Monday, December 27, 2010

December 2010

Things seem to be looking up for the mutual fund industry as it saw a net inflow in November 2010. The mutual fund industry saw an inflow of Rs 18,379 crore in November 2010 as against a total outflow of Rs 5,742 crore in October 2010. Income funds experienced an inflow of Rs 11,307 crore in November 2010, as against an outflow of Rs 5,305 crore in October 2010. The equity funds saw an outflow of a mere Rs 41 crore while they saw an outflow of Rs 2,869 crore during the previous month. In September 2010, the figure stood at Rs 7,011 crore. Total sales of all schemes during November 2010 touched Rs 7.77 lakh crore, while redemptions were Rs 7.59 lakh crore. Redemptions have been decreasing month after month since September 2010. The heavy profit-booking spree of investors has finally shown visible signs of abatement. Arresting downtrend, the assets under management (AUM) of the mutual fund industry have also shown an increase of about 3% in November 2010 to Rs 6.65 lakh crore from Rs 6.46 lakh crore in October 2010.

The domestic mutual fund industry recorded its highest profit after tax (PAT) in 2009-10. According to a report by the fund industry tracker, Morningstar, fund houses’ consolidated profit after tax in 2009-10 stood at Rs 911 crore as against Rs 224 crore in 2008-09. The industry profitability, measured by dividing the consolidated profit by total average assets for the financial year, rose sharply to 13 basis points in 2009-10 as against four basis points in the previous year. HDFC Mutual Fund emerged as the most profitable fund house, with a PAT of Rs 208 crore, followed by Reliance Mutual Fund at Rs 195 crore. The gross income of fund houses has risen substantially, resulting in higher profitability for the industry this year. Other fund houses that recorded strong profit growth in FY10 were ICICI Prudential, Birla Sunlife, Kotak, and LIC, among others. The 10 largest asset management companies (in terms of assets) accounted for 80% of the industry’s gross income. In 2009-10, their consolidated profit rose 83%, while the consolidated gross income climbed 41%. Smaller players, such as Quantum, Edelweiss, AIG, and Mirae, managed a decent performance on the back of improved profitability. The players whose profits dropped include Benchmark, Shinsei, Morgan Stanley, IDFC, Sahara, and Baroda Pioneer. Of the 38 AMCs, 15 were in the red during 2009-10, though their losses fell.

Piquant Parade

Shinsei Asset Management (India) Private Limited has entered into an agreement with Daiwa Securities Group Inc. (DSGI) and Daiwa Asset Management Co. (DAM), to divest their stake. As per the agreement, the parent company of DAM will be acquiring 91% of the equity share capital of the Asset Management Company (AMC) and the balance 9% of the AMC will be acquired by DSGI. Accordingly, Shinsei Mutual Fund will be renamed as Daiwa Mutual Fund and Shinsei Asset Management (India) Private Limited shall be renamed as Daiwa Asset Management Co. Ltd. (DAM). The name of the schemes will also be changed to Daiwa Liquid Fund, Daiwa Treasury Advantage Fund, and Daiwa Industry Leaders Fund. Investors, who do not agree to the revision, will have an option to redeem their units from December 8, 2010 to January 11, 2011 without paying any exit load.

Bharti Enterprises, which has a 25% stake in Bharti-AXA Mutual Fund, a unit of Axa SA , is likely to sell its stake in the mutual fund firm to Bank of India.

L&T Mutual Fund has formalised its tie-up with Central Bank of India, a leading public sector bank. This tie up would make the L&T Mutual Fund schemes available at all 3600 retail branch locations of Central Bank of India and the partnership will strengthen their distribution network.

Nikko Asset Management Co (Nikko AM) has reached an agreement with DBS Bank (DBS Bank) to acquire DBS Asset Management (DBSAM), the asset management arm of DBS Bank. In return, DBS Bank will become a strategic minority shareholder in Nikko AM, taking a 7.25% stake in the Tokyo-based firm. This transaction will add USD 7 billion in assets under management to Nikko AM and significantly broaden the firm’s distribution capabilities in Asia. The agreement also establishes a strong strategic alliance between Nikko AM and DBS Bank, bringing together two firms with complementary strengths across products, investment platforms, distribution channels, and geographies. The strategic alliance with DBS Group will strengthen the ability to distribute investment products in the rapidly growing Asian markets and further enhance the wealth management products offered to the bank’s clients.

Regulatory Rigmarole

From January 2011, mutual fund investors will get a weekly consolidated statement of their transactions instead of the monthly statement they get at present. Investors will get one consolidated statement having transaction details across funds, including scheme or fundwise NAV and even the overall portfolio value. This service is ideal for investors who have more than one investment folio. CAMS, Karvy, and Franklin Templeton RTA are already despatching consolidated monthly statements to investors, having their money in schemes managed by 25 asset management companies. The registrar group is expecting non-participating mutual funds to join in when the weekly despatch of consolidated statements commence. SIP investors will get consolidated accounts once in every three months. The statement will be mailed to investors in a paper-and-envelope format.

With gold ETFs (exchange-traded funds) gaining popularity among investors, the Securities and Exchange Board of India (SEBI) is making the norms for verification of underlying assets (physical gold) tighter. Physical verification of gold underlying the gold ETF units should be carried out by statutory auditors of mutual fund schemes and reported to trustees on half yearly basis. The confirmation on physical verification of gold should also form part of half yearly report by trustees to SEBI. The new norm on half yearly reporting of statutory audits will come into effect from April 2011.

Intense competition and more regulation prompt smaller fund houses to position themselves as niche players, with focus on a select group of products. Amid increasing regulatory control and competition, mutual fund houses are differentiating their products and simplifying things for investors. This trend is likely to intensify. Benchmark, Motilal Oswal, DSP BlackRock, JP Morgan, and Quantum are among those carving out a niche position. Benchmark has established itself in the ETF (exchange traded fund) category. Benchmark mutual fund constantly looks at what additional value they are bringing to investors. Motilal Oswal Mutual Fund has taken a measured approach. Rather than going ahead with seasonal products, they concentrate on select products which are fully research-based, simple, and low cost. JP Morgan and DSP Blackrock are bringing their international products to domestic investors. These fund houses are pursuing a trend of positioning selective but strong products. Quantum has a unique strategy. It is straight selling of products to investors, without intermediaries. The rules of the game have substantially changed. The mutual fund market is getting crowded, with so many products, and so new entrants are trying new strategies. The era of offering NFOs (new fund offers) and garnering funds is no more there. Small niche players are emerging.

Monday, December 20, 2010

December 2010

A brief reprieve in the NFO rain!

It is raining NFOs in the mutual fund industry. According to Value Research, an independent mutual fund tracking firm, more than 200 NFOs have managed to mobilise Rs 43,251 crore in the past five months. The fund houses launched NFOs across the spectrum, including 14 equity funds, 20 debt funds, 2 gold funds, 15 hybrid funds, and a host of FMPs. The corresponding figure for the previous year was 100 schemes which managed to mop up around Rs 14,077 crore. In short, there is no denying the abundance of NFOs in the mutual fund industry. However, all NFOs are not great money-making opportunities for retail investors. In fact, SEBI has chided the mutual fund industry for launching schemes with little distinction and making the selection process difficult for the average investor.

With the deadline for KYC compliance less than two weeks away and the herculean task involved in getting the compliance, there has been a temporary lull in the NFO market in December 2010, with a single fund figuring in the December 2010 NFONEST.
Religare Medium Term Bond Fund
Opens: December 13, 2010
Closes: November 24, 2010

Religare Medium Term Bond Fund, an open ended income fund, seeks to generate regular income and capital appreciation by investing in a portfolio of medium term debt and money market instruments. A minimum of 80% of assets and up to 100% will be invested in high quality debt securities having residual maturity of up to five years. The investment strategy of the Religare Medium Term Bond Fund particularly rests on three pillars. This is intended for investors who have got a moderate risk appetite with a minimum investment horizon of six months towards bond fund. This portfolio will be constructed based on good quality assets of both corporate bonds and securities. Secondly, it is biased towards holding assets until maturity. Thirdly, it will play down on the rolled out effect on the yield curve and it will also capture the positive valuation changes given the changes in the yield curve. With the increasing stock market volatility, investors have turned cautious. Portfolio diversification is the key and bond funds aim to provide regular income and lower volatility and can act as a cushion against the unpredictable ups and downs of the stock market. The Benchmark Index for the scheme will be CRISIL Composite Bond Fund Index. The Fund will be managed by Mr. Nitish Sikand and Mr. Pranav Gokhale.

Pramerica Treasury Advantage Fund, Pramerica Short Term Income Fund, Reliance Indonesia Opportunities Fund, MOST Shares NASDAQ-100 ETF, MOST Shares Midcap 100 ETF, Templeton India Corporate Bond Opportunities Fund, and IDBI Tax Savings Plan are expected to be launched in the coming months.

Monday, December 13, 2010

December 2010

The goal of any investor is to accumulate wealth to fulfill future wants and needs. For a conservative investor, protection of principal is of utmost importance. However, financial prudence lies in having liquidity for contingencies, as well as a means for capital appreciation. If you seek capital appreciation and tax comfort, along with reasonable safety of capital, then debt funds should find a place in your portfolio.

