Sebi has been making a lot of changes in the mutual fund business – there is a good chance that the size of the industry will shrink. Same thing about RBI and IRDA.

Just hold on! Is the industry shrinking in size? No. Not at all.

Some re-arranging will happen. If you have been wondering why there were 44 players in the mutual fund industry, but only 4 were profitable, well now there will be more.

Fidelity is planning to sell its stake (according to ET, but then ET has said this many times in the past, and frankly I have no clue whether they will or whether they are planning to).

http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/fidelity-set-t

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Alas such options are not available. In fact not even a SINGLE pension product (disbursal stage) is available from the mutual fund industry, and that is a real big tragedy.

The Chairman of SEBI occasionally makes a noise that Mutual funds should ‘bring pension products’.

To me this is complete humbug. There has to be some clarity among the regulators about who will regulate what! If a mutual fund has a pension plan will PFRDA make norms for it? If a life insurance company has a pension plan without a life cover attached, should they be allowed to launch it at all? What is the role of IRDA if the ‘product’ call is taken wrongly by another regulator…these are all issues which the govt. will have to resolve BEFORE making holistic statements.

By the way I am convinced that there is no pension plan with the life insurance companies which inspires you to lock in the money for 60 years….

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I have no clue about the accuracy of this statement. His argument was even for those who started in 2002 and were in the boom, only HALF their money participated in the boom (thanks to the high charges).

When the ULIPs were launched in 2001-2, the mutual fund industry was already 15 years old (other than UTI). This industry had a nice set of rules and regulations -and all that IRDA had to do was to do a cut paste of the MF regulations of SEBI. However regulator egos may have been at play, and this did not happen.

One simple Mutual fund requirement that all fund houses will launch schemes only at Rs. 10 NAV was also not an IRDA requirement. And financial power houses who claimed to be the paragons of virtue also took advantage of this to launch their schemes at a higher NAV. Even today I know people who are happy seeing their NAv – without realising that it started at a different place!

So if somebody tells me that no ULIP has been able to give a REAL return it is easy to believe because there is no single website which tracks ULIP performance. I can also understand why such sites are missing – there is no mandate by IRDA for a monthly or a quarterly disclosure of portfolios.

However it is high time that disclosures started. Given the higher sales commissions, and the fact that tied agencies can SELL ONLY their own ULIPs, ULIP sales have increased dramatically. Icici Pru has an aum of Rs. 40,000 crores – far higher than many mutual fund houses – and it is growing. I do not have the figures of other ULIP schemes or of other insurance companies – but I am convinced that the EQUITIES with insurance companies COULD be bigger than the EQUITIES with mutual funds (and this I am saying without including LIC’s booty)….

Hey regulator can we have some disclosures please?

With such fantastic ULIP sales, I am wondering which business will pay better:

- Financial literacy programs (at least my children should not suffer!) or

-Law practice – to bring class action suits?

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Many wealth oriented people are hoping that the clients will understand the need for Medical and Life cover insurance. Typically my suggestion is for people to buy Term insurance online. However many people (sadly including readers of this blog) go online – and the company sends over a rep. This rep is then able to convince them to buy a ULIP – and surprise, surprise fall for it!

There are agents who did not find the whole business lucrative, so they just dropped out. Then there are others who find selling mutual funds and E-brokerage accounts more remunerative, so they have dropped out. Many girls have dropped out because marriage has made them relocate. Many men have dropped out because they have changed jobs and are unable to find time to do this business – effort reward ratio has gone against them.

I know of some top agents (who would have been in the top 30 in any company from the years 2001 to 2008) who have completely dropped out of the radar. The ratio of Bank sales : Agent sales is now far far heavily favoring the banks – something like 70% even for non bank promoted life insurance companies (read Reliance, Max N Y Life, MetLife, Birla..). Even though technically Hdfc Life Insurance is promoted by Hdfc (and not by the bank) Hdfc bank is a very good sales channel and is responsible for a dominant share of the business done by the life insurance arm of the Hdfc group.

Of course there are agents who are benefitting by the dropping out of agents – those who are in the business and continue to be there will surely benefit.

