Monday, March 16, 2009

NFO Nest
(March 2009)

Of mean markets and pompous products…

Since April 2008, about 290 offer documents were filed with SEBI, according to the Delhi-based mutual fund tracker Value Research. During October 2008, the Sensex fell to a low of 7,700. Since then, there has been some recovery. But markets continue to languish. The more recent new fund offerings have managed to garner only minimal amounts due to low investor appetite. But debt funds are getting inflows into their fixed income and liquid schemes. It is no wonder that fund houses have deferred launches, despite approvals being given to around 40-45 schemes. The adverse market conditions apart, pending responses to queries from SEBI and a change in guidelines have also been contributory factors to the lull in the NFO market. Out of the 183 schemes for which offer documents were filed since October 2008, 68 schemes were fixed maturity plans (FMPs) that had to be shelved because of a change in guidelines in the third quarter of 2008-09. Of the remaining 115, SEBI is yet to approve around 70-75 schemes.

SEBI is not comfortable with structured products. SEBI has expressed its discomfiture with schemes that are based on equity-linked debentures (ELD) and constant proportion portfolio insurance (CPPI). These products are too complex for the lay investor. With the continued downturn in the equity markets, and ratings of ELD issuers too moving into negative zone, the products carry a risk of default. Currently, there are three ELD-based schemes that have collected Rs 1,516 crore. Four ELD based schemes — UTI Equity Linked FMP Series I, Tata Equity Linked FMP, Birla Equity Linked FMP Series 1M and HSBC Equity Linked FTP — have not yet received SEBI’s approval. ELDs are floating rate debt instruments whose coupon (interest) is based on the return of the underlying equity index, like the Nifty. However, if the issuer of ELD defaults, the investor bears the risk of losing a part of the principal. There are no CPPI products for retail investors.

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

Taurus Ethical Fund
Opens: 19 Feb, 2009 Closes: 30 Mar, 2009

Taurus Ethical Fund, an open-ended equity-oriented fund, is the first actively managed product in the Indian mutual fund space that conforms to the principles of Shariah investing. It is benchmarked to the S&P CNX 500 Shariah Index. The fund will refrain from investing in sectors or companies that are not compliant with Shariah principles- banks and financials, tobacco, breweries, alcohol related chemicals and meat processing. The fund will also apply additional company-specific filters to weed out companies that are high on debt or interest outgo, in keeping with the Shariah principles. The three financial filters are: Total debt/total assets less than or equal to 25 per cent, cash/receivables/total assets less than or equal to 90 per cent and interest income/total income less than or equal to 3 per cent. These filters will make the fund’s investment universe more restricted as compared to a plain vanilla diversified fund. But Shariah-compliant stocks account for roughly half of the market capitalisation and turnover on the NSE. Roughly 260 of the CNX 500 companies and 40 of the 50 CNX Nifty companies feature in the respective Shariah indices of the NSE. This suggests that this fund will have access to a sufficiently large universe to deliver good diversification. In fact, this fund’s investment universe will be much larger than that of most theme funds.

It is difficult to arrive at the return prospects of this fund, given the lack of comparable products with sufficient history. However, in the global context, Shariah-compliant funds have outperformed broader market indices over the past two years. This performance is clearly explained by their complete avoidance of financial stocks and highly leveraged companies, which have borne the brunt of the credit-triggered global financial crisis. Such out-performance may not be sustained at all times. In fact, the fund’s basic tenet of avoiding highly leveraged businesses and leaning towards those with relatively high cash, would tilt the portfolio towards mature businesses with moderate growth prospects. This may make such a Shariah-compliant portfolio a suitable option for conservative, rather than aggressive growth-seeking investors. A Shariah-compliant portfolio may also carry a valuation premium to the market today, given that over the past year stock market investors too have gravitated towards precisely such companies.

The scheme has been certified by an independent Shariah Board, Taqwaa Advisory and Shariah Investment Solutions (TASIS). The role of this board is to regularly monitor stock picks and certify their Shariah compliance on a quarterly basis. TASIS Shariah Board comprises eminent Shariah Scholar Mufti Barkatuallh Abdul Kadir, who is on the Shariah Board of reputed UK based banks.

Sahara Short Term Bond Fund
Opens: 12 Mar, 2009 Closes: 8 April, 2009

Sahara Short Term Bond Fund aims to generate optimal returns with moderate levels of risk and liquidity. For this purpose, it will primarily invest in debt securities including government securities, corporate debts and other debt instruments as well as money market instruments. As per its mandate, the fund can invest fully in debt and money market instruments with an average maturity of less than or equal to 12 months. It can maintain up to 50 per cent exposure in various debt instruments with an average maturity of more than 12 months. Exposure to securitized debt can go up to 50 per cent. The fund can also invest in foreign securities up to 10 per cent and in derivatives up to 50 per cent of the net assets respectively. The fund’s investment strategy would consist of various parameters such as prevailing interest rate scenario, quality and liquidity of the security, maturity profile of the instruments and growth prospects of the company whose instruments would be considered for investment. The fund will be benchmarked against CRISIL Liquid Fund Index and Mr. Devesh Thacker would be its designated fund manager.

The scheme offers attractive investment opportunity with low to medium risk profile and instant liquidity to investors at all time. Given the current scenario, this fund offers better opportunity to earn attractive returns besides having relative tax advantages.

ICICI Prudential Ultra Short Term Plan, ICICI Prudential Medium Term Plan, Mirae Asset Income Fund, Quantum PFN Equity Fund of Funds, Tata PSU’s Bond Fund, Religare Business Leader Fund and Tata Triple Ace Fund are expected to be launched in the coming months.

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