FUND FULCRUM (contd.)

December 2013

 

The Indian mutual fund sector’s slide started in 2009, after the Securities and Exchange Board of India banned entry load, an upfront fee funds charged investors to pay distributors. Since then, many distributors have been indifferent to selling mutual funds. The continued bear market added to the woes. Smaller fund houses were hit harder because these could not compete with larger peers’ deep pockets for pushing products. In the past four years, the share of the top 10 funds in the sector’s total assets rose to almost 80%. Currently, there are a little over 40 entities in the mutual fund sector. Hardly a third of them are profitable.

 

Piquant Parade

 

Morgan Stanley became the second largest global giant to exit India's crowded and barely profitable mutual fund industry when it agreed to sell its business to HDFC, the country's biggest mutual fund manager. HDFC Mutual Fund, with assets of Rs 1.03 lakh crore, agreed to buy all eight schemes of Morgan Stanley with combined assets of Rs 3,290 crore. The purchase is expected to help the fund widen the gap with Reliance, the second biggest mutual fund house and consolidate its position at the top of the industry. Reliance has assets worth Rs 93,249 crore. Morgan was the first global fund to launch a mutual fund in India in 1994 after liberalisation but its performance in the country has been rather lacklustre. Its asset size is small by international and Indian standards and like Fidelity it has been unable to keep pace with the growth of Indian mutual funds such as HDFC Mutual Fund, Reliance Mutual Fund, ICICI Prudential, UTI Mutual Fund, and Birla Sunlife which between them control over 50% of the industry's assets. The fund posted losses in both 2011 and 2012. Morgan becomes the second big global investor to exit the local market after Fidelity which sold its business to L&T in March 2012. Daiwa sold its assets to SBI Mutual Fund for an undisclosed amount this year and this was preceded by Invesco's purchase of a 49% stake in Religare for Rs 460 crore and Nomura's acquisition of 35% in LIC Mutual Fund for Rs 308 crore.

Regulatory Rigmarole

Small fund houses are up in arms against the SEBI Mutual Fund Advisory Committee’s  recent proposal to raise minimum net worth of fund houses having AUM of less than Rs 1000 crore to Rs 25 crore within three years. Presently, fund houses have to maintain a minimum net worth of Rs. 10 crore. The 16-member committee is headed by Janki Ballabh, former Chairman of the board of trustees of UTI Mutual Fund. Only 1% of the AUM is from the bottom 10 AMCs. This percentage has not changed substantially in the last five years and it is indicative of the presence of non-serious players in the industry.

Research analysts will soon have to obtain a certificate from the capital market regulator to continue giving opinions and recommendations on listed companies. SEBI issued draft Research Analysts Regulations, 2013, which mandated all research analysts to obtain a certificate of registration, have right educational qualification, and also a minimum net worth. SEBI has proposed research analysts, which are corporate bodies, will have to maintain net worth of at least Rs 0.5 crore, while individual or partnership firms will have to have net tangible assets of Rs 500,000. The certificate will be valid for five years. Research firms incorporated outside India will have to set up a subsidiary in India and register it with SEBI. SEBI has exempted investment advisers, asset management companies, proxy advisory service providers, and fund managers. However, if these entities provide their views through the public media, they will have to follow the processes regarding conflict avoidance and disclosures. Analysts or a brokerage will not deal in shares of companies a month before and five days after publishing of a research report. Analysts will be barred from publishing or recommending a security if they are traded in the previous 30 days. The compensation or bonuses of an analyst should not be tied to any specific investment banking or brokerage transactions. The regulations also bar an analyst or a brokerage from issuing research reports or making public appearances on companies where they act as investment bankers in IPOs or FPOs. The proposed regulations also bar distribution of research reports to selective clients in advance. In addition, analysts distributing third-party reports can do so only after ensuring their accuracy.

Dealing room activities of brokers, fund managers, and other institutional investors have come under regulatory scanner for possible manipulations through use of web-based social networking apps and messaging platforms. While use of personal mobile phones are already prohibited inside dealing rooms -- where trades are executed on behalf of clients -- some brokers and fund managers have been found to be active on social networking and other web-based groups and messaging platforms while placing orders. This has brought to the fore significant risks of insider trading, front running and other manipulative activities with regard to key client trade information being shared with outside investors or even among the dealers possibly working as a cartel. Brokers and fund managers are not allowed to use their personal mobile phones inside dealing rooms to receive orders from clients, while fund houses and brokerage firms are required to store records for all client calls for future inspections by SEBI. SEBI is considering further tightening of norms with regard to dealing room communications, given the fast emergence of social networking and other web-based messaging platforms. Those likely to be affected include entities dealing in stocks, derivatives and currency trading, among others. In a global probe into suspected rigging of forex rates, including those involving rupee as well, foreign regulators already suspect use of intra-bank and web-based messaging platforms among the currency traders. Subsequently, many large global banks have already started clamping down on use of such platforms inside their dealing rooms and similar action can be expected with regard to Indian markets as well.

