Monday, February 27, 2012

February 2012

The assets of equity mutual funds went up 11% from Rs. 1.40 lakh crore in December 2011 to Rs. 1.56 lakh crore in January 2012 as the BSE Sensex gained 11% in January 2012 despite Rs. 456 crore of net outflows. A combination of redemptions in SIPs and low gross sales has resulted in the outflow from equity funds. The equity AUM went up due to the rebound in markets. The industry’s AUM gained 8% from Rs. 6.11 lakh crore to Rs. 6.59 lakh crore due to inflows of Rs. 26,950 crore in liquid and gilt funds. In December 2011, the industry saw heavy redemptions in liquid funds to the tune of Rs. 48,839 crore.

According to the Securities and Exchange Board of India, close to 100,000 folios were closed in January 2012 alone. This brings the total number of folio closure in the current financial year, to around 900,000. In 2011, when Indian equities were among the worst performing of markets, folios were consistently being closed. Equity folios, both pure equity schemes and equity linked savings schemes, are being closed mainly on account of profit booking by investors and better alternate assets and avenues offering assured returns of as high as 10%. There is an emerging trend of investors shifting to debt.

Of the 39 asset management companies that declared their earnings in 2011, 16 recorded a collective profit of around Rs. 1,100 crore and 23 booked around Rs. 550 crore loss. Reliance Mutual Fund saw its profit rise almost 30% to Rs. 236 crore and HDFC Asset Management Co. Ltd, the largest fund house by assets, saw its profit increase 16% to Rs. 242 crore in fiscal year 2011.

In a clean-up exercise, mutual fund houses have eliminated one-tenth of the equity schemes in operation in 2011. As many as 33 equity funds were merged with other schemes this year, even as fund houses made fewer new fund launches. Fund houses have resorted to merger of their schemes in three situations. Some have merged narrowly defined sector funds with diversified equity funds, because the latter may deliver steadier long-term returns. Some fund houses have also used mergers as a way to migrate investors in underperforming products within the fund house. Some of these mergers also seem to be prompted by regulatory pressure.

Piquant Parade

Fidelity Investments is in talks to sell its Indian mutual fund business. Fidelity is seeking a valuation of Rs 100 crore for the asset management arm and the assets may attract interest from a large number of fund houses including Goldman Sachs Asset Management Company. Fidelity Mutual Fund may retain the equity fund management team headed by Alexander Treves after taking into account the overall valuation of the deal. To add to the confusion, there is even a talk about the possibility of a joint venture with an Indian bank with sections within the Fidelity management feeling that it may be a wrong time to exit India with the local market just stepping into a bullish phase.

In sharp contrast to moves made by asset management firm Fidelity Mutual Fund to exit India, the Chennai-based conglomerate Shriram Group has decided to revive its defunct mutual fund business. Shriram AMC had four mutual fund products way back in the 90s, which the company decided to eventually wind up due to lack of interest. However, the company soon came under pressure from market regulator SEBI either to render the licence or restart operations. Shriram AMC, the only listed asset management company in India, will launch new products in the next six months targeting the retail investor. The AMC business is planning to launch products, which would offer gold and balanced funds.

Public sector Bank of India (BoI) is hopeful of starting its asset management business next fiscal and is currently waiting for regulatory approvals. BoI recently bought 51% stake in the mutual fund business of Bharti Axa Mutual Fund, a joint venture between the telecom company Bharti Enterprises and Axa Investment Managers of France. BoI had started its mutual fund business in 1990. Of the six schemes launched by the BoI Mutual Fund, four had been redeemed and two schemes transferred to Taurus Mutual Fund after giving exit option to investors in 2004. With the likely approval from the regulator, the bank will re-enter this space and join 41 other players in the domestic market.

State-run United Bank of India has signed an agreement with DSP BlackRock Investment Managers to distribute DSP’s mutual fund products. This agreement will help DSP BlackRock to expand retail distribution of its mutual fund products while it will give a boost to the non-interest income of United Bank of India.