December 2010 GEMGAZE helps you zero in on the debt funds that you can include in your portfolio. All the five GEMs of December 2009 have retained their venerable status in December 2010.

Kotak Bond Regular Fund Gem
Optimum option…

Incorporated in November 1999, Kotak Bond Fund has an AUM of Rs. 87.83 crore. The average maturity of the fund is low at 2.42 years and the credit quality is high. The portfolio is diversified with 15 holdings and the top 5 holdings constitute 67.43% of the total portfolio. Bonds constitute 51% of the portfolio, Government of India securities 18% and Certificates of Deposit 15%. The fund has returned 4.47% in the past one year as against the category average of 4.33%. The returns since launch have been an impressive 9.37% and the expense ratio is 2.07%. Though the recent performance is not as dazzling as the previous year, the fund has bettered the category average and maintained an optimal portfolio against the backdrop of the current market conditions.

ICICI Prudential Gilt Investment Fund Gem
Long-term laurels…

Incorporated in August 1999, ICICI Prudential Gilt Investment Fund, a pure debt fund that invests only in government securities, has an AUM of Rs. 225.45 crore. The average maturity of the fund is high at 9.75 years, the Yield To Maturity (YTM) is 8.08%, and the credit quality is high. To cater to a long term horizon, the fund invests in securities of longer tenure. This helps in earning the higher yield associated with longer term investments. However, this also comes with a higher level of interest rate risk, in the short to medium term. This is because the portfolio's value is marked to market, and therefore responds to changes in market interest rates. The objective is to closely manage the downside risks of the portfolio arising out of changes in the market rates, by actively managing the duration of the portfolio. The portfolio is concentrated with 8 holdings and the top 5 holdings constitute 100% of the total portfolio, all Government of India securities. The fund has returned 4.07% in the past one year as against the category average of 3.55%. In recent times, the RBI has undertaken a series of rate cuts to infuse liquidity into the system. The falling interest rates have translated into an appreciation in prices of long-term bonds and government securities alike. Expectedly, this fund has benefited. The returns since launch have been a laudable 10.98%. The expense ratio is 1.25%.

Fortis (BNP Paribas) Flexi Debt Fund Gem
Aggressive activity…

Incorporated in September 2004, BNP Paribas Flexi Debt Fund has an AUM of Rs. 250.31 crore. The average maturity of the fund is medium at 6.33 years, YTM is at 6.15%, and the credit quality is high. BNP Paribas Flexi Debt is an actively managed debt scheme where the fund manager’s view is reflected clearly through the maturity profile of the securities and the subsequent duration of the scheme. The fund takes advantage of arbitrage between corporate and government bonds and between short and medium term corporate and treasury bonds. But the fund accords top priority to safety of the principal and selection of bonds that are liquid enough to buy and sell. The main objective of this fund is to generate income through a range of debt and money market instruments of various maturities to maximise income, while maintaining an optimum balance between yield, safety, and liquidity. The portfolio sports 10 holdings and the top 5 holdings constitute 93.82% of the total portfolio. Debentures constitute 49% of the portfolio, Government of India securities 32%, and Structured Obligations 15%. The fund has returned a mere 3.77% in the past one year as against the category average of 4.33%. The returns since launch have been 8.05%. The expense ratio is 2.08%. In view of its notable performance over the years, the fund still enjoys a GEM status.

Canara Robeco Income Fund Gem
Costly churning …

Incorporated in September 2002, this ICRA 5 Star Gold Award winning fund has an AUM of Rs. 227.62 crore. The average maturity of the fund is 8.23 years, the average YTM is 8.44%, and the credit quality is high. The fund maintains a well-diversified portfolio of 19 holdings with a mix of long- and short-term instruments. The top 5 holdings constitute 62.80% of the total portfolio. Debentures constitute 28% of the portfolio, Government of India securities 27%, and Commercial Paper 25%. The fund has returned 4.24% in the past one year as against the category average of 4.33%. The returns since launch have been 8.87%. The expense ratio is 2.12%. The fund manager actively manages the maturity of the portfolio. This nimble-footed strategy has amply rewarded the fund. But the churning has come at a cost and it is among the most expensive funds in the category.

Birla Sun Life Dynamic Bond Fund Gem
Deft delivery…

Incorporated in September 2004, Birla Sunlife Dynamic Bond Fund has a high AUM of Rs. 7095 crore. The fund seeks to optimise returns by designing a portfolio to dynamically track interest rate movements in the short-term by reducing the duration in a rising rate environment, while increasing it in a falling rate environment. To maximise returns and gain maximum value out of securities, the fund looks at curve spreads on both the gilt and bond markets. For investors who cannot actively manage their debt portfolios, Birla Sun Life Dynamic Bond Fund is an ideal option. The average maturity of the fund is low at 3 years, the average YTM is 8.13%, and the credit quality is high. The portfolio is diversified with 33 holdings and the top 5 holdings constitute 60% of the total portfolio. Bonds constitute 31% of the portfolio, Government of India securities 24%, and Structured Obligation 18%. A close scrutiny of the fund’s portfolio over the past year shows that it has juggled tenors and assets quite nimbly in what was a challenging year for debt managers. The fund has been deftly managed, delivering impressive returns over a year, and figuring within the top quartile of debt funds over the three- and five-year time-frames. The fund has comfortably beaten its category average over all of these terms. The fund has returned a commendable 5.14% in the past one year as against the category average of 4.33%. The returns since launch have been 7.81%. The expense ratio is very low at 0.98%.

Monday, December 06, 2010

December 2010

A perfect fit…

Are you looking for debt instruments beyond bank fixed deposits and post office instruments? Debt mutual funds may fit the bill well. Debt mutual fund is a product whose main aim is capital preservation coupled with descent returns i.e. higher than savings account and bank fixed deposits. Debt fund returns is essentially a combination of capital appreciation and regular income. Capital appreciation is where a debt mutual fund has an edge over a fixed deposit. Capital appreciation is possible because the debt instruments that the mutual fund company invests in are tradable. Based on the interest rate, the bond yields move. When interest rates move southwards, yields on bonds increase making it profitable for mutual fund companies to sell the bond.

Fund Flavour analyses threadbare the performance of the entire gamut of debut mutual funds in the past one year.

Gilt Funds

Gilt Funds invest in government debt, namely, the debt issued by Reserve Bank of India on behalf of the government. They also invest in securities issued by state governments. The investments are done in ultra safe paper because they are backed by the government itself but that does not mean the Gilt Funds are risk free. They can go down in value because when interest rates rise, the value of the debt goes down. So, there could be a possibility that the debt funds lose some part of their NAV also. Short government funds invest in government securities with one- to three-year maturities. For one-year period, the category delivered marginal 2.2% return. The intermediate government bond category includes funds with residual maturities between three- to seven-years and generated 0.4% returns. Out of 11 funds shortlisted for analysis, three funds beat their category peers. Long government funds invest in government securities with average maturities of more than seven years. This category generated -0.1% return during the one-year period. Out of 8 funds selected for analysis, only three funds outperformed their peers. Gilt Fund returns have suffered a substantial slowdown over the past one year. Gilt funds, which lost their lustre due to hardening yields on government bonds, are slowly moving up the performance charts on the back of an increase in bond prices in recent months. The average return delivered by the 47 funds was 2.9% as against 11.5% a year ago. Of the 47 medium and long-term gilt funds, only 20 funds beat the I-Sec Composite Gilt index's returns of 2.9% while six funds delivered negative returns. In this scenario, gilt funds have witnessed a muted performance.

Fixed Maturity Plans
Towering over FDs…

Fixed Maturity Plans (FMPs) are quite similar to fixed deposits in the sense that these funds are usually closed ended, which saves you from interest rate risk, and even if rates move upwards the fund NAV does not go down. The way the fund works is that a fund house announces a new fund offer specifying the duration of the fund say 18 months or so, and then they collect money from you which is then invested in debt of the same duration. These funds have become popular because of a sort of a tax advantage where interest on fixed deposits is charged at a higher tax rate than dividends from FMPs for individuals who are in the higher tax bracket. The risk of investing in FMPs is that they might invest the money in lower quality debt, and then during times such as the last crisis might come under pressure, and in that sense your capital is not really assured as it is in the case of a fixed deposit. Most of the corporates prefer investing in fixed maturity plans, offered by mutual fund houses as these provide maturity at shorter terms while offering competitive profits. FMPs allow you to lock into prevailing market rates for debt via a professional manager. That is a unique benefit when other debt options such as bank deposits or small savings schemes do not dynamically adjust to market rates. One year FMPs have returned a minimum of 7% and a maximum of 14% over the past one year whereas one-year FDs have returned a maximum of nearly 7% only during the same time period.