The market watchdog is already mulling over steps it can take to check risks being posed by use of new-age smartphone messaging services like BlackBerry Messenger (BBM) and WhatsApp by manipulators to spread sensitive information about their target stocks. To strengthen its surveillance on stock market transactions, SEBI has already got software tools in place along with IT experts to analyse discussions on social networking sites like Twitter and Facebook. However, applications like WhatsApp and BBM have proven trickier, given the multi-level difficulties faced in tracking the source and spread of market-sensitive information through these mass-messaging platforms. While these applications use the internet servers of smart phones, the transmission of messages through these platforms happen in a highly encoded manner and it is very difficult for a third party to decode them.

SEBI has released consultative guidelines for the operation of REITs in India, five years after it first introduced the initial guidelines. REITs are investment vehicles that invest in return-generating real estate. This investment may either be in the form of properties, mortgages or mortgage-backed securities. The trust collects money from retail or institutional investors in return for shares in the property and its managers then deploy the funds into real estate (usually commercial) projects. The income—mainly rent or lease—is then distributed as dividend among investors. In this way, REITs are similar to mutual funds. But there are some important differences, the prime one being that REITs directly buy property instead of investing in property stock. REITs are focused on one sector and invest in a limited set of assets therein. SEBI’s list of regulations is more stringent. It states that 90% of the total investment corpus must be put into completed revenue-generating real estate within India. REITs cannot invest in vacant or agricultural land or mortgages (except mortgage-backed securities). These limitations are clearly aimed at improving the risk and return profile of REITs. In addition, three-fourths of the revenues shall necessarily be from rental, leasing and letting of real estate assets, and 90% of the after-tax income must be distributed to investors. To weed out fly-by-night operators, the regulator has set a minimum corpus size of Rs.1,000 crore for REITs. Further, when a REIT gets listed, the initial offer size must be at least Rs.250 crore, of which 25% must be publicly floated. SEBI has also proposed that the minimum subscription size be set at Rs.2 lakh and that high networth individuals and institutions be approached as initial investors until the market develops. All in all, the draft regulations are geared towards protecting the investor, while simultaneously opening up the liquidity tap and ensuring total transparency of operation. The regulator seems to have performed a laudatory balancing act. However, this is not to say that REITs do not have their own risks. While they promise investors stable returns, they do have some aspects comparable to equity markets. For instance, a downturn in real estate can impact investors’ ability to sell off their shares (since real estate is an illiquid asset and selling a property can take time). Moreover, there are some taxation issues. In the current form, experts feel the tax burden could exceed 40%. However, it is believed that plans are afoot to make REITs a pass-through investment, which will make them taxable only at a single point, i.e., in the investor’s hands.

Distributors have requested AMFI to consider relaxing the unique identification (EUIN) rules. They want EUIN remediation period to remain 30 days as is the rule currently. Distributors were required to provide valid EUIN within 30 day from the end of the month in which the transaction took place. The commission withheld was released by fund houses if distributors remediate it within this period. From January 01, 2014, this remediation period will be seven days from the end of the month in which the transaction takes place. For instance, all transactions submitted prior to January 01, 2014 have to be remediated from February 07, 2014 and within seven days from subsequent months. Thus, distributors risk losing their commission if there are unable to provide EUIN within the stipulated remediation period. Quoting EUIN in application forms became mandatory from June 01, 2013 for purchases, switch, registration of SIP / STP / DTP / trigger. SEBI introduced EUIN to address the issue of mis-selling. Distributors have to get EUIN for all employees who advice clients. This helps track the employee/relationship manager if in case of mis-selling. If there is no interaction between the employee of the distributor with respect to a particular transaction, distributors have to get a declaration signed by the investor. If the distributors fail to furnish this declaration to the AMC within the remediation period, their commissions are forfeited permanently.

SEBI has modified account opening forms (AOF) by doing away with annual income and occupation details of clients to be captured in KYC forms. It has now been decided in consultation with various market participants to shift certain information (annual income, occupation) in Section C of Part I to Part II of the account opening form AOF (for both individuals and non-individuals). Part I contains the basic KYC details of the investor used by all SEBI registered intermediaries and Part II captures additional information specific to the area of activity of the intermediary. Information contained in revised Part I of AOF shall only be required to be captured in the systems of KRAs. SEBI has given a timeframe of six months to make modifications to KYC forms. The modifications would assist in avoiding repeated modifications in the KRA system as information provided by the clients in Section C changes over a period of time and will facilitate in making the KYC uniform for the entire financial sector. Distributors say that the KYC norms are stringent for non-individuals as they have to furnish their financial details every year.  Companies and partnership firms are supposed to submit copy of the balance sheets for the last two financial years. This is required to be submitted every year which is a tedious process. Income and net worth data will still be required to be captured in order to comply with Prevention of Money Laundering Act (PMLA). Client’s income can change every year and this was not getting updated in the systems of KRAs since it is not feasible to perform KYC multiple times.