Pramerica Mutual Fund is close to buying a 39% stake in Ahmedabad-based retail distribution outfit Prudent Corporate Advisory Services for about Rs 20 crore. The stake acquisition will help Pramerica, which manages over Rs 2,100 crore worth of assets, widen its distribution base significantly as Prudent ranks among the top five retail fund distribution companies.

SEBI will launch an investor education programme through short films, TV and radio commercials in English and regional languages. The objective is to create general awareness on securities market, products and facilitate participation of retail investors in the securities market. The awareness campaign will be done through five 25-30 minutes short films, ten 30 seconds TV commercials, ten 30 seconds Radio spots and ten print advertisements.

The ICRA Mutual Fund Awards 2012 saw HDFC win the Fund house of the year – Equity award and UTI win the Fund house of the year – Debt award. HDFC Mutual Fund bagged the Best Equity Fund House Award and the Best Multi-asset Fund House Award, while ICICI Prudential Mutual Fund won the Best Debt Fund House Award at the Morningstar 2012 Awards.

Regulatory Rigmarole

Sebi plans a slew of measures for market operations. The three critical changes being planned are: allowing interoperability of clearing corporations, imposing pre-trade order limits on exchanges and segregating brokers’ accounts from those of clients. India’s capital market regulator has in the pipeline plans to reduce transaction costs for investors, limit liabilities of clearing corporations and protect the market from unwarranted risks and manipulation.

SEBI has expressed displeasure over some investors getting the same day’s net asset value (NAV) by splitting their purchases in income or debt schemes to ensure the Rs 1-crore limit is not crossed. On purchase of units in income or debt-oriented schemes, other than liquid schemes, with an amount equal to or more than Rs 1 crore, irrespective of the time of receipt of application, the closing NAV of the day on which the fund house receives the money is applicable. If the investment is under Rs 1 crore, investors get the NAV of the day on which the application was made.

AMFI has asked R&Ts and AMCs to consolidate folios based on matching PAN with investor names to smoothen consolidated account statement (CAS) issuance process by February 29, 2012. However AMFI has observed that many investors have provided different names, sometimes full names and sometimes only initials or surname. Thus a large number of investors got excluded from getting CAS, which resulted in duplication of costs. AMFI has now instructed R&Ts to drop the validating folios on the basis of exact name match for statements to be dispatched from March 2012. AMFI has also directed R&Ts to send CAS electronically to valid email ids from May 2012 onwards. CAS is issued every month if there are any transactions done by investors.

AMFI will shortlist four out of the eleven audit firms for carrying out due diligence on 220 big distributors. Among the eleven firms are KPMG, PWC, Deloitte, M. P. Chitale & Co. AMFI is waiting to receive the terms and conditions and charges from audit firms to make the final list. AMFI will start the due diligence audit by March 2012 as the regulator wants to see the implementation of the regulation before the end of the current financial year. After appointing the audit firms, the distributors will be segregated and allocated to the four auditors.

The ICRA report on the mutual fund industry says that with the equity markets on an upswing in 2012, interest among investors may come back. The funds can also benefit from gradual improvement in confidence due to policy actions aimed to mitigate concerns emerging out of the Euro Zone debt crisis. Expected easing of monetary policy in other emerging markets is also expected to add to the positive sentiments. The BSE Sensex has so far risen 13.6% during the calendar year 2012 as against a fall of 24% witnessed in 2011.

Monday, February 20, 2012

February 2012

Dearth of Equity NFOs

The year 2011 saw just 10 equity NFOs being launched with a total inflow of Rs 612 crore whereas 2010 saw 23 NFOs being launched bringing in Rs 4,659 crore. Tata Retirement Savings Fund-Moderate Plan and Tata Retirement Savings Fund-Progressive Plan, could garner just Rs10 crore of investment. Peerless Equity Fund and Edelweiss Select Midcap Fund could garner Rs 24 crore, and Rs 6 crore, respectively. A rather poor performance compared to Union KBC Equity Fund, which collected Rs 167 crore of investments in June 2011, one of the highest inflows during 2011.

In line with the bleak scenario for equity NFOs in 2011, the February 2012 NFO NEST unveils just two NFOs of which only one is an ELSS fund that figured in the January 2012 NFONEST also. FMPs continue to rule the roost.

