Monday, January 26, 2009


(January 2009)

Green end to 2008…..

The mutual fund industry has broken a three-month losing streak. Despite the sharp fall in the market since January 2008, the mutual fund industry saw a consistent rise in the AUM till May 2008 — from Rs 5.7 lakh crore to almost Rs 6 lakh crore. This was primarily because investors, including companies and high net worth individuals, continued to pump in funds in Fixed Maturity Plans (FMPs), Liquid and Liquid-plus funds. However, since May 2008, assets fell by almost Rs 2 lakh crore — from Rs 6 lakh crore to Rs 4.21 lakh crore by December-end. October was particularly bad for the mutual fund industry when it lost Rs 97,000 crore in a single month. This was because of a severe liquidity crunch, which forced a large number of corporates in need of working capital to exit FMPs, Liquid and Liquid-plus funds. Even high net worth individuals moved out of such schemes because there were concerns that these schemes had invested in risky papers. Moreover, there was a mismatch in the maturity of the papers and schemes. Both AMFI and SEBI have stepped in since then with guidelines to regulate these schemes.

The total assets under management of India’s 35 mutual fund houses have soared to Rs 421,117 crore, following an increase of Rs 19,088 crore at the end of December 2008, according to the data by the Association of Mutual Funds in India. Reliance Mutual Fund maintained its top position with an AUM of Rs. 70208.10 crore, which is a third more than its second closest competitor HDFC Mutual Fund, which manages around Rs. 46757.45 crore. UTI Mutual Fund retained its third position with an AUM of Rs. 42548.17 crore witnessing an inflow of Rs 4190.03 crore. ICICI Prudential Mutual Fund was placed fourth with an AUM of Rs 41,878 cr and Birla Sun Life Mutual Fund was placed fifth with an AUM of Rs 36,565 cr. Similarly, SBI Mutual Fund retained its sixth position with average assets under management of Rs 25,004 cr, while Franklin Templeton Mutual Fund was at the seventh place with an AUM of Rs 19,244 cr. The top 10 fund houses in terms of AUM have remained unchanged except for the tenth position that has been taken over by LIC Mutual Fund from DSP Black Rock Mutual Fund. It is noteworthy that LIC's AUM has witnessed an upsurge of 23.24 per cent which is the highest change in percentage terms. As against two fund houses that reported an increase in their AUMs in November, it is indeed a positive development that 16 fund houses saw an upsurge in their AUMs in December. The fund houses that recorded a double digit rise were LIC Mutual Fund, JP Morgan, Birla, ICICI and Canara Mutual Fund. However, it seems that the new entrants had to bear the brunt of investors' drowning faith on the shaky markets resulting from the global recession blues. The three fund houses that shed their AUM the most were Edelweiss Mutual Fund, Mirae Asset Mutual Fund and Bharti AXA Mutual Fund, witnessing a fall of 53.14 per cent, 35.50 per cent and 31.61 per cent respectively. The above mentioned fund houses had started their operations in India in 2008 only.

Piquant Parade

UTI Asset Management Company has indefinitely deferred its plans to go public due to the bearish market conditions. The company will be roping in a strategic partner by diluting a 26% stake. The negotiation is at an advance stage and deal is expected to be closed by February or early March 2009. Japan-based Shinsei, with which the fund house has a tie-up with regard to global fund management, is being actively considered to be the strategic partner. Other US and European players, including the second largest fund house in the USA, Vanguard Mutual Fund, have also shown interest in picking up a strategic stake in the mutual fund. The strategic partner is expected to add value to the business and strengthen the distribution network and help upgrade technology.

UTI Mutual Fund has opened 7 new UTI Financial Centres (UFCs) at various centres viz. Meerut, Belgaum, Alwar, Kozhikode, Malda, Amravati and Aurangabad.

In a bid towards reinforcing its commitment to expanding retail participation, Kotak Mahindra Asset Management Company has entered into a distribution tie-up with Central Bank of India, which will offer the entire bouquet of Kotak Mutual Fund products from its branches.

