FUND FULCRUM (contd.)

 

December 2012

 

The year gone by must have been one of the worst for the Indian mutual fund industry. Whether it was rampant closure of equity folios (primarily retail), poor sales, action-packed regulatory environment, or in several cases shutting down of branches across the country - all had a telling impact on the struggling industry. However, industry officials are optimistic and expect the coming years to be less tough as they foresee improvement in the macro economic scenario and stability in the regulatory framework. Despite an unexpected rally of over 20% (the initial part of which was completely missed by fund managers) in the country's stock markets, participation from domestic investors remained abysmal till date. At every rise, the fund industry faced redemption pressure as the retail segment was quick to book profits and exit the mutual fund space. Amidst an uncertain environment with highly volatile equity markets, the sector witnessed closure of a massive 39 lakh equity folios during the January-November 2012 period - never before seen in the history of the industry. The last month of the year may not be any different. Poor sales and wafer-thin margins amidst tight regulatory framework burdened fund houses further. Expectations of rate cuts, continuation of easy global liquidity, bottoming out of economic data, more action from the government, and return of domestic investors into equity markets should propel equities to a new high next year.

 

Regulatory Rigmarole

 

Securities and Exchange Board of India (SEBI) has brought mis-selling of mutual fund schemes under its norms on prohibition of fraudulent and unfair trade practices. SEBI has inserted an additional clause whereby mis-selling of mutual fund schemes would be deemed to be a fraudulent trade practice. “Mis-selling” would refer to sale of units of a mutual fund scheme by any person, directly or indirectly by making a false or misleading statement or concealing material facts and associated risks or not taking reasonable care to ensure suitability of the scheme to the buyer. Distributors would now need to document each and every sale by risk-profiling clients. They may have to take the signature of their clients before executing a transaction in order to protect themselves. It appears that with SEBI now terming mis-selling as ‘fraud’, the penalty for distributors is likely to get harsher. If a distributor sells ETF or sector fund to a retired person it could be an act of mis-selling as per the client’s risk-profile. If investor insists that he/she wants to invest in a sector fund, then distributor could take a signature of the client to document the sale. In this regard, the market watchdog has brought in amendments to SEBI’s Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations. They would come into force on the date of their publication in the Official Gazette.

Mutual fund investors who have done their KYC before January 01, 2012 are required to provide certain additional mandatory information to invest in new mutual funds from November 30, 2012. The additional mandatory information includes father’s/spouse name, marital status, nationality, gross annual income or net worth and in-person verification (IPV) if they wish to invest in a new mutual fund (new AMC). Existing investors in a fund who are KYC compliant can continue to invest if their KYC status is verified by CVL KYC Registration Agency (KRA). All investors investing after November 30, 2012 with a new fund house need to comply with this rule. Only after complying with the new KYC norms, investors would be able to open a new account/folio with any other new mutual fund. Non-individual investors need to do their full KYC again. The KYC requirements for non-individual investors are stringent as compared to individual investors. For instance, corporates need to provide a copy of the balance sheets for the last two financial years, copy of latest share holding pattern, copies of the memorandum and articles of association and certificate of incorporation, among other things.

Distributors are not supposed to approach individual AMCs, RTAs for any modification in their employee unique identity number (EUIN) data from January 2012. AMFI-unit of CAMS will create a centralized comprehensive database of distributors that will comprise the list of employee unique identity number (EUIN) submitted by various distributors. SEBI, in its circular in September 2012 had directed mutual fund houses to capture the unique identity number (EUIN) of the employee/relationship manager/sales person of the distributor who are interacting with investors for selling mutual fund products. The AMFI-unit of CAMS will be sharing the list of EUIN with all RTAs. It will also update all RTAs on new EUIN generated and deletions/modifications of existing EUIN. It will also frame and implement procedure and business rules for EUIN. AMCs will not accept any modification related to corporate ARN, name of the corporate, employee name, EUIN, from any distributor from January 2013. Distributors have to approach the AMFI-unit of CAMS for any changes. AMCs shall highlight in the Key Information Memorandum the importance of providing EUIN, particularly in advisory transactions, and state that EUIN will help the fund houses to curb mis-selling even if the employee/ relationship manager/sales person/ distributor quits the company. The fund houses are also supposed to tally EUIN records with transactions and identify inconsistencies, if any, between the numbers of transactions by EUINs vis-à-vis total number of EUIN registered by the ARN holder or the total sales staff of the ARN holder. AMCS have been advised to put in place necessary systems and processes in order to implement the above system by January 15, 2013.

