Monday, February 23, 2009


(February 2009)

The year 2009 started on a brighter note for the mutual fund industry as their assets continued to grow in January 2009. The month saw the assets under management of the fund industry rise by 9.43 per cent, witnessing an overall increase in its AUM of Rs 39,793 crore. The total AUM of the industry stood at Rs 4.62 lakh crore as against the December AUM of Rs 4.21 lakh crore. This is the highest jump since October 2007 when the assets had risen by 15 percent and the highest growth since the start of the market fall 12 months ago. The inflows are mainly happening in the fixed income schemes due to large surpluses in the banking sector, coupled with a softened interest rate scenario.

Of the 37 fund houses, 13 have reported a decline in asset base while 22 have reported a rise in AUMs. The older fund houses are the ones that have contributed the most in the upsurge of the AUM. The top mutual fund house by asset size, Reliance Mutual Fund reported an increase in asset base of more than eight per cent. The second largest – HDFC Mutual Fund – logged an almost 10 per cent rise, maintaining its second position. Last month saw ICICI Prudential MF replacing UTI MF in the third position in terms of asset size. ICICI Prudential’s asset base has gone up by more than 13 per cent and stands at Rs 47,515 crore, while UTI, which managed to log gains of over eight per cent, now manages close to Rs 46,161 crore of assets. While there were some fund houses such as LIC MF (30 per cent growth) and IDFC MF (28 per cent) that registered substantial increases in AUMs, a few reported steep dips in AUMs. These include Edelweiss Mutual Fund, which reported an AUM fall of more than 58 per cent; Benchmark Mutual Fund (16 per cent fall) and Mirae Asset Management (14 per cent fall).

Equity mutual funds are choosing to hold sizeable cash positions in view of the current market uncertainties. The proportion of cash to total equity assets has gone up from 10.1 to 20.5 per cent between January 2008 and January 2009. Though the actual cash holdings have only increased from Rs 18,000 crore to Rs 20,000 crore, the contraction in equity fund assets (due to NAV declines and some outflows) has resulted in a larger proportion of cash. Cash includes cash and cash equivalents such as money market instruments and short-term debt instruments. Among the larger AMCs Reliance Mutual Fund and UTI Mutual Fund hold cash positions amounting to about 30 per cent of the equity assets while SBI and HSBC Mutual hold about 20-22 per cent.

Piquant Parade

With increasing investor faith on branding in a market hit by recession, top mutual fund houses like Reliance, ICICI Prudential, UTI, Tata are going all out to claim their share of the pie. Some mutual funds are concentrating on branch expansions and strengthening channel partners, while others are enhancing investment knowledge for investors, distributors and financial advisors who influence investors. All efforts are aimed at getting fresh investments. While UTI is intensifying its core focus on financial advisors, Reliance Mutual and ICICI Prudential are going in for aggressive marketing strategies supported by knowledge dissemination programmes. Tata Mutual, which plans to add 25 branches by March 2009, is taking various initiatives under knowledge management. Buoyed by the success of its strategy to use 'dabbawallas' for promoting sales of its mutual funds, UTI MF now plans to use the SMS service in mobile phones to deepen and widen its penetration, especially in rural areas.

UTI Retirement Solutions, UTI Mutual Fund’s fully owned subsidiary, has emerged as the best bidder for the government’s proposed scheme for those not covered by its pension system. At a fee of Rs 9 for every Rs 10 lakh of pension money it would manage, the UTIMF arm’s bid was half its nearest competitor Reliance MF. Pension Fund Regulatory and Development Authority (PFRDA) selected six asset management companies to manage pension of citizens other than government employees. Besides UTIMF and Reliance MF, ICICI Prudential Life Insurance, IDFC MF, SBI and Kotak MF also qualified. All the five fund managers now have to agree at UTI Retirement Solution’s rate of Rs 9 for every Rs 10 lakh of funds managed.

Goldman Sachs Asset Management Company India, the Indian asset management arm of US based Goldman Sachs has deferred its plans to set up mutual fund operations in India as market conditions are not favourable. The plan to launch the mutual fund has been delayed by a year or more.

UTI asset management company, the manager of the fourth largest mutual fund in the country has put its plans on hold for sale of 26% stake due to poor valuation. The company had earlier called off an IPO due to adverse market conditions.

