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Given that both fixed income and equities are doing well at present, MIPs are looking attractive. But buy them only if your overall portfolio is short on the debt component or if you really need it

Lisa Pallavi Barbora, Mint 28/2/2012

source: http://www.livemint.com/2012/02/27210026/Relook-at-MIPs-for-your-portfo.html

Typically, investors tend to shift funds to fixed income when equity markets are not doing well (as it happened last year) and vice-versa. But these are good times in our capital markets, when complementary asset classes—fixed income and equity—are in step with each other and are both giving attractive returns. Some experts suggest that this trend could dominate most of this calendar year.

So does this mean you should invest in hybrid funds, such as monthly income plans or MIPs, which are debt-oriented products with marginal exposure in equity?

In hybrid funds such as MIPs, both asset classes—fixed income and equity—can be managed actively to take advantage of market dynamics. Though most experts we spoke to believe it’s a good time to invest in this product, they also maintained that it’s not worth timing an entry into such products as any time is a good time to start long-term investments.

Market expectations are positive

Equity: The good news is that despite the sharp rally, experts believe there is still more steam left. The reason for this exuberance, even as fundamentals are looking worse, is the boost of liquidity in global markets. Says A. Balasubramanian, chief executive officer, Birla Sun Life Asset Management Co. Ltd, “Sentiment and outlook in the market has improved and the markets are going up, thanks to liquidity. At the same time, valuations are still reasonable.”

Foreign institutional investors (FIIs) have so far invested nearly $5.57 billion (Rs. 27,293 crore) in the domestic equity markets.

If the positive expectations on monetary easing and government policy action come through, the impact on earnings and industrial growth will happen with a lag; better performance from Indian companies and pick up in manufacturing growth can possibly be seen in the second half of 2012. According to a February 2012 fund manager survey by ICICI Securities Ltd, 82% fund managers believe earnings growth for FY13 will be 10-15%. The survey also showed that 76% believe equity markets will rally another 5-10% from here.

But investors should be mindful of the risks. A lot of what is happening in the markets today is driven by global liquidity and any negative surprises on global events can change the market direction very quickly, as is happening at present. Moreover, global liquidity is also fuelling commodity prices, thereby increasing inflationary pressure. Says Mahendra Jajoo, chief investment officer (fixed income), Pramerica Asset Managers Pvt. Ltd, “With crude at around $120 per barrel, inflationary pressure from commodity markets remain and can potentially push inflation higher. But that will happen with a lag and may take six-eight months.”

Fixed income: Across products, fixed income has done well through most of 2011, thanks to high interest rates. Investors in fixed deposits, liquid and ultra short-term funds and even corporate bonds are looking at annual returns in the range of 8-10%.

Such attractive rates have meant that a lot of retail funds in the last year got channelled into fixed-income products. Says Vishal Kapoor, head (wealth management, India), Standard Chartered Bank, “We did see incrementally higher flows into fixed income last year. It happened because of a combination of attractive returns from the asset class across products and lack of appetite for equity.”

The other side of fixed income is trading in bonds, where returns can be positive in a declining rate environment. Bond prices rise when rates fall. Expectation of lower policy rates going forward has already led to a rally in benchmark 10-year government bonds. Yields on 10-year government securities (G-secs) have moved from levels of 9% in November to around 8.2% now. The Reserve Bank of India (RBI) last month cut the cash reserve ratio and said that going forward focus will shift to aiding growth rather than managing inflation. After steady monetary tightening through 2010 and 2011, many fund managers are now expecting RBI to cut policy rates or continue its pause in the months ahead. This, in turn, could aid a further rally in bonds across different maturity periods.

Thus, we are seeing higher average maturities or increase in exposure to relatively longer maturity bonds across income funds and even MIPs.

Should you consider MIPs now?

With positive sentiment both in equity and fixed income, risks notwithstanding, a product like MIP is poised to deliver good returns in 2012. Does this mean you should jump in and buy? Yes, you should buy an MIP, but advisers and fund managers caution that these are not opportunistic products and are meant for long-term investing, where you should not simply chase returns but look at overall long-term portfolio allocation.

Says Jajoo, “As long as both equity and debt have a long-term value proposition, such products will do well and the need for timing doesn’t arise.”

