FUND FULCRUM

April 2014

 

The huge run-up in the capital markets in March 2014 resulted in assets under management (AUM) of mutual funds gaining 3% to 9.09 lakh crore in the March quarter against 8.82 lakh crore recorded in the December quarter, according to the latest data compiled by the Association of Mutual Funds in India. The 47 active mutual funds have registered a total AUM of Rs 8.23 lakh crore in the March quarter of the financial year 2012-13. HDFC Mutual Fund retained its top position with average assets in the March quarter increasing 4% to Rs 1.13 lakh crore, from Rs 1.09 lakh crore in the December quarter. Baroda Pioneer registered 11% rise in AUM due to investor addition. ICICI Prudential registered a growth of 9% in AUM at Rs 1.06 lakh crore, while Reliance Mutual Fund was up 1% at Rs1.05 lakh crore (Rs 1.04 lakh crore). The top three mutual funds — Reliance Mutual Fund, ICICI Prudential Mutual Fund, and HDFC Mutual Fund — together managed about 38% of the total assets of the industry, according to AMFI data. Birla Sun Life Mutual Fund and State Bank Mutual Fund recorded increase of 5% and 1% respectively, at Rs 89,136 crore (Rs 85,086 crore) and Rs 66,311 crore (Rs 65,415 crore). The average AUM of 24 mutual funds dipped in the March quarter compared with the same quarter last year, eroding the value of investors’ investments. Twenty eight mutual funds had assets under Rs 10,000 crore, while six had assets above Rs 50,000 crore. During the financial year ended March, the total asset base of the entire mutual fund industry grew by over Rs 40,000 crore, from Rs 8.6 lakh crore at the end of financial year 2013-14.

The industry’s average assets under management increased by 13% from 7.94 lakh crore to Rs. 8.96 lakh crore largely on account of inflows in debt funds. Investors poured in Rs. 63,339 crore in debt funds. This is reflected in the growth in debt folios which increased by over seven lakh from 61 lakh in FY12-13 to 68 lakh in FY13-14. A lot of investments has moved to FMPs which were highly attractive when the yields were hovering around 9.50 % to 10% during September 2013. A lot of FMPs were launched in March 2014. Equity schemes have seen Rs 5,526 crore in outflows, according to data from the Association of Mutual Funds in India. This is the second year in which the money pulled out of equity Mutual Funds by investors is more than what was put in. In 2012-13, net outflows stood at Rs 12,931 crore. In 2011-12, there were net inflows of Rs 264 crore. The mutual fund industry lost close to 40 lakh folios in equity funds in FY2013-14, according to the latest SEBI data. This decline can be attributed to redemptions and folio consolidation. As on FY2013-14, there were 2.91 crore equity fund folios, down from 3.31 crore the previous year. Investors pulled out Rs. 9,269 crore from equity funds last year as the markets continued the uptrend in 2014. Fund houses launched a slew of close end equity funds which managed to collect decent money from investors. The industry launched 19 closed end funds last year. The number of equity funds has gone up to 363 in FY13-14 from 347 the previous year. However, inflows in existing schemes continued to be low. The pace of folio closures though slowed down in FY13-14. The industry lost close to 40 lakh equity folios in FY13-14 compared to 45 lakh decline in FY2012-13. The industry’s total folio count dropped by 32 lakh from 4.28 crore in FY2012-13 to 3.95 crore in FY2013-14.

Investors pumped in nearly Rs 54,000 crore in various mutual fund schemes in 2013-14, 30% lower than the amount infused by them in the preceding fiscal. However, fund mobilisation in mutual fund schemes is expected to grow in the coming months. This is in view of SEBI recently clearing its first ever long-term policy for the sector, proposing a number of tax benefits and measures for growth of Mutual Fund business. The policy is aimed at channelising household savings into equities and mutual funds. According to the latest data available with SEBI, there was a net inflow of Rs 53,782 crore during the 2013-14 financial year as against over Rs 76,539 crore 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 97.68 lakh crore during 2013-14, while there were redemptions worth Rs 97.14 lakh crore as well during the period. This resulted in a net inflow of Rs 53,782 crore. Of the total net investment made in the past fiscal, a huge part of inflows in the mutual fund schemes came during April 2013 and January 2014. In April, 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 fund houses mobilised Rs 83,533 crore in various schemes in January 2014.The significant level of fund mobilisation has also helped the total asset under management of mutual funds to grow to Rs 8.25 lakh crore at the end of March 31, 2014 from Rs 7.01 lakh crore during fiscal 2012-13.

