S&P BSE Sensex*	Re/US $	Gold Rs/10g	Crude ($/barrel)	FD Rates (1-Yr)
33,176.00 |-131.14 -0.39%	64.90 |0.20 0.31%	30,325.00 | -160.00 -0.52%	64.70 |1.09 1.71%	5.0% - 7.25%

 

Especially in the recent past, cities Beyond the Top 15 (B15) have recorded faster growth as compared to that recorded by Top 15 (T15) cities. As per the AMFI (Association of Mutual Funds in India) data released for February, contribution of B15 in the Assets Under Management (AUM) of the mutual fund industry grew by 41.7% as compared to that during the same time last year. Between February 2017 and February 2018, industry’s total AUM grew at 25.3%.

Such a significant improvement in the AUM of B15 towns is no accident. Falling interest rates on bank deposits and the lacklustre performance of gold and real estate pushed investors to equity. Mutual fund houses have benefited from the various investor education initiatives that has significantly increased investors’ awareness about equity as an asset class and the benefits of Systematic Investment Plans (SIPs). So, they kept investing in markets despite of the markets’ choppiness.

Reaching out to investors from the smaller towns was a challenge for mutual funds. To overcome this hurdle, Securities and Exchange Board of India (SEBI) allowed mutual funds to charge 30 basis points (bps) additional expense ratio on new inflows on them satisfying the following criteria:

New inflows from B15 cities shall be at least 30% of gross new inflows in the scheme.

Or

New inflows from B15 shall be 15% of the average assets under management (year to date) of the scheme.

Recently, SEBI tweaked these rules which remained in place for more than five years. As per the SEBI circular dated February 02, 2018, the capital market regulator decided to substitute T15 with T30 and B15 with B30 respectively in relevant places.

In other words, the reward of additional 30bps in the Total Expense Ratio (TER) will be given to a mutual fund house only if it garners the pre-specified percentage of total AUM from beyond the top 30 cities.  

And SEBI hasn’t stopped here.

It’s going to push the mutual fund industry to further reduce its TER.

In 2012, the mutual fund industry had a tough time due to poor market conditions. Investors were pulling out their investments, thereby putting the existing investors at a disadvantage. Usually bigger schemes enjoy economies of scale; but when the AUM decreases, they start losing out economies of operation and start charging existing investors higher TER.

To deal with this situation, SEBI had asked mutual funds to plough back the exit load to the scheme, which until then was going into the profit and loss account of the Asset Management Companies. And to compensate for this loss, it allowed mutual funds to charge additional expenses of 20bps.  

Now that mutual fund inflows are extremely stable and the investor base is also expanding, SEBI feels mutual funds can easily absorb the redemption pressure without being compensated by 20bps of additional expenses.

At the board meeting scheduled on March 28, 2018, SEBI will take up this topic for discussion. It’s likely that the capital market regulator will reduce the compensation fee from 20bps to 5bps.

As a result of these SEBI initiatives, investing in mutual funds is likely to get cheaper by 20%. The impact would be felt prominently on equity schemes. TER of equity diversified schemes (under regular plan) ranges from 3.31% and 1.09%. This range might shift lower to 2.65% to 0.87%.

Since direct plans are cost efficient, TER of equity diversified schemes under direct plans currently range from 2.65% to 0.22%. Now direct plans will become even more cost efficient and their TER may revolve in the range of 2.12% and 0.18% depending on the AMC and the scheme AUM.

SEBI has not only decided to make mutual fund investing more affordable, but to make it more transparent, especially the disclosures about TER. The capital market regulator has already made it mandatory for mutual fund houses to declare the TER of all schemes on daily basis under a separate head – “Total Expense Ratio of Mutual Fund Schemes.”

What investors should do?

Although, investing in a scheme that manages its costs well is important, lower TER shouldn’t be the sole criterion to invest or not to invest in a scheme. Impeccable track record is the most important parameter when selecting one mutual fund scheme over others.

Rule of Thumb: Always consider your financial goals and the risk appetite before investing in mutual funds.

Editor’s Note: If you are worried about the unpredictability of the equity markets and confused about which mutual funds to invest in this year, we have just the remedy for you. PersonalFN’s latest exclusive report: Top 5 Equity Funds To Invest In 2018 has been created keeping the current investment scenario in mind. This exclusive report is already gaining popularity among our readers. So do not miss it. Subscribe now!

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Dynamic Bond Funds: How Have They Fared?

It was a tough two years for the bond market.

