FUND FULCRUM (contd.)

September 2013

Regulatory Rigmarole

The Securities and Exchange Board of India (SEBI) classified foreign investors coming to India through the newly introduced portfolio investment scheme (PIS) route into three categories, category I, II, and III investors, while issuing know-your-client or KYC norms for such investors. In a bid to attract foreign inflows, the capital markets regulator in June 2013 had rationalized foreign investment routes, simplified their registration and investment procedures while bringing all categories of foreign investors under a single channel called PIS. Foreign direct investment (FDI) was kept as a separate category. The KYC procedures will vary according to the category. Overseas government-related bodies such as foreign central banks, sovereign wealth funds, international or multilateral agencies will be classified under category I. Category II will include regulated broad-based funds such as mutual funds, investment trusts, insurance and reinsurance firms, banks, asset management companies, investment advisors, university funds, pension funds and so on. Endowments, charitable trusts, foundations, corporate bodies, individuals, family offices and all other types of foreign investors who are not in the first and the second category will be classified under category III. The KYC format put out with the SEBI release revealed that the registration procedure will be the simplest for category I investors. According to the new rules, all foreign institutional investors, sub-accounts, and qualified foreign investors fall under a single set of rules framed for PIS. The KYC norms will be applicable for both the new and existing clients.

The AMFI ARN committee has advised that overseas distributors will have to complete some basic level of registration with AMFI. However, they will not be required to obtain NISM certification. Overseas distributors are those who do not sell mutual fund schemes to any investors in India. Overseas distributors are required to comply with the extant laws, rules, and regulations of jurisdictions where they carry out their operations. These distributors will be required to pay a one-time fee of US $ 1000 (corporate) and US $ 100 (Individuals) for registering with AMFI. To register with AMFI, these distributors are required to submit identity proof and address proof. They are also required to submit proof of registration/ regulation in the jurisdiction(s) where they propose to carry out activity of distribution of Indian mutual fund schemes. The due diligence of these distributors has to be done by AMCs. After obtaining ARN, they are required to approach the AMCs for empanelment. After empanelling with the AMC, they can sell units of mutual fund schemes of the AMC to investors outside India. The ARN allotted to Overseas Distributors does not have a time limit.

SEBI has received applications for forming mutual fund distributors’ Self Regulatory Organization (SRO) from AMFI, Financial Planning Standards Board India (FPSB), and Financial Intermediaries Association of India (FIAI). The deadline for submitting applications for SRO was July 31, 2013. Interestingly, the three entities are very different – while AMFI is the trade body of mutual fund manufacturers (albeit with the responsibility of distributor registrations), FIAI is an association of 15 large distributors, and FPSB provides CFP certification. The SRO must be a company registered under section 25 of the Companies Act, 1956, and must have a minimum net worth of Rs 1 crore. SEBI will initially grant an in-principle approval for setting up an SRO. According to SEBI, the applicant will be given a reasonable time period for complying with all requirements for getting the recognition of SRO.

AMFI has communicated to fund houses that the employee unique identity number (EUIN) remediation period will be reduced from the current 90 days to 30 days from October 1, 2013 onwards and to seven days from January 1, 2014. The new rule was communicated to the CEO of AMCs on August 27, 2013. Currently, if distributors fail to mention EUIN in transactions, they are supposed to furnish EUIN to CAMS within 90 days; otherwise AMCs forfeit the commissions on such transactions. Earlier, EUIN was not required in execution only transactions. AMFI later clarified that EUIN has to be mentioned mandatorily irrespective of the nature of transaction – whether advisory or execution only. Quoting employee unique identification number (EUIN) became mandatory from June 1, 2013. EUIN is mandatory for transactions like new purchase, additional purchase, fresh SIP, switch, fresh STP, fresh (Dividend Transfer Plan) DTP. For transactions like ongoing SIP, ongoing STP, ongoing DTP, dividend reinvestment, bonus units, redemption, SWP, mentioning EUIN is not required. Through this platform distributors can slice and dice data, benchmark with peers, cut across asset classes, demographics and product category.

New cadre of distributors cannot sell FMPs since they do not meet SEBI’s criteria of three-year track record and out performance against benchmark. FMPs, which are close-ended products come with a fixed tenure, cannot have a track record. All AMCs have to follow AMFI’s best practices guidelines in identifying schemes eligible for new cadre of distributors. According to AMFI guidelines, a diversified equity scheme category should be large cap, which should not include sector funds, small and mid-cap funds and should not have concentration in less than 30 stocks. The list of eligible schemes is compiled annually based on the performance of the scheme during each of the last three financial years (April to March). The list is reviewed and modified every year in April. If these distributors submit any applications of schemes, which are ineligible then AMCs reject such transactions. AMCs have published the list of schemes, which are eligible to be sold by the new cadre of distributors. SEBI has allowed business correspondents, insurance agents, FD agents, retired government, and semi-government officials (class III and above or equivalent), retired teachers, and retired bank officers with a service of at least 10 years to enroll as new cadre of distributors. AMFI has waived off ARN registration fee for the new cadre of distributors till September 30, 2013.

