Days of commission-led-selling may never return

May 7, 2011

In this issue:
» Better days ahead for retail investors in India?
» Is the 'silver bubble' on the verge of bursting?
» China's demographic dividend in jeopardy
» Millionaires in the US to double
» ...and more!

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Reckon this. The Indian mutual fund industry today manages Rs 7 trillion worth of investor money. This is after losing Rs 388 bn (5% of assets under management, AUM) to redemptions in 2010. But the key difference between 2010 and 2011 is a landmark change in the way in which mutual funds are sold in India.

Thanks to the ex SEBI chief Mr C. B. Bhave, the mutual fund industry managed to break away from the shackles of commission led selling. One which thrived by helping the 'big' funds get bigger by handing over commissions to distributors for selling their funds. In the bargain, the retail investors became the victims of rampant mis-selling. And to top it they paid for the distributor commissions from their own pockets! The industry termed this wrongful charge as 'entry load'.

With the end of Mr Bhave's tenure it was widely speculated if his successor would reverse the rule on ban of entry loads. The big AUM focused mutual funds especially hoped so. For each of their new fund offerings had earlier succeeded not due their novelty or long term benefit. But due to the distributors' willingness to push the fund to customers for a hefty commission. Some even enjoyed paid vacations overseas at the mutual fund's expense for ensuring a handsome AUM to start with.

But it appears that the new SEBI chief Mr U. K Sinha is not taking any chances with his predecessor's goodwill. While keeping the ban on commissions untouched, he in fact aims to make disclosures for mutual fund investments more investor friendly. This is certainly something for retail investors in India to rejoice about. For a nation with more than 35% of GDP in the form of savings, mutual funds can be a brilliant long term wealth creator. And with just around 5% of the population deriving the benefit of the same, the industry certainly has a long way to go. More competition is certainly on the cards for existing players. But what will determine the long term success of the industry is favouring the more competitive and investor friendly players rather than the big ones. We keep our fingers crossed.

Do you think the mutual fund industry will get more retail investor friendly in the days to come? Let us know your views or post them on our facebook page.

 Chart of the day
Energy consumption in India is amongst the highest in the world. Being the number two in terms of economic growth and population, India's energy needs will only grow. But with rising oil prices, India's oil imports could become a sticky situation for the government.

Despite government subsidies, high fuel prices have spiked the consumer inflation in India over the past few months. As of now, Indians pay Rs 63 per litre of petrol. Today's chart of the day shows that when compared to prices across the globe, the cost of petrol appears very skewed. While in Turkey a litre of petrol costs Rs 114.5, in Saudi Arabia the same costs Rs 5.35. In fact, in Venezuela, all you have to pay is 71 paise for a litre of petrol. India stands pretty much in the middle. However, China and the US comparatively pay much lesser for their fuel.

Data source: Rediff

Silver has occupied a fair deal of news space in recent times. The current week was no different. This time though, the limelight fell on the white metal for all the wrong reasons. In a matter of just five trading days, silver prices have come undone by a whopping 29%. What such a steep correction has done is that it has crushed the dreams of a lot of recent investors hoping to cash in on the silver rally. They indeed should have known better. Any commodity that goes up so fast, so soon is bound to be susceptible to bouts of violent corrections. Matters were made worse by the small size of the silver market as there werevery few large investors who could come in and curb the fall to some extent.

However, does this mean it is the end of the road for silver? Certainly not. Silver along with gold is a good hedge against the expansionary policies of central banks around the world. As long as they don't mend their ways, silver could continue to see better days ahead. After all, the metal is still ruling way below its inflation adjusted all time high. However, we certainly warn against making it too big a part of one's portfolio.

Could you have ever imagined a country holding 19.4% of the world's population going through a demographic crisis? Yes, that's true and we're talking about China.

