Accessibility of Fund AMCs - lets look at the numbers

While fund houses have been quick to shift the blame regarding high distribution expenses over to distributors/agents on the pretext that they have a deeper penetration which cannot be fought with, let us also look at what fund houses have done to allow investors to access them directly.

Here is a list of direct contact numbers for the AMCs (obtained from their websites):

ABN AMRO : 91-22-6656 3838
Benchmark : 1800-22-5079 (toll-free)
Birla Sun Life : 1800-22-7000 (toll-free)
BOB : 1-901-334034 - link to Karvy
CanBank : Multiple Contact Points
DBS Chola : 1-800-22-2300 (toll-free)
Deutsche : Multiple Contact Points
DSP Merrill Lynch : 1-800-345-4499 (toll-free)
................... - link to CAMS
Escorts : Multiple Contact Points
Fidelity : 1800-180-800 (toll-free)
Franklin Templeton : 1800-425-4255
HDFC : Multiple Contact Points
HSBC : Multiple Contact Points
ING Vysya : Multiple Contact Points
JM Financial : Multiple Contact Points
Kotak Mahindra : 1800-22-2626
LIC : 22842521, 22851661/63 (no STD code)
Lotus India : Multiple Contact Points
Morgan Stanley : 91 22 2209 6600
Principal : 1 800 22 5600 (toll-free)
........... - at select locations
Prudential ICICI : Multiple Contact Points
Quantum : 1800-22-3863 (toll-free)
Reliance : 30301111 (Reliance phones);
.......... 022 30301111 (others)
Sahara : Multiple Contact Points
SBI : 1800-22-3040 (toll-free)
StanChart : "Contact Us" Link doesn't work
Sundaram BNP Paribas : No "Contact Us" Link avalable; Facility to have them call you
Tata : Multiple Contact Points
Taurus : Multiple Contact Points
UTI : Multiple Contact Points;
..... 1-800-22-1230 (perhaps only for GoldETF)

Note: This info is as on 21-Mar-07 & may be subject to change.

A few interesting observations come out of this basic study.
a. PruICICI, claiming to be No. 1, has no toll-free number for its investors.
b. Reliance, again claiming to be No. 1, has differential treatment for Reliance phone subscribers (paying local charges) v/s others (paying STD charges)
c. StanChart hasn't even bothered to check the "Contact Us" page link - guess they don't want to be disturbed while packing their bags
d. Principal has a special toll-free numbers for investors in specific locations - guess they do not want customers from other than the select locations
e. UTI has a toll-free number that shows up only on GoldETF ads - it is not clear whether other investors should be using that or not
f. BoB & DSPML have conveniently shifted the service part to their RTAs (Karvy & CAMS, respectively). However, BoB is explicit about it, while in case of DSPML, you can only find out after you call them up.
g. LIC has mentioned the contact numbers without STD code. Either they have this number available at all locations (I think not) or they want only investors from Mumbai to contact them (I hope not) or it is sheer laziness and indifference towards this basic customer service requirement (most likely).
h. Kotak Mahindra & Franklin Templeton have single contact numbers that look like toll-free (starting with 1-800...), but it is not mentioned clearly. In case of Franklin Templeton, a detailed reading of the fine print in their KIM indicates that "local charges apply".

A few pleasant surprises to show you that all is not lost.
a. SBI has a toll-free number - I'm sure no one would have expected such attention to customer service from SBI.
b. Quantum, which was born yesterday (technically a year ago), and has the lowest AUM, has a toll-free number (since inception).
c. Sundaram BNP Paribas, which does not have a contact link, but does have a facility to have them contact you.

Considering that the Fund houses have done hardly anything to make themselves accessible to the investor population, I believe the high distribution costs should be borne by them (as an acknowledgement of their failure) instead of passing it on to customers and blaming the distributor cartel.

At the very least, SEBI or AMFI should mandate toll-free or single access number for all Mutual Funds and make this a standard disclosure as part of Investor service section of the Offer Documents & KIM. After all, once the distributor "changes his/her cell-number" after completing the sale, when you have to contact the fund house for any service need, the least the investor deserves is a single access number (preferable toll-free). I rest my case.