AMFI is likely to standardize the process of product labeling for AMCs. Product labeling, which came into effect from July 1, 2013, was introduced by SEBI to curb mis-selling. The recent volatility and negative returns seen in debt funds has put the relevance of product labeling under question. For instance, liquid funds are denoted by blue color, which according to SEBI’s definition carry low risk of losing principal. AMCs are supposed to put color codes in all their advertisement materials, front page of initial offering application forms, key information memorandum (KIM), scheme information documents (SIDs) and common application forms. There are discrepancies in the way products are labeled across AMCs. AMCs might differ in categorizing some products based on their risk. So, the color code may differ. Currently, the product labels are divided into three categories – blue, yellow, and brown. Blue determines that principal is at low risk while yellow signals that the principal is at medium risk. Brown indicates that the principal might be at high risk.

The capital market regulator SEBI has said that it needs to work towards spreading financial education, upgrading technology and be strict and prompt in enforcement to create an atmosphere of trust in the market, confidence in the investor and efficiency in the system. Expressing concern over the marked decline of financial savings and increasing channelisation of domestic savings into physical assets, such as gold and real estate of late, SEBI said that it would take care of the interests of retail investors in the market and appropriate measures as and when required would be taken in the future. In its annual report for FY13, SEBI said it had constantly worked to fulfil its goal through supervision and proactive regulations and had an infrastructure for disclosure, surveillance and trading that was robust and in sync with global standards. A high-level committee is looking into the current insider trading regulations and reviewing them so as to align the regulations with global best practices. The surveillance system has been effectively monitoring the market and aberrations are investigated to ensure a free and fair market. To widen and deepen the market, it would consistently pursue market developments and take proactive policy measures. While some segments of the market may require constantly evolving vigil due to their pervading effect, all grey areas would require immediate intervention. As the regulatory framework for grey areas such as unauthorised capital mobilisation is still under construction, it is imperative for the investors to be well informed of the financial decisions they take. The only antidote to this is increasing the access to banking and regulated financial services and awareness of investors and continuous fine-tuning of regulations to address any regulatory lacunae. Investor education though various measures would continue to remain a priority area.

FUND FULCRUM

September 2013

Assets under management (AUM) of mutual fund industry posted a marginal rise of 0.7% to Rs 7.66 lakh crore in August 2013, contributed mainly by net inflows into liquid funds, according to a CRISIL report. As per the rating agency, liquid funds' AUM rose by 16% to Rs 1.50 lakh crore on the back of inflows of Rs 32,100 crore into this category. During July 2013, liquid funds witnessed redemption pressure of Rs 45,300 crore on the back of liquid tightening measures of the Reserve Bank of India (RBI). Interestingly, equity mutual funds also saw inflows in August 2013 of Rs 460 crore as compared to Rs 1,800 crore outflows in the previous month.  Equity category was also a net buyer in the equity market in August 2013 and bought worth Rs 1,600 crore, making it the first month of positive net buying by mutual funds since June 2012. Meanwhile, income funds saw the largest outflows since December 2012 with its AUM falling by 2.66% to Rs 4.20 lakh crore during July 2013. The outflow was due to recent volatility in the debt market following de facto monetary tightening measures by the central bank coupled with negative returns from the category. In the gilt fund category, the AUM rose 8.4% to Rs 8,900 crore in August 2013. The category's assets gained despite posting mark-to-market (MTM) losses due to inflows of Rs 900 crore as market participants renewed interest in government bonds after the RBI measures. However, FMPs (fixed maturity plans) saw significant investor interest on the back of RBI's liquidity tightening measures, prompting a lot of buying interest in these schemes. In the gold ETF category, the AUM rose 11% to Rs 11,800 crore, led by MTM gains as well as the underlying asset prices. The CRISIL report, however, noted that the category saw record outflows of Rs 590 crore in August 2013. Meanwhile, fund of funds, which enable investors to put money in overseas assets continued to attract inflows. The AUM under such schemes rose by 14.6% to Rs 2,370 crore in August 2013. Domestic mutual funds have purchased shares worth over Rs 1,600 crore in August 2013, after pulling out more than Rs 2,400 crore in the preceding two months. The funds bought shares worth about Rs 1,607 crore in the equity market during August 2013 following a net outflow of Rs 2,169 crore in July 2013 and another Rs 269 crore in June 2013, as per the latest data available with SEBI. 

