 "Close-ended equity schemes - a sheer play around luck?")
"Time (spent) in the market is more important than timing the market."
It's an oft-repeated phrase used by mutual fund executives. It's hard to disagree with because history proves that markets reward investors who do not attempt to time it. It's equally true that those who do so tend to either lose money or end up making far less than if they had remained invested.
But are these fund houses practising what they preach? Are investors their prime focus or do they believe that higher payouts to large distributors are key? Or, for that matter, have they done away with the flavour-of-the-season product strategy?
The sector brought in 35 new equity funds, loaded with upfront commissions and a 3-5 year lock-in period, with more to come. They have been marketed widely with distributors' payout reaching as high as 6-8%. Old habits truly die hard.
After all, it's an easy way to garner assets in a rising market for an industry busy in the AUM-chasing game. Already, these products have cornered a little over Rs 6,500 crore – no small sum, given the poor track record of fundraising over the past five years.
But such an approach raises serious questions. Learning lessons from infrastructure related schemes launched between 2005 and 2008, which took a hit, sector officials said they were not in favour of flavour-of-the-season quick-fix products. Nonetheless, close-ended schemes have mushroomed. The Systematic Investment Plan (SIP) was one of the top thrusts by the industry to bring sticky money, but it is again asking for lump sum investments via close-ended products.
Industry executives look for investors with a good track record. But do close-ended schemes themselves have a track record? Moreover, isn’t the 3 or 5 year time-frame an indication that they, subconsciously, are falling prey to the practice of 'timing' the market?
What would happen to a three- or five-year product if the market slumps in the final year?
I agree it's a far-fetched possibility. If it doesn't, fund houses will be on top of the world. But if things turn sour, it will be another shocker for investors and it could take a while to restore their faith in equities - the most shunned asset class among India's investors. Investment heads agree that luck is an important factor but argue that what's more important at this stage is the valuation.
Moreover, these are not SIPs, but simply asking investors to put in a lump sum on the assumption that markets will reward investors at the end of the lock-in period. Has the concept of SIP been sidelined in the race for asset gathering?
Several media reports, including this paper, have written extensively about the higher commission structure and how such practices could bring back the malpractice of widespread churning of investors' money by distributors.
Who are these distributors? Are they an army of foot soldiers – the fraternity of Independent Financial Advisors (IFAs)? There is no classified data available, but enough anecdotes from industry insiders and distributors suggest that it's the large distributors, mainly banks, which are pulliig in higher sums.
But this trend has not escaped the regulator’s eye. U K Sinha, chairman of the Securities and Exchange Board of India (Sebi) has expressed his displeasure at higher distributors' payout and advised fund houses to be reasonable. Has the advice fallen on deaf ears?
Recently, a chief executive officer of a mid-sized fund house termed media reports about higher commissions in close-ended schemes as "rubbish" at a public forum. He went on saying that in order to have 'happy investors' it's needed to 'lock them (in)'.
When asked if a five-year closed equity product had been launched in January 2004, how would have he faced his investors and distributors after five years in January 2009, he struggled for a satisfying answer.
A senior fund manager quips, "If close-ended schemes do better, in that case, let's close all the open-ended schemes. Haven't the open-ended schemes done well?"
Many argue that a close-ended structure allows fund managers to focus on growth-oriented stocks and offer better returns to investors without bothering about redemption pressure. This is not only a foolish argument but also raises doubts on the capability of the fund managers and intent of the fund house which, in a way, wishes to escape accountability for a good part of the lock-in period.
Interestingly, these are the same executives who until recently said investors were becoming smarter and saw nothing wrong if investors made profits by redeeming units. Ironically, today the industry is locking-in those so-called smart investors!
The role of the market regulator in allowing a plethora of such schemes also needs a review. After being so strict in giving a go-ahead for new launches during 2009-2012, what is fueling the surge of approvals?
Since equity is one of the riskiest asset classes, the close-ended schemes are nothing but a sheer play on luck. If the 'timing market' strategy plays out well, it's a win-win situation for all stakeholders. Else, these schemes could burn both fund houses and thousands of investors.