Piquant Parade

ICICI Prudential Mutual Fund bagged four awards at the Morningstar Fund Awards event. The fund house was adjudged as the Best Equity Fund House, Best Debt Fund House, and Best Multi-Asset Fund House. ICICI Prudential Dynamic Plan bagged the Best Large-Cap Equity Fund Award. Awards were presented in eight fund categories. The Morningstar Awards are designed to help investors identify the year’s most exceptional funds and fund houses. These awards honour the funds and fund houses that outperformed their peers and added value for investors.

To create more awareness about capital market and to protect investors' interests (across the country in 13 major languages) SEBI plans to initiate campaigns through mobile as well as Internet platforms and by collaborating with industry bodies, stock exchanges, and depositories. In December 2013, SEBI began a campaign on 'Investor Grievance Redressal Mechanism', through mass media. SEBI has proposed to carry forward the campaign through media in the next financial year 2014-15 under which it would inform investors about grievance redressal mechanism, Collective Investment Schemes (CIS) as well as promote securities through mutual funds and primary and secondary markets.

A new portal called Moneybase provides online investing facility for investors and acts as a sub-broking platform for IFAs. More players are tapping the online route to distribute mutual funds among masses. Similar to FundsIndia and Fundsupermart, the portal www.moneybase.in  provides online investment facility for investors as well as distributors. One has to initially sign up by providing his/her details like name, address, PAN, etc. After creating a login id one has to submit KYC, bank mandate, cancelled cheque and other documents to Moneybase. Once the account is created, investors can start transacting through the portal. Based on information like goal, risk appetite and time-horizon provided by investors, the portal recommends funds to invest in.

Regulatory Rigmarole

Some of the non-tax related proposals set out by SEBI in its long term policy for mutual funds have become effective from April 01, 2014. SEBI has issued a circular in which it has asked AMCs to make a number of disclosures. SEBI has also specified the voting norms of AMCs. Other decisions taken by SEBI board like seed capital and net worth are likely to come after a gazette notification.

AUM disclosure

Currently fund houses disclose the AUM break up of T-15 and B-15 cities and the AUM of different categories of schemes like equity, balanced, debt, ETF, etc. on a quarterly basis on their websites. In addition to this, AMCs will have to disclose the AUM contributed by sponsors, contribution to AUM from investors type (retail, corporate, etc.) in different scheme types (equity, debt, ETF, etc.) and state-wise/union territory-wise contribution to AUM. This will now be a monthly disclosure.

Voting

In order to encourage AMCs to actively take part in casting voting rights on behalf of their investors SEBI had asked fund houses to disclose their general policy of voting and the actual exercise of their proxy votes in the AGMs/EGMs of the investee companies from 2010-11. In addition to disclosing voting patterns, fund houses now have been asked to share the rationale behind casting vote for or against any matter. Further, AMCs will be required to publish summary of the votes cast across all its investee company and its break-up in terms of total number of votes cast in favour, against or abstained from. AMCs will have to disclose this data on their website on a quarterly basis. AMCs will have to obtain a certificate from auditor on the voting reports annually. This report has to be submitted to trustees and published in the annual report and website. SEBI has asked the trustees and boards of AMCs to monitor and ensure that the votes cast by AMCs are prudent and adequate.

EUIN remediation period will remain 30 days as opposed to the seven days proposed earlier by AMFI. EUIN is a unique seven digit alpha numeric number assigned to the employees of distributors which was introduced by SEBI to tackle the menace of mis-selling. If distributors fail to quote EUIN within the remediation period their commissions were forfeited. Effective April 01, 2014, distributors have sufficient time (30 days) to remediate EUIN. Commissions are withheld for 30 days within which distributors have to furnish EUIN. The commissions are released by fund houses if distributors remediate it within this period. 

SEBI has asked for a share of the investor awareness program (IAP) corpus available with fund houses. The government was funding SEBI so far. Now they are looking at AMCs for this funding. Even before SEBI mandated AMCs to spend two basis points on investor awareness, AMFI was conducting its own investor programs through AMCs. It had run a media campaign ‘Savings Ka Naya Tareeka’.

