Monday, March 31, 2008


Fund Fulcrum (contd.)
(March 2008)

Piquant Parade

The Robeco Group has finally marked its presence in India’s mutual fund sector. The Robeco Bank has picked up a 49% stake in Canara Bank's Asset Management Arm. It has already allocated USD 1 billion to the Indian market and would like to increase it from an international perspective.

SBI Mutual Fund has formalised its tie up with the Kerala-based Dhanalakshmi Bank for distribution of its investment products through the bank. The tie-up would qualitatively enhance SBI Mutual Fund’s reach of mutual fund investors across the country, especially in the South.

UTI Mutual Fund has opened 4 new financial centres at various places, namely, Jabalpur, Gurgaon, Aligarh and Bareilly. The aim is to expand its wide distribution network to cover non-metros and smaller cities.

Regulatory Rigmarole

Institutional investors will now have to pay margin on their share transactions in the cash segment from April 21, in the same way as applicable to other investors. SEBI also operationalised short selling and securities lending and borrowing from the same date, April 21. It had specified the broad framework for this in December 2007 but had not operationalised it, pending clarifications from the tax authorities. It is, indeed, ironical that short-selling constraint is likely to be removed just after equity prices have tanked. Irony apart, allowing short-selling is a good move that will improve the market microstructure.

SEBI has issued a circular to waive off the entry and exit load fees on the bonus and dividend reinvestment units with effect from 1 April. The new rule is as per the recommendations of the working group on standardization of key operational areas of Association of Mutual Funds in India (AMFI). In support to the waiver of the load structure on bonus and dividend reinvestment transactions, the argument made by SEBI was that it is investor’s money that has contributed to the earnings and the investors were not entering afresh.

India's mutual funds are going to have to pause for breath….. With effect from 1 April, 2008 SEBI has asked them to more than double the time they spend on risk warnings to investors in their radio and television commercials. The funds, which now take two seconds in their commercials to tell customers "Mutual Fund investments are subject to market risks, please read the offer document carefully before investing," must do so in five seconds. This is because, the rapid-fire manner in which the standard warning is recited in the audio-visual and audio media renders it unintelligible to the viewer/listener.

Private life insurer ICICI Prudential’s launch of ‘R.I.C.H. fund’ has run into controversy with the mutual fund industry taking serious exception to the product’s advertisement campaign, which according to them gives an impression that it is a mutual fund scheme though it actually is a Unit-Linked Insurance Plan (ULIP). Based on the complaints from mutual funds, the AMFI has taken up the matter with both the Securities and Exchange Board of India and the Insurance Regulatory & Development Authority. The advertisement by ICICI Prudential Life Insurance Company says the ‘New fund opens on March 15 @ Rs 10’. The commercial mirrors advertisements by mutual fund houses for their NFOs.

Considering the long wish list of the Mutual Fund industry for the Finance Minister in Union Budget 2008, there is not much for the Mutual Fund industry to write home about. However, the increase in short term capital gains tax, service tax on ULIPs, status-quo on STT and long term capital gains tax, and TDS exemption for corporate debt is good news for the industry. The Mutual Fund industry will benefit with longer term investors being encouraged and short term churning being discouraged by the short term capital gains tax being raised to 15% from 10%. Increase in Short Term Capital Gain taxes will discourage speculative investments and, will not impact investment flows in the medium term. This would encourage investments into Equity Mutual Funds by retail investors. The imposition of service tax on ULIPs will level the playing field with mutual funds, who have been paying this for a number of years already. In addition, the fact that corporate taxes, STT (Securities TransactionTax), and long term capital gains tax were not tinkered with is a positive for investors.

Though the budget provisions related to mutual funds proved to be a damp squid with many concerns having been left unaddressed and with the market immediately plummeting, the few long-term benefits that accrue cannot but be overemphasised!