Income Funds
The interest rate yo-yo…

Income funds are categorized on the basis of maturity period of the fixed-income instruments they invest in. The ultra short bond category with funds consisting of average maturities over 91 days but less than one year, posted 4.6% return in the past one year. Out of 21 funds analysed, 10 funds beat the category average. During the one-year period, the short-term bond category with residual maturities between one- to three-years, posted 6.1% return. Out of 15 funds considered, 8 funds outperformed their peers. The intermediate bond category, including funds with maturities between three and seven years, registered 4.5% return during the past one-year. Out of 20 funds shortlisted, 13 funds beat the category average.

Floating rate funds
An ace up the sleeve

A floating rate fund is a fund that by its investments in floating rate instruments seeks to provide stable returns with low level of interest rate risk and volatility.These debt securities peg their coupon or interest rate payable to a market-driven rate such as the Mumbai Interbank Offered Rate (Mibor). Hence, each time the benchmark rate fluctuates, the coupon rate is adjusted accordingly. The primary advantage of these funds is that they are less volatile than other types of debt funds. This advantage arises due to the inherent structure of the floating rate bonds. In case of fixed rate bonds when interest rates in the economy change, the price of the bond adjusts to make up for the fixed coupon of the bond. While this happens even in the case of floating rate bonds, the change in the price of the bond is less drastic due to the periodic change in the coupon of the bond. The fall in the price of the floating rate bond will depend upon the reset period. The lesser the gap between the resets, the lower will be the fall in price. The reset could be daily, monthly, quarterly, half-yearly, annually or any other periodicity specified by the issuer. These funds, in turn, ensure that the portfolio has a limited interest rate risk. Under normal conditions, floating rate funds intend to invest minimum 65% of net assets in floating rate securities. There are two types of floating rate funds — long term and short term. The portfolio of the short-term plan is normally skewed towards short-term maturities with higher liquidity, and the portfolio of the long-term plan is skewed towards longer-term maturities. However, even the longer-term funds are positioned more on the lines of short-term funds and are not very aggressive. Moreover, the volatility arising due to investment into long-dated fixed coupon bearing securities is offset by the presence of floating rate securities. The one-year return for the floating rate funds in the last one year was in the 5.3 to 6.1% range, and the 3-year returns range between 6.9% and 7.9%.

Liquid Funds
Short and sweet…

Liquid Funds are funds that are used by investors for extremely short time durations, such as 1-3 months and in most cases instead of a savings account. In the last one year, liquid funds have returned between 7.7% and 8.85%. Recent data shows that banks are taking fresh exposures in liquid funds which indicate a high degree of safety and confidence in liquid funds. This shows that liquid funds are a good product to invest in if you are looking to fulfill some short-term goals. The changed SEBI rules on liquid funds ensure that you cannot get your units allotted till your money actually reaches the fund by 2 pm (the revised cut-off time) and realistic valuation. Your fund manager’s skills would be tested to the hilt. Fund managers will have to sharpen their skills to be able to dynamically manage the duration of funds and debt papers.

…in a perfect portfolio

Debt funds should be a key constituent of your portfolio. They add more value than passive debt investments such as fixed deposits and other small-saving instruments. You may equate debt funds with liquid funds that offer low returns. But there are many actively-managed debt funds, as discussed, that deliver higher returns, albeit with higher volatility. These actively-managed funds target dislocations in the yield curve and position themselves to profit from them. Debt funds are usually meant for those of you who prefer less volatility, want a regular income, and are willing to take limited risk.

Monday, November 29, 2010

November 2010
Regulatory Rigmarole

The Securities and Exchange Board of India (SEBI) has relaxed the norms on merger and consolidation of mutual fund schemes. The circular reverses the June 2003 ruling of SEBI that viewed any merger or consolidation as change in the fundamental attributes of the surviving scheme and hence made it mandatory for fund houses to follow certain procedures laid down in this regard. The recent SEBI order states that the mutual fund will have to “demonstrate that the circumstances merit merger or consolidation of schemes and the interest of the unit holders of the surviving scheme is not adversely affected”. After approval by the boards of AMCs and trustees, mutual funds will have to file such a proposal with SEBI. The regulator would then communicate its observations on the proposal. The letter to unit holders would be issued only after the final observations communicated by SEBI have been incorporated and final copies of the same have been filed with SEBI. The mutual fund industry may soon see consolidation of its plethora of schemes as SEBI makes the process easy.

According to SEBI, purchase and redemption of mutual fund schemes can now also be done through the clearing members of the registered stock exchanges, apart from the existing distributor facilities. Depository participants of registered depositories are now permitted to process redemption requests of units held in de-materialised form. Once the units are purchased or redeemed, the AMC would credit the units or pay the proceeds to the broker/clearing member's pool account. The brokers/clearing members would in turn forward it to the respective investor. This would end the obligation of the AMCs to pay the individual investors. One of the fundamental problems in the industry was that the clearing process was not centralised. This move is a lot better for the industry from an operational and settlement point of view. Close-ended funds would not fall in this category since they are anyway traded on the exchanges. SEBI further said that exchanges and depositories should provide investor grievance handling mechanism to the extent they relate to disputes between their respective regulated entity and their client and should also monitor the compliance of code of conduct for intermediaries of mutual funds.

Retail investors in mutual funds will have to compulsorily follow the KYC (know-your-customer) norms irrespective of their investments from 1 January, 2011. Till now, retail investors were not required to go through KYC procedures for investments up to Rs 50,000. The same rule was applicable for NRIs (non resident Indians) and other non-individual investors till September 2010. However, from October 1, 2010, KYC is mandatory for NRIs and other non-individual investors for any investment amount. CDSL Ventures Ltd. (CVL), a wholly owned subsidiary of Central Depository Services (India) Ltd (CDSL), has been assigned the task of processing the KYC norms. AMFI had also allowed distributors to carry out the task on behalf of their investors and then submit all necessary documents with CVL. If the documents are found in order in accordance with KYC requirements, CVL will issue an acknowledgement to such investor to the effect that he is KYC compliant. On the basis of the acknowledgement, investor routing his investment through distributors will be allowed to make investments without being asked to go through KYC process again through CVL. KYC norms were first implemented from 1 February, 2008, for all investors investing Rs 50,000 or more in mutual funds to comply with the Prevention of Money Laundering Act 2002.

The Association of Mutual Funds in India (AMFI) has asked fund houses not to accept third party payments after November 15, 2010, barring a few exceptions. Third-party payments would only be accepted in case of payment by “parents/grand-parents/related persons on behalf of a minor for a value not exceeding Rs 50,000 (each regular purchase or per SIP installment); payment by employer on behalf of employee under systematic investment plans (SIP) through payroll deductions and custodian on behalf of an FII or a client.”

In compliance with AMFI Best Practice Guidelines Circular dated October 22, 2010, fund houses offer its investors the facility to register multiple bank accounts in their folios to receive redemption / dividend proceeds with effect from November 15, 2010. While individual and Hindu Undivided Family (HUF) investors will be allowed to register up to 5 bank accounts, non-individual investors will be allowed to register up to 10 bank accounts. The unit holder can choose any one of the registered bank accounts as default bank account. However, in case a unit holder does not specify the default bank account, the Fund reserves the right to designate any of the registered bank accounts as default bank account. Unit holders may also note that the registered bank accounts may also be used for verification of pay-ins (i.e. receiving of subscription funds) to ensure that a third party payment is not used for mutual fund subscription. The following documents will be required for the registration/change of the bank account(s) mandate: (i) A cancelled original or self attested copy of cheque leaf with the account number and name(s) of the account holders printed on the face of the cheque. (ii) Alternately, the investor can also submit a certificate from the bank or the bank account statement or a copy of the bank pass book.

According to SEBI, redemptions in interval funds will only be allowed during specified transaction periods. The current option of redeeming units on any business day, subject to applicable loads, will no longer be available. The specified transaction period will consist of a minimum of two working days. The SEBI circular also mandates that the minimum duration of an interval period in an interval scheme/plan must be 15 days. Also, investments by these schemes will only be made in those securities which mature on or before the opening of the immediately following specified transaction period. According to the current regulations, there is no restriction on the tenure of the securities in which an interval scheme can invest. This, coupled with the daily redemptions, was resulting in an asset-liability mismatch. The circular makes it mandatory for the units of interval schemes to be listed. The Asset Management Companies will ensure compliance from the date of next specified transaction period or April 1, 2011 whichever is later.

With respect to the Net Asset Values (NAVs) of liquid schemes, SEBI has specified that the closing NAV of the previous day will be applicable if application is received before 2 pm (as against 12 noon at present) and funds are also available for utilisation before the 2 pm cut-off time. For applications received after 2 pm on a day and when funds are available for utilisation before the cut-off time, the closing NAV of the day of application will be applied for that purchase. In case of applications received at a time when funds are not available for utilisation, the closing NAV of the previous day on which the funds are available for utilisation will be applied for the purchase. The entire amount of the application must also be credited to the bank account of the respective scheme before the cut-off time. The funds to be allotted should be made available before the cut-off time by the respective scheme. This is to check on investing on borrowed money. Earlier, several fund houses were seen investing in debt papers by resorting to short-term borrowing even before the fund got credited into the account. This would reflect in the asset-liability mismatch. With the new ruling, we would have more bank accounts with direct credit facility which will ensure fund transfers do not take time. In a way, this move will make systems more effective and reduce operational risks.

