Interest Rates, Gold and Mutual Fund

What is happening in the mutual fund industry?

Well it is a little funny. Most of the fund houses are not getting any money in their equity schemes. A few schemes which are doing well are able to get some money – which is customer driven. A 15 month SIP in a good scheme would be giving you about 7% return (annualised) – and is not exciting enough for the distributor or the end user. L O L.

However it is easy to tell the customer that ‘keep money in a liquid account’. So most fund houses are trying to build their liquid assets, their FMP portfolio and perhaps some long term debt too. This of course comes at a price. Most fund houses are throwing so much money at the distributor for getting them liquid funds and FMPs that it is not funny. I guess it is the ranking game which most fund houses are playing. I have not heard of DSP Blackrock make any payment, but most of the others do.

The other game being played is the Gold ETF. In case you invest in a gold etf there is a lot of money to be made by the distributor. The Munoth public issue, the bond issue etc. are all helping the gold prices. What will happen if gold prices fall? especially if there is a speculative bubble created in one part of the world? I have no clue, but the amount of brokerage a distributor gets for selling gold – esp the ETF schemes is amazingly high.

To me the financial logic of running a mutual fund business is not visible – for the fund houses from no. 8 to no. 44! However they are all taking people to jaunts in the US, Goa, ..the annual bonuses have not been bad, but not surely spectacular.

If interest rates are going up, bond prices have to fall. When IFCI came out with an issue of bonds at 10.75%p.a. interest rates, I was excited. Like all smart people, I wanted go buy SBI bonds expecting it to correct the yield rationale! However the IFCI bond issue is poorly marketed -all the parties are Delhi based. There is no Mumbai based lead manager or broker. Anyway the broker must be making about 2% including some statutory levies. So IFCI is now borrowing at 10.75% + say 2% costs. At 12.75% costs, it requires a brave company….I would rather ask all of you to repay all your loans. Housing EMI is already at 14.75% to 16% on a floating basis. Ouch.

The IFCI issue has not depressed the SBI bonds – obviously because of the risk perception.

However the current SBI Chairman’s decision to postpone the SBI issue is likely to be expensive for them. If they were to come out with an issue now (as tier 2 cap, they do not have a choice) – they will have to pay at least 10.5%p.a. Ouch it hurts.