FUND FULCRUM

 

October 2013

 

The Average Assets Under Management (AAUM) of the mutual fund industry declined by 4.5% having fallen from Rs. 8,52,662 crore in April-June 2013 to 8,14,267 crore in July-September 2013, shows the quarterly data released by the Association of Mutual Funds in India (AMFI). This decline can be attributed to volatility in short-term interest rate during the second quarter. Investors pulled out their money from liquid funds and debt funds resulting in the decline in the industry’s AAUM. RBI’s unexpected rate hike and volatility in rupee have compounded the problem. Almost all the major fund houses have recorded a dip in their AAUM for the quarter ended September 2013. Among the top 10 fund houses in terms of AAUM, ICICI Prudential MF, UTI, Kotak Mahindra, and DSP BlackRock saw large outflows in percentage terms while Franklin Templeton and IDFC saw an increase of 4.7% and 1.5% respectively.   

Owing to profit booking and new issues of tax-free bonds, equity funds and liquid funds collectively witnessed huge outflows of Rs 30,135 crore in the month of September 2013. AMFI data shows that equity funds saw net outflow of Rs 2116 crore while liquid funds lost Rs 28019 crore in this period. In August 2013, both equity and liquid funds saw net inflows of Rs 467 crore and Rs 32123 crore respectively. Except fund of funds, which received net inflows of Rs 104 crore, all other categories saw total outflows of Rs 33910 crore in September 2013. International funds received healthy inflows due to depreciation in rupee against dollar in September 2013. Gold ETFs and gilt funds saw net outflows of Rs 294 crore and Rs 1546 crore respectively.

Top 10 AMCs have recorded a marginal growth of 2% in their Profit after Tax (PAT) margin by registering a net profit of Rs 1126 crore in FY 2012-13 as against Rs 1104 crore in the corresponding period last year, according to AMFI data. However, overall PAT of the industry stood at Rs 758 as most of the fund houses have posted losses. Among the top 10 AMCs, 7 fund houses saw an increase in their profitability. HDFC Mutual Fund has overtaken Reliance Mutual Fund as the most profitable AMC by registering 19% growth in PAT at Rs319 crore from Rs 269 crore last year. Reliance Mutual Fund’s PAT for fiscal 2012-13 stood at Rs 198 crore, down 28% from last year at Rs 276 crore. SBI Mutual Fund swung back to action by clocking a net profit of Rs 86 crore as against a net profit of Rs 61crore in the previous year. Similarly, IDFC posted a healthy growth of 170% in PAT margin at Rs 27 crore against Rs 10 crore last year. The profits of ICICI Prudential rose from Rs 88 crore in FY12 to Rs 110 crore in FY13. DSP BlackRock’s profit grew from Rs 50 crore in FY12 to Rs 57 crore in FY13. UTI’s PAT too increased from Rs 149 crore in FY 12 to Rs 134 crore in FY-13. Meanwhile, Franklin Templeton and Kotak Mahindra recorded a dip in their profits.

The folio numbers issued by mutual fund houses declined a marginal 0.47% in September 2013 to 4.13 crore from 4.15 crore in August 2013. The trend was despite the assets under management by 44 mutual fund houses increasing 13% in September 2013 to Rs 8.66 lakh crore, compared with Rs 7.66 lakh crore in the preceding month.  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 investor accounts. Mutual Funds lost an estimated over 15 lakh investors, measured in terms of individual accounts or folios, in the first six months of the current fiscal, mainly due to profit booking and various merger schemes

 

