Monday, November 24, 2008


(November 2008)

The Indian mutual fund industry shrank sharply in October 2008. The combined assets of the 35 fund houses declined from Rs.5.3 lakh crore in September to nearly 4.3 lakh crore (June 2007 levels), a fall of Rs.97,196 crore or 18.4%. While equity component of the AUMs have shrunk by around 18-25%, their debt assets have dwindled by as high as 60%. Mutual funds faced unprecedented redemptions in liquid schemes and FMPs.

Mirae AMC and AIG saw the sharpest decline in AUMs at 55% and 44% respectively. In fact, no fund house has come out unscathed - all of them have declared a dip in their AUM. The AUM of Reliance fell by Rs.15,400 cr to Rs.71,093 crore. ICICI Prudential and HDFC saw a decline by Rs. 10,594 cr and Rs. 6,519 crore to Rs.39,209 cr and Rs. 45,479 cr respectively. Despite the fall, the major fund houses maintained their respective positions. Among the top 10 fund houses (in terms of asset size), Franklin Templeton has witnessed the highest loss in assets (-22.4%), followed by ICICI Prudential (-21.3%) and Kotak AMC (-20.7%). As expected, the new funds bore the brunt of the widespread decline in AUMs.

Piquant Parade

India Infoline has received the in principle approval from SEBI for sponsoring a mutual fund.

Union Bank of India and KBC Asset Management, the globally active asset manager of the Belgium-based KBC group, have agreed to set up a 51-49 joint venture AMC in India.

DLF Pramerica Mutual Fund, a joint venture between U.S. life insurance major, Prudential Financial and the real estate company, DLF, has received an in principle approval from SEBI to sponsor a mutual fund.

DSP Merrill Lynch Investment Manager has changed its name to DSP Black Rock Investment Manager to reflect the change in ownership of the AMC.

Dutch financial services major Aegon and Religare Enterprises have decided to call off their joint venture. The AMC had recently got SEBI approval for setting up a mutual fund. It had also acquired Lotus India Mutual Fund to strengthen its operation. Sources say that Religare would still go ahead with the Lotus acquisition as it had struck the deal at an attractive valuation and it would help Religare expand its presence in the market.

According to industry sources, Indian asset management arm of the crisis-ridden American International Group, which saw a fall of over Rs.1000 cr in assets in October, is up for sale.

In a cost-cutting drive, UTI Mutual Fund has drastically reduced its advertisment budget by appointing 'Dabbawalas' as relationship managers and using the mobile phone screens to communicate information to investors.

Lipper FMI, a Thompson Reuters company, announces the launch of its Asian Fund Market Almanac 2008, an essential resource for fund strategists to get up to date with the latest development in the fund management industry across nine key Asian markets.

Regulatory Rigmarole

In order to end the liquidity crisis faced by mutual funds, Public Sector Banks have now relaxed norms for accepting CDs of some private and foreign banks as collateral, which have not been previously accepted by them and have agreed to lower the interest rate they charge to fund houses.

The government, which had allowed navratna and miniratna companies to invest 30% of the surplus in Public Sector Mutual Funds last year, now plans to review the situation every 3 months due to current volatility in the market.

At present, investors can exit FMPs by paying 2% exit load on NAV at any point of time. SEBI now plans to make exit from FMP schemes harder so as to keep investors invested in schemes for the entire duration of the scheme.

The minimum capital an AMC has to maintain to manage the assets is expected to go up. This measure is being contemplated by SEBI to combat the bitter experiences of the turbulent market. Currently mutual funds are operating on a thin capital base of Rs.10 cr. It is also planned to introduce the concept of capital adequacy, due to which the quantum of funds managed by AMCs would be linked to their capital base.

SEBI is planning a proposal to remove the short-term tax benefits on dividends paid by mutual funds. According to current norms, there is no tax on short-term dividend payout and for debt funds the tax is 22.66% for companies and 14.16% for individuals. This is in contrast to the short-term Capital Gains tax of 15% on equities and 33% on debt. Using this loophole, many firms and High Networth Individuals exit funds after they get interim dividend. These early redemptions mean loss in the NAV of long term investors.