Some mutual funds have come under scanner of the capital markets watchdog SEBI and industry's front-line regulator AMFI for allegedly window-dressing their fiscal-end assets base through illicit trades. In order to meet their redemptions, mutual funds have been involved in a transaction that typically include forward deal on corporate deposits, which are in violations of SEBI's norms and are entered into at pre-fixed prices. To avoid fall in AUM towards the financial year-end, Mutual Funds typically reach to cash-rich clients for such trades. Mostly funds with high focus on liquid assets tend to adopt such practices. In order to desist funds from such trades, AMFI has requested all Asset Management Companies to send, on a daily basis, their entire trade data, such as secondary market trades, primary market trades and inter-scheme trades to (rating agencies) Crisil/ICRA. These agencies internally have also been requested by AMFI to highlight individual Outlier Trades, if any, to individual AMCs on a weekly basis. In this connection, AMFI has also sent a Best Practice Circular to all AMCs requesting them to present Outlier Trades (variation in trade figures), if any, to their respective Boards as per the data provided by Crisil/ICRA.

The latest iteration of Direct Taxes Code Bill 2013 has been a mixed bag with some dampener for industry on R&D front and also some positive surprises on taxation of equity shares and equity oriented mutual funds. While equity shares held for more than 12 months would be considered as long-term investments and exempt from tax, the method of calculation of 12-month period has undergone a change. Now, the 12-month period is to be reckoned from the end of the financial year in which it is acquired and not from the date of acquisition. The Direct Tax Code proposes to levy 10% additional tax on resident recipient if the total dividend in his hands exceeds Rs 1 crore. The Code has rejected the recommendation of the Standing Committee to do away with the Securities Transaction Tax, in order to regulate day trading. In respect of investment assets being equity shares in a company or a unit of equity-oriented fund which are short-term in nature — that is to say their period of holding is 12 months or less than 12 months — a deduction amounting to 50% of the income so arrived shall be allowed for computation of short term capital gain. Currently, no deduction is available for computation of short term capital gains. Other investment assets (not including equity share or equity oriented fund) will be considered as long term when they are transferred at any time after one year from the end of the financial year in which they are acquired by the assessee. The DTC Bill proposes to scale down the R&D benefits.  The new Code now provides for a reduced weighted deduction of 150% for in-house scientific research. Similarly donations to specified institutions will qualify only for a deduction of 125%. This will be a major setback for corporates who had all geared up to set up R&D facilities given the attractive deductions.

SEBI’s new norms on related party transactions could pose practical difficulties for listed companies. The norms are part of a stringent corporate governance framework for listed companies that would be effective from October 1, 2014. Under the new corporate governance rules mooted by SEBI, all material related party transactions require shareholders’ approval through special resolution. Besides, the related parties should abstain from voting on such resolutions. According to SEBI, any transaction with a related party that exceeds 5% of the annual turnover or 20% of the networth of the company —— whichever is higher —— on the basis of latest audited financial statement would be considered “material”.  It would be applicable for transactions entered with a related party individually or taken together with previous transactions during a financial year. Among others, listed companies would be required to disclose policy on dealing with related party transactions on their website as well as in the annual report.

Mutual fund penetration is low in India — the total assets managed by the industry is just 4.7% of the country’s GDP, compared with 77% in the US, 41.1% in Europe, and 33.6% in the UK. Even as the long-term returns on mutual fund investments outscore other investment options, the product is yet to find favour with small investors. Customer service remains one of the most under-examined reasons for this. Customers very rarely protest against bad service. Instead, they simply switch investments to other fund houses. But does the industry take cognisance of the deficiencies in servicing customers? In India, customers of 47 AMCs are serviced by three registrar and transfer agents (RTAs) with the top two holding a 90% market share. We need an industry framework that provides enough attention to customer servicing aspects. Together, we need to walk that ‘extra mile’. It is our collective responsibility to track the customer, hand over the undelivered mail and hard-earned money with the same zeal with which the fund house had collected it.

