Are Mutual Fund Schemes true to their Colour?

by Deepak Sharma 10. June 2010 12:07

Mutual funds schemes are the vehicle for investors to take their desired destination. The destination or goals of the investors vary from investor to investor as per their risk appetite. To lure the various risk appetites, manufacturers normally keep a bunch of schemes to attract the various risk appetites or destinations of the investors. In case, they (manufacturer) found any new appetite, they plan a NFO (New Fund Offering) and sometimes they launch NFO’s to create extra appetite or called professionally as market expansion. But the question is "Are the  Mutual Fund Schemes True to their Colour?". Are these schemes work as per their specific objectives? Or the objectives set are quite vague? Does the legal objectives of these schemes differ from the moral/postioning objectives? We at SarthiWM has done a detailed research to find the answer for all these questions and the results are surprising. Please do call or write for the reports.

 

 

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Mutual Funds

RBI Hikes Repo & Reverse Repo Rates

by Deepak Sharma 19. March 2010 20:00

RBI’s Press Release Extracts

 

“In the emergent scenario, low policy rates can complicate the inflation outlook and impair inflationary expectations, particularly given the recent escalation in the prices of non-food manufactured goods.”

“As a part of the calibrated exit strategy, initiated in the Second Quarter Review in October 2009 and carried forward in the Third Quarter Review in January 2010, it has been decided:”

*              To raise the repo rate under the Liquidity Adjustment Facility (LAF) by 25 basis points from 4.75 per cent to 5.0 per cent with immediate effect.

*              To raise the reverse repo rate under the LAF by 25 basis points from 3.25 per cent to 3.5 per cent with immediate effect.

These measures should anchor inflationary expectations and contain inflation going forward. As liquidity in the banking system will remain adequate, credit expansion for sustaining the recovery will not be affected. The Reserve Bank will continue to monitor macroeconomic conditions, particularly the price situation, and take further action as warranted.

 

The Cause

 

*              The developments on the inflation front, however, are a source of growing concern. Notwithstanding some moderation in recent weeks, food prices remain at elevated levels. In fact, consumer price inflation, as measured by various consumer price indices, has accentuated further. The acceleration in the prices of non-food manufactured goods and fuel items in recent months has been of particular concern,

*              The growing confidence in the economy and the risk of supply side inflation spilling over into a wider inflationary process,

*              Increasing capacity utilisation and rising commodity and energy prices are exerting pressure on overall inflation. Taken together, these factors heighten the risks of supply-side pressures translating into a generalised inflationary process,

 

 

The possible impact

 

*              Although, the markets were expecting an increase in rates from the regulator, the interim measure has given the participants a surprise,

*              The liquidity may remain comfortable, especially once the advance tax money collected by the govt, comes back in circulation, expected by the first fortnight of April,

*              Although bond markets were cheering the decline in food inflation numbers, published on Thursday, reflecting the decline in benchmark yields from 8%+ levels to the Friday close at 7.83%, coming Monday, can see again the increase on the benchmark yields by 10 to 15 basis points,

*              For coming days, it will be important to watch non-food inflation numbers and impact of this measure to estimate the further course of action by the regulator,

*              There may not be immediate impact on the debt borrowing rates for corporate for long term, depending on the overall macro scenario and regulator’s stance, expect a gradual increase in rates over the next financial year,

*              Shorter-end  interest rates for corporate for CP’s/ NCD’s expected to increase,

*              Stock markets too discounted the expected increase in the policy rates but this interim earlier than expected measure may make sentiments negative on Monday,

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Glimpses of the Budget 2010

by Anand Lakhotia 27. February 2010 13:02

GENERAL OVERVIEW:

  • Economic crisis: "We have withered the global slowdown well," says FM.
  • 18.9% growth rate in manufacturing sector in third quarter of 2009 (highest in last 2 decades).
  • Fiscal deficit pegged at 5.5%
  • Hope to breach 10% mark in GDP in near future, says FM.
  • Growth to exceed 7.2% in this fiscal, says FM.
  • General Sales Tax and Direct Tax Code can be introduced in April 2011
  • Gradual phasing out of stimulus packages, says FM.
  • Rs 25,000 Crores disinvestment target this year
  • Government to set up apex level Financial Stability and Development Council
  • RBI to release additional licenses to Private sector banks and non-banking financial institutions
  • Repayment tenure for farmer loans extended by 6 months to June 30th 2011
  • Delhi-Mumbai industrial corridor taken up for development
  • Government to raise Rs 25000 Crores through Disinvestment
  • Technology advisory group to be set up under Nandan Nilekani. UID authority given Rs 1900 Crores
  • Allocation to Defence over Rs 147,000 Crores
  • Petrol prices to go up
  • Rs 16,500 Crores capital support for PSU banks
  • NREGA allocation to Rs 40,100 Crores
  • Rs 400 Crores corpus for micro-finance scheme
  • Interest subvention for exports to extended for one year
  • Interest subvention of 2% to be extended for Exporters of handicrafts and SMEs
  • Bank for every village with population of 2,000
  • No extension of STPI
  • Subsidy delivery in cash to oil & fertilizer companies
  • Slum Free India at the earliest
  • Easy access for funds to marine and cold storage facility
  • Repayment Extension For Farmer to June 2010
  • Aims to make FDI policy user-friendly

