Fund Fulcrum (contd.)
(December 2007)

Piquant parade

Union Bank of India is to form a 51% joint venture with Belgium-based KBC group to enter the Indian mutual fund arena.

UTI Mutual Fund, which is likely to become the first public-listed fund manager in Asia, will open 53 new branches in the next three months across the country by utilising a part of the proceeds from its proposed public offer which is likely to hit the market in February 2008.

The Pension Fund Regulatory and Development Authority (PFRDA) has given its assent for investments of up to 5 per cent of the funds under the new pension system (NPS) in stock markets and another 10 per cent in equity linked mutual funds. SBI, UTI and LIC Mutual Funds have been appointed as the fund managers to manage Rs. 2000 cr under NPS for a period of three years from June 2008. The fund managers would also offer an option to employees to invest 100 per cent of their pension funds in Government securities which give assured returns.

Regulatory Rigmarole

Indian Mutual funds can invest upto $7 billion annually in the overseas markets - a good 40% jump over the present ceiling of $5 billion. The present ceiling has been raised from $4 billion about three months back.

The exposure limit of banks for loans and advances to individuals against units of mutual funds were specified by RBI so far. Capital market loans extended by banks to Mutual Funds and issue of Irrevocable Payment Commitments (IPCs)(payment commitments made to stock exchanges on behalf of mutual funds and foreign institutional investors (FIIs).), now fall under the ambit of the RBI exposure limit. However, according to SEBI regulations, mutual funds can borrow to meet temporary liquidity needs for repurchase, redemption of units or payment of interest or dividend to unit holders. However, this borrowing is limited to 20% of the net asset of the scheme and for a duration not exceeding six months.

SEBI guidelines entail that entry and exit loads should not be charged for units given as bonus or against reinvested dividends.

Every investment made into a fund will compulsorily have to be accompanied by a valid PAN card from Jan 1, 2008. Mutual fund investors will have a single-point of dissemination of all financial documentation essential to fulfil the mandatory KYC norms as prescribed by SEBI. Mutual funds association AMFI, in collaboration with CDSL Ventures, a subsidiary of Central Depository Services (India), has developed a single centralised platform, to store proof of identity, proof of address, PAN card, and a photograph while investing Rs. 50,000 and above (to be phased down to zero in the second stage) in mutual funds schemes with effect from 1 February, 2008. A unique client id will be allotted and mapped to each client’s PAN. The relevant document and information have to be provided only once by the investor, after which a copy of KYC acknowledgement slip can be furnished for future investments. The back-up documentation has to be kept for a period of 10 years.

Several forward looking measures are in the draft stage and SEBI plans to finalise them after seeking expert and public opinion.

After a gap of six years, SEBI will be allowing domestic fund houses to short sell securities (the sale of securities that an investor does not own) as well as to avail stock lending and borrowing (SLB) facilities. There is a ban on naked short-selling- all short-sellers would be required to mandatorily honour their obligation of delivering the securities at the time of settlement.They can honour the trades by borrowing the securities through the proposed SLB scheme. No institutional investors will be allowed to do day trading. This virtually prohibits squaring off of their transactions intra-day. All shares that are in the futures and options (F&O) segment will be eligible for short-selling. SEBI has asked stock exchanges to establish systems to operationalise short-selling and SLB. The exchanges were also asked to ensure all appropriate trading and settlement practices as well as surveillance and risk containment measures, before their introduction.

Real Estate Investment Trusts (REITs), which would invest directly in real estate projects after collecting funds from investors through the stock exchanges, will soon enter the Indian markets with SEBI placing draft rules for such trusts. Banks, public financial institutions, insurance companies and corporate houses can be trustees of REITs, which should be created under the Indian Trusts Act. The trust and management companies are required to be registered with SEBI and they should have a net worth of not less than Rs 5 crore. REITs will be close-ended and the schemes will be compulsorily listed on stock exchanges. Before launching, the schemes should also be valued by a principal valuer empanelled with SEBI. REITs are exempted from making investments in vacant land and none of their schemes should have 15% of funds exposure to a single property project. The schemes should invest only in income generating real estate projects. In case of uncompleted units in a building or units which are in the course of substantial development, the contract value of such real estate must not exceed 20% of the NAV, which will be disclosed on a yearly-basis.The SEBI move comes amid plans by the country’s biggest real estate players, including DLF and Unitech, to raise nearly $5 billion from Singapore Stock Exchange through REITs early next year.

SEBI has drafted a proposal to fast track the launch of mutual fund products. Till now, AMCs had to go through a long process of filing the offer document (OD) and waiting for a go-ahead from SEBI. AMCs would now only have to directly file the final offer document with an additional due diligence certificate from the compliance committee and other basic requirements. Once SEBI confirms the receipt of the standard OD to the AMC (in writing), they would be free to launch the scheme. SEBI, however, retains the power to advise amendments to the offer document in the interest of the investors. To begin with, this process would be adopted for Fixed Maturity Plans (FMPs) and close-ended income schemes. The reason being that they constitute the bulk of new ODs that are filed with SEBI. Moreover, the asset allocations are standard and most of the AMCs have existing schemes.The standard OD would require elaborate instructions on the intended disclosures. According to SEBI, these disclosures would help prospective investors make an informed decision.The final offer document will be posted on the SEBI Web site, accompanied by due diligence certificate from the trustees and additional due diligence certificate from the compliance head and fund manager. The fast-track model is framed after examining the experiences of regulators in Australia, Malaysia, the US and the UK, and customising the framework available in these countries to suit Indian needs.

Action by global majors for a piece in the precious pie - the Indian Mutual fund space … Rigourous regulatory steps in the right direction …A happy combination indeed to enter The NEW YEAR!

Fund Fulcrum
(December 2007)

The net inflow into the mutual fund industry in 2007 has been Rs 11865 crores, almost a third of what it was in 2006 (Rs 33465 crores). 70% of the money came in from the existing mutual funds inspite of the fact that the number of NFOs increased from 39 to 48. The reason for this sparse flow can be attributed to the fact that in 2006, the markets had a secular rise whereas in 2007, as many as 3 corrections were seen coupled with the new norms like the amortisation of fund expenses and the regulations regarding pan card which applied brakes on the forward march. Besides, a lot of money has been diverted towards ULIPs and FMPs.

All CRISIL mutual fund indices ended November 2007 on a positive note. The mutual fund industry`s assets under management (AUM), however, fell to Rs 5.42 lakh crore in November, against an all-time high of Rs 5.60 lakh crore recorded in October 2007. Twenty-two of the total thirty-two fund houses registered a decrease in their AUM, with debt funds being the main culprit. The decline in AUM can be attributed to a combination of a tightening of liquidity for banks and corporate investors, equity market volatility, outflow on account of mega IPOs like Mundra Port and the festive season during the month where individual investors typically end up withdrawing money. Reliance Mutual Fund continued to be the largest fund house, with an AUM of Rs 77,764 crores, followed by ICICI Prudential Mutual fund with an AUM of Rs 54,903 crores, while UTI Mutual Fund was at the third place with an AUM of Rs 52,200 crores.

Piquant parade

On the pattern of the National Investment Fund, the Post and Telegraph wing of the Government under the Communication Ministry is entrusting Rs.9000 crores under Postal Life Insurance and Rs.1625 crores under Rural Postal Life Insurance to UTI and SBI, which will launch two new mutual fund schemes to manage them. Being a competitor to postal life insurance, LIC was not selected.

Mirae Asset, a Korean independent financial service provider, is foraying into the Indian mutual fund space with an investment of Rs.200 crores, having secured the license from SEBI to start mutual fund operations. The fund plans to introduce 6-8 equity products and 3-4 debt products over the next 18 months and operate in 23 cities. It has filed an offer document to launch MIRAE Asset Asia Pacific Opportunities Fund.

Realty major DLF is awaiting regulatory clearance for its 39% joint venture with Prudential Financial Inc.(US), the world's 14th largest institutional asset manager with an AUM of S$637bn. The two companies will jointly invest $50 million in the new company, DLF Pramerica Asset Managers Pvt Ltd., which is expected to start operations in the next financial year.

Eton Park, a leading global investor, proposes to acquire a 5% stake in Reliance Capital Asset Management Ltd. for Rs5.01bn. Eton Park currently manages over US$10bn through its offices in New York, London and Hong Kong. The proposed investment values Reliance Capital at approximately 13% of its AUM. Few months ago, Dutch asset management company, Robecco valued Canara Bank Mutual Fund at a whopping 12% of its AUM. The ruling rate was about 4 % a couple of years ago. This dramatically improves the situation for UTI Mutual Fund, which plans to go public early next year.

MPC Synergy, a joint venture between Germany's MPC Capital AG and Switzerland-based Synergy Asset Management SA, has earmarked around $200-300 million for setting up its mutual fund operations in India either through an acquisition or a joint venture by early 2008.