Identifying the right option within the right scheme

As if selection of the right fund house & scheme wasn't hard enough, the investor also has to choose the right option. Here are the typical options

1. Growth

2. Dividend

2.1 Payout

2.1.1 NA (per fund decision)

2.1.2 Yearly

2.1.3 Half-yearly

2.1.4 Quarterly

2.1.5 Weekly

2.2 Reinvestment

2.2.1 NA (per fund decision)

2.2.2 Yearly

2.2.3 Half-yearly

2.2.4 Quarterly

2.2.5 Monthly

2.2.6 Weekly

2.2.7 Daily

3. Bonus (Not very common & I don't know enough about this)

Also note that not all options are available in all fund-schemes. Some are typical in debt funds or liquid funds only. Yet others are for institutional investors only (you can qualify if you are investing in crores, but then you don't need to read these postings).

The unfortunate part is that the offer documents & KIM offer little input in helping the investor choose the right option based on his/her situation. Most of the time, the agent recommends (or selects on their own) one of the options randomly. Even worse, not choosing any of the options or choosing the incorrect combination allows the fund house to use the defaults (as specified in KIM), irrespective of whether it is right for you or not.

Here are some aspects you need to be clear about before you take the next step:

a. Identify if your fund-scheme is a "Equity-Oriented Fund" or not. In case you are not aware, the requirements are that your fund should have 65% invested in "Listed"+"Indian"+"Shares". If you cannot identify this, you should take some time in learning the basics before investing your money in mutual funds.

b. Next determine your need for income. Are you counting on the fund to provide you regular income? Are you looking for predictable or varying amount of income? Are you counting on random income distributions to be treated as "fun-money"? Are you more comfortable with taking your own decisions on withdrawing money from the fund?

c. Finally determine your tax situation. Someone who is below the tax exemption limit needs to choose the options differently vis-as-vis someone in the middle or higher tax brackets to minimise the tax impact. It may be likely that your agent has good intentions but poor competence, which is leading you to pay unnecessary tax at source or as capital gains.

Here are some useful guidelines in helping you select the right option:

a. For Equity-Oriented Funds, typically dividend is declared per fund decision, though some funds typically do it annually. If you are counting on regular steady income, go for growth option and subsequently, opt for SWP with fixed amount (preferably after 1 year of investment to avoid 10% STCG Tax). If you are counting on regular income, though variable, opt for dividend payout from funds who intend to do so annually. This also allows profit booking periodically without paying income tax or STT. For all other cases, simple Growth option is the right choice. DO NOT choose Dividend Reinvestment over Growth in any case. This results in the same portfolio value, but will subject your recent units credited (via investment of dividend) to separate holding period and may result in STCG instead of LTCG (in case you have invested more than a year ago). Choosing this option is the worst any agent can do for you, whether it is done by mistake or stupidity.

b. For Debt-Oriented Funds, your tax situation and duration of investment is a critical decision maker. The fund pays 14% tax on dividends distributed - this is indirectly paid by you as your return is lowered. Just check what is the amount of tax you would pay if you include the entire amount in your income - if it is lower than 14%, you should go for growth option and subsequently, go for SWP or redemption as per your need. If you do not need income from your funds but need to access funds within a year and your marginal tax rate is 20% or more, opt for dividend reinvestment - this will ensure your gains are taxed at a max of 14% instead of your marginal tax rate. In case you intend to invest for more than one year, always opt for growth option (irrespective of your tax status) and then go for SWP or redemption after 1 year. This will ensure that the gains are taxed as LTCG - at 10% rate or 20% (after indexation).

It would be really beneficial if AMFI insists that such basic recommendations are made by the fund houses in the KIM itself so that investors can make the right choice at the right time.

Investing in Equity? What's your horizon???

If your horizon is the much popular 3-years, as so proudly recommended by MF agents and fund houses (especially for ELSS), read this article to get a taste of reality.

What has been the worst performance of Nifty (a reasonable blue-chip index) over a period of 3 years? The answer is -5% (yes, that is a negative), based on data from 1990-2006. That is assuming you invested at an average price (via SIP) and were not subject to volatile ups & downs during the year. On 4 such instances (out of 14), it has shown -ve returns. And also remember that this does not factor in inflation at all.

The story with Sensex (a deeper blue-chip) isn't too rosy either. It has shown a worst 3-year return of -8%, based on data from 1980-2006. On 3 instances (out of 24), it has shown -ve returns. Again, inflation has not been accounted for.

So, how many years do you need to stay put to be assured that you won't lose money? The correct answer is not 5 or 7 years, but 10 years (for both Nifty & Sensex). Are you ready for that??? If you get sold on the idea that Mutual Funds can do better than the market all the time, you are living in a fool's paradise. Unless your MF agent can give it in writing (with appropriate collateral) that the fund he is recommending will give +ve return in 3 years, don't get swayed.