  

DIRECT TAX:

·         Direct tax code will be implemented from April 1, 2011

·         I-T dept to notify simple two-page Saral 2 (Only 2 Pages) form for individuals for current year

  • Direct Tax proposals to give loss of Rs 26,000 Crores; Indirect Tax to yield gain of Rs 45,000 Crores
  • No capital gains tax on conversion of a business entity into Limited Liability Partnership
  • R&D allocation increased 200%
  • Businesses up to Rs 60 Lacs and professionals up to Rs 15 Lacs to be exempted from auditing obligations
  • Interest on delay deposit of TDS increased to 18% pa
  • SOPS on Real estate housing project has extended
  • Two star hotels anywhere in India are provided Investments based incentives

PERSONAL TAXATION:

 

            -Income up to Rs 1.60 Lacs:                    NIL tax

-Income between Rs 1.60-5 Lacs:             Tax at 10%

-Income between 5-8 Lacs:                     Tax at 20%

-Income above Rs 8 Lacs:                       Tax at 30%

 

  • Minimum Tax Exemption limit for Senior Citizens and Women remains unchanged; i.e. Rs. 2,40,000 and Rs. 1,90,000 respectively.
  • Additional Rs 20,000 deduction made available for investment in Infrastructure Bonds. This is above Rs. 1,00,000 80C exemption

 

Change in Corporate Tax

 

  • Minimum Alternate Tax up from 15% to 18% on book profits
  • Reduced Surcharge of 10% on domestic companies to 7.5%
  • Professionals with Gross receipts exceeding Rs 15 Lacs need accounts audit

INDIRECT TAX:

·         Service Tax rates unchanged at 10%, to bring more services under service tax

  • Duties on smoking and non-smoking tobacco products up
  • Peak excise duty hiked from 8% to 10%
  • Peak customs duty remains unchanged at 10%
  • Rs 1 per liter excise on petrol, diesel
  • Full excise cut on electric cars
  • Partial rollback of excise duty on cement
  • Agricultural seeds exempt from Service Tax
  • News agencies exempt from Service Tax
  • Service tax to GDP ratio is 1%
  • Customs duty on gold, platinum imports raised to Rs 300 from Rs 200
  • Import duty on silver raised to Rs 1500 per kg
  • 5% import duty on crude petroleum restored
  • Duty free import of samples now allowed upto Rs 3 Lacs
  • No penalty on excise dues paid voluntarily before SCN issued
  • Excise duty on cement & cement clinker & precious metals increased
  • Service tax refund simplified
  • Setting up of cold storages exempted from service tax

 

 

Budget which speaks in figures:

 

  • National Social Security Fund created for workers in unorganized sector with allocation of Rs.1,000 crores
  • Rs.4,500 crores allocated for ministry of social justice and empowerment, a hike of 80 percent
  • Rs.2,600 crores allocated for ministry of minorities affairs
  • Rs.1,900 crores for Unique Identification Authority of India
  • Rs.147,344 crores allocated for Defence
  • 2,000 youth to be recruited in central paramilitary forces
  • Allocation on primary education raised from Rs.26,800 crores to Rs.31,300 crores
  • Rs.66,100 crores allocated for rural development in 2010-11; Rs.40,100 crore for National Rural Employment Scheme; RS.48,000 crores for Bharat Nirman
  • Rs.1,270 crores allocated for Rajiv Awas Yojana for slum dwellers, up from Rs.150 crores, an increase of 700 percent with the aim of creating a slum free India.
  • Forty-six percent of plan allocations in 2010-11 will be for infrastructure development
  • Allocation for new and renewable energy sector increased 61 percent from Rs.620 crores to Rs.1,000 crores in 2010-11
  • Rs.200 crores to be provided in 2010-11 for climate-resilient agricultural initiative
  • Rs 500 Crores for Clean Ganga Mission
  • Rs 66, 100 Crores for rural development in FY10-11
  • Allocation for school education up from Rs 26, 800 crores to Rs 31, 036 Crores
  • Rs 22, 300 Crores allocated for Health Ministry
  • Coal regulatory authority proposed
  • Rs 300 Crores for Rashtriya Krishi Vikas Yojana
  • Bank farm loan target: Rs 3.75 Lacs crores

