Will this move give mutual fund fortunes a boost?

Mar 1, 2011

In this issue:
» Will there be enough food available by 2050?
» Chinese pull back on US Treasuries will be evident
» "We are all doomed," says Marc Faber
»  How big can the oil price shock be in 2011?
» ...and more!

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The Finance Minister announcing FDI in the mutual fund industry must have surely made the latter rub its hands in glee. After all, the industry in recent times considered itself at the receiving end of regulatory overhaul at the hands of ex-SEBI chairman Mr. Bhave. Most fund houses considered the norms introduced for protection of retail investors detrimental to their business.

The FM in his Union Budget speech has essentially allowed foreign investors to now directly invest in equity mutual fund schemes. Earlier, only FIIs and sub-accounts registered with the market regulator SEBI and NRIs were allowed to invest in mutual fund schemes. The latest proposal is expected to broaden the asset bases of fund houses in India. More importantly, fund houses believe that foreign investors (which would largely be fund houses and high net worth investors) would prefer to invest in schemes from a long term perspective.

While the move can be construed as a positive one, it is still early guns and the success of this will depend a lot on factors such as KYC norms, tax aspects, investment limits and the like. Also, one hopes that foreign investors invest in funds because they believe in the long term growth story and do not go in for redemptions at the slightest sign of volatility. Indeed, so far FIIs at least have not struck the right chord by influencing Indian stock markets. These FIIs, while contributing to bull runs, have also withdrawn money in droves from the markets considerably impacting the same. The meltdown witnessed in the markets post the subprime crisis is a perfect case in point. Further, Indian mutual fund houses must ensure that in their hustle for attracting foreign funds they do not ignore the interests of the Indian retail investor.

Do you think FDI in the mutual fund industry will give their fortunes a boost? Share with us or post comments on our Facebook page.

 Chart of the day
Emerging economies continued to tower over their developed peers in terms of GDP growth. As today's chart of the day shows, China, India and Russia grew at a healthy pace in the last quarter of 2010., Although inflation and higher interest rates have sparked fears of a slowdown in these emerging economies, they should still do better than their developed peers who are struggling to shake off the crippling effects of recession.

Data Source: The Economist

Anybody who cares to glance through news on current affairs will have no problems concluding that food is indeed getting scarce by the day. Infact, the Economist has even gone on to call it the 9 billion-people question. The magazine has wondered whether there will be enough food to go around by 2050. Please be noted that by then, the world's population would have grown to as much as 9 billion people, up 50% from the current levels.

The current state of affairs is indeed not very encouraging. A combination of falling yields, a shift away from cereals towards meat and vegetables, overused soil and less focus on plant related R&D has let production decline or stagnate. Population growth on the other hand has kept on rising and this has led to inventory falling faster than it can be replenished. Add to this the inclement weather and there is no surprise that food prices are on a boil.

One can draw two conclusions from this scenario. One can continue believing that the situation will deteriorate further or one can hope that adequate steps are taken to increase food production. Count us in the latter camp. We believe that the green revolution of the 70s was an outcome of a similar scarcity of food. We don't see any reason why Governments across the world cannot get their act together and bring about a similar revolution. What shape will it take we do not know. But we are certain that the problem will be sorted out. After all, this is how humanity has progressed for tens of thousands of years now.

Chinese officials have not minced words when it comes to their discomfort with the US' interest rate policy. After all the former have borne the maximum brunt of high risk being associated with US government papers. Its ballooning government deficit has not done any good to the US' Treasuries over the past two years. And appetite for the same has been waning amongst foreign and domestic investors alike. But according to Financial Times, the real impact of the same will be visible soon. The US' monetary easing programme (QE II) ends in June 2011. And that is when the Chinese pull back on US Treasuries will be evident in the hardening of interest rates. The Amercian economy has so far been comfortably feeding its high government debt. This was thanks to ample appetite for US papers amongst the foreign investors. But soon it will have to look for options, amongst others US pensioners. However we believe that that a steep rise in the cost of US government debt is but a given.

"I think we are all doomed." This line is not any Mayan prophecy about the world coming to an end in 2012. But it comes from Dr. Doom aka Marc Faber. We always like to hear what this revered economist has to say.

Here is his doom formula:

Economic deterioration ->More money-printing -> Inflation and poor economy -> Stagflation -> War -> Market Collapse = DOOM.

Of course, his views are mostly aimed at the Western economies. But there are crucial lessons for Indian investors as well. He gives the example of Germany. If you look at the country's history, they had World War I. They had hyper-inflation in World War II. The bond-holders got wiped out three times. On the other hand, if you owned a stock like Siemens then, and you still owned Siemens today, you would at least have something with you. You wouldn't be wiped out. So the bottomline is simple. It is always better to have ownership in companies than being a lender to them, and even worse, to governments.