The new census numbers are hinting at a serious demographic crisis which is set to only worsen over time. According to the recently released census data, the population of mainland China stands at 1.34 bn. During the 2000-2010 decade, the average annual growth rate of population had slowed down to 0.57% as against 1.07% in the preceding decade. The population under the age of 14 has reduced from 23% of total population in 2000 to 17% in 2010. Further, a slower birth rate has been accompanied by a drastic ageing of population. While in 2000, 10.3% of the total population was above 60 yrs, the same now stands at 13.3%.

This is going to result in a growing burden on the working young population to support the elderly as well as the government-run healthcare and pension systems. All this clearly indicates that China's "demographic dividend" is over.

China's one-child policy that was laid in 1980 seems to be the root of the problem. Apart from lowering the necessary fertility rate, it has also aggravated the gender imbalance. With a strong cultural preference for a male child, there are far too many boys in China than girls. The effects of these imbalances will be strongly felt in the coming times. If not dealt with appropriately, it can very much threaten the future of the fastest growing economy.

Did anyone say that the US is getting poorer? As per a report by the Deloitte Center for Financial Services, America, in few years, will be home to more families with net worth of more than US$ 1 m. Currently at 10.5 m, the number of such families will climb to pre crisis levels by 2015 and will reach 20.6 m in 2020.

As per CNN money, while U.S will occupy the top slot, China will be the one to lead all on metric of growth of millionaires. It will be followed by Brazil and Russia. Despite the fast growth, it will take lot longer for developing nations to be in the league of developed nations in terms of wealth. So will slow and steady win the race? Time will tell. But as far as findings for U.S are concerned, we believe that the positives should be taken with more than a pinch of salt. Such wealth will be concentrated at the top. The unemployment levels are soaring like never before, thus adding more and more people to the class of chronically unemployed. So, if the estimates come true, U.S will be marked not just for extremes and contrasts, but also for a gradual wipe out of the middle class. We wonder how long it will rest at the top in the absence of the same.

The week gone by was a lackluster one for the global markets. Except for Japan, all global indices closed the week on a negative note. India was the biggest loser (-3.2% WoW) followed by Brazil (-2.6% WoW) and Hong Kong (-2.4% WoW). The RBI's monetary policy turned out to be the biggest negative for Indian markets this week. Even the US markets were down 1.3% during the week. Possibility that Greece might leave the Euro zone fuelled negative sentiments in the world markets (as concerns with respect to sovereign debt crisis increased). However, a surprisingly strong job data from US salvaged some worries built around Greece.

The entire Asia pack (except for Japan) was bleeding throughout the week as commodity shares were battered the most amidst falling crude and metal prices. The Indian stock markets reacted sharply to the rate hike by RBI which triggered concerns over a dent in corporate earnings.

Data source: Yahoo Finance, Kitco

 Weekend investing mantra
"The investor of today does not profit from yesterday's growth." - Warren Buffett

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11 Responses to "Days of commission-led-selling may never return"


May 20, 2011

This is a stupid point of view. It overlooks the role of intermediaries. Without them, it is unlikely that MF industry will grow very big and even with 2% entry loads, it is reasonable rate of commission. They have to go meet people, educate them, induce them to doing it. Without the incentive, everyone is selling Insurance with 25% a year costs.

Even if the assumption is that MFs were missold ealier, the whole act of taking away commissions has deprived the country of the best investment option. Some guys will do it but they could have done earlier.

the whole notion that 2% entry load was bad is utter nonsense. It should be brought back and if possible increased so as most people in this country are part of India growth story. Someone who goes to sell has an incentive to do so.

In US, they have 5% up front commissions. We should think on those lines so that people are not induced into buying ULIPs with crazy expenses.



K K Wadha

May 16, 2011

Accross the MF industry companies don't declare what will AMC fund management cgarge specific to a scheme rather say only only minimum & maximum regulatory prescribed charge.In the absence of specific FMC of a scheme,clients are not able to make necessary judgment & compare the schemes. FMC should vary with expected investment activity required on the of AMC and disclosed. It will be in the interest of investors if Regulator mandate this as done for Life Insurance products by IRDA.



