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!!

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The monkey agreed to play the arbitrator. He breaks the bread into two pieces – then he finds one is bigger than the other – so he eats a little from that slice. That makes this piece smaller, so he eats a little from the other bread…..you can now guess what happened!

The monkey eats the whole bread!

For the mutual fund distributor there is a commission called the ‘TRAIL commission‘ – which comes from the N A V of the scheme. So it is the investor who is paying the trail commission to the DISTRIBUTOR. Today amfi has come out with a notification /clarification on who should get the trail in case of a ‘transfer of aum’ from one distributor to another. Many banks and other big distributors were supposed to be playing tricks to get Aum transferred.

So I have been SCREAMING that for a direct investor and for an investor who invests through a distributor there should be separate NAV. However this is not likely to happen. What happens to the TRAIL commission of the ‘Direct’ investor? Well the investor PAYS the trail…but it is kept by the mutual fund. Any accountant here, please help, I may be wrong..not sure.

However there was a new problem – if a distributor changed in the interim period what to do? AMFI has come out with a brilliant solution – the AMC pays not trail. Which means the AMC gets to charge the trail (remember all of us get the same N A V?). Why did this happen?

Simply because AMFI is not an industry body, it is a Manufacturer’s club. As a young A M C’s MD told me ‘a typical British Club with various classes of membership – Platinum, Gold, Silver, Earthen,…..

So now the old distributor and the new distributor both do not get the trail, even though the client pays it through the NAV, and the AMC gets to ‘spend it on investor education’. Congrats A M F I. I hope S E B I takes this with all seriousness and creates a fund into which this amount should be deposited AND GETS MONITORED BY N I  S M.

I hope you still remember where we started…the cats and the monkey story!

http://www.dnaindia.com/money/report_no-trail-commission-if-distributor-changed-amfi_1380296

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Once upon a time there used to be a ‘ring’ in The Stock Exchange (you dummy it had to be just called this, because the other ones did not exist). The Stock Exchange, Mumbai became the BSE – the Bombay Stock Exchange. The people with the ‘sauda’ book went into the ring and executed the transactions. Quotes were given by jobbers (called taravaniwalas). The daily turnover used to be around Rs. 200 crores – anything higher was considered great. There were 100,000 graduates / undergraduates who worked as jobbers, clerks going into the ring, sub-brokers, share transfer clerks, etc.

Then came technology – and the peopl who brought it said ‘now there is tranparency’ – after all the tech people, ‘educated’ people, etc. had to create new terminology. So out went badla, and in came F&O….and many such changes. Jobs changed hands. Frankly do not know whether the benefits went to the investor or the people who created a big army of financial service sector jobs. It would be intersting to see the ‘wealth created’, the ‘salary paid’ , the turnover tax paid…velocity benefits everybody except the investor (assuming he is still alive!).

Then came the mutual fund industry – ‘wealth management’ they said it was. Again distribution was required, professionals were required – so ‘charges’ were imposed. Some people made an attempt to understand the charges – the super big guys understood and negotiated it. The smaller guys do not understand the charges though there are some who pretend that they do. The amount of expenses that an amc can charge is decided by the amount of money that they can charge as expenses and its own fees. These were fixed when the aum of the biggest amc was under Rs. 1000 crores. Now it is Rs. 100,000 crores. Mr. C B Bhave has an advisory committee which is supposed to benefit the end investor. I have not seen any MD of any company of any industry say “Regulator please reduce my charges so that the end customer can benefit”. Well bureaucrats have some simple illussions in life, do they not.

For a customer who invests Rs. 100,000 a year for 30 years the load that he pays would be Rs. 2000 * 30 = Rs. 60,000. However even if the fund puts in a mediocre performance, the amc charges he pays would be Rs. 250,000 in THE THIRTIETH YEAR ALONE!