The data released by AMFI show that equity mutual funds saw inflows of Rs 460 crore in August 2013 compared to Rs 1,800 crore outflows in the previous month. Interestingly, equity mutual fundss were also net buyers in the equity market in August 2013 and bought stocks worth Rs 1,600 crore, making it the first month of positive net buying by mutual funds since June 2012. The equity category has seen some kind of inflows in August 2013 on the back of value buying. But, the inflow amount is too small to indicate any trend. Fund flows into the equity category are indication of portfolio churning rather than fresh addition to the existing investment. The benchmark index Sensex had witnessed a volatile trade last month, with the index falling below 17,500 levels, on the back of possible withdrawal of US bond buying programme along with RBI tightening measures to contain rupee volatility. Despite market volatility, there was value buying by investors, which was reflected in the inflows. The equity mutual fund category as well as the market witnessed interest in value buying after the sharp downfalls by the equity market in August 2013.

According to the latest data available with market regulator SEBI, the net outflow of Rs 50,067 crore (of which Rs 51,625 crore outflow was into private sector mutual funds while public sector mutual funds saw inflow of Rs 1,187 crore) during July 2013 was the highest withdrawal by investors in mutual fund schemes in a single month since March 2013, when investors had redeemed Rs 1.08 lakh crore. This has left the mutual funds' net mobilisation of funds from investors so far in the current fiscal (April-July 2013) at about Rs 45,539 crore. At gross level, mutual funds mobilised Rs 7.8 lakh crore in July 2013, but also witnessed redemption worth Rs 8.27 lakh crore, resulting into a net outflow of Rs 50,067 crore. This has brought down the total assets under management of mutual funds to Rs 7.6 lakh crore as on July 31, from Rs 8.11 lakh crore in the previous month. The BSE's benchmark Sensex plunged by 232 points, or 1.2%, during the period under review. During the financial year 2013-14 so far (April-July), mutual funds net mobilised Rs 45,539 crore as compared to Rs 1,33,976 crore mobilised in corresponding period of 2012-13.In the entire fiscal 2012-13, mutual funds had garnered Rs 76,59 crore from investors while a net amount of over Rs 22,000 crore moved out of the mutual funds' kitty during the preceding year.

The mutual fund industry lost more than 36 lakh investors in 2012-13. The last financial year also marked the fourth consecutive year of loss of folios by mutual funds. During the preceding three financial years, the mutual fund industry had lost over 15 lakh new investor accounts. India’s struggling equity segment of the mutual fund sector has seen the lowest monthly decline in its investors' base since December 2011. Mutual funds lost more than 13 lakh investors, measured in terms of individual accounts or folios, in the first four months of the current fiscal, mainly due to profit booking and various merger schemes. According to market regulator SEBI's data on total investor accounts with 44 fund houses, the number of folios fell to around 4.15 crore at the end of July 2013, from 4.28 crore in 2012-13. During the April-July period of 2013, the number of investor folios for equity schemes fell by over 14 lakh. The total number of folios in equity funds were 3.16 crore by the end of August 2013 as against 3.31 crore by March 2013. As on August 31, 2013 assets under management of equity segment stood at Rs 1.57 lakh crore, constituting 21% of the sector’s overall AUM.

Going by the data on SEBI web site on the status of applications of new entrants seeking mutual fund license, interest has dried up. In the last two years, just two applications have been filed, one by Karvy Stock Broking and the other by Microsec Financial Services. While Karvy Stock Broking runs a broking and distribution business, an affiliate company runs an R&T business. Microsec is a NBFC headquartered in Kolkata, which provides retail broking and investment banking services. There are two other pending applications - from Bajaj FinServ Ltd - Allianz Asia Pacific GMBH and Mahindra & Mahindra Financial Services. While Bajaj Finserv had applied with SEBI for a mutual fund license in July 2009, it received an in-principle approval in January 2011. Similarly, Mahindra & Mahindra Financial Services had applied for mutual fund license with SEBI in December 2008 and it got an in-principle approval from the regulator in October 2011.Both Bajaj and Mahindra are supposed to revert to SEBI with further information. Among the domestic players, PPFAS is the only Indian entity, which has entered the industry recently. The Chennai-based Shriram group, which acquired SEBI license in 1994 and wound up its business in 2004 is trying to make a comeback now.