Bharti AXA investment managers announced a new corporate identity, the logo is in line with the Bharti Group unveiling its vision 2020 of building Bharti into India’s finest conglomerate by 2020. The Bharti brand reflects a multi-dimensional character that seeks out new avenues to grow.

Credence Capital, a mutual fund set up by students of the Indian Institute of Management-Lucknow (IIM-L) for fellow students, has seen its corpus double in less than two years - from an investment of Rs.300,000 in August 2007 to Rs.600,000 at present.

Regulatory Rigmarole

To support the Non Banking Finance Companies (NBFCs) and Mutual Funds to meet their liquidity requirements, Reserve Bank Of India has extended its special repo window till 30th September, 2009. The banks could use this window to borrow funds at the repo-rate and lend the same to credit hit Mutual Funds and NBFCs. The extension of the window would help the mutual funds to face the asset-liability mismatches, address the fund raising problem and stabilize the business.

The internal compliance teams of some mutual fund houses
have asked their fund managers to curb inter scheme asset transfers, which is often adopted as a recourse to meet short term liquidity constraints. The move comes in the wake of several fund houses cutting questionable asset transfer deals during October and November 2008, when debt schemes (particularly fixed maturity plans - FMPs) witnessed unprecedented redemption pressures. While it is not illegal for mutual fund houses to transfer assets (or to put it plainly, sell papers to another schemes) to other schemes of longer maturity terms or higher liquidity, the transfers have to be done at fair market yields. Industry sources claim there have been instances where the schemes which received the assets, were short changed or saddled with dud paper.
In a move that will ensure greater transparency in the way mutual fund schemes are sold to investors, SEBI is proposing to make it mandatory for distributors to disclose the commission they are paid by mutual fund houses. The regulator is also proposing a variable load structure, wherein investors can decide on the commission they are willing to pay to the distributor. At present, the AMC is free to pay the distributors any commission they feel is appropriate. Investors are at a disadvantage as they have no control over what they pay for the advice rendered to them. The Advisory Committee of Mutual Funds has suggested for a separate section in the application form, wherein investors can indicate the commission payable to the distributor. This would be jointly signed by the investor and the distributor. The AMC would then deduct the amount payable and pay the distributor. Alternately, investors could issue a separate cheque to the distributor towards commission. In the second option, the investor would issue two cheques — one for the investment in the mutual fund scheme and the second in favour of the distributor for the agreed commission. In both the above options, the process for making the investment application remains the same, except for the entry load being decided in terms of the agreement between the investor and the distributor. Market participants have been asked to submit suggestions before March 6, 2009.

Despite the volatility in the stock markets, the mutual fund industry has started showing signs of revival thanks to the softening of interest rates. Long term bond funds are poised to deliver good returns in 2009. The positive outlook for debt funds notwithstanding, it is important for debt fund investors to be aware of other risks such as the credit quality of the bond fund portfolio while making their choice. The extent of time an investor stays invested in a debt fund and timing of investment would also have a bearing on returns. Well diversified equity funds with a tilt towards large caps should still form the core of an investor’s portfolio. Cautious optimism is what is called for in an investor to ride safely on the road to recovery.

Monday, February 16, 2009


NFO Nest
(February 2009)

NFOs on a free fall

Fund houses appear to have have hit the pause button on new scheme launches. After having mobilised Rs 22,809 crore from new schemes in September 2008 (FMPs flooded the market) , the highest in the past 12 months, fund houses have managed to collect a mere Rs 37 crore from new schemes in January, 2009. Just five schemes were launched in January and the sales from new schemes for the month were the lowest in the last one year. The fall has been particularly steep in the last three months with sales nose-diving from Rs 4,229 crore in November 2008 to Rs 762 crore in December 2008, according to data from Association of Mutual Funds in India (AMFI). While fund houses launched 103 schemes in September 2008, it came down to 36 in November 2008 and 21 in December 2008.

The following funds find their place in the NFO Nest in February, 2009.

Shariah BeES
Opens: 4 Feb, 2009 Closes: 25 Feb, 2009

Benchmark Mutual Fund has launched the first ever Shariah Benchmark Exchange-traded scheme in India. The investment objective of the scheme is to provide returns that, before expenses, closely correspond to the total returns of the securities as represented by the S&P CNX Nifty Shariah Index by investing in securities which are constituents of S&P CNX Nifty Shariah Index in the same proportion as in the Index. It will enable millions of muslims and other investors to participate in stock markets. To be Shariah compliant, the fund will not invest in business activities related to pork, alcohol, gambling, financials, advertising and media (newspapers are allowed and sub-industries are analysed individually), pornography, tobacco and trading of gold and silver. The scheme will be benchmarked against the S&P CNX Shariah index, an index that was launched by Standard & Poor's and India Index Services & Products. Each unit is priced at 1/10th of the S&P CNX Nifty.