The raw deal...the ray of hope

The RBI data reveals the rapid fall in the bank exposure in mutual funds from Rs.21,699 cr in September to Rs.13,630 cr in October, 2008 (Rs. 60,000 in early May, 2008). The timely RBI rescue (the mutual fund industry had borrowed Rs.22,000 cr out of which Rs.9000 cr has been paid back) has put the mutual funds on the road to recovery and staved off a plausible bankruptcy of a few mutual funds.

Monday, November 17, 2008


NFO Nest
(November 2008)

Waning FMPs …waning NFOs …

At least three fund houses — Franklin Templeton Mutual Fund, Kotak Mutual Fund and Taurus Mutual Fund — have extended the NFO period for their fixed maturity plans (FMPs) in the last few days.
• Some funds have started charging an exit load on their debt schemes to discourage redemptions.

While redemptions were not as big as feared, the launch of new FMPs has drastically come down in October and the money collected through New Fund Offers stood at Rs 6,778 crore, compared to Rs 23,173 crore in September. This has hurt the industry hard. NFOs have, for all practical purposes, served to roll over monies from maturing schemes.

The following funds find their place in the NFO Nest in November, 2008.

UTI Wealth Builder Fund Series II
Opens : 21 Oct, 2008 Closes : 19 Nov, 2008

The ongoing global economic and stock market turmoil has fewer investors asking whether or not they should invest in gold. The relevant question is increasingly – how can we invest in gold? Besides buying actual gold bars, in India we have two options. One is to invest in mutual funds that buy the stocks of mining companies abroad or invest in Gold Exchange Traded Funds (ETFs).

Now there is one more interesting option thrown up – a mutual fund that invests in gold, equity as well as debt. UTI Wealth Builder Fund-Series II will invest in a diversified portfolio of equity and equity related instruments, debt as well as Gold ETFs. The equity allocation will not be restricted to any market capitalisation or sector. It will be tilted towards large caps though and will also employ derivatives to hedge and manage volatility. The exposure to equity can vary from 65% to 100%. However, the exposure to Gold ETFs will be anywhere from 0 to 35%. The same percentage applies for debt and money market instruments. The fund has the following benchmarks: BSE 100 (equity), CRISIL Bond Fund Index (debt), gold price as per SEBI regulations for Gold ETFs (gold).

This combination of equity, debt and gold is an innovative scheme and looking at the asset allocation and large cap tilt, it should be a conservative offering with low volatility. It is mandatory to have a demat account when investing in a Gold ETF. That requirement is eliminated here. Moreover, unlike funds which buy gold mining stocks, this one will directly have exposure to gold via an ETF. A well thought out combination of gold and equity. Since the equity exposure is a minimum of 65%, for tax purposes it will be treated like an equity fund. So investors selling their units after a year will not have to pay any capital gains tax.

UTI Wealth Builder Fund - Series II is the first of its kind in the mutual fund industry to offer an asset allocation which combines traditional as well as non traditional asset class i.e. Equity and Gold. It is important to have an alternative asset in one’s portfolio and to build a portfolio around assets that have low correlation. Gold has proved to be "counter cyclical" or low correlated asset class as compared to equity investments and has generally been considered as a safe haven during times of economic upheavals and volatile equity markets. The investment in Gold ETFs will diversify portfolio risk and reduce overall volatility of returns in a reasonable time frame.

ICICI Pru S.M.A.R.T. Fund – Sr D and G
Opens : 15 Oct, 2008 Closes : 28 Nov, 2008

ICICI Prudential S.M.A.R.T. (Structured Methodology Aiming at Returns over Tenure) series D and G aim at investing in short-term and medium-term debt instruments with fixed and/or floating payouts linked to the equity indices normally maturing in line with the time profile of the schemes (24 months in the case of Series D and 36 months in the case of Series G). (Series D opened on 16 October and will close on 20 November).

DBS Chola Tax Advantage Fund - Series I, DWS Treasury Plus Fund, Edelweiss Equity Linked Savings Scheme, Edelweiss Arbitrage Fund, Tata Infrastructure Tax Saving Fund, Religare Ageon Business Leaders Fund and Lotus India Active Nifty Fifty Fund are expected to be launched in the coming months.