Canadian Securities Administrators, the securities market regulator of Canada, has barred Indian asset management companies from selling investment products to local investors, dealing a blow to these fund houses, which raise a sizeable amount from that country. The Canadian regulator has mandated a registration process for investment managers, which also includes AMCs managing monies of local residents outside Canada, to protect the investments of local residents. Non-resident investment fund managers that manage one or more investment funds that have distributed securities to residents of a local jurisdiction will have to register as an investment fund manager in that local jurisdiction unless an exemption from registration is available. By local jurisdiction, the regulator refers to the Canadian provinces of Ontario, Quebec and Newfoundland and Labrador. The ruling will have a significant impact on Indian fund houses, which raise a significant amount of investments from Indians settled in that country. Domestic fund house Franklin Templeton Investments has already said it will not sell its India-domiciled funds in Canada. Other Indian asset managers such as UTI, Birla Sun Life Mutual, Kotak Asset Management, Reliance Mutual Fund, ICICI Prudential Mutual Fund, and Religare Mutual Fund, among others, may follow suit.

The Securities and Exchange Board of India has set up a committee headed by Cabinet Secretary K.M. Chandrasekhar which will look into a single route for all different categories of FIIs.

A total of 48 warning letters have been issued to mutual funds regarding violations of norms in the past three fiscal years. Of these, 30 letters were issued in 2010-11, 14 in 2011-12 and four letters were issued in 2012-13 up to November 2012. In addition, Sebi has issued 26 deficiency letters in 2010-11 and 6 such letters in 2011-12. For the year 2012-13 (up to November, 2012), no deficiency letters have been issued by Sebi. 5 entities have been prohibited from buying, selling or dealing in securities directly or indirectly, till further orders and required to deposit the illegitimate gain identified in the investigations in an escrow account till further orders, in the last two years. During the same time a consent order has been issued in 5 cases. In 7 cases, related to 2011-12 adjudication proceedings are underway. SEBI takes administrative action by way of issuing warning and deficiency letters against mutual funds found to have committed irregularities. Enforcement actions such as direction, adjudication, enquiry, etc. can be initiated under SEBI's norms, depending upon the severity of the violation observed.

Three years after the then SEBI chief CB Bhave shook up Indian fund houses, the mutual fund industry is now in the cusp of another big change. Come January 2013, several bank and corporate treasuries that comprise the largest investor group in mutual funds will sidestep intermediaries and invest directly to earn higher returns. A fortnight ago, many such big ticket investors who regularly park surplus funds in liquid mutual fund schemes, have communicated their decision to leading distributors. These investors will subscribe to 'direct plans' which will be cheaper by 50-75 basis points as customers have the flexibility to invest directly without incurring any incidental costs. According to a SEBI decision taken earlier in 2012, every fund and scheme must have a direct plan for investors who do not want distributor support and the net asset values of such plans will be given separately.

The Indian mutual fund industry has come a long way from the launch of India’s first mutual fund – Unit Trust of India. However, there is a huge gap between India and global peers in terms of penetration as well as AUM, according to CRISIL Research. The domestic mutual fund industry’s AUM is less than 5% of the country’s GDP, whereas it is 77% for the US. Among developing economies, certain markets such as Brazil, where assets managed by the mutual fund industry are 41% of its GDP, highlight the gap that needs to be bridged. Global mutual fund assets stood at USD 25 trillion as of June 2012. Of these assets, the Americas comprised 57%, Europe 30%, Asia-Pacific 12% and Africa less than 1%. Equity funds constitute 40% of global mutual fund assets, bond funds 25%, money market funds 19%, hybrid funds 11% and others less than 5% of total assets. This is in sharp contrast to the distribution of assets in the Indian mutual fund industry where bond and money market funds together constitute close to 65% of the AUM. After two consecutive years of plunge, the Indian mutual fund industry managed to register a smart turnover in 2012, with its assets base seen nearing Rs 8 lakh crore with an increase of about Rs 2 lakh crore this year. As some wide-ranging reforms initiated by the market regulator SEBI and the government are yet to translate into true business gains for the investors and fund houses, the industry is hopeful of even better days ahead in 2013.

