FUND FULCRUM (contd.)

September 2014

The top ten equity funds account for 34% or Rs. 80,300 crore of the total Rs. 2.35 lakh crore managed by the 300 plus equity mutual funds in India as on August 2014, according to a Motilal Oswal Securities report. HDFC Equity Fund and HDFC Top 200 are the largest funds in the industry which together manage assets of Rs. 28,800 crore. While HDFC Equity Fund (India’s largest fund in terms of size) has an AUM of Rs. 15,800 crore, HDFC Top 200 manages Rs.13,000 crore. Both these funds have significantly outperformed their benchmark during the five year period. Value Research data shows that HDFC Equity Fund and HDFC Top 200 have delivered CAGR of 17% and 15% respectively in five years against the 10% CAGR of their respective benchmarks. This was followed by Reliance Equity Opportunities Fund and ICICI Prudential Focussed Bluechip Equity Fund which manage AUMs of Rs. 8,100 crore and Rs.7,300 crore, respectively. While Reliance Equity Opportunities Fund has delivered 22% CAGR, ICICI Prudential Focussed Bluechip Equity Fund has given a CAGR of 17% in five years, according to Value Research online. Both HDFC Mutual Fund and ICICI Prudential Mutual Fund have three funds each in the list of top 10 equity funds. Other fund houses - Reliance, Birla Sun Life, IDFC, and Franklin Templeton have one fund each in the list.

Regulatory Rigmarole

Fund houses have started collecting necessary information from foreign investors about their tax residency status in order to comply with the requirement of Foreign Account Tax Compliance Act (FATCA) provision. The FATCA regulations is an anti-tax evasion law for which fund houses are required to report information on US investors to US IRS (Internal Revenue Service) through CBDT. India has agreed ‘in substance’ to FATCA by signing an Intergovernmental Agreement (IGA) with US in effect from April 11, 2014. Simply put, the legislation is meant to prevent wealthy US individuals from parking money overseas to avoid paying taxes. As a part of due diligence, the fund houses have asked foreign investors particularly from USA and the distributors who have clients from the USA to furnish documentary evidences of tax residency and other information. In July 2013, SEBI had asked fund houses to register with US by December 2013 and obtain a Global Intermediary Identification Number (GIIN). Following this, many fund houses had temporarily stopped accepting fresh investments from US residents.

In order to safeguard Indian markets from any manipulative research reports, SEBI has notified norms for 'research analysts' to remove any conflict of interest in their activities. Foreign entities acting as research analysts for Indian markets or India-listed companies would need to tie-up with a registered entity in India, while domestic players would also be subjected to strict disclosures and scrutiny. The new norms would also cover those providing advisory services similar to research analysts. These new norms would be called the Securities and Exchange Board of India (Research Analysts) Regulations, 2014. These regulations shall come into force on the 19th day from the date of their publication in the Official Gazette. According to new norms, every individual or entity desiring to function as a research analyst would need to get registered after meeting the prescribed criteria regarding qualifications and capital adequacy among others.