The intention is not to scare you away from equity, but to help you understand that while everybody agrees that Equity scores over the long term, the definition of long-term is flexible. However, instead of basing your decision on sweet-talk or hard-sell by agents, take a hard look at the real numbers from the past. Those who forget history are doomed to repeat it...

Myth : Invest in ELSS & Save 33,660

It is surely wonderful to see a saving of 33,660 in a year, especially if it is saving on Income Tax. However, before you get swayed by the huge number, here is a reality check:
a. You need to have a taxable salary > 10 lac to realise the full savings. Else, the savings change to 30,600 for salary > 2.5 lac, 20,400 for salary > 1.5 lac & 10,200 for salary > 1 lac. Please note that the slabs would change a bit for women & senior citizens, but you get the point.
b. You need to invest entire 1 lac in ELSS. If your salary is 2 lac and you are investing 1 lac to save tax of 10,200 - I'm sure your attitude towards savings needs a standing ovation.
c. There is an implicit assumption that you are not salaried & thus do not contribute to PF. Remember that PF contribution also counts towards 80C & reduces the 1 lac by the relevant amount.
d. There is another implicit assumption that you do not have any insurance policy. Remember again that Insurance premium also counts towards 80C & reduces the 1 lac by the relevant amount.
e. There is a final assumption that you are not investing anything towards other savings such as NSC or PPF. Remember that these also count towards 80C & reduce the 1 lac by the relevant amount.

So, lets do some hard numbers.
a. Your taxable salary is 1.5 lac (as per Form 16)
- Your basic is around 45,000 (rest is allowances & perks)
- Your PF contribution would be 5400 (80C contribution)
- You have insurance of around 15 lac (term policy)
- Your insurance premium would be around 4500 (80C contribution)
- You do not have any NSC or PPF contributions
- You pay tax of 4090 (after 80C deduction)
- You can invest any amount in ELSS, but get tax benefit on 40,100
- You have saved 4090 (100% of your tax, but 12% of promised savings)
b. Your taxable salary is 2 lac (as per Form 16)
- Your basic is around 60,000 (rest is allowances & perks)
- Your PF contribution would be 7200 (80C contribution)
- You have insurance of around 20 lac (term policy)
- Your insurance premium would be around 6000 (80C contribution)
- You do not have any NSC or PPF contributions
- You pay tax of 12607
- You can invest any amount in ELSS, but get tax benefit on 86,800
- You have saved 12852 (100% of your tax, 37% of promised savings)
c. Your taxable salary is 2.5 lac (as per Form 16)
- Your basic is around 75,000 (rest is allowances & perks)
- Your PF contribution would be 9000 (80C contribution)
- You have insurance of around 25 lac (term policy)
- Your insurance premium would be around 7500 (80C contribution)
- You do not have any NSC or PPF contributions
- You pay tax of 22134
- You can invest any amount in ELSS, but get tax benefit on 83,500
- You have saved 17034 (77% of your tax, 51% of promised savings)
d. Your taxable salary is 3.5 lac (as per Form 16)
- Your basic is around 1.05 lac (rest is allowances & perks)
- Your PF contribution would be 12600 (80C contribution)
- You have insurance of around 35 lac (term policy)
- Your insurance premium would be around 10500 (80C contribution)
- You do not have any NSC or PPF contributions
- You pay tax of 49031
- You can invest any amount in ELSS, but get tax benefit on 76,900
- You have saved 23531 (48% of your tax, 70% of promised savings)
e. Your taxable salary is 5 lac (as per Form 16)
- Your basic is around 1.5 lac (rest is allowances & perks)
- Your PF contribution would be 18000 (80C contribution)
- You have insurance of around 50 lac (term policy)
- Your insurance premium would be around 15000 (80C contribution)
- You do not have any NSC or PPF contributions
- You pay tax of 91902
- You can invest any amount in ELSS, but get tax benefit on 67,000
- You have saved 20502 (22% of your tax, 61% of promised savings)
f. Your taxable salary is 12 lac (as per Form 16)
- Your basic is around 3.6 lac (rest is allowances & perks)
- Your PF contribution would be 43200 (80C contribution)
- You have insurance of around 1.2 cr lac (term policy)
- Your insurance premium would be around 36000 (80C contribution)
- You do not have any NSC or PPF contributions
- You pay tax of 321161
- You can invest any amount in ELSS, but get tax benefit on 78,000
- You have saved 7001 (2% of your tax, 21% of promised savings)

There are many assumptions in this representation, however, the idea is to help you realise that the 33,660 figure is nothing but a mirage. Next time your agent tells you you can save 33,660 by investing in ELSS (or even ULIP, as the calculations apply in the same manner), ask him/her to demonstrate the same based on your salary and other financial details.