HSBC Asset Management has launched a Shariah portfolio scheme for affluent Indian investors. The HSBC Amanah India Shariah Portfolio is an actively managed open ended equity offering wherein investors can invest in conformity with Islamic Shariah principles. Minimum investment amount for this customised product in Rs 2.5 million.

Globally, Shariah compliant investments add up to USD 65 billion. Around 53% of the assets, or USD 35 billion, is held in mutual funds; out of this, USD 33.6 billion is managed by local fund managers and remaining USD 1.4 billion is managed by foreign fund managers. Saudi Arabia is the largest market in the world for Shariah mutual funds measured in terms of number of funds or by assets. In Asia, Malaysia is also the most important market for Shariah funds. Internationally, other prominent markets for Shariah products are Middle East countries, Indonesia, Pakistan, United States and South Africa. There are more than 800 Shariah-compliant stocks in Indian bourses; Pakistan, a favoured Islamic capital market investment destination, has only 30 Shariah-compliant scrips out of some 700-odd companies. The current share of Indian Shariah compliant market capitalisation (at over 60%) is highest even when compared with the number of Islamic countries such as Malaysia, Pakistan and Bahrain.

IDFC India GDP Growth Fund
Opens: 28 Jan, 2009 Closes: 26 Feb, 2009

The fund would endeavour to represent the growth in GDP by capturing the growth in the constituents of the GDP. The scheme will invest 65-100% in equity and equity related instruments and up to 35% in debt and money market instruments. Investment in derivatives will be up to 50% of net assets. Investments in securities lending and foreign debt instruments will be up to 35% (each) of the net assets of the scheme. Investment in ADRs and GDRs issued by companies in India, as permitted by SEBI regulation can go upto 50% of the net asset of the scheme. The benchmark index for the scheme is BSE 500 index.

HSBC Floating Rate - LT (Div-W)
Opens: 20 Feb, 2009 Closes: 20 Feb, 2009

The fund aims to generate reasonable returns with commensurate risk, from a portfolio comprised of floating rate debt instruments and fixed rate debt instruments, swapped for floating rate returns. The scheme may also invest in debt and money market instruments.

Canara Robeco Short Term Fund, DBS Chola Select Income Fund, ICICI Prudential Global Basics Fund, Reliance Infrastructure Fund, Bharti AXA G-Sec Fund and ICICI Prudential Dividend Yield Fund are expected to be launched in the coming months.

Monday, February 09, 2009



Resilience lowers risk…

Looking for a lower-risk alternative to a pure equity fund? The Fund of Funds may fit the bill. The resilience displayed during the recent downturn raises its position as a priced possession in an investor’s portfolio. Fund of Funds primarily provide a reasonable hedge against protracted market declines. With very little expectation of a quick revival in the stock market, FOFs could provide some balance to a flagging equity portfolio.

The glittering gems listed below have outsmarted their category average which has catapulted them to this envious position. Four of the six gems listed last year have the distinction of maintaining their position. FT India Dynamic PE Ratio Fund, by displaying the much needed resilience, has been accorded the status of a GEM while Kotak Equity FOF has failed to live up to investor’s expectations. Optimix Asset Allocator’s excellent performance in its short stint has enabled it to topple its counterpart Optimix Equity and attain the status of a GEM.

FT India Life Stage Fund of Funds Gem

Flair for life

The FT India Life Stage Fund of Funds are among the better performing equity oriented funds of 2008 — a loss of NAV of about 39 per cent for the year. That may seem an unimpressive show in absolute terms, but still much better than the equity fund category, which has lost 55 per cent in value for the year. This is mainly explained by the fund’s large-cap orientation and a 20 per cent debt exposure, which has protected the capital. The funds re-balance their portfolio to maintain their fixed allocation, at six-month intervals. The funds’ ability to contain downside well in the choppy markets of 2008 has given it a leg up in the recent return rankings. A very conservative strategy of maintaining a low portfolio maturity in recent months appears to have limited the potential for gains from tumbling bond yields. However, given that the interest rate environment is likely to remain benign for some months to come, there appears to be potential for improvement in returns through a more aggressive stance over the next few months.

