An 8 lakh crore industry that neglects investors - The 5 Minute WrapUp by Equitymaster
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An 8 lakh crore industry that neglects investors

Jun 24, 2010

In this issue:
» Germany equally at fault for the Euro crisis, George Soros
» Millionaires in India rise by more than 50%
» A crisis that could be worse than Lehman Brothers
» Fed keeps interest rates low for an extended period
» ...and more!!

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00:00
 
"Can't help but beat my children when they are naughty," is a common point a parent has. And if you are the parent of a child that owes money amounting to Rs 8,000 bn, you need to go an extra mile in taking him to task for his disobedience! The child here is the Indian mutual fund industry. And the parent, SEBI.

SEBI's chairman Mr. C.B. Bhave has rapped the Indian mutual fund industry for playing with investors' hard-earned money! He has scolded mutual funds for putting their short term interests above that of investors. He has also questioned them about the kind of homework they do before launching new products every now and then! In short, he has really taken the industry to task.

Overall, Mr. Bhave is of the view that the structure of incentives in the mutual fund industry drives away investors. This is because what is good for the industry in the short term is not generally beneficial to the investors.

He bluntly put it, "There are 30-odd fund houses and around 3,000 schemes in the market. An investor will have no idea of which scheme is good for him. Are new fund offers (NFOs) being launched even while the existing offers are at their sub-optimal levels? Or is that there are wrong incentives for launching NFOs?"

So, do you think mutual funds put their short term interests above that of you, the investor? Share with us.

00:53
 Chart of the day
 
Energy giant BP has been hogging a lot of limelight these days. Unfortunately, for all the wrong reasons. The bone of contention is a technical malfunction that has led to a huge oil spill in the Gulf of Mexico and which is turning out to be a huge environmental disaster. As per reports, the size of the spill has been put in the range of 20,000 to 40,000 barrels per day. It should be noted that even at the lower end of the range, the BP oil spill has turned out to be one of the biggest ever accidental oil spills and the same has been highlighted in today's chart of the day. Given how the estimates have been revised over time, one can never know, the BP oil spill could occupy an even higher position in the time to come.

Source: Economist

01:34
 
Continuing with BP, no doubt that the oil spill is an ecological disaster. There is also concern over what it means for ambitious oil & gas exploration projects around the world. But here's an impact no one is paying sufficient attention to. The impact on the global financial system. You see, BP is one of the world's financial powerhouses. And its insolvency could mean a bigger blow to liquidity than the capitulation of the biggest investment bank one can think of.

BP extends credit - through trading and finance. They extend the amounts, quality and duration of credit a bank could only dream of. The company has business sprawled around the world. Who becomes the counterparty for all of BP's outstanding paper that so many smaller oil, gas and electricity companies, airlines, shipping companies, local bus, railway and transportation networks rely on? Moreover, oil majors have a huge role to play in the derivatives markets - which directly ties them to global financial system. Hence, in our view those calling for demolition of the energy giant must also take the financial impact into account. Or else we might have another Enron or even Lehman like collapse on our hands.

02:16
 
Greece has been rapped on the knuckles. A stern warning has even been given to rest of the PIGS. Thus, the hugely indebted countries of the Eurozone have been really pulled up for bringing the region on the verge of an economic collapse. But are these countries alone responsible for the crisis? George Soros, one of the world's foremost currency speculator clearly does not think so. He has opined that other nations like Germany should also take the blame for the crisis. Infact, Soros believes that Germany should take a very large part of the blame for the current state of the Euro. He argued that the entire construct of the Euro was flawed from the first day itself. This is because as per him, a currency cannot have a common monetary policy and an uncommon fiscal policy, both at the same time.

Indeed, some of the countries took advantage of the low interest rate regime of the common currency and began to grow faster and built up huge trade and budget deficits. And this has now led to the situation that we are in currently. Soros further adds that Germany, the most powerful of the Euro nations is creating a huge obstacle in the path of recovery.

A staunch opponent of inflationary practices, Germany has asked member nations to tighten up at a time when these countries are desperately in need of an inflationary boom to pay off their high debts. Thus, by opposing counter cyclical policies, Germany is pushing them towards a deflationary spiral, reckons Soros. And this could lead to disastrous consequences. However, all is not lost as per Soros. He hopes that German authorities recognize the gravity of the situation and provide the kind of strong leadership that is needed.

03:21
 
India is a country in paradox. There are millions of Indians living below the poverty line at present. At the same time there has also been a big rise in millionaires. Take the year 2009 for instance. The 2010 World Wealth Report has stated that the number of Indians with investible resources in excess of 1 million dollars rose 51%. This has been on the back of a smart recovery in asset prices. What is more, the number of high net worth individuals (HNIs) was 126,700 in 2009. In other words, it means that there was one HNI for every 9,471 Indians.

And this buoyancy will continue going forward as well. After all, India's fundamentals in terms of economic growth remain strong. And it has the advantage of a favourable demographic dividend as well. These are some of the factors that will aid the personal incomes of a large section of India's population. Indeed, strong sustainable growth in GDP is critical to raise the standard of living of Indians. Certainly, it will turn many Indians into millionaires. But also, it will be instrumental in lifting people out from poverty.

03:57
 
They have done it once again. The US Fed seems least affected by the criticism that it has earned due to its liberal policy on interest rates. The Fed has once again affirmed that interest rates will remain zero for 'an extended period'. The huge deficit numbers that have neatly sunk some European economies features lower on the US' priority. It seems to be keen to first pump prime growth. Given the shocking unemployment numbers released recently, this decision is to an extent justified. But probably not its long term implications. The Fed's short term lending rate has been between 0-0.25% for more than 18 months now.