Note: It is quite likely that you have adjusted your basic to be too low or have taken a very low insurance cover (thanks to your agent selling you a non-term policy). At the same time it is quite likely that you have included other 80C items in your portfolio for diversification (PPF, NSC, 5-Yr FDs). In all likelihood, 90% of the tax-paying folks would be well-served by this representation.

Why Total Return Index is not chosen as a Benchmark

Most of the Index Funds and also Diverified Equity Funds choose Common Indices like Sensex, Nifty, BSE-200, S&P-500, CNX-MidCap, etc. In case of Index Funds, the index chosen is simply the index it attempts to replicate. In case of Diversified Funds, the index chosen represents the scope of companies (blue-chip or mid-cap, etc.) they intend to pick from while aiming to beat the Index. In case of Sector Funds, the index chosen is usually a Sectoral Index, like CNX-IT Index.

The interesting part is that majority of the Offer Docs, KIMs & Fact Sheets specify the benchmark index as Nifty instead of Nifty-TRI (you can subsitute Nifty for Sensex or other Index). The latter represents "Total Return Index" - which assumes that the Dividends received are reinvested in the Index. Considering that the Dividend Yield of Nifty is about 1.6% (for last 8 years, ranging between 1% to 3%), the growth in Total Return Index is expected to lead the growth in Index by the similar margin. Picture this - if your fund beats the Index by 5%, it has actually beaten the Total Return Index by 3.4% (or 2%, depending on the dividend yield for the period) & suddenly the fund manager appears a little less of a hero.

The facts are simple - any teenager can invest in the index stocks, capture the index yield of 2%, deduct expense ratio of 1% and still show that he beat the index by 1%. This is not an illusion, but a grand larceny perpetrated by the fund houses and sadly abetted by regulators. Next time your agent compares the return of his favorite pick with benchmark, ask him/her if the benchmark is a Total Return Index or not. If not, ask him/her to explain why not, and how does the performance compare when TRI is used. Chances are that your agent will run away, but if you start hearing explanations you do not understand, perhaps you should run away.

Till date, I have seen only one Diversified Fund - Quantum Long Term Equity Fund - that has chosen BSE-30-TRI as the benchmark. Other fund Offer Docs mention that they attempt to beat the total return of the index, but they do not mean TRI, as is shown in the fact sheets.

The worse part of the story is that while the regular index values are published widely and are available on net or other publications, the TRI values are not available on net, not even on the stock exhange houses which compute the indices. Good luck trying to be an informed consumer.

Index Funds v/s ETFs

ETFs do not pay commissions to MF agents or brokers - they are traded as shares on the stock exchange. This means you have to buy them - they are not sold. Also the fund houses typically allocate low advertising budget to them, which is good for the long term investors, as it means low expense ratio.

Index Funds on the other hand are available with most of the fund houses. Though they are not actively marketed (low entry load & low expense ratio turn into low commissions on sale & continuity), they may be offered by financial planners, if you care to ask.

However, the important question for any investor is - should he/she go for Index Fund or ETF? Here are some tips that might be of help:

ETFs have to be bought from the market (if you are a small investor) or directly from the fund house (if you are a very large investor) - in either case, there are no commissions to be made by the MF agentat the time of purchase (via entry load), or retention (via trailing fees). These are best for investors with these characteristics:
a. Very long term buy & hold approach (to offset the brokerage at purchase & sale), as the expense ratio is lower than Index Funds
b. Already have a Demat account (to reduce total cost of ownership)
c. Have a good brokerage deal (to reduce cost of purchase or sale)
d. Making purchases large enough to get reasonable brokerage rates (please note that some brokers might require minimum transaction value or impose a minimum brokerage fee).

Index Funds have entry load of 0% (for a few funds) or 1% (for most - though I wonder how they manage to get investors). This is usually set-off via exit load for short-term redemption. The expense ratio is about 1% (or less for few funds) to 2% (again, I wonder how they manage to get investors). The combination of these low fees ensure you get market return minus expenses in the long term, while your agent gets low trail commissions only. These are best for investors with these characteristics:
a. Low investment amount - usually in thousands
b. Need for regular investment vehicle - due to affordability issues
c. Need to reduce volatility via regular investment v/s lump-sum
d. Not having Demat Account or PAN, etc.
e. Willingness to accept self-service - do not expect any MF agent to be interested in a client like you...