ICICI Prudential Capital Protection-oriented Fund II – Series 7
Opens: February 14, 2012
Closes: February 27, 2012

ICICI Prudential Capital Protection Oriented Fund –II –Series 7 (24 Months Plan) is a close ended Capital Protection Oriented Fund. The objective of investment in the Fund is to try to protect capital by investing a portion of the portfolio in good quality debt securities and money market instruments (88%–100%) and also to provide capital appreciation by investing the balance in equity and equity related securities (0% – 12%). The performance of the fund will be benchmarked against CRISIL MIP Blended Index. Chaitanya Pande and Rajat Chandak will be the Fund Manager(s) of the fund. The former will take care of debt investment and the latter of equity investment.

SBI Tax Advantage Fund – Series II
Opens: December 22, 2011
Closes: March 21, 2012

SBI Mutual Fund has launched SBI Tax Advantage Fund-Series-II, a 10 year close ended Equity Linked Savings Scheme. The investment objective of the fund is to generate capital appreciation over a period of ten years by investing predominantly in equity and equity-related instruments of companies across large, mid and small market capitalization, along with income tax benefit. The fund will allocate 80-100% of assets in equity and equity related instruments. The fund shall also invest up to 20% in debt and money market securities with low to medium risk profile. The performance of the fund will be standardized against BSE 100 Index and Jayesh Shroff will be the Fund Manager.

Canara Robeco Multicap Fund, HSBC China Consumer Opportunities Fund, Goldman Sachs India Equity Fund, ICICI Prudential Lakshya Fund, Indiabulls Short term Fund, Axis Life Plan, L& T Prudence Fund, Birla Sunlife Capital Protection oriented Fund Series 9, and IIFL Gold Exchange Traded Fund are expected to be launched in the coming months.

Monday, February 13, 2012

February 2012

The art of asset allocation

It has been grilled into our head that asset allocation is a must if we want our investment plan to succeed. The first thing that you have to set is your life goals. Next, you have to decide on the instrument (or asset class) that will help you reach the goal. Again, there is the tedious process of reviewing the investment portfolio and rebalancing it — if there is a need — in case the investment landscape undergoes a change. If you are curious to see how asset allocation works, you can check out the fund of funds from mutual funds. These funds will help you in allocating money across different asset classes, depending on your investment goals and risk-taking ability. An asset allocation fund is an open-ended fund of funds that seeks to generate superior risk-adjusted returns to investors in line with their asset allocation. Put simply, the fund first defines an asset allocation and then identifies a basket of the funds in which it will invest to achieve the pre-defined asset allocation. The best part of investing in a fund of fund is that you will get access to a basket of funds with different investment styles that will invest according to your asset allocation plan. It saves the time needed for investing in multiple schemes and tracking them.

All the GEMs in the February 2011 GEMGAZE have retained their preeminent position in the February 2012 GEMGAZE, thanks to their consistency and stability.

FT India Life stage Fund of Funds Gem
Magic formula of life

Franklin Templeton AMC has five plans based on life stages that will suit your age profile - FT India Life Stage FoF 20s, FT India Life Stage FoF 30s, FT India Life Stage FoF 40s, FT India Life Stage FoF 50s Plus, and FT India Life Stage FoF 50s Floating Rate. All these are plans of a single fund that has assets of around Rs 165 crore. The AUM of each plan is Rs 10.59 crore, Rs 7.34 crore, Rs 12.09 crore, Rs 16.31 crore, and Rs 118.05 crore respectively. The top three sectors in the portfolio are finance, energy, and technology (not necessarily in that order), with technology being replaced by metals in the case of the penultimate plan. Allocation to large caps in the various plans range from a low of 62% to a high of nearly 75%. The allocation to equity tapers from 67% in the first plan to a measly 18% in the last plan. The one-year returns of the plans are 7.11%, 7.84%, 7.99%, 7.82%, and 7.79% respectively. They have all surpassed their respective category averages but for the last plan. While the expense ratio for all the plans is the same at 0.75%, the portfolio turnover ratio is 14.38%, 8.8%, 6.2%, 26.61%, and 40.41% respectively.