Polarisation of assets towards India's top 10 mutual fund houses is continuing unabated. Meanwhile, the year is proving to be a difficult one for smaller players. Preference among investors' community for larger fund houses is on the rise if statistics for the first half of the current financial year is anything to go by. AUM of top players has remained more or less stable while smaller and mid-sized fund houses are losing money big time. At a time when industry as a whole could see a mere decline of 1% in its AAUM, several small players lost anywhere between 15% to as high as 42% of their assets. For instance, Taurus Mutual Fund and Peerless Mutual Fund witnessed an erosion of about 42% during April-September period while, Principal PNB MF and ING MF saw about 23% of asset erosion. In contrast, the top ten players collectively managed to gain 1.3% in assets to Rs 6.36 lakh crore. With this, big fund houses captured about 2% more market share, taking it up to 78.7% during the period. HDFC MF, Reliance MF, UTI MF, and SBI MF are focusing more on retail now. As on 30 September 2013, industry had an average AUM of Rs 8.08 lakh crore against Rs 8.16 lakh crore in March 2013.  

 

Piquant Parade

 

I-Can Financial Solutions has launched an investment advisory platform called ‘Multi-MF Platform’ through which an IFA can recommend mutual fund schemes on the basis of his client’s goals and risk assessment. Unlike other platforms, which facilitate only transaction, the I-Can Multi-MF platform claims to provide online solutions for various financial goals such as retirement planning, wealth education, child education, buy a home or buy a car. Based on details given by IFAs, the platform can generate risk profiling, asset allocation, portfolio building, and product recommendations. In addition, the advisor can frequently customize the portfolio of his/her clients. Very soon, the platform will offer other facilities like investments, redemptions or switching. I-Can states that their research team will not only recommend suitable products but also provide other necessary financial planning inputs such as how much to invest, tenures of investments, short listing of products etc. Moreover, it will provide regular periodic review of portfolios. To enable this service, advisors need to empanel with I-Can Financial Solutions through the website www.icanindia.com and pay annual fees depending on geographical locations of advisors.

 

AMFI appointed Sundeep Sikka, Reliance MF President and Chief Executive, as its Chairman. The association has also elected Sandesh Kirkire, Chief Executive Officer of Kotak Asset Management Company, as its vice-chairman. Sikka, who was earlier the vice-chairman of AMFI, succeeds Milind Barve, Managing Director of HDFC MF. By convention, AMFI vice-chairman takes over as the Chairman of the organisation though Barve was re-elected as Chairman last year. Before that, UK Sinha, who was heading UTI MF at that time, prior to his appointment as the head of market regulator SEBI, was appointed AMFI Chairman in 2010. AMFI, which is the industry association of mutual funds, interacts with market regulator SEBI regarding mutual fund related issues and also represents the industry to the government, RBI, and other organisations. It also serves as a self- regulatory body for mutual funds.

Regulatory Rigmarole

 

SEBI has allowed mutual fund distributors, who are ARN holders, to use recognized stock exchange platform to purchase and redeem mutual fund units directly from AMCs on behalf of their clients. Earlier, only stock brokers and clearing members were allowed to carry out such transactions. However, the distributors cannot handle pay-in and payout of funds on behalf of their investors. Stock exchanges have to put the necessary system in place so that pay-in and payout will be directly made to the account of investors. Similarly, units can be credited or debited directly from the demat account of investors. The recognized stock exchange should grant permission to distributors on request of AMFI. AMFI will send its request on the basis of fee, code of conduct etc. Those ARN holders who have already taken permission from stock exchange can start executing such transactions. BSE has started giving membership to mutual fund distributors to access its ‘BSE StAR Mutual Fund Platform’. Distributors need to have a minimum paid up capital of Rs 1 lakh to register with BSE. BSE is charging a lifetime membership fee of Rs 15000. There will be no annual fees. The platform was launched in December 2009. Around 2650 schemes of 34 AMCs are available on BSE StAR Mutual Fund Platform. 