ICICI Prudential Advisor Series Gem

Promise of potential

Prudential ICICI Advisor series is an open ended asset allocation fund, which is of the nature of fund of funds, with a one-year return of -25.45%, a spectacular return in relative terms. Its return for the fortnight ended 6 February, 2009 is actually positive at 2.6%. There was a change in the fund manager as recently as September 2008, with Rahul Goswami taking over the reins.

Birla Asset Allocation Plan Gem

Brilliant at the battlefield

The fund has established a comprehensible trend of performing well in difficult market conditions. Its three-year return of 6.5 per cent compounded annually over the last three years outperformed the diversified-fund category average of -1.5 per cent. However, the plan’s historical chart hints that its performance during sharp rallies is considerably below average compared to equity-category returns, suggesting that its show may not be consistently superior across market cycles. Over the last year, it has declined by 26 per cent as against its benchmark return of -37 per cent. Its performance was also superior to similar FOFs which have declined between 26-51 per cent over a similar period. The fund’s equity portfolio appears to hold a value strategy what with higher exposures to sectors such as IT and financial services, that hold attractively valued stocks. The fund’s debt portfolio also attracts attention for its strategic mix of short-term, income and bond funds from the Birla stable. The fund’s quick shift to debt in the correction of 2006, 2007 and now have aided the fund create a cushion against equity declines.

Fidelity Multimanager Cash FOF Gem

Cashing in on composition

Fidelity Multimanager Cash Fund has been able to retain a positive return in view of the composition of its portfolio - 20% each in HSBC Cash Institutional Plus, HDFC Cash Management Savings, Birla Sun Life Cash Plus Institutional and ICICI Prudential Liquid Super Institutional and current assets. Its one year return is 8.4%

Optimix Asset Allocator Multimanager FOF In

Optimum Output

OptiMix Asset Allocator Multi Manager Fund of Fund packs a combination of tactical asset allocation and fund selection. The OptiMix Asset Allocator not only chooses funds based on performance and manager skills, but goes one step further in also determining the allocation between equity and debt. Unlike balanced funds, which tend to be tilted towards either debt or equity, this fund shifts between 100 per cent equity and debt based on a mechanical model designed to predict intermediate market trends. This fund does its asset allocation based on the PE levels of the market. But it uses an in-house tool called the limited loss moving average (LLMA) to identify changes in market direction. The fund has protected the downside risk and delivered decent returns in upswings.The fund has not always cut on equities at high PE levels. It has generally maintained a high equity allocation during market upswings and high PE levels and has cut the allocation as and when the market has slipped. Optimix Asset Allocator has delivered a return of about 12 per cent since its inception beating its benchmark: the Crisil Balanced Fund Index by about two percentage points. Top performing balanced funds have returned twice as much since. However, much of their outperformance can be explained by the heavy bias to equity. OptiMix Asset Allocator has managed to beat the average debt-oriented balanced fund. OptiMix Asset Allocator was almost fully invested in equity during the initial months after its launch. Since February, however, its exposure to equity has declined to less than 25 per cent. The lower allocation to equity appears to have coincided well with the market correction that began in early February. However, the FoF appears to have been waiting by the sidelines since then, with a substantial cash/liquid fund allocation. The allocation to debt has been limited to liquid funds, probably as the fund waited to take advantage of opportunities in the equity market.

FT India Dynamic PE Ratio FOF In

Dynamism overcomes downturn

FT India Dynamic PE Ratio FOF follows a dynamic and systematic asset allocation strategy. The fund changes its asset allocation based on the weighted average PE ratio of the NSE Nifty Index. At higher PE levels, it reduces allocation to equities in order to minimise downside risk. The fund clearly adheres to its strategy. If the PE of the Nifty falls below 12, the fund will be fully invested in equity. If the PE rises to above 28, it will translate into it being fully invested in debt. In doing so, the fund has clearly attained its objective of downside protection during a market downturn. While the Sensex lost nearly 50%, it lost just 24%. On the flip side, in a rising market, as the equity exposure gets reduced, the investor may have to compromise on returns. Its options are limited to just Franklin India Bluechip Fund, an open-end diversified equity scheme and Templeton India Income Fund, an open-end income fund.