Monday, November 10, 2008



Defense pays but……divergence prevails

The broad market fall from January 2008 has taken its toll on the tax planning ELSS funds as well. The downside protection strategy has a common thread across several funds. Many of the funds have significantly increased exposure to large-cap stocks as a result of the volatility associated with mid-cap stocks. The increase in asset size has also necessitated a move to large cap stocks over the past year. Concentration of stocks and sectors has also quite reduced. Some funds have moved heavily into cash/debt investments. The year-to-date returns of these funds have significantly lagged the Sensex, Nifty and BSE-100 returns. Barring Sundaram Tax Saver and Taurus Libra Tax Shield (a bolt from the blue since it has been a laggard in the past), none of the funds yielded positive returns on a one-year basis. The gulf between the top and bottom five funds’ returns is quite wide, indicating that stocks and sectors chosen may have made a big difference.

Magnum Taxgain Gem

Street Smart

Magnum Taxgain has emerged as the prodigious son of the ELSS category. The top performing fund in the 3- and 5-year time frame, SBI Magnum Taxgain retains the flexibility to move into whichever market segment it sees opportunities in. Since January 2007, the fund has been consciously reducing its exposure to technology, while increasing exposure to auto and financial services. The allocation to the tech sector is down to 8.98% from 16.6% last year. The share of financial services has gone up by five times from 3% last year to 15% this year. The past performance of the fund and its ability to move into various segments of the market makes it an attractive proposition for investors willing to put up with a degree of uncertainty for higher returns.

HDFC Taxsaver Gem

Vital Veteran

An exemplary track record and a highly reliable fund house make HDFC Taxsaver one of the best in its category. Since November 2004, it has steadfastly held on to its five-star rating. Known for its astute stock picking and stellar performance, it has also shown resilience while protecting the downside time and again. But despite being a compelling tax-saving option, it has stumbled a bit lately when there was a change in fund manager. Once at the helm, the new fund manager made a couple of visible changes to the portfolio. Exposure to auto and construction stocks was significantly lowered while notable positions were built in sectors like energy, banking and services. The increased investment in Reliance Industries and banking stocks proved rewarding but the higher allocation to technology has dented performance. Though held in high regard, as far as the category of tax-planning funds is concerned, the fund is not completely out of the woods. But going by its great performance history and the reliability of the fund house, this fund remains a vital ingredient of a core portfolio despite its recent setback.

Birla Equity Plan Gem

Meticulous Model

Birla Equity Plan has come a long way since inception to emerge as a category beating fund. Except for 2007, the fund has consistently beaten the category returns over the past five years. The fund manager churns the portfolio quite aggressively. He moves swiftly in and out of sectors spotting opportunities and strategically timing his entry and exit. With a fund size of Rs 196 crore, the fund is still small enough to be nimble while moving in and out of sectors and stocks. From a concentrated portfolio of 32-35 stocks, the fund has gone to a more diversified portfolio of 45-50 stocks in the last six months. While this reduces the risk in the fund, it also limits the gains from good stock picks. The refreshing difference in the portfolio is the lower than average allocation to the technology sector. This has stood the fund in good stead in the recent market meltdown.

Fidelity Tax Advantage Gem

Youthful Yarn

In its short life, Fidelity Tax Advantage has managed to consistently shine over its category. This fund prefers to play it safe and has maintained an average large-cap allocation of 62 per cent. This move has paid off well for the fund as in the ongoing market turmoil. The portfolio is diverse with stocks ranging between 66 to 91 and rarely any stock accounts for four per cent of the fund’s portfolio. Nearly three fourth of the fund’s portfolio has been held for over one year. The fund manager has picked small positions ahead of many others in a series of small companies which have been very rewarding. The fund manager seems to be bullish on the financial services sector and has been consistently increasing the stake in this sector. Technology and Energy are the other dominant sectors in the fund’s portfolio.The fund has evolved to be a steady well-diversified offering that has consistently beaten the category average.