 

SEBI has accepted e-KYC service offered by Unique Identification Authority of India (UIDAI) as a valid process for KYC verification. To avail this facility, the investors have to authorize intermediaries to access their Aadhaar data through UIDAI system. The e-KYC service offered by UIDAI enables individuals to authorise service providers to receive electronic copy of their proof of identity and address. The service makes KYC instantaneous, totally secure and paperless while enhancing privacy of data. Presently, e-KYC is free of cost. However, UIDAI can charge for its authentication service in future. The information containing relevant client details and photograph made available from UIDAI as a result of e-KYC process shall be treated as sufficient proof of Identity and Address of the client. Besides mutual funds, SEBI has allowed stock exchanges, brokers, depository participants, portfolio managers, alternative investments funds and collective investment schemes to accept e-KYC service. Banks and insurance companies are already using e-KYC service to carry out their KYC verification procedures.

AMFI has further extended the ARN fee waiver period till March 2014. AMFI started issuing ARN free of cost to individuals and new cadre of distributors (for those who register for the first time) from February 2013 in a bid to expand the distribution force. This is the second time AMFI has extended the fee waiver period. AMFI is also trying to enroll 100 new distributors from each of the 200 districts where it is conducting District Adoption Program (DAP), an investor awareness initiative, with AMCs.  Large AMCs like Reliance, HDFC, UTI and SBI are trying to enroll new cadre of distributors. The fee waiver strategy seems to have paid off going by the new ARN registrations with AMFI. As per information available on AMFI's website, around 1200 people have applied with AMFI for an ARN license till March 2013. Around 200 applications under the new cadre of distributor category were received till March 2013.

SEBI is likely to allow Real Estate Investment Trusts (REIT) in India. It has put out a consultative paper on REITs for public comments recently. Earlier, in 2008 too, SEBI had come out with a draft regulation on REIT. REIT, somewhat like a mutual fund, pools the money of investors and invests in real estate. According to the consultative paper, REIT should have to invest at least 90% of their corpus in completed revenue generating properties so as to ensure regular income to investors. SEBI proposes to allow REIT to invest up to 100% of their corpus in a project with minimum asset size of Rs 1000 crore.  In addition, no REIT is to be allowed to invest in vacant, agriculture or mortgaged backed securities or lands. The structure of REIT will consist of trustees, sponsors, managers and a principal officer. Like a mutual fund house, trustee of REIT will play a supervisory role and will be independent of sponsor and manager. Once it gets SEBI approval, it will have to list itself so that it can raise funds through follow-on offers.  REITs will have to declare their NAV at least twice a year. SEBI has signaled that only large and resourceful players can enter the market since it has proposed that REIT should have a minimum asset size of Rs 1000 crore to float an initial offer. Further, the minimum size of initial offer should be Rs 250 crore to ensure adequate public participation. REIT can raise funds from retail investors, HNIs, foreign institutions etc. However, only HNIs and institutions are allowed to invest during the initial stage. Moreover, the minimum subscription size is proposed to be Rs. 2 lakh and unit size at Rs 1 lakh.

Some key features of REIT:

• REITs will be managed by professional fund managers, who have diverse skill in property development, redevelopment, acquisition, leasing, and management.
• Listed REIT will provide easy exit and liquidity benefits to the investors.
• REIT will bring in transparency and accountability in the real estate sector.
• Investors should have the right to remove the manager, auditor, principal valuer, seek delisting of units etc.
• REITs have to organize an annual meeting of investors to discuss the matters related to accounts, valuation, performance, etc.
• Approval of investors is mandatory for all transaction above a threshold limit.

 

SEBI is considering raising the minimum capital for a mutual fund to Rs 25 crore from the existing Rs 10 crore. The capital markets regulator initially wanted to enhance the net worth requirement to Rs 100 crore. Strong protest from the segment has prompted the Mutual Fund Advisory Committee (MFAC) to recommend raising the capital base to Rs 25 crore. SEBI is keen on raising the minimum capital to ensure only ‘serious’ companies to stay in the business.