AUM data for the initial three quarters of 2013 suggests that the year has been sluggish for the mutual fund industry. In fact, notably, during the year, no new licenses were issued, there were no M&A activities and no fresh foreign investment flowed into the sector. SEBI had, in the past, taken steps to re-energise the mutual fund industry with continued focus on investor protection. These steps have contributed a sense of stability to the mutual fund industry, which has been operating in a challenging environment. Going forward, SEBI could adopt a stricter approach towards 'non-serious' asset managers. An advisory committee formed to review the net worth requirement for AMCs has suggested an upward revision in the minimum net-worth required for an AMC. Debt schemes continue to be the flavour of the season. The first Infrastructure Debt Mutual Fund scheme (mutual fund-IDF) was launched in the year 2013. Further, while mutual fund AMCs have shown interest in tapping the pension products market, in the absence of adequate tax incentives, this is yet to take-off. From an asset management industry perspective, the proposal to launch REITs could provide an alternative investment avenue to investors. While the Government has pro-actively amended the law to resolve taxation issues for mutual fund industry on investment in securitisation trusts, the industry remains circumspect and the amendments have failed to attract investments by mutual funds in securitisation trusts. The industry continues to litigate past tax issues on securitisation trusts. In a sense, the performance of the mutual fund industry has, to an extent, mirrored the performance of the Indian economy, the stock markets, and the FII investment (or divestment) story. With elections on the anvil, an element of 'uncertainty' could prevail for the next quarter or so. Moving on, the industry looks forward to quick and clear directions on safe harbour for management of offshore funds from India and other similar measures whereby tax can be a facilitator for growth. Nearly fifty years old, the Indian Mutual Fund industry is fraught with a number of challenges. The penetration of mutual funds in India (as measured by the AUM/GDP ratio) remains low at 4.7% as compared to 77.0% in the US, 41.1% in Europe and 33.6% in the UK. Greatly under-penetrated, the industry comprising over 40 mutual fund companies today collectively manages 2.5% of Indian household savings. The right kind of awareness among investors about mutual funds, the diversity and benefits of its offerings remains a challenge. Being an advisory product which is largely distribution driven, stagnation in growth of distributor base also acts as a limiting factor.

FUND FULCRUM

December 2013

 

Investors have put in more than Rs 1.5 lakh crore in various mutual fund schemes in the financial year 2013-14 so far, nearly twice the amount pumped in by them in the entire financial year 2012-13. According to the latest data available with SEBI, there was a net inflow of Rs 1,50,675 crore during the 2013-14 fiscal (April-November 2013) as against a net inflow of over Rs 76,000 in the preceding fiscal. Prior to that, a net amount of more than Rs 22,000 crore and over Rs 49,000 crore moved out of the mutual funds' kitty during 2011-12 and 2010-11, respectively. At a gross level, mutual funds mobilised over Rs 63 lakh crore during April-November period this year, while there were redemptions worth Rs 61.5 lakh crore as well. This resulted in the net inflow of Rs 1,50,675 crore. Mutual fund investors have put in most of their money in debt schemes during April and May 2013 in anticipation of interest rate cuts by the Reserve Bank of India (RBI). Most of the inflows were into short-term debt schemes and liquid funds. Investors have infused a net amount of Rs 1.44 lakh crore during the period. In April 2013, mutual funds mobilised around Rs 1.08 lakh crore in various schemes. This was the highest net inflow by investors in such schemes in a single month since April 2011, when investors had put in a whopping Rs 1.84 lakh crore. The significant level of fund mobilisation has also helped the total asset under management of mutual funds to grow to Rs 8.9 lakh crore at the end of November, 2013 from Rs 7.01 lakh crore as on March 31, 2013.

Mutual fund assets under management (AUM) rose for the second month in a row, touching almost Rs 900,000 crore level in November 2013. The rise in AUM was primarily due to inflows into liquid/money market funds. According to CRISIL Research, as per the monthly numbers released by the Association of Mutual Funds in India (AMFI), the Indian mutual fund industry’s month-end AUM rose 7% to  a record high of Rs 8,90,000 crore in November 2013. Money market/liquid funds saw net inflows worth Rs 51,400 crore and rise of 30% in AUM due to improved liquidity in the system and cyclical inflows. Liquidity in the banking system improved in November 2013 due to gilt purchases through open market operations (OMOs) and an additional 11-day repo auction by the RBI. Government spending also helped ease liquidity in the system. Improvement in liquidity is reflected from two instances - the decrease in banks’ average borrowing through the central bank’s marginal standing facility (MSF) and the decline in the average net borrowing via the RBI’s liquidity adjustment facility (LAF) - the repo and reverse repo. Cyclical inflows in the category in October and November 2013 helped; these inflows are a result of companies re-investing their short-term investments in the category before they withdraw in December 2013 to meet their advance tax requirements. In October-November 2013, the category saw record inflows of Rs 1,19,000 crore on a consolidated basis. Equity funds’ AUM up for the third consecutive month, rose to Rs 1,75,000 crore marking its third monthly rise in a row. The rise in equity funds’ assets was an outcome of inflows in the category, and rise in the small and mid-cap indices. The category saw inflows of Rs 700 crore in the month (highest in the past five months) compared to outflows of Rs 3500 crore in October 2013.

The mutual fund industry has been facing consistent equity folio closures for the past few months. Mutual funds have lost an estimated over 20 lakh investors, measured in terms of individual accounts or folios, in the first seven months of the current fiscal, mainly due to profit-booking and various merger schemes. According to SEBI data on total investor accounts with 44 fund houses, the number of folios fell to around 4.07 crore at the end of October 2013 from 4.28 crore in the last fiscal (2012-13) — indicating a decline of 20.72 lakh. During April-October, the number of investor folios in equity schemes fell over 25 lakh. The total number of folios were 3.06 crore at the end of October 2013 against 3.32 crore at the end of March 2013.