RBI, in its annual report 2012-13, said that household investments in mutual funds and fixed deposits have grown while investments in gold has come down. Financial savings has increased by 20 basis points i.e. from 7.5% of GDP to 7.7% on account of investments in mutual funds and fixed deposit whereas household investments in valuables, especially gold, declined from 2.4% of GDP to 2%, a fall of 40 basis points compared to the corresponding period last year. The marginal increase in the household financial savings rate during 2012-13 emanated from the higher growth in savings under bank deposits and mutual funds even as life insurance funds remained sluggish and outflows under small savings persisted. This could have helped somewhat to buttress household financial savings in 2012-13 and may even show up in an increase in household physical savings.

Piquant Parade

SEBI has granted Investment Adviser registration certificates to 12 distributors, which include individuals and entities. While ICICI Securities, SenSage, Valuefy, IFMR, and Edelweiss are the five corporate entities, which have received SEBI Investment Adviser certificate so far, the rest are individuals. The Chennai based company - IFMR Rural Finance Services is AMFI registered ARN holder.  Principal Retirement Advisors has also applied with SEBI. Among individuals, Prakash Praharaj, Kavitha Menon, Jatin Thukral, Amit Kukreja, Pankaj Kulkarni, Shitiz Gupta, Manjeet Singh Vohra have got the certificate of registration. While advisers are allowed to provide execution services through a separately identifiable division or subsidiary, some advisers plan to stick to pure advisory model and will not provide execution services. Prakash Prahraj, Kavitha Menon, and Jatin Thukral plan to operate purely as investment consultants. They are not registering with AMFI through a subsidiary to get trail commissions. People who were acting as investment advisers before the commencement of IA Regulations have to apply for registration before October 21, 2013.

Karvy Computershare announced the launch of a business intelligence (BI) tool called FundSight, which aims to help mutual fund distributors by providing information on market dynamics.  Unlike many parts of the world, distribution of mutual funds in India is served by a scaled IFA fraternity. Given the scaled yet fragmented network, distributors need a strong Business Intelligence (BI) tool. As a result, Karvy has launched ‘FundSight – Your business insight online’ which will immensely benefit the distributor fraternity. FundSight’s future proof market insights and peer segmentation will help these IFAs to focus on their core competencies and open up new business avenues. This internet based platform gives anytime anywhere access to the distributors and offers them a customizable multi-dimensional view of various industry trends in their desired formats. Karvy is providing this facility free of cost to distributors for the first year. Karvy Computershare is a joint venture between Karvy and Australia based global registry leader Computershare.

to be continued…

NFO NEST

September 2013

FMPs to the fore

Mutual funds have ramped up the number of new fund offer (NFO) launches in the Fixed Maturity Plan (FMP) category in a bid to lure back investors who have raised redemption pressure in debt funds due to negative returns in July 2013. In August 2013, fund houses have launched nearly 35 NFOs with FMP, taking the monthly average of launches in this category to twice that in the June 2013 quarter. Funds expect FMPs to receive fresh inflows, as short-term interest rates have jumped up substantially compared with bank fixed deposits following the Reserve Bank's recent liquidity-tightening measures. FMPs offer a certain level of predictable returns, which lure investors to such products. These are close-ended debt funds that follow a lock-in strategy, and thus closely resemble bank FDs. But, post-tax returns from FMPs are usually higher than bank FDs.

Equity NFOs are still conspicuous by their absence in the September 2013 NFONEST.

SBI Debt Fund Series 366 Days - 40

Opens: September 16, 2013

Closes: September 17, 2013

SBI Debt Fund Series aims to provide regular income, liquidity, and returns to the investors through investments in a portfolio comprising of debt instruments such as government securities, PSU and corporate bonds and money market instruments maturing on or before the maturity of the fund. Hence, the fund will allocate the assets accordingly. For funds with maturity up to 16 months, the funds shall invest up to 100% in debt and money market instruments. For funds with maturity more than 16 months, the funds shall invest 60%- 100% in debt and up to 40% in money market instruments. Exposure to domestic securitized debt may be to the extent of 40% of the net assets. The fund shall not invest in foreign securitized debt. The performance of the fund will be benchmarked against CRISIL Short Term Bond Index and CRISIL Composite Bond Fund Index. Rajeev Radhakrishnan will be the Fund Manager of the fund. 

ICICI Prudential Multiple Yield Fund–Series 5–Plan A

Opens: September 5, 2013

Closes: September 19, 2013

ICICI Prudential Mutual Fund has launched a new fund named as ICICI Prudential Multiple Yield Fund - Series 5 - Plan A, a close-ended income fund. The tenure of the plan is 1100 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 fund's assets in equity and equity related instruments. The fund will allocate 75% to 95% of assets in debt securities (including government securities) with low to medium risk profile. It would allocate up to 20% 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 30% of the asset in equity or equity related securities with medium to high risk profile. Of the investments in debt instruments, 80% to 85% would be invested in AA 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.