Do I know agents? Well I know a few ’00s if not a few ’000s. Many of them have the clients good at heart, but I do not know of any agent who can really think of what is good for the client ONLY. That is not only tough, but also impossible to expect. Nor am I finding the end buyers taking the trouble to do enough research and know what to buy.

Dilemma…if your agent has disappeared…do not worry there is somebody who is consolidating, but he may not be as servile – he knows he is in a small club of skilful, valued agents! Good for him for sure…..

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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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Actually in the Indian context we do not know how much the regulators will talk to each other! For example if RBI, SEBI, MCA, IRDA, …et al spoke to each other you may not have to file the same document with each of the authorities. If MCA, for e.g. regularly checks its quantitative information with Chambers of Commerce, Income tax authorities, Excise, etc. surely inconsistencies can be found.

Even internally (within the organization) the word sales can mean a different number to the salesman and a different number to the accountant. Gross sales could include excise duty, but for the calculation of commission it will have to be just the sales figure without the statutory levies.

This is even likely to become a great opportunity for software vendors and accountants – checking for internal consistency – afterall the business rules will have to be created, is it not?!!

In the United States for example – financial information filed with the SEC is shared with various organisations. The submission made by banks (to Federal Financial Institutions Examination Council) is shared by them with Federal Deposit Insurance Corporation (FDIC), Federal Reserve System (FRS), and the Office of the Comptroller of the Currency.

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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!

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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

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there is no doubt that the mutual fund industry is suffering from the after effects of Mr. Bhave and Don Quixote. However when Mr. Sinha came the industry was (perhaps) hoping for some relief. Well what has come has come out in a round about way and that is only fair.  If entry load was removed as a ‘good for the end user’ feature it will take a brave man to reverse it, so Mr. Sinha will not.

However SEBI is now making a great attempt to ‘inform’ the investor that he can hold the units in a demat form. This is a joke – anyway the units are NEVER held in physical form. I would want to demat something which I can ‘lose’ – like say gold, equity shares, etc. WHY THE HELL would i hold valueless ‘no. of units statement’ in demat form.

Well one of the important things a regulator does is in the name of the ‘common man – investor’ INCREASE THE REVENUES FOR THE players. So if you buy ‘units’ through a broker, you will end up:

1. paying brokerage

2. pay demat charges – sometimes going in, some times going out

3. some money will have to the stock exchanges, correct?

4. as volumes increase there could be some ‘service tax’ on some of the services, correct?

LOL ..so if you increase the number of intermediaries …IN THE REAL WORLD  the price goes up.

In regulator language, the ‘investor’ becomes safe.

Long live regulators! without them what would bloggers write about?

solution: put all your money in PPF. RIP

ps: do you get a feeling when Nomura and Goldman Sachs enter….industry ki vaat lagti hai? LOL

what will suffer: client’s net return.

why: costs will go up. …

God bless. Sorry for spoiling your weekend. Could not resist commenting on yet another stupid SEBI ad.

PS: what about a communication class for the shenanigans at the regulator’s office?

No, I am not looking for work, Sucheta Dalal and Debashis should do this work shop. Of course they may come out pulling their hair. Debashis does not have too much to pull, though. LOL

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Well it can be argued till the cows come home. Value fund, growth fund, large cap, mid cap, mid and small cap, large cap value, mid cap value, large cap growth, opportunities fund, special situations, price-earning ratio fund, equity biased balanced fund, debt heavy balanced fund,…..and a million such words are possible.

I can argue why so many schemes should exist and in the same breath argue why the existing sales force will not be able to distinguish between the schemes. In case of fund house they had said ‘We will invest in Value based equity shares’ – when SEBI asked them to define the word ‘value’ they dropped the word value!

If fund managers find it difficult to define the purpose of a fund how does one expect the sales person, the distributor and the common man to know the difference between different schemes. I have argued with a fund manager – saying ‘I can see value in the growth that this company will get’. Navin Rego of Managalore will agree with this!

In this background one has to see what SEBI can do. Sebi was in a good position to grill fund houses FAR, FAR before things came to such a sorry state. However having brought to this stage ….they may be doing something, well hopefully!

http://www.livemint.com/2011/01/05234332/Declutter-existing-products-M.html

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