ICICI Prudential Advisor Series Gem
Precious advice

ICICI Prudential Mutual Fund offers Fund of Funds through five plans: ICICI Prudential Advisor–Very Aggressive, ICICI Prudential Advisor –Aggressive, ICICI Prudential Advisor–Moderate, ICICI Prudential Advisor–Cautious, and ICICI Prudential Advisor–Very Cautious. The AUMs of Aggressive, Moderate, and Cautious Plans are Rs 6.9 crore, Rs 5.62 crore, and Rs 3.09 crore respectively. The top three sectors in the portfolio are finance, energy, and technology. Allocation to large caps hovers around 70% in all the plans. The allocation to equity is 52%, 41%, and 13% respectively. The one-year returns of the plans are 12.78%, 10.77%, and 10.23% respectively. They have all surpassed their respective category averages. While the expense ratio for all the plans is the same at 0.75%, the portfolio turnover ratio is very high at 96%, 199%, and 95% respectively.

Birla Asset Allocation Plan Gem
Defensive bargain

Birla Asset Allocation Plan is an open-ended fund of funds that offers three plans – Aggressive, Moderate, and Cautious Plans. The AUM of Aggressive, Moderate, and Cautious Plans is Rs 14.08 crore, Rs 8.46 crore, and Rs 6.5 crore respectively. The top three sectors in the portfolio are FMCG, finance, and automobile. Allocation to large caps hovers around 60%. The allocation to equity is 72%, 41%, and 24% respectively. The one-year returns of the plans are 4.27%, 4.55%, and 6.23% respectively. The expense ratio for all the plans is low at 0.35%.

FT India Dynamic PE Ratio Fund of Funds Gem
Auto timing the markets

FT India Dynamic PE Ratio Fund of Funds is a hybrid fund, which moves into equity and debt in an automated manner. The fund protects downside and behaves conservatively because of its mandate. In other words, the fund automatically rebalances its asset allocation. The AUM of the fund is an impressive Rs 1506 crore. The top three sectors in the portfolio are energy, finance, and technology. Allocation to large caps is high at 89%. The allocation to equity at present is 60%. The one-year return of the fund is 7.72%. While the expense ratio is at 0.75%, the portfolio turnover ratio is 44%. During five- and three-year periods, the fund clocked a compounded annualised return of 13.4% and 11.6% and bettered the Sensex by 3.5 percentage points and 6 percentage points respectively. It also comfortably outpaced its benchmark CRISIL Balanced Fund index. The fund, which dynamically allocates between equity and debt, is an apt choice for investors who want to have equity exposure but are shy of risks and volatility associated with it.

Monday, February 06, 2012

February 2012

Simplicity in the midst of complexity

Mutual fund investing today has become complex and stressful. Investors need to choose from thousands of funds, closely track their performance, take decisions to retain or change funds, attract tax liability if funds are changed before 12 months and finally, reconcile all these holdings at the end of the year. These are real concerns of investors today. Fund of Funds simplify all this in an instant. Globally, investor awareness of multi-manager fund of funds is widespread. India too has multi- manager fund of funds though investors do not have sufficient awareness of these. When markets behave like they have been doing lately, the one who loses less is called a winner. Fund of Funds by their very design are meant to lose less. Still, only one per cent of the Indian Mutual Fund Industry's AUMs are made up of Fund of Funds.

Building blocks of awareness

But first, what is a Fund of Funds? At its simplest — a mutual fund that invests in other funds is a fund of funds. Conceptually it does what you do, create a portfolio of funds. The difference being, when you buy funds yourself, you buy them individually and hold and track and access them separately, while when you buy a fund of funds, you hold just one fund which in turn holds other mutual funds inside it. Two structures of multi-manager funds facilitate risk reduction - one is FOF, short for Fund of Funds, another is MOM or Manager of Managers.


The most prominent feature of the FOF is that instead of being invested directly into underlying securities, they are put into a single fund at first and then the money will be spread over several underlying funds. The credentials of every underlying fund are evaluated on the basis of its previous performance, asset classes, risks involved, and most important of all, the performance of the funds’ managers. The portfolio will be constructed based on the factors mentioned above. At present there are 108 FoF schemes, of which 70 are equity ones, 31 debt and 7 in the hybrid category.