India Infoline Ltd. and Almondz, a Delhi based financial service provider have decided to seek Board approval for sponsoring of mutual fund and setting up of an Asset Management Company.

SBI Mutual Fund is now in talks with some banks in the Middle-East for tie-ups to sell its products. Reliance Mutual Fund has concluded a pact with New India Co-op Bank for distributing its products. UTI Mutual Fund has tied up with Standard Chartered bank and Citibank N.A. for distribution of its mutual fund schemes.

The acquisition of Standard Chartered's mutual fund business in India by the Swiss banking giant UBS has hit a roadblock. The Reserve Bank of India (RBI) has rejected the deal which was announced earlier this year, citing existing restrictions on transfer of shares in a non-banking finance company. India is the only country where StanChart has an AMC business. StanChart owns 74.99% in the AMC, while the bulk of the balance was with the Atul Choksey group of companies, which sold it to UBS. There were initially around 19 bidders for the AMC business. Aviva, which was one of the highest bidders, walked out of the race. StanChart may look for a new buyer for the AMC or retain the AMC, given the changing market dynamics.

To be continued…

Fund Fulcrum
(December 2007)

The net inflow into the mutual fund industry in 2007 has been Rs 11865 crores, almost a third of what it was in 2006 (Rs 33465 crores). 70% of the money came in from the existing mutual funds inspite of the fact that the number of NFOs increased from 39 to 48. The reason for this sparse flow can be attributed to the fact that in 2006, the markets had a secular rise whereas in 2007, as many as 3 corrections were seen coupled with the new norms like the amortisation of fund expenses and the regulations regarding pan card which applied brakes on the forward march. Besides, a lot of money has been diverted towards ULIPs and FMPs.

All CRISIL mutual fund indices ended November 2007 on a positive note. The mutual fund industry`s assets under management (AUM), however, fell to Rs 5.42 lakh crore in November, against an all-time high of Rs 5.60 lakh crore recorded in October 2007. Twenty-two of the total thirty-two fund houses registered a decrease in their AUM, with debt funds being the main culprit. The decline in AUM can be attributed to a combination of a tightening of liquidity for banks and corporate investors, equity market volatility, outflow on account of mega IPOs like Mundra Port and the festive season during the month where individual investors typically end up withdrawing money. Reliance Mutual Fund continued to be the largest fund house, with an AUM of Rs 77,764 crores, followed by ICICI Prudential Mutual fund with an AUM of Rs 54,903 crores, while UTI Mutual Fund was at the third place with an AUM of Rs 52,200 crores.

Piquant parade

On the pattern of the National Investment Fund, the Post and Telegraph wing of the Government under the Communication Ministry is entrusting Rs.9000 crores under Postal Life Insurance and Rs.1625 crores under Rural Postal Life Insurance to UTI and SBI, which will launch two new mutual fund schemes to manage them. Being a competitor to postal life insurance, LIC was not selected.

Mirae Asset, a Korean independent financial service provider, is foraying into the Indian mutual fund space with an investment of Rs.200 crores, having secured the license from SEBI to start mutual fund operations. The fund plans to introduce 6-8 equity products and 3-4 debt products over the next 18 months and operate in 23 cities. It has filed an offer document to launch MIRAE Asset Asia Pacific Opportunities Fund.

Realty major DLF is awaiting regulatory clearance for its 39% joint venture with Prudential Financial Inc.(US), the world's 14th largest institutional asset manager with an AUM of S$637bn. The two companies will jointly invest $50 million in the new company, DLF Pramerica Asset Managers Pvt Ltd., which is expected to start operations in the next financial year.

Eton Park, a leading global investor, proposes to acquire a 5% stake in Reliance Capital Asset Management Ltd. for Rs5.01bn. Eton Park currently manages over US$10bn through its offices in New York, London and Hong Kong. The proposed investment values Reliance Capital at approximately 13% of its AUM. Few months ago, Dutch asset management company, Robecco valued Canara Bank Mutual Fund at a whopping 12% of its AUM. The ruling rate was about 4 % a couple of years ago. This dramatically improves the situation for UTI Mutual Fund, which plans to go public early next year.

MPC Synergy, a joint venture between Germany's MPC Capital AG and Switzerland-based Synergy Asset Management SA, has earmarked around $200-300 million for setting up its mutual fund operations in India either through an acquisition or a joint venture by early 2008.

India Infoline Ltd. and Almondz, a Delhi based financial service provider have decided to seek Board approval for sponsoring of mutual fund and setting up of an Asset Management Company.

SBI Mutual Fund is now in talks with some banks in the Middle-East for tie-ups to sell its products. Reliance Mutual Fund has concluded a pact with New India Co-op Bank for distributing its products. UTI Mutual Fund has tied up with Standard Chartered bank and Citibank N.A. for distribution of its mutual fund schemes.

The acquisition of Standard Chartered's mutual fund business in India by the Swiss banking giant UBS has hit a roadblock. The Reserve Bank of India (RBI) has rejected the deal which was announced earlier this year, citing existing restrictions on transfer of shares in a non-banking finance company. India is the only country where StanChart has an AMC business. StanChart owns 74.99% in the AMC, while the bulk of the balance was with the Atul Choksey group of companies, which sold it to UBS. There were initially around 19 bidders for the AMC business. Aviva, which was one of the highest bidders, walked out of the race. StanChart may look for a new buyer for the AMC or retain the AMC, given the changing market dynamics.

To be continued…

NFO Nest

Raining Real Estate NFOs!

ING Global Real Estate Fund and ICICI Real Estate Securities Fund NFOs closed a couple of days ago, with the former investing in overseas real estate mutual fund schemes, Real Estate Investment Trusts (REITs) and Real Estate Operating Companies (REOCs), and the latter being a three-year close-ended fund that takes the debt route to investing in realty. This is a unique fund that provides investors with an avenue to earn higher yields, with contained risk. The only other fund focused on real estate is the JM HIFI Fund, an open end equity-oriented fund.

Inundating infrastructure NFOs…more than a third of the NFOs discussed this month are infrastructure funds, adding to the existing gamut of more than a dozen funds.

The following funds find their place in the NFO nest in December, 2007.

Franklin Asian Equity Fund Opens: 19 Nov , 2007 Closes:18 Dec , 2007

Franklin Asian Equity Fund is an open-ended fund which will invest in companies in the Asian region, excluding Japan. As per the stated asset allocation, the scheme will deploy at least 50 per cent of its assets in foreign equity while the domestic equity can go up to 40 per cent. Overall, equity and equity linked instruments would account for at least 70 per cent of the portfolio while up to 30 per cent may be invested in fixed income securities. This equity fund with less than 65% allocation to domestic shares will be deprived of the capital gains exemption for long-term gains, lower short-term capital gains tax and tax-free dividend.

JM Agri and Infra Fund Opens: 19 Nov, 2007 Closes: 18 De , 2007

JM Agri & Infra Fund is a close-ended equity-oriented scheme that will be converted into an open-ended fund after a specified period. It will invest predominantly in equity / equity related instruments of companies that focus on agriculture and infrastructure development of India.

DBS Chola Small Cap Fund Opens: 20 Nov , 2007 Closes: Dec 20 , 2007

The DBS Chola Small Cap Fund is a three-year close-ended fund that would automatically be converted into an open-ended fund at the end of the said period. It proposes to invest at least 65 per cent of the fund proceeds in equity and equity related securities of small companies and upto 35 per cent may be invested in debt and money market instruments. Here, small cap companies are defined as those whose market capitalisation falls between the highest and the lowest constituent of the BSE Small Cap Index. Lot of proven mid caps are available in the market. Pure small cap oriented funds are very few ( DSPML Small Companies Fund and Sundaram BNP Paribas Select Small Cap).

Kotak Indo World Infrastructure Fund Opens: 27 Nov , 2007 Closes: 22 Dec, 2007

Kotak Indo World Infrastructure Fund seeks to generate long-term capital appreciation by investing in stocks of domestic as well as global infrastructure companies. This fund would automatically be converted into an open ended fund after the expiry of three years.The fund proposes to invest at least 65 per cent of the fund proceeds into Indian equities. It has an option of investing between 10-35 per cent in overseas infrastructure fund and upto 35 per cent may be invested in debt and money market instruments.The fund has short-listed a global infrastructure fund of T. Rowe Price (to be launched soon) as the vehicle to invest in overseas markets. This offering taps the growth potential of global infrastructure related companies and helps spread the sharp downside risk, which can be particularly useful when Indian infrastructure stocks go out of favour domestically in a market downturn.

