MUMBAI: The 626-point fall in the Sensex on Monday would have shaved off around Rs 7,000 crore, or roughly 4%, from the equity portfolios of all
mutual funds combined, based on their holdings at the end of July. A back of the envelope calculation on the basis of stock portfolio weightage (as per July AUMs) of mutual funds reveals that key players such as ICICI Pru MF, Reliance MF, DSP Blackrock , UTI MF, Birla Sunlife MF, SBI MF, HDFC MF and Sundaram MF would have shed their equity asset base by around 3.3-4 .5% on Monday. According to sources, the mutual fund industry is currently holding Rs 20,000 crore of cash in their portfolios, with most fund houses maintaining 8-9 % cash levels. Domestic institutional investors have bought shares worth close to Rs 3,000 crore since the beginning of this month. “Institutional investors have begun cashing out of high beta stocks and moving into market defensives. Most fund managers have been increasing investment exposure to large-cap IT stocks, energy and pharma stocks over the past few days,” said Gopal Agarwal, equities head, Mirae Asset Global Investment. As per first quarter shareholding pattern of India Inc, domestic mutual funds were overweight in consumer staples, industrial utilities and telecom companies in their portfolios. Underweight positions in technology, financials and materials funded their market purchases in highbeta sectors. Towards end-July and beginning of August, mutual funds tilted their portfolio to add financial services’ companies and defensives such as consumer goods and IT in their portfolios. “The focus now is on stocks with higher safety margins. We’ve been investing in stocks keeping in mind high valuations,” said SBI Mutual Funds CIO Navneet Munot. According to Mr Munot, the market will continue to be volatile near term. Market watchers said, apart from switching investments into low-beta sectors, mutual funds are also increasing their exposure to equity derivatives. In times of volatility, fund managers find it beneficial to allocate some part of the portfolio in extremely liquid instruments like equity derivatives where fund management strategies such as raising cash or deploying cash can be easily managed without significant impact cost. + Although, derivatives trading in India has been in existence for more than eight years, their use by mutual funds is of relatively recent origin. Previously, mutual funds could use derivatives only for hedging purposes; also, they could deploy no more than 50% of their assets towards hedging. But with changes in Sebi guidelines, mutual funds are allowed to increase net assets exposure up to 80% in the futures and options segment. According to dealers, a few fund managers have begun trading in options market by buying ‘put options’ , anticipating a further fall in share prices.
Aug 19, 2009
For sensible capital gains taxation
The government’s proposed direct taxes code has been widely welcomed. It seeks, rightly, to bring corporate tax rates closer to the Chinese and combine lower rates with fewer exemptions.
Experts have already analysed most proposed changes threadbare. But virtually none have focused on one area where the proposed code goes seriously wrong — capital gains tax. Indeed, the underlying issues are fundamentally misunderstood globally.
Any financial expert will tell you that it is prudent to diversify your savings, putting them in different asset classes (shares, bonds, real estate). It is also prudent to diversify within each asset class like shares
— you should distribute your holdings of shares between different sectors such as finance, auto, healthcare, and IT. The sums you allocate to different assets should change with time — textiles constitute a sunset sector and IT a sunrise sector, and you should reshuffle your portfolio accordingly. A fund manager who never reshuffles his portfolio will be sacked on the ground of incompetence. He will be guilty of having harmed the savings of the clients whose interest he is supposed to serve. Yet the proposed capital gains tax will exempt people who never sell any assets, and penalise those who do. Assets rise in value whether they are sold or not. Reshuffling a portfolio of assets means selling some assets and buying others. The proposed tax will be levied only on gains from sales, not on gains in the value of unsold assets. So although reshuffling is economically efficient and financially prudent, the proposed code will tax this good practice and exempt the bad alternative. That is terrible policy.
It makes better sense to levy capital gains tax only on assets that are liquidated — converted to money. Portfolio reshuffling should be encouraged, and so the new tax code should exempt reshuffling. Three considerations should govern any tax proposal: efficiency, equity and simplicity. That is, a tax should promote economic efficiency and provide incentives for desirable behaviour; it should aim for vertical equity (rich folk should pay more) and horizontal equity (some sorts of gains should not get preferential treatment over others); and it should be simple to administer, reducing litigation and evasion. The proposed change in capital gains tax fails on all three counts—efficiency, equity and simplicity. International studies show that revenue from capital gains tax is typically under 1% of total revenue. It is nevertheless widely used to check the conversion of income into capital gains to avoid tax (zero coupon bonds are one example of such conversion). For the same reason, many countries levy gift tax: this too yields little revenue but checks evasion. This, then, is a sound reason for levying capital gains tax in India. It also improves vertical equity to the extent it gathers revenues from rich folk who are taxed relatively lightly today.
Experts have already analysed most proposed changes threadbare. But virtually none have focused on one area where the proposed code goes seriously wrong — capital gains tax. Indeed, the underlying issues are fundamentally misunderstood globally.