 

SEBI has allowed AMCs to hold gold certificates issued by banks in physical form. Earlier AMCs were supposed to hold these certificates only in dematerialized form. In February, SEBI allowed Gold ETFs to invest up to 20% of their net assets in gold deposit schemes (GDS) of banks following the finance ministry’s move to link gold deposit schemes of banks with Gold ETFs. The advantage will be that a part of the gold lying in stock will be brought into circulation and will partially meet the requirements of the gems and jewellery trade. It is hoped that, consequently, there will be a moderation in the quantity of gold that is imported into the country. Before investing in GDS of banks, mutual funds need to have a written policy with regard to investment in GDS. Investing in gold deposit schemes of banks helps Gold ETFs/gold fund of fund schemes to get incremental returns which helps the performance of Gold ETFs. As on September 2013, there are 14 Gold ETFs managing Rs. 10415 crore.

 

To ward off any attempts to manipulate share prices through 'independent' reports on stocks and listed companies, SEBI may soon issue a new set of guidelines for research analysts covering Indian markets. While regulated entities like brokerage firms, investment banks and fund houses are already under SEBI's ambit for their research reports, the capital markets watchdog is now working on a detailed code of conduct and guidelines to be followed by the 'independent' research analysts. This would help remove a regulatory gap exploited by the individuals and entities who do not register themselves with SEBI to avoid any action for manipulative actions carried on the basis of research reports published by them on the Indian stock markets and individual shares.

 

Asset management companies (AMCs) are keeping a watch on the Foreign Account Tax Compliance Act (FATCA). FATCA requires foreign financial institutions, including mutual funds, to register with the American tax authorities and provide details on any assets held by American citizens. Despite the fact that it is US legislation, FATCA has global implications for all financial institutions. US financial institutions, acting as withholding agents, need to be compliant by July 2014, while financial institutions operating outside of the US – termed Foreign Financial Institutions (FFIs) – should implement new procedures for account opening and existing account review by July 2014, but will begin reporting by March 31, 2015. Institutions need to adopt procedures, processes, and systems necessary for U.S. account and US owner identification. The new rules require more stringent compliance practices and are likely to increase costs for the mutual fund industry, where roughly half the players are currently running losses.

 

Gearing up for a major overhaul of its role, functions, and organisational structure under 'Project Shikhar', markets regulator, SEBI, is looking to re-define its 'vision, mission and value statements'. SEBI's board has accepted the recommendations of the independent global consultant Oliver Wyman for overhaul of its functions, role, and organisational set-up with a stronger workforce and greater IT resources, and the same are in the process of being implemented. Among others, it has been recommended that SEBI should impart a greater focus on mobilising household savings into capital market assets, strengthen its supervisory functions and its oversight of listed companies. Meanwhile, SEBI is considering a 'triple-A approach' of spreading awareness among investors, promoting appropriate products and ensuring proper audit of the marketplace. The other goals identified in this project are building a diversified and balanced investor base in the country, developing viable alternatives to bank credit, enhancing ability to prevent and respond to crises, empowerment of investors and ensuring full trust and confidence of investors in the securities market.

NFO NEST

October 2013

Capital Protection Funds corner the NFO market

Capital Protection Funds rule their roost in the October 2013 NFONEST, with equity funds still being conspicuous by their absence.

ICICI Prudential Capital Protection Oriented Fund – IV – Plan E

Opens: October 7, 2013

Closes: October 21, 2013

ICICI Prudential Capital Protection Oriented Fund IV - Plan E, a 36 months close ended capital protection oriented fund, seeks 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 fund will allocate 80% to 100% of assets in debt securities and money market instruments with low to medium risk profile, and will allocate up to 20% of assets in equity and equity related securities with medium to high risk profile. The fund performance will be benchmarked against CRISIL MIP Blended Index. The fund will be managed by Rahul Goswami (Debt Portion) and Rajat Chandak (Equity Portion). The investments of the fund in ADR/GDR and other foreign securities are being handled by Atul Patel.