FUND FULCRUM

December 2012

According to rating agency CRISIL, the mutual fund industry's assets under management during November 2012 grew by 3.25% to touch Rs 7.93 lakh crore, the highest month-end assets for the industry since April 2010, mainly due to inflow of funds into money market. Money market saw net inflows worth Rs 11,400 crore, garnering over 91% of the total inflows (of Rs 12,600 crore) seen by the industry in the month. The inflows were, however, lower compared to Rs 18,200 crore in the previous month. Inflows in the category are part of the cyclical money flow in the category as corporates invest their short-term investments in this category during the quarter before withdrawing a major chunk at the end of the quarter to meet their advance tax requirements.

Continuing redemptions and a drop in sales led to a net outflow of Rs 1,525 crore during November 2012. From June 2012 to November 2012, there has been an outflow of over Rs 10,000 crore from equity mutual funds. Though the quantum of redemptions was much lower than that of the previous three months, the new inflows through sales could not balance the outflows. The total equity assets under management, in November 2012, increased by 3.5% to Rs1.90 lakh crore, whereas, the Sensex moved up by 4.5% over the same period. For the calendar year, equity schemes witnessed just two months of positive net inflows. There have been just seven new fund offers (NFOs) launched during the last 11 months. The latest NFO—Goldman Sachs India Equity Fund—was able to amass just Rs 67 crore in the last month. Sales for the past month declined by 12% year-on-year to Rs 2,777 crore from Rs 3,173 crore in November 2011. This is the fourth month in a row where sales have declined continuously month-on-month. Except, for a peak in sales in February and March 2012 (above Rs 3,500 crore), sales for other months varied between Rs 2,900 crore to Rs 3,350 crore.

Investors pulled out Rs 10,784 crore from equity funds from April to November 2012 to cash in on the rally in Indian equities, resulting in a drop of more than 30 lakh folios, which is the highest fall so far. Equity folios account for 79% of the mutual fund industry’s total investor folios of 4.40 crore. Investors pumped in Rs 25,241 crore in equity funds, which is the gross mobilization, and redeemed Rs 36,025 crore which resulted in a net outflow of Rs 10,784 crore. Since April 2012, the industry has seen net inflow in only one month, May 2012 when Rs 506 crore came in. Balanced funds also saw net outflows of Rs 336 crore with more than one lakh folio closures. Fund of funds which invest overseas also saw net outflows to the tune of Rs 315 crore. These funds have been seeing continuous outflows since June 2012. Industry’s assets under management went up to Rs 7.87 lakh crore from Rs 6.60 lakh crore, up 19 % during the same period. Overall, the industry recorded a net inflow of Rs 1.61 lakh crore from April to November 2012, largely on account of inflows in debt funds. As equity markets remained volatile, fund industry has largely been promoting fixed income funds, particularly FMPs and bond funds. Debt funds saw net inflows of Rs 1.71 lakh crore with close to seven lakh accounts being opened in this category. The total count of industry’s folio dropped 5% to 4.40 crore in November 2012 from 4.64 crore in March 2012.

During October 2012, mutual funds saw a net inflow of Rs 46,720 crore (of which Rs 34,901 crore were mobilised by private sector and Rs 11,819 crore by public sector) as compared to a net outflow of Rs 51,907 crore (of which Rs 37,588 crore were from private sector and Rs 14,319 crore from public sector) during September 2012, according to SEBI. This significant level of fund mobilisation has also helped the total asset under management of mutual funds to grow to Rs 7.68 lakh crore as on October 31, 2012. So far in the current fiscal year (2012-13), overall net investment in mutual fund schemes rose to Rs 1.48 lakh crore from Rs 96,566 crore mobilised in the corresponding period last year.