According to SEBI data, the total number of folios in debt funds rose about 4.22 lakh to 66 lakh at the end of October 2013. Besides, exchange traded funds lost 48,755 folios to nearly seven lakh. Balanced schemes, which invest in equity and debt category, gained 1.06 lakh folios to 27 lakh. As on October 31, 2013, the sector offered 1,335 schemes to investors, of which 344 were equity schemes and 891 were debt-linked schemes. The mutual fund industry lost more than 36 lakh investor accounts 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. The mutual fund industry’s average AUMs in November 2013 rose mainly on investments by banks and financial institutions in the liquid funds category, but the continuity of this trend is doubtful due to the volatile nature of such flows. It is too early to cheer rising inflows into equity funds last month, though redemption pressure is receding.

Piquant Parade

 

In a tough year marked by volatility, debt fund managers from Franklin Templeton Mutual Fund and equity wealth managers from ICICI Prudential Mutual Fund outmatched their peers and their respective benchmarks to win the Business Standard Fund Manager of the Year awards. While Sachin Padwal-Desai and Umesh Sharma of Franklin Templeton won the award for the debt category, S Naren and Mittul Kalawadia of ICICI Prudential took the honours in the equity segment.

UTI Mutual Fund bagged the best fund house award at the Outlook Money Awards. Franklin Templeton walked away with the best equity fund house award while Birla Sun Life was awarded the best debt fund house. K N Sivasubramanian of Franklin Templeton won the best equity fund manager award while Amandeep Chopra of UTI bagged the best debt fund manager award.

Pursuant to the transfer of schemes of Daiwa Mutual Fund to SBI Mutual Fund and at the request of Daiwa Mutual Fund, Securities and Exchange Board of India (SEBI), has cancelled the certificate of registration of Daiwa Mutual Fund and has withdrawn the approval granted to Daiwa Asset Management (India) Private Limited, to act as the Asset Management Company to the Mutual Fund in the letter dated November 26, 2013.

The upgraded version of Bombay Stock Exchange’s (BSE) StAR MF platform is expected to be launched on January 14, 2014. BSE is making some changes in the back end of the platform since the settlement would now be between the investor and the exchange. Earlier, the settlement took place between the stock exchange member and the exchange. The old platform will continue to function. Earlier, only members of BSE were permitted to transact through this platform. The high costs associated with taking stock exchange membership deterred distributors, especially IFAs, from joining the platform. BSE is offering this lifetime membership for a non-refundable fee of Rs. 15000. The platform currently does not provide switch facility which means that an investor has to redeem and then reinvest if he/she wishes to switch to another scheme. BSE is working on introducing this facility.  BSE StAR MF platform seems to have gained acceptance among distributors. The exchange has registered 300 distributors after it opened membership for intermediaries in October, 2013. Out of the 300 distributors, 100 are IFAs. National distributors and platforms like IIFL Wealth Management, Aditya Birla Money Mart, iFAST Financial have also taken BSE StAR MF membership.

Fund houses have started organizing investor awareness programs in the districts allotted to them by AMFI under its new initiative called ‘District Adoption Program’ (DAP). The DAP is expected to be formally inaugurated by SEBI chairman U K Sinha. 200 districts across the country will be a part of this program. AMFI is aiming to conduct 5000 Investor Awareness Programs by the end of next year. AMFI has formed a ten-member committee which is headed by Jaideep Bhattacharya, MD & CEO, Baroda Pioneer AMC, to oversee the project. Some AMCs have already started to reach out to investors in their respective districts. Kotak Mutual Fund was allotted Agra, Gwalior, Panipat and Rohtak districts. The fund house has started an outdoor campaign on SIP. It is also planning to reach out to students in schools and colleges in these districts. L&T Mutual Fund has started its investor and distributor education meets in Ambala, Dhanbad, Moradabad, Madurai, and Visakhapatnam. Franklin Templeton has been given 10 districts that include Hubli, Sitapur, Tiruvallur among others. The fund house will start its activities next month. This is the perhaps the first time that the industry is laying greater emphasis on upgrading the skills of distributors along with reaching out to investors. In order to increase the industry’s distribution force, SEBI has asked AMCs to create a new pool of distributors called the new cadre of distributors’. Many AMCs are trying to enroll LIC and PPF agents into the mutual fund distribution fold. “The District Adoption Program (DAP) aims to create employment for nearly 2000 youths in Tier II and III cities, by inducting them as new cadre of Independent Financial Advisors (IFAs) in the mutual fund industry. AMFI is also likely to take its ‘Savings Ka Naya Tareeka’ on radio channels soon. The campaign will be run in multiple languages on FM channels.

…to be continued

NFO NEST

December 2013

 

Is the lull in the NFO market set to end?