In a surprise move that has created a flutter among mutual fund distributors, HDFC Mutual Fund has asked its distributors to refund a part of the brokerage they received for selling FMPs, as a result of premature redemptions in those schemes. HDFC Mutual Fund has decided to invoke a clause in its agreement with distributors, which mentioned that in the event of investors pulling out before the maturity period, brokers would have to refund the brokerage proportionate to the 'unexpired period'. This is a very unusual move as fund houses are heavily dependent on distributors to sell their schemes. Many distributors who have been slapped with this demand are furious over it as according to them the distributor’s role is to advise investors at the time of investment but once the investment is made they cannot control the actions of investors.

Regulatory Rigmarole

The Securities and Exchange Board of India (SEBI) has forbidden mutual funds from offering indicative yields and portfolios to lure investors. Indicative yields and portfolios, generally revealed by funds in the case of FMPs, have been misleading. This practice came under the scanner during the recent liquidity crunch that FMPs faced. Investors were up in arms because FMPs were unable to actually match the promises implied by indicative yields.

In order to match the tenure of debt securities in the portfolio with the maturity of schemes, SEBI has cut the maximum maturity of papers in which liquid funds could invest. From February 1, 2009 mutual funds have to invest inflows received in liquid and liquid plus schemes into debt securities having a tenure of up to 182 days. From May 1, 2009 they can invest in securities maturing up to 91 days only.

SEBI announced that all the Mutual Funds registered with SEBI need to discontinue the nomenclature of ‘Liquid Plus Scheme’. As per the regulator, the nomenclature gives a wrong impression of added liquidity to the investors. The mutual funds have been advised by SEBI to carry out the change in the nomenclature of ‘Liquid Plus Scheme’ and confirm compliance to SEBI within 30 days from the date of the circular (19 January, 2009).

Fifteen firms have been short listed by the Pension Fund Regulatory and Development Authority (PFRDA) to become fund mangers of the pension fund that is likely to be allowed from April. 21 fund houses had submitted proposals to manage the pension funds for the non-government employees out of which only 15 have been selected and requests for proposals have been issued. The firms which have been selected include government promoted SBI Pension Fund, LIC Pension Fund and UTI Retirement solutions. These firms are also pension fund managers for the central government and state government employees. The PFRDA will allow six firms to set up pension funds for the non-government employees after the completion of the selection process which is expected to be completed by the second week of February. The regulator has plans to allow up to 26% foreign investment but with a condition that direct or indirect holding should not exceed 26%. The condition for selection criteria are at least five years of experience in fund management; monthly average assets under management not less than Rs 8000 crore for the last 12 months and net worth of Rs 10 crore. The regulator intends to allow the fund managers to offer five-six schemes, of which one will be a 100% debt plan, while another one will let investment mix between debt and equity to be decided by the age of the investor. The other schemes will allow investment of 15-85% in equities, while the rest will be allocated to debt.

Recovery sans dead (red) end?

2008 had been a torrid year for the Indian capital markets, with the Sensex falling by 52.47% - the highest in the past 3 decades. The mutual fund industry's AUM also shrank by 24.19 per cent during 2008. There has been a steady month-on-month increase in cash levels maintained by mutual funds with some mutual funds holding cash in excess of 20% for over the past two months. But on a positive note, India remains one of the world's fastest-growing major economies, with a large domestic consumption base. The country's relatively low dependence on exports limits its direct exposure to the global slowdown, while cheaper oil prices are helping to narrow the current-account deficit. The lag-effect of the liquidity crisis in October is lingering on in the market as of now. Going forward, the unfortunate Satyam fallout this month will also further dent confidence but that is only short-term. As long as there are no further shocks of such magnitude, the markets should remain normal in 2009. Let us hope that the December effect rubs on the coming months of 2009 and we see the market's convalescence journey take stride.

Monday, January 19, 2009


NFO Nest
(January 2009)

Funds lie to vie for the investor’s pie rather than die…

Old wine being pumped into new bottles is doing the rounds in the NFO market. To cash in on the rush for tax saving instruments this quarter, mutual funds have started launching a spate of ELSS Funds. The volatile and uncertain equity markets have not deterred mutual funds, not to mention dampening their “spirits”. Some fund houses have the dubious distinction of duplicating their offerings (Tata Tax Advantage Fund, DBS Chola Taxsaver...), thereby, facilitating duplication of the unsuspecting investor’s portfolio.