HDFC Capital Protection Oriented – I – 36M

Opens: September 16, 2013

Closes: September 30, 2013

HDFC Mutual Fund has launched the New Fund Offer (NFO) of HDFC CPO - I - 36M, a close-ended income fund. The investment objective of the fund is to generate returns by investing in a portfolio of debt and money market securities, which mature on or before the date of maturity of the fund. The fund also seeks to invest a portion of the portfolio in equity and equity related securities to achieve capital appreciation. The portfolio of the fund will be structured in a manner that the debt allocation of the portfolio will lead to orientation towards protection of capital at the time of maturity and equity allocation of the portfolio will provide upside over the face value. The performance of the HDFC Capital Protection Oriented Fund – Series I would be benchmarked against CRISIL MIP Blended Index. Mr. Anil Bamboli (debt portfolio) and Mr. Vinay Kulkarni (equity portfolio) will be the Fund Managers for HDFC Capital Protection Oriented Fund - Series I. Both the fund managers managing large portfolios are associated with HDFC Mutual Fund for several years.

ICICI Prudential Capital Protection Oriented Fund – IV – Plan D

Opens: September 19, 2013

Closes: October 1, 2013

ICICI Prudential Mutual Fund has unveiled a new fund named as ICICI Prudential Capital Protection Oriented Fund IV - Plan D - 60 Months, 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 highest rated 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 Plan under the fund. The fund will allocate 70% to 100% of assets in debt securities and money market instruments with low to medium risk profile. On the flipside, it would allocate up to 30% 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 Rahul Goswami 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 Atul Patel.

Pramerica Alpha Equity Fund, IDBI Tax Saving Fund, Reliance Interval Fund - II, LIC Nomura CPO Fund Series 1, Union KBC Focussed Equity Fund, Pramerica Retirement and Pension Fund, Principal PNB Dual Advantage Fund Series D1 and E1, DSP Blackrock Banking and PSU Debt Fund, Axis Infrastucture Debt Fund – Series I, JP Morgan India Banking Income Fund, Reliance US Equity Opportunities Fund, ICICI Prudential Value Fund Series 1 and 2, L&T Emerging Businesses Fund, DWS Inflation Indexed Bond Fund, Morgan Stanley Midcap Fund, Pramerica Absolute Return Fund, LIC Nomura MF Debt ETF, BNP Paribas Dual Advantage Series I, II, and III, Canara Robeco COF  Series 2 Plan A and B, Shriram Balanced Fund, Kotak Medium Term Fund, Motilal Oswal MOSt Ultra Short term Bond Fund, Motilal Oswal MOSt Midcap Focussed 30 Fund, Axis Hybrid Fund Series 8 to 10, Peerless Value Fund, Axis Global Equity Alpha Fund, Axis Asian Opportunities Fund, Axis Fixed Income Opportunities Fund, Peerless Gilt Fund, BOI AXA COP Fund Series I, Axis Yearly Interval Fund Series 1 to 3, DSP Blackrock  Dual Advantage Fund Series 21 to 25, Sundaram Hybrid Fund Series F-J, Birla Sunlife COP Fund Series 16 to Series 18, HDFC Money Market Fund, and HDFC Banking and PSU Debt Fund  are expected to be launched in the coming months. 

GEMGAZE

 

September 2013

It would be rare to find an investor who is unmoved even after the recent fall in Indian equity indices. Considering the dire state of India’s economy, falling equities should not surprise investors but the manner in which they are shunned nowadays, is worrisome even for an experienced investor. Besides, rupee is hitting fresh lows every day sending shivers down the spine of investors. Measures taken by the RBI and the government have fallen flat. Under such difficult circumstances, it is heartening to know that the five GEMs of September 2012 have retained their esteemed status by virtue of their consistent performance and they continue to occupy the coveted position  in the September 2013 GEMGAZE.