 
After new equity fund launches hit a decade-low in 2012, such new fund offers (NFOs) have made a smart come back so far in 2013, as benchmark indices hover at historic peaks. Not only have the number of equity NFOs doubled but they could also mobilise more than three times the funds they collected in 2012. Between 2005 and 2008, the Indian mutual fund industry had launched 171 equity NFOs and collected Rs 1.12 lakh crore. However, since then, the magic of new equity launches lost sheen, as global stock markets collapsed after the global financial crisis. In 2012, the mutual funds came up with just eight equity NFOs and collected a little over Rs 500 crore in all. In 2013, there have been 14 NFOs so far (a couple of more are scheduled to be closed in December 2013), which mopped a sum of Rs 1,532 crore. Though the statistics look encouraging, when we delve a little deeper, it appears that the situation continues to remain worrisome. Of the 14, four NFOs were close-ended products from fund houses like IDFC, ICICI Prudential, Axis, and Union KBC, while six others were Rajiv Gandhi Equity Saving Schemes or RGESS from Birla Sun Life, DSP BlackRock, HDFC, IDBI, LIC Nomura, and UTI. These 10 launches, put together, cornered the lion’s share of Rs 1,100 crore or over 70% of the total assets. The remaining four managed a paltry collection of Rs 190 crore. It is this predominance of close-ended products that is a major cause for concern. 
Fund houses are now rushing to launch close-ended funds, with all five funds figuring in the November 2013 NFONEST being close-ended.
 

ICICI Prudential Capital Protection Oriented Fund - Series IV Plan G (60M)

Opens: December 2, 2013

Closes: December 16, 2013

ICICI Prudential Mutual Fund has unveiled a new fund named ICICI Prudential Capital Protection Oriented Fund IV - Plan D - 60 Months Plan D, 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 will 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 will be handled by Aditya Pagaria.

Sundaram Hybrid Fund – Series D

Opens: December 5, 2013

Closes: December 19, 2013

Sundaram Mutual Fund has launched a new fund named Sundaram Hybrid Fund - Series D, a three year close-ended income fund. The objective of the fund will be to generate capital appreciation and current income, through a judicious mix of investments in equities and fixed income securities. The fund will allocate up to 65%-90% of assets in fixed income securities, up to 30% of assets in money market instruments and cash equivalent with low to medium risk profile and invest up to 10%-35% in equity and equity related instruments with high risk profile. The fund's performance will be benchmarked against CRISIL MIP Blended Index. Siddharth Chaudhary will be the fund manager for the debt portion and Shiv Chanani will be the fund manager for the equity portion.

ICICI Prudential Capital Protection Oriented Fund - Series IV Plan H (36M)

Opens: December 11, 2013

Closes: December 24, 2013

ICICI Prudential Mutual Fund has unveiled a new fund named ICICI Prudential Capital Protection Oriented Fund IV - Plan H - 36 Months Plan, 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 will mature on or before the maturity of the Plan under the fund. The fund will allocate 80% to 100% of assets in debt securities and money market instruments with low to medium risk profile. On the flipside, it will allocate up to 20% 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 will be handled by Aditya Pagaria.

Reliance Close ended Equity Fund - Series B

Opens: December 13, 2013

Closes: December 27, 2013

Reliance Mutual Fund has launched a new fund named Reliance Close Ended Equity Fund - Series B. The investment objective of the fund is to provide capital appreciation to the investors, which will be in line with their long term savings goal, by investing in a diversified portfolio of equity and equity related instruments with small exposure to fixed income securities. The fund will allocate 80% to 100% of assets in equity and equity related instruments with high to medium risk profile and it will allocate up to 20% of assets in debt and money market instruments with medium to low risk profile.  The fund will be benchmarked against S&P BSE 200 Index and will be co-managed by Sailesh Raj Bhan and Jahnvee Shah.

Sundaram Select Microcap Fund - Series I

Opens: December 16, 2013

Closes: December 30, 2013

Sundaram Mutual Fund has launched Sundaram Select Micro Cap - Series I, a close-ended equity fund. The fund seeks capital appreciation by investing predominantly in equity/ equity-related instruments of companies that can be termed as micro-caps. A company whose market capitalisation is equal to or lower than that of the 301st stock by market cap on the NSE at the time of investment will be considered to be in micro-cap category. The fund will invest up to 65%-100% in equity and equity related securities of companies of micro-caps with high risk profile. On the other hand, it will invest up to 35% in other equity with high risk profile and fixed income and money market securities with low to medium risk profile. The fund will follow a bottom-up approach with emphasis on investing in companies with quality management, unique business strengths, sustainable long-term growth prospects, and reasonable valuations. The fund will be benchmarked against S&P BSE Small Cap Index. The fund managers will be S. Krishnakumar (Equity) and Dwijendra Srivastava (Fixed-Income).

Birla Sunlife RGESS Series 2 and 3, ICICI Prudential Capital Protection oriented Fund V - Plan A to A, SBI Tax Advantage Fund - Series III, LIC Nomura Capital protection oriented Fund – Series 2, Principal Index Fund – Midcap, UTI Medium Term Fund, Baroda Pioneer Money Market Opportunities Fund, HDFC Capital protection oriented Fund - Series II, ICICI Prudential Value Fund - Series 3 and 4, DWS Residual Duration Fund - Plan A to Plan D, Principal Asset Allocation Fund of Funds, Tata Dual Advantage Fund (Scheme B to D), BOI AXA Capital Protection oriented Fund - Series 2, HDFC Debt Fund for Cancer Cure 2014, ICICI Prudential Multiple Yield Fund – Series 6 Plan A to F, Motilal Oswal MOSt Asset Allocation Fund – Series 1, and ICICI Prudential Credit Opportunities Fund are expected to be launched in the coming months.