Net SIP registrations have been negative each month from April 2012 to September 2012. The SIPs that ceased or expired accounted for a greater number than new SIP registrations leading to a decline of nearly 3.09 lakh SIP accounts despite the fact that the number of new SIP registrations was showing a rising trend from June 2012 to September 2012. And now with the consolidation of plans according to the new regulations, the SIP accounts are expected to decline further.

Even as the BSE Sensex lost more than 1700 points in FY11-12, at least seven mid-sized AMCs have managed to cut their losses, shows a Cafemutual study of 15 mid-sized AMCs that are currently ranked 10 to 25. Axis, Baroda Pioneer Mutual Fund, LIC Nomura, IDBI, JM Financial, J P Morgan, and Peerless managed to minimize their losses to the tune of Rs 82 crore. Axis (Rs 513 crore), Deutsche (Rs. 3,958 crore, IDBI Rs (Rs 1954) and JP Morgan (Rs 2959) recorded an increase in their assets in FY12. The combined net loss of 8 AMCs came down to Rs 161 crore in FY12 as against Rs 292 crore in FY 2010-11. Six AMCs posted a combined profit of Rs 54 crore as against Rs 48 crore the previous year, showing a marginal improvement in their businesses. Among the profitable players, Sundaram and Deutsche recorded a dip in their profits in FY12. Sundaram Mutual Fund’s profit after tax dipped from Rs 13 crore in FY11 to Rs 11 crore in FY12. Deutsche AMC saw its net profit decrease from Rs 11 crore in FY11 to Rs 6 crore in FY12. Tata AMC saw its net profit grow from Rs 17 crore in FY11 to Rs 31 crore in FY12. Among the mid-sized players, HSBC and Principal reported an increase in their losses. HSBC Mutual Fund’s net loss increased from Rs 8 crore in FY11 to Rs 27 crore in FY12 while Principal Mutual Fund’s net loss went up to Rs 8 crore from Rs 3 crore during the same period. Religare Mutual Fund turned profitable by posting a net profit of Rs 0.31 crore against a net loss of Rs 50 crore in FY11. BNP Paribas AMC which reported a net loss of Rs 24 crore in FY11 reported a profit of Rs 1 crore in FY12. Cost rationalization and right product mix will be important for mid-sized and small AMCs to sustain their businesses. Raising assets has also helped some AMCs cut their losses.

Piquant Parade

L&T Finance, a part of the diversified group Larsen & Toubro, has completed the acquisition of Fidelity's mutual fund business in India for an undisclosed amount. On completion of this transaction, the all new L&T Mutual Fund has over Rs 12,800 crore in managed assets and an investor base of close to 9.5 lakh investors from more than 200 cities and towns. This transaction is one of the largest mergers and acquisition deals in the Indian mutual fund industry and provides L&T with the necessary size, scale, and momentum to move to the next level. Over the last few months, they focused on a seamless transition and added high quality talent to their investment team and other areas. The new entity will answer different customer needs with a range of investment options spanning 25 funds across asset classes, risk profiles, and time horizons.

DSP BlackRock has received an in-principle approval from PFRDA to act as a fund manager for National Pension Scheme (NPS). Currently seven firms manage private and government retirement corpus - LIC, SBI, UTI, IDFC, ICICI, Kotak Mahindra, and Reliance Capital. NPS was initially launched for central government employees and later extended to all citizens from May 2009. According to PFRDA, NPS has 38.28 lakh subscribers with assets under management of Rs 21638 crore as on September 2012. PFRDA had recently revised the fund management fee to 0.25% p.a. of the AUM from November 1, 2012. Fund managers are to revise the investment management fee once a year.

SEBI has asked AMFI to expedite the process of creating a new simplified route for broad basing the distribution force. SEBI had identified postal agents, retired government and semi-government officials, retired teachers and bank officers, bank correspondents as the new cadre to sell mutual funds. These new cadres of distributors would require a simplified NISM certification and AMFI registration. AMFI is said to be in the process of finalizing the structure of this new certification with NISM. Details like minimum passing percentage, language, validity are also being worked out. The process of registering with AMFI for ARN is also being reviewed. These distributors will only be allowed to canvas simple schemes like diversified equity schemes, fixed maturity plans (FMPs), and index schemes having track record which equals to or is better than their benchmarks for each of the last three years. For simplifying this exam, NISM could do away with the negative marking for wrong answers or bring down the minimum percentage of mark from 60% to 50%. The curriculum could also be converted into regional languages. The KYD requirement could also be done away with. SEBI’s decision to expand the distribution force comes in the wake of declining active distributors in India. There were more than 80,000 ARNs registered with AMFI and the number came down to 40,000 after KYD was introduced. KYD is mandatory for selling mutual funds. Unofficial reports peg the active distributors count at 5,000 to 10,000