The following funds find their place in the NFO Nest in January, 2009.
Bharti AXA Tax Advantage Fund
Opens :12 Dec, 2008 Closes:12 Feb, 2009

The baby of the Indian mutual fund industry, Bharti AXA Mutual Fund, has come out with its fourth offering - second one in the diversified equity category. This will be a diversified multi-cap fund, not biased towards any sector or market capitalization. It also has a leeway to invest up to 20 per cent in debt and money market instruments. It offers two plans viz. eco and regular plan with growth & dividend options. The scheme is benchmarked against S&P CNX Nifty Index and will be managed by Mr. Prateek Agrawal.

DBS Chola Tax Advantage Fund
Opens: 19 Dec, 2008 Closes: 19 Mar, 2009

DBS Chola Tax Advantage Fund - Series 1 is a 10-year close ended equity linked saving scheme, subject to a lock in for a period of three years from the date of allotment. The objective of the scheme is to seek to generate long-term capital growth from a diversified portfolio of predominantly equity and equity-related securities and also to enable investors to get income tax rebate as per the prevailing Tax Laws and subject to applicable conditions. The fund would invest between 80-100% in Indian equities and equity related securities and 0% to 20% in money market instruments / debt securities instruments. This fund will follow value investing strategy. Current market conditions favour this strategy as it limits the downside potential of these stocks. The benchmark Index is BSE-200 Index and Anant Deep Katare will manage the fund.
Fidelity Wealth Builder Fund
Opens: 14 Jan, 2009 Closes: 5 Feb, 2009

Fidelity Wealth Builder Fund is an open ended fund of funds scheme offering asset allocation options with three Plans. The fund manager will use a two-tier investment approach – asset allocation and fund selection – to invest in Fidelity’s funds. This is a zero entry load Fund with free switching between Plans permitted. The Fidelity Wealth Builder Fund offers three plans with varying levels of exposure to debt and equity that investors can choose from depending on their risk appetite. These are called Plan A, Plan B and Plan C. The investment in the fund can be done via regular investment option or systematic Investment Plan. Under plan A, the fund will invest up to 85% in debt schemes and around 15% in equity schemes. Under plan B, the fund will invest around 30% of net assets in equity schemes and the remaining in debt schemes and under plan C, the fund will invest at least 50% of the net assets of the plan in debt schemes and 50% of the net assets of the plan in the equity schemes. The performance of the scheme will be measured against CRISIL Composite Bond Fund Index and the BSE 200 in the proportion of the split between debt and equity for each Plan. Sameer Kulkarni will be the fund manager for the scheme.

Bharti AXA Regular Return Fund
Opens: 28 Jan, 2009 Closes: 24 Feb, 2009

Bharti AXA Regular Return Fund aims to generate regular income through investments in fixed income securities and also to generate long term capital appreciation by investing a portion in equity and equity related instruments. The scheme will offer two plans viz. eco and regular plan with growth & dividend options. The scheme will invest up to 80%-100% in money market securities and debt securities including government securities, corporate debt, securitized debt and other debt instruments and invest up to 20% in equity and equity related securities. Investment in asset backed securities (securitised debt) will not exceed 20% of the net assets as at the time of purchase. Investment in derivatives instruments may be up to 50% of the net assets of the scheme for the purpose of hedging and portfolio balancing purposes. The benchmark index for the scheme is CRISIL MIP Blended Index. Sujoy Kumar Das will manage the fixed income and Prateek Agrawal will manage the equity investments of the scheme.