NFO NEST

April 2014

 

 Income funds to the fore

 

The number of NFOs launched by mutual funds in February 2014 has been the highest since March 2012. According to the monthly data posted by the Association of Mutual Funds in India, 140 new schemes were launched in the month of February amounting to investments of Rs 22,347 crore. The last time fund houses launched a higher number of schemes was in March 2012 when the 157 new schemes launched garnered assets worth Rs 36,361 crore. Of the total of 140 schemes that were launched, 131 were fixed income schemes, five equity schemes and one each from the gilt, overseas fund of funds, ELSS-equity and the infrastructure debt fund category. The income funds garnered assets to the tune of Rs 30,812 crore most of which came from fixed maturity plans (FMPs). Out of the 131 income schemes, 128 were FMPs according to a report by CRISIL. The financial year-end typically sees a spurt in FMP launches as investors are drawn to the indexation and double indexation benefits these offer, depending on the tenure. In February 2014, fund houses garnered Rs 21,300 crore by launching 128 FMPs compared with Rs 11,300 crore garnered in January through 75 FMP launches.

Equity fund NFOs have made rare appearances in the recent past and April 2014 is no exception as is evident from the April 2014 NFONEST.

Sundaram Hybrid Fund - Series G (5 year) – Regular Plan (G)

Opens: April 7, 2014

Closes: April 21, 2014

Sundaram Mutual Fund has launched a new fund named as Sundaram Hybrid Fund - Series G, a five year close end 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 20% 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 is the fund manager for the debt portion and Shiv Chanani is the fund manager for the equity portion.

HSBC Managed Solutions Fund

Opens: April 9, 2014

Closes: April 23, 2014
 

HSBC Mutual Fund has launched an open ended fund of fund called HSBC Managed Solutions Fund, which will invest in existing schemes of HSBC Mutual Fund – both domestic and international funds. The fund aims to provide long term capital appreciation through an active asset allocation by investing in equity funds, debt funds, gold ETFs, offshore mutual funds, and money market instruments. The fund is available in three options – growth, moderate, and conservative based on the risk profile of the investors. Growth option has more exposure to equity and the exposure comes down further in moderate and conservative plans. In addition, the growth option will be benchmarked against BSE 200 and Composite Bond Index while moderate and conservative options will be benchmarked against CRISIL Balanced Fund Index and CRISIL Composite Bond Index, respectively.  HSBC Managed Solutions is a holistic solution based on the principle of active Asset Allocation. This active asset allocation-based solution helps contain portfolio volatility and positions it well to deliver better risk-adjusted returns over the long term. HSBC Managed Solutions builds in regular rebalancing as a core feature which helps the portfolio remain aligned to the needs of the investor. Sanjay Shah, Gaurav Mehrotra, and Piyush Harlalka will co-manage the fund.

 

Religare Invesco Global Equity Fund - Regular Plan (G)

Opens: April 15, 2014

Closes: April 28, 2014

Religare Invesco Mutual Fund has launched a new fund as Religare Invesco Global Equity Income Fund, an open ended fund of fund. The investment objective of the fund is to provide capital appreciation and / or income by investing predominantly in units of Invesco Global Equity Income Fund, an overseas equity fund which invests primarily in equities of companies worldwide. The fund may at the discretion of the fund manager, also invest in units of other similar overseas mutual funds with similar objectives, strategy and attributes which may constitute a significant portion of its net assets. A globally diversified portfolio benefits from the performance of various underlying markets and limits exposure to a single overseas market, theme or sector thereby reducing country-specific risks and volatility. Pursuing investments in global markets help in curbing portfolio volatility given their low correlation to Indian equity market. The fund will invest up to 95%-100% of its asset in shares of Invesco Global Equity Income Fund or other similar overseas mutual funds with high risk profile and invest up to 5% in debt and money market securities (including government and corporate debt) / units of debt and liquid funds of Religare Invesco Mutual Fund with low to medium risk profile. The benchmark Index for the fund will be MSCI World Index-Net Dividend. The fund manager will be Neelesh Dhamnaskar.

