Have you been mis-sold a mutual fund?

Sep 27, 2010

In this issue:
» Indian banks' lending to realty sector - stable yet risky
» India must learn from China, says Narayana Murthy
» US Fed saved OPEC from a total price collapse
» Bright September for US markets
» ...and more!!

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Stock market bull runs bring with themselves a whole lot of other bull runs. One of them is the increase in the number of experts appearing on business channels. The other is the sharp increase in the number of financial advertisements we see appearing everywhere. And then, there is a sharp surge in the number of such advertisement 'mis-selling' products and services to investors.

We came across one such advertisement in a leading business daily today. It came from a mutual fund house that was boasting about how its investors have made so much money over the past few years just from the dividends they received from the fund.

The ad reads - "An investment of Rs 10 since inception would have earned Rs 41.6 per unit just as dividends." "Interesting, very nice!" would be an investor's first reaction on seeing this ad. But the ad's fine print (as mandated by the regulators, and not in the interest of the fund house!) says that after the payment of dividend, the fund's NAV falls to the extent of the payout.

Simply put, if your mutual fund's NAV is Rs 15, and it pays a 20% dividend or Rs 3 per unit, the NAV will fall to Rs 12 (15 minus 3) after the dividend is paid. So this means that the investor's own money is returned to him in the form of dividends. And the mutual fund still boasts as if it has done any special favours to the investor!

So, have you been mis-sold a mutual fund on the 'dividend' plank? Share your comments with us or post your comments on our Facebook page.

 Chart of the day
Today's chart of the day shows how the Indian banks have increased their lending to the risky real estate sector. While the lending, as percentage of total bank lending, has come down marginally over the past three years, it still remains high at 16.6% (FY10).

The Wall Street Journal had recently carried a column on how the Indian banking sector has entered a high risk phase via lending to realty companies. The situation looks worse in light of the fact that the realty sector has not seen a real revival in demand, especially given the surge in property prices. Amidst all this, it will be interesting to see how the banks fare with their realty loan assets, which might indeed become huge liabilities in the future.

Data Source: CMIE Prowess

In its recent findings, the Comptroller and Auditor General (CAG) has stated that majority of the 2G licenses issued by the telecom minister Mr. Raja in 2008 were illegal. CAG states that more than 75 of the 126 licenses issued in 2008 did not meet the basic criteria set for awarding a license. CAG states that companies like Unitech, Allianz Infra, Swan and Datacom have acquired 75 licenses through their various holding companies. This has caused a loss of over Rs 600 bn to the Indian government. While the monetary losses can be calculated, the loss of face for the nation remains incalculable.

A lot of mayhem has ensued in the Indian IT sector ever since US President Obama has veered towards protectionism. The latest in this regard has been the hike in visa fees, which have left many Indian IT companies fuming. After all, the US is an important market for our software companies. And policies such as those being proposed by the Obama are only going to hamper performance of the blue eyed boys of India Inc. But Infosys' founder Mr. N. R. Narayana Murthy has a different take on this matter.

Mr. Murthy believes that the solution for India is not to become strident or jingoistic. What India should do instead is focus on innovation and ideas. This will then make Indian companies indispensable to customers. In this regard, he has compared India with China. Murthy opines that China does not waste time making meaningless talk. The dragon nation has become more and more indispensable to the global economic order thanks to its hard work and commitment. And so, instead of laying the blame on the US, Indian IT companies need to ask the question, "Why don't we learn from China?"

In a country where a large section of the society is poor, social causes do attract reasonable attention. Take the case of microfinance institutions. These bodies meant to provide funds to the poorest of the poor were initially seen as serving a social cause. Unfortunately, the 'messiahs' of the poor are now being seen as parasites. The handsome gains made by the promoters of the country's largest micro finance lender SKS Microfinance during its recent public offering triggered this emotion. This has sent the RBI scampering to figure out whether the company is after all victimizing the poor.

The high rate of interest charged by the microfinance institutions (MFIs) has indeed miffed the RBI. Some MFIs charge more than 25% on the loan value as interest. Hence the central bank has mandated PSU banks, which are the key source of funding to MFIs, to restrict loans to this segment. The growth of MFIs is certain given the need for financial inclusion in India. Their profitability could however be hugely impacted with such mandates.

The US central bank Federal Reserve's decisive actions have saved the world's largest economy from collapse. You must have heard this statement many times, and especially from the US establishment. What is less well known is that it saved crude oil and OPEC from a total price collapse.

