FUND FULCRUM

 May 2013

Robust inflows in income and liquid funds push industry’s AUM 18% from Rs 7.01 lakh crore in March 2013 to Rs 8.25 lakh crore in April 2013. Return of corporate and bank money, which typically happens at the end of every quarter, to the tune of Rs 1.05 lakh crore in liquid and income funds, helped industry gain 18% assets in April 2013. As the expectations of rate cut were running high, gilt funds received Rs 986 crore net inflows in April 2013 as a result of which the AUM of gilt funds reached Rs 9181 crore. Equity funds saw net outflow of Rs 80 crore in April 2013 as the BSE Sensex went up by 4%. Industry’s equity assets went up from Rs 1.49 lakh crore to Rs 1.55 lakh crore largely on account of mark to market gains. ELSS too saw net outflows of Rs 190 crore. All in all, the industry received net inflows of Rs 1.06 lakh crore largely on account of inflows in liquid and income funds as against net outflow of Rs 1.08 lakh crore in March 2013. 

Mutual fund industry lost more than 36 lakh investors, measured in terms of individual accounts or folios, for the fourth consecutive year in the financial year 2012-13. Folios are numbers designated to individual investor accounts, although one investor can have multiple folios. As per the latest data compiled by market regulator SEBI on total investor accounts with the country's 44 fund houses, the number of folios have fallen to 4.28 crore at the end of March 2013 from 4.64 crore in the financial year 2011-12, translating into a decline of 36.23 lakh new investor accounts. In the past four financial years till 2012-13, the mutual fund industry had lost more than 55 lakh new investor accounts. Mutual fund sector, which held 4.75 crore folios at the end of financial year 2008-09, saw an increase of 3.66 lakh new investors account to 4.8 crore in 2009-10. However, later the number of folios continued to witness a southward trend and tumbled to 4.28 crore. The sharp fall in the number of folios can be attributed to profit booking and various merger schemes in the mutual fund industry, among others.

Tenure-wise analysis of assets under management (AUM) across investor types and categories for the half year ended March 2013 showed that 63% of the retail AUM stayed in equity mutual funds for more than two years. A similar trend was also observed in the data released by AMFI as of September 2012. Declining interest rates saw retail investors adding gilt funds to their portfolio with retail folios in this category almost doubling in 6 months from 27,145 folios to 51,763 folios as of March 2013. Corporates continued to dominate mutual fund AUM with a 46% share in March 2013, slightly lower than 47% in September 2012. HNIs with a 28% share were the second biggest AUM contributors followed by retail investors with 23% share.

With 23.5% and 20.2% of their AUM coming from B-15 cities, UTI and SBI are the AMCs with the highest proportion of assets from B-15 cities. Out of Rs 69,450 crore AUM managed by UTI, 23.5% comes from B-15 cities. This success can be attributed to their long established presence, strong distribution channel, and deeper penetration in the smaller cities. UTI has 150 branches in B-15 cities. UTI is targeting to have 30% of AUM from B-15 cities in the coming months. At present, UTI is strengthening its distribution force by empaneling 900 new cadres of distributors in smaller cities. UTI is followed by SBI with 20.2% of its AUM coming from B-15 cities/towns. SBI currently manages AUM of Rs 54,904 crore. At present, SBI Mutual Fund has nearly 13000 distributors in B-15 cities and is planning to empanel 3000 more new cadre of distributors. India’s largest fund house by assets, HDFC boasts of 19.7% AUM concentration in B-15 towns, followed closely by Reliance at 19.6%. Among the medium sized fund houses, Religare has 19.2% AUM concentration in the hinterland. Axis and Goldman Sachs too boasted of 16% AUM concentration in B-15 towns. ICICI Prudential has 16% AUM concentration in B-15 cities. SEBI has allowed AMCs to charge higher expense ratio on assets sourced from beyond the top 15 cities. Fund houses have also hiked the commission structure for application received from these towns. Currently the top 15 cities account for nearly 87% of industry’s AUM. Nearly 5% of industry’s assets are concentrated in the next top 20 cities (those beyond top 15).

Piquant Parade

UTI Mutual Fund topped the tally of CRISIL Fund Rank 1 schemes with 7 of their funds in the top cluster followed by SBI Mutual Fund with 6 funds as per the latest CRISIL Mutual Fund Rankings for the quarter ended March 2013. During the quarter under review, top ranked funds from largecap, diversified and small & mid-cap categories beat their benchmarks on the back of allocations in information technology (IT), telecom and fast moving consumer goods (FMCG). On the other hand, lower ranked funds had a higher exposure to banks, construction, capital goods and metals, which gave negative returns. Within debt categories, gilt funds were the top performers during the quarter under review, followed by income funds. The performance was primarily on account of fall in interest rates.