ICICI Prudential Value Fund - Series 4 – Regular Plan (D)

Opens: April 21, 2014

Closes: April 28, 2014

"Good companies at Discounted prices" – the value investment philosophy of ICICI Prudential Mutual Fund is the theme behind launching the fund. It is a close ended equity fund and the fund portfolio would comprise of focused 25-30 high conviction stocks by following the 'value investing philosophy'. The investment objective of the fund is to provide capital appreciation by investing in a well-diversified portfolio of stocks through fundamental analysis. The fund aims to find commendable companies at reasonable price rather than generic companies at bargain price, capture profits by selling equities or using derivatives, declare commensurate dividends, and invest in multi-cap stocks. The fund proposes to invest in stocks that are trading at a huge discount in the BSE 500 index and plans to book profit and distribute dividends regularly rather than waiting for 2-3 years as that could even wipe out the gains. On the debt side the investment will be only in those securities that mature on or before the date of maturity of the fund. Performance of the fund will be benchmarked to the S&P BSE 500 index. Mrinal Singh, Rajat Chandak, and Ashwin Jain will be the fund managers.

ICICI Prudential Capital Protection-oriented Fund V – PlanE

Opens: April 15, 2014

Closes: April 29, 2014

ICICI Prudential Mutual Fund has launched ICICI Prudential Capital Protection Oriented Fund V - Plan E (1100 Days), 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 provide capital appreciation by investing the balance in equity and equity related securities. The securities would mature on or before the maturity of the fund. The fund would allocate 80% to 100% of assets in debt and money market instruments with low to medium risk profile and up to 20% in equity and equity related securities with medium to high risk profile. The benchmark index for the fund is CRISIL MIP Blended Index. The fund managers are Rajat Chandak, Rahul Goswam, Aditya Pagaria, and Abhishek Pathak (for investments in ADR / GDR and other foreign securities).

 

Birla Sunlife Capital Protection-oriented Fund – Series 20

Opens: April 15, 2014

Closes: April 29, 2014

Birla Sun Life Mutual Fund has launched a new fund named as Birla Sun Life Capital Protection Oriented Fund - Series 20, a close ended capital protection oriented fund. The tenure of the fund is 1094 days from the date of allotment. The investment objective of the fund is to seek capital protection on maturity by investing in fixed income securities maturing on or before the tenure of the fund and seeking capital appreciation by investing in equity and equity related instruments. The fund would allocate 80% to 100% of assets in debt and money market instruments with low to medium risk profile and up to 20% in equity and equity related instruments with high risk profile. Benchmark Index for the fund is CRISIL MIP Blended Index. The fund managers will be Prasad Dhonde and Vineet Maloo.

ICICI Prudential Multiple Yield Fund – Series 6 – Plan E - Regular Plan (G)

Opens: April 21, 2014

Closes: May 5, 2014

ICICI Prudential Mutual Fund has launched a new fund named as ICICI Prudential Multiple Yield Fund - Series 6 - Plan E, a close ended income fund. The tenure of the plan is 1825 days. The primary objective of the fund is to seek to generate returns by investing in a portfolio of fixed income securities/ debt instruments. The secondary objective of the fund is to generate long term capital appreciation by investing a portion of the fund's assets in equity and equity related instruments. The fund will allocate 65% to 95% of assets in debt securities (including government securities) with low to medium risk profile. It will allocate up to 30% of assets in money market instruments, cash and cash equivalents with low to medium risk profile and it will allocate 5% to 35% of the asset in equity or equity related securities with medium to high risk profile. Of the investments in debt instruments, 72% to 77% will be invested in AA rated non convertible debentures. The benchmark index for the fund will be Crisil MIP Blended Index. Rahul Goswami and Aditya Pagaria will jointly 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 Abhishek Pathak.

LIC Nomura Capital Protection-oriented Fund – Series 3 - Regular Plan (G)

Opens: April 21, 2014

Closes: May 5, 2014

LIC Nomura Mutual Fund launched a capital protection-oriented fund - Series 3, a three-year close-ended fund. The fund seeks to achieve capital protection 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. The fund, which is designed for investors seeking capital protection, will invest 85% of the corpus in debt and the rest in equity. This will help investors earn regular income over the medium to long-term. The fund will be managed by Y. D. Prasanna and Sachin Relekar.

Sundaram World Brand Fund Series I to III, Reliance Capital Protection-oriented Fund (Plan A-Plan F), Canara Robeco Global Consumer Trends, JP Morgan India Monthly Income Fund, Axis Child Plan, DWS Arbitrage Fund, IDBI Banking and PSU Fund, Sundaram Hybrid Fund – Series (K-O), ICICI Prudential Multiple Yield Fund – Series 7, Sundaram Select Microcap Series V to VII, and DWS Midcap Fund are expected to be launched in the coming months.