GEMGAZE

December 2013

 

Debt funds offer a plethora of options where funds range from dynamic funds, medium term funds, and long term income funds. These are usually all-weather funds as they are considered to be less risky as compared to their equity counterparts and are an alternative to investors keen on holding fixed income instruments. Debt funds act as a cushion for an all-equity portfolio. Debt funds are supposed to be the simple choice for risk-averse investors. But, is it really that simple given the huge variety of debt funds available, with not much to differentiate when it comes to their investment mandate? To be fair, barring basic schemes such as dynamic bond funds, plain income funds, ultra short-term, and short-term funds, debt mutual funds are not designed for retail investors at all. Instead, this category primarily attracts institutional investors as they are actually the biggest investors in debt funds.

 

All the GEMs from the 2012 GEMGAZE have performed reasonably well though thick and thin and figure prominently in the 2013 GEMGAZE too.

 

ICICI Prudential Gilt Investment Fund Gem

Launched in August 1999, ICICI Prudential Gilt Investment Fund sports an AUM of Rs 432 crore. Being a gilt fund, the credit quality of the portfolio is very high with Government of India securities constituting 96.78% of the total assets. There are six holdings in all with an average maturity of 15.5 years. The fund earned a return of 0.87% in the past one year as against the category average of 3.98%. The expense ratio is 1.42%. The fund is benchmarked against the I-SEC Li-BEX index. The fund is managed by Mr. Rahul Goswami. Goswami is pragmatic in his approach—he is mainly focused on medium- to longer-term trends, but he has displayed an ability to combine them with shorter-term cyclical considerations to build portfolios that are well-positioned to take advantage of all market conditions. This is borne out by the consistency in the fund’s performance from Oct 2005 to Oct 2009, when it featured in the top performance quartile 92% of the time, on a one-year rolling basis. Goswami is also willing to take big bets against the norm if he believes the risk/reward is favourable and his calibre and research-intensive approach are well-suited to such moves.

Canara Robeco Income Fund Gem

 Canara Robeco Income Fund was launched nearly a decade ago in 2002. The current AUM of the fund is Rs 381 crore with 14 holdings. Central Government loan constitutes 65% of the total assets, bonds 12%, debentures 10%, and commercial papers 7%. The credit quality of the fund is reasonably high. The interest rate sensitivity of the fund is high with the average maturity at 6.94 years. Canara Robeco Income Fund has had a rough ride in the past two years. Its return in the past one year is 5.69%, almost on par with the category average of 6.12%. The expense ratio of the fund is high at 1.72%. The fund is benchmarked against the CRISIL Composite Bond Index. The fund is managed by Mr Akhil Mittal since May 2013.

 

Birla Sunlife Dynamic Bond Fund Gem

Birla Sunlife Dynamic Bond Fund manages assets worth Rs 14,710 crore. This fund is a steady top quartile performer with low volatility. It has delivered returns across interest-rate cycles and is among the top few in its category. The one-year return of the fund is 7.02% as against the category average of 6.12%. Over one-, three- and five-year time-frames, the fund has consistently outpaced its benchmark Crisil Composite Bond Fund Index by comfortable margins of 1.5-2.5 percentage points. In the last five years, Birla Dynamic has generated compounded annual returns of 9.4%, putting it among the top couple of funds in its category and ahead of peers such as SBI Dynamic Bond, Kotak Flexi Debt, and BNP Paribas Flexi Debt. With diversified holdings and generally accurate calls on portfolio duration, the fund has rewarded its investors well. This fund’s portfolio is designed to dynamically align with the interest rate outlook by increasing or decreasing the maturity duration of investments accordingly. Although it’s dynamic mandate allows it to take bets across the yield curve, the average maturity has exceeded four years only twice; once touching 11 too. The portfolio’s average maturity profile is 1.25-2.5 years generally and, at select times, depending on the interest rate scenario and market conditions, the tenure is longer. The yield to maturity too has generally been relatively high and better than fixed deposits or MIPs of similar duration, at 9.48%. More than 60% of the fund’s holding are in the highest AAA rated instruments such as corporate debt, debentures, and certificates of deposit. Another 21.1% of the fund’s investments are in AA rated securities, but these investments too are in well-established names. In addition, 12.8% of the holdings are in sovereign debt that carry nearly no default risk. To play it safe, the fund also increases cash position during times of highly uncertain interest rate scenarios. The expense ratio is 1.08%. Maneesh Dangi is the fund manager since September 2007.