Sundaram BNP Paribas Tax Saver In

Sensible Star

A defensive strategy of maintaining nearly 30% as cash compared to 10% a year earlier has enabled it to hold its head above water (earn a positive return) as opposed to its peers who have had to remain under water (earn negative returns). The fund has always maintained a well-diversified portfolio with 55-60 stocks. So, even if one, or few stocks underperform, the overall performance will not be at risk. The fund has reduced its large-cap exposure in the last quarter of 2007 unlike most funds that increased holdings in large-cap stocks during the period. As a fund that can shift across segments, the ability of the fund manager to identify trends early enough has been crucial in the fund's performance and is suitable for investors willing to take this risk. Its AUM has been surging at a breakneck speed. It started out as a fund having assets of Rs 3.8 crore in January 2001. At the end of January 2008, the AUM surged to Rs 402 crore, an increase of 100 times in seven years!

Principal Personal Tax Saver In

Super Saver

The Principal Personal Tax Saver is a diversified ELSS which has been around for more than a decade now. The fund offers a high amount of stock and sector level diversification with top five sectors constituting 42% of the corpus and a consistent 35-45 scrips in its kitty which currently stands at 44. The fund made early inroads into infrastructure and related sectors when the sector started booming and consistently maintained a high exposure especially to capital goods which witnessed a spectacular run and has still continued to show great potential. The fund has taken a contrarian stand with high exposures to IT and textiles which have been reeling due to Rupee appreciation and has only recently pruned its exposure to Auto although this does not seem to have dented the fund’s fantastic performance. The stock selection has consistently been excellent. The fund has traditionally been an aggressive offering with the fund manager often resorting to high portfolio churn and high levels of exposure to small caps and mid caps. But more recently it has witnessed a significant change in style with a much needed increase in exposure to large caps and adoption of a more conservative strategy with the entry of the new fund manager. The new fund manager has retained a majority of the small and mid cap stocks that have contributed handsomely to the fund’s performance, thus creating an excellent balance between safety and aggression.

Taxing Times

The trauma of the financial sector has (t)painted the present scenario as taxing times. Nevertheless, the towering tax tycoons of last year have maintained their position refusing to be torn by the typhoon or rather tsunami that devastated the hitherto invincible (so we thought!) financial behemoths. A red carpet has indeed been spread to accord a royal welcome to two of the most resilient ELSS funds that have embellished the entourage!

Monday, November 03, 2008



Equity Linked Savings Scheme (ELSS)

A boon blossoming from the boom…

A booming stock market (till December 2007) coupled with relaxations in the overall investment limits for ELSS funds eligible for tax breaks over the past three years have prompted investors to allocate larger sums to equity linked tax saving schemes floated by mutual funds. Assets managed by ELSS mutual funds have grown nine-fold between April 2005 and March 2008, from a minuscule Rs 1,727 crore to Rs 16,000 crore. While there have not been too many new launches in this space, established ELSS funds, which have topped the return charts over the past three years have been the ones to see substantial inflows. These funds have managed to generate an astounding return of 41.30 per cent per annum in the last five years (as on June 2, 2008). While the equity-linked funds have gained popularity, thanks to the relatively shorter lock-in period, collections under small savings avenues such as the National Savings Certificates have seen a decline in recent times. In 2004-05, total collections under NSC stood at Rs 10,097 crore. But these stood at only Rs 3,628 crore in the first nine months (until December 2007) of 2007-2008, as per the data provided by the Accountant-General, Posts and Telegraph.

The ban(e) bombarding from the bust…

The market meltdown in the past ten months has raised a question as to whether the investors should opt for the Equity Linked Savings Scheme (ELSS) of mutual funds or take a mix of fixed income tax saving investments and diversified mutual funds that would provide them with some flexibility even while offering tax benefits. The question has arisen because of the steep decline in the value of equity linked savings schemes which come with a lock in period of three years, thus blocking the exit route for the investors in any falling market before the mandatory three year period is served. It is true that it is not only the ELSS but the diversified mutual funds which have taken the stick in the sharp fall the market has witnessed in the past ten months - from a high of more than 21,000 points of BSE Sensex in January to around 10000 now. But the sustained market volatility has led to a huge fall in the NAV of ELSS of even established fund players with proven track record. The rising interest rates of bank deposits and the fact that diversified equity funds offer the flexibility of cashing out in a falling market without worrying about lock-in period have further eroded the NAV of ELSS Funds.