Agrees Balasubramanian, “Investors need to review portfolios from time to time but not for redemption, rather with a goal for rebalancing. That’s where hybrid products can fit into an investor’s overall portfolio, especially since the rebalancing is done by the fund manager.” Such products are best suited for investors looking for a comprehensive solution, which takes care of safety, liquidity and return participation.

In case of MIPs, risk is minimized by fixed income and participation in additional returns is taken care of by equity exposure. If you decide to invest in MIPs, keep in mind key aspects such as asset allocation, whether dividend payouts are regular (monthly or quarterly), credit quality of fixed-income portfolio and performance track record.

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source: http://www.investmentkit.com/articles/category/financial-planning/

You must have heard this ad nauseam that disciplined investing and a long-term perspective hold rich rewards for the patient investor. Not convinced? Try answering this quick riddle. If a person saves 5,000 a month in an investment that earns 12%, his corpus at the end of 30 years will be 1.52 crore. Now, if he changes his plan and:

a. chooses an option that earns 9% annualised returns

b.reduces investment to 3,000 a month

c. reduces tenure to 25 years. The question is, in which of the three options will his corpus be the lowest?

The correct answer is C, wherein his corpus would be 84.31 lakh compared to 85.1 lakh with option A and 91.56 lakh with option B. Reducing returns by 3 percentage points or the investment amount by 40% did not have as much a bearing on the final amount as the reduction of the tenure from 30 to 25 years. The last five years were crucial for the power of compounding.

The gains from compounding are initially modest but they gather strength as the years pass. The longer the money stays invested, the faster it grows. As the graphic shows, a 25-year-old person saving a modest 2,000 will have a corpus three times bigger than someone who starts saving four times as much at age 45.

The importance of an early start cannot be stressed enough. Here are some eye-popping statistics that illustrate how crucial the first 5-10 years are.

What the 25-year-old investor puts away in the first five years will account for 44% of his total corpus at 60. His investments in the next five years will account for 25% of his wealth. The investments in the remaining 25 years will account for the balance 31% of the corpus. In other words, even if he stops adding to his investments after 10 years (when he is 35 years old), his corpus would grow to 75.33 lakh by the time he is 60. In stark contrast, the 45-year-old investor would have invested four times the amount for 15 years and would still have a corpus half the size.

Many young people keep procrastinating their investment plans. They should know that with each passing year, they are foregoing the opportunity to benefit from the extraordinary power of compounding. The best way to ensure financial nirvana is to start saving today. The amount you can save is not as important as getting started early.

What is crucial here is the discipline of not dipping into the corpus before you reach the financial goal. Do not withdraw from your investment because it would dilute the effect of compounding. Many investors make the mistake of choosing the dividend option of a fund when they are actually saving for a longterm goal. Go for the dividend option only if you require the periodic payouts.

It’s also important to continue investing regularly. The systematic investment plans (SIPs) offered by mutual funds ensure that a fixed amount flows into your investment kitty every month. Automate the process by setting up an ECS (electronic clearing service) with your bank. This will ensure that even if you forget to invest in a particularly busy month, your bank won’t .

Also Read: http://vridhi.co.in/wealth-creation/

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Deserting their Investors: Madhusudan Kela, Ved Prakash Chaturvedi & Nilesh Shah all three have left the Mutual Fund Industry

Two weeks ago, Nilesh Shah, deputy managing director and chief investment officer (CIO) of India’s third largest fund house ICICI Prudential Asset Management Co. Ltd, resigned to seek “other opportunities”. Shah, 42, is one of the three leaders the Rs.7 trillion mutual fund (MF) industry has lost in recent months.

In September, Ved Prakash Chaturvedi, 50, a 20-year industry veteran, stepped down as chief executive officer (CEO) of Tata Asset Management Ltd. A month earlier, Madhusudan Kela, head of equities at Reliance Capital Asset Management Ltd, the country’s largest fund house, moved out of the firm.

Kela, 41, continues to be with Reliance-Anil Dhirubhai Ambani Group, but is no longer involved in the MF business. Chaturvedi is planning his own venture while Shah will decide on his future career path after taking a short break.

For the best part of the last decade, Chaturvedi, Shah and Kela have been among the faces of Indian MF industry. Between them, they were overseeing nearly one-third of the industry’s assets under management.

The number of experienced fund managers leaving the asset management industry has been on the rise. In the past two years, at least 65 fund managers, including CIOs and CEOs, have ventured out of the industry into other financial services, according to MF tracker valueresearchonline.com.