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New Norms for Mutual Funds Valuation

by Deepak Sharma 4. February 2010 14:28

Preface

 

The Debt and Money Market Instruments in various portfolios of mutual funds are governed by the norms prescribed by the SEBI. As per the norms all instruments having residual maturity over 180 days are valued on the traded prices of the instruments on a particular valuation day and the Mutual funds to follow pricing matrix provided by the rating agencies for the instruments not traded. The instruments less than 180 days residual maturity are valued at the traded prices or on the amortisation basis.

 

The Change

 

*              SEBI has modified provisions related to valuation of Debt and money market instruments in a circular dated February 02, 2010  has reduced the residual maturity period to 91 days from earlier 180 days for the valuation purpose to ensure that portfolios of Mutual Funds reflect the current market scenario.

 

*              In case of securities purchased by mutual funds do not fall within the current framework of the valuation of securities then such mutual fund shall report immediately to AMFI regarding the same. Further, at the time of investment AMCs shall ensure that the total exposure in such securities does not exceed 5% of the total AUM of the scheme. AMFI has been advised that the valuation agencies should ensure that the valuation of such securities gets covered in the valuation framework within six weeks from the date of receipt of such intimation from mutual fund. In the interim period, till AMFI makes provisions to cover such securities in the valuation of securities framework, the mutual funds shall value such securities using their proprietary model which has been approved by their independent trustees and the statutory auditors.

 

*              The aforesaid valuation would be applicable with effect from July 1, 2010.


 

The possible impact

 

*              Clear segmentation between Liquid Funds and Ultra Short term Funds (largely known as Liquid Plus) by risk profile,

*              The daily NAV of Ultra Short-term funds will be now will be reflecting the current interest rate scenario in its valuation and can be more volatile relatively,

*              The mark to market portion will increase in the portfolios of Ultra Short-term funds or the existing Ultra-short term funds may reduce their average maturities from 90-130 days to 50-100 days to protect the NAV from market Volatility,

*              Ultra Short-Term Schemes may introduce some exist loads for investors for some days to prevent the price volatility affect in their portfolios,

*              More transparency in valuation of debt portfolios,

Now, investor has to look at more closely into the Ultra-Short term schemes portfolios as per their risk appetite,

Tags:

Mutual Funds

Major Changes Proposed in Direct Taxes Code Bill

by Anand Lakhotia 31. August 2009 08:56

                                       Income Tax Act, 1961                                                 Direct Tax Code Bill, 2009 (w.e.f 1.4.2011)        

1

At present there are two legislation i.e. Income Tax Act, 1961 and Wealth Tax Act, 1957.

Single code for Income Tax Act and Wealth Tax Act. The code consists of 285 sections.

2

There are three kind of Residential status i.e ‘Resident’, ‘Non Resident’ and ‘Resident but not Ordinarily Resident’.

Residential status of “Resident but not ordinarily resident” has been done away with.

3

There are ‘previous year’ and ‘assessment year’.

To eliminate confusion only ‘Financial Year’ will prevail.

4

Date of filing of tax return 31st July for non-business non-corporate assessee and 30th Sept for others.

Date of filing of tax return preponed to 30th June for non-business non-corporate assessee and 31st Aug for others

5

Individual tax rates in Income Tax Law (ITL) are as follows

Individual tax rates proposed in Direct tax code (DTC).

 

10%

from Rs.160000 to Rs.300000

from Rs.160000 to Rs.1000000

 

20%

from Rs.300001 to Rs.500000

from Rs.1000001 to Rs.2500000

 

30%

from Rs.500001 and above

from Rs.2500001 and above

6

The corporate tax rate of domestic company is 30% and for foreign company, it is 40%. Business losses can be carry forward for 8 yrs. Dividend distribution is at 15%.

The corporate tax rate of all companies reduced to 25%. Business losses can be carry forward for unlimited period. Dividend distribution tax remains at 15%.