GEMGAZE
April 2014

 

For the average Indian investor, international avenues are still a relatively unexplored territory. Despite the fact that the easing of overseas investment norms for mutual funds made it possible for the retail investor in India to participate in international markets and add a foreign flavour to the portfolio, the risky nature of this investment, high volatility, and tax liability have definitely applied brakes on the growth of global funds. If you are patient enough to wait and watch your investment grow and willing to take risks in order to earn higher returns then this investment is right for you. However, do watch the charges and take care to ensure you choose a fund with a good track record.

GEMGAZE enables you to do exactly this. The five sparkling GEMs among the global equity funds in India in 2013 have retained their preeminent status in 2014 also.

Principal Global Opportunities Fund Gem

Principal Global Opportunities Fund is an open-ended balanced fund of fund launched by Principal Financial Group (Mauritius) Limited. The fund is managed by Principal PNB Asset Management Company Private Limited. It invests in funds which invest in the public equity and fixed income markets across the globe. Launched in March 2004, Principal Global Opportunities Fund is the oldest global fund in India. With an AUM of Rs 25 crores, Principal Global Opportunities Fund has earned a one-year, three-year, and five-year returns of 3.48%, 4.83%, and 14.30% respectively. Being a feeder fund, the performance of the fund depends entirely on Principal Global Investors – Emerging Market Equity. 96% of the portfolio is in equity, predominantly mid and small cap stocks. The fund is benchmarked against the MSCI World Index. The expense ratio is 1.29% and the portfolio turnover ratio is 10%. The fund has been managed by Mr. Rajat Jain since inception.

 

Templeton India Equity Income Fund Gem

 

With an AUM of Rs 897 crores, the one-year return of the Templeton India Equity Income Fund is 16.73% as against the category average of 23.29%. With about 30-35% exposure to international stocks, this fund delivered 11.5% annually in the last three years, comfortably beating its benchmark BSE 200’s return of 5.1%. The fund also finds a place in the top quartile of three and five-year performance chart of diversified equity funds. The fund will hold only up to a third of its assets in international stocks. Hence, with at least 65% holding in Indian equities, it will qualify for capital gains tax benefits available to equity funds. As the fund holds a number of dividend yield stocks as part of its value approach, it also regularly distributes dividends. Since, its inception the fund has, without fail, paid out dividends once or twice a year. The fund boasts of an offbeat portfolio with stocks from semiconductor industries to transportation – sectors that do not find much place in the Indian listed universe. Semiconductor stocks such as United Microelectronics Corporation (Taiwan) as well as shipping plays such as Cosco Pacific are part of the fund’s portfolio. True to its value style, the fund has typical high dividend yield sectors such as finance, oil and chemicals. Even in the dividend yielding FMCG space, it holds less expensive stocks from countries like Taiwan and Chile. As a value fund, the fund would have to scout outside India for value. India has on most occasions traded at a premium to many Asian, emerging nations. The fund is managed by renowned fund manager Dr. J Mark Mobius and assisted by Chetan Sehgal and Vikas Chiranewal. The expense ratio of the fund is 2.45% and the portfolio turnover ratio is 10%.

 

DWS Global Thematic Offshore Fund Gem

Deutsche Mutual Fund changed the name of DWS Invest Global Thematic Offshore Fund to DWS Top Euroland Offshore Fund. The underlying fund has been changed to DWS Invest Top Euroland, a Germany-based fund. The feeder fund was earlier investing in DWS Invest Global Thematic Fund based in the US. The fund's benchmark has been changed from MSCI World Index to EURO STOXX 50. The India-based fund will allocate 95-100% of its assets to units of overseas fund. Its allocation to debt instruments in the domestic money market will stay between 0 and 5%. With an AUM of a mere Rs 59 crores, DWS Global Thematic Offshore Fund has earned a one-year, three-year, and five-year returns of 25.55%, 14.41%, and 15.67% respectively. The expense ratio of the fund is 1.85% and the portfolio turnover ratio is 37%.