Any financial expert will tell you that it is prudent to diversify your savings, putting them in different asset classes (shares, bonds, real estate). It is also prudent to diversify within each asset class like shares
— you should distribute your holdings of shares between different sectors such as finance, auto, healthcare, and IT. The sums you allocate to different assets should change with time — textiles constitute a sunset sector and IT a sunrise sector, and you should reshuffle your portfolio accordingly. A fund manager who never reshuffles his portfolio will be sacked on the ground of incompetence. He will be guilty of having harmed the savings of the clients whose interest he is supposed to serve. Yet the proposed capital gains tax will exempt people who never sell any assets, and penalise those who do. Assets rise in value whether they are sold or not. Reshuffling a portfolio of assets means selling some assets and buying others. The proposed tax will be levied only on gains from sales, not on gains in the value of unsold assets. So although reshuffling is economically efficient and financially prudent, the proposed code will tax this good practice and exempt the bad alternative. That is terrible policy.
It makes better sense to levy capital gains tax only on assets that are liquidated — converted to money. Portfolio reshuffling should be encouraged, and so the new tax code should exempt reshuffling. Three considerations should govern any tax proposal: efficiency, equity and simplicity. That is, a tax should promote economic efficiency and provide incentives for desirable behaviour; it should aim for vertical equity (rich folk should pay more) and horizontal equity (some sorts of gains should not get preferential treatment over others); and it should be simple to administer, reducing litigation and evasion. The proposed change in capital gains tax fails on all three counts—efficiency, equity and simplicity. International studies show that revenue from capital gains tax is typically under 1% of total revenue. It is nevertheless widely used to check the conversion of income into capital gains to avoid tax (zero coupon bonds are one example of such conversion). For the same reason, many countries levy gift tax: this too yields little revenue but checks evasion. This, then, is a sound reason for levying capital gains tax in India. It also improves vertical equity to the extent it gathers revenues from rich folk who are taxed relatively lightly today.
Jul 9, 2009
Jun 18, 2009
Meltdown Mutations
One interesting result of the financial crisis has been a new focus on how fund investors invest and disinvest rather than just what they invest in. By how, I mean the pace at which they move in and out of funds, as well as how they book and protect the profits that they have made.
I guess this is an inevitable by-product of the sea of regret that Indian investors have been floating in since last years’ crash. Since that crash came after years of massive gains (and was so deep), most investors lost a good chunk of the returns that they had earned.
For most of us, the regret was not that we made the wrong investments, but that we ended up losing the money that we should have been able to keep. Those who came a little late to the party lost not only all the returns that they had earned but even a good part of the capital that they had invested.
A few weeks ago, I had written about a product from ICICI Prudential Mutual Fund in which gains made in stocks were regularly transferred to a safe and steady debt fund. The idea was an automated profit-booking system whereby profits once generated are made permanently safe from the vagaries of the stock markets. The product was not entirely new — asset management companies (AMCs) have long offered a triggered switch in which gains above a certain level are switched to a different fund.
However, ICICI Prudential’s product did come out at a very uncertain time and succeeded in striking a chord with investors.
Now, Bharti-AXA Mutual Fund, which is a relatively new fund company, has introduced a variation on this theme, which is better suited to the new, hopeful mood on the markets. Here, money is first invested in a safe liquid fund and then gains are periodically shifted to an equity fund.
This way, investors effectively get protection of the initial capital. The originally invested amount is always safe and only its gains are exposed to equity. Even if there’s a collapse of stock prices, the investor won’t be out of pocket. Even in the worst of times, a conservative large-cap equity fund is unlikely to lose more than 50 per cent except temporarily (something that we’ve recently seen). This effectively means that for all practical purposes, such an investment offers true capital protection.
It must be noted that despite their different packaging, both these concepts are variations of an age-old idea that lies at the heart of sound investing — that of asset allocation and asset rebalancing. The idea is simply that an investor chooses a particular balance of debt, equity and other asset types as ideal. Then, as one asset type earns more than the other, money is periodically shifted from the one that’s earning more to the one that’s earning less to restore the original balance.
The two specific products that I’ve talked about actually practise only half of this principle. In both, the movement is only one way. In one, most of the money will eventually end up in fixed income and in the other, as equity. Actually, it’s plain old balanced funds that offer the best implementation of asset reallocation, as they always have.
Depending on where profits have been generated, balanced funds can shift money either way between equity and debt. For most investors, steady investment in a good, balanced fund should take care of all asset allocation concerns.
I guess this is an inevitable by-product of the sea of regret that Indian investors have been floating in since last years’ crash. Since that crash came after years of massive gains (and was so deep), most investors lost a good chunk of the returns that they had earned.
For most of us, the regret was not that we made the wrong investments, but that we ended up losing the money that we should have been able to keep. Those who came a little late to the party lost not only all the returns that they had earned but even a good part of the capital that they had invested.