The way investors are making a beeline exiting from funds in a rising market to book profits is hurting AMCs. The only way to survive in these tough times is to woo investors for the long-term. Having sold the idea of long-term wealth creation through systematic investment plans (SIPs), AMCs are now deploying new ways to retain investors by introducing exit loads and turning to capital protection funds. Take for instance the newly launched Reliance Small-Cap Fund; it levies a 2% exit load on redemptions in the first year and 1% for withdrawals made in the second year. Investors are being coerced to remain in this fund for the long-term. Capital protection funds are for investors who are conservative and prefer their investments to be in the form of bank deposits. There is potential upside and virtually no downside to these funds. All said and done, the investor exodus from mutual funds is a temporary phenomenon. Solid foundation laid at educating investors about the powerful potential of this investment vehicle will take the industry to great heights, albeit at a slow and steady pace.

Monday, November 22, 2010

November 2010

After a rise in average assets under management (AAUM) for two straight months, the fund industry saw its assets fall in October 2010. The month was tough for the industry, which recorded a poor performance on all fronts – average assets, net assets, and outflow from equity schemes. According to the Securities and Exchange Board of India (SEBI) data, the industry’s AAUM stood at Rs 6,98,852.71 crore on October 31, 2010 a decline of 2.02% compared with the previous month’s Rs 7,13,281.23 crore. Moreover, net assets slipped for the second consecutive month by 1.66% to Rs 6,46,395.40 crore from Rs 6,57,313 crore in the previous month. The equity segment continued to see net outflows for the fifth month in a row at Rs 2,869 crore, according to data from the Association of Mutual Funds Association (AMFI). The figure crosses the Rs3,000-crore mark if equity-linked saving schemes are counted. This takes the total redemption over the past ten months to a whopping Rs 17,000 crore. The sales of new equity schemes stood at a paltry Rs106 crore (Baroda Pioneer PSU Equity Fund and Reliance Arbitrage Advantage Fund were launched) while sales of existing equity schemes was Rs 4,914 crore in October 2010. But last month, redemptions from existing equity schemes stood at Rs 8,413 crore meaning that equity mutual funds suffered Rs 2,900 crore of net outflow in October 2010. Nevertheless, compared with September 2010, when the equity segment saw a net outflow of over Rs7,000 crore, the redemption pressure eased a bit. October was an uncertain month. There was pressure from investors who had put in money during earlier peaks. Cash for the Coal India offer had to be generated. Overall net outflows were Rs5,742 crore in October 2010, while income funds saw an outgo of Rs5,305 crore. The liquid & money market segment saw net inflows of Rs2,283 crore, while gilt funds and gold exchange-traded funds registered inflows of Rs117 crore and Rs220 crore, respectively.

In the retail investor category, equity funds reported a net outflow (more money went out than came in) of Rs2,552.54 crore between August 1, 2009 and July 31, 2010. In the HNI category, they saw a net inflow of Rs1,096.92 crore (more money came in than went out). In the same period, the Bombay Stock Exchange’s benchmark Sensex index rose 25%. Banks and large national and regional distributors seem to have churned their customers the most. Equity funds reported a net outflow of Rs1,275.93 crore in the bank channel, and Rs1,483.65 crore in the large national and regional distributor channel between August 1, 2009 and July 31, 2010. Curiously, although independent financial advisors constitute a hefty 29% of the total distribution base of the mutual fund industry (banks and national distributors constitute 29% and 36%, respectively), this channel saw a nominal net outflow of just Rs.185.35 crore in the same period

The retail investor exodus from mutual funds continues unabated even in October 2010 as most schemes witness money exiting and drop in folio numbers. Equity funds witnessed folio numbers shrink by 3.52 lakh to 3.91 crore in October 2010. Overall, the number of investors’ account dropped by 3.62 lakh to 4.68 crore in October 2010 compared with 4.71 crore in September 2010. Even balanced funds witnessed a fall in the number of folios by 38,113 to 27.58 lakh during the month. Overall, in October, equity diversified funds (including tax-saving funds) observed a net outflow of Rs 3,063 crore. Units worth Rs 9,227 crore were redeemed during the month, while new sales accounted for Rs 5,164 crore. The redemptions were mainly on account of profit booking by investors. With the market indicators touching the highs of January 2008, many investors who had been stuck in the market since 2007 preferred to exit to recover the notional losses. Gold and other ETFs had an increase in investors where the account rose by 13,000 while the same increased by 24,000 in schemes of debt category.

Piquant Parade

AMFI would declare the average asset under management of the mutual fund industry on a quarterly basis instead of the current practice of declaring it on monthly basis. The AAUM for each quarter (90 days average) will be computed and uploaded on AMFI Website on the first working day of the following month of every quarter, effective from quarter ending December 31, 2010. There has been a demand from a majority of fund houses to stop declaring monthly AAUM as it gave a wrong picture of the industry assets. Around 75% of the mutual fund industry's assets is accounted for by institutions, who park their surplus cash for short periods, often as short as a few days, in debt funds. This combination of large size, and large & frequent investments and redemptions means that the impact of institutional transactions overshadows the trends in retail segment. It has been observed that in quarter-ending months, institutions pull out of mutual funds resulting in sharp drop in average AUM of the industry in those particular months. However, fund houses can upload their monthly AAUM on their websites. This follows a consensus move by the industry, which wants to put an end to this monthly “AUM race. Instead, building long-term, stable, and healthy businesses should be the underlying motive.

Concerned that mutual fund schemes are becoming too complex for average investors, SEBI has asked several asset management companies to rework some proposed new schemes and file offer documents afresh. More than a dozen new fund offer (NFO) prospectuses of leading mutual fund houses such as Reliance Mutual Fund, ICICI Prudential, Birla Sunlife Mutual Fund, Kotak Mutual Fund, Tata Mutual Fund, and Benchmark Asset Management are awaiting approval from the market regulator. The regulator is going slow on approving structured mutual fund schemes where instead of investing in equities and debt in a pre-determined ratio, the fund manager is given the flexibility to adopt complex strategies. Structured funds require investors to take active calls on market direction. SEBI is also discouraging fund houses from launching flexi cap, thematic funds and also schemes similar to the ones they already have.

Birla Sun Life Mutual Fund has launched a mobile platform called 'Mobile Investment Manager' in association with MCHEK India Payment Systems. The service is available to existing investors of Birla Sun Life Mutual Fund with the benefit of managing their investments from the convenience of their mobile phone. On this mobile platform, an investor can seek portfolio information, make additional purchases, register for SIPs and also make switches and redemptions. The launch of 'Mobile Investment Manager' assumes great significance for Birla Sunlife Mutual Fund given the rapidly increasing number of mobile users and the mobile penetration, which is currently above 500-million. It allows users, especially those who are always on the move, the freedom to transact from anywhere and at anytime.

to be continued…

Monday, November 15, 2010

November 2010

NFOs have started making a slow comeback, with debt funds far outstripping the number of equity funds featuring in the November 2010 NFONEST…

JPMorgan India Capital Protection-oriented Fund
Opens: November 12, 2010
Closes: November 26, 2010

JP Morgan Capital Protection-oriented Fund is a 39-month closed-end income scheme, which will mature on March 6, 2014. The fund is rated AAA (ind) (SO) by Fitch Ratings and the fund will only invest in AAA rated papers. The investment objective of the scheme is to generate returns and reduce interest rate volatility, through a portfolio of fixed income securities that are maturing on or before the maturity of the scheme along with capital appreciation through equity exposure. The scheme will allocate 80% to 100% of assets in debt and money market instruments with medium risk profile. It will further allocate upto 20% of assets in equity and equity linked instruments with high risk profile. Benchmark indices for the purpose of performance comparison will be 15% BSE 200 + 85% CRISIL Short Term Bond Fund Index. Mr. Nandkumar Surti and Mr. Namdev Chougule will manage the fixed income portion of the scheme. Mr. Harshad Patwardhan and Mr. Amit Gadgil will manage the equity portion.

ICICI Prudential Regular Savings Fund
Opens: November 15, 2010
Closes: November 29, 2010
ICICI Prudential Regular Savings Fund, an open ended income fund, aims at providing reasonable returns, by maintaining an optimum balance of safety, liquidity, and yield through investments in a basket of debt and money market instruments with a view to delivering consistent performance. The scheme will allocate up to 100% of assets in debt securities (including government securities) with maturity of more than one year and in money market securities. Debt securities include securitized debt (single loan and / or pool loan securitized debt) of up to 50% of the portfolio. It also includes derivative instruments to the extent of 50% of the net assets as permitted by SEBI. The scheme's performance will be benchmarked against Crisil Composite Bond Fund Index. The scheme will be managed by Mr. Chaitanya Pande.

