Monday, May 28, 2012


FUND FULCRUM


May 2012

 

According to rating agency Crisil Ltd, fund houses lost at least 700,000 folios in the six months ended March 2012.The retail category was the biggest loser in terms of folios, especially in the equity category, dragged down by the fall in the domestic markets in 2011. Domestic banks/financial institutions category also witnessed a decline of 77% in folios during the year ended March 2012, mainly due to RBI’s recent circular restricting bank investment in Mutual Funds to 10% of their net worth from January 2012. In 2010-11, the net inflow into the equity schemes of mutual funds was down by about Rs 13,500 crore. But, in the following year, it turned positive with a net flow of around Rs 700 crore. Indian retail investors, who access equities through the mutual fund (MF) route, continue to eschew investments in stock markets. The closure of 300,000 folios in one month at the beginning of the current financial year (April 2012) has further shrunk the equity investors’ base of the mutual fund sector. A worsening global market situation impacting Indian stocks is proving a big deterrent for investors. Between January and April 2012, 11 lakh retail equity folios have been closed. Data from the Securities and Exchange Board of India show the total number of equity folios was 3,73,47,567 on April 30 2012, down 3% from December 2011, at 3,84,96,253.

India's top asset management companies (AMCs) have continued to remain profitable, no matter whether mutual fund investors made money or not in the tough market conditions. Rather, top players have posted growth in their profitability during the financial year 2011-12. Reliance Mutual Fund, despite losing its top slot to HDFC Mutual Fund during the year, continued to remain the most profitable asset manager in the industry, with Rs 276 crore as net profit in FY12, a growth of 5.6% against Rs 261 crore in the previous financial year. HDFC Mutual Fund, the country’s largest fund house, grew faster to Rs 269 crore, growth of 11% compared with Rs 242 crore in FY11. The top five control 54% of the industry’s assets (there were 44 fund houses managing an average assets under management (AUM) of Rs 6,64,792 crore as on March 31, 2012). These players reported rise in profits in a year that saw erosion of a little over 5% of the industry’s AUM, while equity AUM dipped 6.7%.

A common perception is that investment in the capital markets, particularly equities, is largely an urban phenomenon, essentially a metro show. This seems to be true of mutual fund investments as well, if one goes by the data of geographic distribution of AUM with UTI MF available on its website. But what is surprising is that many small cities in the country have taken to the equity cult even if, in terms of percentage, their share in the overall pie of UTI MF is very small. In broad terms, investors from five cities account for a little more than 50% of the total AUM of UTI MF, which is in line with the general trend. But what is interesting is investors' preference for particular funds. While Mumbai occupies the top slot in all categories except one (Gilt fund where it is toppled by Jaipur), those that figure among the top five are not uniform across all the funds. For instance, Chennai does not figure among the top five in the income fund category as it is replaced by Ahmedabad. In equity funds, Hyderabad replaces Bangalore while the other four are common. In the balanced fund list, Mangalore and Jodhpur elbow out Bangalore and Chennai. In Gilt funds, Jaipur accounts for nearly half the investment with a 47.09% share while Mumbai came a distant second with 20.63% share. In the ELSS category, Chennai and Bangalore are edged out of the top five by Hyderabad and Pune. But in Gold ETF, Chennai ranks fourth with a 4.13% share.

Piquant Parade



Bharti Enterprises exits from the mutual fund business as Bank of India makes a re-entry. State-run Bank of India (BOI) has re-entered the mutual fund industry by buying 51% stake in Bharti AXA Investment Managers for an undisclosed sum. BOI has acquired 25% stake from Bharti Enterprises (which will exit the fund house) and 26% from AXA Investment Managers (Asia). The remaining 49% stake will be held by AXA Group. The fund house will be renamed ‘BOI AXA Investment Managers’. PSU banks have been able to leverage their extensive branch network for distributing mutual funds.

Competition watchdog Controller of Capital Issues (CCI) has approved the proposal of Japanese major Nippon Life to acquire 26% stake in Reliance Capital's mutual fund arm Reliance Capital Asset Management Ltd. The deal, which is valued at an aggregate amount of Rs 1,450 crore, is the largest Foreign Direct Investment (FDI) deal in any Indian asset management company till date.