Monday, March 24, 2008


Fund Fulcrum
(March 2008)

A McKinsey report titled, “Indian Asset Management: Achieving Broad-based Growth” says institutional investments in Indian mutual funds may witness 25-33 per cent annual growth, with total assets under management increasing from $42 billion in 2007 to $160 billion by 2012. The retail segment could grow at a compounded annual growth rate of 36–42 per cent annually, taking the total AUM from US$36 billion in 2007 to $160–$200 billion in 2012. The total investment in Indian mutual funds is, therefore, expected to be around $350-440 billion by 2012.
According to data available with the Association of Mutual Funds in India, the combined Assets Under Management of the 32 fund houses jumped to Rs 5,65,469.53 crore at the end of February this year, compared to Rs 5,48,063.51 crore till January. Reliance Mutual Fund maintained its top position with AUM of Rs 93,531.67 crore for February compared to Rs 77,210.03 crore in January, adding Rs 16,321.64 crore during the month. ICICI Prudential Mutual Fund is the second largest fund house, despite recording a decline of Rs 4,767.42 crore in its AUM. At the end of February, ICICI Prudential's AUM stood at Rs 59,277 crore against Rs 64,045 crore in the previous month. State-run UTI Mutual Fund also suffered a dip in its assets in February, which stood at Rs 52,464.71 crore compared to Rs 52, 656.19 crore in the previous period. The other two fund houses among the top five, HDFC Mutual Fund and Franklin Templeton have AUM worth Rs 46,291.97 crore and Rs 29,901.69 crore, respectively in February.

Birla Sun Life Asset Management Company has been crowned the Mutual Fund of the Year, at the annual CNBC TV 18 - CRISIL Mutual Fund awards function, powered by the rating agency CRISIL. This particular award recognizes the fund house for its performance and consistency in wealth creation, across all schemes offered by the fund house. The fund house received 6 awards in total; three debt schemes, two equity schemes and the most coveted Mutual Fund of the Year award. These CNBC TV 18-CRISIL awards come in the wake of the 2 awards won by Birla Mutual Fund at the recent ICRA Fund Awards. Recognition of the fund house’s performance has not been restricted to the shores of India. Lipper, the international rating agency, also bestowed 4 awards on Birla Sun Life Mutual Fund, including one wherein their Tax Fund was adjudged the 3rd best performing equity fund in the world, and the best in India, over a 10-year horizon.

Piquant Parade
CRISIL has assigned a CRISIL IPO Grade "4/5" to the proposed initial public offer of UTI Asset Management Company Ltd. This grade indicates that the fundamentals of the issue are above average relative to other listed equity securities in India.
United Bank of India (UBI) is tying up with Kotak Mahindra to sell mutual funds. UBI currently has tie-ups with five asset management companies, including UTI, HDFC, Franklin Templeton, Reliance and ICICI Prudential for selling mutual fund schemes. In addition to mutual funds, UBI is also selling insurance policies as part of its drive to boost non-interest income. Selling mutual funds and insurance policies through third-party companies constitutes UBI’s non-traditional non-interest income. Currently, UBI’s business from mutual fund and insurance schemes is estimated to be around Rs 14.5 crore, which is about 5% of total non-interest income. However, the bank will focus on its mutual fund businesses in the coming days with greater vigour.
Infrastructure Development Finance Corporation (IDFC) will buy Standard Chartered Mutual Fund. IDFC will pay $205 million (Rs 830 crore), way above $135 million (Rs 542 crore), the amount offered by UBS for the AMC in January last year. Standard Chartered has agreed to sell Standard Chartered Trustee and Standard Chartered Asset Management, including the local minority shareholders. The UK major has a 74.9% stake in the AMC with the remaining being held by Atul Choksey, the former co-founder of Asian Paints. The consideration is before deductions of local taxes and deal expenses. The two acquired companies represent the mutual fund business of Standard Chartered PLC in India. At the above price, the fund house is valued at 6 per cent of its total assets and about 20 per cent of its equity assets under management. The transaction is subject to regulatory approvals, which are expected to be completed by the second quarter of 2008.
Fortune 500 firm Indian Oil’s proposed strategy to invest its surplus funds estimated at Rs 35,000 crore for current fiscal — is restricted to only big equity-linked mutual fund schemes of minimum Rs 500 crore. However, the IOC board may enhance the limit subject to investments in equity-oriented schemes not exceeding 30% of surplus funds of longer tenure. The company plans to invest only its long-term (minimum one year) surplus funds in equity-oriented Mutual Fund schemes. However, the company has not proposed any such restrictions for debt-oriented MF schemes. IOC’s proposed policy on investment of its surplus in Mutual Funds would be effective after the approval of the petroleum ministry. In August 2007, the government had allowed navratnas and mini-ratnas to invest their surplus funds in debt and equity-oriented schemes of Sebi-regulated public sector Mutual Funds. Earlier, PSUs could invest their surplus in debt-based units of UTI only. As per revised guidelines, IOC can have option to invest Mutual Funds of UTI, SBI, LIC, GIC, BoB, Canara Bank and PNB.
Consultancy firm Mercer plans to offer advisory services on Indian fund managers and investments. The firm has appointed two analysts and expects to hire four more this year to track India's fund industry and will roll out the service by May. Mercer already provided intelligence on emerging market managers. Going forward, the firm would also advise Indian clients on overseas managers. Mercer, which is involved in consulting, outsourcing and investment services, is a subsidiary of Marsh & McLennan Cos Inc.
To be continued…