Tata Infrastructure Tax Saving Fund
Opens: 17 Dec, 2008 Closes :16 Mar, 2009

Tata Infrastructure Tax Saving Fund is a 10-year close ended ELSS, subject to a lock in for a period of three years from the date of allotment. The investment objective of the scheme is to seek to provide medium to long term capital gain by investing predominantly in equity / equity related instruments of the companies in infrastructure and infrastructure related sectors along with the income tax benefit to its unitholders. The fund will invest 80-100% in equities and equity related securities, out of which 65% to 100% will be invested in equity & equity related instruments of companies in infrastructure and infrastructure related sectors. The scheme may invest 0% to 20% in debt, money market & securitized debt instruments. The Benchmark index for the scheme would be BSE Sensex. Fund Manager for the scheme will be M. Venugopal & Mahendra Jajoo.

Bharati AXA Income Fund, ICICI Prudential Recovery Fund, ICICI Prudential Target Return Fund, Edelweiss Income Plus Fund and Tata Opportunities Fund are expected to be launched in the coming months.

Monday, January 12, 2009



Serenity in a single shot!

Balanced funds offer you the benefits of asset allocation, while investing in a single avenue. Moreover, in times of market volatility, well-managed balanced funds can have a calming influence on portfolios, thanks to the presence of the debt component. Now is a good time to put balanced funds under the scanner and evaluate their performance.

The gleaming gems listed below have proved their mettle time and again…..Four of the five funds listed in last year’s GEM GAZE have retained their envious position. DSP Blackrock Fund has made it to the list while Tata Balanced Fund, in view of its lacklustre performance, has made a quiet exit.

HDFC Prudence Fund Gem

Hale and Hearty

HDFC Prudence is a class act. It sprints like an equity fund but delivers the stability of a balanced fund. Continuity of the fund manager, unmatched returns and optimum stability make it the right fund for the long-term. Powered by an impressive track record across the risk and return parameters, the ICRA 5 star (3 years) award winning fund has often set the tone for its peers from the balanced funds segment. With net assets at Rs.2538.9 crores, the fund manager has consistently maintained an excellent blend of growth and value stocks which has been his key to success. Some of the contra calls made by the fund manager in sectors such as FMCG and Pharmaceuticals have paid off rich dividends. The fund manager sticks to his conviction in stock selection irrespective of market conditions and believes in long term investing. HDFC Prudence follows a more conservative approach and has stable holdings. While it has trailed its benchmark over the last year, it has, nevertheless, managed to contain losses better than indices such as the Sensex and the Nifty. HDFC Prudence has around 40 per cent of its portfolio in midcap (with less than Rs 7,500 crore market cap) stocks and has retained this proportion for over a year. This strategy worked well for the fund during last year’s market rally. The fund also invested in momentum sectors such as capital goods, banks and power. It does not indulge in heavy churning in sectors. But exposure to defensive sectors such as pharmaceuticals and consumer non-durables has seen an increase.

HDFC Prudence has all the right ingredients - an excellent performance history, below average risk and consistent returns. The fund merits inclusion in just about every risk-taking investor’s portfolio.

FT India Balanced Fund Gem

Forte and fortitude

Though the past one year has been far from promising with a dismal return of -ve 39.25%, the past month has turned the tide with a positive return of 3.21%. Even this one year negative return is better than the category average of 42.65%. The net assets as on 31 December, 2008 stand at Rs. 211.86 crores. The top ten holdings in the portfolio are companies with solid businesses. Debt forms 36% of the portfolio, with debentures of Rural Electrification Company at 7%, leading the entire portfolio. These priced possessions, it is hoped, will lead the recovery of the fund that temporarily suffered a mild jolt (like its peers) in the course of 2008.

It may not be the boldest balanced fund but it gets the job done. The focus is on stability and not extraordinary returns. A cautious investor, who prefers peace of mind over flashy returns should like this fund.

Magnum Balanced Fund Gem

Meandering about the median

Magnum Balanced Fund, an ICRA 7 star gold (3 years) award winner, has traditionally been a more aggressive fund within the balanced category, with relatively high equity exposures and several mid- and small-cap stocks among the equity holdings. The fund’s equity exposure, which hovered at 77 per cent levels in late 2007, has since declined and is now at 70 per cent. The fund has 39 stocks in its latest equity portfolio and the top ten account for 29 per cent of the assets. Close to 30 per cent of the assets were held in debt and cash. In its debt portfolio, it has invested primarily in high quality short-term papers mostly issued by the finance companies. Despite its tendency to invest in large-cap stocks, the fund’s higher exposure to equity pegs up its risk profile. This was reflected in the one year return of –ve 45.11% as against the category average of – ve 42.65%. But the one month return is an impressive 5.25% as against the category average of 3.68%. The fund's large equity exposure may make it unsuitable for the conservative investor, though the large-cap focus and diversified portfolio will go a long way in rationalising the risk. This will also provide steady rather than spectacular returns.