 

Regulatory Rigmarole

The National Institute of Securities Market (NISM) has raised the cost of the Mutual Fund Distributor CPE Programme. It costs, at the most, Rs. 3,600 for adhering to the new mutual fund requirement norms stipulated by NISM at a time when the distributor business is dwindling. To provide a smooth transition, NISM will continue to offer the current CPE programme (the one-day programme) till May 31, 2012. An associated person holding a certificate whose validity will lapse on or before November 30, 2012 may undergo the current programme till May 31, 2012. Such a person holding a valid certificate whose validity will lapse between June 1, 2012 and November 30, 2012, and who has not undergone the above programme, may attend the NISM Mutual Fund Distributor (MFD) CPE as per the revised requirements from June 1, 2012 onwards, within the validity period of the said certificate. An associated person holding a certificate whose validity will expire on or after December 1, 2012 must undergo the NISM MFD CPE as per the revised requirements from June 1, 2012 onwards.

Fund houses such as SBI, Canara Robeco, Taurus, JP Morgan, Principal have introduced or increased exit loads on early exits by investors. The exit load would discourage very short term investments in debt schemes as it brings down the net gain to investors. Exit loads introduced are in the range of 0.15% to 0.5% and are for redemptions before completing 15 days to 180 days depending on the scheme. An income fund may charge exit load for redemptions up to 180 days from the date of allotment of units, whereas a short term bond fund, may charge exit load for redemption up to 90 days from the date of allotment.

Know-Your-Client (KYC) registration agency CDSL Ventures Ltd has asked market intermediaries to exercise caution while accepting KYC applications and supporting documents from investors. The agency has put out a list of 'reasons' that hinders smooth KYC clearance. Exclusion of PAN from income tax database, data mis-match or error, inadequate document support, differences in signatures, in-person verification not done, unsuitable address proof, mismatch between address on KYC Form and the proof submitted, incomplete KYC form etc. are some of the reasons for rejection of KYC.

In order to prevent fraudulent redemptions, AMFI has asked AMCs to stop accepting redemption requests along with change of bank mandate at the same time. The guideline came into effect from May 1, 2012 as part of AMFI’s best practices code. This is primarily being done to reduce operational risks. There are chances of fraud. So, AMFI has discouraged it. There has to be some cooling period between any change in bank account request and redemption. Fund houses allow retail investors to register five bank accounts and ten accounts for non-individual investors. Last year, SEBI disallowed third-party cheques to avoid fraudulent redemption practices.

The prolonged ebb in the market has taken its toll on the mutual fund industry. But hope remains in view of the strong fundamentals and the inherent nature of the market…




Monday, May 21, 2012


NFO NEST

May 2012

A delectable spread on the NFONEST platter…a happy combination of flavours to be savoured in the NFONEST May 2012.

JP Morgan India Hybrid Fund – Series 1

Opens: May 7, 2012

Closes: May 21, 2012
 

JP Morgan India Hybrid Fund Series 1 aims at generating returns by investing in fixed income securities that are maturing on or before the maturity of the fund along with achieving capital appreciation through equity exposure. The asset allocation of the fund will be in such a way that the objective of the fund to generate returns and reduce interest rate volatility will be met, through investments in a portfolio of fixed income securities and equity related securities. Hence, the fund will allocate 65 to 95% of assets in debt and money market instruments and 5 to 35% in equity and equity related instruments. The fund will be benchmarked against 15% of BSE 200 and 85% of the CRISIL Composite Bond Fund Index. Namdev Chougule, Ravi Ratanpal, Amit Gadgil and Karan Sikka will be the Fund Manager(s).


ICICI Prudential Capital Protection Oriented Fund II – Series IX

Opens: May 14, 2012

Closes: May 23, 2012

ICICI Prudential Capital Protection Oriented Fund II - Series XI - 36 Months Plan is a close ended capital protection oriented fund. The investment objective of the fund is to seek to protect capital by investing a portion of the portfolio in good quality debt securities and money market instruments and also to provide capital appreciation by investing the balance in equity and equity related securities. The securities would mature on or before the maturity of the fund. The fund will allocate 82% to 100% of assets to debt securities and money market instruments with low to medium risk profile. On the flipside, it would allocate up to 18% of assets in equity and equity related securities with medium to high risk profile. The fund`s performance will be benchmarked against CRISIL MIP Blended Index. Debt portion of the fund will be managed by Chaitanya Pande and equity portion will be managed by Rajat Chandak. The investments of the fund in ADR/GDR and other foreign securities are being handled by Punit Mehta.