On March 28, 2013, Invesco acquired 49% shareholding in Religare Asset Management Company Private Limited and Religare Trustee Company Private Limited and now acts as the co-sponsor of Religare Mutual Fund. Religare Mutual Fund will now be known as Religare Invesco Mutual Fund. The mutual fund schemes will also be renamed accordingly.

Fund houses have got quicker in resolving investor complaints with most grievances being resolved within 30 days, shows an analysis of complaints data posted on AMC websites. Reliance Mutual Fund received 13679 complaints in FY 2012-13 and resolved 13424 of them within 30 days. Only 63 complaints took up to three months for getting redressed. Similarly, DSP Black Rock received 2025 complaints during FY 2012-13 out of which 2023 were resolved within 30 days. Tata Mutual Fund received 1462 during the same period and 1443 were resolved within 30 days. IDFC Mutual Fund too resolved 971 complaints within 30 days, out of the total 988 complaints received by it during last year. Greater the number of folios higher the number of complaints. For instance, Reliance has more than 63 lakh folios and it received 13679 while Axis Mutual Fund, which has close to five lakh folios received comparatively less complaints (361). Similarly, a new fund house like IIFL with 26928 folios received only 41 complaints. An analysis of investor complaints posted by AMCs on their websites shows that majority of these complaints are in connection with errors in statement of accounts and relating to non-update of changes in address, PAN, bank details, nomination, etc. The non-receipt of redemption proceeds and account statement were the other major reasons for complaints. The complaints, which fund houses receive are broadly divided in three categories. These are non-receipt of money (dividend units, redemption proceeds), account statement (non-receipt of account statement, errors in account statement), and service related (wrong switch between schemes, deviation from scheme attributes).

In an effort to explain the significance of mutual funds and to de-jargonize its complicated terminology, AMCs have come up with innovative methods of delivering the mutual fund story through comics, cartoons, and short films. So, on the one hand, Axis Mutual Fund is trying to explain the mutual funds concepts through popular Punjabi comic characters Santa and Banta, on the other IDFC has produced a short Hindi film called ‘Bachat Nivesh Badhat’. Sometime back, Edelweiss Mutual Fund came up with a character called Mr Absolute (depicting a common man) to explain various attributes of Edelweiss Absolute Return Fund. Birla Sun Life Mutual Fund has used the old age fable of Crow and Pitcher to illustrate the advantage of SIP in achieving financial goals. SBI Mutual Fund, Tata Mutual Fund, and Kotak Mahindra Mutual Fund came up with Fund Guru, Professor Simply Simple, and Faayde lal Ke Funde. All the concepts aim to explain the mutual funds jargons in an interesting and easy way. 

Regulatory Rigmarole

National Automated Clearing House system (NACH), initiated by National Payments Corporation India (NPCI) is a system, which helps faster transaction settlement, wider coverage, and superior mandate management system. HSBC is the first bank in India to complete live customer transactions on the NACH debit platform in March 2013 followed by Reliance Mutual Fund. The NACH Debit is an effective way to collect funds from consumers spread across remote locations in India as compared to Electronic Clearing System Debits. NACH is a new payments system, which incorporates best practice functionality from existing systems around the world. Currently registering a SIP ECS mandate takes 21 days and there is no process to track if the ECS has been confirmed at the bank’s end. NACH is an online end-to-end electronic system, which helps fund houses register SIP mandates swiftly. The concept is new to India, having been operationalized in December 2012. NACH can be utilized to pay utility bills, insurance premiums, and mutual fund SIP ECS. NACH systems helps fund houses cut down SIP registration time from the existing 21 days to three days.

The mutual fund sector might introduce uniform valuations of debt securities across AMCs, to increase the transparency in the valuation of these instruments. The move would mean a debt security could not have different valuations even in different fund houses. Currently, traded debt securities can be valued on the basis of weighted average price. Untraded ones can be valued on the basis of parameters set by an AMC’s valuation committee. The Association of Mutual Funds in India (AMFI) has asked members to work with third-party entities to introduce a uniform valuation system for all securities across funds. They expect it to be formally implemented from July 2013.