 

HDFC Equity Fund Gem

A long-term bet

HDFC Equity definitely boasts a long experience having faced both the bullish and the bearish phases in its 16-year-long journey. It is predominantly a large-cap oriented, actively managed, diversified equity fund. With net assets of Rs. 10,824 crore, the one-year return of HDFC Equity has been 1.71% as against the category average of 4.85%. Finance, energy, and technology are the top three sectors constituting 56% of the total assets in the portfolio. The fund follows a multi-cap approach, with an affinity for large cap companies, with 68% of the fund’s assets invested in large cap stocks. This allows the fund to keep volatility in check, while at the same time garnering better returns from its exposure to mid and small cap companies in a mature bull run. The fund follows a concentrated investment strategy, and maintains consistency in its holdings. It remains fully invested most of the time and does not resort to high cash exposure during market downturns. In the past 3 years, its equity allocation has been above 95%. The key take away from the portfolio is its disciplined investment management and consistency in management, with Prashant Jain managing the portfolio since the scheme’s inception. The fund has given stupendous returns of 21% per annum since inception and its past 3 year and 5 year returns stand at 7% p.a. and 10% p.a. respectively, while the market has gone nowhere in the past 5 years. The 10-year Systematic Investment Plan (SIP) has given returns of about 24% p.a. Disciplined Systematic Investment in this fund has certainly generated very good returns, for passive investors. For active investors, investments in this fund when markets are down sharply or during bearish phases will give spectacular returns. It is one of the best funds to be in, for the long term.

Sundaram Midcap Fund Gem

A leader in the midcap space

A mid-cap fund must be an integral component of every intelligent equity portfolio to boost the overall returns. Its acclaimed track record makes a robust case for Sundaram Select MidCap. It is a class-leading fund tracking the mid-cap space with a diversified and growth approach. Sundaram Midcap Fund sports net assets of Rs 1804 crores. 44% of the assets are invested in sectors such as finance, healthcare, and engineering. The top ten stocks in the portfolio account for 46% of the assets. The one-year return of the fund is –4.17% as against the category average of –2.75%. Its three-year and five-year returns are –3.58% and 9.33% as against the category average of –4.55% and 6.78% respectively. The compounded annual return of 28.6% since launch in July 2002 outpaces the S&P BSE Mid Cap Index by 10.4 percentage points on a compounded annualized basis. 10,000 invested in Select Mid Cap at launch would have grown to Rs. 1,55,919 as of June 30, 2013. The fund is managed with a clear investment philosophy emphasizing on bottom up approach leveraging on strong in-house research capabilities to identify winners. It invests in companies with scalable businesses, sustainable competitive advantage, and strong operating cash flows.  Many stocks have been held for more than 5 years and have now become large caps, say for example, IndusInd Bank and United Spirits. The fund is well diversified across key growth sectors spread across Agriculture, Services, and Manufacturing (Financial Services, Consumer Goods, Automobile, Pharma, Industrial Manufacturing, and IT).

ICICI Prudential Dynamic Fund Gem

A dynamic yet consistent performer

ICICI Prudential Dynamic Plan is an open-ended Diversified Equity Fund that aims to make the most of market changes. Given the dynamic nature of the markets, the fund has the ability to attack by taking aggressive asset calls in equity and equity related securities. On the flip side it may also adopt a defensive strategy by investing in debt, money market instruments and derivatives as and when markets get overvalued. This fund adopts a "Bottom-up" fundamental analysis strategy across market capitalizations on a diversified basis, to identify and pick its investments. The fund manager has the discretion to take aggressive or defensive asset calls, based on market conditions. With net assets of Rs 3,572 crore, the one-year return of ICICI Prudential Dynamic Fund is 9.71% as against the category average of 4.85%. The returns since launch have been 25.26%. The top ten stocks accounted for close to 44% of the assets invested in equity. The top three preferred sectors are energy, finance, and technology, constituting 43% of the total assets in the portfolio. 67% of the assets are large caps. It could be an ideal product in a volatile environment as it has the agility, aimed at capturing upside opportunities in the market across market capitalizations. On the flip side, it has the ability to switch to cash; thus seeking to limit the downside, in case stock markets get into an overvalued position. Its long-term results reflect consistent performance as its 5-year annualised returns of 7.64% are slightly better than the category average of 5.19%. All this has helped it emerge as the second-largest fund in its category.

DSP Blackrock Equity Fund Gem

A temporary lull?

DSP Black Rock Equity Fund is a diversified equity fund with assets under management of Rs 2,180 crore. Its one-year return is –2.2% as against the category average of 2.7%. The top three sectors technology, finance, and energy constitute 47% of the portfolio. Exposure to the top 10 stocks is currently at 49%. Large caps constitute 61% of the portfolio. It has been an out performer for a long time but its recent performance has not been spectacular. It had a good run from 2003 to 2009 when it was consistently in first or second quartile. In the past few years its returns have been marginally above its peers and its benchmark, S&P CNX 500.  This fund has the ability to achieve consistent risk-adjusted returns across market cycles and has the potential to handsomely reward investors staying for the long-term. A well-diversified portfolio of quality stocks helps this fund maintain its performance edge irrespective of the market movement. This fund adopts a top-down approach by evaluating economic trends and analysing various sectors before it invests in both value and growth stocks. In its history of 14 years, this fund has under performed the category average only on three occasions, making it a compelling pick.