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Do not wish to talk about this person, but it is really amazing how the people who ‘run’ and ‘govern’ and think they do understand the ultimate customer’s needs are actually only savers, never investors. If you see the SEBI committee on ‘Mutual Fund Advisory’ – it would be interesting to see the mutual fund investments of each of the members! The committee contains ‘manufacturers – the amcs’ – there is no representation of the Investor in mutual funds, or the distributor. The AMCs have been described by one the magazines (who anyway depend on the advertisements) as NFO factories because of their selling skills – the sales force can only sell NFOs! One bank was selling a NFO recently by telling the customer “Sir, you will get full allottment of these units at Rs. 10 if you buy it from our bank” – which is an amazingly true statement! So here is a committee which is indifferent to entry loads (though most of them privately admit that the entry load is a subsidy for their growth – other wise their salary bill will go through the roof), who have decided to abolish the entry load. Good. Will the small IFA die? No but he will surely shrink – his time given to the mutual fund business. He will get people to do more day trading, sell more life insurance, car loans, educational loans, post office schemes, etc. The question is how will the manufacturers react? Some old houses with a great reach can be more easily challenged – if they have the willingness to hire people and pay well – are JP Morgan, DWS, AIG, listening?

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In a new study, Age Wave, found that only 4% of respondents strongly agree that Americans behave in a financially responsible manner. An overwhelming 95% of respondents said financial management should be a standard part of high school curricula. Eighty-one percent said that to live within ones means was the most important financial advice that parents could pass on to their children.

All of these responses underscore the need for guidance and education among financial services clients, and financial planners are positioned to provide those services, said industry professionals. “There has not been a moment in history when more people need to be coached, guided and educated about how to create a long-term plan,” Dychtwald said. “What you’ve got is a population of people who have been spooked. They don’t know who to trust, who’s lying, or what people’s intentions are.” This is absolutely true in India too. Ajit Dayal of Quantum Mutual fund and Personal fn (one a full cost asset management company and the other a mutual fund and life insurance distributor!) writes a column titled “Honest truth”.

The study, called “Retirement at the Tipping Point: The Year that Changed Everything,” gathered opinions from more than 2,000 Americans from four generations. The study was conducted with Harris Interactive.

Nearly 60% of Americans lost money in mutual funds, 401(k) plans or the stock market. Respondents believe that it will take about seven years, on average, to recover losses. Among respondents 55 and older, 46% say that medical expenses not covered by insurance is a top financial worry for their retirement phase. Four out of ten respondents said they believe they will have to help support their parents, in-laws or siblings eventually. In light of their financial situations, respondents believe, they might need to postpone retirement by 4.2 years, on average.

“Personally, I think it would be a shorter recovery time, more like three to five years,” Diachok said. Of course, he acknowledged, “that is a significant amount of time if you were planning to retire in two years.”

In the survey, some Americans did express optimistic attitudes about retirement, and even saw working during their retirement years in a positive way. Seventy percent say that working in retirement is a way to remain stimulated and pay bills.   Many of them will not have a choice!

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It is a negative story so it is easy to carry – and people will read.

I belong to the old school of journalism – we actually thought we had to do our home work, read, talk to amcs, distributors, SEbi, banks, employees and collect stuff. Then we had to find a pattern. Let me take an example. I have been told by 3 alert clients about the ‘true to label’ investing mistakes by 3 fund houses. Is it enough to do a story saying the ‘label should be ignored’ or even better ‘the label is a fable’ ? The answer is yes, of course. However the correct way is to do a review of 20-30 schemes and then say ‘A’ fund house is doing it, ‘B’ had done in the past, …etc.

Similarly if there is a story on throwing money at distributors – this story misses it. This is a ‘personal’ – ‘khunnas’ kind of story. Sorry SS story should be on topics, not people – even if it some easy sitting duck like Pankaj Razdan or Ajay Srinivasan. You should have done research on money being thrown by other AMCs – even the ‘holier than thou’ ones are doing it. Why are we fooling ourselves into believing that only PR and AS are doing it? Ask the distributors – you have a bigger story waiting.

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· Right of timely services

· Unit holders entitled to receive dividend warrants within 30 days of date of declaration

Unit holders have right to payment of interest at 15% p.a. in the event of failure on the part of Mutual fund to dispatch redemption proceeds within ten working days.

· The Unit holders can claim unclaimed redemption proceeds or dividends due within a period of 3 years of the due date at the prevailing NAV. After 3 years he/she will be paid at NAV applicable at the end of the third year.