Anoop Bhaskar of UTI bagged the best equity fund manager award while Maneesh Dangi of Birla Sun Life walked away with the best debt fund manager award. HDFC Mutual Fund won the best fund house award while UTI emerged as the runner-up at the Outlook Money Awards 2012. HDFC also bagged the best equity fund house award. The best debt fund house award went to Kotak Mahindra.

Mutual Fund houses have started issuance of the mutual fund common account statement in electronic form in association with AMFI. The facility was introduced from November 2012. SEBI had earlier mandated that all fund houses provide a common account statement (CAS) to investors with an objective to offer an investor enhanced value, convenience and security with benefits such as anytime/anywhere access. Since November 2011, physical copies of CAS are being dispatched to investors. It is issued each month to mutual fund unit holders in whose folios financial transactions have taken place during that month. Now, the electronic version of this statement will be sent to the investor's e-mail ID, that is, the e-mail ID registered as per the investor's KYC (know-your-customer) records or the one registered in the last transacted folio during the month. With eCAS, investors will have further convenience and will together make a positive impact on environmental responsibility through this go-green initiative.

To be continued…

NFO NEST

December 2012

Banking Debt Funds flood the NFO market

Asset management companies have started offering banking debt funds, a thematic debt fund designed as a long-term investment solution for debt investors looking for a focused exposure and for investors averse to taking credit risk on their investment portfolios. Investors have been showing interest in these funds, despite concerns of rising non-performing loans among public sector banks. Religare Mutual Fund, Principal Mutual Fund, and Axis Mutual Fund already have banking debt funds in their portfolios. Several others are in the pipeline, Reliance Mutual Fund, ICICI Mutual Fund, and Birla Sun Life Mutual Fund, to name a few. Banking debt comprises investment in CDs and bank bonds. A bank debt fund or CD fund is launched primarily to take advantage of attractive yields prevalent for bank CDs which are considered to be relatively superior credit as compared to corporate debt. The benchmark 3-month CD is currently trading at 8.4% p.a. Bank debt funds generate 'liquid fund type returns' over a one-year period. Liquid funds, as a category, have returned 9.4% over the past one year. Investment in bank debt and money market instruments, treasury bills, government securities, and securities issued by Public Financial Institutions is primarily with the intention of maintaining high credit quality and liquidity.

Two debt funds and one hybrid asset allocation fund find its place in the December 2012 NFO NEST. A welcome change indeed!

Union KBC Asset Allocation Fund - Conservative

Opens: December 3, 2012

Closes: December 17, 2012

Union KBC Asset Allocation Fund - Conservative Plan is an open ended hybrid fund which will build a portfolio by investing across equities, gold, and debt. Union KBC, a Joint Venture setup between Union Bank of India and KBC Asset Management NV is a relatively new entrant to the mutual fund space and has been in existence only since 2011. Union KBC Asset Allocation Fund - Conservative Plan will have a 15-25% allocation to equity, 55-95% allocation to debt, and 0-20% allocation to gold. While the equity and debt component of the portfolio will be actively managed, the gold portion of the portfolio will be invested in Gold ETFs of other mutual funds. Investors who do not have actively managed portfolios can use such multi asset allocation funds. Since these funds invest in multiple assets there is automatic rebalancing which works in favour of the investor. These funds are taxed like debt funds and hence will give lower post-tax returns. The fund is co-managed by Ashish Ranawade (CIO) and Parijat Agrawal (Head-Fixed Income).