Pramerica Equity Fund and Pramerica Dynamic Fund
Opens: November 19, 2010
Closes: December 3, 2010

Two funds – Pramerica Equity Fund and Pramerica Dynamic Fund – have been launched by Pramerica Mutual Fund. Pramerica Equity Fund will be an actively managed diversified portfolio, which will invest in equity and equity-related securities, including derivatives, debt and money market instruments. This equity fund, with a large-cap bias, will follow two investment approaches. The sector-rotation approach will involve identifying the right sectors for investment, while the special situation approach is a bottom-up strategy in identifying companies. Pramerica Dynamic Fund is a dynamic asset scheme in which investments will be managed by a tool, Pramerica DART (Pramerica Dynamic Asset Rebalancing Tool), developed by Pramerica Mutual Fund. The tool allocates assets to the fund by measuring the relative attractiveness of the markets and makes an optimum selection of debt and equity. It reduces the exposure to equity instruments when the markets are on a high and increases the equity-exposure when the markets are down. Thus, it makes an appropriate selection of assets based on market conditions. The scheme will allocate up to 100% in equities with a minimum of 30% in equities and the balance in debt and money market instruments. The two schemes will be managed by Mr Ravi Gopala Krishnan and Mr. Mahhendra Kumar Jajoo, Executive Director and CIO, Fixed Income.

Sundaram Capital Protection-oriented Fund Series II
Opens: November 22, 2010
Closes: November 30, 2010

This three-year closed-end fund, the second in the series, aims at providing income and minimising capital loss by investing in a portfolio of fixed income securities. A maximum of 20% of the assets can be invested in equities. The fund is AAA (SO) rated by CRISIL. The fund is benchmarked against the CRISIL MIP Blended Index. Dwijendra Srivastava is the fund manager for the debt portion and S. Krishnakumar is the fund manager for the equity portion.

Reliance Banking and PSU Debt Fund, Sundaram Money Opportunities Fund, Reliance Fixed Horizon Fund, DWS 3 in 1 Fund, IDFC Savings Scheme, IDFC Small Cap Equity, Canara Robeco Suraksha Fund, Axis Midcap Fund, Birla T 20 Fund, and Principal Dynamic Bond Fund are expected to be launched in the coming months.

Monday, November 08, 2010

November 2010

34 ELSS Funds in all with 14 having a track record of five years and more – exhibited lower divergence between the best and worst in the category, compared with diversified funds. After a prolonged phase of underperformance, tax-savings funds are slowly catching up with their open-end diversified peers. The one-year average return of ELSS is, in fact, one percentage point higher than the diversified fund category. Besides, barring a couple of ELSS funds, almost the entire universe has outperformed the return of bellwether index Sensex.

The towering tycoons in the tax-saving space have retained their GEM status with two new GEMs, Religare Tax Plan and DSPBR Tax Plan, entering the hall of fame.

Magnum Taxgain Fund Gem
Leading light…

The true leader in its class, SBI Magnum Taxgain the grand old man of ELSS Funds, was launched as early as March 1993. It is also credited to be India’s largest ELSS scheme with over 17 lakh investors in its kitty and net assets of Rs 5996 crores. This fund is a behemoth that has ‘A’ group shares as its top holdings, and a large cap heavy portfolio. The scheme is well-diversified, where allocation to top five holdings as well as sector bets is highly rationalised. The portfolio is adorned with 68 stocks and the top 5 holdings accounting for a mere 18%. The top three sectors in which the fund has exposure are energy, financial services, and engineering. The fund has a growth-oriented large cap portfolio with 75% invested in large-cap blue-chip companies. The fund's returns since launch have been 19.89%. One-year return is 31.67% as against the category average of 38.9%. With standard deviation of 22.13 the fund ensures safety of returns. The expense ratio is 1.78% and the portfolio turnover ratio is 37%. This is a good fund for investors who choose diversification and safety over returns.

HDFC Tax Saver Fund Gem
Packing a punch…

Launched in June 1996, HDFC Taxsaver is one of the oldest open-ended tax-saving funds in the industry with an AUM of Rs 2885 crores. It is more than 13 years old and still packs a punch. This fund from one of the finest fund houses in the country is a champion in both good and bad times. The top three sectors are financial, energy and healthcare. The fund sports a large cap growth-oriented portfolio, with more than 60% of the funds in large caps. The fund is sufficiently diversified with 53 stocks and the top 5 holdings account for 24%. Smart stock picks and sector moves over the last 10 years has shown its ability to manage downside as well as riding upside. The fund is well-known for protecting investor’s money during bear markets or severe downturns as was proved during 2008. Return since launch is 34% which is an unmatched achievement in itself. HDFC Tax Saver Fund has given returns of 34.39% in a 14 year SIP and 31.92% in a 10 year SIP. The fund has consistently outperformed its category average with one-year return of 46.43% as against the category average of 38.9%. The returns since launch have been an impressive 35.61%. The expense ratio is 1.86% and the portfolio turnover ratio is 26.01%.

Fidelity Tax Advantage Fund Gem
Awe-inspiring awards…

Fidelity Tax Advantage Fund, in existence since February 2006, has been a consistent performer and ranked Crisil-CPR 1 over the last seven quarters ending December 2009. Funds ranked Crisil-CPR 1 form a part of the top 10 percentile of Crisil’s ranked universe. The fund received the ICRA 7-Star Gold Award 2010 and the CNBC TV18 - CRISIL Mutual Fund of the Year Award in the Equity Linked Savings Schemes (ELSS) category. The fund follows a bottom-up stock picking approach, focusing on a company’s core strengths, and stock selection is backed by thorough in-house research. The fund’s ideal core investment is a “go-anywhere” approach. In other words, the fund strategy is to invest in stocks without any bias towards market capitalisation, sector and trend. However, unlike the implication of a go-anywhere approach, the volatility in returns is low. To a large extent this has been possible due to a cap of 4% on single-stock exposures. The level of diversification and general aversion to volatile sectors paid off for the scheme in 2008, where it emerged as amongst the least to regress. There has hardly been any churn in the top 10 holdings of the scheme, which is encouraging. The top three sectors are financial, energy and technology. It has a high exposure to the financial services sector—about 27% at present. This is because the fund manager feels that banks still have a wide market to penetrate.70% of the assets are in large caps with a growth-oriented large cap portfolio. The portfolio is diversified with 24% in top 5 holdings. The portfolio has around 60 to 70 scrips, which could be a challenge going ahead as the fund’s size is already Rs 1,296 crore. Returns since launch in Jan 2006 is 20.55%. One-year return is 47.46% as against the category average of 38.9%. The expense ratio is 2% and the portfolio turnover ratio is 25%.

Sundaram Tax Saver Fund Gem
Fiery Flexibility…

The feather in the cap for the Rs 1582 crore scheme has been its ability to contain losses in 2008, where it outperformed its benchmark and category by losing much less. The fund invests in stocks across market-cap categories with a sizeable allocation to large-caps. Large caps constitute 66% of the portfolio which has a blend of growth and value stocks. Top five holdings constitute 22% of the portfolio with a total of 41 stocks. The fund follows both top-down and bottom-up approach for making investments. The fund focuses its investments towards companies which have macro elements like infrastructure spending, restructuring, skilled labour, etc. What distinguishes Sundaram Tax Saver from others in the category is its active churn of holdings. The average holding period in any leading stock is not more than one to three months. Diversification among giant, large, and midcap companies makes it a good fund. It is a little aggressive fund with 55% portfolio in just 3 sectors of energy, finance and construction, betting on India’s future. A very flexible fund known for its adaptability with any situation makes it suitable for every kind of investor. The fund has an impressive track record over an eleven-year period with annual returns of 23.36% since launch November 1999. Though it outperformed its category average in the three and five year periods, its one year return has been 30.24% as against the category average of 38.9%. The expense ratio is 1.96% and the portfolio turnover ratio is 237%.

Canara Robeco Tax Saver Fund Gem
Safe sailing …

One of the oldest tax saving funds with 16 years of good track record with an AUM of Rs. 220 crore, its ability to sail through the down time and steer ahead in the upturn is quite remarkable. The top three sectors are finance, energy, and services. The fund is well-diversified with only 20% assets in the top 5 holdings. 58% of the assets are in large cap stocks. The fund has diversified its portfolio into 52 stocks across various sectors with top 5 sectors (financial, energy, services, technology and healthcare) constituting 74.15% of the total portfolio. Canara Robeco Equity Tax Saver is well-diversified and has a good mix of large- and mid-cap stocks. Return since launch is 16.69% which is decent enough in such a long term. Mind boggling 43.19% return in the past one year as against the category average of 38.9% shows that some great potential is building in this fund. The fund has performed well, both in rising markets (2009) and falling markets (2008) as compared to its category average. The expense ratio is 2.38% and the portfolio turnover ratio is 51%. The fund is a safe bet, typically for conservative investors.

Religare Tax Plan In
Fresh Fire…

Religare Tax Plan is a relatively new kid on the block, having just completed three years. With a corpus of just over Rs 100 crore and fund manager Vetri Subramaniam’s good track record, the fund did well in both the falling markets of 2008 and rising markets of 2009. The top three sectors are finance, energy, and FMCG. The fund is well-diversified with 53 stocks and the top five holdings constitute 22%. Large cap stocks make up 60% of the portfolio. Return since launch in December 2006 is 18.64% and the one year return is 43.34% as against the category average of 38.9%. The expense ratio is 2.49% and the portfolio turnover ratio is 43%.

