2009 has been a year where the mutual fund industry has witnessed a transformational shift in the way business is done. CNBC-TV18's Mrinalini Krishna and Priyal Guliani report on how the Securities and Exchange Board of India (SEBI) has enforced game changing moves in mutual funds.
No entry load - 2009 highlight
Market regulator SEBI cleaned up of the mutual fund industry, bringing in a flurry of reforms and ushering in transparency. The most significant one was the abolition of entry fee on mutual fund schemes.
On June 18, 2009, CB Bhave, Chairman, SEBI, had said, "There will be no entry load on any mutual fund schemes. The investor will decide the commission that he is to pay to the distributor directly. The board also decided that if the distributor is selling different schemes then he must disclose to the investor as to what commission he is getting for different schemes."
So far, every time an investor bought a mutual fund, a fee of 2.25% was charged upfront by asset management companies (AMCs) and mutual fund distributors. But now, fund houses and distributors had to learn to live by the new rules, where the customers could choose to pay an advisory fee.
Despite this shift, fund houses saw their average assets under management (AUM) rise. They crossed Rs 6 lakh crore in May, Rs 7 lakh crore in August and Rs 8 lakh crore in December.
But equity funds saw outflows to the tune of over Rs 5000 crore since August, largely due to profit booking. New fund offers (NFOs), the key sales drivers for the industry, failed to take off with nine new funds managing to garner a little over Rs 1000 crore.
Regulator's tough stance
The regulator, meanwhile, came down on fixed maturity plans (FMPs) as well. It directed that no indicative yields were to be announced for any debt mutual fund and liquid funds were allowed to invest into money market instruments of upto 91 day tenure only. That's not all the regulator demanded that the trustees of asset management companies played a more engaging role.
In October 2009, KN Vaidyanathan, Executive Director of SEBI, had said, "Our sense is to re-emphasise the sense of responsibility and accountability that the trustees have. They are the investor facing entities, they have the fiduciary responsibility in a sense they are the first level regulators."
Year-end cheer for MFs
By the end of the year, brokers had something to cheer about. They could now buy and sell mutual funds through exchanges, pretty much like stocks.
The mutual fund industry has changed over the last year, possibly beyond recognition. The new regulations have broken the shackles of traditional practices and have made mutual funds one of the most affordable and accessible financial instrument for Indian investor.
Their asset quality is among the best in the industry. Plus they have the added advantage of vast distribution network in the form of branches in rural and semi-urban areas. If the current rally continues, the stocks of these tops PSU Banks will continue to outperform the benchmark indices as they are expected to perform better than their peers. While a few private sector banks like HDFC Bank, Yes Bank, IndusInd Bank and Dhanalakshmi Bank also made a new all time high, their valuations have already factored in the very high growth rates and the chances of further stock appreciation are limited.
The midas touch
Gold prices continued their march towards a new all time high of $1,210 per troy ounce in 2009 due to a weak US dollar and rising investors' interest. The last leg of the rally past $1,100 was, however, initiated by the news of India's central bank buying 200 tonnes of gold in the last quarter. India joined countries like Russia, the Philippines and China that have been consistently adding gold to their official reserves since late 2008. All this buying led to an increase in the gold reserves of world central banks first time in last nine years.
Defensive stocks make moolah
Defensive sectors like FMCG and Pharma typically under-perform the broader market indices during a rally. However, this year, most FMCG and Pharma companies have outperformed the Sensex.
Pointers To The Future
Except the big FMCG daddies like Hindustan Unilever and ITC, most of the leading FMCG companies including Dabur, Nestle India, Marico, Godrej Consumer Products, Emami and smaller players like Procter & Gamble Hygiene & Healthcare have outperformed the Sensex during the year.
It is the same case with most pharma stocks like Dr Reddys Labs, Ranbaxy, Lupin, Cadila Healthcare and Ipca Labs among others that beat the broader market indices this year. Most of these companies from both these sectors have registered strong growth in their revenues and earnings over the last couple of quarters and consequently the investors have cherished their stocks. However, these sectors are unlikely to register a repeat out-performance going ahead as most companies have reached their peak valuations.