It's an oft-repeated phrase used by mutual fund executives. It's hard to disagree with because history proves that markets reward investors who do not attempt to time it. It's equally true that those who do so tend to either lose money or end up making far less than if they had remained invested.
But are these fund houses practising what they preach? Are investors their prime focus or do they believe that higher payouts to large distributors are key? Or, for that matter, have they done away with the flavour-of-the-season product strategy?
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The close-ended equity MF schemes are an apt example of the fact that when the stock market shows a steep rally, a majority of participants indulge in practices that can potentially go against basic investing principles.
The sector brought in 35 new equity funds, loaded with upfront commissions and a 3-5 year lock-in period, with more to come. They have been marketed widely with distributors' payout reaching as high as 6-8%. Old habits truly die hard.
After all, it's an easy way to garner assets in a rising market for an industry busy in the AUM-chasing game. Already, these products have cornered a little over Rs 6,500 crore – no small sum, given the poor track record of fundraising over the past five years.
But such an approach raises serious questions. Learning lessons from infrastructure related schemes launched between 2005 and 2008, which took a hit, sector officials said they were not in favour of flavour-of-the-season quick-fix products. Nonetheless, close-ended schemes have mushroomed. The Systematic Investment Plan (SIP) was one of the top thrusts by the industry to bring sticky money, but it is again asking for lump sum investments via close-ended products.
Industry executives look for investors with a good track record. But do close-ended schemes themselves have a track record? Moreover, isn’t the 3 or 5 year time-frame an indication that they, subconsciously, are falling prey to the practice of 'timing' the market?
What would happen to a three- or five-year product if the market slumps in the final year?
I agree it's a far-fetched possibility. If it doesn't, fund houses will be on top of the world. But if things turn sour, it will be another shocker for investors and it could take a while to restore their faith in equities - the most shunned asset class among India's investors. Investment heads agree that luck is an important factor but argue that what's more important at this stage is the valuation.
Moreover, these are not SIPs, but simply asking investors to put in a lump sum on the assumption that markets will reward investors at the end of the lock-in period. Has the concept of SIP been sidelined in the race for asset gathering?
Several media reports, including this paper, have written extensively about the higher commission structure and how such practices could bring back the malpractice of widespread churning of investors' money by distributors.
Who are these distributors? Are they an army of foot soldiers – the fraternity of Independent Financial Advisors (IFAs)? There is no classified data available, but enough anecdotes from industry insiders and distributors suggest that it's the large distributors, mainly banks, which are pulliig in higher sums.
But this trend has not escaped the regulator’s eye. U K Sinha, chairman of the Securities and Exchange Board of India (Sebi) has expressed his displeasure at higher distributors' payout and advised fund houses to be reasonable. Has the advice fallen on deaf ears?
Recently, a chief executive officer of a mid-sized fund house termed media reports about higher commissions in close-ended schemes as "rubbish" at a public forum. He went on saying that in order to have 'happy investors' it's needed to 'lock them (in)'.
When asked if a five-year closed equity product had been launched in January 2004, how would have he faced his investors and distributors after five years in January 2009, he struggled for a satisfying answer.
A senior fund manager quips, "If close-ended schemes do better, in that case, let's close all the open-ended schemes. Haven't the open-ended schemes done well?"
Many argue that a close-ended structure allows fund managers to focus on growth-oriented stocks and offer better returns to investors without bothering about redemption pressure. This is not only a foolish argument but also raises doubts on the capability of the fund managers and intent of the fund house which, in a way, wishes to escape accountability for a good part of the lock-in period.
Interestingly, these are the same executives who until recently said investors were becoming smarter and saw nothing wrong if investors made profits by redeeming units. Ironically, today the industry is locking-in those so-called smart investors!
The role of the market regulator in allowing a plethora of such schemes also needs a review. After being so strict in giving a go-ahead for new launches during 2009-2012, what is fueling the surge of approvals?
Since equity is one of the riskiest asset classes, the close-ended schemes are nothing but a sheer play on luck. If the 'timing market' strategy plays out well, it's a win-win situation for all stakeholders. Else, these schemes could burn both fund houses and thousands of investors.