Magnum Balanced has both the pedigree and the rich history to warrant a place in any investor's portfolio.

Sundaram Balanced Fund Gem

Shining under the shade

This ICRA 5 star (1 year) winner has made an even more dramatic recovery from the -ve 42.89% over the past one year to 4.66% over the past one month. The one month return is a clear one percentage point higher than that of the category average. This is significant since its one year return almost equalled the category average (a little less). Though the tilt towards growth and largecap scrips and net assets of Rs. 28.64 crores with approximately 29% allocated to debt show the fund in a good light, the 12% holding of the NCDs of Unitech (top holding), a real estate company, is a cause for concern.

The scintillating performance (relative to its peers and the benchmark) shrouds the minor misgivings and qualifies it as a GEM.

DSP BlackRock Balanced Fund In

Disciplined and diversified

The fund has a propensity to hold a well-diversified equity portfolio and also a fair degree of consistency can be seen therein. The fund’s risk-averse nature is adequately highlighted in its debt portfolio as well; the latter is dominated by high rated instruments (AAA or equivalent) coupled with a low average maturity. The fund’s rigid adherence to its mandated debt-equity allocation despite being tested by rising equity markets deserves mention. Secondly, the fund’s stable fund management style and penchant for holding a well diversified portfolio (equity and debt) are noteworthy. The fund has been able to tactically shift between sectors in its equity portfolio. On the equity side, the fund generally holds a well-diversified stock portfolio comprising of stocks from across market segments. The fund, which had high exposures to IT and FMCG stocks, contained the downside better by scoring on stock selection and weights in defensive sectors. Similarly, on the debt side, the fund has allocations of close to 35% and largely steers clear of credit and interest rate risk. The fund has rightly taken exposure to short-term debt in order to gain from rallying interest rates.

With over a third of its assets in debt, the fund declined 22 per cent on a one-year basis. Exposure to debt has restricted the fund’s losses to about 50 per cent of the Sensex return (of -43 per cent). The fund’s three-year annualised return of 15 per cent is not only superior to its benchmark Crisil Balanced Fund index but also higher than the Sensex return. Over a six-month period, the fund declined about 19 per cent, 400 basis points more than its benchmark. The Sensex declined 33 per cent over this period.

DSP Blackrock Balanced Fund, with a strong and consistent track record, has weathered the earlier as well as the recent downturn reasonably well. A must in every investor’s portfolio.

Monday, January 05, 2009



Balanced Funds

Endangered …

Once upon a time, there used to be a type of mutual fund called a 'balanced fund'. It was a very useful type of fund which was generally the most suitable type for a large proportion of retail investors. Actually, balanced funds still exist. It is just that Indian fund houses seem to be trying their best to sweep them under a carpet. If you depend on the marketing and sales efforts of mutual fund houses and distributors to get to know about funds, I am sure that you have not invested a single paisa in a balanced fund. Balanced funds form only approximately 1.5% of the total fund industry assets. Since the stock markets started rising in 2003, 12 new equity-oriented balanced funds have been launched. During the same period, 157 new equity funds have been launched. That is 13 equity funds for every balanced fund. As things stood in 2002, the ratio was 20 balanced funds to 48 equity funds. That is one balanced fund to 2.4 equity funds. Quite a drastic shift…

To figure out why balanced funds need more attention than they get, let us recap what balanced funds (also called hybrid funds) are.