In 2010, at least 35 fund managers left the industry where tighter regulations have increased the pressure on the fund managers and shrinking margins have reduced rewards.

“The dream job of a high-flying fund manager is not the same any more,” said one senior fund manager who recently left the industry and didn’t want to be identified.

Unlike privately managed funds, MFs are governed by elaborate regulations and disclosure requirements, including declaration of a daily net asset value (NAV). This makes a fund manager’s work open for scrutiny by not only superiors, but also by peers, regulators, media and common investors.

“The pressure on fund managers is tremendous. Teams are small and responsibilities are wide. Managing public money keeping in mind day-to-day NAVs is not easy,” said an official from a large private sector fund house, who also spoke on condition of anonymity.

Despite five new fund houses—Pramerica Asset Management Pvt. Ltd, Motilal Oswal Asset Management Co. Ltd, Peerless Funds Management Co. Ltd, IDBI Asset Management Co. Ltd and L&T Finance Investment Management Ltd—commencing business this year, the overall number of fund managers and CIOs remained stagnant at around 260-270, according to data provided by valueresearchonline.com.

Arjun Parthasarathy of IDFC Asset Management, Ashish Nigam of Religare Asset Management Co. Ltd and K. Ramkumar of Sundaram Asset Management Co. Ltd are some of the senior fixed-income managers who left the industry that has seen many regulatory changes since August 2009.

The Securities and Exchange Board of India (Sebi) has introduced changes in MF regulations, including the abolition of entry loads (the commissions that an investor has to pay while purchasing MF units), marking debt instruments to their market value and tightening rules for approval and launch of new fund offers.

Many asset management firms are facing falling profits and some of them even ran into losses in the quarter ended September.

“Industry is still seeing negative inflows at the net level. Forget the variable (compensation), even increments (in pay) are unlikely to happen,” an official from a large private sector fund said on condition of anonymity.

Attrition not only hurts the firms but also investor interest. Top fund managers in developed markets such as Bill Miller of Legg Mason Capital Management Value Trust and Anthony Bolton of Fidelity International have spent nearly their entire career managing a single fund with a single fund house. Miller’s fund beat the market for 15 consecutive years beginning 1991. Bolton managed Fidelity Special Situations Fund for 28 years between 1979 and 2007.

While the pressure is rising, the rewards are shrinking, forcing managers to look for greener pastures, say head hunters.

“Fund managers are looking for opportunities elsewhere as the MF industry has been affected by numerous regulatory changes. As the fee income for the fund houses comes down, their margins are squeezed. While smaller funds are most affected, even the larger fund houses are facing trouble,” said Kris Laxmikanth, CEO, Head Hunters India Pvt. Ltd.

This directly affects the pay cheque of fund managers, Laxmikanth said.

MFs are not making meaningful money any more and fund managers are high-cost resources. Typically, a fund manager’s variable pay, linked to the performance of the fund, is thrice the amount of the fixed pay.

“A senior fund manager typically earns around Rs.40 lakh in fixed pay and Rs.1.2 crore in variable. So, in a good year, the pay could be Rs.1.6 crore. But these salaries have vanished as the industry itself has not done well,” Laxmikanth said.

“Regulatory tightening has certainly made these people a little pessimistic about the growth of the business,” said Dhirendra Kumar, CEO, Value Research, a Delhi-based MF tracker. “But cost may not be a major issue behind this attrition.”

The sheer amount of opportunities and growth prospects that other financial services offer are increasingly becoming too good to resist for fund managers.

For instance, investment banks are always on the lookout for talented executives and fund managers with expertise in analysing companies and valuing them are often easy targets. Ramkumar of Sundaram AMC is one of the fund managers who has become an investment banker.

Other opportunities for MF managers include family offices that manage the investments of wealthy families and hedge funds where regulatory obligations are minimal and financial rewards are lucrative.

Chaturvedi said his decision to leave Tata Asset Management was a personal decision and did not have anything to do with the status of the industry. “It happens to a lot of people after serving in an industry for 15-20 years and there are various compulsions,” he said.

Kumar of Value Research also said personal reasons could be part of the reason for fund managers leaving the industry.

“The rules have changed and people who were very relevant to the industry earlier may not be as relevant for growth in today’s environment. So, while some people are moving out on their own, some must have been pushed out.”

Source: http://www.livemint.com/2010/12/28004353/Mutual-funds-see-exodusof-top.html?atype=tp