7

Wealth tax rate is 1% above Rs.30 lacs. Definition of wealth includes some specific assets excluding investments in shares. It was applicable to all assessee.

Wealth tax rate reduced to 0.25% above Rs.50 crore except for private discretionary trust, for which no threshold limit will be available. Definition of wealth has been expanded to include all assets, including investments. Further corporate assesses have been relieved from wealth tax.

8

MAT @ 15% is levied on ‘Book Profit’. Further MAT tax credit is allowed to be carried forward up to ten assessment year.

Basis for levy of MAT is 2% on gross assets. Carry forward of such MAT tax credit has been denied.

                              

9

There is no such provision for to declare an arrangement as impermissible.

General Anti-Avoidance Rule to introduce to empower the Commissioner of Income Tax (CIT) to declare an arrangement i.e round-tripping, transaction through an intermediaries, self-canceling transaction etc as impermissible if the same has been entered into with the objective of obtaining tax benefit and which lacks commercial substance. Such arrangement can be invoked by CIT.

10

Tax incentives were based on location or on export turnover upto a specified period. Further capital investment were not allowed to amortized.

Export and Area/profit based exemption to be discontinued without affecting currently enjoying such incentive. Under the DTC, all capital investment and revenue expenditure (except land, goodwill and financial instruments) allowed to be amortized indefinitely and the period of such amortization will be called as ‘Tax Holiday’.

11

Income from Salary includes all perquisites such as house rent, leave travel assistance, children education allowances, encashment of unavailed earned leave on retirement, medical reimbursement and free/concessional medical treatment paid/provided etc is exempt up to a certain limit.

All such exemption withdrawn.

12

As per section 80C certain investment/savings upto Rs. 1 lac were deductible from taxable income.

Exempt-Exempt-Taxation (EET) method of taxation of savings/investment, will be applied on new contribution after commencement of the code. Limit for investment raised to Rs.300000 p.a. However deduction on investment in tax-saving mutual funds and fixed deposits have been abolished.

13

Self-occupied house property whose gross rent is taken as NIL, used to get deduction of interest on loan. Deduction for repair based on annual value in case of rented house property is 30%.

Self-occupied house property whose gross rent is taken as NIL, will not get deduction of interest on loan. Deduction for repair on annual value in case of rented house property is proposed to reduce to 20%.

14

Short term capital gain which attracts STT is taxed at 15%, Short Term Capital Gain which does not attract STT attract normal rate of tax. Long Term Capital Gain, which attracts STT, is exempt from Tax. Long Term Capital Gain which does not attract STT is subject to a tax rate @ 10% without indexation or 20% with indexation. Unabsorbed capital loss allowed to be carried forward up to 8 assessment years.

Since STT proposed to abolish, short term and Long term capital gain will form part of income, therefore all capital gain on transaction of equity shares/unit will attract normal tax. However indexation benefit of long-term capital gain will remain. Unabsorbed capital loss will be allowed to be carried forward indefinitely.

15

As per Income Tax Act, 1961 the assessing officer is never required to forward a draft order of assessment. Maximum amount of penalty is 300% of the amount of tax, but the same AO can waive the penalty. Appeal can be filed before ITAT against an order passed by the CIT directing revision of assessment. The appeal against ITAT order is eligible to be filed in the High Court.

The assessing officer is required to forward a draft of the proposed order of assessment in case the variation to the returned income is in excess of prescribed limit. Maximum penalty for willful under-reporting of tax can be 200% of tax but no income tax authority shall have the power to waive penalties. No appeal shall lie to the ITAT against an order passed by the CIT directing revision of assessment. The appeal against ITAT order lies with National Tax Tribunal and not High Court.

16

There is no such provision for upfront determination of the arm’s length pricing or pricing methodology.

Transfer Pricing matter will be well settled under proposed Advance Pricing Agreement (APA), under which an agreement between the taxpayer and the tax authorities for the upfront determination of the arm’s length pricing/pricing methodology of an international transaction will be made but shall not be effective for more than five consecutive years.

17

As per Income Tax Act, 1961 there is no such provision.

Every business will constitute a separate source and will be computed separately.

18

As per Income Tax Act, 1961 loss on Sale of business capital assets will be treated as Short term capital loss and will be allowed to be carried forward up to 8 eight assessment year.

As a disincentive to asset stripping and loss manipulation, the loss on sale of business capital assets will be treated as intangible asset and depreciation will be allowed at the same rates applicable to the relevant block of assets, therefore allowing a fraction of the loss every year.