Union KBC Trigger Fund – Series 1

Opens: October 14, 2013

Closes: October 25, 2013

Union KBC Trigger Fund - Series 1 is a close-ended equity fund with a feature of inbuilt profit booking, to enable the investors to realize their profits at a pre-defined level and enjoy benefits of appreciation of the investments. The fund has a unique feature of exit in which the fund automatically liquidates on the tenth business day whenever the fund hits its pre-defined trigger of 30% returns anytime within 3 years. However, if the fund does not reach its pre-defined level, the fund will mature after 3 years from the date of allotment at its prevailing NAV. In addition, there will be a marginal difference in returns since the fund redeems on the tenth business day after hitting its trigger owing to some procedural constraints in the winding up of fund. The fund will invest in a portfolio of equity and equity related securities, predominantly constituted of companies in S&P BSE 200 Index. The fund may invest in debt and money market instruments for tactical reasons and/or rebalancing the portfolio.

ICICI Prudential Value Fund – Series 1

Opens: October 18, 2013

Closes: October 28, 2013

ICICI Prudential Asset Management Company has announced the launch of ICICI Prudential Value Fund Series 1, a close-ended equity fund that focuses on investing in stocks that trade at a discount to their true value. The fund aims at adopting the ‘value investing’ approach where low priced stocks with justifiable higher fundamentals are identified and invested in with the aim of long-term capital appreciation. Value investing, one of the most popular investment themes globally, is a far bigger theme than any other opportunity in India in the prevailing market situation.

Birla Sunlife Capital Protection Oriented Fund – Series 16

Opens: October 15, 2013

Closes: October 29, 2013

Birla Sunlife Capital Protection Oriented Fund seeks capital protection by investing in fixed income securities maturing on or before the tenure of the scheme and seeking capital appreciation by investing in equity and equity related instruments.

DSP Blackrock Dual Advantage Fund – Series 19 – 39M

Opens: October 17, 2013

Closes: October 30, 2013

DSP BlackRock Dual Advantage Fund - Series 19 - 39M, a close-ended income fund, aims to generate returns and seek capital appreciation by investing in a portfolio of debt and money market securities. The fund also seeks to invest a portion of the portfolio in equity and equity related securities to achieve capital appreciation. As far as investments in debt and money market securities are concerned, the fund will invest only in securities, which mature on or before the date of maturity of the fund. The fund's performance will be benchmarked against CRISIL MIP Blended Fund Index and its fund managers are Dhawal Dala and Vinit Sambre.

 HDFC Capital Protection Oriented – I – 36M

Opens: October 17, 2013

Closes: October 31, 2013

HDFC Capital Protection Oriented Fund - Series I, a close-ended capital protection oriented income fund, aims to generate returns by investing in a portfolio of debt and money market instruments 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 will be benchmarked against CRISIL MIP Blended Index. Mr. Anil Bamboli (debt portfolio) & 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.

BOI AXA Capital Protection Oriented – I – 38M

Opens: October 17, 2013

Closes: October 31, 2013

BOI AXA Capital Protection Oriented Fund–Series 1, a 38 months close-ended Capital Protection Oriented fund, aims to seek capital protection on maturity by investing in fixed income securities maturing on or before the tenure of the fund and seeks capital appreciation by investing in equity and equity related instruments. Alok Singh (CIO- Fixed Income) and Saurabh Kataria (Fund Manager – Equity) will be the fund managers for this fund. The fund’s performance will be benchmarked against the CRISIL MIP Blended Fund Index.

Canara Robeco Capital Protection Oriented – 2 Plan A – 36M

Opens: October 17, 2013

Closes: October 31, 2013

Canara Capital Protection Oriented Fund - Series 2 aims to seek capital protection by investing in high quality fixed income securities maturing on or before the maturity of the fund and seeking capital appreciation by investing in equity and equity related instruments. However, there is no assurance that the objective of the Fund will be realised and the Fund does not assure or guarantee any returns. The fund managers are Suman Prasad and Krishna Sanghavi.