The Securities and Exchange Board of India wants to bring domestic and foreign portfolio investors at par on know your client norms in order to facilitate framing of rules based on investor risk profiles. In its draft circular seeking responses, the capital market regulator has proposed that the new structure will have KYC norms for domestic investors, both individual and institutional, based on their potential to bear risks — low, medium and high. The existing system of KYC norms prescribes for two categories — individual and non-individual (institutional) — in the domestic investor segment. Fulfilment of KYC norms is mandatory for investment in the capital market. The market intermediary will categorise the investors based on its risk management policy. The policy will define the norms for categorisation of the investors. Once the category is decided, minimum documents for KYC will be collected from the investors. However, the intermediary will be free to ask for additional documents from any category of investors. In the proposed structure, investors with lower risk will have to submit lesser number of documents and vice versa. But, if the investor is also trading in the derivative segment (futures and options or F&O), he will have to submit documents to ascertain his/her financial position in addition to documents required for KYC. A standard account opening form was prescribed by SEBI on December 26, 2013, for both domestic investor categories. For all individual investors, it sought permanent account number (PAN) and Aadhaar (if the applicant has one) accounts along with proofs of identity and address. For non-individual or institutional investors, the applicant is required to provide PAN and registration number such as CIN (corporate identification number), residential address and photograph of promoters/ partners/ karta/ trustees and whole-time directors. DIN (director identification number) of whole time directors and Aadhar number of promoters and partners are also required to be submitted. The draft has also prescribed additional norms for investors participating in F&O trading in the equity market. In case of individual investors, the market intermediary can ask for a three-month bank statement (against the current norm of six months), salary slip, copy of Form 16, and copy of demat account holding statements. This in the long-term, not just for asset classification but also for investors and market participants, will lead to a much better risk assessment of the capital market for the regulator.

The Securities and Exchange Board of India (SEBI) plans to make it mandatory for issuers to reserve 25% of an initial public offering (IPO) for domestic mutual funds and insurers. However, if investors do not subscribe to their portion fully, the IPO could be considered a failure. According to SEBI, a higher participation of 25% of the issue size or half of that slotted for qualified institutional bidders would enable a fairer valuation. Besides, it will benefit both issuers and investors as these local institutional investors play the conservative card when it comes to pricing, aligning more with retail investors. At present, the issuer allots 50% of the shares in an IPO to QIBs, which include overseas and domestic funds, 15% to non-institutional investors, including high net worth individuals and corporates, and 35% to retail investors.

AMFI has asked AMCs to avoid the practice of intimating distributors and investors in advance about dividend and bonus announcements. The industry body has said that AMCs should follow the rule in its true spirit. This has come in the wake of a sudden spurt in the demand of dividend and bonus option in mutual funds. Post the changes in tax structure of debt funds, arbitrage funds gained popularity because of their tax efficiency. Few fund houses like JM Financial and Religare Invesco introduced an annual bonus option in their arbitrage funds.

In a bid to prevent money laundering, fund houses are supposed to identify ultimate beneficial owners (UBO) in the case of non-individual investors (listed companies are exempted) as part of the SEBI guidelines pertaining to anti money laundering. SEBI defines UBO as the natural person or persons, who ultimately own, control or influence a client and/or persons on whose behalf a transaction is being conducted, and includes a person who exercises ultimate effective control over a legal person or arrangement. Investors such as unlisted companies, unincorporated association / body of individuals, trusts, limited liability partnerships, religious trusts, etc. are required to furnish details regarding UBO. Individuals, listed companies, foreign investors, are not required to comply with this rule. Non individual investors have to furnish PAN along with filled up UBO form. UBO forms can be downloaded from AMC websites. A KYC acknowledgement copy has to be submitted along with the UBO form. In this form, quoting the relevant UB code (10 UB codes have been prescribed by SEBI) is mandatory.

According to a circular issued by SEBI, mutual fund houses are subject to trading member level position limits on investments in Government bond futures. The capital market regulator has said that each fund scheme would have to separately comply with client level restrictions on the instrument. Trading members are allowed to have gross open positions of 10% of the total open interest of a bond future or Rs. 6 billion ($98.10 million), whichever is higher. Client level restrictions are capped at 3% of open interest or Rs. 2 billion at present, whichever is higher.