DSPBR Tax Saver In
Effective effervescence…

DSPBR Tax Saver has a fund corpus of around Rs 941 crore and follows a flexi-cap investment strategy — it invests in large- and mid- and even small-cap stocks, depending on the market fancy. The churning of stocks too is quite aggressive, with turnover ratio of around 89% which may subject the fund to volatility in returns. Banking sector, a favoured sector in the past rallies, does figure as the top sector in the recent portfolio with energy and technology occupying the second and third slots. Its top 5 sector picks constitute both growth-oriented and defensive sectors and constitute 17% of the portfolio. The fund has a growth-oriented multi cap portfolio with 53% of the corpus in large cap stocks. There are 72 stocks in the portfolio. Since inception in December 2006, DSP BR Tax Saver fund has offered 18.8% returns and 42.57% for the last one year as against the category average of 38.9% which goes to prove that this is an effective fund with a good fund manager in the backseat. The expense ratio is 2.08% and the portfolio turnover ratio is 89%.

Monday, November 01, 2010

November 2010

The versatile ELSS Funds…

ELSS Funds are variants of diversified equity funds. Besides being equipped with the typical features of diversified equity funds, they offer tax advantage. You can make your investment tax deductible under Section 80C of the Income Tax Act. The limit under Section 80C is Rs 1 lakh. The ELSS funds have a lock-in period of three years. They are the gateway through which novices to investments get a taste of equity. ELSS Funds are one of the best tax saving options and an excellent mode of investment.

Saving taxes and building wealth too…

Why is ELSS the best investment strategy for tax savings?

• Generates highest returns as compared to other investing avenues.
• Provides a lock-in period of three years which is the minimum for any tax saving avenue.
• Lock-in enables long term investing in equity markets.
• Promotes disciplined investing by enabling SIP of Rs 500 per month.
• Dividend option enables liquidity since you get tax-free dividends during the tenure.
• Provides dual benefit of capitalising on superior returns as well as tax saving.

Advantage “ELSS”

The added and unique advantages of ELSS Funds have been enumerated below:

Cost conscious

According to the data from mutual fund rating agency, Value Research, 14 ELSS schemes had an expense ratio of 2.5% and 19 others had a lower expense ratio. Of the top 10 ELSS schemes seven had a ratio lower than 2.5%, while the remaining three had a ratio of 2.5%. This kind of lower cost is good for a long-term investor who stays invested in the scheme for several years.

Old is gold

The last ELSS scheme was launched in October 2005 and the first scheme came to the market in March 1993. So, the youngest ELSS fund is five years old.
Low Performance Differential

In the last one year, the best performing ELSS scheme returned 127% and the worst performer returned 63%. In comparison, the difference between the worst and best performing equity diversified funds was a whopping 138%. When compared over a period of two or three years, returns given by the best and the worst performing ELSS were 24% and 22% per annum, respectively.

Match making

There are more than 30 ELSS schemes available in the market today. Choice of ELSS funds depends upon your risk profile and priorities. You should make an investment decision based on overall financial planning.

Large Cap ELSS Funds: These funds invest predominantly in the large cap companies. While this may mean muted returns when the markets are rising, it may also mean a limited downside when the going gets tough. Franklin India Tax Shield and SBI Magnum Tax Gain are a few examples of this type of fund.

Growth ELSS Funds: These funds have about 30% exposure to mid-caps, 10% to small-caps & the rest in large caps in their portfolio. Hence, they may give a higher return in rising markets. Sundaram BNP Paribas Tax Saver is a good option in this category.

Mid-cap ELSS Funds: No pain, no gain. These funds have a sizeable exposure to mid-caps and small-caps. This aggressive investment style can pay rich rewards. Sahara Tax Gain and HDFC Tax Saver are good examples of such funds.

Small Cap Funds: Small-cap stocks can act like performance enhancing drugs. In the above discussed types, the maximum allocation to small-caps is 12%. However, Taurus Tax Shield has invested almost 30% in this high-risk zone. This can be very rewarding when the going is good, but a dream run can easily become a nightmare. Taurus Tax Shield has given 98.01% returns in last one year.

ELSS is a great instrument for tax planning which also ensures good returns. But investment should be carefully planned and you should devote sufficient time in selecting the right fund. GEM GAZE that blossoms next week will aid you in the process.

Risky route

The basic risk with ELSS funds is that since it has a considerable equity exposure, the returns are linked to market returns and hence there is no guarantee of returns and even capital. If you choose an ELSS fund which has delivered excellent performance in the past years and has a track record of consistent performance, and invest regularly for the long term, the chance of you losing out would be negligible.

…to go the dinosaur way?

All said and done, there is a greater risk looming large…the possible extinction of this venerable instrument, thanks to the DTC, which comes into effect from April 1, 2012. ELSS Funds will no longer get tax exemption under DTC. It is this tax exemption that sets it apart from equity diversified funds and gives it the added advantage. ELSS Funds, at present, is an endangered species. Hopefully, the laws are altered before such an unfortunate calamity befalls.

Monday, October 25, 2010

October 2010

The Average Assets Under Management (AAUM) of the mutual fund industry grew 3.7% to Rs 7.12 lakh crore in September 2010 as against Rs 6.87 lakh crore in August 2010 according to the data available from AMFI. Of the existing fund houses, 29 players managed to remain in the positive territory of growth in September 2010. Among the top five players, UTI Mutual Fund led the growth and added 5.37% more assets to its kitty, replacing Birla Sun Life Mutual Fund as the fourth largest fund in terms of AAUM. The assets of Birla Sun Life Mutual Fund grew 4.99%, followed by HDFC Mutual Fund and Reliance Mutual Fund which saw their assets increase by 3.25% and 3.1% respectively. ICICI Mutual Fund remained a laggard, with a growth of merely 1.39%.

According to the Association of Mutual Funds in India, the number of folios — including debt, balanced, and exchange-traded funds—declined by over a million during the first half from 4.81 crore to 4.71 crore. The number of folios indicates the number of investors in the fund market. It is a mix of high net worth investors (HNIs) and retail investors, with the latter accounting for a substantially larger portion. The average ticket size of folios, however, went up to Rs 1.51 lakh in September 2010 from Rs 1.44 lakh in August 2010, as assets rose in line with stock gains. The total number of folios in the industry as at April end 2010 was 4.78 crore. Folio numbers rose to touch 4.79 crore in June 2010. However, post-June, the industry saw a drop in folios month after month. July 2010 saw a decline of 1.6 lakh folios, and August 2010 49,723. The biggest drop of 5.8 lakh folios was recorded in September 2010. Primarily, these redemptions are because the stock market levels have consolidated at a high range, to 2007 levels. Secondly, the distribution channels are taking a while to adjust and settle down to the new game-changing regulations. Among the top five fund houses, except HDFC Mutual Fund, all others saw a dip in the number of folios. Reliance Mutual Fund was hit the hardest as it lost 226,000 folios, while ICICI Prudential Mutual Fund lost 106,000 folios. Birla lost half a lakh folios whereas UTI Mutual Fund saw a dip of 36,340. HDFC Mutual Fund added close to 300,000 folios. The loss is certainly a cause for concern. In September 2010, the equity segment saw a record net outflow of over '7,000 crore. However, the debt segment outperformed other categories and saw a rise of 624,000 folios to 43.6 lakh from 37.3 lakh at the beginning of 2010. UTI Asset Management Company holds the highest number of folios in the country, around 99 lakh. It also holds the highest number of debt fund (around 23 lakh) and equity fund (65 lakh) folios.

While high redemptions and net outflows on the equity side continue to be cause for anxiety, there has been good news from the Systematic Investment Plan (SIP) side. According to the data provided by the CAMS (MF registrar), SIP accounts have witnessed a whopping growth of 160% over the last year. In August 2010 alone, there were about 3.24 lakh new registrations (new accounts opened). An interesting sidelight, however, is the surge in SIP accounts in non-metros. The data show that new accounts opened in the non-metros have outpaced the growth reported in the five metros cities by a huge margin. The top 25 cities put together have opened more accounts, growing their count by about 188% to 1,18,113 at the end of August 2010. In comparison, only 95,403 SIP accounts were opened in metros. Not surprisingly, with non-metros adding higher accounts, the market share too is tilted in their favour. The share of non-metro accounts has surged from 33% seen last year to 36.5% now. Notably, that of metros has slid from 33% to 29.5%. Interestingly, there has also been a slight improvement in the average SIP ticket size. From about Rs 2,100 it has now moved to Rs 2,200.The other interesting observation has been the higher growth in the micro SIP segment (below Rs 1,000).The market share of this segment has moved up to 16% from 13% last year. Put together, the data clearly point towards the expanding influence of the equity cult. The higher share at non-metros can be attributed to the Government's decision to exempt investors whose annual investment is Rs 50,000 or less in SIPs from submitting details of PAN at the time of investment. It could also be reflective of the fact that distributors may now have started to look at SIPs as a more stable business model and perhaps may have started to market the same.