It makes a comeback
At the beginning of 2009 only a brave heart could have bet on the IT sector. With ever-fluctuating rupee that led to forex losses and tumbling tech demand from the western economies, the sector's fate was more or less sealed. Yet, 2009 was sort of the year of resurrection for the IT stocks. After betraying investors for two consecutive years, top IT companies offered marketbeating returns on bourses in 2009. The stock price of TCS, the country's largest IT company and HCL Tech, the fourth biggest, nearly trebled. Infosys and Wipro, the second and third in ranking, respectively, rose two-folds.
A recovery in demand from global financial sector and expanding domestic IT space were the major reasons for the outstanding performance. Going ahead, the stocks are less likely to see a major run-up since current valuations reflect most of the positive triggers in near future.
The call drops— telecom loses lustre
There are very few leading sectoral indices, at the end of 2009, which have moved southwards, at a time when the broader market indices have moved northwards. And telecom sector is one such beleaguered sector. After consistently outperforming the Sensex for last three years, the one-time darling of investors has grossly under-performed by a whopping 83%
Considering this past performance, the investors, at the beginning of the year, wouldn't have expected the sector to log such a poor show. The intense competition among companies and consequently falling tariffs has led to the de-rating of the sector. Going forward, the things can only improve given the incredibly low valuations in the sector right now.
Food for thought
On the backdrop of high commodity prices for major part of 2008, the inflation was expected to be moderate in 2009. Reserve Bank of India had anticipated an inflation of 5% for FY10 while presenting its annual statement in April 09. However, deficient monsoon rains and untimely showers in October and November badly hit kharif crops this year.
There is an estimated 17% drop in kharif food grains this year. All this resulted into escalating food prices. Food inflation has already touched a decade-high level of 20% during the week ended Dec 6. The effect of high inflation is clearly visible in inflation based on CPI (consumer price index) as it is hovering around 15-18% for different categories. Such high consumer inflation is likely to trickle down in the system and overall inflation will gear up. This is likely to push the WPI (wholesale price index) based inflation to a level of 6.5% by end of this year.
Mutual funds sans entry loads
SEBI's complete abolition of entry load from investments in mutual fund schemes has led to a hue and cry among the mutual fund distributors across the country. Many distributors have stopped selling MF schemes altogether while others are recommending their investors insurance plans like ULIPs in lieu of MFs in a bid to earn their livelihood.
In a country where the financial literacy is still quite low, it is difficult to make an investor shell out some extra bucks to pay commission to their distributors, which is now mandated by the regulator. The impact of SEBI ruling is also being felt at the fund houses who are now finding it difficult to attract fresh inflows into their new as well as existing schemes. While the financially literate investor will approve the ruling, for others, it may take some time to overcome the detestation of paying out some commission for want of some advice.
Auto sector vrooms ahead
Every Bollywood script has a hero and story revolves around him and his exploits. The plot was similar in case of the global financial crisis and its Indian episode. Here automobile manufacturers took the centre-stage of the unfolding economic crisis. Auto sales tumbled like nine pins as the financial crisis deepened with the fall of Lehman Brothers, September last year. In segment such as high-end passenger cars and commercial vehicles, off take of new vehicle fell by as much as 50-60%.
This sent a shock wave through the industry. The recovery has however been equally sharp and shocking. In matter of four quarters, the industry moved from an existential crisis to all time high sales, revenues and profitability. Just as automakers were harbingers of the crisis, they become the poster boys of the stock market rally. In the last nine months, most of the auto stocks have trebled or quadrupled in value and have led this bull-run. But does this mean they will, consolidate next year or underperform the broader market? Only time will tell.
Housing finance companies step in to provide loan to customers turned away by banks.