 

IDBI Gilt Fund

Opens: December 5, 2012

Closes: December 17, 2012

IDBI Mutual Fund has launched a new fund namely, IDBI Gilt Fund, an open ended gilt fund. The investment objective of the fund is to provide regular income along with opportunities for capital appreciation through investments in a diversified basket of central government securities, state government securities, treasury bills, and other similar instruments. IDBI Gilt Fund is an approved instrument for investment by exempt provident funds, superannuation funds, gratuity funds and also under the new pension scheme. IDBI Gilt Fund will invest in Gilt securities which bear zero-credit risk and offer adequate liquidity. The fund will dynamically manage duration of gilt securities so as to optimize returns in the backdrop of present uncertainties. The performance of the fund will be benchmarked against CRISIL Gilt Index. The fund will be managed by Gautam Kaul.

Religare Bank Debt Fund

Opens: December 10, 2012

Closes: December 24, 2012

Religare Bank Debt Fund is an open ended debt fund. The investment objective of the fund is to generate optimal returns by investing in a portfolio of debt and money market instruments issued primarily by banks. The fund will invest 80%-100% of assets in debt and money market instruments issued by banks while up to 20% of the assets will be invested in securities issued by public financial institutions, treasury bills, CBLOs, government securities, units of debt and liquid mutual fund schemes. Risk averse investors looking for a portfolio with relatively low credit risk and offering superior liquidity can consider investing in a bank debt fund. The performance of the fund will be benchmarked against CRISIL Short Term Bond Fund Index. The fund will be managed by Mr. Nitish Sikand.

Morgan Stanley Gilt Fund, Morgan Stanley Ultra Short-term Bond Fund, R*Shares CNX 100 Fund, Axis Hybrid Yearly Interval Fund – Series 1 to 3, Sundaram Select Microcap – Series 1, BOI AXA Gold Income Stabilizer Fund, and Edelweiss Gold Exchange Traded Fund  are expected to be launched in the coming months.

GEMGAZE
December 2012

Debt mutual funds are in a way considered suitable for retail investors, who with a small investment amount want to diversify their portfolio and benefit from various highly rated and high-yielding debt instruments. In the last one year, when benchmark indices have given a negative return of 15%, long-term bond funds have given an average of 4%, with many funds even giving returns in the range of 6% to 8%. A bond fund’s total return measures its overall gain or loss over a specific period of time. The total return includes income generated by the underlying bonds and (both realized and unrealized) price gains or losses.

All the five GEMs in the December 2011 GEMGAZE have retained their pre-eminent position in the December 2012 GEMGAZE too.

ICICI Prudential Gilt Investment Fund  Gem

Launched in August 1999, ICICI Prudential Gilt Investment Fund sports an AUM of Rs 239 crore. Being a gilt fund, the credit quality of the portfolio is very high with Government of India securities constituting 91.27% of the total assets. There are seven holdings in all with an average maturity of 10.72 years. The fund earned a return of 10.98% in the past one year as against the category average of 10.26%. The expense ratio is 1.5%. The fund is benchmarked against the I-SEC Li-BEX index. The fund is managed by Mr. Rahul Goswami.

Canara Robeco Income Fund Gem

Canara Robeco Income Fund was launched nearly a decade ago in 2002. The current AUM of the fund is Rs 203 crore with 17 holdings. Being an income fund, debentures constitute 44.56% of the total assets, with reverse repo and Government of India securities constituting 31% each. The credit quality of the fund is reasonably high. The interest rate sensitivity of the fund is high with the average maturity at 6.53 years. Canara Robeco Income Fund has had a rough ride in the past two years. Its return in the past one year was 10.06%, almost on par with the category average of 10.03%. The expense ratio of the fund is high at 2%. The fund is benchmarked against the CRISIL Composite Bond Index. The fund is managed by Mr Ritesh Jain.

 