Tata Capital Protection Oriented Fund – Series I

Opens: May 16, 2012

Closes: May 30, 2012

Tata Capital Protection Oriented Fund Series I (3 Years) is a close-ended debt scheme with a duration of 3 years from the date of allotment. The investment objective of the scheme is to seek income and minimize risk of capital loss by investing in a portfolio of fixed income securities. The performance of the scheme will be benchmarked against CRISIL MIP Blended Index and will be jointly managed by Mr. Thomas J Priju (for Equity portion) and Mr. Marzban Irani (for Debt portion).



Taurus Banking and Financial Services Fund

Opens: May 16, 2012

Closes: May 30, 2012

Taurus Mutual Fund has launched its first sector fund, the open-ended Taurus Banking & Financial Services Fund. The primary objective of the fund is to generate capital appreciation through a portfolio that invests predominantly in equity and equity related instruments of Banking, Financial and Non Banking Financial Companies that form part of the BFSI Sector. The fund will be actively managed and benchmarked to the BSE Bankex. Being a sectoral fund, the portfolio could be concentrated. Since sectoral funds carry a higher risk, investors with a high risk appetite and longer time frame of 3-5 years, can consider investment here.



BNP Paribas Income and Gold Fund

Opens: May 17, 2012

Closes: May 31, 2012

BNP Paribas Income and Gold Fund is an open-ended debt fund with an investment objective to generate income from a portfolio consisting of debt and money market securities, along with investments in Gold Exchange Traded Funds (ETFs). The scheme’s portfolio comprises of 65% to 90% debt instruments and 10% to 35% of assets in Gold ETFs with a high risk profile. Crisil Short Term Bond Fund Index + Price of Gold with the ratio of 75:25 will be the Benchmark Index for the fund. The fund will be managed by Puneet Pal.


Axis Fundamental Factors Equity Fund, Union KBC Asset Allocation – Moderate, Union KBC Capital Protection Oriented Fund – Series I, UTI Capital Protection oriented Fund – Series III, Canara Robeco Gold Savings Fund, UTI Medium Term Fund, JP Morgan US Growth Equity Offshore Fund, JP Morgan Hybrid Fund Series II, DSPBR Dynamic Asset Allocation Fund, and India Bulls MIP Gold Plus are expected to be launched in the coming months.


Monday, May 14, 2012

GEMGAZE

May 2012

Index funds are miracles of modern finance and should form the core of every investor’s portfolio. Since index funds have a large expense advantage over any actively managed mutual fund, they must have above-average returns in any significant time period. Thus, if you want above-average returns, index fund is the answer.

The May 2011 Index GEMs have retained their eminent status in May 2012 too.

Goldman Sachs Banking BeES Gem

There has been a drastic fall in the AUM of Goldman Sachs Banking BeES (formerly Benchmark Banking BeES) from Rs 271.2 crores last year to Rs. 53.23 crores at present. The one-year return of the fund is –15.26%, slightly ahead of the category average of –17.47%. The returns of the fund are benchmarked against the Benchmark CNX Bank Index. Large caps rule the roost with 94% of the portfolio in large cap stocks. 99.9% of the assets are in equities. The expense ratio is 0.48% and the portfolio turnover ratio is 96%.

ICICI Prudential Index Fund Gem 


The AUM of ICICI Prudential Index Fund has been hovering around Rs. 88.92 crores during the past couple of years. The one-year return of the fund is –10.84%, slightly below the category average of –10.57%. The returns of the fund are benchmarked against the Benchmark S&P CNX Nifty. The top three sectors, finance, energy and technology account for 50.77% of the portfolio. The expense ratio is 1.46% and the portfolio turnover ratio is 19%.

Can Robeco Nifty Index Fund Gem 


The AUM of Can Robeco Nifty Index Fund is a paltry Rs. 4.37 crores. The one-year return of the fund is –11.19%, below the category average of –10.57%. The returns of the fund are benchmarked against the Benchmark S&P CNX Nifty. The top three sectors, finance, energy and technology account for 57.75% of the portfolio. The expense ratio is 1.14% and the portfolio turnover ratio is 13%.

