Kautilaya's management principles in play

Mutual Funds adopt all means to entice investors

The mutual fund industry is adopting Kautilaya's management principles of Saam, Daam and Dand to lure and retain investors.

The fund houses are exploring all possible means to attract new investors and retain the existing ones. On one hand the new Securities and Exchange Board of India (Sebi) regulations are forcing them to use the dand principle by raising exit load on the schemes and on other hand, using the Saam principle they are launching new schemes focusing on infrastructure stocks to optimize their returns and raise their asset base. The daam principle comes in focus with huge dividend announcements, aiming at enticing investors' money towards mutual funds.

In the past one month, many fund houses have hiked exit loads in their equity and debt schemes. The fund houses adopted this measure to discourage investors from exiting the schemes and re-investing when the Sebi's decision to ban entry load come into force from 1 August 2009.

In an investor friendly move, Sebi took decision of banning entry load for all schemes. On exit load charged to the investor, a maximum of 1% of the redemption proceeds would be maintained in a separate account that could be used by the asset management company to pay commissions to distributors and take care of other marketing and selling expenses, Sebi said, adding that any balance would be credited to the scheme immediately. It shall be applicable by 1 August 2009.

Fund houses like Reliance Mutual Fund (MF) revised the exit load from zero to 2% for Reliance Regular Savings Fund, an open-ended scheme, in case of redemptions before one year. UTI MF hiked the exit load from 0.75% to 3% under UTI Mahila Unit Scheme, in case of exit before 1 year.

Bharti Axa will now charge 2% exit load for investments of less than Rs 5 crore in its Regular and Eco Plan, an equity fund if redeemed within 1 year from the date of allotment. It used to charge 1% for redemptions before six months. Birla SunLife, HDFC MF, ICICI Prudential MF, ING MF, Kotak MF, LIC MF, Tata MF and IDFC have also revised loads for specific schemes.

The other side of the coin says that the Sebi's ban on entry load is likely to reduce the number of fresh NFOs and might incite fund houses to rush into launching the already cleared NFOs before the 1 August 2009 deadline. Since last week of June 09 till date as many as 7 NFOs have come into the market and many are waiting to get clearance from Sebi and hit the floor.

However these NFOs may not be able to garner good subscription amount as investors may wait until 1 August to invest. Also the entry load ban may make NFOs more unattractive among distributors and thus the number of new NFOs may make down drastically. As many as 16 funds and lined up for clearance from the regulator considering the months of June and July 09. Meanwhile three schemes' viz. Sahara Super 20 Fund, Mirae Asset Short Term Bond Fund and Franklin Build India Fund have their NFO running currently.

To attract investors and cash on the benefits of increased government focus on infrastructure development the fund houses have launched many schemes focusing on infrastructure sector. In June and July 09 till date around 6-7 funds have filed their offer document with Sebi focusing on infrastructure and rural growth.

The fund houses are free flowing dividends to hold back investors in the scheme on the back of volatile markets. The number has increased to a record of more than 250 schemes announcing dividend in the month of June 09. With the improvement in market conditions and to revive investors' confidence the fund houses are showering dividends. The quantum of dividend ranged between 10%-60%. Tata Life Sciences & Technology Fund announced dividend of 20%. Similarly Franklin India Prima Fund offered tax-free dividend of Rs 6 per unit. Birla Sun Life Basic Industries Fund announced dividend of 50%. Recently SBI MF has also announced dividend of 50% in Magnum Sector Funds Umbrella (MSFU)-Contra Fund.

Thus by applying all means the fund houses are assaying to lure investors besides revitalizing their interest in the schemes.

GDP Deflator

The Indian economy grew by better than expected 5.76% in the March 09 quarter from a year earlier. This led the yearly growth of 6.7% in real GDP in FY 2009. Moving away from the real GDP to nominal GDP the quarter growth in the two have shown some interesting facts.

The growth in Nominal GDP, which measures the value of all the goods and services produced expressed in current prices, decelerated to less than half in merely two quarters from 19.3% in Q2 FY09 to 8% in Q4 FY09 respectively (a near 60% drop in 2 quarters), marking its lowest growth in the last 6 years (since Q4 FY03). But the growth in Real Gross Domestic Product, which measures the value of all the goods and services produced expressed in the prices of some base year, fall by merely 25% from 7.7% in Q2 FY09 to 5.8% in Q4 FY09. This aberration can be answered by the growth in GDP Deflator.

Since the real GDP is derived by dividing nominal GDP by GDP Deflator, if the GDP deflator slows down i.e. there is disinflation, then the real GDP tends to increase even if the nominal GDP remains constant. That would be an unusual case.