BNP Paribas Dual Advantage Fund – Series 1

Opens: October 17, 2013

Closes: November 1, 2013

BNP Paribas Dual Advantage Fund - Series I, a close-ended income fund, seeks to generate income by investing in a portfolio of debt and money market securities maturing on or before the maturity of the fund and capital appreciation by investing in premium of exchange traded options and/or equity instruments. The fund will allocate 75% - 100% of assets in debt instruments including money market securities with low to medium risk profile. On the other side, it will allocate up to 25% of assets in premium of exchange-traded options and / or equity instruments with high-risk profile. The fund is benchmarked against CRISIL MIP Blended Index. Mr. Puneet Pal and Mr. Shreyash Devalkar are the fund managers.

Edelweiss Debt and Corporate Opportunities Fund, SBI Dual advantage Series I, II, and III, Sundaram CPO Fund 2 years (Series A-B), 3 years 9 Series (A-B) and 5 years (Series 5-6), Birla Sunlife Pure CBLO Fund, Birla Sunlife Banking and Financial Service Fund, Kotak US Equity Fund, Religare Invesco Global Equity Income Fund, Religare Invesco US Value Equity Fund, Religare Invesco Asia Consumer Demand Fund, and ICICI Prudential MIP 35 are expected to be launched in the coming months. 

GEMGAZE

October 2013

The prolonged volatility in the Indian stock market has taken its toll on the mutual fund performance, with sector mutual funds in dire straits. This lacklustre performance is reflected in three out of five funds in the October 2012 GEMGAZE making an unceremonious exit from the October 2013 GEMGAZE.

 

Canara Robeco Infrastructure Fund Gem

Performance pays

Canara Robeco Infrastructure is an open-ended equity mutual fund co-launched by Canara Bank and Robeco Groep N.V. on December 2, 2005 and is domiciled in India. The fund invests its AUM of 71.5 crores in growth stocks of companies operating in the infrastructure sectors, with nearly 62% of the assets in large caps. The fund’s one-year return is -16.44% as against the category average return of -17.46%. The fund’s return of 5% annually in the last three years is nothing to write home about. But so was its benchmark index BSE 100’s performance of 4.5% annually over this period. The fund’s performance is also not poor if one considers the downturn faced by infrastructure and capital goods stocks in the last three to five years. The BSE Capital Goods lost a fifth of its value in the last three years. The fund has demonstrated good performance in rallies. From the March 2009 lows, for instance, it has delivered an absolute return of 130%, next only to Taurus Infrastructure. HDFC Infrastructure managed 112% over this period, while ICICI Prudential Infrastructure climbed 66%. Canara Robeco Infrastructure also did quite well in the 2011 volatility, losing 20%, as against the 25% fall in its benchmark BSE 100 as well as the Sensex. With a well-diversified portfolio of stocks in the energy, engineering, and construction space, Canara Robeco Infrastructure has been among the better performers in its category.

SBI Magnum FMCG Fund Gem

More than just defensive

In the past one year, the Rs 222 crore Magnum FMCG Fund is perched at the top and its AUM has almost doubled from Rs 108 crore the previous year. 70% of the assets are in large caps. Owing to its small size, the fund could stay with a compact portfolio, an advantage given the limited universe of FMCG stocks. The one-year return of the fund is 19.12% as against the category average of 16.23%. Over the three and five year periods, the fund posted 20.8% and 33.2% of CAGR, respectively. Most FMCG stocks have proved to be more than just defensive bets over the last two years. They remained steady through the worst phase of inflation, when cost pressures increased, margins plunged, and demand shrunk. The FMCG industry trends continue to be positive and earnings growth is likely to be strong in the near term as well.