Consolidation in the mutual fund sector could see a few fund houses getting disproportionately higher assets and thereby raise the concentration risk. The sector has seen exit of three fund houses —Morgan Stanley, ING, and Pine Bridge Investments — in nine months. Daiwa and Fidelity also have exited in recent years. The tightening of regulations and lack of profitability forced several fund houses to close. The top 10 mutual fund houses managed 80% of the sector’s assets and more entities could be exiting. A large number of assets managed by a few entities would mean a fewer number of fund managers managing a larger number of investors’ money. Investors should have more of a choice. The recent increase in the net worth requirement from Rs 10 crore to Rs 50 crore has made it difficult for the smaller entities. Their promoters are uncertain about putting more money into the business at a time when business prospects are difficult. More than half the AMCs do not generate profits at present. According to smaller entities, the dominant players, with their distribution network and deep pockets, are difficult to combat. Currently, there are 45 entities in the sector, managing a corpus of a little over Rs 10 lakh crore. The top five — HDFC, ICICI Prudential, Reliance, Birla Sun Life and UTI — collectively have an asset size of Rs 5.4 lakh crore, nearly 55% of the total assets under management.

FUND FULCRUM

September 2014

The asset base of the mutual fund industry rose by more than Rs 6,300 crore to Rs 10.12 lakh crore in August 2014 boosted by inflows in equity funds. Assets Under Management of the country's 45 fund houses increased from Rs 10,06,452 crore in July 2014 to Rs 10,12,824 crore in August 2014 - up Rs 6,372 crore, according to the monthly numbers released by the Association of Mutual Funds in India. The asset base had crossed the Rs 10 lakh crore mark for the first time in May 2014, when the markets rose after Prime Minister Narendra Modi led BJP government came to power. The rise in AUM during August 2014 was primarily due to inflows in equity funds, aided by a strong stock market. The equity mutual funds witnessed an inflow of Rs 5,217 crore taking the assets base to Rs 2.35 lakh crore. In addition, balanced funds saw an inflow of Rs 448 crore to take the AUM to Rs 17,293 crore. Liquid funds' AUM grew to Rs 2.45 lakh crore in August 2014 from Rs 2.44 lakh crore in July 2014. On the other hand, income funds' asset base fell to Rs 4.61 lakh crore in August 2014 from Rs 4.71 lakh crore in July 2014, led by outflows of Rs 12,696 crore.

The latest SEBI data shows that the industry has added over 1 lakh folios across all scheme categories in August 2014. The folio count has increased to 3.92 crore in August 2014, from 3.91 crore in July 2014. The mutual fund industry has managed to grow its investor base in equity funds by adding over 1.28 lakh folios in August 2014. The total investor count in equity funds stands at 2.94 crore now. Likewise, balanced funds saw a marginal increase of 11,000 folios in August 2014. Meanwhile, the industry has lost close to 26,000 folios in debt funds due to revision in tax structure of debt mutual funds. While gilt funds have lost over 900 folios, liquid funds added 3200 folios in August 2014.

Investors pumped in over Rs 1 lakh crore in various mutual fund schemes in August 2014, making it the second consecutive monthly inflow. According to the latest data available with the Securities and Exchange Board of India, investors have put in Rs 1,00,181 crore in mutual fund schemes in August 2014 after pouring in a staggering Rs 1,13,216 crore in July 2014. Prior to that, there was an outflow of Rs 59,726 crore in June 2014. At gross level, mutual funds mobilised Rs 43.67 lakh crore in August 2014, while there were redemptions worth Rs 42.67 lakh crore as well. This resulted in a net inflow of over Rs 1 lakh crore. This significant level of funds mobilisation has also led to increase in the total assets under management of mutual funds that surged to Rs 10.12 lakh crore as on August 31, 2014 from Rs 10.06 lakh crore in July 2014. Overall, during the current financial year so far (April-August), mutual funds on a net basis have mobilised around Rs 3 lakh crore as compared to Rs 53,783 crore garnered in the entire 2013-14 fiscal.

Piquant Parade

Taking forward its deal to acquire the assets of ING Investment Management India, Birla Sun Life Mutual Fund has begun the process of merging all the schemes of the target entity with its own portfolios. Birla Sun Life Mutual Fund, part of Aditya Birla Financial Services Group, will merge all the 26 schemes offered by ING Mutual Fund with its own funds, according to a public notice. Besides, Birla Sun Life Mutual Fund has given an exit option to the unit holders of ING Mutual Fund. The option to exit is available to all unit holders except for unit holders who have pledged their units. The option to exit the schemes without any exit load can be exercised from September 8, 2014 and is valid up to October 9, 2014. The Board of ING Investment Management India, ING Trustee, Birla AMC, and Birla Trustee have approved the merger and the market regulator SEBI has also given its nod to the proposed deal.