Monday, March 17, 2008


NFO Nest

The NFO market is at a low ebb with only a few funds making their appearance in March 2008. Only a couple of funds are currently open and secure a position in NFO Nest this month. But Fixed Maturity Plans (FMPs) are back with a bang! A series of FMPs are flooding the market...

The following funds find their place in the NFO nest in March, 2008.

DSPML Natural Resources and New Energy Fund
Opens 3 Mar, 2008 Closes: 27 Mar, 2008

An open ended equity growth fund, it proposes to invest in companies which belong to the natural resources, energy and new energy sectors. These sectors would include base metals, other minerals and commodities, water and agriculture, and energy including oil, gas and coal. The new energy sectors include renewable energy and alternative fuels.The fund will invest a minimum of 65 per cent of the corpus in Indian companies, which form a part of these sectors and up to 35 per cent of its funds in Merrill Lynch International Investment funds which include New Energy Fund and World Energy Fund.

The fund-house seeks to capitalise on the current boom witnessed in the natural resources space, especially commodities such as metals, minerals and oil. A consumption-driven growth pattern arising in the emerging markets is likely to spur demand for natural resources. Further, the urbanisation and industrialisation process in these economies could drive demand for natural resources that are inputs for building infrastructure/generating power. The fund has highlighted that, historically, demand for natural resources tends to surge within few years of GDP per capita (on purchasing power parity basis) touching $3,000. India is said to be at such an inflection point, with GDP per capita of $3,802 in 2006. Power as a theme also holds potential in India, given the huge projects planned to meet the power deficit situation in the country. On the energy side, while increase in the price of oil has impelled exploration and development activity in the oil and gas space, higher environmental awareness and need to look for fuels that have unlimited supply and that are cheaper has led to increasing investments in renewable and alternative fuels such as wind energy, bio-fuels and solar fuel cells.

As Sundaram BNP Paribas and Reliance have already launched funds with a similar positioning, there may arise a risk of too many funds chasing similar ideas/stocks, thus losing out on any ‘early find’ advantage. This constraint may be overcome to some extent if the fund chooses to invest in companies that enable oil activities — typically offshore drilling companies, engineering in companies that produce rigs or those that enable transport of oil and gas. Further, the fund’s commodity universe also includes water and agriculture. Technologies that enable better utilisation of water resources and improved production in agriculture may also be investment segments that could open a wider universe to the company compared to peers.