The recent figures however depict that even if both the nominal GDP as well as the GDP deflator increases (or declines), but the GDP deflator increases (declines) at a slower rate (more sharply) than the nominal GDP, then the real GDP can record an unexpectedly high growth. Thus while the nominal GDP grew 8% (Y-o-Y) in Q4 FY09, the GDP deflator grew a mere 2.1%, thus helping the real GDP record a good growth rate.

We have calculated the quarterly GDP deflator index by dividing the nominal and real GDP numbers. The GDP deflator grew merely 2.1% Y-o-Y in Q4 FY09, as against 10.72% and 8.06% in Q2 FY09 and Q3 FY09 respectively. On the other hand, the nominal GDP grew merely 8% Y-o-Y in Q4 FY09, as against 19.30% and 14.23% in Q2 FY09 and Q3 FY09 respectively. Thus, while the growth in nominal GDP fell off the precipice in Q4 FY09, the real GDP grew at a rate equal to that in Q3 FY09, due to the steeper decline in the GDP deflator.

Further though the real GDP has shown an unexpected growth the steep fall in nominal GDP is a cause of concern as it may hit the main source of government revenues adding more pressure on fiscal position.

The above diagram clearly shows the relationship between GDP deflator, nominal and real GDP. Even though the nominal GDP has slowed down aggressively the falling GDP deflator has aided the real GDP to record more than expected growth of 5.8% in Q4 FY 09. Thus in reality the GDP deflator has been working as a real GDP inflator.

Even though the difference between the GDP deflator and a price index like CPI/WPI is often relatively small, it has shown some significant differences in few years. As per the data available in FY2001, WPI was 7.2%, while GDP deflator was 3.26%; in FY04, WPI was 5.50%, while GDP deflator was 3.43%; and in FY09, WPI was 8.41%, while GDP deflator was 7.00%. These three years had a common feature of rising crude oil prices and decelerating GDP growth except for FY04, which recorded a growth of 8.5%.

My comment in Live mint

Posted: Thu, Feb 5 2009. 9:31 PM IST

Inflation slows to 5.07%, near 1-yr low

The annual inflation rate was 4.78% during the corresponding week of the previous year

Cherian Thomas / Bloomberg

New Delhi: Inflation slowed to near a one-year low, giving the Reserve Bank of India (RBI) more room to cut interest rates and stimulate growth.

Wholesale prices fell 5.07% in the week to 24 January from a year earlier after gaining 5.64% the previous week, the commerce ministry said in New Delhi on Thursday. Economists expected an increase of 5.25%.

RBI governor D. Subbarao had said last week inflation will slow to below 3% by 31 March and indicated the central bank will reduce rates to help the economy weather the global recession. A top aide of Prime Minister Manmohan Singh said on Thursday that rate cuts may come after the government’s interim budget on 16 February.

“Interest rates are bound to fall as prices ease and the economy slows,” said N. R. Bhanumurthy, an economist at the Institute of Economic Growth in New Delhi. “The central bank will have to assess the government’s borrowing programme before it sets rates.”

The central bank will “have to figure out” the liquidity that will be needed in the banking system after seeing the government’s borrowing programme for the fiscal year starting 1 April, said Suresh Tendulkar, chairman of Prime Minister’s economic advisory council.
The government will announce an interim budget on 16 February as its five-year term ends in May. RBI kept interest rates unchanged last week after lowering them to a record on 2 January to help shield Asia’s third largest economy from a global slump.

RBI’s reverse repurchase rate is at 4% and the repurchase rate at 5.5%.

Wholesale prices in the week to 24 January fell after the index of manufactured products declined by 0.5%, Thursday’s statement said.. The index of fuel, power and light rose 0.6% on higher prices of naphtha and furnace oil. Thursday’s inflation rate may be revised in two months, after the government receives additional data. The commerce ministry cut the inflation rate for the week ended 29 November to 7.86% from 8%.

Anjali Said:
The inflation figures were in spotlight last year after it hit double digits. However end August 2008 proved to be a turning point as inflation figures have been declining since then and from November 2008 we have seen single digit inflation numbers, thanks to sharp decline in crude oil prices together with the slide in prices of metals, foodgrains and cement. Starting January 2009 inflation fell to an 11-month low of 5.24% on week ended 3 January 2009, but an eight-day nationwide truckers' strike that pushed up food articles prices caused the inflation to rise in the next two weeks. But with cut in domestic petrol prices by Rs. 5 a litre, diesel by Rs. 2 and cooking gas by Rs. 25 per cylinder the overall WPI based inflation is set to tumble down further. The Reserve Bank of India has also revised inflation projection downward to 3% by end fiscal year 2008-09 from 7% set earlier, in third quarter policy review 2008-09.
Posted On 2/6/2009 11:28:50 AM