Birla Sunlife Frontline Equity Fund Gem

Performance through thick and thin

Birla Sunlife Frontline Equity Fund, with net assets of Rs. 3180 crore is among the handful of equity funds with over a decade’s track record. While quite a few funds with such a record have fallen by the way side, this fund managed to chug along well, keeping itself in the top quartile of the performance chart. Its one-year return is 12.09% as against the category average of 4.85%. Its three-year and five-year returns of 2.3% and 10.82% surpass the category average of –1.53% and 7.04% respectively. The top three sectors of finance, technology, and energy constitute 50% of the portfolio. Top 10 holdings constitute 40% of the portfolio. 72% of the portfolio is in large caps. This large-cap focused fund delivered 15% annually in the last 5 years, convincingly beating its benchmark S&P BSE 200 by a good 6 percentage points. Its ten-year annual return at 22% beats its benchmark BSE 200 by a good 5 percentage points. Over the one, three and five-year timeframes, the fund has soundly beaten the BSE 200 by a margin of four to six percentage points. Over the past ten years, the fund has bettered its benchmark a whopping 92% of the time on a yearly rolling return basis. It is this consistency and the ability to contain losses that make it an attractive fund today. A long record of good performance across market cycles, a blue-chip bias, and deft juggling of sectors make Birla Sun Life Frontline Equity suitable for an investor’s core portfolio.

FUND FLAVOUR

September 2013

Diversified Equity Funds – running out of steam?

If there is one element that makes a diversified equity fund a darling of investors, it is adaptability - much like an SUV. In other words, these schemes hold sway across the board. But curiously enough, when it comes to returns, these funds seem to be running out of steam. India's diversified stock funds posted their worst quarterly performance in over a year as fund managers' bets on small- and mid-cap shares and sectors like capital goods dented unit values, according to data from fund tracker Lipper. Such funds fell 7.5% on an average during the three-month period that ended in March 2013, under performing the Sensex's drop of 3% by a wide margin, and registering their worst quarterly show since Oct-Dec 2011. In March 2013, the funds registered a drop of 1.34%. Increased risk aversion hurt Indian stocks as disappointment over the annual budget and the central bank's cautious outlook on rates and political uncertainty after a key ally withdrew from the ruling coalition resulted in shares posting their first quarterly fall in five years. However, the poor performance of funds was largely attributable to the more volatile small- and mid-cap stocks, which fell much more than their larger peers during the quarter. Certain sectoral allocations also hurt overall performance. Financials and industrials, which collectively account for more than a third of such funds' assets and are among the favourite sectoral picks, struggled during the quarter as India continued to battle slowing economic growth.

Across categories…

Safe, reliable, and steady

Large cap funds may look disappointing during market rallies but during bear-market phases, their ability to check the fall makes them a compelling buy. Large cap funds are safe, have predictable returns, easy to understand and less volatile to market swings compared to other diversified equity funds. These funds mirror the performance of the economy and are geared to handle market cycles better. Unlike mid- and small-cap stocks that may not last through a long down market cycle, large-caps have the size and scale to weather the bad market phase. The large cap universe comprises some of the biggest companies, which are well represented in the more frequently tracked indices such as the Sensex and the Nifty. Widely tracked and analysed, large-cap stocks have a large floating stock, which provides immense liquidity in all market conditions. These traits make large-cap funds advisable as a core holding in the portfolio as they stand tall when the market turns downward. The flipside of investing in these funds is that they do not deliver exceptional returns in a rising market. The sheer scale and size of stocks in this category means their growth is not as high during a turnaround as it would be for mid- and small-cap stocks, which are nimble. For instance, the category dropped 23.14% in the market downturn of 2011 compared to 24.64% of the Sensex. In contrast, in 2012, the category posted 26.76% gains which pales in front of 41.41% by the mid- and small-cap fund category. 

A dare-devil of a category

Mid and small cap category is capable of touching great heights, only if you take necessary risks. It adds a lot of spice to the portfolio and is capable of offering above-average returns when the markets are rising. At the same time, funds in this category are more prone to volatility as mid and small cap companies are hit harder when markets tank. These funds can touch soaring heights when the markets are favourable, while it can also wipe out fortunes when the tide reverses. For instance, they gave an average return of 18.77% higher than other categories in the last 6 months of 2012 but it is also pertinent to keep in mind that they have fallen by 14.16% between February and July 2013.