Franklin India Index Fund Gem

The AUM of Franklin India Index Fund is Rs. 162.23 crores. The one-year return of the fund is –11.5%, below the category average of –10.57%. The returns of the fund are benchmarked against the Benchmark S&P CNX Nifty. The top three sectors, finance, energy and technology account for 57.73% of the portfolio. The expense ratio is 1% and the portfolio turnover ratio is 16.53%.

Principal Index Fund Gem

The AUM of Franklin India Index Fund is Rs. 13.37 crores. The one-year return of the fund is –11.19%, below the category average of –10.57%. The returns of the fund are benchmarked against the Benchmark S&P CNX Nifty. The top three sectors, finance, energy and technology account for 58.34% of the portfolio. The expense ratio is 1% and the portfolio turnover ratio is 7%.

Birla Index Fund

The AUM of Birla Index Fund is Rs. 25.73 crores. The one-year return of the fund is –11.96%, much below the category average of –10.57%. The returns of the fund are benchmarked against S&P CNX Nifty. The top three sectors, finance, energy and technology account for 53.77% of the portfolio. The expense ratio is 1.5% and the portfolio turnover ratio is 78%.

UTI Nifty Index Fund

The AUM of UTI Nifty Index Fund is Rs. 168.66 crores. The one-year return of the fund is –11.74%, much below the category average of –10.57%. The returns of the fund are benchmarked against S&P CNX Nifty. The top three sectors, finance, energy and technology account for 58.05% of the portfolio. The expense ratio is 1.49% and the portfolio turnover ratio is 34%.

Tata Index Nifty Fund

The AUM of Tata Index Nifty Fund is Rs. 9.16 crores. The one-year return of the fund is –11.15%, below the category average of –10.57%. The returns of the fund are benchmarked against S&P CNX Nifty. The top three sectors, finance, energy and technology account for 57.74% of the portfolio. The expense ratio is 1.5% and the portfolio turnover ratio is 3%.

SBI Magnum Index Fund

The AUM of SBI Magnum Index Fund is Rs. 34.67 crores. The one-year return of the fund is –11.33%, below the category average of –10.57%. The returns of the fund are benchmarked against S&P CNX Nifty. The top three sectors, finance, energy and technology account for 55.83% of the portfolio. The expense ratio is 1.5% and the portfolio turnover ratio is 76%.

Monday, May 07, 2012

FUND FLAVOUR

May2012

The matchmaker

Investment markets are very complex. To build a portfolio of securities that consistently outperforms all other portfolios is virtually impossible. However, most portfolios do under-perform the indexes used to "measure the market." Since index funds own the stocks that make-up the index, they will perform as well as the market that the index measures. Index funds are perfect for the buy-and-hold investor - the kind of person who likes to sit back and let his investment grow, rather than moving in and out of the market in an effort to beat the market. An investor wishing his or her investment portfolio to keep pace with the market should consider index funds. Index Funds provide a perfect investment avenue for investors looking to invest into equity but not willing to take higher risks. This is because Index Funds propose to invest in companies in the same proportion as that of the underlying index. Simply put, these funds are made up of the securities that comprise major market indexes. They do not try to beat the market. Instead, they try to match it.

Footprints on the sands of time

Index funds are very, very old. Their history dates back to the 17th century. During the renaissance, world famous figures like Blaise Pascal or Edmund Halley created the basis for risk management and the theory of probability, both of which are the pillars of modern finance. The great thing about this financial instrument is the cost of index funds. Index funds require little or no active management. In most cases, computer-trading software dictates the portfolio allocation to match the chosen index. Besides the traditional index fund, there are the fundamental index funds, also known as quad funds. In this kind of funds, the index is not composed of the trends in the market, but of quantitative goals. The problem with quad funds is that, since they require active management, they have a higher fee than typical index funds (but not as high as mutual funds).

Picking the pearls…

It is fairly known that index funds are less risky compared to actively managed diversified funds. Since index funds mirror the benchmark index, they are less volatile compared to other equity-based funds. What is also known is that the risk in index funds is also lower because your investments are not at the mercy of a fund manager taking a wrong investment decision. What few investors know is how to identify the best index fund. The normal method of identifying schemes that have outperformed their benchmark indices will not work here. One should go for funds that closely map index. In other words, if a fund is giving returns higher than its index, it may not be such a great fund. The tracking error, or the difference in the returns of the index fund and its benchmark, is the most common tool for this.