Kotak Mahindra Asset Management Company Ltd, a wholly owned subsidiary of Kotak Mahindra Bank Ltd, announced that it has executed definitive agreement to acquire the domestic schemes of Pine Bridge Mutual Fund, subject to regulatory approvals. The assets included are equity oriented which provides a further enrichment to Kotak’s equity base. The fund houses share common investment philosophies of selecting robust companies with good management quality. This provides an optimal platform for smooth and efficient integration of the schemes. As of August 31, 2014, the Asset under Management of Kotak Mahindra Mutual Fund is approximately Rs. 37,000 crore and the AUM of Pine Bridge Mutual Fund is approximately Rs. 660 crore. US-based Prudential Financial Inc., which manages $1.3 trillion globally, will sell a 50% stake in its Indian asset-management company Pramerica Mutual Fund to Dewan Housing Finance. The move is aimed at expanding the asset management business, leveraging the mortgage lender's vast network across the country. Industry’s much-awaited order routing platform MF Utility has started onboarding advisors. The platform is currently at the testing stage and is awaiting approval from SEBI. The system is undergoing multiple levels of testing to ensure smooth functioning on launch. The platform will provide investors a Common Account Number (CAN) which can be used to invest across all AMCs. This common number will enable distributors and their clients to submit multiple requests across schemes of various fund houses using a single application. With the availability of a CAN, static details like bank mandate, nomination, email id, etc., can be maintained at one place. Thus, any change in these details can be registered at one place, i.e. with MFU and the same shall be automatically reflected in all AMCs where the CAN is registered, instead of submitting multiple requests to multiple AMCs for each such change. Chennai based software firm Polaris has developed the platform. The MF Utility will provide order routing and payment mechanisms with connectivity to RTAs, AMCs, stock exchanges, DPs, banks, and centralized KYC repository. The software is expected to have in-built features like web based front end for distributors which will give one-view of their assets across industry, their investors' investments across AMCs, submission of transactions either individually or in bulk, scanning of documents, and placing of service requests for distributors, web based front end for investors to permit one-view of investments across the industry, submission of transactions and placing of service requests, and web based front end for RTAs & AMCs for information exchange, data uploads, MIS access, data maintenance, etc. CAMS announced the launch of its ‘Anytime, Anywhere Mutual Funds’, mobility enabled technology solutions for mutual funds. The introduction of ‘Anytime, Anywhere Mutual Funds’  using  tablets, digital pens, hand held devices, and smart phones would facilitate mutual fund  relationship managers and distributors  in reaching out to investors across the country at their doorstep, accept and submit mutual fund transactions and deliver a delightful investing experience. These devices enable digitization and near real time data transfer from virtually any part of the country, assuring same day NAV to investors. The mutual fund investors would be spared from elaborate form filling, rushing to time stamp, anxiety about transaction completion, which now would be a thing of the past. CAMS has launched four solutions – CAMS slate, CAMS swift, CAMS scribe, and my CAMS. CAMS slate can be used on any tablet / smart phone and acts as an official point of transaction which is ideal for AMC market representatives, relationship managers, and distributors. This app provides CRM, image capture, KYC completion, additional purchase, redemption and switch, time stamping, etc. CAMS swift is a customizable hand held device which can be used from anywhere in India where a mobile phone works to accept and submit mutual fund transactions. It is suitable for B-15 penetration where physical official points of transactions are not available. It is a 2G / 3G enabled device which has in-built camera, USB Port, Printer, SIM and biometric app. It enables KYC and biometric authentication using Aadhar database. It also has a debit card swipe facility which will enable users to accept cash and issue receipts. The device is designed especially for new cadre of distributors who accept small ticket/micro SIPs. CAMS scribe is a digital pen which uses ICR technology which does away with the process of digitising hand written forms and instructions. It facilitates instant data and image capture and is ideal for AMC sales force and distributors. My CAMS is an app which runs on Android and iOS devices which helps in transacting and managing information in a faster, easier, and smarter way for mutual fund investors. Through this app one can submit query or register complaint to CAMS customer care centre, order encrypted statements, access account profile, see portfolio details, redeem, invest, switch and do much more.  To be continued….