As there are not too many significant companies in the alternative fuel space in India, the fund may be using the feeder route (through the New Energy Fund) to gain exposure to these areas. While this segment, no doubt, has good prospects, internationally non-conventional energy production is now driven more through offers of incentives by governments. For instance, in the US, production tax credits are available until December 2008 for producers of wind energy. Similarly, the European Union is proposing to introduce at least a 10 per cent ethanol blending for transport fuels through granting some sops. While the latter proposal has seen some resistance, an expiry of tax production credit in the US may discourage tapping wind energy as a resource. While this is not to doubt the potential that alternative resources hold, it remains a fact that this space at present requires a lot of regulatory and monetary support to gain significance.

The benchmarks for the World Energy Fund and New Energy Fund have returned 19 per cent and 11 per cent respectively on a compounded annual rate over five years. This suggests that the theme is not suitable for investors looking for order-of-magnitude returns. The fund can, however, serve as a diversifier into a theme that is still evolving and may be suitable for long-term investors.The global portfolio will be invested in World Energy Fund and New Energy Fund, managed by the BlackRock Investment Managers. The latter proposes to acquire a 40 per cent stake house in the DSPML fund house in India. The BlackRock Team also invests on behalf of DSPML’s World Gold Fund. This fund has returned 63 per cent since its inception in September 2007 as against the benchmark FTSE Gold Mines (CAP) Index of 37 per cent.

SBI Debt Fund Series 13 Months Series 7
Opens: 7 Mar, 2008 Closes: 17 Mar, 2008

This close ended debt fund aims at providing regular income, liquidity and returns to the investors through investments in portfolio comprising of debt instruments. It will invest 0%-100% in Government of India dated securities and treasury bills. The investment in securitised debt will be up to 20% of the exposure to AAA/AA+ bonds, and money market instruments.

UTI Global Emerging Market Fund, ABN Amro Banking and Financial Services Fund , HSBC Equity Linked Fund, ICICI Prudential Banking and Financial Services Fund, Magnum Sector Funds Umbrella Real Estate Equity Fund, Sundaram BNP Paribas Entertainment Opportunities Fund and Sundaram BNP Paribas Financial Services Opportunities Fund are expected to be launched in the coming months.

Monday, March 10, 2008


Gem Gaze
Versatility in Volatility!
How would you like to invest in a fund that gives you:
  • better returns than liquid funds
  • same risk as a liquid fund
  • much better tax treatment than a liquid fund
I can see you raising your eyebrows in suspicion. No, this is certainly not a ‘get rich quick scheme’ that will fleece you of your money.

It is an equity fund that is like a debt fund: an Arbitrage Fund! The common USP of these funds is to earn virtually risk-free return of around ten per cent (which is twice as much as the conventional short term debt funds) from an equity investment, that too on a regular basis, by doing arbitrage between the cash market and the futures market. This fund is aimed at an investor who seeks the returns of small-savings instruments, safety of bank deposits, tax benefits of RBI Relief Bonds and liquidity of a mutual fund!

Benchmark Derivative Fund

First off the blocks was Benchmark Mutual Fund, which launched its Benchmark Derivative Fund in December 2004. However, a minimum investment stipulation of Rs 2 lakh meant it excluded most retail investors. With a meagre corpus of Rs 55 cr., its return since inception is an unimpressive 7.5%.