 

Sundaram Global Advantage Fund Gem

Sundaram Global Advantage Fund was launched in July 2007. The fund has an AUM of Rs 40 crores. Sundaram Global Advantage Fund has earned a one-year, three-year, and five-year returns of 7.22%, 6.46%, and 15.48% respectively.  The fund has invested in 10 foreign equity mutual funds, with Fidelity South East Asia and DB Tracker Emerging Markets Asia being the top two funds. 86% of the fund’s assets are in equities with the rest in cash. The fund is benchmarked against the MSCI Emerging Markets Index. The fund managers are Mr. J. Venkatesan since January 2008 and Mr. S. Bharath since November 2009. The expense ratio of the fund is 1.4%.

 

ICICI Prudential Indo Asia Equity Fund Gem

ICICI Prudential Indo Asia Equity Fund was launched in September 2007. The fund has an AUM of Rs 126 crores. Its one-year return is 25.85% as against the category average return of 21.34%. ICICI Prudential Indo Asia Equity Fund, an open-ended diversified equity fund offers a balanced portfolio of investment opportunities in India as well as Asia ex-Japan, where the offshore allocation is aimed at improving the return and risk characteristics of the portfolio over a longer term. This fund invests 65-100% in Indian equity & 0-35% in IOF Asian Equity Fund; a diversified fund managed by Prudential Asset Management, Singapore. The Indian component is managed as a flexi-cap fund and seeks to benefit from diversification across developed and emerging economies across Asia (ex-Japan). The fund has access to global leaders not otherwise available e.g. Industrial and Commercial Bank of China (China), Samsung Electronics (Korea), Taiwan Semi-Conductor (Taiwan), and access to industries not otherwise available e.g. Taiwan's Semi-conductor industry, Hong Kong's Property sector, China's Insurance and Aerospace industries, Korea's Ship Building industry. The Fund is benchmarked against CNX Nifty (65) and MSCI AC Far East Free Ex-Japan (35). The expense ratio of the fund is 2.66% and the portfolio turnover ratio is 106%.

FUND FLAVOUR

April 2014

 

Spread your wings!!

 

Financial markets across the globe are getting increasingly interlinked and the systematic risks of the global markets have increased. On the contrary, there continues to be a stark variation in the returns posted by the different markets over the long as well as the short run. Therefore, despite the increasing financial integration, different economies continue to move through different phases of economic cycles. Going by this logic, global exposure can make your investments truly diversified. One of the simpler ways through which you can do this is through mutual fund investing across different geographies. There is a vast choice available for an investor to offset risk due to domestic markets by taking exposure to international markets through mutual funds.

 

Why Global Funds?

Global Funds provide a unique opportunity to domestic investors to participate in international markets. Because the world is a single market, a global fund allows you to benefit from major international developments. Moreover, investing in specific markets can help you leverage your inherent strengths, for example, Latin America (commodities), Asia region (services), US (has a highly diversified economy and is a key market for emerging regions), BRIC (highly promising developing economies) all have specific industries that outperform others.

·       Global Funds are considered as an excellent opportunity for diversification in the true sense because investing in global funds provides access to a wider range of markets reducing exposure to country-specific risks. Since global markets usually do not move in the same direction, spreading your investment across geographies can serve as a hedge and protect your portfolio from risks of volatility in the market. 

·       Since there is no particular market index which has managed to deliver consistently high returns over years, the idea of spreading your investments across countries definitely gets stronger and boosts your returns. 

·       In times when the domestic markets are dull and down, venturing into global markets provides a wider opportunity to investors. 

·       Investing in international funds gives you a chance to invest in areas/markets that are normally inaccessible. 

·       Although global fund opportunities are invariably evolving, there is a wide range of investment themes that these funds offer. These can be based on geography, asset-classes, commodities, and sectors to name a few. However, just like any investment option, global funds also bring certain risk factors along with them.

 

A note of caution!

 

·       Investing in international funds is not for first time investors in stock markets. It is for more seasoned investors looking to diversify away risks. It is not wise to just look at glittering returns and make an investment. Investing in international funds is tricky and you should make a cautious start by investing in a sector or theme that you understand and can track. Only then can you increase your exposure to global markets through global mutual funds. 

·       Foreign exchange risk is the main reason to be wary about when investing in global funds as it can work for an investor both ways. If the foreign currency in which your fund is invested falls in value vis-a-vis the rupee, then your investment returns will suffer despite the gains your fund may have made in the market. Thus, if at redemption, the rupee has depreciated against the dollar, you will earn more, and if the rupee has appreciated, your returns will be hit. 