NFO NEST

September 2014

NFOs to the fore again

With Indian stock indices scaling new highs, new equity launches by the country’s mutual fund industry is gaining traction. So far in 2014, fund houses have launched 33 new fund offers in the equity category, the most since 2008, when 41 new offers had been made. In the past few years, new offerings had lost flavour and the mutual fund industry faced challenges in garnering new assets amid poor market sentiment. In 2012, the industry was able to launch only eight NFOs, which cumulatively mobilised only Rs 500 crore. The tide now seems to be turning as the new offers are getting good response and money is flowing into the existing schemes as well. Out of the 33 equity NFOs that have hit the market in 2014, 21 have been close-ended products with lock-in periods between three and five years. In absolute terms, of the Rs 3,580 crore of fresh mobilisation through NFOs, Rs 2,685 crore came through close-ended equity schemes. Since a majority of these funds are close-ended in nature, with much better commissions, distributors are also pushing these products.

The euphoria surrounding close end funds does not seem to have subsided yet. Nearly two-third of the NFOs in 2014 and five out of seven NFOs in the 2014 NFONEST fall in the close-end equity fund category.

Birla Sunlife Capital Protection Fund - Series 23

Opens: September 1, 2014

Closes: September 15, 2014

Birla Sunlife Capital Protection Fund-Series 23 is a close ended fund with the objective 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 tenure of the fund is 1099 days from the date of allotment. 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. The benchmark Index for the fund is CRISIL MIP Blended Index. The fund managers will be Prasad Dhonde and Vineet Maloo.

ICICI Prudential Capital Protection Fund VI – Plan H

Opens: September 5, 2014

Closes: September 15, 2014

ICICI Prudential Capital Protection Oriented Fund VI - Plan H is a close-ended capital protection oriented fund with a tenure of 1100 days. 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 plan under the fund. The fund would allocate 75%-100% of assets in debt securities and money market instruments with low to medium risk profile and invest up to 25% of assets 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 is proposed to be listed on NSE. The fund managers are Vinay Sharma (equity portion), Aditya Pagaria and Rahul Goswami (debt portion), and Ashwin Jain (for investments in ADR / GDR and other foreign securities).

JP Morgan India Corporate Debt Opportunities Fund

Opens: September 8, 2014

Closes: September 17, 2014

JPMorgan India Corporate Debt Opportunities Fund aims to generate regular income and opportunities for capital appreciation while maintaining liquidity through active management of a diversified portfolio comprising of corporate bonds and securities across the investment grade credit rating and maturity spectrum. The fund would allocate 80%-100% of assets in corporate bonds and securities including securitized debt instruments with low to medium risk profile and invest up to 20% of assets in other debt and money market instruments with low risk profile. The benchmark Index for the fund is CRISIL Short Term Bond Fund Index. The fund managers will be Namdev Chougule and Ravi Ratanpal.

UTI Capital Protection Oriented Scheme IV – II

Opens: September 8, 2014

Closes: September 22, 2014

UTI Capital Protection Oriented Scheme -Series IV -II (1104 Days) is a close ended fund with the primary objective to endeavour to protect the capital by investing in high quality fixed income securities and the secondary objective to generate capital appreciation by investing in equity and equity related instruments. The fund shall invest 70-100% of assets in debt and money market instruments with low to medium risk profile and up to 30% in equity and equity related instruments with medium to high risk profile. The benchmark Index for the fund is CRISIL MIP Blended Index. The fund manager is Sunil Patil.