Birla Sunlife Special Situations Fund Opens Dec 17: , 2007 Closes: Jan 15 , 2007

Birla Sun Life Special Situations Fund will invest about 80% in equity and the rest in debt. Among equity, the fund would invest in mergers and acquisitions, PE deals, open offers, delisting and buy backs. Fidelity Fund Management runs a similar fund in India which has risen about 48 percent in the last one year and has ICICI Bank and State Bank of India as its top two holdings.

Standard Chartered Small and Mid-cap Equity Fund, Sahara Fortune Child Fund, Tata Growing Economies Infrastructure Fund, Sahara Power Fund, ABN AMRO China Equity Fund, Principal Global Real Estate Equity Fund and Mirae Asset India Opportunities Fund are expected to be launched in the coming months.

Gem Gaze

Dashing Debt Dynamites!

Optimal debt fund management is about generating superior returns with minimal incremental risk. These debt dynamites have been dashing enough to take advantage of opportunity in the midst of volatility, while at the same time, lending stability to your portfolio.

Principal Income Fund

A disciplined approach to credit and interest rate risk makes this the most effective fund in this category. The superior performance in the past seven years is a result of dynamic asset allocation and relative valuation trades. Being quality-conscious, the fund confines itself to AAA-rated corporate bonds and gilts. Its dynamic asset allocation strategy has seen government securities move from 55.6 per cent of the portfolio, when yields were near an all-time low, to 13.3 per cent when bond prices corrected. Within its government securities portfolio too, the fund has been tactful to move between value and momentum stocks depending on the state of the market. The fund has exhibited its vitality by adjusting its average maturity to changes in the market and tiding over sudden swings in assets, unscathed. Slighty high expense ratio is the price the fund has had to pay for this dynamism but superior returns more than make up for this.

Birla Sunlife Income Fund

Birla Sunlife Income fund, formerly known as Alliance Income Fund, has been in existence since March, 1997. Safety and quality are on top of the agenda with a major portion of the portfolio invested in treasury bills (45.79%), AAA-rated corporate bonds (22.94%) and securitized instruments (10.5%). Over the past decade, the fund has put up a sterling performance with a CAGR of almost 10% since inception.

Kotak Bond Regular

Kotak Bond Regular has generated consistent returns since its inception in November 1999, yielding 9.72 per cent per year with a very low expense ratio of 0.89 per cent. The portfolio consists predominantly of quality rated corporate papers (30.52 per cent in non convertible debentures and 9.83 per cent in commercial papers). The fund has parked 31.63 per cent of its net assets in dated gilts, with an average maturity of 8.38 years. On the other side of the spectrum, instruments such as securitised debt are used to increase the average yield of the portfolio. Risk management is accorded top priority and the emphasis on a high yield portfolio has helped keep the fund’s volatility under control.

LIC Bond Fund

LIC Bond Fund has been one of the most consistent performers, thanks to its high exposure of 87.4% to corporate bonds. Importantly, within the fund’s huge corporate bond portfolio, there is a 24.3 per cent holding in AA- and AA+ bonds, higher than its peers. Inspite of its high holding of low-rated paper relative to its peers, its corporate bond portfolio tilted in favour of AAA-rated papers, has helped it achieve stable returns over the past five years. The cut in its average maturity profile from about six years at the end of 2003 to just 1.3 years and the reduction in the exposure to g-secs was done to hedge against rising yields.

UTI Bond Fund

UTI bond Fund, with relatively low volatility and stable returns, is ideal if you have a medium term investing horizon. This is due to conservative positioning with a relatively lower average maturity of its portfolio, a higher weightage of corporate bonds and a portfolio of g-secs, which are of medium-term duration. 61.7 per cent of its holding is in AAA rated bonds, which give strong accruals, and only 10.7 per cent is in g-secs. The fund has seen a slow but sure growth in NAV. UTI Bond has the largest asset base of Rs 388.98 crore among its peers and a low expense ratio of 1.4. During periods of increased volatility, this helps boost the fund's returns.

Debt funds were on a roll till early 2003, when interest rates bottomed out with a steep slide from 14 % to 7 %. This turned the table in favour of administered return schemes such as POMIS, NSC and RBI bonds and saw a drastic reduction in the size of debt funds. Now with the slowing down of the US economy, falling inflation and softening interest rates, the debt dynamites are back with a bang! Get ready for the balancing act…interesting times indeed.

FUND FLAVOUR

Debt Funds

The prodigal son …

“The debt fund I invested in returned only 5% last year. I would be better off (earning nearly double that amount) investing in the fixed deposit of my bank.” So went the common investor refrain... With an average 3-year return of 4.7 per cent, these funds had little to offer investors who were seeing their equity fund portfolios returning 48 per cent in the same period. Bank Fixed Deposits (FD) and Post Office Monthly Investment Schemes (POMIS) had supplanted debt funds. But all this is passe. Debt funds are making a comeback. With interest rates expected to soften in the long term, debt funds are radiating their new-found brilliance.

Time to delve deep into Debt Funds

Fixed Income/ Income/ Debt Funds are funds that invest in short, medium and long-term debt instruments issued by private companies, banks, financial institutions, governments and other entities belonging to various sectors. The debt instruments are obligations on the part of the issuer to pay the principal and interest thereon as per an agreed time schedule. Debt funds are funds that seek to generate fixed current income (and not capital appreciation). So, debt funds distribute a large fraction of their surplus to you. Fixed Income Funds can be further classified into:

Bond Funds

Bond Funds generally invest in bonds with good rating issued by reputed banks, companies and public infrastructure development bodies having fixed maturity and interest rate. Though the focus is on regular income, the capital value of the investments, traded in the open market for the same maturity, may also fluctuate depending on changes in prevailing interest rates. Another investment avenue for funds investing in corporate debt is securitisation transactions. Securitisation involves conversion of a pool of financial assets into a structured financial instrument which can be sold to a buyer and subsequently traded.

Gilt Funds

Gilt Funds invest in gilts which are debt securities, like dated securities and treasury bills, issued by the government. They are called gilts because government security documents used to be issued with their edges coated in gold to emphasise highest security. The values of gilts also fluctuate depending on the varying maturities, prevailing interest rates and the demand for such securities from large institutional investors like banks.

Money Market / Liquid Funds

Money Market Funds invest in the money market - the market for very short term borrowings mostly by banks and other financial institutions to meet immediate requirements. The maturity of such borrowings can be as short as one day. Interest rates will depend on the overall liquidity position in the financial system - high when sufficient funds are not available in the market and vice versa. Money market transactions are highly secure as the borrowers are the best banks and financial institutions. Retail investors cannot participate in money market transactions as the value of individual transactions is very high. Money Market Funds offer an opportunity for retail investors to participate in this relatively more secure and highly liquid market for short term funds.

Diversified Fixed Income Funds invest in all kinds of debt securities like bonds, gilts, money market instruments, etc. They keep their investment options wide and have the flexibility to move from one type of assets to another.

The risk – return trade off

The returns from a debt fund are essentially the weighted average of the returns on each of its investment, weighted by the proportion of invested sum. Returns are determined by the quality of papers and average duration of the portfolio. However, the prices and yields of debt instruments can fluctuate like other investments and so there is some risk inherent even in debt funds and they are not absolutely risk-free as they are often made out to be. Although debt securities are generally less risky than equities, they are subject to interest rate risk, credit risk (risk of default) and delay risk by the issuer at the time of interest or principal payment. To minimize the risk of default, debt funds usually invest in securities from issuers who are rated by credit rating agencies and are considered to be of "Investment Grade". The greater the risk of a debt fund, the higher the potential return.

Dotting on Debt Funds

Investment in debt should necessarily form a part of your portfolio, more so in the case of people on the verge of retirement or those with moderate risk appetite. Debt Funds offer the much needed diversification to a portfolio, thereby, aiding rebalancing and lending good risk-adjusted returns. Debt funds are primed to give good returns along with lower volatility, liquidity, convenience and tax efficiency. Debt Funds have to pay a dividend distribution tax of 15 per cent but dividends from debt funds are exempt from tax. and long-term capital gains from debt funds are taxed at 10 per cent or 20% after reducing the rate of inflation (indexation benefit).

Welcome with moderation and not a banquet!

While there is no doubt about the bond market’s resurgence, you should wait for an easing trend in interest rates backed by a sustained fall in inflation, before committing funds. The bond markets may see some uncertainty in the short term, before they stabilise and rally. Hence, depending on your ability to stomach uncertainty, you can wait for more clarity on interest rates before entering debt funds, or enter them in tranches over the next couple of months.