May 9, 2011

On Japans market being up and if found to be so for the entire month then a possible inflow of the recent easing of hundreds of billions of print paper in the bank by the japanese govt after the Tsunami would be a cause? Really interesting ...



May 9, 2011

About 'China's demographic dividend being over'; i certainly disagree. It is a narrowed approach looking it that way. Its about overall population. Its not about age ranges. when one curtails popultion growth this supposed to happen.
Let me ask: If China dint curtail then what.. We would have comeout and said China has to import most of the resources to fulfill the UNBELIEVABLY GROWING needs. THe headlines would have changed?
I guess India will have a bigger challenge to face than the demographic dividend what we are taking about.




May 8, 2011

dear all !
wellcome,nice to read good and practical views from you,but kindly remember the number of investors who do some home work before investing like visting such blogs may be very less.
so as long as indians either hate or blind trust things without CROSS CHECKING the information, mis selling will be a very natural thing.
I personally believe despite of any good regulators the product manufactures find NEW ways to benefit !
It is their business secret or a game like police and thief.
thanks for this good work and hope this message reaches to the needy.



May 8, 2011

For fast growth the MF industry has no choice but to become as investor friendly as possible.



May 7, 2011

distributors are blood sucking leeches who have managed to drive away lots of investors forever from mutual the ultimate losers are investors and mutual fund houses.distributors are laughing their heads off at both these suckers.



May 7, 2011

Re Silver, you say "What such a steep correction has done is that it has crushed the dreams of a lot of recent investors hoping to cash in on the silver rally. They indeed should have known better. Any commodity that goes up so fast, so soon is bound to be susceptible to bouts of violent corrections."

"However, does this mean it is the end of the road for silver? Certainly not. ........... After all, the metal is still ruling way below its inflation adjusted all time high."

On one hand you analysts get people to buy Silver and then sympathise with them when they loose money!
.... Wonder why you consider the "All time high of silver" as a standard, and that too adjusted for inflation. That high itself was a gross aberation, and people who must have bought then have waited for decades to even get that price nominally, barely! And the selloff again. Looks like the hedge funds etc are making suckers of the silver and other commodity investors.



May 7, 2011

Eq.Master Team,
After reading your article, I am prompted to observe as follows ;
Just as it is the difference of just "one degree-temperature " that boiling water (Liquid form) turns into steam (vapour), our MF Industry MASTERS HAD COINED A TECHNO-WORD AS "entry load " JUST As some Erudite Western Financial Wizards had coined the (now-dreaded)(but at that time very commonly used terms as the "COLLATERALISED DEBT OBLIGATIONS " etc etc.).
A sharp-edged instrument such as a surgeon's scalpel unless used with delicate expertise of an experienced surgeon, could cause more damage than the purpose of removing a malignancy from the patient's body ??

I hasten to conclude !!



May 7, 2011

I think that this comnission thing makes good headlines and off late an overhyped issue. Raked up when there is little to report. Investments in equity products are likned to market risks and are different asset class not compareable with commodity / FD's or realty. All have different risk levels and for any individual it is case of asset allocation depending on his risk profile. Commission has been so much discussed as if abolishing it has started resulting in profits / improved performance of MF schemes ?? I do not disagree with plugging the excesses in commission or anywhere but abolishing and making them unviable from the business point of view is something that needs some re-thinking. We are living in a society where many are keen on free bees / jugar /contact /to see some music programme or any such thing with free passes - do not want to spend 200/- To expect them to pay for services is very optimistic. No product sells without the seller making some money - infact barring MF's no one knows what banks make on our deposits / car seller makes on selling a car etc. People should demand service and pay for it. Do proper asset allocation - press should get over with negative bias for intermediaries - commission thing according to me is overblown and surely not a wonder drug for improving partcipation / performance of funds or anything. prformance will always be linked to market perfromance and no one can do anthing about it - therfore focussing on asset allocation is more important.

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