A look at the data published by Value Research in a recent issue of ‘Mutual Fund Insight’ shows that the returns from Tax Planning Equity Funds has sharply come down not only on a one year basis but on a three year basis as well, which should be of concern. The inconsistency in performance of fund houses is also visible and some of the funds that figure prominently in five year category of top performing funds do not find a place in the next two categories – three years or one year. The wild swing in performance can be attributed to government policies and business environment of a particular sector and valuations at which stocks are purchased by a mutual fund also have an important role to play. If some funds had invested in power, capital goods and engineering, and real estate sectors some 10 months back, they would have underperformed as valuations in this space have been de-rated considerably whereas funds with greater exposure to IT and/or pharma would have given better yield than their peers. ELSS funds invest across all sectors because of the flexi cap mandate. Funds which could do relatively better did so due to better stock picking capability and probably higher concentration (in) specific stocks.

Will the market turmoil lead to investors having a re-look at their ELSS investment options? Considering the current valuations and potential over the next 3-5 years, staying away from equities carries a greater risk than staying with it.

A more rewarding help finance your future

Come March 31 and you will, like every year, find people running around, looking to invest in tax-saving instruments. Most choose the regular ELSS (equity-linked saving scheme) instruments that have a three-year lock-in period as it gets them tax benefits under Section 80C. But this year, there have been some interesting options. Mutual fund houses have launched products similar to the usual ELSS, but with a much longer tenure of 10 years. What is more, since these are new funds, they come with the added advantage of having no entry load, unlike existing funds which carry an entry load of 2.25 per cent.

Nuggets to gnaw at…

By keeping a few strategies in mind, you can make the most of your ELSS investment.

Keep financial goals in mind: Every ELSS adopts different stock picking strategies. Some schemes such as Franklin India Tax Shield maintain a large-cap focus and are suitable for those who have a lower risk profile. On the other hand, funds that have greater exposure to small- and mid-cap stocks, such as Principal Tax Savings Fund, fit the portfolio of those willing to take a higher degree of risk. Ignoring this aspect would lead to a mismatch between the fund and your profile.

Diversify among styles: The role of the ELSS in a portfolio is restricted to providing tax benefits without compromising on the return. It cannot form the core of a portfolio. A portfolio should ideally stick to at best two schemes with varying investment styles and market focus.

ELSS & SIP – A Perfect Match : The first option gives you twin benefits of tax savings and capital gains. The next option helps you take advantage of fluctuations in the stock market and averages your cost of investment. What more does one need? However, remember that each instalment will be subject to a 3-year lock-in. So, if you enroll in a 3-year SIP and invest systematically every month for three years, you will get your entire proceeds only after six years, after your last instalment (at the end of the third year) completes three years.

Growth or dividend option: Choosing the growth option ensures compounding and capital appreciation in a mutual fund investment. However, in the case of an ELSS, the dividend payout option provides a degree of liquidity even during the lock-in period. The dividend paid out can be invested in other investment options, whether equity or debt, depending upon the rebalancing needs of the investor's portfolio and, thereby, reduce the risk in the overall investment plan. From the tax perspective, both options are equally efficient.

Do not chase NFOs: A new fund does not offer a track record to bank on. Populating your portfolio with ELSS NFOs every year is a mistake.

Buy from the company: Why pay Rs 2.25 entry load on every Rs 100 you invest to the agent ? Go to the fund office and buy.

See the whole to avoid the hole…

ELSS should be treated as part of the overall portfolio and not merely as a tax-saving instrument. This will ensure that all your investments will be as per your risk profile. Moreover, it will be goal oriented and not for the temporary purpose of saving tax only. You get returns from the equity market only when you have a long time horizon. If you keep adding money in a disciplined manner, you create a good corpus. It is indeed a good option to save tax and create long-term wealth with ELSS.