Unlike Fund of Funds which adopts the method of diversifying the funds across several managers, the Manager of Managers fund is run by multiple fund managers of a single fund. It is also called segregated mandate, in which every manager has some expertise in some specific asset class. In principle, this method manages to spread risks by distributing the responsibilities among a number of fund managers. In addition, it allows a general fund manager to introduce specialization in different asset classes in order to achieve the maximum income.

The verdict

The advantages of FoFs far outweigh the disadvantages. FoFs are a great way to start investing into mutual funds for a first time investor. In a FoF investment, in principle, all eggs would not be put in one basket leading to greater diversification, hedging investor risk across various sectors. The fund manager would automatically switch between funds, in line with the investment objective of the scheme without the investor attracting capital gains tax or exit load. Investors would have only one folio to maintain and one NAV to keep track of. New or first time investors, who do not have large capital for a diversified portfolio, could diversify from among thousands of funds and stocks, with a small amount of money. With the FoF scheme, an investor gets access to such funds which are otherwise off limits for small investors. When a fund of funds manager changes any fund it has invested in, there is no tax liability that accrues on the investor. Expense fees and management costs are higher than normal mutual funds, as the cost structure will include the fees of the underlying mutual funds, as well as that of the the FoF. There is a possibility that the FoF may be holding the same stock through different funds it has invested in. The investor will have to bear a dividend distribution tax similar to a debt mutual fund.

Hence given the aforementioned pros and cons, a FoF scheme is a worthwhile investment proposition for:

· Small investors willing to build a portfolio of quality mutual funds
· Investors who are new to mutual funds and lack the resource of researching and choosing the right funds
· Investors who want to eliminate the cost incurred on research and advise on investment in regular mutual funds
· Investors who want to eliminate the hassle of maintaining and tracking their investment in multiple schemes

Changing perception

Many investors lack the time, inclination and expertise to monitor the market or mutual funds. In such cases too, fund of funds comes as the perfect investment tool. As far as their performance is concerned, most equity oriented FoFs led by the domestic equity oriented ones have delivered luring returns across time frames and also managed their risk well (as revealed by their Standard Deviation) which thus has resulted in them providing appealing risk-adjusted returns (as revealed by their Sharpe Ratio). The return of a fund of funds will always be closer to the weighted average returns of the funds it has invested in, quite like the return of an investor’s portfolio of funds. And by the very same logic, a fund of funds will not go down as much as the worst performing fund it holds inside it. For this very reason, fund of funds are known to give superior risk adjusted returns. Second, fund of funds until very recently were perceived as competition by distributors. If one single fund of funds itself can buy, hold, sell, overweight, underweight the funds it invests in, then how will a distributor add value to the investor! This misplaced perception has begun changing in the last one year. Fund of funds industry AUMs have more than doubled in the last 15 months to over Rs 8000 cr as of October 2011.

Building portfolio the efficient way!!

Building an efficient portfolio of wealth creating mutual funds is often seen as a daunting task by many investors. There is more to mere assessment of past returns in the process of selecting winning mutual funds. It is noteworthy that it also involves analysis of factors such as performance of peers in the category, performance of the fund under consideration across phases of market cycles, risk which the fund has exposed its investors to, risk-adjusted returns, portfolio characteristics (i.e. top-10 stock holdings, top-5 sector exposure and portfolio turnover ratio), costs of investing (i.e. expense ratio and exit load), and investment processes and systems. Moreover, one cannot rule out the fact that with vast number of schemes available confusion can mount thus making the task of selecting winning mutual funds portfolio more complex. Selecting winning mutual funds for the portfolio, makes not only tracking of the mutual fund schemes necessary but also leads to multiplicity of transactions, filling forms, and maintaining multiple account statements. Given the aforementioned intricacies involved, while holding a portfolio of winning mutual funds may appear dispiriting, investing in a good Fund of Fund (FoF) scheme offers the comfort of enjoying a diversified portfolio of winning mutual funds. A FoF offers investors an excellent and a unique investment proposition, as it is a mutual fund scheme that invests in schemes of other mutual funds (thereby taking the concept of mutual fund investing to another level).