Monday, February 02, 2009


FUND FLAVOUR - Fund of Funds
(February 2009)

Prescription …

In volatile and uncertain markets diversification and rebalancing of the portfolio on an ongoing basis are crucial in order to enhance returns or minimize losses. Fund of Funds (FoFs) or Multi manager Funds may just be what the doctor ordered as it simplifies the investment process for investors who normally have to invest in a range of mutual funds to achieve their desired asset allocation. FoFs make the investment process much easier for investors on account of their rebalancing feature, as normally, market movements make their steady state asset allocation go awry, and frequent rebalancing is cumbersome and inefficient from a tax perspective. Moreover, the different options in the FoFs make them an ideal investment avenue for investors and distributors seeking a ‘one-stop’ shop for their investment needs.

The Multi manager advantage

Multi manager funds aid long term wealth creation through comprehensive diversification, convenience and affordability and are active at all stages – from setting objectives, asset class selection, strategic asset allocation, portfolio construction, manager selection, tactical asset allocation, active manager allocation to monitoring and review.

Team players at premier prices

Multimanagers can switch rapidly between funds as their fortunes wax and wane. Like a wealthy football club, they can sign up the best players in the game – and such a galaxy of talent should, in theory at least, deliver a superior performance. However, as those who pay star footballers can tell you, such talent does not come cheap, saddling investors with a huge burden. Investors purchasing multimanager funds have to fork out two layers of charges: one for the multimanager doing the fund selection and another for the underlying funds.These funds have a tax structure similar to debt mutual funds, irrespective of the exposure they have to underlying funds, equity or debt. So, investors pay a short-term capital gains tax at 30% and long-term capital gains tax of 10%, or 20%, with indexation (applicable surcharge and cess to be added to the tax rates). A dividend distribution tax of 12.5% for retail investors and 20% for institutional investors is payable on debt funds.

A Motley mixture

FoFs offer off the shelf asset allocation. A ready made asset allocation solution compared to investing directly in a varying portfolio of shares, bonds and mutual funds saves time. A critical evaluation of FoFs vis-a-vis equity funds have revealed that FoFs have a better Standard Deviation (risk) but score low on the Sharpe Ratio (risk-adjusted return) front. Corpus size, investment in funds across the industry and performance vis-s-vis the benchmarks are other key criteria in the selection of FoFs. FoFs lag in performance in a broad based bull market. The bull market of 2007 made it difficult to outperform the index. In the 2008 downmarket these funds managed to preserve their capital since they had allocated a lion’s share to liquid and debt funds in their portfolio. Close to 75% of the FOFs outperformed the BSE sensex. As FOFs can take asset allocation calls, funds with flexible debt and equity mix, can take advantage of such market conditions. The figures speak for themselves:

How FoF scores over other Funds

Fund type 3 mths (%) 6 mths (%) 1 yr (%)

Figures are category average returns as on 31 October 2008

A sojourn not so smooth

FoFs, though sound conceptually, have a long way to go in India. All the FoFs combined have a corpus of Rs 896 cr. This is miniscule compared to the total AUM in the entire mutual fund universe. Despite the advantages they offer, FOFs have not caught on with the average investors. This is like a fill-it-shut-it-forget-it investment vehicle. It is interesting to note in this context that, multimanager funds are hugely popular in the US and Europe in particular. Multimanager investing is the hottest trend in the financial services industry in the US and Europe enticing asset managers to loudly tout their wares. But Indian FoFs are relentless despite the lack of recognition.

Daring dream

ING Group expects assets under its multi-manager products in India to surge five times to 50 billion rupees ($ 1.1 billion) in three years as the strategy attracts retail and institutional money. The firm launched the strategy in India in 2006 and now has about 10 billion rupees from investors in India and AsiaPacific region, while those from Europe and Middle East were interested. The number should easily be five times its size in the next three years, with room to grow further. ING manages about $10 billion globally under its OptiMix division. The fund plans to launch 2-4 multi-manager products in 12 months, including globally-invested funds. Brisk demand for multi-manager funds is expected as professional managers look for such products in a volatile Indian market and rising complexity in domestic funds industry makes taking investment decisions tough for retail investors.

…in times of panic

During an economic slowdown or recession, it is not advisable to follow a fixed investment style in mutual funds as it can be detrimental to the fund's performance. In such a scenario, one should diversify across investment styles or multiple investment portfolios. Fund of Funds is a category of mutual funds that provides such benefits in times of panic.