 

Birla Sunlife Government Securities Long term Fund Gem

 

Launched in October 1999, the fund has an AUM of Rs 528 crore. The one-year return of the fund is 3.64% as against the category average of 3.98%. The fund is benchmarked against the I-Sec Li-Bex. The fund has seven holdings with an average maturity of 6.98 years and the yield to maturity of 8.97%. Active management of interest rate risk and ability to identify and benefit from short-term technical abnormalities in the interest rate curve have ensured that the fund is among the top five in the medium and long-term debt funds category. While the name of the scheme may suggest that it is a typical long-term gilt scheme, the fund has a highly flexible strategy. It can take exposure to government securities of both Central and State governments and can also invest in more short-term treasury bills. To this extent, it can take advantage of any rallying interest rate scenario by moving to short-term treasury bills. This not only protects the portfolio from any lack-lustre performance in long-dated instruments but also peps up returns albeit for a short duration. A more important asset allocation mandate is that the fund can only invest in government securities. This effectively brings the credit risk of the fund's portfolio to almost nil as all government instruments come with a sovereign guarantee. The expense ratio of the fund is 1.74%. Prasad Dhonde has been the fund manager since October 2012.

 

Birla Sunlife Floating Rate Short term Fund Gem

 

This relatively young fund, launched in October 2005, boasts of a massive AUM of Rs 3397 crore.  In the past one year, this liquid fund has returned 9.02% as against the category average of 8.76%. Debentures constitute the lion’s share of the portfolio at 53%, Certificate of Deposit at 11%, and Commercial Papers at 10%. The cash exposure is very high at 25%. Being a liquid fund, the average maturity is 0.11 years. The number of holdings in the fund’s portfolio is 38 with an average yield to maturity at 9.91%. The expense ratio is a mere 0.23%. The fund is benchmarked against the CRISIL Liquid Index. Sunaina da Cunha and Kaustubh Gupta are the fund managers.

FUND FLAVOUR

December 2013

 

Debt Funds dominate…

Contrary to popular perception, mutual funds are primarily debt investors. For retail investors, investment in mutual funds has always been a substitute for direct investment in equity markets. This preference has created a distorted notion that mutual funds are predominantly equity investors. An analysis of the market data, however, paints a picture that is surprising as well as revealing. As on June 30, 2013, the total AUM of mutual funds stood at Rs 800688.22 crore. Out of this, debt assets alone aggregated to Rs 620094.90 crore – a 71% share of the total AUM. This reflects the overwhelming preference of mutual funds for debt instruments. The total mutual fund AUM invested in debt as on March 31, 2009 was approximately Rs 2 lakh crore – a 49% share of the total AUM. Since then, the mutual fund debt assets have grown at a compounded annual growth rate (CAGR) of 30% as against a CAGR of 18% for the total mutual fund AUM (that includes debt, equity, alternate assets, etc). The preference for debt investments can be attributed to lucrative returns offered consistently by this asset class over the past five years. According to CRISIL – AMFI Debt Fund Performance Index, an index that seeks to track the performance of 86 debt funds, debt funds have offered consistent returns of 8.93% over the last 5 years, 8.78% over the last 3 years, and 11.11% over the last year (as on June 30, 2013). In contrast, equity markets have been too unpredictable over the same period. Consequently, mutual funds have been net sellers in equity and net buyers in debt, over the stock exchange, over the last four years.

Source of funds and investor preference

As on March 31, 2013, the fund contribution of corporate and high networth individuals (HNIs) to mutual fund debt funds (liquid funds, gilt funds, and debt oriented funds) stood at 60% and 30% respectively. The remaining 10% was contributed by banks, financial institutions (FI), foreign institutional investors (FIIs), and retail investors (individual investors with investments of less than 5 lakh). Further, analysis of the AUM data indicates that 92% of funds in debt schemes are from corporate investors, 89% of funds from Banks/ FIs, 77.5% of funds from HNIs, 43% of funds from FIIs, and 18% of funds from retail investors. While corporate, HNIs, FIIs, and retail investors preferred investing in debt oriented funds, HNIs, Banks, and FIs primarily invested in liquid funds.

 

Allocation across schemes and distribution across maturities

In terms of number of debt schemes, 749 out of 1184 schemes were income/ debt oriented schemes. This preponderance was despite the fact that equity mutual funds have a favourable tax treatment as compared to debt mutual funds. Within the debt schemes, almost 72% assets (Rs 441310.11 crore) were under regular debt schemes, 26.5% assets (Rs 170862.68 crore) were within liquid/ money market schemes, and remaining 1.5% assets (Rs 8473.19 crore) were under gilt schemes. A significant chunk, 45.20% of all debt assets, is invested in instruments that have a maturity of 90 days or less. Overall, 67.5% of all debt assets are invested in instruments with maturity of less than one year. Though mutual funds seem to be reluctant investors in maturities above one year, there has been a marked shift towards longer maturity papers.

Choice of debt instrument

The choice of instruments also corroborates with the preference for liquidity and safety. Over 50% of all assets are invested in extremely liquid short term papers viz Certificates of Deposit (31%), Commercial Paper (15%), Bank FD (6.64%), CBLO (3%), other Money Market Instruments (3%), and Treasury Bills (0.03%). This inclination for safer liquid assets is also reflected in higher portfolio allocation to better rated Corporate Bonds (23.45%), and PSU Bonds (8.20%). It should be noted that higher rated (AAA, AA+) corporate bonds are relatively more liquid than other bonds.