Piquant Parade

The board of Association of Mutual Funds in India (AMFI) has appointed Mr.U.K.Sinha as the Chairman and Mr. Milind Barve as the Vice-Chairman. Presently, Sinha is the Chairman and MD of UTI Asset Management Company, while Milind Barve is HDFC Mutual Fund’s Managing Director. Both Sinha and Barve would hold office till the next annual general meeting. Both have vast experience in the financial services sector and mutual fund industry. Sinha takes over the reigns from Mr. A.P. Kurian, who held the post since the formation of AMFI in 1995.

Sundaram Finance has bought out BNP Paribas' 49.9% stake in their joint venture Sundaram BNP Paribas Mutual. BNP Paribas recently acquired the financial services activities of the Fortis group. Since Securities Exchange Board of India regulations mandate that an entity cannot have a stake in more than one Asset Management Company (AMC), BNP Paribas was compelled to move out of its joint venture with Sundaram. Internationally, there will be no change in the equity platform. There might be some effect on the investments that are coming directly through BNP Paribas. Currently, the total business coming through BNP Paribas is to the tune of Rs 1,320 crore annually. The assets under management of Sundaram Mutual as on September 30, 2010 was Rs. 14,240 crore and the total number of folios is around 22 lakh.

Bharti Enterprises is in talks with Bank of India, the fifth-largest state-owned bank, to sell its 25% stake in the domestic asset management joint venture with AXA Investment Managers, paving the way for the bank’s re-entry into the 41-member local mutual fund industry, after it shut the business in 2004. Talks between the parties are in an advanced stage, but Bank of India wants a higher stake because of the network it would bring in. Bank of India, which has a strong presence in states such as Maharashtra and Gujarat, has about 3,200 branches across the country.

UTI Mutual Fund announced the launch of SIP investments (Systematic Investment Plans) through NSE's-the Mutual Fund Service System (MFSS) platform. Terminals of NSE brokers will be the official point of acceptance and hence the date of acceptance of the transaction will be the date of entering the request on the terminal. Investors will also have the added advantage of obtaining the same day's NAV (before 3 p.m.) at a large number of outlets in more than 1500 towns and cities, including remote locations. The investors will also have an advantage of getting their units allotted in demat mode in addition to the existing physical mode in accordance with their choice.

Regulatory Rigmarole

UTI Mutual Fund has permitted investment by Foreign National Individuals
resident in India as per the provisions of the Foreign Exchange Management Act, 1999 and the Income Tax Act, 1961 of India, on a prospective basis, with effect from 18 October 2010.

The Securities and Exchange Board of India (SEBI) had directed portfolio managers to charge fees on profit calculated on the basis of the high water mark principle. For new client agreements, the above norms will be applicable from November 1, 2010 while for existing clients, the revised norms will be effective January 1, 2011. The regulator had on July 27, 2010 issued a consultative paper in this regard. The market regulator has also prescribed a standardised format of declaring fees and charges. Providers of portfolio management services are now expected to provide details of fees and charges under three scenarios — 20 per cent profit, no profit/no loss and 20 per cent loss — to all clients. This format enables a client to compute the indicative gain or loss on the funds he would be investing for a year. Portfolio managers should send a letter on the applicability of the ‘high-water mark' principle to clients and get their signature on the new fees and charges structure. New clients are required to sign a document declaring that they have understood the fee structure.

In the face of alleged violations in sale of universal life policies (ULPs), insurers would stop selling ULPs from October 23, 2010 till November 4, 2010 in accordance with a stiff direction by regulator IRDA. ULPs are basically hybrid products, having the flexibility of unit-linked products and traditional plans. At present, four companies Max New York Life, Aviva Life, Bharti Axa Life, and Reliance Life offer these plans. For protecting policyholders' interest, IRDA came up with guidelines for ULPs and sought life insurers’ views on the same till October 31, 2010. As per the draft guideline, IRDA has proposed a minimum life cover of Rs 50,000 or 10 times the annual premium for a customer below 45 years of age. For customers above 45 years, a minimum cover seven times the annual premium has been proposed. According to IRDA, the minimum policy term for such products should be five years and the lock-in period of three years. These products are to be linked to the savings bank account of a customer. The draft guideline says that a variable insurance policy would lapse if the customer does not pay premium for 12 months from the due date.

The asset management business in India is not as unprofitable as the mutual fund industry has sought to project, with fund houses nearly tripling their profits in fiscal 2010 - a year in which fund flows were impacted after distributors stopped selling some schemes. Total earnings of the 41 fund houses in India rose 284% to a record high of Rs 935.6 crore in the fiscal year ended March 2010, according to data from the Securities & Exchange Board of India (SEBI). Indian fund houses managed to boost their earnings by focusing more on a good mix of equity and debt assets and limiting costs, in a period that was marked by major regulatory changes. The securities market regulator had, last year, eliminated some marketing practices, including a ban on entry load which it believed was inimical to investor interest. In some cases, the regulatory hurdle on commissions has turned out to be a boon, as it brought down costs. In fiscal 2009, Indian asset management companies reported a profit of Rs 243.5 crore. The list of the most-profitable fund houses was led by Reliance Asset Management Company, followed by HDFC AMC, UTI AMC, ICICI Prudential AMC, and Birla Sunlife AMC in that order. But not all mutual funds are earning profits. Nearly 85% of the industry profits are accounted for by the top-10 players. Though many fund houses are still bleeding, their sponsors, including some of the biggest names in the global fund management business, have not wound up operations since India is one of the fastest-growing markets. India's 8.5% economic growth, which is the second-highest among major developing nations behind China, is expected to throw up many millionaires, according to a recent Capgemini-Bank of America Merrill Lynch report.

Monday, October 18, 2010

October 2010

Mutual Funds had launched 26 new fund offers in the equity segment between November 2007 and January 2008. Today, the NAVs of half these schemes are below the face value of Rs 10 per unit. And, no scheme has an NAV of more than Rs 20. Given the huge rush at that time to participate in the equity market, these NFOs garnered a significant amount of money – Rs 21,205.40 crore. Reliance Natural Resource Retail mopped up Rs 5,660 crore, UTI Infrastructure Advantage Rs 3,500 crore, and HDFC Infrastructure Rs 1,720 crore. However, the combined assets under management of these schemes had dipped 32% to Rs 14,456.5 crore as on September 27, 2010. It could be because of redemption by investors and due to the inability of the stocks held to reach their previous highs.

Many fund houses seem to have learnt a lesson and are reluctant to launch new schemes. From the statistics available with the Association of Mutual Funds in India, between April and August 2010 the mutual fund industry witnessed the launch of only 10 equity NFOs. The collections were also not impressive at less than Rs 2,000 crore. The reluctance of the houses is also due to the fact that distributors are no longer pushing their products. Moreover, stricter guidelines introduced by the Securities and Exchange Board of India have tied their hands. To garner Rs 700-800 crore assets in a single scheme involves an expense of Rs 20-25 crore on promotional activities. If the fund house cannot recover this cost in two to three years, it will rather not launch a scheme. But Baroda Pioneer PSU Equity Fund - an open ended equity scheme – chooses to differ. It has received a favorable response from its investors and collected over Rs 1 billion during the NFO period.

IDFC Savings Scheme – Series I
Opens: October 15, 2010
Closes: October 29, 2010

IDFC Savings Scheme - Series I, a close ended debt scheme with the duration of 36 months, will mature on Nov.7, 2013. The scheme endeavours to generate income by investing in high quality fixed income securities as the primary objective and generate capital appreciation by investing in equity and equity related instruments as a secondary objective. The scheme will allocate 75% to 100% of assets in debt and money market instruments with medium risk profile. It will further allocate upto 25% of assets in equity and equity related instruments with high risk profile. Investment in securitised debt will be nil. Investments in foreign securities will be upto 50% of the net assets of the scheme. Investments in derivatives will be upto 50% of the net assets of the scheme. Benchmark Index for the scheme is CRISIL MIP Blended Index. The scheme will be managed by Ashwin Patni.

JPMorgan EEMEA Equity Off-shore Fund
Opens: October 18, 2010
Closes: October 29, 2010

JPMorgan EEMEA Equity Off-shore Fund, an open-ended fund of funds scheme, aims primarily at providing long term capital appreciation by investing in JPMorgan Funds – Emerging Europe, Middle East, and Africa Equity Fund, an equity fund which invests primarily in a diversified portfolio of companies incorporated or which have their registered office located in, or derive the predominant part of their economic activity from, an emerging market in Central, Eastern, and Southern Europe, Middle East, or Africa. The scheme will allocate 80% to 100% of assets in units/shares of JPMorgan Funds - Emerging Europe, Middle East & Africa Equity Fund with medium to high risk profile. It will further allocate upto 20% of assets in money market instruments and/or units of liquid schemes with low to medium risk profile. The scheme will be benchmarked against MSCI EMEA (Total Return Net). The scheme will be managed by Namdev Chougule.