Fund Fulcrum

(November 2007)

The total AUM of the 32 mutual fund houses in India stands at Rs 5,56,700 crore on 31 October 2007, with Reliance Mutual Fund leading the pack with the highest AUM of Rs 79,973 crore followed by ICICI Prudential Mutual Fund whose asset base swelled by 11 per cent to Rs 56,212 crore, according to data from AMFI. The growth rate of 17% in October is the third highest in the current year with the highest rate being recorded in the month of July. The latest increase is, however, on an expanded asset base. The augmenting AUM can be attributed to the surge in the stock market, large corpus raised by new fund offerings, lower redemptions and availability of liquidity in the banking industry, which saw short-term fund flows into liquid schemes. Investors, who withdrew money from equity schemes fearing a sharp correction when the benchmark indices were scaling new highs, typically reinvested these funds into liquid and liquid-plus plans.

Piquant parade

UTI Mutual Fund plans to come out with an IPO in February. All the four sponsors -- State Bank of India, Punjab National Bank, Bank of Baroda and Life Insurance Corporation - holding 25% each in the UTI Mutual Fund have already agreed to divest 49% stake. 20% would go to strategic partners through private placement which would help UTI expand its core businesses. No single investor will get more than 5% through the pre-IPO placement. Besides, the fund house would divest 29% of its stake through offer for sale for which Draft Red Herring Prospectus would be filed with the regulator by December, 2007.

UTI Mutual Fund is in talks with Société Générale Asset Management (SGAM) of France for managing its funds globally.The tie-up is a part of UTI’s plans to increase its global business to $1 billion by the end of 2007. SGAM, a dominant player in the global mutual fund arena with presence in over 20 countries in Europe, United States and Asia, is already managing SBI Mutual Fund’s products after it entered into an agreement nearly a year ago.

UTI Mutual Fund is planning to launch a special customized fund scheme for the public sector units (PSUs). The decision to launch a new product is in line with a recent circular from SEBI that allows 12 Navaratna and 54 mini-Navaratna PSUs to invest upto 30% of their investible surplus in the equity funds of the public sector mutual funds. Prior to this circular, the PSUs were only allowed to invest in liquid and debt schemes of UTI.

In the first of its kind among property consultants, the UK-headquartered Knight Frank Group will launch a $250 million India-focused real estate fund. The offshore fund will raise investments from high net worth individuals and other investors from the UK and will have an investment threshold of $0.5 million and above.

ICICI Prudential AMC has tied up with New India Co-operative Bank and Central Bank of India for distribution of its mutual fund schemes. Reliance Mutual Fund has entered into an agreement with the United Bank of India and State Bank of Saurashtra for distribution of its products. Doha Bank has signed an agreement with Kotak Mahindra Asset Management Company for the distribution of the latter’s mutual fund products in Qatar. Earlier Doha Bank had signed up with UTI Mutual Fund, Reliance Mutual Fund, Birla Sun Life Mutual Fund and Sundaram BNP Paribas Mutual Fund to offer a variety of mutual fund products.

Geojit Financial Services has launched an online trading platform for mutual funds.

Leading mutual fund research firm, Lipper, announced the launch of a rating system to help investors and their advisors to select right schemes to meet their investment goals. Lipper, a subsidiary of Reuters, provides information on mutual funds, retirement funds, hedge funds, fund fees and expenses to the asset management and media by covering 80,000 funds in 66 domiciles. The rating system is based on a numeric scale arranged in ascending order where '1' represents the lowest-scored funds (bottom 20 per cent) and '5' represents the highest-scored funds (top 20 per cent). In India, the Lipper Leader Rating System will judge funds based on three parameters - total return, consistent return and preservation.

Regulatory Rigmarole

SEBI reduced the expenses charged by Index Funds and ETFs. The total expenses shall not exceed one and one half percent (1.5%) of the weekly average net assets out of which investment and advisory fees shall not exceed three fourths of one percent (0.75%) of the weekly average net assets.

SEBI relaxed the duration of short-term investments by mutual funds in bank deposits to 182 days from the earlier limit of 91 days. This will give greater flexibility for mutual funds to choose the deposit option to park their money in and get slightly higher yields without any material impact on duration.

Enabling provisions have been made for a mutual fund to engage in short selling of securities as well as lending and borrowing of securities. However, these amendments will take effect on a later date to be notified by SEBI, which will be after the new framework for short selling of securities and securities lending and borrowing is put into place.

Currently, 50 per cent of the shares in an IPO is reserved for Qualified Institutional Buyers (QIBs). Of this portion, 5 per cent is reserved for mutual funds. Others competing for their share in this category include FIIs, banks and insurance companies. Allotments in IPOs happen on a pro-rata basis. This means that if there are about 100 FIIs and just about 15-20 mutual funds applying for the IPO, FIIs get a higher allotment compared to mutual funds.The quota for mutual funds in public offers of equity shares is proposed to be hiked in order to promote retail investments in share markets.

Proposals for introduction of Real Estate Investment Trusts (REITs) in India, guidelines for real estate mutual funds, and regulations for trading in securitised debt instruments are on the agenda of the capital markets regulator SEBI for the near-term.

These forward-looking strategic arrangements and the impending changes in the mutual fund regulatory environment bode well for the mutual fund industry.

NFO Nest

The NFO bandwagon is slowing down, thanks to the see-sawing sensex and the painful PAN. Though the number of NFOs are on the rise, the magnitude of money mobilised is on the decline.

The following funds find their place in the NFO nest in November, 2007.

SBI Capital Protection Oriented Fund Opens: 15Oct , 2007 Closes: 23 Nov, 2007

A five year close-ended capital protection oriented fund, the scheme aims at protecting the capital invested in debt and money market instruments as well as equity while at the same time also seeking to provide investors with opportunities for long-term growth in capital. The schemes’ portfolio structure has been rated AAA by CRISIL. The rating given by CRISIL will be reviewed on a quarterly basis.The scheme aims at investing 73% to 100% in debt securities and money market instruments, 0% to 20% in securitized debt and 0% to 27% in equity and equity related instruments including derivatives.This fund will be benchmarked to CRISIL MIP Blended Index.

Lotus India Agile Fund Opens: 25Oct , 2007 Closes: 23 Nov, 2007

Lotus India AMC, a joint venture between Fullerton Fund Management Group and Sabre Capital Worldwide, has launched India’s first Quant based Mutual Fund Scheme Lotus India AGILE Fund (Alpha Generated from Industry Leaders Fund). Quant funds operate on the basis of computer generated mathematical models designed by the Fund Management Team. The primary objective of this fund is to generate capital appreciation by investing in a passive portfolio of stocks selected from the industry leaders. The portfolio of the scheme will consist of stocks which satisfy the following conditions.

• The market capitalisation of the stock chosen should not be less than the market capitalisation of the last stock of S&P CNX Nifty.
• The floating stock of the company should not be less than the least floating stock of S&P CNX Nifty.
• The stock should have a price history of at least 1 year before the date of investment.
• The industry represented by the stock should be present in the composition of S&P CNX Nifty.

Of all the stocks that meet the above criteria, only the top 11 will be selected for investment. Thereafter, 9 per cent of the total corpus will be invested in each of these stocks and the remaining 1 per cent will be invested in debt and money market instruments.This fund will redefine the product suite available in the market and will provide investors a model based alternative to the existing value and growth based investing philosophies.

JPMorgan Smaller Cos Fund Opens:Nov 9 , 2007 Closes:Nov 30, 2007

The second equity fund from the JP Morgan stable, JPMorgan India Smaller Companies Fund is an open-ended equity growth scheme that aims to generate long-term capital appreciation from a portfolio that devotes 65 to 100% to smaller companies. The scheme can also invest in derivatives traded on the futures and options segment of Indian stock exchanges not exceeding 50 per cent of the net assets of the scheme, offshore securities, ADRs and GDRs and up to 35 per cent in debt and money market instruments. The benchmark index for the scheme is CNX-Midcap.

Sundaram BNP Paribas Energy Sector Fund Opens:Nov 12, 2007Closes:Dec 11, 2007

A three-year close-ended equity fund with an automatic conversion into an open-ended scheme on expiry of three years, the fund seeks long-term capital appreciation by investing in equity and equity-related instruments of companies in the domestic energy sector. The fund managers will seek to invest more than 65 per cent of net assets in equity shares of the targeted theme, up to 35 per cent of its net assets in instruments outside the theme, and up to 15 per cent in treasury bills, Collateralised Borrowing and Lending Obligation (CBLO) and reverse repo.

UTI-Infrastructure Advantage Fund Opens:12 Nov,2007Closes:19 Dec, 2007

A three year close-ended equity scheme, this scheme aims to provide income distribution for medium to long term capital by investing 65 -100 per cent in equity and equity related instruments of companies engaged either directly or indirectly in the infrastructure sector and up to 35 per cent in debt and money market instruments including securitised debt.The benchmark index for the scheme is BSE-100.