 As SEBI celebrates its 25 years of existence, Chairman U K Sinha says this has been an eventful journey for the capital markets regulator and it has created market infrastructures that are better than those in many other countries, including some most developed economies. Sinha is the eighth Chairman of SEBI since its inception as an independent regulator in 1988, when the central government headed by the then Prime Minister Rajiv Gandhi decided to give a boost to the stock market activities as part of its economic liberalisation drive. Prior to SEBI coming into existence, the capital markets were regulated by the Capital Issues (Control) Act of 1947. There have been massive changes in the way the market functions and the trading takes place. From the use of latest technology to widening of the markets and market activities, a host of eventful changes have taken place. A host of new investment avenues and market entities, starting from mutual funds to venture capital funds have come to the fore, widening the markets in a big way. There have been huge changes in the way primary markets function and are regulated. Amid all this growth and widening of the markets, safeguarding the investors' interest has remained paramount and significant changes have been made on that front as well. Despite some of the shortcomings of the institution, successive chairmen have built on its strengths both in terms of regulation and market development featuring what many acknowledge global electronic trading systems, depository, clearing corporation and settlement systems, derivatives trading, better quality orders, and enforcement of regulations.

NFONEST

May 2013

Close-ended funds are back with a bang!

Close-ended equity schemes, which were out of favour in the past five years, are back in vogue. At least three fund houses are coming out with close-ended equity schemes in such a volatile environment. In fact, IDFC Mutual fund has already launched its IDFC Equity Opportunity-Series I, which is a three-year close-ended scheme. Other fund houses such as Reliance Mutual Fund and Axis Mutual Fund have already filed an offer document with the market regulator, SEBI seeking to launch their close-ended mutual fund scheme. 

During the boom in the markets between 2004 and 2008, we saw many fund houses coming out with close-ended schemes. During that period, the performance of close-ended schemes was not very inspiring to say the least. The ban on entry loads and streaks of measures from the market regulator has led to less monetary benefits to fund houses, which were shying away from launching close-ended schemes. That the fund houses are coming out with close-ended schemes now means they have done their homework well.

With close-ended FMPs flooding the market, only two funds (with one of them being a close-ended fund again) find their place in the May 2013 NFONEST.

PPFAS Long term Value Fund

Opens: May 13, 2013

Closes: May 21, 2013

PPFAS Long Term Value Fund is the maiden fund of Parag Parikh Financial Advisory Services Ltd, an investment advisory firm that has managed portfolio management services (PMS) schemes for many years. It is an equity diversified fund that will invest in companies across market capitalization. The fund plans to invest in stocks selected on the basis of value investing principles which can offer capital appreciation in the long term. The fund's investment objective is to generate long term capital growth from an actively managed portfolio primarily of equity and equity related securities. Fund manager will invest at least 65% of the money in equities. Maximum 35% of money can be invested in debt and money market instruments. Foreign securities can be bought to the extent of 35% of the scheme's assets. The fund does not have any sectoral or market capitalization bias. The fund manager aims to follow an active investment strategy primarily based on fundamental research driven by bottom up stock selection approach. The fund manager, Rajeev Thakkar, plans to invest in companies with a clear focus on long term. Such a fund is suitable for investors looking to own equities in the long term.

ICICI Prudential Multiple Yield Fund – Series 3 – Plan B

Opens: May 17, 2013

Closes: May 31, 2013

ICICI Prudential Mutual Fund has launched a new fund named as ICICI Prudential Multiple Yield Fund - Series 4 - Plan A, a close ended income fund. The tenure of the plan is 1825 days. The primary objective of the fund is to seek to generate returns by investing in a portfolio of fixed income securities/ debt instruments. The secondary objective of the fund is to generate long term capital appreciation by investing a portion of the scheme's assets in equity and equity related instruments. The fund will allocate 65% to 95% of assets in debt securities (including government securities) with low to medium risk profile. It would allocate up to 30% of assets in money market instruments, cash and cash equivalents with low to medium risk profile. On the flip side it would allocate 5% to 35% of the asset in equity or equity related securities with medium to high risk profile. Of the investments in debt instruments, 65% to 70% would be invested in AAA rated non convertible debentures. The benchmark index for the fund will be Crisil MIP Blended Index. Rahul Goswami, will manage the debt portion of investments under the fund. The equity portion will be managed by Rajat Chandak. The investments under the ADRs/GDRs and other foreign securities will be managed by Atul Patel.