The Fed's policy of low interest rates and quantitative easing helped the oil market ignore some of the most bearish fundamentals in decades. For example, there is a massive inventory build-up of oil products in the US. As per the Energy Information Agency, it stands at 768 m barrels - the highest since 1990. With a weak economic outlook and a glut of supply, oil prices should have crashed. So why haven't they? Because when the Fed prints dollars, it affects oil prices that are denominated in dollars worldwide. Simply put, the US Fed's policies have been supportive of oil prices. The question to ask then is - how long can it continue?

It has been an unusually bright September for the US stock markets. As per CNN Money, the US benchmark stock market index - Dow Jones Industrial Average - has already rallied more than 8% this month. It is thus on course for its best September since 1939, when it rose 13.5%. Even if it doesn't surpass the 1939 mark, it will still count as a pretty significant achievement. Indeed, no one would have expected that the Great Depression-II would be followed in such a quick succession by the Great Rise-II, if at all one were to give a name to the current September rally.

Also, please bear in mind that the current rise has come about without a concomitant increase in the overall well-being of the US. The unemployment levels in the US are still uncomfortably high. And the overall debt burden has only been transferred from private to public hands. Given this backdrop, it would not be out of place to surmise that there is more than meets the eye to this rally. Perhaps, it is being driven by cheap money and does not have any real legs. We will certainly look for any signs that prove otherwise.

Anyways, the rally in the Indian markets continued today as well. The BSE-Sensex was trading with gains of around 90 points (0.4%) at the time of writing this. Metal and realty stocks led today's gains while last week's heroes, FMCG stocks, performed the worst. Other key Asian markets also closed with gains, led by China and Japan (up 1.4% each).

 Today's investing mantra
"First, many in Wall Street - a community in which quality control is not prized - will sell investors anything they will buy." - Warren Buffett

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32 Responses to "Have you been mis-sold a mutual fund?"


Sep 30, 2010

Like 6 months back I bought a Canrobeco equity mutual fund(ELSS - 3 years locking) by looking at their previous performance.. after one month they declared 2 rupess divided which seems to be good but when i see the fund's NAV it was reduced by 2 rupees. What does it means?


P. Srinivasan

Sep 28, 2010

I do not understand your logic.
If on an investment of Rs 10 there is a return of Rs 41 or so , it IS A return! regardless of NAV.
Are you suggesting that NAV is more important than performance or returns.

If the dividend is not paid out and the NAV increases by a like amount, does these quantum of return change?

What if a mutual fund in the same period increase NAV to Rs 41 and did not pay dividend , is the NAV value to be taken as superior performance by saying the "value of investment has increased by 3/4 times?".

So what, according to you, is net return on investment?

And what would have happened if the investor had gone in for dividend reinvestment.

On one hand in your , you say in your articles , do not be misled by NAV, and here you are fixated on the NAV value.

If NAV growth is to be compared then we have to compare against growth options of MFs only.




G. Allen

Sep 28, 2010

I totally agree with most of the writers here who have written on the subject of the dividend being paid on the Face Value and not on the NAV... and secondly those writers who have asked "what is the harm in receiving a dividend... even if it is your own money" or even if the ads are 'misleading' or things like that not-with-standing. As the writer Sudeer rightly wrote "isnt it ALWAYS better to take something off the table when the market is Overheated." I couldn't agree more.
For that matter some Mutual Funds including Quantum is yet to 'distribute' a dividend. Wouldn't it have been better TO HAVE RECEIVED a dividend when its NAV had reached around Rs.20/- when the markets had reached a peak a couple of years back. Even a dividend of 50 percent or Rs. 5/- (at that peak) would have taken the NAV to only Rs. 15/- following this exercise...rather than the unit-holders helplessly watching this NAV come down even below 15/- because of the market crash that followed. What was better? In fact the NAV of the fund came to even below Rs. 10/- if I am not mistaken.. without 'giving back' a dividend. Would it not have been better - anyday - to have received a dividend ... and then see the NAV come down...rather than watching the so called smart fund manager do nothing even as the NAV came hurtling down because of inertia and ineptitude...or whatever, that is beyond the understanding of the common investor.