In the meanwhile, the economy has seen investor money go to emerging markets in search of better returns. Needless to say that at a cost of zero, you can take any amount of risk. So, some of these funds have created bubble like situations in emerging economies. A rise in Fed's lending rates is necessary for the US and emerging markets. To save the former from excess inflation. To save the latter from asset bubbles.

04:38
 
Meanwhile, after spending first half of the trading session in the positive, BSE-Sensex, the BSE benchmark slipped into the negative territory and was trading around 70 points lower at the time of writing. Selling pressure was being exerted by heavyweights like Reliance and ICICI Bank. Most of the other Asian indices have also closed in the red. Europe too is trading in the negative currently.

04:54
 Today's investing mantra
"There are two times in a man's life when he should not speculate - when he can't afford it and when he can." - Mark Twain

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74 Responses to "An 8 lakh crore industry that neglects investors"

shende m m

Jul 4, 2010

Sebi came here when itself had no idea for what? what to dorea;lly? No, govt did not know what to do bcoz of india s situation on 23 july 1991-own mistakes of course--tax payers money fully publiclised and public money fully politicised.
Then came all IPOs first at CCI and then looters---with no HO and only namer and name of co.OF 17000 cos only 8000 reamined leaving all public with coffers poverty and cheated minds --this when GOvt made merry all the time.
Next all MF s came in giving certificate of UTI US 64 --They knew that MF industry has no proper atmosphere for its growth or infrastructure at all but still gobbled up money ... living investors with negative returns after years with tears at death bed. Again GOVt was adjusting all their homework till then...
Then suddenly all tax / investors money gone public with US 64 gobbled up... with itt all MFs dried up.

Sudden death with dotcom bubble.
Then some greenery after US attcks due to shifting of FIN powers etc
Now when indvl investors r redcd to 7-8% from 40-50 % from 1993 --in mean time all FIIS and GOVT made merry at their cost...
LIC is forced to invest all their surplusss like UTI ...
will LIC be wound up like UTI??????
Let alone MFs????
Why blame SHRI BHAVE when he has come to give a setting for next 10--15 years for lifespan of Indian investors... Do not allow any fund house to have more than TEN schemes at any point of Time live....
will work very well..at least for next indias gebneration at least..But baove transition of money will keep up happening with FIIS and real estaters jumping in..


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Zaheed Diwan

Jun 29, 2010

I agree with you else why would you see more than 3000 schemes in the market. I believe that the fund houses are using trial and error method with investors money. However, one should not be very harsh at the industry considering there are certain fund houses that have different scheemes based on investor requirements and have shown strong returns. Overall certain stringent regulations should sort this issue for the investors.

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H K Prakash

Jun 28, 2010

Yes. Not only live ones but recently deceased ones also. I had to sign all kinds of forms in Franklin Templeton even tho' I showed them the succession cert pert. to my father's estate! Even the other MFs took upto 3 months and I had to use all kinds of threats before I got my dues!

Who can forget the MF (whose name starts with the third letter of the alph.) whose staff regularly siphoned off shares which had shot up and deposited money with the fund = the original investment

Well done Bhave Saheb! May your tribe increase. Continue to force IRDA/ Insur Cos. to think of the consumer instead of the insur cos./ agents

Like 

K.Krishnaswamy

Jun 27, 2010

Yes. Slowly it is becoming evident that the fund managers aim at short term gains and most of the new funds launched in the past 2 to 3 years are not delivering to their expectations while their share of the income is guranteed and there seems to be no system of sharing the profit on an incentive basis to the fund houses. SEBI when will you wake up?

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narayan joshi

Jun 26, 2010

Mutual Fund Industry in my Personal opinion is for Mutual Interest of Few Fund houses and Politician, who compel innocent Investors in Loosing Games, because there is "No Law made for Politicians or Scamsters in India" Janab Apkoto Hajaro Khun Maf Hai Kyonki Police or Judiciary bhi Apke Sath hai.After 'BHOPAL GAS JUDGEMENT' anyone on Earth will agree with me.

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R C Dixit

Jun 26, 2010

I agree with Mr Bhave.The mutual fund investors are at gravest risk if funds manager compromises on integrityI hold jm basic Gfund which were purchased @Rs 29.02 in 2007 & whose current price is Rs 17.52I am firm that fund manager has bungled the issue and RESORTED TO DISHONESTY as a result my money and other innocent investers money has got lost very heavily due to such corrupt fund managers as in JM basics.
rcdixit

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PRABHAKAR

Jun 25, 2010

Sir,

Why only rap the mutual fund industry. Why not the sharebrokers ,who play havoc with the sentiments of individual investors and give often misleading advices and are wont to back the wrong horse.

Lakhs of investors have lost lakhs of rupees ,due to the wrong advice doled out to them by the sharebrokers.
Bhaveji,whynot focus on them.

PRABHAKAR



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Vikram

Jun 25, 2010

Mr Bhave himself is responsible for this.
He removed entry loads and barred the brokers from commision,and now we find the same broker dragging the investors to high cost ulip or he shows disinterest in selling MF,resultant,the money moving towards less return FDs or Ulip,causing investors to missout indian growth story.This also results in MF industry coming up with newer products to lure investors and brokers for marginally high commision.
Each and every product sold has it margin ranging from 5% to even over 100% than whats the problem with MF 2% commision.

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Tikam Patni

Jun 25, 2010

1) What if a MF house goes bust? Is there any protection to the investor's money?
2)For investments made, mutual funds give only a computer generated unsigned statement. What if at the time of redemption, they deny about any such investment.
3)They do not have any transparency on investment allocation, NAV calculation and donot have any set system of periodic balance confirmation.
MY industry certainly requires complete overhaul in its investor interface procedures.

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sreekumar

Jun 25, 2010

A simple control put on funds. Only one NFO can be launched during a period of 3 years by one company

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