  | | November 23, 2012 | | | | | | | Weekly Facts | | | Close | Change | %Change | | BSE Sensex* | 18,506.57 | 197.2 | 1.08% | | Re/US$ | 55.21 | (0.5) | -0.95% | | Gold Rs/10g | 31,910.00 | 135.0 | 0.42% | | Crude ($/barrel) | 111.87 | 2.7 | 2.50% | | FD Rates (1-Yr) | 7.50% - 8.90% | Weekly change as on November 22, 2012
*BSE Sensex as on November 23, 2012 | |
Impact 
About a month-an-half back, the capital market regulator - the Securities and Exchange Board of India (SEBI) enunciated some reform measures to transform the mutual fund industry in the interest of investor. Some of the various reform measures included:
In addition to the above, SEBI also allowed mutual fund houses to levy brokerage and transaction costs (which are incurred for the purpose of execution of trade) subject to a maximum ceiling of 0.12% (i.e. 12 basis points) for cash market transactions and 0.05% (i.e. 5 basis points) for derivatives dealings. And now recently vide a circular, issuing a clarification thereto, SEBI has said that "any payment towards brokerage and transaction cost, over and above the said 12 bps and 5bps for cash market transactions and derivatives transactions respectively may be charged to the scheme within the maximum limit of Total Expense Ratio (TER). Any expenditure in excess of the said prescribed limit (including brokerage and transaction cost, if any) shall be borne by the AMC or by the trustee or sponsors."
We are of the view that, SEBI by issuing this clarification has permitted expense ratio fungibilty to be used for brokerage and transaction costs incurred by mutual funds, which will thereby now allow mutual funds to levy an extra cost for brokerage and transaction (borne by investors), although restricted to maximum TER. This move may induce portfolio churning too in a mutual fund scheme's portfolio, in the fund's endeavour to generate alpha returns.
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Impact
Many of you may have witnessed that debt-overhang situation in the Euro zone and fiscal cliff confronted by the U.S. has send shivers across international markets. Since a couple of years now, the BSE Sensex after reaching once again near the top, has peculiarly moved sideways with some intermediate impulse and correction; and this directionless market has led investors to take refuge under the precious yellow metal, for its trait of being a safe haven a store of value.
(Source: AMFI, ACE MF, PersonalFN Research)
The chart above depicts the fact that although gold prices have moved northwards and they have been elevated, investors have evinced interest in gold. The ascending trend in AUM of Gold ETFs (GETFs), reveals the fact that investor are now taking the smart way of investing in gold. Over the last 12 months there has been an addition in Asset Under Management (AUM) of GETFs of Rs 1,909 crore, despite gold moving up.
We are of the view that, indeed GETFs are a smart way of investing in gold due to host of advantages which it offers. The overall trend for gold, we believe seems to be intact with the global economy surrounded with downbeat economic situation and the risk event phase. The easy monetary policy adopted by the developed economies in order to aid growth, will be supportive for gold. Also the festive and wedding season in the ensuing month(s) will facilitate gold to look bold.
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Impact
In order to refrain small/retail investors from trying their luck in the derivatives segment of the Indian equity markets, SEBI issued a circular for discontinuation of mini derivatives contract on the Index (i.e. BSE Sensex and Nifty) on the exchanges, which have a minimum contract size of Rs 1 lakh.
Thus now exchanges have been directed not to issue any fresh mini futures or options contracts. However the circular mentions that existing unexpired contracts till January 2013 will be traded till expiry and new strikes can also be introduced in the existing contract months. It is noteworthy that SEBI had introduced mini derivative contracts on the Index during the exuberant phase of the market, to allow retail players to access the instrument for a lower cost than the normal index futures.
We are of the view that, the move to discontinue mini derivative contracts on the Index will be protect small / retail investors who often get carried away by fancy products in their endeavour of trying to make a quick buck in the stock markets. As far as the impact on the exchanges or brokers is concerned, we think it would be negligible due to a low turnover in the mini derivative segment.
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Impact
In the 2nd quarter review of Monetary Policy 2012-13, RBI proposed to advise banks that other than working capital finance, they (banks) are not permitted to finance purchase of gold in any form and a detailed guideline in this regard will be issued separately. Recently, the central bank vide a notification put in effect this proposal and thereby advised banks that no advances should be granted by banks for purchase of gold in any form, including primary gold, gold bullion, gold jewellery, gold coins, units of gold Exchange Traded Funds (ETF) and units of gold mutual funds. To read more about this news and know our view over it, please click here.
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Impact
While many perceive debt market investing to be a very safe avenue, the fact is, it is not so. Investing is debt markets also entails with it risk such as interest rate risk, default risk, inflation risk, liquidity risk and re-investment risk, amongst host of other economic risk as well. Recently the capital market regulator - the Securities and Exchange Board of India, facilitating mutual funds to hedge their risk, allowed mutual funds to participate in the Credit Default Swap (CDS) market (vide a circular).
However the circular has distinctly stated "mutual funds shall participate in CDS transactions only as users (protection buyer)," and thus cannot enter into short positions in CDS. To know what this means and to read our view over it, please click here.
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- The guidelines issued on prudential limit for sectoral exposure in debt oriented mutual fund schemes had put a limit of 30% at the sector level. However, ascertaining the important role played by Housing Finance Companies (HFCs), SEBI recently provided more leeway by deciding than additional exposure not exceeding 10% of net assets of the scheme shall be allowed only to HFCs as part of financial services sector for prudential limits in debt oriented schemes.
Moreover the capital market regulator has said, relaxation would be subject to to certain conditions such as that the securities issued by HFCs were rated 'AA' or above. Also, the HFCs should have been registered with the National Housing Bank (NHB).
We believe that, the move taken by SEBI would provide an impetus to HFCs which play a pivotal role of fulfilling the social objective of increasing home ownership and supporting economic growth through infrastructure. Certain debt mutual fund schemes, such as long-term Fixed Maturity Plans (FMPs) are a preferred route for the NBFC (Non-Banking Finance Company) sector and therefore this is an important move for them as it enables in raising medium to long-term funds at attractive rates.
- Reliance Mutual Fund (RMF) launched a Portfolio Systematic Investment Plan (PSIP), which is an investment facility for retail investors, enabling them to invest in various investment schemes (i.e. equity, debt and gold) offered by the fund house.
The minimum investment for one to start investing vide PSIP in multiple schemes is Rs 6,000 and the frequency for a SIP can be either monthly or quarterly, and as an investor you can define percentage allocation to each scheme selected for your portfolio. PSIP also offers investors to determine their risk profile using a risk profiling questionnaire, so depending on that customers can choose their allocation for aggressive, moderate or conservative investors. Besides these asset allocation based options, as an investor you have a choice to invest in maximum five schemes of RMF using PSIP facility.
We are of the view that, PSIP is a good investment facility enabling investors to form a portfolio of mutual funds and invest in them through the SIP mode of investing, which offers the benefit of rupee-cost averaging and compounding. The risk profiling sheet at the time of availing this facility enables one to allocate funds as per ones appetite for risk, which is also a prudent. However, for you as investors while selecting mutual funds for their portfolio it is imperative to select only winning mutual funds in order to strengthen your portfolio and create wealth over the long-term.
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Total Expense Ratio (TER): A measure of the total costs associated with managing and operating an investment fund such as a mutual fund. These costs consist primarily of management fees and additional expenses such as trading fees, legal fees, auditor fees and other operational expenses. The total cost of the fund is divided by the fund's total assets to arrive at a percentage amount, which represents the TER.
Source: Investopedia
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