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| April 01, 2016 |
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Impact 
When you become desperate to achieve something, you leave no stone unturned. You try every possible way. Something similar is happening to the capital market regulator. The Securities and Exchange Board of India (SEBI) is pulling out all the stops to make the functioning of mutual funds more transparent. Its objective is simple. The regulator wants to create an environment where investors have open access to the information that may affect their choices. Despite trying hard, industry has not been successful in improving its reach.
In the past, it was observed that the commission-driven nature of the industry gave rise to malpractices among distributors who grossly mis-sold products. Moreover, there have been a few instances where mutual fund houses had to shut down their businesses on account of unsustainable cost structures. Eventually, all these factors affected the performance of funds.
To overcome these difficulties, SEBI has now come up with fresh disclosure norms.
Let’s see what it now wants mutual fund houses to disclose:
- Commission they pay to distributors
- Cost of top executives to the company
- Cost structure of direct plans and that of regular plans
- A list of employees earning a package of Rs 60 lakh or more
What remains unanswered is how these disclosures would (or should) help investors make a right choice. If a fund house pays more for hiring the best talent in the industry, you should look upon that as a positive rather than a negative. There’s a consensus building among independent mutual fund rating agencies that the disclosures above are not going to make any significant difference in the end as they are of little concern to the mutual fund investor.
What is the real problem?
PersonalFN has been repeatedly highlighting this for a very long time now—investors are not adequately educated about their finances. Lack of awareness is the biggest drag on improving the reach of mutual funds. It is mandatory for mutual funds to spend a minimum of 0.02% of their Assets under Management (AUM) on investor awareness programmes each year. PersonalFN wrote an article exposing the lacklustre response of mutual funds to this initiative. Moreover, in the name of investor awareness programmes, sometimes mutual funds promote their products. In the rising market scenarios, mutual fund houses release some New Fund Offers (NFOs). Investors, many a time, invest in NFOs believing that the Net Asset Value (NAV) of Rs 10 is cheaper than the existing schemes. They are mostly unaware of the risk of high valuations and other market risks. These are the primary factors for the lower penetration of mutual funds in India.
PersonalFN has taken many initiatives to educate investors from time to time. While it went solo most of the times, it also worked with mutual funds that were cautious to spreading awareness among investors.
What criteria should you consider when choosing the right funds?
- Compare funds for their track records under different market conditions and time periods
- Try to understand who among them follow sound risk management and investment processes
- Check the expense ratios
- Understand your risk appetite and try picking up the one that matches your profile the most
In case you want to opt for expert advice, try out the unbiased mutual fund research service provided by PersonalFN.
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Impact
If you have not made any contribution to your Employee Provident Fund (EPF) account in last 36 months; there’s good news for you. The Government is still going to pay you interest on your balance in the account. This move will be effective from April 01, 2016.
UPA Government had discontinued the practice of paying interest on inoperative accounts from April 01, 2011thinking that it will discourage participants from opting out. There are close to 9 crore dormant accounts with a corpus of over Rs 32,000 crore. Employees' Provident Fund Organisation's (EPFO) manages around Rs 8.5 lakh crore.
Commenting on this news, the Labour Minister Bandaru Dattatreya said, “Now, we have decided to credit interest in inoperative accounts. There will not be any inoperative accounts.” This was a much-needed clarification, which will bring relief to those who change jobs. There’s always a possibility that a person turns his employment and moves to a company that doesn’t qualify to implement the provident fund scheme. In such a case, his account would go inoperative for no fault on his part.
A few more changes
The Government has worked out a proposal to alter the the minimum number of workers criterion for it being compulsory for companies to cover its employees under Employee Provident Fund Scheme. The number is expected to reduce from 20 to 10. As narrated by a senior Government official, such a move will provide social security to about 50 lakh more people working in the organized sector. With this step, total Assets under Management (AUM) of EPFO is expected to go up by Rs 20 lakh crore.