AXIS Gold Exchange Traded Fund
Opens: October 20, 2010
Closes: November 3, 2010

Axis Gold ETF, an open ended Gold Exchange Traded Fund, aims at generating returns that are in line with the performance of gold. The new fund offer price for the scheme is Rs 100 per unit plus premium equivalent to the difference between the allotment price and the face value of Rs 100. The scheme will allocate 90% to 100% of assets in physical gold (includes investments in gold related instruments (including derivatives related to gold) which will be made as and when SEBI permits mutual funds to invest in gold related instruments). The scheme may also invest upto 10% in money market instruments. The scheme will be benchmarked against domestic price of physical Gold. Anurag Mittal will manage the fund.

JPMorgan Global Natural Resources Equity Off-shore Fund, Pramerica Short Term Floating Rate Fund, Birla Sun Life Gold ETF, and Canara Suraksha Fund-Series 1 are expected to be launched in the coming months.

Monday, October 11, 2010

October 2010

I have embarked upon the task of picking out one GEM from each of the prominent sector from the October 2010 GEM GAZE. Earlier the GEMs came from any of the sectors with certain sectors left uncovered. This broad-based Sector Fund GEMGAZE is all-encompassing…

ICICI Prudential Infrastructure Fund Gem

The largest fund in the category, at Rs. 3680 crores, it dabbles in every sector barring FMCG, Media, Infotech, and Pharma. Being a multi-sector theme fund, the fund changes the sector composition in tune with market valuations. The top three sectors, energy, financials, and metals account for 55% of the portfolio. For a sectoral fund, the fund is pretty well-diversified with nearly 38 stocks and 75% of the portfolio is large-cap oriented. However, this diversification is highly skewed in favour of specific scrips. The top three holdings alone account for nearly 26% of the fund’s portfolio and Reliance Industries is the fund’s top holding with a weightage of 9.5%. The fund also has a good exposure in the derivatives market. Though currently the fund is invested in equities to the tune of about 93%, historically, the fund has had a decent percentage of cash, debt and money market instruments in its portfolio – balancing the fund’s risk taking ability. The cash levels had however surged drastically during the downturn. The fund manager's contrarian calls give ICICI Prudential Infrastructure an edge over its peers. It expense ratio is 1.83% and the turnover ratio is 123%. Launched in August 2005, the fund has given significant returns since then. It has given 26.88% annualized return since its inception. A relatively high beta fund, ICICI Prudential Infrastructure outperformed its benchmark index – Nifty, with good margins, over the five and three year periods. However, of late, the fund has underperformed diversified funds in one year with a return of 18.59%. Though the good monsoon has played truant acting against short-term earnings for the sector as reflected in the quarterly numbers, this does not in any way alter the outlook for the infrastructure sector.

Reliance Diversified Power Sector Fund Gem

Reliance Diversified Power Sector Fund has generated huge investor interest. This could probably be the reason why a sector fund is, surprisingly, the largest equity fund in India today with more than Rs 5,180 crore of assets under management. Active fund management and portfolio rebalancing is the key. The flexible mandate (power and allied sectors and cash exposure) has been instrumental in the successful management of such a huge corpus. Equity exposure averaged just 68% in 2008 and helped cushion the fall to 50.39%, lower than the relevant sectoral indices and even the Sensex. Though equity exposure dropped to 55% February 2009, the fund manager quickly changed that when the market began to rally in March 2009. In fact, the fund had its best month soon after with a return of 35% (May 11 - June 10, 2009). In 2010, the fund's exposure to stocks is about 97%, while 3% of the total net assets are kept in cash. A large cap-oriented fund with a large cap exposure of 58%, the top three sectors, energy, engineering, and metals constitute 68% of the portfolio. Overall, the portfolio is well-balanced and there is not any over exposure to any particular stock. The expense ratio is 1.81% and the portfolio turnover ratio is 34%. Reliance Diversified Power Sector’s ability to beat the market indices in the bull-run, as well as in the downturn has given this fund an edge over many others in the sectoral theme based funds. The one year return has been 18.52% as against the category average of 13.93%. Though a pessimistic view is prevalent in the power sector in the short term, the long term is promising.

Magnum FMCG Fund Gem

In the past one year, the Rs 30 crore Magnum FMCG Fund has returned 61.77% as against the category average return of 49.85%. 86% of the fund’s investment is in the FMCG sector with the rest in the chemicals sector. There are 15 stocks in the portfolio and 35% of the assets are in large caps. The expense ratio is 2.47% and the portfolio turnover ratio is 45%. Given their ‘defensive' tag, stocks in the FMCG universe usually do not keep up in rising markets, but the past year has been an exception. The BSE FMCG Index, with a return of 26% for one year, has easily beaten the returns of BSE Sensex of about 17%. The reasons for FMCG stocks good performance were two-fold. One, FMCG companies managed the downturn of 2008-09 very well, delivering strong profit as well as sales growth, aided by the rural demand juggernaut. That and their strong cash positions endeared the sector to investors in the aftermath of the economic crisis. Two, home-grown FMCG players have managed to improve on profit growth in 2009-10 helped by acquisitions and expanding overseas operations. However, with the BSE FMCG index seeing its price-earnings multiple climb from its low of 20 to over 28 now, sustaining this kind of financial as well as stock price performance is going to present a challenge. With food inflation rearing up, players are already witnessing pricing pressures and slower growth in segments like soaps and detergents. Rising competition, which is driving up ad spend, too could play spoilsport. But given the mild diversification of this decade old fund, launched in July 1999, an encore could be possible.

Reliance Banking Fund Gem

The very first banking sector fund, Reliance Banking made its debut with a bang. Its return in 2004 put it way ahead of the BSE Bankex and CNX Bank Index. Its performance has been scintillating barring 2006 when certain wrong calls were taken. The fund stood vindicated when it raced ahead in 2007 and fell the least in 2008. The fund manager has a keen preference for public sector banks. The transformation in the space and valuations beckon. Like other sector funds in the Reliance Mutual Fund stable, this one too has the flexibility to go 100% into any of the three asset classes: equity, debt or cash. Despite a high cash allocation way back in July 2004 (64%), the fund manager does not use this leeway to a large extent and even during the credit crisis of 2008, he refused to run to cash for cover. Between September 2008 and February 2009, the cash allocation averaged at around 18.51%. The cash component is 6% at present. The fund manager dynamically manages the fund by oscillating between large and mid caps as well as between private and public sector banks. 55% of the portfolio consists of large caps. He also dabbles in derivatives. The fund strives to exhibit consistency in performance. There are 18 stocks in the portfolio. The current AUM of the fund is Rs 1466 crores and the one-year return is 58.11% as against the category average return of 48.04%. The expense ratio is 2.01% and the portfolio turnover ratio is 31%. The banking sector as a whole has potential but within it there are also a lot of alpha generation opportunities which the fund looks for. Reliance Banking is a compelling choice if investors stay in for the long haul.

Franklin Pharma Fund Gem
This pocket-sized 286-crore pharma category was launched just nine years back. The category till date has five funds making it up. Over the years, it lingered at the bottom of the table but has now emerged out of the pocket. Despite having a miniscule portion of the pie, pharma funds are topping the charts with their recent enticing performance. Franklin Pharma Fund, a very stable decade year old fund, launched in March 1999, at times gets aggressive in its portfolio. This Rs 126.81 crore fund typically has a portfolio of 28 stocks and often takes concentrated bets. Like other pharma funds, this fund also took off as a large-cap, but gradually shifted towards mid-cap stocks. Its interest in small-cap stocks has also increased over time. At present 25% is in large caps. 9% of the portfolio is in cash. The fund has given the maximum returns, since launch, of 29%. Its one year return is an impressive 54.72% as against the category average of 47.42%. The expense ratio is 2.11% and the portfolio turnover ratio is 10.16%. The strong outlook of the pharma sector, besides being a defensive play, will hold the fund in good stead in the years to come.

ICICI Prudential Technology Fund Gem

One of the oldest funds in this category, this fund has been a top quartile performer continuing its winning spree in the past couple of years with a return of 51.17% in the past one year as against the category average return of 37.16%. Currently around 77% of the Rs 108 crore corpus is invested in the technology sector. The only other sector it has diversified into is services. Within the technology space, the fund is inclined towards software with Infosys alone accounting for 51% of the portfolio. The fund has made a fortune with the Infosys stock bought at the time of meltdown. The portfolio is highly concentrated with just 12 stocks. But 66% of the portfolio is large cap-oriented. The expense ratio is 2.49% and the portfolio turnover ratio is 17%.

The starting point in an investment journey should be through diversified equity funds. Thus, while diversified equity funds should constitute your core portfolio and form 90% of it, sector funds could be added to get an extra edge with an allocation of about 10%. Once you are comfortable with diversified equity funds, then you can look at sector funds for the added flavour or returns. Sectoral funds are riskier compared to well-diversified/plain vanilla equity funds. Such sectoral funds are suitable for sophisticated and nimble-footed investors with rich experience in the stock market. You should have a time horizon of three to five years while investing in such narrow-based funds.