MutualFunds

I had written about Fidelity leaving (What to do about the In-Fidelity?) recently, and Manoj Nagpal has brought it to my notice (Thanks!) that Fidelity may take the fund management team with them.

This is a huge change from my earlier assumption that Fidelity was only exiting as an owner. It seems it is taking the managers with it.

Fidelity Mutual Fund, in its 'request for proposal' document, has stated it is keen to retain the equity fund management team headed by Alexander Treves. Fidelity Mutual will reach a final decision on its equity fund management team after taking into account the overall valuation of the deal, said a Fidelity insider.

Now there is no clarity on whether the fund management team will stay. In case they don’t, your only choice is to exit, or face a lot of uncertainty before the buyer finds a manager for each fund.

Will they let the management team continue? That looks increasingly impossible considering that Fidelity’s costs have killed its profitability and fund managers are likely to be a big part of those costs, and supposedly buyers have to pay for the non-manager-bloat as well:

A few leading domestic fund houses, however, did not bid for Fidelity's assets as the acquirer, as part of the deal, has to give jobs to all members of the business management team, comprising marketing and sales personnel.

If I were an investor in a Fidelity fund right now, this would ring serious alarm bells, and I’d choose to exit. This is of course not a recommendation, choose wisely.

Fidelity Mutual Fund has decided to exit ops in India, presumably on six years of no profits. They manage assets of 8,800 cr. and there were a lot of posts talking about how this is a huge negative for India and how this is because of SEBI’s regulations etc.

Total. Horse. Shit.

First, if they have been losing money for six years, it’s not because of SEBI’s regulations. SEBI allowed funds to charge investors entry loads till 2009; there were other onerous charges like “NFO marketing costs” that funds were allowed to charge even earlier. If they couldn’t make profits then, chances are SEBI isn’t the one to blame.

Second, other mutual funds have been making money. The most profitable are HDFC and Reliance, but even the tiny Quantum is making profits. There’s no reason to think the industry is in doldrums. It’s in flux, yes. It’s in play, to consolidate, to realign, yes. But not in the pits.

Third, what rules has SEBI changed recently? Mostly the entry load and commissions. Srikanth Meenakshi of fundsindia.com reminds me (on the quora board) that Fidelity has most of its money in the US in no-load funds (more than 93% of assets). Management fees are just 0.85% in the US (India’s limit is 1.25%, which applied even before Fidelity got in)

Lastly, there are many fund houses that keep wanting to exit. When Merrill went crying to the arms of BoA, DSP-ML became DSP-Blackrock. Lotus exited its funds to Religare. Benchmark sold to Goldman. The point is that getting out is normal – there should be nothing more to read into it other than that Fidelity didn’t have the stomach for the fight anymore, which is fair in the world of business.

I don’t know why they allow such a rumour to spread that they are leaving due to low profitability. Who the heck will pay big money for their funds? Anyhow, people are going to be willing to buy. Typical deals are 3-4% of assets, but we’ve recently seen many with over 6%.

What should you do if you own a Fidelity fund? Well, stay put, there’s nothing wrong with the fund. Would you sell your Infosys shares if Narayan Murthy sold his? All that’s happening is that the owner of a fund is changing. The employees, the fund managers etc. are likely to continue. What you should care about though is that if enough people exit your funds – to take the assets of the fund to less than 100 cr, for instance – you might consider leaving as well.

Update: You might want to consider exiting if the fund management team is leaving as well. More in this post.

And don’t go by the hullah in the press. There’s nothing spectacular about Fidelity leaving.

I’ve had two questions on email recently about Dynamic bond funds.

The concept of Dynamic bond funds needs an understanding that bonds are complicated, way more than stocks. A few things that make bonds different:

a) Issuer creditworthiness: Is a government bond more likely to default, or a second rate corporate bond? Would a Reliance bond have a chance of default more than say an ICICI Bank bond? The lower the credibility the higher the interest rate one asks for.

b) Yield: How much interest will I get, on a comparative basis, for this bond versus that one?

Jago Investor is running an “action month” where they talk of “pure action”, you commit to taking certain action: buying a term plan, buying health insurance, starting an SIP, organizing your financial life, and surrendering useless policies. Manish will keep in touch and there are prizes from multiple sponsors, such as MProfit (a neat software to manage investments), Moneysights (a fin portal), FundsIndia (buy or sell MFs online).

Disclosure: These are all people I know, and folks I think are doing a great job on the financial internet, so deem me interested. There is nothing in it financially or otherwise from me, other than the goodwill of these awesome people.

What am I going to do? I’ve already got term plans but I’ll buy the next round ditching the current ones next year after premiums go down (they will after the results from the census are incorporated). I’ve got health insurance for the family. I won’t do an SIP because I actively manage my money. I need to reorganize some of my financial life like get out of some very old mutual fund investments or to at least get them online so I can transact when I want (I will do this). And finally, I will not surrender my useless policies because surrender is worse than paying to the end of term for them (I’ve calculated). My actions shouldn’t determine yours – you should take your own decisions.

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SEBI has in a new circular, allowed transaction charges of Rs. 100 per transaction for transactions above Rs. 10,000, to be deducted from the transaction itself. For new subscribers, distributors will be paid Rs. 150.

That means for a cheque of Rs. 10,000, only 9,900 will be invested for new investments into new fund schemes, and Rs. 9,850 for existing subscribers of a fund scheme. Distributors can opt-out of this charge entirely for all of their customers (not selectively per customer or per transaction). SIPs will be charged that amount as well, but over 3-4 installments.

FundsIndia has announced that they won’t charge this for any of their customers; I hope others will follow suit. I buy online with HDFC Bank right now, but if they start charging, I will move to FundsIndia or go direct. (Haven’t bothered because I’m lazy)

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AMCs have also been asked to deduplicate folios within six months. I wonder how many folios will be shown once deduplicated.

MFs will now have to reveal data by geography (top n cities and so on), and total commissions paid to distributors of Retail/HNI investments greater than 100 cr. AUM raised.

FundsIndia posted in it's twitter account, that Value Research suggested no-lock-ins for ELSS fund savings if you didn't try to save tax:

If you had not invested in the tax planning funds to save tax, the three-year lock-in does not apply which is mandatory for only those seeking tax deductions by investing in these funds. You can redeem your investments in these two funds whenever you wish.

This is not true. I tried to redeem certain tax-saving funds ahead of time but the application was rejected.

And then, how will the fund know that the applicant didn't try to use it to reduce tax? Will they ask for a tax return? Many tax returns are so convoluted that it takes experts to decode them - so will funds hire a tax analyst?

I doubt this is the case. The tax department won't be happy if ELSS funds (called "tax-saving" funds) are allowing early redemptions; the tax saving is contingent on their not being accessible for three years.

Of course ELSS is being scrapped from next year, so any further argument will be moot.

Update: Value Research has acknowledged the error, both on Twitter and in the comments section, and changed the original post.

In theory, if you make investments in ELSS funds and you later discover that you were not liable to pay tax, then you may redeem your investments within the lock-in period. This would involve getting a certificate to the effect from the tax authority and then approaching the fund for redemption. We are not sure how easy or difficult this may prove in practice and whether the tax authorities and the AMCs have the processes in place to actually do this.