With an aim of providing more leeway to EPFO, the Government also increased the upper limit for investing in Sovereign Securities from 50% to 65%. This may enhance the quantum of investments in G-secs by about Rs 11,000 crore every year. This might provide depth to the Government Securities market.
PersonalFN believes that all of the above changes would make the provident fund scheme more employee friendly and help enhance the social security net to people who are currently not covered. However, you should not depend entirely on Provident Fund for your retirement. Start building a kitty for your retirement from the time you earn your first salary. The Retirement Letter, which is a subscription-based service, assists you in your retirement planning.
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Impact
Many parts of India are facing severe drought this year. In some regions, residential areas are getting municipal water supply only twice or thrice in a month. March is here, and it is going to be tough to sustain water supply for the next 2 ½ months until the monsoon. When there’s a scarcity of clean water supply, the only option people have is to switch to bottled water which is unaffordable to many. Those who cannot afford the expensive water have no alternative but to rely on tanker supplies. This is a cheaper alternative but you always have to deal with problems such as the higher proportion of dissolved salts or at times even contaminants. Of course, we are unsure about the source of the water, but questioning the level of hygiene seems insensible. How can we expect it to be pure? Some people do the smart thing they use bottled water for drinking purpose, and for other activities use water supplied by tankers and other sources. However, what would you do when even bottled water is impure?
Investors in debt mutual fund schemes might ask themselves similar questions very soon. The investment climate around them is horrifying. Companies are defaulting, banks are slashing interest rates on deposits (keeping the lending rates more or less unchanged) and, investing in insecure deposits is always risky. Good quality debt securities have become scary and assessing the risk has become demanding. Under such a scenario, many investors prefer to take the mutual fund route and invest in debt schemes. As the professionals manage the portfolios, investors believe that their hard earned money is in safe hands. However, startling revelations like the one is given below prove to be nasty surprises for them.
To ready more about this story and Personal FN’s views over it, please click here.
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Impact
English is a versatile and beautiful language, and sometimes it’s fun to play with words.
Take this old adage for example, “A friend in need is a friend indeed”, which means—one who helps you in difficult times is your real friend.
But the entire connotation could change if you added a space or a question mark to the original phrase, and rewrote the adage as “A friend in need is a friend in deed” This now means a person in difficulty would extend the hand of friendship to seek favours, so is he/she indeed your friend?
More to this story
Recently, Securities and Exchange Board of India (SEBI) reprimanded mutual fund houses against rescuing financially troubled companies. Banks have become increasingly averse to lending money to businesses that have already borrowed heavily. Business prospects for many companies, especially those operating in export-driven enterprise and commodity businesses have deteriorated significantly. . Both these segments are down in doldrums and corporations are finding it difficult to even service the loans they currently have.
It appears that mutual funds have been playing with words and with investors’ money as well. Unfortunately, they refuse to analyze whether the companies whose debt they are piling on the portfolios of schemes under their management are worth any business relationship indeed.
To ready more about this story and PersonalFN’s views over it, please click here.
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A combination of rising prices, falling incomes, and nationwide strike of Jewellers is expected to push down India’s gold demand to its lowest level in the March quarter this year. Gold demand may stand at 60-70 tonnes in the March quarter which would be the lowest level seen since the March quarter of 2009.
PersonalFN believes, while international and domestic factors may continue to affect gold prices, investors should keep buying it in small quantities. Gold is a portfolio diversifier, and a wise investor always has around 10%-15% of their portfolio in it.
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Sweetener: “A special feature or benefit added to a debt instrument (such as bonds) or a preferred stock offering to increase its value in the markets. Two popular forms of sweeteners are warrants and rights, which allow the holder to either convert securities into stock at a later date or purchase shares at below-market prices.”
(Source: Investopedia)
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Quote : "Prosperity last long for one who acts after proper consideration."
-Chanakya
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