Birla Sunlife Dynamic Bond Fund Gem

Birla Sunlife Dynamic Bond Fund delivers superior annual performances and has often been a top quartile performer. Of the 29 quarters of its existence, the fund has underperformed in just four. The fund returned an annualised 9.5% over a five-year period. That is a good 2.4 percentage points higher than its benchmark. The category average return was an annualised 7.4% during this period. The fund has returned 10.6% in a year, thanks to falling yields across instruments with various maturity periods. Higher accruals (interest payout from the instruments) also propped returns. Birla Sunlife Dynamic Bond Fund has flexibility to increase or decrease its portfolio maturity based on the interest rate outlook. This essentially shifts the responsibility of managing a debt portfolio actively from the investor to the fund manager. Their dynamic nature, nevertheless, makes funds of this category slightly risky. The duration of the portfolio as of October 2012 was 3.75 years compared with 2.7 years in August 2011. The yield to maturity of the portfolio is 9.08%. The fund managed Rs 12,125 crore of assets as of December 2012. Its large size, besides high cash holding, allows it to latch on to good debt opportunities when they arise and also diversify the portfolio. The cash holdings also provide for investor redemptions without affecting fund performance. The cash holdings as of October 2012 accounted for 9% of the portfolio. In spite of high cash holdings, the fund holds instruments of 66 different issuers in its portfolio. This somewhat diversifies the fund from company-specific risks. The holdings are predominantly in high quality instruments such as gilts, AAA rated bonds, AA+ rate bonds, and top rated short-term debt. Top-rated instruments have better liquidity than the ones with lower rating. This allows the fund to churn the portfolio without too much price risks. The expense ratio of the fund is 1.12%. The fund is benchmarked against the CRISIL Composite Bond Index. The fund is managed by Mr Maneesh Dangi.

Birla Sunlife Government Securities Fund (LT) Gem

Launched in October 1999, the fund has an AUM of Rs 303 crore. The one-year return of the fund is 10.97% as against the category average of 10.26%. The fund has five holdings with an average maturity of 10.67 years and the yield to maturity of 8.34%. With a compounded annual return of 11.3% over the last three years, the fund convincingly beat its benchmark I-Sec Li-Bex, by over four percentage points. Active management of interest rate risk and ability to identify and benefit from short-term technical abnormalities in the interest rate curve have ensured that the fund is among the top five in the medium and long-term debt funds category. While the name of the scheme may suggest that it is a typical long-term gilt scheme, the fund has a highly flexible strategy. It can take exposure to government securities of both Central and State governments and can also invest in more short-term treasury bills. To this extent, it can take advantage of any rallying interest rate scenario by moving to short-term treasury bills. This not only protects the portfolio from any lack-lustre performance in long-dated instruments but also peps up returns albeit for a short duration. A more important asset allocation mandate is that the fund can only invest in government securities. This effectively brings the credit risk of the fund's portfolio to almost nil as all government instruments come with a sovereign guarantee. The fund has also been adept in changing the maturity profile of its portfolio. It has now shifted to 91-day treasury bills from holding gilts with a maturity of 7.7 years five months ago to ride the current high short-term interest rate wave. The expense ratio of the fund is 1.5%.

BSL Floating Rate Fund (ST) Gem

This relatively young fund, launched in October 2005, boasts of a massive AUM of Rs 4423 crore.  In the past one year, this liquid fund has returned 9.83% as against the category average of 9.28%. Commercial Papers constitute the lion’s share of the portfolio at 44% and Certificate of Deposit at 11%. The cash exposure is very high at 40%. Being a liquid fund, the average maturity is 0.09 years. The number of holdings in the fund’s portfolio is 23 with an average yield to maturity at 8.6%. The expense ratio is a mere 0.2%. The fund is benchmarked against the CRISIL Liquid Index. Sunaina da Cunha and Kaustubh Gupta are the fund managers.

FUND FLAVOUR

December 2012

Low penetration despite performance…

Debt funds have been around in the Indian market for several years now. However, the penetration of debt mutual funds among retail investors remains quite dismal. Data from AMFI shows that retail investors account for a negligible portion – about 5-10% of the overall assets in most debt fund categories. In some categories like liquid funds, retail investment accounts for just 1% of the category assets. Meanwhile, retail investment in equity funds has grown over the years and presently accounts for about 68% of assets of all equity oriented funds. This is despite the fact that debt mutual funds across categories and tenure performed well in 2012.