A brief account of the performance of the major categories of debt funds, namely, gilt funds, FMPs, and liquid funds, would put things in the proper perspective.

Gilt Funds

Gilt Funds are mutual fund schemes that invest in government securities (G-Secs), issued by the RBI on behalf of the government. Being sovereign papers, these do not expose investors to credit risk. The G-Sec market is largely dominated by institutional investors and gilt funds are an avenue for retail investors to participate in the market. These are ideal for those who want more safety for their investments or are risk-averse and, at the same time, are looking for reasonable returns on their money. These are a good option when inflation is near its peak and the RBI is not likely to raise interest rates immediately. On the flip side, factors such as fiscal deficit and the country’s debt burden weigh on the performance of G-Secs and hence, gilt funds. Investment in gilt funds is subject to interest rate risks. These funds invest in G-Secs, which are not actively traded and are hence highly illiquid. According to mutual fund rating agency, Value Research, medium and long-term gilt funds gave returns of 3.84% for the year ended May 30, 2013. In the short-term (less than a year), they have returned 4.18%. But efforts by the RBI in July 2013 to salvage the rupee have hit these funds hard. A meaningful portion of the gains made by gilt funds in the last one year were eroded by this move. Even as many market participants believed this to be a one-off event, the volatility does not seem to be reducing. The benchmark 10-year G-sec yield has risen by nearly 100 basis points in the last one month and bond prices slid by as much as 6%. As a result, gilt funds, on an average, lost over 3% in a short span of ten days, which is a rather short period of time to gauge the performance of a fund. However, episodes such as this occur rarely but they highlight that the fund manager’s ability to manage rate risk is important to reduce volatility in returns.

 

Fixed Maturity Plans

FMPs invest in a mix of short-term options, such as money market instruments, certificates of deposit, commercial papers, and the like. Given that these are currently offering a yield of 9.5-10%, the funds are also likely to deliver a similar pre-tax return. The investors who lock in money at the current level should enjoy double-digit returns over a one-year horizon. The recent RBI move to tighten liquidity has put a big question mark on the trajectory of rates. The uncertainty regarding the future interest rate movements makes FMPs a safer bet. FMPs offer returns that are relatively predictable, though not guaranteed. These are closed-ended, or of a fixed tenure, where the fund invests in instruments with a maturity profile matching that of the fund, and the instruments are typically held till maturity. For instance, a one-year FMP will invest in fixed income instruments bearing the same maturity. As such, any gyration in interest rates in the interim period does not affect the value of the fund. Hence, in an environment where the stability of the debt market is suspect, an FMP provides a safer way to navigate the uncertainty. This is a good window for investors to lock in their money at higher yields through FMPs. They should supplement the riskier open-ended funds in their portfolios with more stable FMPs. Besides, FMPs are more tax-efficient. Opt for a fund whose tenure matches your investment term and financial goal. If you are risk-averse, go for a higher tenure product, which will enable you to lock in at high yields for a long period. If you plan to buy a car after a year, a one-year FMP will be ideal to help make the down payment. It is critical to choose the tenure wisely since these funds have a lock-in period and you will not have access to your money for this duration. Even though these instruments are listed on the exchanges and are tradeable, the liquidity is very low. So you cannot sell whenever you want without having to compromise on price. Opt for fund houses that typically invest in the highest quality instruments, such as AAA or AA rated corporate or PSU bonds. There is a high risk of default in the underlying paper if it has a lower rating.

 

Liquid Funds

Liquid funds are getting increasingly popular these days because of the high interest rates, safety, and tax advantage that they offer. A recent study conducted by CRISIL Fund Services has pronounced liquid funds, an attractive alternative to retail investors for parking funds lying idle in their savings bank accounts. Over the last five years, liquid funds (Crisil Fund Rank 1 index for liquid funds) have given an annualised post-tax return of 5.78% as compared to 2.5% given by a savings bank account. Despite this disparity in returns, a majority of Indians continue to park a large amount of funds in savings bank accounts. Beyond returns, liquid funds also have advantages in terms of liquidity, safety and portability. They can be redeemed within 24 hours and have no exit load. Further, liquid funds invest in securities with a maximum maturity of 91 days, which cuts down the credit risk. Most liquid fund schemes are also highly rated (P1+f), signifying very strong protection against losses from credit defaults. Within liquid funds the dividend option is more tax-efficient. This option would be more suitable for investors who fall within the 20 and 30% tax brackets, as it attracts a lower dividend distribution tax of 12.5%. Post tax deductions, liquid funds yield better returns as compared to savings accounts and fixed deposits, wherein the interest earned would be taxed based on an individual's tax slab.

…retail investors yet to join the league

A debt fund has a lot going for it as an investment. In fact, it is the only way to invest in income-generating instruments without having to commit huge sums of money or getting entangled in assorted worries such as transaction costs, stamp duty, or lack of liquidity. In fact, many of the most attractive debt instruments are unavailable directly to the retail investor. Debt fund is an ideal investment if you want to meet short-term goals, park emergency reserves profitably, pay less tax than FDs, generate regular income, and use it as a launching pad for large equity investments. Despite their advantages common investors mostly ignore debt funds. By this logic, debt funds should get a unique place in your asset portfolio.