19

There is Provision of choice between Income Tax Act and Double Taxation Avoidance Agreement; whichever is beneficial to the assessee. 

The code states that neither a Double Taxation Avoidance Agreement (DTAA) nor the code shall have a preferential status by reason of its being a DTAA or law. However in case of a conflict between the code and DTAA, the one that is later in point of time shall prevail.

20

Presumptive tax system wherein assuming 8% of turnover as taxable profit were available to retail business having turnover upto Rs.40 lakhs.

The limit of turnover for such presumptive tax system for retail business is raised to turnover upto Rs.100 lakhs.

21

Carry forward and set-off of losses of unlisted companies in the hands of amalgamated company will lapse with change in shareholding of 50% or more.

Such carry forward and set-off of losses will not lapse even with change in shareholding of 50% or more.

Tags:

Income Tax

10 Rules for Investors

by Dhiraj Chawla 14. August 2009 09:11

10 Rules for Investors

By Bob Farell, Source : http://www.marketwatch.com

*               Markets tend to return to the mean over time

When stocks go too far in one direction, they come back. Euphoria and pessimism can cloud people’s heads. It’s easy to get caught up in the heat of the moment and lose perspective.

 

*               Excesses in one direction will lead to an excess in the opposite direction

Think of the market baseline as attached to a rubber string. Any action too far in one direction not only brings you back to the baseline, but leads to an overshoot in the opposite direction.

 

*               There are no new eras - excesses are never permanent

Whatever the latest hot sector is, it eventually overheats, mean reverts, and then overshoots. Look at how far the emerging markets and BRIC nations ran over the past six years, only to get cut in half. As the fever builds, a chorus of “this time it’s different” will be heard, even if those exact words are never used. And of course, it - human nature - is never different.

 

*               Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways

Regardless of how hot a sector is, don’t expect a plateau to work off the excesses. Profits are locked in by selling, and that invariably leads to a significant correction eventually.

 

*               The public buys the most at the top and the least at the bottom

That’s why contrarian-minded investors can make good money if they follow the sentiment indicators and have good timing. Watch Investors Intelligence (measuring the mood of more than 100 investment newsletter writers) and the American Association of Individual Investors Survey.

 

*               Fear and greed are stronger than long-term resolve

Investors can be their own worst enemy, particularly when emotions take hold. Gains “make us exuberant; they enhance well-being and promote optimism”, says Santa Clara University finance professor Meir Statman. His studies of investor behavior show that “Losses bring sadness, disgust, fear, regret. Fear increases the sense of risk and some react by shunning stocks.”

 

 

 

 

*               Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names

This is why breadth and volume are so important. Think of it as strength in numbers. Broad momentum is hard to stop, Farrell observes. Watch for when momentum channels into a small number of stocks.

 

*               Bear markets have three stages - sharp down, reflexive rebound and a drawn-out fundamental downtrend

I would suggest that as of August 2008, we are on our third reflexive rebound - the January rate cuts, the Bear Stearns low in March, and now the Fannie/Freddie rescue lows of July.

 

*               When all the experts and forecasts agree - something else is going to happen
As Stovall, the S&P investment strategist, puts it: “If everybody’s optimistic, who is left to buy? If everybody’s pessimistic, who’s left to sell?” Going against the herd as Farrell repeatedly suggests can be very profitable, especially for patient buyers who raise cash from frothy markets and reinvest it when sentiment is darkest.

 

*               Bull markets are more fun than bear markets

Especially if you are long only or mandated to be fully invested. Those with more flexible charters might squeak out a smile or two here and there.

 

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General

No Entry Load for Mutual Funds : The Good, The Bad, The Ugly

by Deepak Sharma 19. June 2009 08:37

No Entry Load for Mutual  Funds : The Good, The Bad, The Ugly

 

Preface

 

In a significant decision, SEBI has removed the entry load on the investors for current or new mutual fund schemes.

 

“There shall be no entry load for the schemes, existing or new, of a Mutual Fund. The upfront commission to distributors shall be paid by the investor to the distributor directly. The distributors shall disclose the commission, trail or otherwise, received by them for different schemes/ mutual funds which they are distributing or advising the investors.” SEBI Press Release 192/2009.

 

Thoughts!!

 

*                    Today after almost 12 years of open-ended era, Mutual fund AUM has reached close to Rs. 6.5 bn with approx 8mn folios, which is still approx 20% of the overall bank deposits and not even 1% of the population to MF folios. Most of this is through the Debt schemes which by and large are not affected by this move. It is the retail equity culture (or the lack of it) that is worst affected by this.