ICICI Prudential Real-estate Securities Fund Opens:Nov 15,2007 Closes:Dec 14,2007

A three-year close-ended debt fund, the fund will invest in real estate and related sectors such as cement, construction, metals, hotels, retail, banks and finance companies etc. to gain from the real-estate boom in India. This is a hybrid fund that will predominantly invest 51 per cent in high-yielding debt securities, while investing up to 49 per cent in equity.

Sundaram BNP Paribas Global Advantage Fund, Sahara Retail and Entertainment Fund, Taurus Parsoli Ethical Fund, Quantum Gold Fund, SBI Emerging International Opportunities Fund, ING Optimix Emerging Markets Fund, ING Global Real Estate Fund, ICICI Prudential Retirement Fund Series, LIC Infrastructure Fund, Franklin Asia Equity Fund, SBI Gold ETF and SBI Tax Advantage Fund are expected to be launched in the coming months.

Gem Gaze

Towering Tax Tycoons!

Tax savers have finally risen from their slumber! The hitherto microscopic corpus of the ELSS schemes, which are exclusive preserves of individual investors, have started burgeoning in the recent past and these towering tax tycoons have been the target of the tax conscious investing public in view of the scintillating performance turned out by them. Funds that have an impeccable five-year record (the sole exception being one-year old Fidelity Tax Saver) and have also managed to beat the broad market (S&P 500 index) would be the right choice for your portfolio.

Magnum Taxgain

Magnum Taxgain’s performance has propelled it into the number one slot in the ELSS category since 2004. This fund had a miserable past but has steered clear of it. Magnum Taxgain has also changed several fund managers since November 2005, but this has not affected its excellent performance. It is the largest ELSS fund with an asset size of Rs.1664 crore. In the recent past, the fund has kept its mid- and small-cap allocation in check and is now at 57.59 per cent. The fund fared quite well in the current market crash and not much of the portfolio has been revamped over the past few months.

HDFC Taxsaver

An excellent performer, this fund has performed well during good times and displayed resilience during the bad times too. The fund has a limited corpus of 31 to 35 stocks. At one time, exposure to large-caps was huge and it dropped dramatically in 2004. Since then it has risen and it hovers in the 55 per cent range. It has 33 and 13 percent respectively in the mid-cap and small-cap segments. It is most heavily invested in the auto sector with 18.29% in auto stocks. Dancing to the tunes of the sectoral performances, it has re-entered the financial services sector which it exited sometime back while exposure to the automobile sector has declined.

Birla Equity Plan

Birla Equity Plan has come a long way since inception to emerge as a category beating fund. It has displayed an uncanny ability to sense an opportunity at the right time. Barring 2004, the fund has had a good run since 2002. The ability to identify trends, make swift moves and go against the herd has paid off. Good stock picks have in fact become the USP of the fund. For instance picks such as Automobile Corporation of Goa have delivered significant returns for the fund at a time when the auto sector has been in the grip of bears. In fact, the fund has maintained its position in the automobile sector at a high of 13 per cent through the bear phase while the average category exposure to the sector has hovered around 7 per cent. In spite of such a churn, the volatility in returns is below average. The fund manager prefers to hold a small portfolio of around 35 stocks in which he invests with conviction. Moreover each of these holdings accounts for over 1 per cent of the portfolio. This in turn means that each stock has a significant impact on the fund's returns. The mid- and small-cap allocation is high at 64.64 per cent. Another refreshing difference in the portfolio is the lower than average allocation to the technology sector. Those of you who have a tech heavy portfolio and are looking for a tax-planning fund to balance such a discrepancy can definitely look at Birla Equity Plan.

Fidelity Tax Advantage

The fund, positioned as one with a ‘go anywhere’ approach, has no market cap bias, no sector bias and no trend bias. At the same time the fund also aims to be well-diversified for greater risk control.The results delivered thus far look encouraging. The fund has managed to keep up with its peers in every quarter since its inception in January 2006. If the true test for a fund lies in its performance in a falling market, then Fidelity Tax Advantage has passed with flying colours. This achievement has been owing to the fund’s preference for large cap companies coupled with its diversified portfolio inspite of it being a new entrant. Perhaps the only departure from the category norm is the fund’s 10.88 per cent exposure to the healthcare segment. If Fidelity Tax Advantage manages to keep up its impressive fund management, it will emerge as one of the star performers in the ELSS space.

Selecting a good tax saving fund at the beginning of the financial year and using the systematic investment route to spread out your exposures in these funds over several months is the best course of action to follow. Tax saving funds being equity-oriented funds, and fairly aggressive at that, SIP investments may be the best way to ride out the volatility that is an inherent part of their returns.

FUND FLAVOUR

Equity Linked Savings Scheme

Versatility is the name of the game (scheme)!

100 per cent tax deduction, high returns, no lock-in period and full safety – looks like a Utopian dream. But the equity-linked savings scheme (ELSS) comes closer to achieving this Utopian dream. It offers 100 per cent tax deduction up to Rs 1,00,000 per year, it delivers returns higher than traditional investment avenues, it has a moderate lock-in period of three years and though equity and risk go hand in hand with each other, history has shown that most ELSS schemes have been safe and investors have rarely lost their money.

What is this versatile ELSS all about? ELSS was introduced to promote investments in equity markets by giving tax concessions to the investors. As the name lucidly suggests, it is a savings scheme that is linked to equity. It invests in stocks of various companies in different sectors. It is mostly open-ended in the sense that you can buy and sell units from the mutual fund anytime you desire (there are a few exceptions like TATA Tax Advantage – 1, which is close-ended).

So, is it just another diversified equity fund? In many ways, yes… but the difference lies in the tax benefit. These funds give a tax benefit of upto Rs. 1 lakh under Section 80C of the Income Tax Act. But, to get this benefit, your investment is locked-in with the fund for at least three years and the fund has to invest at least 80% of its corpus in equity.

Titans of tax saving

In case of a debt-oriented mutual fund scheme, short-term capital gains are taxed at the normal slab rates applicable to the individual. But long-term capital gains are taxed at the lower of 10% (without the benefit of indexation) or 20% (with the benefit of indexation). (Indexation is a factor used to adjust the impact of inflation to the cost of acquisition of mutual fund units).Equity-oriented scheme provides an added advantage, both in case of short as well as long-term capital gains. While the short-term gains are taxed at the moderate rate of 10%, irrespective of the income tax slab to which the individual belongs, long-term gains are exempt from tax. ELSS has an additional feather tugged to its cap! While the exit is tax free — since it carries a lock-in period of three years, rendering it as a long-term investment instrument — the initial investment is also eligible for deduction under the Rs 1-lakh threshold of Section 80C. ELSS schemes give twice the benefit as compared with diversified equity schemes. They give you tax sops on investments and are also exempt from long term capital gains tax.

Monarch in the money game

You are in the money game. At the end of the day, you want to know what you are getting in return for your investment. Over the years, the average return from tax-saving funds on the whole has far outweighed any fixed-income return. The average annual return over the past five years has varied from 16% to 108%. Compare this to the National Savings Certificate (NSC), which gives you an interest rate of 8%, and the Public Provident Fund (PPF) which gives you 8.5%. Besides having the potential to deliver the most lucrative returns, the lock-in period of three years is considerably less when compared with other tax-saving avenues like PPF (15 years) and NSC (6 years). Since tax-planning funds have a three-year lock-in period, it gives greater room to fund managers in making flexible investment decisions and taking massive sectoral bets. Consequently, majority of these funds are relatively more volatile than their equity diversified peers. But this should not be a cause for concern as over the long-term the returns get smoothened. Moreover, they are not required to hold huge cash, as they are usually not susceptible to a huge redemption. They provide decent scope for capital appreciation with added advantage of tax-free dividends. Though they do not provide an assured return, when reviewed over a long term horizon, they tend to give superior returns.

ELSS gives you the option of saving tax while participating in the growth of the capital market. ELSS are evergreen funds and are ideal for:

• Small investors as it is a simple way of investing in the stock market.
• Investors who may not have a lump sum to invest in order to save tax. Open-ended ELSS allows them to invest at various points depending on the availability of funds, as well as take advantage of cost averaging.

Constant tracking is passe. Daily statistics will tell you nothing. Consider investing in ELSS through a systematic investment plan so that you can fully exploit the potential of such funds. Tax planning should never be left till the end of the financial year - it should be an ongoing process. If you commit your money at one go, you will be at the mercy of the market. But by distributing it over the months, you minimise your risk. Develop an early tax planning strategy within the broad framework of your financial plan and take advantage of this versatile scheme.

Fund Fulcrum (contd.)
(October 2007)

Piquant parade (contd.)

US-based financial major, Goldman Sachs, is to establish an asset management company in India, with an initial investment of $ 50 million. Of the proposed $50 million, $7.5 million will be invested upfront and the remaining $42.5 million will be invested in the next 2 years.