A few weeks ago, I had written about a product from ICICI Prudential Mutual Fund in which gains made in stocks were regularly transferred to a safe and steady debt fund. The idea was an automated profit-booking system whereby profits once generated are made permanently safe from the vagaries of the stock markets. The product was not entirely new — asset management companies (AMCs) have long offered a triggered switch in which gains above a certain level are switched to a different fund.
However, ICICI Prudential’s product did come out at a very uncertain time and succeeded in striking a chord with investors.
Now, Bharti-AXA Mutual Fund, which is a relatively new fund company, has introduced a variation on this theme, which is better suited to the new, hopeful mood on the markets. Here, money is first invested in a safe liquid fund and then gains are periodically shifted to an equity fund.
This way, investors effectively get protection of the initial capital. The originally invested amount is always safe and only its gains are exposed to equity. Even if there’s a collapse of stock prices, the investor won’t be out of pocket. Even in the worst of times, a conservative large-cap equity fund is unlikely to lose more than 50 per cent except temporarily (something that we’ve recently seen). This effectively means that for all practical purposes, such an investment offers true capital protection.
It must be noted that despite their different packaging, both these concepts are variations of an age-old idea that lies at the heart of sound investing — that of asset allocation and asset rebalancing. The idea is simply that an investor chooses a particular balance of debt, equity and other asset types as ideal. Then, as one asset type earns more than the other, money is periodically shifted from the one that’s earning more to the one that’s earning less to restore the original balance.
The two specific products that I’ve talked about actually practise only half of this principle. In both, the movement is only one way. In one, most of the money will eventually end up in fixed income and in the other, as equity. Actually, it’s plain old balanced funds that offer the best implementation of asset reallocation, as they always have.
Depending on where profits have been generated, balanced funds can shift money either way between equity and debt. For most investors, steady investment in a good, balanced fund should take care of all asset allocation concerns.
SEBI Wants MFs to Chase Retail Investors
With the mutual fund industry increasingly becoming the playground of the rich and powerful, the market regulator has issued a statement that it must give adequate representation to retail customers.
Chairman of the Securities and Exchange Board of India (SEBI), C.B. Bhave, has said that the mutual fund industry must hike the retail portion of their assets under management (AUM). In other words he has indicated that the industry as such is ignoring the very people, investors who do not fall under the category of high networth individuals (HNIs) or institutional investors, for whom it should have been of the greatest service.
Bhave indicated that this would be good not just for the retail investors, but also for the industry because, “In October 2008, when the liquidity crisis almost derailed the industry, redemption pressure had come from corporates and not retail investors”.
He was addressing the CII Mutual Fund Summit in Mumbai on Wednesday.
Bhave added, for good measure, “To prevent any such re-occurrence, the industry must diversify its assets base away from those who can give a big one-time jolt. The potential of non-corporate investors is tremendous.”
However, according to U.K. Sinha, Chairman, UTI Asset Management Company, this would not be possible till the government extended further sops to the industry. He said, “Major tax incentives are a must for retail investors to come to the industry. Also, investor education initiatives must be taken up to improve participation.”
What was clear from the industry heads’ speeches was that the industry must co-operate in a better way to make sure there was greater tangible growth and benefits for all concerned. At the moment there were many cases of the industry working at cross-purposes.
However, not satisfied with just the Rs 20,000 crore bailout package that the government had extended to the mutual fund industry in 2008 to escape the redemption pressure and remain solvent, there were more calls made for greater government support to the industry for faster growth.
According Sinha, “We need support from regulators, policy-makers and the government in equal measure to generate rapid growth.”
Chairman of the Securities and Exchange Board of India (SEBI), C.B. Bhave, has said that the mutual fund industry must hike the retail portion of their assets under management (AUM). In other words he has indicated that the industry as such is ignoring the very people, investors who do not fall under the category of high networth individuals (HNIs) or institutional investors, for whom it should have been of the greatest service.
Bhave indicated that this would be good not just for the retail investors, but also for the industry because, “In October 2008, when the liquidity crisis almost derailed the industry, redemption pressure had come from corporates and not retail investors”.
He was addressing the CII Mutual Fund Summit in Mumbai on Wednesday.
Bhave added, for good measure, “To prevent any such re-occurrence, the industry must diversify its assets base away from those who can give a big one-time jolt. The potential of non-corporate investors is tremendous.”
However, according to U.K. Sinha, Chairman, UTI Asset Management Company, this would not be possible till the government extended further sops to the industry. He said, “Major tax incentives are a must for retail investors to come to the industry. Also, investor education initiatives must be taken up to improve participation.”
What was clear from the industry heads’ speeches was that the industry must co-operate in a better way to make sure there was greater tangible growth and benefits for all concerned. At the moment there were many cases of the industry working at cross-purposes.
However, not satisfied with just the Rs 20,000 crore bailout package that the government had extended to the mutual fund industry in 2008 to escape the redemption pressure and remain solvent, there were more calls made for greater government support to the industry for faster growth.
According Sinha, “We need support from regulators, policy-makers and the government in equal measure to generate rapid growth.”
Subscribe to:
Posts (Atom)