 

*                    Investors are the clear intended beneficiaries of this move; complete transparency, no mis-selling, no more price-influenced advice, and definitely no greed based churning of the portfolios. Now mutual fund products, arguably the cheapest option for investors, just got cheaper!

 

*                    But this begs the question that if MF products are already quite cheap as compared to say insurance products, is there a need to further reduce costs? Will this not stifle the marketing attempt to spread out the MF products across the breadth of the country? Where are the commercials for the AMCs or Distributors to sell the product in say Tier 2 or Tier 3 cities let alone smaller towns? Let’s face it. Investment products have to be marketed and sold. If an investment oriented insurance product has as much as 10% variability in cost structure a similar investment oriented MF product earlier had a 2.5%

 


band width, which now stands revised close to zero. Eventually the small and medium retail investors will drift to the insurance products and end up paying higher! Are they then the real beneficiaries?    

 

*                    Or has the financial regulation in this country has decided that an investor segmentation is the need of the hour. Insurance (or investment products coming out of insurance companies) is for Retail and the open ended investment products of AMC’s are for the affluent.

 

*                    The regulation also says that the investor will now pay the distributor. Imagine a situation; A retail customer walks into a distribution unit with an equity investment application for Rs.10,000/-. In the current scenario, he expects some thing back as commission. Now, can he be explained that he is going to get a better NAV and therefore he should pay Rs 50 or 100 as advisory fee? Well. This is what is being expected by saying “The upfront commission to distributors shall be paid by the investor to the distributor directly”. One is not sure how practical this measure is and whether this works even for market savvy, whole sale participants. The investor however smart would not like to pay for a distribution or for an AMC marketing service. 

 

*                    This will therefore trigger a re-positioning of the business plans of AMCs and distribution networks. AMCs need to plan their distribution network to reach out to retail customers or concentrate only on high end businesses. For AMCs, the rich will become richer and the small will face more difficulties to grow business

 

*                    The distribution businesses built on Channel model are the most effected with these new norms. Since the arrangement going forth is, the fee is to be provided directly to the advisor by the customer, the scope of intermediaries will be a question mark. The mass retail business will be commercially unviable for distribution houses to sell mutual funds. The mass retail MF business will tilt towards online side and the geographical penetration in rural/ new locations will certainly come to a halt. Since, customer will decide the fee for the advisors; the institutional mutual fund advisory business will be

 

 

more competitive and will also open for the organised players who earlier were not participating in it due to unfair means for the pass backs. Affluent/ high end business will become competitive on the basis of service & advice. The advisors have to invest much more on the technology & serious research so as to create a visible value to the investor

 

*                    Some businesses worked for years to create a stable annuity from mutual funds assets, by selling a very prudent and investor friendly product “SIP” (systematic investment plans), based on the principles on average rupee cost. They have accordingly invested initially and worked on the NPV benefits of the business. With the new norms on no entry load on existing & new schemes, the question arises on the assumptions on which these businesses had been built with a focus on discounting the future revenues. One good thing that may emerge from these norms is that it would hit those of the distribution community whose revenue dependence was largely on the portfolio churn of the customers.

 

*                    The new “Mantra” for the business planning in AMC’s may be CDSE (Cumulative Deferred Sales Expenses), which is going to be very important decision by AMC’s to put in various schemes to pay off various distribution channels upfront commission in lieu of entry loads. Instead of taking any further cost to their profit & loss accounts, AMC’s can introduce CDSE in the schemes to meet the need of distributors to get up-fronts for survival and  to look MF as a product to sell to their (??) customers. But eventually this measure will too affect the P&L of AMC’s either by margins or by creating working capital provisions to fund the upfront brokerages. The “trade-off” is going to be crucial in the strategies of various AMC’s and raise issues on the basic capital norms for the AMC’s. Eventually the current minimum capital norms for AMC business (Rs.100mn capital) will have to be revised upwards in recognition of the hard reality that long term custom cannot be created from a stable investor base without decent marketing and sales budgets

 

 

 

 

In the end

 

In conclusion, the effects of the new regulation are mixed. Part of it is very good, especially the push to abolish churn based selling and the pressure on AMC’s to take a re look at the Capital. The bad part is the impracticality of investor paying for distribution service. The ugly one easily is the segmentation that is indirectly being thrust on the investor community based on size; i.e., if you are small, go for insurance products (even if they are investment products) and if you are rich enough to be approached by an AMC or a Distributor, you can take a look at MF products    

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Mutual Funds

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