Investors can benchmark mutual funds’ performance
Q Investments in mutual funds have grown substantially in India in the last two years. However, for an ordinary investor, it becomes difficult to monitor the performance of each mutual fund. Is there some way to make an objective assessment of the performance of mutual funds?
A: Currently, the performance of mutual funds is monitored by the price index. However, the Securities & Exchange Board of India (Sebi) has made it mandatory from February 1 this year to benchmark performance of mutual funds based on the total returns index (TRI). The TRI takes into account the dividend payout of stocks in addition to the capital appreciation which is reflected in the price. Mandatory benchmarking to the TRI implies that active fund managers may have to work harder. This is because the Sebi has now mandated a process of categorisation and rationalisation of mutual fund schemes. Under this new dispensation, the Sebi has brought in a stricter definition pertaining to funds dealing in large, mid and small-cap stocks. Currently, inappropriate benchmarks for many funds drive up their performance. The application of TRI will ensure that investors have a realistic view of the performance of mutual funds.
Q: My son who is studying for his chartered accountancy exam in India wants to specialise in forensic audit. I am not sure whether there is sufficient scope for this type of professional service in India.
A: A forensic auditor is in great demand in India, especially after the Insolvency & Bankruptcy Code has come into force. Forensic auditors are in great demand as both bankers and insolvency resolution professionals want greater authenticity in respect of understated transactions with related entities. These transactions have been undertaken in the past for asset stripping and for diversion and siphoning of funds which may have resulted in insolvency of the entity. Forensic auditors do background checks on specific entities as well as on vendors and suppliers. Many promoters declare bankruptcy to prevent enforcement of personal guarantees but most of them have undeclared assets which are kept in the names of entities, the ownership of which is not known. Forensic auditors, therefore, play a very substantial role in identifying such hidden assets which help creditors to recover their dues.
Q: NRIs have the option to invest in Indian banks by depositing in either the FCNR or NRE accounts. I am told that NRE deposits are more popular. What could be the reason?
A: Non-Resident (External) deposits have to be converted into rupees when the funds are remitted to India at the prevailing exchange rate. When the depositor withdraws his money, his rupee deposits will be converted into the same foreign currency at the exchange rate prevailing on the date of conversion. The rupee has strengthened against the dollar in the past few months as a result of rising inflows into India. Therefore, NRIs who had deposited in the NRE account have benefited in terms of appreciation. Further, NRE deposits provide a higher rate of interest ranging from 5.25 per cent to 6 per cent depending on the tenure of the deposit. On the other hand, deposits in the Foreign Currency NonResident account do not provide any exchange gain if the rupee appreciates against the dollar because the deposit remains in the same currency in which the funds were remitted. The interest paid on the FCNR deposits is on par with international rates pertaining to the currency, which is much lower than the rate of interest on NRE deposits. As of November 2017, NRE deposits in India were to the extent of $86 billion whereas FCNR deposits were $21 billion. Hence, NRE deposits are the preferred choice for investment by NRIs. The writer is a practising lawyer specialising in tax and exchange management laws of India. Views expressed are his own and do not reflect the newspaper’s policy.