Union Bank is planning to enter the mutual fund industry accompanied by a foreign company as its partner by the end of this fiscal.

Regulatory Rigmarole

The Securities and Exchange Board of India is looking at reducing the fees of all mutual fund schemes — equity funds (open- and close-ended), debt funds, index funds and even funds of funds. The first step in this exercise was Sebi’s proposal in August to scrap the entry-load payment on open-ended schemes that are bought through online applications or directly through asset management company collection centres instead of distributors.

This proposal by SEBI has faced opposition from the Financial Planning Standards Board (FPSB) India, a Mumbai-based professional standards-setting body for financial planners. As a first option, the Board has recommended that the rebating system should be reinstated for mutual fund distributors, but the discount given to investors should be properly documented. Under the rebating system, which was eliminated by Sebi in June 2002, distributors can give a certain percentage of discount to customers out of their commission income. The second option is a 'variable entry load' model at investor level under which a client and distributor can negotiate entry load on a transaction-to-transaction basis, based on the perceived value of advice. As per the present guidelines, variable loads are allowed at a scheme level. The proposed model, which is similar to the structure prevalent in the stock-broking industry, allows distributors to add value to its services to clients, without impacting the NAV. Currently, an investor hands over an amount to a distributor who gives it to the fund house. The fund house deducts the entry load from the amount and gives it to the distributor, who unofficially parts with a small portion of this money to the investor, thereby, denying the investor the entire benefits of the investment. In the proposed variable fee-based structure, the client pays the distributor a certain fee for the advice, over and above the investment amount. A third option suggested is a two-track system for charging loads marked by two options. One, a zero-entry load option carrying a higher exit load or, two, an entry load with no exit load.This will enable fund houses to retain an investor for a longer period of time.

In a bid to bring transparency in the manner in which mutual Funds charge expenses to closed-ended schemes, Sebi is likely to prohibit close-ended Mutual Funds from charging up to 6% of the corpus as initial offer expenses, which is then amortised over a period of time. Amortisation allows AMCs to show a higher NAV in close-ended schemes. For example, if you buy 100 units of Rs 10 each of a new close-ended fund, the fund house charges 6% as initial expenses, which means that the NAV should be Rs 9.40, but it is still shown as Rs 10 initially. The Rs 6 charged to the scheme is amortised over a period. In April 2006, Sebi had recast regulations relating to initial issue expenses and banned only open-ended schemes from charging 6% initial issue expenses. The open-ended schemes had to meet sales, marketing and other expenses through entry load (not allowed in the case of close-ended schemes), which is usually about 2.25%, and not initial issue expenses. The difference in treatment of expenses between open and close-ended schemes has made the latter attractive for fund houses.

The RBI has hiked the overall limit for overseas investments by mutual funds from $4 billion to $5 billion. The cap on overseas investments by individual mutual fund houses has been raised to $300 million from the earlier limit of $200 million or 8-10 per cent of the total assets under management, whichever was lower. In addition, the existing facility of investing up to $1 billon in overseas Exchange Traded Funds, as may be permitted by SEBI by a limited number of qualified Indian mutual funds would continue. This is subject to a maximum of $ 50 million per mutual fund. The requirement of 10 years of experience of investing in foreign securities for being eligible to invest in overseas Exchange Traded Funds (ETFs) has been dispensed with. Moreover, Indian mutual funds are now allowed to invest in a new basket of instruments overseas that include ADRs/GDRs issued by foreign companies, initial and follow-on public offerings, foreign debt securities in the countries with fully convertible currencies, which have a rating not below investment grade, and also money market instruments that are rated not below investment grade. Mutual fund can also invest in government securities of countries, which are rated not below investment grade. Other instruments include derivatives traded on recognised stock exchanges overseas only for hedging and portfolio balancing with underlying securities, short-term deposits with banks overseas where the issuer is rated not below investment grade, units/securities issued by overseas mutual funds registered with overseas regulators and investing in approved securities of Real Estate Investment Trusts listed in recognised stock exchanges overseas or unlisted overseas securities which are less than 10 per cent of their net assets.

Since mid-September, the pace of FII money in the form of Promissory Notes (PNs) flowing into the Indian bourses has been unprecedented leading to a bubble-like growth in stock prices and a steroid effect on the Indian Rupee. With FIIs dealing with PNs having been asked to register themselves with SEBI, the veil of threat shrouding the identity of those investing in the Indian stock markets have been done away with. The markets have since stabilized and the positive outlook is inviting many foreign funds to seek greener pastures in India.

Fund Fulcrum

India may have recently entered the elite club of trillion dollar economies, and companies here may have metamorphosed from frogs in the well to global predators, but at $88-billion worth of assets under management as against $21.8 trillion worldwide, India's mutual fund industry ranks a measely 24th in the world. This is not to say that the funds industry in India, a miniscule contributor to the world total, is not growing in terms of size and potential. It sure is, a fact reflected in the latest AUM (assets under management) tally released by the Association of Mutual Funds in India.

The mutual fund industry closed September 2007 with Rs 4.77 lakh crore of AUM, an increase of 2.15% compared with August 2007. Assets under management by mutual funds have remained flat for September, despite the BSE Sensex rising by around 13% during the month. The September pattern is cyclical in nature as it is nearing the half-year corporate results season when banks redeem their funds. Moreover, companies have to go in for advance tax as the half-year ends. Reliance Mutual Fund continued its run as the largest fund house with Rs 70440.57 crore of AUM in September 2007 followed by ICICI Prudential Mutual Fund at Rs 50369.93 crore. Occupying the third and fourth slots, the AUM of UTI Mutual Fund and HDFC Mutual Fund were Rs 45002.62 crore and Rs 41333.4 crore, respectively.

Piquant parade

The trickle of private equity money into the country’s infrastructure sector is now turning into a deluge, with a slew of billion-dollar funds dedicated to core sector financing on the anvil. Australia’s Macquarie Bank Group and the International Finance Corporation are slated to jointly launch a $1-billion ‘Macquarie India Infrastructure Opportunities Fund’, while Power Finance Corporation’s $1-billion ‘India Power Fund’ and the UK-based 3i Plc’s $1-billion ‘3i India Infrastructure Fund’ are among the dedicated core sector funds on the horizon.

Mirae Asset Global Investments (India) is being set up as a 100% Foreign AMC of Mirae Asset, one of South Korea’s largest mutual fund managers, and would be investing $50 million in India over a three-year period to set up its Indian arm for asset management.

About five years after it ended operations in India, Pioneer Investments has tied up with Bank of Baroda for asset management. The group, which has presence in 25 countries, will take 51 per cent in Bank of Baroda’s existing asset management company. Pioneer’s domain knowledge and technical expertise makes an enriching combination with the widespread branch network of the bank. The bank would continue to sell products of other asset management companies through its branches.

Corporation Bank has announced a strategic partnership for distribution of Birla Sun Life’s Mutual Fund products and Bank of Baroda for Franklin Templeton and Sundaram BNP Paribas Mutual Fund products.

South Africa’s largest insurer Old Mutual, which manages £263 billion in assets worldwide, will soon enter into a tie-up with Kotak Mahindra Mutual Fund.

India's second largest private sector lender Housing Development Finance Corporation (HDFC) has acquired an additional 10 per cent stake in HDFC Asset Management Company from Standard Life Investments Ltd - the investment arm of the UK-based Standard Life Plc taking its holding to 60%.

Rana Talwar’s Sabre Capital, backed by private equity giant Temasek, is in talks with Cholamandalam DBS Finance to take over the latter’s mutual fund company — DBS Cholamandalam Asset Management. A few other strategic investors are also believed to be in the fray. The fund’s AUM had dropped from over Rs 5,000 crore in July 2007 to around Rs 3,829 crore in September. If Sabre and Temasek succeed in the acquisition, they will merge the AMC with Lotus.

Reliance Mutual Fund concluded a pact with the world`s third largest risk management service provider - MSCI Barra, to offer services across all its funds.This alliance will help Reliance Mutual Fund to access MSCI emerging markets module that includes MSCI India Index, the common benchmark used by non-Indian investors looking to allocate money to Indian equity investments.

SBI and UTI Mutual Fund have bagged the lion's share of the pension-fund kitty. They, alongwith LIC, have been named fund managers for the new pension system and the National Investment Fund. Of the Rs 1,000 crore under the National Investment Fund, UTI MF will manage 60%, SBI 30% and LIC 10%. On the other hand, of the Rs 2,000 crore under the new pension scheme, SBI will manage 55% , UTI MF 40% and LIC 5%.

Post-rebranding, Axis Bank (formerly UTI Bank) is now getting ready to enter the mutual fund and trusteeship business. The third-largest private bank had earlier looked at the option of taking over UTI asset management company.