How big can the oil price shock be in 2011? Well it all depends on how long the supply disruptions persist. As spike in the oil prices have been a pre cursor in most of the last major downturns, it is hard for economists not to hit the panic button. In a recent report, the outlook for oil prices is projected to be more alarming since the current crisis is induced due to supply constraints and has hit at the worst time possible as countries face fragile demand along with huge deficits.

True, all is not well anymore with crude oil causing the most friction against growth in the global economy. However, we don't expect crude prices to persist at current levels for long. And we have a very simple logic to believe so. The prices that will prevail in the long term will be what people will be willing to pay. The current surge in oil prices is not based on fundamentals, especially with OPEC sitting on huge spare capacities. Besides, alternative fuels like natural gas are substituting oil at a rapid pace and shale gas promises to be the next game changer. To conclude, we believe that rally will not last too long unless the crisis engulfs Saudi Arabia in which case all bets are off.

In the meanwhile, India's benchmark index, the BSE-Sensex was trading higher by around 500 points (up by 2.8%) at the time of writing. All sector indices are trading in the green. The BSE Auto Index has risen by over 5% on account persistent heavy buying in automobile stocks. The Asian Indices are trading strong, however Europe has opened mixed with FTSE trading lower.

 Today's investing mantra
"Stick with businesses whose profit picture for decades to come seems reasonably predictable." - Warren Buffett

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18 Responses to "Will this move give mutual fund fortunes a boost?"


Mar 2, 2011

It is a good move. However I wonder how KYC norms would be observed, and the facility may be used for illegal activities.



Mar 2, 2011

yes, fully agree with readers.Low interest or zero rates may attract debt funds to our country, but these are again subjected to foreign laws of each individual customer.
BUT fullfiling our KYC and investing for more time, only time can tell us.
when mutualfunds almost failed to attract indians from bank fixed deposits to MIP, i doubt its success.
thanks for this good work and service.



Mar 2, 2011

FDI Ultimately in a sense should provide Local employment. Basically a long term stategy. It can be conventional industry, machinary, or anything for that reason etc..
FDI as just a investment INSTRUMENT does no good long term...
FDI meaning is lost here.

Now after the GDP % growth etc.. governement is trying to go after now FDI inflows to show how much the economy is growing..I nee really congratulate Mr. Pranab to start a new fever.....

THese politcians are Brewing everytime something...Just twiking the system...



Krishna Kanth

Mar 2, 2011

So, a new set of FII's are created - Foreign INDIVIDUAL Investors! Already we are dancing to the tunes of Foreign Institutions, this nothing but adding fuel to fire. FM should have first built up credibility in regulating the FII's which wreck havoc in our markets, just at their whims & fancies. It is naive to believe that Foreign Individual Investors would be any different.

There is undoubtedly a huge untapped potential in the Domestic Retail investors community. Fund managers are constantly hungry for funds. At the same time, millions of Investors are desperately searching for good (relatively safe, well managed & decent returning) investments. All the Govt. needs to do is to provide a mechanism & conducive climate for these two to meet. Simple sanity tells us that that instead of going abroad begging, this is better done first.



Mar 2, 2011

The Mutual Funds will have more collection by allowing foreign investment, but this may not help interest of Indian retail investor.


Ramakant Desai

Mar 1, 2011

While various aspects of the Budget are commented upon, political aspect is overlooked. While Bengal, kerala and Tamilnadu are benifitted Gujarat is damaged. The former may be due to draw votes in the state elections.Later is punished by taxing S E Zs because Gujarat votes B J P and that too Narendra Modi.
Is it fair to use such tactits for short term electoral gains?


K. R. Baliga

Mar 1, 2011

Genuine Foreign investments in our Mutual Funds would be welcome. But we have to observe very strict KYC procedure to see that this route is not misused for funding terrorist and illegal activities. A lot will depend on those administering the MF not to cut corners in gathering these funds.



Mar 1, 2011

which is boost


sunilkumar tejwani

Mar 1, 2011

Its too early to say but merely allowing Foreign Investors to invest in mutual funds may or may not attract them to local mutual funds. For the simple reason, why they will allow a local fund manager to play the market when they can hire in-house experts to invest? Further if they invest through mutual funds, they will have a considerable influence on the local fund manager in investing decisions.



Mar 1, 2011

Probably the statement: "one hopes that foreign investors invest in funds because they believe in the long term growth story and do not go in for redemptions at the slightest sign of volatility" is not written by an experienced professional.
Why does our market have to be so volatile everyday, especially when something happens in Korea / Libya as those do not have a considerable amount of effect on India?
Don't you think that FII, running their business from out of India (sitting in HK, sgp, ldn) actually keep moving their money (a huge amount) at the slightest unrest, between all markets that they invest in i.e. move from korea to india to hk and so on in search of a safer place. So how can you think that they will not pull out their money from MFs on a whim?
I think there should only be a few funds which should be allowed foreign investment and that too with a lock in period and a sufficient exit load - maybe that's not possible as every MF AMC would want more money (all of us are greedy after all) and unfortunately there is no greenpeacce in this industry.

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