10 of ET (19 JULY 2011)  Nishanth Vasudevan has done a story, not sure of the figures, but the story is good. Poor guy he must also  (like me) be praying for some nice source of authentic mutual fund information. I am still groping.
Read the link

http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/banking/banks-set-goals-for-their-branches-to-sell-equity-schemes-with-sips/articleshow/9277005.cms

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

For doing this they need to buy a software which will convert their excel sheets into xbrl documents. This tool is a must because the returns have to go very often (MCR is a monthly report and is a complex document for example). So it is better to buy a tool, learn how to use it and start filing the return in xbrl format.

A mutual fund gets its data from at least 3 sources – the Registrar and Transfer Agent (Cams, Karvy CPL, Franklin Templeton, Sundaram BNP Paribas PSL, Escorts, Deutsche ISPL) the fund accountant (like Mfund) and some of the data that is self generated. The fund house has to collate this data and make the reports for SEBI.

Can this be out sourced? The answer is yes.

Should they outsource it? No. They should not. Why they should not is very simple. It is critical current and data with time lines. Also SEBI is giving them about 4-5 months to do ‘voluntary filing’ – this is the learning period.

So they should buy a tool, convert (learn to convert in say 2 days) the data and then send it to SEBI.

What about the annual return of the Asset Management Company – which is compulsory filing?

Well this is better outsourced! This is because the annual return is far more complex to tag – with block tagging, syntax errors, etc. Also this is  a once a year kind of effort. The data is not at all strategic – after all the balance sheet is available on the website of all the mutual funds.

So the strategy should be – SEBI reporting do it yourself, but ROC reporting outsource it. Next year the ROC reporting prices are likely to be 50% of this years rates….my guess. I could be completely wrong if the taxonomy increases (which will) and the scope of tagging increases (it will!). However more number of people may be offering this service!

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

We this is such a difficult question to answer that no sane man can answer this question. Having said that, I am planning to make an attempt. If that gives you a hint of my sanity, so be it!!

The facts: You keep hearing every day that a foreigner is pulling out of Indian operations. Since many of them have not confirmed it, I am not naming them.

Then you hear a deal like Goldman Sachs buying over Benchmark mutual fund.

So largely in a country where you are playing around with highly inaccurate data you cannot really do any data driven story – just speculate about the quality of the data that is available!

Let us look at the positive side of the whole thing. I heard (not confirmed) that there are 55 lakh SIPs currently in India. Also the average number being thrown about is Rs. 2500 per month per SIP. Now this means about Rs. 1375 crores per month is flowing into EQUITY FUNDS every month. This is kinda difficult to believe. Assuming this is true, about Rs. 18000 crores flows into equity funds every YEAR. Now assume that in the next 3 years the number of SIPs increases to 110 lakhs and the average SIP amount increases to say Rs. 5000 per month…the amount per month will be Rs. 2750 crores and about 35k crores per annum. Now all this and the existing aum in equities will make this a really significant industry.

Will it happen? I have no clue! However it is possible that all the mutual funds selling SIP aggressively – and the people seeing the advantages will all help.

The load being there or not being there is incidental!!

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

In a similar story the mutual fund regulator (regulators speak the language of the dominant player) is now creating business for brokers and demat service providers like banks.

The first step towards increasing business for brokers was to say that mutual funds have to list the units …or at least give the customers an option of holding the units in demat form.

We have spent enough energy (at least I have) – and Srikanth of fundsindia.com will agree that holding units in demat form is of no use to the end user!

I am happy holding my units in paper form – and keep my portfolio in free websites like www.myiris.com, www.valueresearchonline.com or www.moneycontrol.com. In fact I like the fact that my portfolio is analysed – and I know how my portfolio is split market cap wise and industry wise. No demat service provider does all this for me, and that too for free. Why the hell should I hold my units in demat form beats me.

So suddenly there is a SEBI circular saying…’from 1st October…fund houses should give an option to hold in demat form….’. In a couple of years they may say ‘It is compulsory ….to hold units in demat form’.

Of course SEBI will not want this – Sucheta will suddenly ask SEBI to give her the real number of unit holders in India (cdsl + ndsl – common holders, sorted PAN numberwise)….and the sheepish answer would be 125, 782 instead of ‘about 1 crore unit holders’ as is being flouted now…

This article has somebody saying ‘the transferability of schemes becomes possible….’. Nonsense. In case of a mutual fund, the units are NOT TRANSFERABLE. In case I wish to transfer it to my mother, I have to surrender it and my mother has to buy it from the same fund house – as there is no entry load it does not matter. Earlier I would have incurred an entry load of 2%  for doing the transaction.

Why this demat is being pushed I have no clear idea. However hard I think, I cannot see a legitimate or sensible reason either. For the end investor it increases costs – any way with 84 mutual funds (I believe there are many waiting in the pipleline!), falling brokerage income for demat service providers and brokers….I can only speculate that regulators do not always work in the interest of the investor.

read on

http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/give-investors-option-to-hold-units-in-demat-accout-sebi-to-mfs/articleshow/8444710.cms

Post Footer automatically generated by Add Post Footer Plugin for wordpress.