UTI AMC expects an increased focus on retail investors to help it regain the top slot in the industry. The fund house, which plans an initial public offering by March next year, manages more than 8.5 million accounts worth about 450 billion rupees in assets.

To be continued…

NFO Nest

The first eight months of 2007 (January to August) saw a total of 54 NFOs, a majority of them open ended, garnering Rs 15,409 crore, whereas in the same period last year, the fund houses collected nearly Rs 27,000 crore. Infrastructure, mid-cap and offshore investments have been the main theme of funds launched this year. DSP Merrill Lynch and Reliance Mutual Fund launched the largest number of funds this year - seven each. They are conspicuous by their absence in the September and October 2007 NFO Nest.

The following funds find their place in the NFO nest in October, 2007.

Lotus India Infrastructure Fund # Opens: 25 Sept, 2007 - Closes: 24 Oct, 2007

A three-year close ended equity fund, it would automatically be converted into an open ended fund after the expiry of three years from the date of allotment. Between 65 to 100% of the portfolio allocation will be in equity and equity-linked instruments of companies engaged in infrastructure sector selected by adopting the bottom up approach. Debt securities and money market instrument will comprise of 0 to 35% of the portfolio.

HDFC Arbitrage Fund # Opens: 28 Sept, 2007 - Closes: 15 Oct, 2007

HDFC Arbitrage Fund is an open-ended equity fund with the investment objective of generating income by investing predominantly in arbitrage opportunities between cash and derivative market and arbitrage opportunities within the derivative segment and by deployment of surplus cash in debt securities and money market instruments. There are nearly a dozen arbitrage funds at present delivering a return of 8 to 10 percent per annum.

HSBC Flexi Debt Fund # Opens: 3 Oct , 2007 Closed :3 Oct , 2007

HSBC Flexi Debt Fund is an open-ended debt scheme. The scheme has regular and institutional plans. For regular plan minimum subscription amount is Rs.10000 and for institutional plan minimum subscription is Rs. 50 lakhs. The investment objective of the scheme is to deliver returns in the form of interest income and capital gains, along with high liquidity, commensurate with the current view on the markets and the interest rate cycle, through active investment in debt and money market instruments.

UTI Energy Fund

To enable the investors to capture the growth potential of a broad based energy sector, UTI Mutual Fund is widening the investment objective of its existing UTI-GSF-Petro and renaming the Fund to UTI Energy Fund. The new offer is an open ended equity scheme. The investment objective of UTI-GSF-Petro was to invest in petro sector companies which constitute only a part of the overall energy sector. The investment objective of UTI Energy Fund will cover the entire energy sector to capitalize on the emerging opportunities across the sector. In addition to investing in stocks in the oil & gas sector covering companies engaged in drilling, exploration, refining of crude oil and distribution, UTI Energy Fund will also invest in power generation companies (power generation, transmission, distribution and power trading & companies involved in consulting and financing these businesses), energy storage and distribution companies and equipment manufacturers for the energy sector.

Sahara R.E.A.L. Fund # Opens: 5 Oct , 2007 Closes: 2 Nov , 2007

Sahara R.E.A.L. Fund is a close-ended equity fund with an automatic conversion into an open-ended fund upon expiry of 36 months from the date of allotment. The investment objective is to provide long term capital gains by investing predominantly (at least 90%) in equity/equity related instrument of companies in Retailing, Entertainment & Media, Auto & auto ancillaries and Logistics Sector in order to capitalize on strong growth potential or potential to earn, that may emerge in future. A ceiling of 50% of the total investible corpus would be imposed per sector in order to avoid concentration of investment.

The spate of FMPs in the past months are gradually on the decline with debt-oriented interval schemes taking over the reigns. ICICI Prudential and ING Mutual Fund have come up with debt interval schemes this month.

UTI - India International Fund, JM Multi Strategy Fund, Tata Banking Exchange Traded Fund, Birla Sunlife Special Situations Fund, HSBC Small Cap Fund, Kotak Focussed Sector Scheme and DSPML Natural Resources and New Energy Fund are expected to be launched in the coming months.

Gem gaze

The gems in the sectoral space take turns exhibiting their lustre. Their fortunes are intertwined with that of their sector so much so that perennial prosperity is the priced possession of a select few funds. Listen with rapt attention to the stories…

DSPML TIGER …. the ferocious fauna!

DSPML TIGER's growth-oriented, largecap, well diversified portfolio has helped it deliver good returns. There is a sage behind the aggressive façade that the name presents. An acronym for The Infrastructure Growth and Economic Reforms, the fund focuses on sectors that are likely to prosper from growth related to economic reforms and infrastructure development. Launched three years ago, the fund capitalised on the infrastructure run – a well-timed entry. Though telecom and power are the prime focus of the fund, its broader mandate enabled it to tap into sectors that core infrastructure funds do not - healthcare, FMCG, textiles. The portfolio is, probably, too well diversified at around 65 stocks. RIL, the largest holding, is currently at less than 6 per cent and the rest are all below 4 per cent. One can expect such diversification from a mid-cap fund, but this is surprising from a predominantly large-cap offering. Nevertheless, its tilt towards growth investing – GARP (Growth at a reasonable price) has enabled it to deliver superior returns.

Reliance Diversified Power Sector ….power-packed performance

The Fund is a classic case of being in the sweet spot at the right time. The pioneer and only fund in the power sector, Reliance Diversified Power has a proven track record, way ahead of its benchmark India Power Index. The Fund aims to exploit growth opportunities available in power sector in the country, driven by rising demand and scarcity of electricity in the country. India is facing electricity deficit of 9.3% and peak demand deficit of 13.9%. Besides, the government has launched an initiative to remove electricity deficit by 2012. This surely provides an upside for the companies engaged in power business.The fund adopts a blend of growth and value oriented buying strategy with a prime focus on mid-caps. The number of stocks held in the portfolio is fairly static at 18 with very little churn in the portfolio in view of the long term vision of the fund manager. The long and successful innings that the power sector promises is based on solid foundations and it is roses all the way for the fund…

Prudential ICICI Infrastructure…a stable star

ICICI Prudential Infrastructure has protected the downside well while growing at a fast pace. The fund exhibits discernible differences that set it apart from other infrastructure based funds. The fund's average exposure to basic and engineering stocks has been only 8.7 per cent as against an average of 20%! The fund is underweight on construction stocks relative to its peers. But its exposure to the banking sector is high. While essentially a growth-oriented fund, it has a substantial representation of value stocks. The fund has managed to strike an equilibrium between making contra bets and limiting its downside by maintaining smaller holdings. And this equilibrium has worked in the fund's favour, for it displays better resilience in a bear market relative to its counterparts. A relatively less volatile performance coupled with an optimally diversified portfolio, make the fund a good choice in the infrastructure space.

DSPML Technology ….the towering techie

DSPML Technology has performed well, delivering good returns with low volatility. The fund's buy-and-hold strategy has paid off well .When referring to sector funds, consistency is not what most people think of. But this fund aims at just that and has succeeded. It has consistently beaten the category average over the past five years. By being well diversified, restraining the number of mid-and small-cap stocks (44.35 per cent of its portfolio is in large-caps) and limiting exposure to single stocks, the fund has managed to deliver good returns at low volatility. In the past 36 months, the portfolio has had an average of 28 stocks. Allocation to individual stocks, barring Infosys which is currently at 16.48 per cent, is mostly restricted to a single digit (NIIT follows in the second place at 9.21 per cent). Its strategy has held it in good stead in the current turbulent market. In the past six months the fund’s assets under management have almost trebled! And this has come at a time when the IT sector is in a slump and its peers have been losing investors. This phenomenon should not come as a surprise since the fund has maintained a broader mandate of investing in media, entertainment, telecom and other technology enabled companies as possible investment avenues. The fund has managed to tide over this slump on the back of astute stock moves as well.

The moral of the stories is… ”Stick to the knitting“ does not pay off …the cushion offered by these funds have stood them in good stead.

FUND FLAVOUR

Sector Funds

Surfing on sectors …

Sector funds have a mandate to invest in just one sector. Currently there are nearly 40 sectoral schemes operating in the Indian Mutual Fund industry, catering to 7 sectors. The first sectoral scheme to be launched was way back in April 1994, by Apple Asset Management Company called Apple Goldshare. It was later taken over by Birla Mutual Fund. The scheme is now known as Birla MNC Fund. The latest entrant in this segment is Lotus Infrastructure Fund which is currently open for subscription. Indian Mutual Funds have funds focussed on banking, technology, FMCG (fast moving consumer goods), pharma, MNC and infrastructure, with the latter being more thematic than sectoral inview of the wider definition.