JM Equity and Derivative Fund
JM Equity and Derivative Fund, launched in February 2005, was the first fund in India to allow the retail investor to avail the facility of arbitrage. It is an income-oriented interval scheme that invests in derivatives. It has reportedly relied on heavy FD exposure (almost one-third) with the likes of HDFC Bank, IDBI Bank, Union Bank of India and State Bank of Bikaner & Jaipur.
JM Arbitrage Fund
JM Arbitrage Advantage Fund, launched in June 2006, has a higher exposure to derivatives (thanks to the changed SEBI rules)and is an equity arbitrage product (65% is maintained in equity). Being an interval fund like its counterpart, the liquidity in JM Arbitrage Advantage is not as high as in an open-ended fund. The redemption is once in a month, that is, the last Thursday of every month which coincides with the settlement of the futures contract. Since the cash and the futures prices converge on that day, the returns are higher as you realise the spread that you had locked in the beginning of the month. Both the funds earned an average one year return of around 8.5%.
Prudential ICICI Blended Plan
Launched in May 2005, Prudential ICICI Blended Plan strikes a mix between equity, debt, money market instruments and derivatives even as it aims at capital appreciation and income distribution. The fund offers two plans, both of which pursue a spot-future arbitrage strategy. Plan A tries to maintain 50 per cent exposure to fully hedged equity, up to 49 per cent in money market securities and a small percentage in equity, adequate to cover the 51 per cent required exposure. Plan B invests between 51-100 per cent in money market instruments and the balance in fully hedged equity. With a corpus Rs. 695.65 crores and a one year return of 8.88%, it ranks third among its peers.
Kotak Equity Arbitrage Fund
Launched in September 2005, it was earlier called Kotak Cash Plus. The investment objective of the scheme is to generate income from investment in debt and money market securities and by availing arbitrage opportunities between prices of spot and derivatives markets. With a corpus of Rs. 429 crores, its one-year return is a tad higher than 9%, the highest in the category.
Launched in June 2006, the investment objective of this Rs. 272 crore open-ended fund is to provide capital appreciation and dividend distribution through arbitrage opportunities arising out of price differences between the cash and derivative market by investing predominantly in equity and equity-related securities, derivatives and the balance portion in debt securities. With an average one year return of 8.95 %, it secures the second position.

SBI Arbitrage Opportunities Fund
Launched in September 2006, the fund invests 65 to 85 per cent of its assets in equities and equity derivatives and the rest in debt and money market instruments. With a corpus of Rs. 695 crores and a one year return of 8.74%, it is an average performer.
Standard Chartered Arbitrage Fund
Launched in November 2006, the Standard Chartered Arbitrage Fund is an open-ended equity scheme that invests in cash and futures across markets. The fund has two plans, one for the retail investor and the other for the institutional investor. It boasts of the highest corpus of Rs. 1316.05 crores in this segment. In its one year existence, it has turned in a below-average performance reflected in its one year return of 7.85 per cent.
Launched in April and September, 2007, Lotus India Arbitrage Fund and HDFC Arbitrage Fund are the latest entrants in the arbitrage arena. With less than a year of existence, it is too early to judge their performance.
You can park your short-term surplus with arbitrage funds - around 10 to 20% of a portfolio should be allocated to these funds. You should take a three to six months time-frame while investing in arbitrage funds. Clearly, one of the reasons is that you have an exit load of 0.35%. Now it looks to be a small load, but in the overall reckoning it eats into the total returns. Moreover, like any investment, there is a gestation period. For a derivative position to unfold its true potential it takes around three to six months. This is because futures contracts are for a month. So a strategy to roll over, hold, buy or sell requires three to six months to fructify. The market is very volatile at present and Arbitrage funds are an option you can consider at this time. They are an ideal way to get a decent return with moderate amount of risk.