Gilt Funds

Gilt funds are good vehicles to play downward movement in interest rate cycle. Gilt funds invest in government securities that have little default risk. Though there is no default risk, a gilt fund investor faces the interest rate risk, wherein a fund may offer losses if the yields move up drastically in the short term. These are ideal for those who want more safety for their investments or are risk-averse and, at the same time, are looking for reasonable returns on their money. According to mutual fund rating agency, Value Research, medium and long-term gilt funds gave returns of 3.84% for the year ended May 30, 2012. In the short-term (less than a year), they have returned 4.18%. Gilt funds were the best performers across categories during the quarter ended June 2012. Gilt funds returned 3.1% over the quarter, outperforming both equity and other debt oriented categories. This was mainly on account of the softening of yields on the back of the Reserve Bank of India reducing the repo rate by 50 basis points (bps) to 8% in its Annual Monetary Policy for 2012-13 in April 2012. Compared to the gilt funds, equity funds returned 1.4% during the quarter, while the S&P CNX Nifty index was up 1.9% and the S&P CNX 500 index was up 1.1%. The higher returns from gilt funds failed to translate into increase in AUM for the category. For the quarter ended June 2012, the average AUM of gilt funds analyzed fell by 13% to Rs 2,574 crore, compared to Rs 2,968 crore in the previous quarter. This was primarily because investors were uncertain about the pace at which the central bank would reduce interest rates. Post the repo rate reduction in April 2012, the RBI retained key policy rates at its mid-quarter policy review in June 2012, giving priority to inflation over growth. Thus, even though gilt funds outperformed other categories, investor interest in this category was muted. Total assets under management under 40 gilt funds stand at Rs 4393 crore, as on October 31, 2012.

Fixed Maturity Plans

The whirring volatility in the stock market has seen many investors rush to the safety of debt instruments like Fixed Maturity Plans (FMPs). Most people are drawn in by the high returns and the superior tax efficiency that they offer compared to that of other debt options such as fixed deposits (FDs). Fixed maturity plans appeared to lose some of their charm among investors during May- June 2012. Indeed, a few fund houses had to withdraw their issuances for want of investors. Inability on the part of fund houses to mobilise the SEBI-mandated 'minimum target amount' of Rs 20 crore was one of the reasons for fund houses withdrawing their fixed term plans. Moreover, many fund houses could not meet the mandatory '20 investors' norm. As per SEBI guidelines, individual FMPs should have a minimum of 20 investors and no single investor shall account for more than 25% of the fund. Apart from about 20 FMP  cancellations, fund houses like ICICI Mutual, L&T Mutual, Tata Mutual, UTI, DWS and Reliance Mutual Fund among others, had to extend their subscription phase to pool in necessary investments and the required number of investors. Now, FMPs are back in vogue. Corporate treasuries are the biggest category of investors in fixed maturity plans. Declining surpluses, over the past few months, have forced corporate investors to cut back their investments in FMPs. However, fund managers feel, short-term debt products like FMPs still offer handsome investment opportunities from a risk-return trade-off perspective. To make up for the shortfall, fund marketers are now pushing fixed term plans to retail investors.

Liquid funds

Liquid funds are getting increasingly popular these days because of the high interest rates, safety, and tax advantage that they offer. Liquid funds invest in treasury bills, government securities, call money, repo and reverse repos and other such instruments that are quite safe in nature and have a short maturity. This means that they are good for parking that part of your money that you would have otherwise put in a bank savings account. Last year has been particularly good for liquid funds, and that is beginning to show in the fund inflows as well. During the month of May 2012, liquid funds had the largest inflow of funds in any category and the inflow was a massive Rs 26,742 crores. The liquid fund category has given average returns of 8.2% over the last one year, according to data from Value Research, an independent provider of mutual fund data and investment information. Meanwhile, savings accounts gave returns of 4%.

…could low risk be the answer?

In its efforts to reduce debt mutual funds’ overexposure to specific sectors, the Securities and Exchange Board of India (SEBI) has imposed a sector cap on the debt mutual fund schemes since SEBI observed that several debt funds, especially Fixed Maturity Plans, were taking huge exposure to specific sectors, raising worries about systemic risk. Each fund house used to decide how much it invests, in which sector. The advisory committee has recommended a cap on debt schemes’ exposure to any sector at 30% within a period of one year. The aim is to reduce exposure of debt schemes to non-banking finance companies (NBFC), as they have the largest exposure, followed by banking and Public Sector Undertakings (PSUs). This could lower the risk of debt fund investing, thereby, increasing its penetration among retail investors.