DWS Corporate Debt Opportunities Fund

Opens: September 9, 2014

Closes: September 23, 2014

DWS Corporate Debt Opportunities Fund is an open-ended debt fund that seeks to generate income and capital appreciation by investing predominantly in corporate debt. The investment objective is to generate regular income and opportunities for capital appreciation while maintaining liquidity through active management of a diversified portfolio comprising of corporate bonds and securities across the investment grade credit rating and maturity spectrum. The fund would allocate 80%-100% of assets in corporate debt securities including securitized debt instruments with low to medium risk profile and invest up to 20% of assets in CBLO, Reverse Repo, T Bills, and Money Market Instruments with low risk profile. The benchmark Index for the fund is CRISIL Short Term Bond Fund Index. The fund manager will be Nitish Gupta.

Sundaram Select Microcap – Series VI

Opens: September 10, 2014

Closes: September 24, 2014

Sundaram Select Micro Cap Series VI (42 Months) is a close-ended income fund. The investment objective of the fund is to seek 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's performance will be benchmarked against S&P BSE Small Cap Index and its fund managers are S Krishna Kumar (Equity) and Dwijendra Srivastava (Fixed-Income).

SBI Equity Opportunities Fund - Series I

Opens: September 11, 2014

Closes: September 25, 2014

SBI Equity Opportunities Fund - Series I aims to generate capital appreciation from a diversified portfolio of equity and equity related instruments. The investment objective of the fund is to generate capital appreciation from a diversified portfolio of equity and equity related instruments. The fund shall invest 65-100% in equity and equity related instruments and up to 35% in debt and money market instruments. The benchmark Index for the fund is S&P BSE 500. The fund would be listed on BSE. The fund manager will be Sohini Adnani.

Reliance Capital Builder Fund, DSP Blackrock Constant Maturity 10 year G-Sec Fund, ICICI Prudential Growth Fund – Series 3 to 8, DSP Blackrock Dual Advantage Fund – Series 29 to 33, SBI Equity Opportunities Fund – Series II and III, Kotak Banking ETF, Sundaram Top 100 Series IV & V, SBI ETF BSE 100, SBI ETF Banking, UTI Focussed Equity Fund – Series I to II, IIFL India Growth Fund, Baroda Pioneer Equity Trigger Fund Series I, DSP Blackrock 3 Years Close Ended Equity Fund, SBI Banking & Financial Services Fund, Reliance R* Shares Sensex ETF, Canara Robeco India Opportunities Fund, Canara Robeco Capital Protection Oriented Fund – Series – 3, Sundaram Value Fund Series I-III, ICICI Prudential Capital Protection Oriented Fund – Series VII, SBI-ETF Nifty Jr, Tata Twenty Fund, Sundaram Long Term Tax Advantage Fund Series I–II, Birla Sunlife Focussed Equity Fund – Series 3 to Series 5, Reliance Capital Builder Fund II, Birla Sunlife Capital Protection Oriented Fund - Series 25 to Series 28, BOI AXA Credit Spectrum Fund, Baroda Pioneer Equity Opportunities Fund, SBI Retirement Benefit Fund, Birla Sunlife Corporate Bond Fund, HDFC Capital Protection Oriented Fund – Series III, India Bulls Arbitrage Fund, JP Morgan India Economic Reforms and Infrastructure Fund, ICICI Prudential Multiple Yield Fund series 8, SBI Debt Fund Series B 1 to 15, SBI Long Term Advantage Fund - Series I & II, Motilal Oswal MOSt Shares S 100 ETF, BOI AXA Capital Protection Oriented Fund – Series 2, JP Morgan India Multi Asset Fund, ICICI Prudential Hybrid Saving Fund, and Axis Hybrid Fund Series 18-21 are expected to be launched in the coming months.