Almost all banks refused a housing loan to a mid-management executive in Mumbai, who earns an annual salary of Rs 28 lakh. The reason? He had bought a sample flat that the developer had furnished and charged him extra for the amenities. A non-banking finance company (NBFC) came to his rescue.
While the market value of the flat is Rs 1.21 crore, it cost the buyer Rs 1.55 crore, including amenities, stamp duty and registration charge. The borrower's requirement was Rs 1.15 crore. Banks didn't lend as the deal was way above the market value of the house. The NBFC not only provided the required amount, but also disbursed it within two days.
This is not an instance of reckless lending, but a calculated call by the lender. Some banks and NBFCs have carved a niche in the lending business. They cater to the class of borrowers generally not serviced by banks. They go beyond the income statement and tax returns to offer what is called as deviations to the standard banking practices. Most private and public sector banks prefer to do business with salaried people and follow the guidelines set by their managements.
One such lender among the NBFCs is Deutsche Postbank, which walks the extra mile to conduct due diligence. Describing its method of functioning, Anoop Pabby, joint managing director, Deutsche Postbank Home Finance, said, "The strength of our credit evaluation process is quick screening of financials, personal meeting with the customer by our credit managers, a visit to his business premises to verify the nature and depth of his business, taking third-party feedbacks, corroboration of the facts from information available in the public domain, banking habits, existing loan repayments, facilities provided by other banks, audit reports and so on."
Some of these lenders even employ chartered accountants as part of their credit valuation team to take a call on the creditworthiness of a customer.
Following are some of the common areas where a large bank may not fit the borrower's criteria, but these lenders would give a loan if they feel the customer can repay.
100 per cent housing loan: Banks typically lend 75-85 per cent of the agreement value, which includes stamp duty, registration and car park. But if the developer asks for cash, the agreement value falls and affects the quantum of loan one can take.
Some lenders, especially privately-owned NBFCs do realise the prevalence of cash in such deals. They do their own valuation of the property before sanctioning a loan. So, if the agreement value is much below the real price of the house, these lenders provide even 100 per cent finance. The amount of loan in most cases is increased by dividing the loan in two parts – a regular housing loan and another one for amenities to provide 100 per cent financing.
Track record: It is a standard practice for all lenders to check a customer's record in the credit information bureau. If the borrower is shown as a defaulter, banks don't lend unless the customer settles the issue with the company that has reported the person as a defaulter. Customers face rejection even if the default is on account of a dispute.
NBFCs such as Deutsche Post lend to customers who can justify the track record and provide supporting documents.
Self-employed: This segment of customers finds it most difficult to get a bank loan. While professionals have difficulties to produce receipts for every transaction to prove their actual income, business owners tend to split earnings among family members for tax purpose. This acts as a hurdle when a self-employed person requires a big-ticket loan.
Banks such as Kotak Mahindra Bank have specialised in lending to this category of customers. The bank goes through various documents to assess the actual income. This includes studying receipts and transactions on bank statements.
In fact, housing finance company HDFC has a product that caters to professionals such as doctors and chartered accountants. "If the customer is a young professional, there are structured repayment options available that provide flexibility and, in turn, a higher loan amount," said the spokesperson of the bank.
One such option from HDFC is a product called Step-up Repayment Facility. This is linked to the customer's expected income growth. Under this facility, the customer will be eligible for a higher loan amount as compared to the regular home loan product and as he would pay lower equated monthly installment (EMI) in initial years, which will rise over the years as the earning capacity improves.
Loan against property: While lending against a property, financial institutions usually provide 50 per cent of the value of the asset. A large bank would first assess the property and then look at the customer's income tax filings. If the EMI is more than the income declared in tax filings, lenders would usually reject the application.
In such cases, a borrower can approach the housing finance company, especially those having a large portfolio of self-employed persons and businessmen. These companies provide 30-40 per cent of loan against the property. They also lend even if a customer does not have income-tax returns to justify his income, provided the borrower can establish that he can pay the EMI.
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