ICICI Prudential Banking & Financial Services Gem

Leader of the pack

ICICI Prudential Banking & Financial Services Fund invests predominantly in large and midcap financial companies. 46% of the portfolio consists of large caps. The Fund has not only outperformed its benchmark, the S&P BSE Bankex but has also outperformed other banking sector funds. The current AUM of the fund is Rs 247 crores and the one-year return is –5.30% as against the category average return of –16.7%.

SBI Pharma Fund Gem

Consistent outperformer

SBI Pharma Fund, launched in 1999, sports an AUM of Rs. 114 crores. The asset allocation reveals that the scheme currently has an allocation of 90.55% towards equities with around 8.39% in debt and a minor 1.06% in cash and cash equivalent. The number of stocks held by the fund in the last few months has hovered around 15. Back in 2007 and early 2008, the number of stocks were just restricted to 8-10. By the second half of 2009, the number gradually increased to 14. The fund currently has 17 stocks in its portfolio. The top 10 stocks account for over 85% of the total assets. With an average market capitalisation of about Rs 30,000 crore, the fund has a higher skew towards large-cap stocks of nearly 60%. The concentration analysis reveals that the fund has around 64.32% assets allocated towards the top 5 stocks while the top 10 stocks make up around 83.11%. The one-year return of the fund is 28.29% as against the category average of 23.03%. There has been a divergence in performance by the pharmaceutical funds. On a one-year and 2-year basis only SBI Pharma could match up to its benchmark, while the other two funds lagged behind. Even on a three-year basis only SBI Pharma could come near the benchmark i.e. S&P BSE Healthcare. Over the five-year period, Reliance Pharma and UTI Pharma & Healthcare funds outperformed. Overall, SBI Pharma seems to be the most consistent performer of the pack.  The fund has delivered good returns in the short as well as long run. It has beaten the broader markets at different time horizons. Pharma fund can be considered by investors who would like to pick a sector specific fund and bet on the prospects of the healthcare sector keeping in mind the risks associated with a sector fund. 

ICICI Prudential Technology Fund Gem

Roller coaster ride

ICICI Prudential Technology Fund is a Rs 111 crore technology fund, which invests in large technology oriented companies. It invests in companies listed in the BSE Teck. Its portfolio has 56% exposure to large cap companies. It heavily invests in Infosys ltd. The fund seeks to invest in knowledge sectors like IT and IT Enabled Services, Media, Telecommunications and others. The one-year return of the fund is 32.6% as against the category average of 30.66%, thanks to the drastic rupee depreciation in the past few months.

FUND FLAVOUR

October 2013

Sector funds invest only in the chosen sector. They get hit hard if the sector is faced with adverse developments. If you look at the performance of mutual funds in a particular year, the top performer is likely to be a sector fund. But the worst performer is also usually a sector fund. Moreover, the top performing sector changes every year. So, sector funds are highly volatile. While sector funds belong to the top end of the risk spectrum, under certain circumstances they can help reduce portfolio risk. In a portfolio of multiple mutual funds, a sector fund can reduce portfolio risk provided the sector has a low correlation with the other equity funds and has low sensitivity to macro-economic factors. The needs of the majority of retail investors are met adequately by a portfolio comprising half a dozen diversified equity funds.

Infrastructure Funds – a damp squib

Back in 2006-07, infrastructure was the way of the future. On every count, whether it was new projects, new businesses, massive IPOs, or infrastructure-dedicated mutual funds, it was a sector that seemed to encompass everything that was exciting about India’s potential. Today, a short half-decade later, the whole thing is in shambles. From the investor’s perspective, no matter which way you look at it, infrastructure is a disaster zone. Despite the fact that infrastructure equity funds rode on the back of market rebound to give investors 25% average gain in 2012, all infrastructure funds gave negative returns for almost all periods above six months.

Banking Funds – driving in top gear

The top performing sector funds at present are the banking sector funds. As per the analysis of net asset values for all mutual fund schemes during 2012, the banking funds gave an average 55% return in the year, as against appreciation of 26-28% in the broader benchmark indices.