Diversification and flexibility

The ability to invest beyond just large-cap stocks makes the large- and mid-cap category the mainstream fund category. Funds in the large- and mid-cap category provide diversification, with sufficient leeway to invest significantly in mid- and small-cap stocks. The number of funds in this category goes up in a booming market when several large-cap funds increase their mid-cap allocation, just the way multi-cap funds enter this category by increasing their large-cap allocation during bear phases. The allocation to mid-cap stocks is the key for the spurt in returns for funds in this category. For this reason during bull runs, this category does better than the large-cap category, and during bear phases it loses out due to the higher allocation to mid-cap stocks leading to a higher drop in returns. However, over long periods, this category does well. In the past ten years, the category average return has been over 22%, with the best performing fund, HDFC Top 200, earning an annualised 28.91%, and the worst fund, JM Equity, earning 16.66% indicating the disparity amongst funds. This category is the frontrunner for equity investments by investors as the maximum chunk of equity assets are in this category with 34.21% of the total equity assets in large-and mid-cap funds. The category also makes up for 21% of the total 258 diversified equity funds accounting for Rs 51,713 crore assets, which is about 27% of the total assets managed by equity funds.

Flexibility with a dash of risk

Adapting to the changing market scenario makes multi-cap funds invest in companies growing faster than the market. The multi-cap fund invests in companies of all sizes. Adopting a mix of growth and value strategy, these funds seek opportunity to outperform the market by shifting their allocation across market capitalisation. Often referred as all-cap or go-anywhere funds, such funds come with their share of risks because of the dynamic nature of fund management required with these funds. In the past one year, the large-cap category has posted the best results, with the multi-cap funds languishing at the bottom. In the past six months, the average multi-cap fund exposure to large-cap stocks is 56%, which has resulted in its performance to almost match the large- and mid-cap, as well as large-cap category. Ideally, funds in this category should always do well because the fund manager has the mandate to move across capitalisation to ride the one that drives the market. It is for this reason that such funds are risky and suitable to investors with a high-risk appetite. The unique characteristic of such funds is the flexibility and convenience that they offer to investors. Moreover, the probability of succeeding in any given market condition is high. For instance, if the large-cap segment is not performing well at a particular point, there is a very good chance that the mid- or small-cap segment will be doing well. The ability to exploit such opportunities makes funds in this category a must have in an aggressive portfolio. Multi Cap funds generate the best returns during market rallies, which is next only to the mid and small cap funds. In the bull-run from March 9, 2009 to November 9, 2010, multi cap funds posted 87.10% returns compared to 69.60% by large cap funds. In the market crash from January 8, 2008 to March 9, 2009, multi cap funds lost 56.88% compared to 62.23% by mid and small cap funds. The trailing 10-year returns as on June 30, 2012 witnessed the highest returns posted by multi cap funds at 24.89% compared to other categories. 

The verdict…

Large caps have escaped relatively unscathed in the recent market downturn. S&P BSE Sensex fell about 8.1% over last 3 months. Decline in the mid cap space has been severe with S&P BSE Mid-cap falling by around 17.5%. S&P BSE 200, which represents broader markets, registered a loss of 11.9% over last 3 months. However, it is noteworthy that performance of all diversified equity funds has been satisfactory, as about two-third of them have outpaced S&P BSE 200 on 3-month returns. HDFC Top 200 and HDFC Equity, which together have a corpus in excess of Rs 20,000 crore, have miserably under performed S&P BSE 200 over last 3 months. Moreover, they have under performed on YTD basis. HDFC Top 200 is a large cap-oriented while HDFC Equity is a flexi cap fund. Reliance Equity Opportunities Fund, which focuses on investment opportunities across sectors and market capitalisation segments, has also under performed broader markets. Among others, Reliance Growth, a mid cap oriented fund and UTI Dividend Yield, which follows the tenets of value investing have made losses in excess of those made on S&P BSE 200. 

It would be rare to find an investor who is unmoved even after the recent fall in Indian equity indices. Considering the dire state of India’s economy, falling equities should not surprise investors but the manner in which they are shunned nowadays, is worrisome even for an experienced investor. In the short term, funds can be volatile and may even under perform the broader markets. Mutual funds essentially are for long-term investors. Current underperformance of some of India’s biggest mutual fund schemes may be just a blip caused by economic aberrations. However, investors need to be watchful of their performance over a little longer time horizon. Consistent underperformance would highlight weakness of these funds. As noted above, funds catering to different market capitalisations and following different investment styles have under performed broader markets. However, long-term performance of most of them remains promising even now. Importantly, they come from fund houses following sound investment processes. It remains to be seen when these funds would start bucking the downtrend. Buying popular funds does not guarantee any success. There is no alternative to meticulous assessment of available options and making diversified equity funds the core of your portfolio.