Monday, March 03, 2008



Arbitrage / Derivative Funds
Imbalance to combat insecurity!
Derivatives are instruments whose value is derived from the value of one or more underlying assets. The most common underlying assets include stocks, commodities, precious metals, market indices etc. Some of the common derivatives are forwards, futures, options and swaps. Fundamentally, derivatives are instrument for hedging purposes, but they can be used for speculative purposes too. Arbitrage Funds or Derivative Funds are recognised for modest and secured returns across the world and are comparatively safer investment options when compared with equity funds.
Arbitrage, in financial parlance, is the practice of taking advantage of a state of imbalance between two or more markets i.e. it involves buying and selling of equal quantities of a security in two different markets with the expectation that a future change in price in one market will be offset by an opposite change in the other. One of the markets is usually cash or spot, while the other is derivatives.
The modus operandi
Position in a stock is created in the spot or cash market and a reverse position in the same stock in the futures contract (a contract which obligates the buyer to purchase or seller to deliver at a future date at a determined price). Let us consider an example. If the price is higher in futures market than the spot market, the fund will buy the stock in spot market and sell it in equal quantity in the futures market simultaneously. To illustrate, if the price of a stock is Rs 100 in the spot market and the month end future price is Rs 120. The scheme would enter into the following trades: Purchase 1000 shares (Rs 100 per share) at the total cost of Rs 1 lakh and sell 1000 futures of the same stock (Rs 120 per share) at the sale proceeds of Rs 1.2 lakh. The trade is done to lock in profits of Rs 20000 irrespective of the movements in the stock price. Also let us assume that the price of the stock has gone down to Rs 95 by the end of the month. That would mean a loss of Rs 5000 {1000* (95-100)} in the spot market and a profit of Rs 25000 {1000*(120-95)} in the futures market. That is a net profit of Rs 20000 for the scheme. Alternatively, if the price goes up to Rs 125, that would result in a net profit of Rs 25000 {1000 * (125-100)} in the cash market and a loss of Rs 5000 {1000*(120-125)} in the futures market. That is again a profit of Rs 20000 for the scheme. By doing this fund is insulated against price variations in the stock prices in both cash and derivative markets.
The return of the fund is, thus, linked to the extent of arbitrage opportunity regardless of what direction and to what extent the market rises or falls. Though it cannot generate the kind of returns that an equity fund can, it will not give negative returns either.
The fledgling Indian market…
Pioneered by Benchmark Derivatives in December 2004, a little more than a dozen derivative funds have made their appearance in the Indian Mutual fund scenario in the past three years, with HDFC Arbitrage Fund being the latest offering.

The Law Point…
SEBI allows full-fledged participation of Mutual funds in derivatives trading. Earlier, they were permitted to participate in derivatives market for the purpose of hedging and rebalancing their portfolios only. The Mutual Funds are considered as trading members like registered FIIs and their schemes are treated as clients like sub accounts of FIIs. Appropriate disclosures are made in the offer document regarding the extent and manner of participation of the schemes of the Mutual Funds in derivatives and the risk factors. Earlier there was a stipulation that the maximum derivatives position a fund could take was 50 per cent of its asset size. Now there is no restriction on the amount arbitrage funds can invest in derivatives. They can engage in arbitrage activity upto 75-80 per cent of the asset size. The tax treatment for a derivative fund is similar to that for an income fund. For the growth option, long-term capital gains is zero, while the short-term capital gains is 15 per cent. For the dividend option, the dividend distribution tax is 14.125 per cent plus surcharge. Those who hold for over a year are eligible for indexation benefits.
The attraction…
Every portfolio should have some asset allocation to an arbitrage fund. That is because, it is virtually a risk- free product, completely hedged at all times and hardly impacted by the volatility in the markets.
The advantages of using derivatives, as an investment strategy over cash markets is that the fund outlay in a derivative contract is lower. Typically, only a percentage is to be paid upfront in the shape of initial margin. Thus, for the same fund outlay, much larger exposure is possible through a derivative contract.
Since such funds come under the category of equity funds post tax returns enhances in such funds compared to the debt funds.
The repulsion…
There is no denying that such funds provide good hedge against volatile markets but the concern is that investment opportunities catering to the mis-pricing of securities in different markets to generate returns may be few and difficult to spot and would require the fund managers to be very active.
Simultaneous trade in various markets which may increase transaction cost and portfolio turnover rate.
In a period when no or few arbitrage opportunity is available, the fund will have to rely upon the fixed income instruments which may dampen the returns. Moreover, arbitrage activity in India is largely concentrated in some of the stocks.
The magnetism unleashed…
Extending the basic fundamental features of mutual funds to various forms of investments through innovative measures has remained the specialty of mutual funds and is a good sign for any industry to evolve. With SEBI allowing the full-fledged participation of mutual funds in derivatives and recent turbulence witnessed in the equity markets, fund managers are now hunting grounds with arbitrage funds and rightly so as such these funds provide risk free returns least affected by the market movements and suffices the needs of conservative investors. As a category, derivative funds have turned in superior returns as compared to other debt categories. As these funds are centered on price difference between the spot and futures markets such price differences provide huge opportunities for generating returns from equity without taking the risks involved in equity investments.