Sundaram Capital Protection Oriented Fund 3 years (Series 10 and 11) and 5 years (Series 5 and 6), Union KBC Small and Midcap Fund, Reliance Corporate Bond Fund, IDFC Infrastructure Debt Fund Series 1, BOI AXA Triple Asset Allocator Fund, BOI AXA Equity Debt Rebalancer Fund, J P Morgan US Value Equity Offshore Fund, J P Morgan India Government Securities Fund, ICICI Prudential Capital Protection Oriented Fund IV (Plan A to J), J P Morgan India Balanced Fund, UTI Banking and PSU Debt Fund, Union KBC Capital Protection Oriented Fund Series 3, and J P Morgan India Monthly Income Fund  are expected to be launched in the coming months.

GEMGAZE

May 2013

Index Funds today are a source of investment for investors looking at a long term, less risky form of investment. The success of index funds depends on their low volatility and therefore the choice of the index.

The five sparkling GEMs among the index funds in India in 2012 have retained their preeminent status in 2013 also, with HDFC Sensex Plus Index Fund being the latest entrant.

Goldman Sachs Nifty BeES Gem

Launched in December 2001, the fund has an AUM of Rs 482.21 crore. Large caps rule the roost with 98% of the portfolio in large cap stocks. 99.8% of the assets are in equities. 59.31% of the assets are in the top three sectors, finance, energy, and technology. The one-year return of the fund is 22.76%, slightly ahead of the category average of 20.28%. The returns of the fund are benchmarked against the CNX Nifty Index.

ICICI Prudential Index Fund Gem 

The AUM of ICICI Prudential Index Fund, launched in February 2002, has been hovering around Rs 96.5 crore during the past couple of years. Large caps constitute 98% of the portfolio, with 99% of the assets in equity. The top three sectors, finance, energy, and FMCG account for 54.45% of the portfolio. The one-year return of the fund is 22.36%, slightly above the category average of 20.28%. The returns of the fund are benchmarked against the CNX Nifty.

Can Robeco Nifty Index Fund Gem 

The AUM of Can Robeco Nifty Index Fund, launched in October 2004, is a paltry Rs 4.29 crores. Large caps constitute 98% of the portfolio. The top three sectors, finance, energy, and technology account for 60.51% of the portfolio. The one-year return of the fund is 22.53%, as against the category average of 20.28%. The returns of the fund are benchmarked against the CNX Nifty.

Franklin India Index Fund Gem

The AUM of Franklin India Index Fund, launched in July 2000, is Rs 297.27 crores. Large caps constitute 98% of the portfolio, with 99% of the assets in equity. The top three sectors, finance, energy, and FMCG account for 58.57% of the portfolio. The one-year return of the fund is 22.86%, as against the category average of 20.28%. The returns of the fund are benchmarked against the CNX Nifty.

Principal Index Fund Gem

Launched in June 1999, the AUM of Franklin India Index Fund is Rs. 21.11 crores. Large caps constitute 98% of the portfolio, with 99% of the assets in equity. The top three sectors, finance, energy, and FMCG account for 59.79% of the portfolio. The one-year return of the fund is 22.94%, as against the category average of 20.28%. The returns of the fund are benchmarked against the CNX Nifty.

HDFC Index Sensex Plus Fund Gem

Launched in July 2002, HDFC Index Sensex Plus Fund sports an AUM of Rs 81.02 crore. This fund has always had a large-cap tilt with over 85% allocation to large-cap stocks considering 80-90% allotment to the Sensex companies, though not necessarily in proportion to the Sensex weightage. Since inception, around 37 non-Sensex stocks have been part of its portfolio. This fund throws no surprises and plays safe. The performance rarely strays from that of the Sensex, with sound downside protection that pays off in the long-run. The one-year return of the fund is 21.63% as against the category average of 20.28%. The top three sectors of the fund are finance, FMCG, and energy. 58.38% of the assets are in the top three sectors. The fund is benchmarked against the S & P BSE Sensex.

Birla Index Fund

Launched in September 2002, the AUM of Birla Index Fund is Rs 26.91 crores. Large caps constitute 98% of the portfolio, with 95% of the assets in equity. The top three sectors, finance, energy, and FMCG account for 53.05% of the portfolio. The one-year return of the fund is 22.2%, as against the category average of 20.28%. The returns of the fund are benchmarked against CNX Nifty.

UTI Nifty Index Fund

The AUM of UTI Nifty Index Fund is Rs 169.85 crores. This open-ended passive fund was created by merging UTI Sunder and UTI Master Index fund on March 14, 2012. Large caps constitute 98% of the portfolio, with 99% of the assets in equity. The top three sectors, finance, energy, and FMCG account for 59.99% of the portfolio. The one-year return of the fund is 23.35%, as against the category average of 20.28%. The returns of the fund are benchmarked against CNX Nifty.