S. Ravindran

Sep 28, 2010

I regularly invest in mutual funds. Initially I also made the mistake of investing into a mutual fund when it announced a dividend. However going through the various financial columns in internet made me aware and I changed my strategy. When ever the market falls by 300 - 500 points I buy the mutual fund units. Also I buy the mutual fund units ex-dividend as there will be a fall in its NAV. I also intiated SIPS when the markets were down in 2008 so that I could get the units at a lower NAV. I do not invest in any NFO as the past performance of a mutual fund is important as also its 3-5 year dividend record. Hence I have invested in well performing mutual fund AMC shemes like, HDFC, Franklin templeton, ICICI Pru, Reliance, Sundaram BNP Paribas, Fidelity etc. As a result of this my mutual fund corpus has appreciated by 60 % at present sensex levels.
S. Ravindran


Praveen Godbole

Sep 27, 2010

Yes, I have been mis-sold a mutual Fund. About 5 years ago, distributor sold me HDFC Long Term Equity Fund, explaining that it was a close ended fund and would be made open ended after three years after which, I could cash out anytime I want. Recently, when I put in application for redemption, I was rudely jolted to fund that the so called 'open-ended-after-3-years' fund would actually be kept 'open' only for 10 business days in a year, 5 each at the beginning of each healf year. So even as I need money now, I will have to wait till 1 Jan 2011 when the fund will open for a 5 day window for redemption.


Ajay singh

Sep 27, 2010

Have you been mis-sold a mutual fund?

See there are a few mistakes in the view ... First if there is 20% dividend on any MF scheme .. it will be Rs 2 because dividend is calculated on Face value that is Rs 10.

Secondly .. Dividend is tax free in the hand of Investor and there is no dividend distribution tax in equity MF ,AMC can declare Divided as many time in a year .. So Investor can save 15% short term capital gain tax on dividend paid.
In Debt schemes too dividend distribution tax in 12.5% and that is much lesser than 30.90 % tax for highest tax slab.for those who does not come under tax slab can go to growth scheme ..
In this way .. dividend is beneficial for Investors .

Yes some time it miss lead investors .. Because they think its on NAV ... But in all equity Shares or MF schemes .. is is being calculated on Face value ....
If NAV of a fund is RS 60 and DIV Declared is 50% , it does not mean its 50% of 60 ( RS 30) but its 50% of face value Rs 10 that comes to Rs 5 only ...



Sep 27, 2010

Mutual Funds: Dividends:Mis-Selling.
Yes. Mis-selling keps happening all the time.The MF Sales team would high light anything that catches the eye!
But, there is the other side! With non-simplified Tax laws, Dividends are NOT Taxable, but, interest & Capital gains may be taxed. This is just a finer point, used by HNIs. But, ordinary investors gets lured by such Ads, without getting correct info!
SEBI is doing a good job! (You too!).



Sep 27, 2010

Hi, totally agree with your views regarding the rampant mis-selling of MF's,and especially Ulip's. One very popular version of ULIP mis-selling is where the agent tells you that you need to pay premium only for 3 yrs and can discontinue later-- suggest you analyse such cases threadbare and inform your readers the true picture. Btw, I thought MF's also declare Dividend on Face value and not on the NAV.Pls confirm.
Also pls give breakup of the realty sector lending bankwise (with default amounts if possible) so that readers like me can stay away from such banks. regds


Thomas Antony

Sep 27, 2010

I was sold two high value pension plans- one had innumerable riders-all taken. The other one sold-on all good faith- for the -Bank Staffs- target criteria-. The first one -the company discontinued the riders taken based on a adhoc descision- The second one -They interchanged my name -by switching the first and second name. The nominee - they decided a name-. FINALLY THEY SIGNED MY NAME in the application form. And all these super sales persons get incremental promotions and procure transfers. I aM HOLDING USED .T.....T PAPERS.



Sep 27, 2010

Dear Sirs,

I am a regular reader of "5 Minutes wrap up" for a long period and a very good admirer of most of the writings.

But in the article called "Have you been mis-sold a Mutual Fund", though I agree with the conclusion, in general, I feel that the examples given are not properly/effectively written.

1. The dividend is paid on the face value of the unit (not on NAV). Thus a 20% dividend on NAV of Rs. 15, may not be Rs. 3/=, unless the face value itself is Rs 15/= (This is quite unlikely, as I am yet to find a Mutual Fund Scheme with Face value of Rs 15/=, in the decades of my investing in various MF Schemes.)

2. In your example, you are mentioning about dividend of Rs. 41.6 since INCEPTION and in the same example you are mentioning NAV of Rs. 15/=. At inception (I understand it as NFO), the NAV is always face value (except for some brokerage, if any), never Rs. 15/=

All the same, I agree with the spirit of the article.


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