· For initial offers unit holders have right to expect allotment of units within 30 days from the closure of mutual offer period.

· Right to information

· Right to approve changes in fundamental attributes of the scheme.

· Right to wind up a scheme if 75% of investors pass a resolution to that effect.

· Right to terminate AMC if 75% of the unit holders decides so, of course with the prior approval of the SEBI

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REGULATORS IN INDIA

· SEBI – The capital markets regulators also regulates the mutual funds in India. SEBI requires all mutual funds to be registered with them. SEBI issues guidelines for all mutual funds operations – investment, accounts, expenses etc.

· RBI as supervisor of banks owned mutual funds – As banks in India came under the regulatory jurisdiction of RBI, bank owned funds to be under supervision of RBI and SEBI.

· RBI as supervisor of Money Market Mutual Funds – RBI has supervisory responsibility over all entities that operate in the money markets. Hence in the past Money Market Mutual Funds scheme of Mutual funds had to be abide by policies laid down by RBI.

· Ministry of Finance – (M o F) supervises both the RBI & the SEBI and plays the role of apex authority for any major disputes over SEBI guidelines.

· Company Law Board – Dept of Company Affairs – Registrar of companies AMCs of Mutual funds are companies registered under the companies Act 1956 and therefore answerable to regulatory authorities empowered by the Companies Act.

· Stock Exchanges

Stock Exchanges are self-regulatory organizations supervised by SEBI. Many of closed ended funds of AMCs are listed as stock exchanges and are traded like shares

· Office of the Public Trustee

Mutual fund being public trust are governed by the Indian Trust Act 1882. The Board of trustees or the Trustee Company is accountable to the office of the public trustee, which in turn reports to the Charity commissioner

· Unit Trust of India

Unit Trust of India formed under UTI Act 1963.The Management of the Trust is under a Board of trustees, which has names of RBI, IDBI, LIC, SBI with the chairman appointed by the Government of India in consultation with the IDBI.

· What are Self-Regulatory organizations?

A Self Regulatory organization (SRO) is an association representing a group of market participants, which is empowered by the apex regulatory authority to exercise pre-defined authority over regulation of their members.

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Existing MFs can launch the REMF schemes, provided “they have adequate number of experienced key personnel/directors”, Securities and Exchange Board of India said in a notification in Mumbai on Friday. There is no doubt that existing players like Hdfc (for those who have forgotten, it stands for Housing Development Finance company!) mutual fund, Icici Prudential, Kotak, will have people with experience, the others will start by poaching!

REMFs will be required to declare net asset value (NAV) of the schemes daily, it said, adding that “every real estate mutual fund scheme shall be close-ended and its units shall be listed on a recognised stock exchange”. One finds this difficult to understand as the property value may not change on a day to day basis. However, the interest accrued, and some other income and expenditure might change on a daily basis.

Entities having experience in real estate business of at least five years will also be allowed to sponsor REMFs provided they fulfill other eligibility conditionsing the notification, Prakash Natarajan said “It was a long awaited the move – it will enable small investors to participate in the real estate market, reduce the opaqueness of the deals and importantly bring capital for developers”.

As regards the investment norms, REMFs will be required to invest at least 35 percent of the net assets of the scheme directly in real estate assets and the balance could be invested in mortgage-backed securities, shares of companies engaged in real estate and other securities.

1. the total investment by REMFs in real estate assets and real estate related securities (including mortgaged-backed securities) will not be less than 75 percent of the net asset of the scheme.

2. All assets, will have to be valued by two accredited valuers every three months from the date of purchase, and lower of the two values will be taken into account for computing NAV.

1. Limits would be imposed on investments in a single city or project
2. REMFs will not be allowed to transfer real estate assets from one scheme to another
3. REMFs will not be permitted to invest in the real estate assets owned by sponsors, asset management companies or its associates for five years.
4. REMFs cannot undertake lending or housing finance activities.

A more detailed notification regarding the caps on the investment in each project, city, state, builder group, who can be a valuer, accounting norms, NAV compounding methodology, whether a fund can buy from an intermediary, etc. should be announced before any amc can launch a scheme.

It will surely bring some life into the mf industry – and one can see a spate of NFOs. Long live the distributors!

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