Balanced funds maintain a balance of two types of investments - equity and fixed income. The fixed income part is generally corporate or government debt of various types. These funds are mandated to stick to a fairly well-defined ratio between these two types of assets. This simple structure is more conservative in returns than equity funds but it compensates with some great advantages. Firstly, to maintain the ratio between debt and equity, the fund manager has to periodically sell whichever investment has done better. With the proceeds of the sale, he has to buy the other type of investment to regain the balance. While this sounds counter-intuitive to the average investor, it ensures that the profits from equity are being regularly realised and then protected from vanishing by investing them in safe debt investments. When the equity markets are falling, it ensures that you are buying equities when they are cheap. Invariably, this is the best strategy to combine profits with safety in the long-term. However, individual investors rarely have the discipline to implement it since it is always counter-intuitive to sell whatever is rising and buy whatever is falling.

In the quagmire…..

With the stock market undergoing a sizeable correction since the start of 2008, 30 out of 50 balanced funds in operation now carry a negative return for a one-year period. The ongoing downturn in the stock markets has clearly caught them on the wrong foot. The gap between the worst and the best performing funds in the category is even wider. While the worst performer recorded an NAV erosion of 26 per cent, the best managed a positive return of 22 per cent. In comparison, diversified equity funds turned in returns ranging from a negative 35 to a positive 23 per cent. Close to half the funds trailed equity indices such as the Sensex and Nifty. The downside for the worst performing balanced fund has clearly been lower. As a category, balanced funds did contain downsides better than diversified equity funds.

…..but flavour not so sour

Balanced funds should rightly be the flavour of the season as the equity markets are fraught with volatility and price declines. Balanced funds, with allocations to both stocks and debt instruments, are considered defensive in comparison to diversified equity funds. Balanced funds may opt for differing mixes of debt and equity, with many funds holding a 65 per cent plus equity exposure to gain tax benefits accorded to equity-oriented funds. The allocation to debt by the average balanced fund stands at less than 20%. Most balanced schemes, barring a couple of them, were hardly popular among investors in bullish times because it was felt the debt allocation would hinder maximisation of equity returns. Those schemes, with higher equity allocation to the extent of 80%, were more in demand then. But with the bear phase setting in since January 2008, these funds have been the biggest laggards in the pack, drawing criticism toward equity-oriented balanced funds. Many funds that generated a positive return of 1-7 per cent were children’s schemes, with higher debt allocations. Principal Child Benefit Fund, Magnum Children Benefit Plan and HDFC Children’s Gift Fund Savings Plan are some instances.

Still a safe bet

Over a complete rise-and-fall market cycle, balanced funds invariably produce decent returns with far less volatility and heartburn. Over the last five years, the average equity diversified fund has given returns of about 31 per cent p.a. and the average equity-oriented balanced fund has produced 23 per cent but with lower volatility. Not only does this balanced strategy get stable returns, it is also more tax-efficient than it would be if you executed it yourself. There are two reasons for this. One, every time you would sell you would pay capital gains tax. When funds buy and sell with their portfolio, there is no tax liability to the end-investor. Two, when you hold any kind of fixed income investment yourself, it is liable for long-term capital gains tax since only equity income is exempt from that. However, if a balanced fund keeps its equity allocation above 65 per cent, then the investor's entire investment is treated as equity for tax purposes and thus becomes free from long-term capital gains tax. Best balanced mutual funds keep allocation flexible and open to changes as per the demands of market conditions but subject to regulations by laws of government and SEBI.

… but not extinct

Which brings us to the original puzzle - why then are fund houses and salesmen not enthusiastic about balanced funds? I believe that is because it is difficult to package balanced funds in some kind of a returns-maximising trick story. As the fund industry has gravitated towards consumer-goods type feature-driven products, simple and reliable ideas like balanced funds get side-tracked. But that does not mean that the sensible investor has to ignore them too. There are a handful of excellent balanced funds with solid long-term prospects available (GEM GAZE due to appear next week will help you seek them out).

Wishes… be a winner

2008 was a forgettable year — a sliding stock market and insurmountable inflation for a better part of the year meant a deep dent in savings and investments. Will 2009 be better? The new year is off to a good start….let us hope the winning streak is sustained. Before I take leave, let me wish you all a wealthy and prosperous 2009!