Banking Funds

The Indian banking sector is witnessing a fair amount of interest and activity.There are three banking funds today - Reliance banking, UTI banking and Benchmark Banking BeES. Lotus Banking Fund is to be launched soon. Five more Banking ETFs are likely to be launched in the near future, two from Kotak, two from Benchmark and one from Reliance.The reason is understandable-Benchmark's Banking BeES is a Rs 5,845- crore fund today. The banking funds have delivered eye popping returns - over 82 per cent over the past one year.The banking stocks picked up momentum after better 2006-07 fourth-quarter results and on expectation of no further hikes in interest rates by the Reserve Bank of India in the future. Of course the fund managers are waiting to read the contours in 2009 when the banking sector will be opened up. In view of the restrictions, foreigners are currently investing through bank ETFs.

Technology Funds

In the past, particularly during the TMT (technology/media/telecom) boom in 1999-early 2000, there was a flood of sector funds targeting the technology/software sector. While some of these sector funds had their place under the sun, most of them were caught wrong footed when the market rally ran out of steam in March 2000. As Technology funds slipped into the morass, seven survivors of the tech melt down rose like a phoenix from the ashes… Magnum IT, DSPML Technology, ICICI Prudential Technology, Birla Sun Life New Millennium, UTI Software, Franklin Infotech and Kotak Tech. Reliance Mutual Fund came up with Reliance Media and Entertainment Fund in 2004. Now the appreciating Rupee does seem to have hit the technology sector but it …ranks next only to banking and infrastructure funds.

FMCG Funds

Though the outlook for the FMCG sector remains bright given the growth in consumer spending and better results posted by the companies, the funds in this category have put up a dismal show on the returns front. The three funds in this category by Prudential ICICI, Franklin and SBI could pull out a return of only 10.45% over the past 12-months, and has, in fact, lost 2.63% in the past six-month period. The sector in general is suitable for investors with reasonable risk appetite and will provide decent returns in a consistent manner over long duration.

Pharma Funds

The health of pharma funds has never been as robust as other equity fund categories. However, these funds' relative performance among the universe of equity funds have improved over the past one year. Among the five funds in this category, the latest entrants, JM Healthcare Sector and Reliance Pharma, both launched in mid-2004, have dished out the best returns over the past one year. Among the older pharma funds, Magnum Pharma has been putting up a better show. With the deadline for complying with international norms coming closer, the removal of controlled price regime should augur well for fundamentally good and competitive firms in the sector. This sector is essentially for the investors who have a reasonably long investment horizon, as this sector will perform in fits and starts and the steady growth will be visible only in a longer duration.

Auto Funds

Automobile stocks seem to be losing steam in the recent past. UTI Auto and JM Auto, both launched in 2004, have been languishing at the bottom of the returns chart. The category has managed to achieve an annualised return of only 18.24% over the past two-years and has, in fact, lost 7.38% in the past six months. However, the performance of the two funds remain wide apart. While, JM Auto, which has a mid- and small-cap orientation, has delivered a decent return of almost 31% over the past one year; UTI Auto, with its predominantly large-cap orientation, managed only 4.28%.

MNC Funds

All mutual funds will feel the crunch as the number of MNCs decreases. But more so, MNC-specific funds like Birla MNC, Kotak MNC and UTI MNC. These three funds were launched in 1998-2000, when MNCs were doing well. Now, with an increase in the number of firms being delisted, their investment universe is restricted. There are about 60 companies, where the public shareholding is less than 25 per cent and another 22 companies where action in the form of buy-back, open offer or voluntary delisting can be expected in the coming months. Though the MNC funds will benefit from the buyback, they will have to exit from lucrative stocks and see their pie shrink.

The Infrastructure Funds

Three of India's top five performing funds in 2006 were pure infrastructure funds. Strong order-flow and increased policy and budget support from the Government augur well for earnings growth of companies in this space. Reliance Diversified Power Sector Fund, ICICI Prudential Infrastructure Fund, DSP Merrill Lynch T.I.G.E.R. Fund, JM Basic Fund (Energy), Birla Infrastructure Fund, UTI Infrastructure Fund, Tata Infrastructure Fund, Principal Infrastructure and Service Industries Fund, Sahara Infrastructure Fund, UTI Petro Fund, Can Infrastructure etc. are relatively new funds with only Tata and DSPML Infrastructure Funds having been in existence for at least two years. Most of the infrastructure related sectors in India, while offering tremendous scope for growth in the medium to long term, are plagued by several roadblocks including land acquisition, political interference and lack of concerted action backed by a clear vision.These problems are likely to prevent the sector from reaching its real potential within the next 2-3 years.

…an adventure worth it?

Whether it was the technology sector in the late 90s or the banking or infrastructure sector lately, sector funds have always caught investor’s fancy. In addition to returns, long-term approach, understanding the sector dynamics, non-expectation of extraordinary returns and risk tolerance capacity should be the watchwords of those who want to surf the sectors and make a killing!

Fund Fulcrum
(September 2007)

The size of the Indian mutual fund industry is expected to double by 2010 assuming a plausible CAGR of around 17%, according to a study conducted by The Associated Chambers of Commerce and Industry of India. But short-term brakes do seem to be applied …

The asset base of the mutual fund industry dwindled by Rs 18,506 crore in August from the levels of the previous month, according to the data released by the Association of Mutual Funds in India (AMFI). Debt and gilt funds have led the decline in AUMs.The industry now manages Rs 4,67,623 crore in assets compared to Rs 4,86,129 crore in July. The decline can be attributed to a combination of factors like hardening call money rates and volatility in the equity market. But some of the mutual funds with large portfolio of assets under management such as Reliance, ICICI Prudential and HDFC showed a net increase. Reliance Mutual Fund remains the largest fund house, with an AUM of Rs 67,597 crore, while ICICI Prudential Mutual Fund and UTI Mutual Fund are at second and third positions with AUMs of Rs 50,611 crore and Rs 41,698 crore respectively. HDFC Mutual Fund is at the fourth position with an AUM of Rs 40,871 crore.

Piquant parade

German financial services group Allianz, Belgium's KBC Asset Management, Qatar's Doha Bank (with a 49 % stake in Investnet) and Bharti Enterprises and AXA Investment Managers and AXA Asia Pacific Holdings (with 25% and 75% stake in the joint venture respectively) have indicated plans to enter the asset management business in India.

UTI International Ltd, a wholly-owned subsidiary of UTI Asset Management Company, and Shinsei Bank Ltd of Japan signed a joint venture agreement to set up UTI International (Singapore) Pte Ltd, to manage funds and undertake investment activities jointly. The JV would also launch and manage structured investment products to cater to the Japan-South East Asia corridor. Tata Mutual Fund has tied up with Invesco, a UK-based global investment management house, for the former’s new scheme, ‘Indo-Global Infrastructure Fund’.

Vijaya Bank plans to sell its 5% stake in Principal Pnb Asset Management Co. Pvt Ltd.. Principal Financial Group and Punjab National Bank are the other partners in the joint venture. GIC Mutual Fund has transferred all its schemes to Canbank Mutual Fund.

ICRA Online Ltd, a wholly-owned subsidiary of credit rating major ICRA Ltd (an Associate of Moody's Investors Service Inc.), announced the launch of ICRA Mpower, a web-based platform for mutual fund distributors and financial advisors, which provides all the tools required for making the distribution business more effective and efficient.

Regulatory Rigmarole

The proposal of SEBI to remove entry load on direct Mutual Fund investments is good news for informed retail investors. This facility would be available for investors who apply directly to the AMC either through the Internet or by visiting the premises of the fund house without involving the services of agents. At present, this option is only available to large investors (Rs 5 crore or more) or for investments in funds belonging to Benchmark and Quantum.This move is progressive as entry loads only reduce overall returns earned by mutual fund investors. It might apply brakes on initiatives of fund houses to improve penetration and reach out to the masses. In India, the role of a distributor in advising the investors becomes crucial, especially in non-metros. Apart from online medium and distribution, branches as a channel for mutual fund products have assumed importance with Reliance Mutual Fund planning to double its branch network from the existing 300 in the next few months, UTI Mutual Fund planning to add 150 branches within one year and HDFC Mutual Fund targeting 75 branches by the year-end. However, expansion of branches might not be an appropriate option as it affects the financial health of funds. As far as distribution business is concerned, it is going to be an integral part of the system. Applications received directly are only 0.02 per cent of the total. So the mutual fund industry has a long way to go and distribution houses will have to play a major role in that.

SEBI issued a circular stating that 'micro pension schemes' will be exempt from producing PAN cards. UTI MF had launched one such scheme, where rural investors could invest in its retirement benefit pension fund. What this means is that micro SIP schemes launched by ICICI Prudential and Reliance Mutual - would still have to face the PAN card rule.

The developments on the fund and regulatory front have sent mixed signals this month with minor hiccups. But with the stockmarkets reaching dizzy heights and still marching ahead, the overall scenario is positive.