Tata Index Nifty Fund

Launched in February 2003, the AUM of Tata Index Nifty Fund is Rs 6.41 crores. Large caps constitute 98% of the portfolio, with 99% of the assets in equity. The top three sectors, finance, energy, and FMCG account for 60.07% of the portfolio. The one-year return of the fund is 23.07 as against the category average of 20.28%. The returns of the fund are benchmarked against CNX Nifty.

SBI Magnum Index Fund

The AUM of SBI Magnum Index Fund, launched in January 2002, is Rs 46.87 crores. Large caps constitute 98% of the portfolio, with 97% of the assets in equity. The top three sectors, finance, energy, and FMCG account for 57.27% of the portfolio. The one-year return of the fund is 23.06% as against the category average of 20.28%. The returns of the fund are benchmarked against CNX Nifty.

 

FUND FLAVOUR

May 2013

Index Funds – a bird’s eyeview

An index fund is a passive investment with investment done in the stocks of a benchmark index. Index funds are mutual funds with an objective to generate returns that commensurate with the performance of a benchmark index.  As such, the fund manager selects a combination of assets for a portfolio that is intended to mimic an index, such as the Sensex or the Nifty. Because the fund's underlying assets are held and not actively traded, operating expenses are usually lower as there is no research or high management overhead.

Both sides of the scale

Index funds are advantageous for risk-averse investors. The various advantages of Index Funds are they are easily understandable with returns always in line with the benchmark index, automatic clean-up of portfolio, absence of security specific risk, easier management of portfolio, suitability for efficient markets, low transaction costs, low expense ratio, less risk, and low dependence on performance of fund manager. Absence of outperformance and lack of options are the two major disadvantages of index funds.

A closer look

To some investors, it is reasonable to assume that all index funds perform the same. However, a deeper look will uncover all sorts of discrepancies between funds.

Expense ratio: Since there is no research or higher management costs, the costs of index fund should be relatively low. E.g. for IDFC Index Nifty fund, the expense ratio is 0.25% and followed by Reliance Index Nifty fund at 0.40%.

Tracking error: If all the Index funds track the same index, then every index fund should offer the same return. Then our choice is to pick-up a low expense ratio. However you need to check the tracking error. The returns generated by an index fund may vary due to returns generated by underlying index. This deviation from index fund returns is called tracking error. Generally low tracking error funds are good.

Index funds in India

Today, there are not enough passive funds for executing all types of investment strategies. For instance, there is only one mid-cap ETF (from Motilal Oswal AMC). On the debt side, there is a severe lack of options (only 10-year G-sec funds are available). The overwhelming majority of funds are based on the Nifty and the Sensex. The universe of passive funds available to Indian investors needs to grow. The category has 45 active funds (only primary funds included) and 30 passive ones. Their cumulative asset under management (AUM) is small: Rs 1,758 crore vis-a-vis Rs 24,663 crore for active funds. However, their proliferation indicates that fund houses are preparing for the day when investor preference might shift to passive funds in this segment.

Why Index funds in India have not become popular?

There are two aspects to this – the first is that actively managed funds have performed better than index funds in the past and people expect that to continue in the future as well. There are several types of mutual funds, which are offering 10 to 15% (annualized returns in the last three years of large cap and diversified mutual funds are 13% and 17% respectively) annualized returns in the last few years. However, returns of index funds range from 4% to 8%. Mutual fund schemes invest in best performing stocks, growing companies, for long term hence the returns are higher compared to index funds. Secondly, index funds are not really low cost in India.

Then, when are Index funds good to invest?

·      Investors who want to take advantage of stock market crashes and want to invest directly in SENSEX or NIFTY.     

           Investors who want to invest in all stocks across index instead of investing in a few stocks or a mutual fund, which picks up only based on its investment objective. 

            Investors who are willing to take risk as investment in index would reflect the stock market volatility

The Bottom Line

If you are an investor who would like to invest in an index fund, be sure to look beyond just the cover. Not all index funds perform the same. Expense ratios, fees and tracking errors can drastically affect an index fund's performance. Investors should carefully investigate an index fund before buying in to make sure that its fees are low and that they have a firm understanding of what the fund invests in, as well as the strategies and goals that management uses to meet its objectives. Index funds can be very dependable investments, but investors are more likely to find one they can count on if they weed out any element of surprise.