·       Geopolitical risk, in the form of unfavourable conditions in the country where investment is made, such as earthquakes or riots, can influence the return on investment. Investors are advised to invest in a wider geographical scenario, so that they can freely exit affected regions without losses. 

·       Most global funds are in the form of a fund-of-fund structure where the Indian fund invests in either one feeder fund set up abroad (which invests according to its mandate) or in a basket of underlying international funds. These kinds of funds suffer from the fact that there is a limited access for the investor to gather adequate information about the underlying global fund(s) to determine its suitability. 

·       There are higher costs involved due to the fund-of-fund structure that exists in general. Global funds may have a higher expense ratio due to the dual nature of management expenses involved at the local and international levels. 

·       You should note that when investing in global funds, a large chunk of the principal is placed in foreign equities. These are treated as debt funds and taxed accordingly. Long-term investment returns are levied at 10% without indexation and 20% with indexation. Short-term gains are included to the income and taxed according to the applicable slab rates.

 

Flavour not yet savoured

 

There are not too many global funds in the nine years since the government allowed Indian mutual funds to invest abroad. No more than Rs 2,400 crore of assets is there in thirty-two such funds. For much of the period for which easy international investing through mutual funds has been possible, Indian investors have not paid much attention to it because the Indian stock markets were doing much better than others. Since investors start with a bias for the familiar, they have not paid any attention to the fact that slowly but surely a combination of equities performance and the decline of the rupee have made the logic of such diversification stronger and stronger. Through these years, while big businesses and the superrich have responded robustly to the easing of capital outflow, the opportunity has mostly been ignored by the smaller investor. Part of the blame also lies with the kind of international funds that the Indian fund industry has launched. A large proportion (22 out of 32), of the actual international funds launched are specialty funds, or gimmick funds, to give them a more appropriate name. Instead of diversified funds (whether actively managed or indexed) based on the major markets of the world, we have global real estate or agri-business or mining funds or Latin American or China funds and so on and so forth. These are just marketing gimmicks that have shifted the onus of deciding whether Latin American real estate will do better or Chinese agri-business will do better to the investor.

 

With Rs 2068 crore assets under management, international fund of funds are yet to gain wider acceptance among advisors. There are two reasons for the slow take-off of these funds. Firstly, advisors believe that Indian markets can offer much better returns compared to overseas markets. Secondly, advisors believe that it is better to invest in markets which you are familiar with and fully understand. It is advisable to invest in funds which offer broad and familiar investment themes like gold, US equities, etc., compared to those with niche themes. Another factor investors should consider when investing in such funds is the expertise of the AMC in managing the theme. Typically, foreign AMCs with their global presence and availability of a track record for the parent fund (in which the domestic feeder fund would invest in) are usually the preferred choice for investors.

 

Exemplary Performance

 

Depreciation of rupee has put international funds in the limelight with the category posting 19% absolute return in one year. With the rupee continuing fall against the dollar, investors in international funds are making a killing. The Indian rupee has depreciated 22% against the US dollar since January 2013. International fund of funds which invest in overseas funds have delivered an average of 19% absolute return in one year, according to data from Value Research. It is not just the falling rupee which has helped these funds. The US market has done well as compared to the domestic markets. The S&P 500 index is up 16% YTD while the BSE S&P Sensex is down 5% during the same period. Domestic diversified equity funds, on the other hand, are not doing well. Among sectoral funds, banking and infrastructure funds have lost the most at -13% and -17% respectively. Technology funds, which invest in IT companies which derive a major portion of revenues from overseas markets, have delivered 31% absolute return in one year.

 

Take Away!

 

Investors looking to diversify within equity can invest in international funds and mitigate the country specific risks to an extent. These funds may not suit a person who has a conservative approach to investment and is averse to investing in equity. You should carefully assess the risks before taking an exposure to international markets through mutual funds. A close watch should be kept on the currency movement. Global investments in your portfolio may act as a return enhancer and hedge as well. Primarily, foreign funds are ideal for investors who intend to diversify their equity portfolio. Investment in foreign mutual funds should be such that it holds very less or negative correlation with the domestic market. Only under such circumstances can investors reap optimal returns from investment in foreign mutual funds.