Technology Funds – dismal show

IT funds, with a return of 6%, were the poorest performers in the year gone by as the chosen theme did not play out well as the winners. Equity funds have invested 10.5% of around Rs 1.9 lakh crore of assets under management in IT companies like Infosys, TCS, Wipro, and HCL Technologies. Equity mutual fund investment in technology stocks is second only to their investment in the banking sector, and much more than their allocations in defensives like FMCG and pharmaceuticals. Fund managers were betting on the technology sector at the beginning of the year on expectations of higher earnings due to a weaker rupee, as most of the technology companies earn more through export of services. But their bets have gone awry, with the rupee strengthening of late.

Auto Funds – slow down

Dun & Bradstreet has prepared a comprehensive Sectoral Outlook report on the Automobile sector for the year 2013 which showcases that achieving high growth rates is likely to be a major concern for the industry in 2013 but the auto industry is likely to gain considerably from the various initiatives on infrastructure development, rural focus, and the improved road infrastructure. Domestic mutual fund managers have taken a fancy for the auto-ancillary industry as an alternative investment option in recent times as the auto sector has slowed down. The auto-ancillary companies are holding firm in uncertain times and the industry has logged average sales growth of 30% in the past three quarters. Even though the demand from the original equipment manufacturers has dipped, the replacement market remains strong, which has helped these companies improve their operating margins to 20% from 15% over the past three quarters.

FMCG Funds – on the fast track

The Indian Fast Moving Consumer Goods (FMCG) sector is booming for the last several years and giving steady returns to its investors despite slowdown in the economy. FMCG sector has several multinational players with strong presence in India such as Nestle, Procter and Gamble, Gillette, etc. There is stiff competition among domestic companies, unorganized segment and MNC companies to increase their sales year-on-year, due to which they operate on low operational cost and margins. FMCG sector is performing well due to strong characteristics and dependence on consumption in domestic market. Mutual funds focused on FMCG are a close second, next only to the banking sector, with an average return of 48% in 2012.

Pharma Funds – a safe bet in difficult times

The past three years have been quite eventful for the global economy and financial markets. Sectors such as real estate, power, and capital goods, which were the investors’ favourites in the last bull-run have completely gone out of favour of late. However, pharma has been the only sector, which has been held up during this descending trend of the Indian equity markets, thereby, proving to be defensive and thus taking care of the health of investors’ portfolio. Being an export-oriented sector, the rupee's depreciation is likely to boost its earnings.

PSU Funds – out of favour

Mutual fund schemes investing in shares of public sector undertakings (PSUs) have fallen out of favour with investors. The assets under management of six such funds have dropped about 28% in a year to June 30, 2013 as declines in these shares have squeezed returns. Total AUMs of the six PSU funds stood at Rs 589 crore as on June 30, 2013 compared with Rs 823 crore on the same day a year ago, according to data sourced from mutual fund tracker Value Research. Average returns from this fund category have contracted 24%, compared with a 21% decline in the CNX PSE index. The BSE Sensex has risen by about 4.9%, while the NSE Nifty has risen 1.7%. Public sector companies underperformed partly because of the government’s share sale programme to meet its divestment target. It was the high exposure to some large-cap and mid-cap PSU stocks that led to the decline in the returns of these funds. Four of the six PSU funds have high exposure to the energy sector with more than half of the corpus invested in stocks of this sector. Financial sector stocks are the second largest category of stocks in these funds with an average exposure of 23.3% per fund. Two of the six funds in this sector are exchange-traded funds tracking PSU bank stocks. Valuations at this point are cheap and could turn out to be good buys from a long-term perspective.

Investors would be better off by investing in diversified equity funds with a time horizon of 3 to 5 years as the benefit of diversification enables them to reduce the risk of the portfolio. Moreover, diversified equity funds, which have a minimum 3 year track record from fund houses which follow strong investment processes and systems, can help tap investment opportunities in the various promising themes as well.