NEWS UPDATE
R O F T I N I WHAT INVESTORS? Shifting Loyalties
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utual fund houses are rejigging debt portfolios and shifting from longer-term Government securities to shorter-tenor government securities (G-Secs), certificates of deposit (CDs) and commercial papers (CPs), which are providing better returns. Falling prices have made longer duration papers unattractive, as selling them in the secondary market would be a loss-making proposition, said fund managers. “We are investing in short-term money market instruments, like one year CDs where we are getting good returns. At present, our debt portfolio is around Rs 10,000 crore, of which the G-sec holding is near zero,” said Mr Maneesh Dangi, Head-Fixed Income Investments, Birla Sun Life Mutual Fund. Yields on the 10-year paper crossed 8 per cent in the first week of March on the back of inflation, supply fears and the upward pressure on interest rates.“We have reduced our holding in G-secs for almost a month now. We have also reduced the maturity of our holdings and positioned ourselves in the short-end,” said Ms Lakshmi Iyer, Head-Fixed Income and Products, Kotak AMC. Kotak has
around Rs 35,000 crore in debt funds, of which Rs 100 crore is invested in gilt funds.For UTI AMC, debt funds account for about Rs 51,000 crore, of which gilt funds make up only about Rs 400 crore, said Mr Amandeep Chopra, Head of Fixed Income. “We are sitting on pretty low duration in our gilt funds, where weighted average is under three years. This has been our position since endJanuary,’’ he said High dividends from MF schemes might be a thing of the past
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any mutual funds may find it difficult to dole out magnanimous dividends to unit holders as seen in the past, with capital market regulator SEBI tweaking an accounting norm that will result in fund houses having lesser amounts for such payouts. Recently, SEBI barred fund houses from tapping the unit premium reserve to distribute dividends. Instead, it directed mutual funds to pay dividends only from realised gains, a move that has drawn hushed protests from the industry. This is how it worked: For instance, if the face value of an equity diversified fund is Rs 10 apiece and its net asset
value (NAV) rises to Rs 100, then Rs 90 will be part of the unit premium account (similar to accumulated reserves of companies). So, if an investor bought units at Rs 100 apiece, the dividends paid by the mutual fund would be drawn from the unit premium account, a practice which amounted to paying unitholders their own money. As per the new rules, SEBI is asking mutual funds to pay dividends from profits booked in the event of a surge in the market. This means, if the NAV rises from Rs 100 to Rs 110, mutual funds can only use Rs 10 to distribute dividends, provided profits were booked. “This step will certainly affect the quantum of dividend payouts by mutual funds, and more importantly, it will plug mis-selling,” said Rajan Mehta, executive director, Benchmark Asset Management. The revised norm will hurt most mutual funds and distributors, as they have churned fees in the past by luring investors, mainly affluent, into equity schemes for dividends. Mutual funds, through distributors, unofficially inform these investors their intention to pay dividend way before the dividend declaration date. These investors exit the scheme on or after this date, pocketing the tax-free dividend and setting off losses from mutual fund investments with other gains. Retail investors are known to buy schemes for dividends, without knowing that such payouts result in
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a corresponding decline in the NAV of the scheme, as dividend distribution reduces the size of the fund. “Dividend payouts in India was like taking money from the left hand of an investor and putting it in the right... retail investors did not benefit from this,” said a head of wealth management of a Mumbai-based broking firm. Mutual funds feel the rules to pay dividends from realized gains are against the market regulator’s vision to encourage them to be long-term investors. “SEBI is simply asking us to churn portfolios more, if we want to pay dividends. This new rule will turn fund managers into traders, as we are also under a lot of pressure to deliver dividends to retail investors, who are used to this practice for a long time now,” said a top official with a private mutual fund. “For example, investors, who had put Rs 10,000 into Infosys in mid-1990s, would have earned at least over a crore by now. In the pursuit of booking profits, we will miss out on such opportunities,” he added. INSURANCE NEWS Public sector insurers well capitalized under new reporting norms
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apital requirements of public sector general and life insurance companies are expected to shrink substantially after the adoption of the International Financial Reporting Standards (IFRS).
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