While one expects bond markets to be stable, the past two years have been nothing like it.

Easing inflation, rate cuts, demonetisation, excess liquidity, India rating upgrade, rising crude oil prices, volatile rupee, uptick in inflation, broadening fiscal deficit and now fears of an interest rate hike summarise a few of the major events that have influenced the bond market over the past 24 months.

Let us take a brief look at how interest rates and bond yields fared over this period.

Two years ago, in February 2016, the 10-year G-Sec yield stood around 7.8%. Bond traders were expecting interest rates to moderate further, giving the Reserve Bank of India (RBI) more room to cut interest rates.

In 2015, the RBI had already reduced interest rates by 125 basis points on easing inflation and stagnant growth. For corporate bonds, the deterioration in credit quality was a growing concern.

As expected, over the course of the year, the monetary policy committee of the RBI cut the benchmark repo rate twice, totalling 50 bps to 6.25% as in October 2016. The bond market reacted positively and bond yields dropped. The yield of the 10-year G-Sec , which was hovering around the 7.8% at the start of the year, eased by 100 bps to around 6.8% in October 2016.

To read more about this story and Personal FN’s views over it, please click here.

Close-ended NFO Factories: Should You Invest?

Investors are showing immense faith in the equity asset class. They have been investing through Systematic Investment Plans (SIPs) even though markets are under pressure and could remain turbulent for a considerable duration.

Mutual fund houses should be happy about this since they are not losing business; and as investors have been pumping money through Systematic Investment Plans (SIPs); they are able to buy cheap.

But instead of focusing on existing mutual fund schemes, fund houses have implemented their old strategy of chasing AUM (Assets Under Management).

If you look at the quantity of close-ended schemes being launched, you realise that mutual fund houses are taking investors for granted.

Mutual Fund Houses need to be more responsible with how they conduct business.

Some mutual funds use roman numerals to denote the series number of their close-ended schemes. At present, the count of these close-ended schemes has exponentially increased. 

In the recent past, the capital market regulator imposed strict restrictions on mutual houses looking at the unrestrained behaviour.

Earlier, mutual fund houses would launch New Fund Offers (NFOs) indiscriminately to grow their AUM. Since it's easy to collect money from investors under rising market conditions, most of these NFOs were launched when the markets were high –––to make hay when the sun shines banking on the market sentiments.

To read more about this story and Personal FN’s views over it, please click here.

HDFC Small Cap Fund: A High-Risk – High-Return Proposition

HDFC Small Cap Fund came in to existence nearly a decade ago on April 10, 2008. At the time, the fund was known as Morgan Stanley ACE Fund and it followed a multi-cap strategy. In 2013-14, after HDFC Mutual Fund acquired the schemes of Morgan Stanley MF, the investment objective changed and the scheme was rechristened as HDFC Small and Mid-Cap Fund.

A couple of years later, HDFC MF once again changed the name of the fund to HDFC Small Cap Fund, as the fund was predominantly focused on the small-cap segment.

HDFC Small Cap Fund defines small-cap companies as those companies whose market cap is equal to or lower than that of the stock with the largest market cap in the NIFTY Free Float Smallcap 100 Index; while the companies having a market capitalization equal to or lower than that of the stock with the largest market cap in the NIFTY Free Float Midcap 100 Index are defined by the fund as mid-caps.

In terms of performance, the fund generated inconsistent returns post its launch. However, over the past few years HDFC Small Cap Fund has closely tracked its benchmark – the Nifty Free Float Small Cap 100 index. In terms of volatility, the fund has been able to lower the risk and reign in the losses.

Click here to read the complete note!

The Insurance Regulatory and Development Authority of India (IRDAI) has planned to revise the third party motor insurance premiums for the Financial Year (FY) 2018-19. It aims to reduce the third-party premium for two-wheelers with lower engine capacity, but intends to increase the premium for ones with higher engine capacity. It is expected to follow the same approach in the four-wheeler segment. Industry players believe that, if the third-party premiums are rationalised, comprehensive motor insurance policies may become cheaper for average car and two-wheeler owners.

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Yield Curve: A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates. The most frequently reported yield curve compares the three-month, two-year, five-year and 30-year U.S. Treasury debt. This yield curve is used as a benchmark for other debt in the market, such as mortgage rates or bank lending rates, and it is also used to predict changes in economic output and growth.

Quote: "Every once in a while, the market does something so stupid it takes your breath away."‒Jim Cramer