Notice that when there is an external date marker, we end up doing things to service that date. Take birthdays, anniversaries, exams and deadlines around work. Exam and work related deadlines specially see us working at all hours with a single focus—of cracking that exam or shipping that order. We do the same when there is a deadline around filing taxes or making tax-saving investments. But most other items on our must-do list, like a health check-up, regular work out and money management, keep getting bumped to the next week, month or year. I’ll do it when I have, fill in the words ‘time’, ‘mindspace’, ‘money’ in the space, and we have our reasons in place for postponing one more time things we know we need to do but don’t since there is no hard deadline.
eading the Irdai (Insurance Regulatory Development Authority of India) draft on updating regulations for unit-linked insurance plans and traditional policies, you get the impression that somebody gave an aspirin when what was needed was a heart surgery. Product structures in finance are taking on a new importance globally because mis-selling and unsuitable sales can be reduced by taking the tricks and traps out of these products. This simply means that the costs and benefits are better defined and marked so that investors are able to understand the features of the products properly. Product structure rules also deal with early exits and their costs so that investors are not trapped in products they buy.
Starting soon your mutual fund will cost less. The capital market regulator, the Securities and Exchange Board of India (Sebi), has put out rules that further tighten the mutual fund industry norms to take care of the loopholes found and misused by the industry. You can read the circular here. There are four changes that impact you.
One, for costs related to the scheme, mutual funds will now pay only out of the scheme account and not from any other source or account. What was happening was this: some of the bigger fund houses were using their profits to pay commissions to distributors to kick up sales. Remember that after a certain scale, it does not cost much more to run a fund house; so as the fund size grows, costs should actually come down.
The capital market regulator, the Securities and Exchange Board of India (Sebi), has once more moved in investor interest in the mutual fund industry. The mutual fund you buy will soon cost less, be less prone to mis-selling and be more transparent. These are the four changes that will make an already investor friendly product go several steps ahead.
One, Sebi has lowered the costs in a mutual fund. An expense ratio in a mutual fund is the cost that the investor pays. The regulator fixes the maximum a fund can charge and leaves it to competition to drive costs down. Levied on the assets under management (AUM), these costs were fixed in 1996 when the industry size was around ₹30,000 crore. Costs in a mutual fund were expected to come down as the size grew because fixed costs do not grow with the size of the AUM. The benefits of larger size, it was assumed, would be passed on to the investor. The industry size is now ₹25 trillion but the costs in the retail part of the market have stayed near the maximum limits; in the institutional part (liquid funds and debt funds), costs have been slashed due to the higher bargaining power of the big customers. Retail customers have no organised voice and continued paying more even as the size of the industry indicated a cost cut. Sebi has now cut the maximum a fund can charge and costs over the board will come down.
It is scary to see your life’s investment shave half its value in a free fall in stock prices. Indian stock market investors saw such an episode starting January 2008. If you had ₹1 crore in an index fund linked to the Sensex as on 9 January 2008, by 9 March 2009, its value was down to just under ₹41 lakh. It is gut wrenching no matter how strong your stomach for risk is. The whole time over the year you were driven by sheer panic to sell as the signals about an imminent global financial crisis caused markets to teeter on the edge and periodically belch out another giant fall in stock prices. Some brave hearts held on to their investments during the bloodbath, married as they were to “long-term” investing. By 4 November 2010, they saw their money recover as the Sensex regained its 2008 peak. The market since has given an 8% average annual return. Who are the people who came out on top and what did they do right? A decade, and nearly another 20,000 points on the Sensex later, there are three lessons that we, as retail investors, can draw from the North Atlantic Financial Crisis that had a trigger point when the $639 billion multinational behemoth Lehman Brothers went bankrupt on 15 September 2008.
The HDFC Asset Management Co. Ltd stock closed 65% up on the first day of listing over its IPO price of ₹1,100 per share. Investors who sold on day one, saw ₹10,000 investment turn to about ₹16,500 over a 10-day period. HDFC AMC’s business is to offer its investment management service to investors—both retail and institutional. It’s performance track record as an asset manager is mixed. For example, investors into the best equity scheme over a one year period—HDFC Small Cap Direct Plan—have seen a one-year return of almost 22%. The worst equity scheme from HDFC AMC, HDFC Infrastructure fund, lost 11% in the same year. Look further back, the worst equity fund is still HDFC’s Infra fund, with an average annual return of about 8% over 10 years. The best equity fund, HDFC Mid-cap Opportunities, has given a huge 20% average annual return over 10 years. As asset managers begin to list on the stock market, HDFC is the second AMC to list, the first being Reliance Nippon Life Asset Management Ltd that listed in November 2017, the question investors are asking is this: should you invest in the schemes of a fund or in the stock of the fund itself?
This year the annual update of Mint50, the curated list of 50 investment-worthy mutual funds got a six-month delay. We usually release the list in January of the year with a list of funds that have moved out and those that have moved in. But this year was different because capital market regulator Securities and Exchange Board of India (Sebi) changed the rules of the game, making a big change in the industry. The changes needed to play out before we could do our research ahead of the new list. The new list is now out and our big change is that we have shrunk the 50 mutual fund list to 30.
What was this change and why is it important? Sebi did two things. One, it divided up the industry into 36 categories of funds, allowing every fund house to have one scheme in the category to reduce the clutter in the industry. Read this column where I had suggested that this is the way to go forward to bring order in the industry in 2015. It took two years for Sebi to finally push funds into doing this. Sebi has left the door open for new innovations that will get their own categories as markets mature further. Mutual fund companies were launching too many schemes that replicated the older schemes causing investor confusion. By defining categories and being very generous with the number of categories, Sebi has left plenty of elbow room for the fund houses to place their funds in a category they think the scheme serves.