But the tracking error does not capture all the deviations from the benchmark index. For example, the Nifty Junior BeES has a high tracking error (at 0.59%), but maps the index very closely and its one-year return matches that of its benchmark, the Nifty Junior. But other index funds that have a lower computed tracking error have shown more deviation from their benchmark returns.

Let us take a closer look at the factors that can influence the tracking error.

Cash component: The cash in the portfolio is a major cause of the difference in returns. The lower the cash component, the closer the fund can track the index. So it always makes sense to stick with an index fund with a lower cash component.

Fund size: If the fund size is larger, the mutual fund house will be able to manage it efficiently. Higher AUM also makes management of inflows and outflows easier as a larger corpus facilitates better cash movement. So it always makes sense to stick with an index fund of significant size.

Expense ratio: Since no active fund management is required, the expense ratios of index funds are relatively low. This should not exceed 0.5%. But in India, there are 16 index funds with expense ratios of more than 1%. And unlike the other two factors (i.e., cash component and AUM), this will remain a major drain on the scheme. In other words, investors need to avoid a scheme with a very high expense ratio even if it has a lesser "declared tracking error", because it is most likely to under perform the benchmark index in the long run.

Index composition: Liquidity of the index component and how smoothly a fund manager can get in and out of these stocks also play a crucial role in determining the tracking error. Since major indices such as Nifty and Sensex are constituted of extremely liquid stocks, the tracking error has to be relatively lower. But that will not be the case when one keeps tracking less liquid indices like Nifty Junior or CNX Bank Index. In other words, investors have to expect a higher tracking error in funds that track non-major indices.

…that suit you

While a vast majority of diversified equity mutual funds have done better than key indices in the long run, index funds are a good option for investors who are new to the market. First time investors can opt for Sensex or Nifty based funds as they have a good exposure to large cap stocks and do not bring undue volatility. Index funds are simple to understand and correlate closely with the returns offered by the market. Index funds also have lower management costs. While the charges for an actively managed fund come to around 2% of the mutual fund’s net asset value, it is between 0.5-1% for index funds. These passively managed funds provide returns that closely correspond to the gains made by their respective indices and have a tracking error (difference between index and fund returns) of about 0.5%. These funds also have a lower risk return ratio compared to actively managed equity funds. Index funds typically bring lower returns in a rising market but fall less sharply during a downturn.

Not the best option in India…

Index funds are a relatively small part of the overall mutual fund industry in India, and this is markedly different from the west, where index funds do quite well, and in fact the biggest fund in the US is an index fund (SPY) that tracks the popular S&P 500 index. Indian indices like the Sensex (30) and the Nifty (50) cover a relatively small number of stocks and ignore many opportunities in the mid-cap sector. An index fund that invests in just 30 or 50 stocks clearly does not offer a great deal of diversification. Contrast this with Vanguard 500 in the US, which tracks the changes in 500 stocks of the S&P 500 index. The basic principle here is: the more the number of stocks comprising an index the better is the diversification and price discovery. Unlike the capital markets in developed countries, Indian markets have not been thoroughly researched which means that there may be more opportunities to beat the market by sound research. Finally, one of the biggest advantages of index funds: their very low expense ratios are less relevant to India where expenses are quite high. Any mutual fund, be it an index fund or a gold exchange traded fund or an equity mutual fund, needs to spend money on marketing the project, pay the fund manager and other such expenses. These expenses as a percentage of total money collected to run the scheme is the expense ratio. US index funds like the Fidelity Spartan 500 have expense ratios as low as 0.1 per cent, while Indian index funds have expense ratios as high as 1-1.5 per cent. This is not that much lower than active funds like the HDFC equity fund with expense ratios of around 2 per cent.

… but potentially rewarding

This does not mean that Indian investors should permanently ignore index funds. In a few years, many of their shortcomings in the Indian context may be resolved. As capital markets mature and the quality of research increases, it will be harder to generate high returns through stock-picking and active strategies. With increased competition, expense ratios in Indian index funds may fall making them more attractive relative to active funds. While the markets may be overvalued today that will not be the case indefinitely. While index funds may not be the best investment vehicle today, they are a potentially rewarding investment that all savvy investors should understand.