GEMGAZE

September 2014

As the equity markets are poised for new peaks in 2014, reaching the zenith of glory has been a cakewalk for the five GEMs under the diversified equity funds category, which have barely managed to walk the tight rope in 2013. No wonder, all the five GEMs of the 2013 GEMGAZE have qualified yet again for the 2014 GEMGAZE.

HDFC Equity Fund Gem

The largest fund from the HDFC stable with assets in excess of Rs 12,500 crore, the two decade old HDFC Equity tops the performance chart over one-, three- and five-year time frames. If steady income from investment is the need, HDFC Equity fits the bill. The fund has been paying dividend every year since 2002. Prashant Jain has been managing the fund since the erstwhile Zurich Mutual Fund’s equity fund was merged with HDFC in June 2003. Fund manager stability is yet another strong point for the fund. HDFC Equity has outperformed its benchmark CNX 500 index during rallies by huge margins. For instance, during the March 2009-November 2010 period, the fund’s NAV jumped about 3.5 times even as the benchmark rose 2.5 times. The one-year return of the fund is 79.14% as against the category average of 57.78%. The fund’s one-year return has been higher than the CNX 500 Index nearly 68% of the time in the last five years. The top three sectors of the fund are finance, energy, and technology. The fund held 56 stocks in its portfolio as of June 2014. The fund is adequately diversified with 31.2% of assets in the top 5 stocks. The fund’s expense ratio of 2.17% is much lower than the average of other funds in the large cap category. The portfolio turnover of this predominantly large cap fund, with 64% of the assets in large caps, is a mere 37%. HDFC Equity is one fund which not only cushions your portfolio during market falls but also generates healthy returns over the long term.

Sundaram Select Midcap Fund Gem 

In the last couple of years, the S&P BSE Mid-cap Index has witnessed quite a bit of volatility resulting in redemption pressures in Sundaram Select Midcap Fund, with its average assets under management dwindling by 22% to Rs 1,963 crore. However, the fund has outperformed its benchmark, S&P BSE Mid-Cap Index consistently. It has delivered a return of 95.08% (BSE mid-cap — 78.38%) and 24.18% (BSE mid-cap — 14.99%) over one and three years. It has gained 20.02%, compounded annually over the last five years, placing it in the top quartile of mid-cap funds. It currently has 57 stocks in the portfolio spread across 23 sectors. Currently, the fund’s top three sector holdings are financial services, engineering, and automobile. These three sectors constitute 46% of the portfolio. The top five stocks constitute 24.86% of the portfolio. The expense ratio of the fund is on the higher side at 2.29% while the portfolio turnover is a measly 11%. Krishna Kumar took over the reins of this fund after former fund manager Satish Ramnathan’s exit in December 2012. His investment style entails investing in fundamentally sound stocks with good growth prospects, good pricing power, and stable cash flow. Krishna Kumar is valuation conscious while investing in stocks but is willing to stay invested in companies with higher valuations in which the longer-term growth prospects appear favourable. For risk-tolerant investors who can ride out short-term volatility, the investment process can deliver pleasing results.

ICICI Prudential Dynamic Fund Gem

The Rs 4254 crore ICICI Prudential Dynamic Fund shuffles its equity, debt, and cash allocations with panache, making it a safe bet in any market situation. It also has a proven track record of delivering steady returns. ICICI Prudential Dynamic has convincingly outpaced its benchmark, the Nifty, over one-, three- and five-year timeframes. The fund’s mandate allows it to straddle large-, mid- and small-cap stocks. But Prudential Dynamic plays it safe, having a large-cap tilt to its portfolio across market cycles with 75% of the assets in large cap stocks currently. The fund betters the benchmark by a good margin during rallies. It adopts a rather defensive approach during times of volatility, holding cash off and on, or choosing to invest in debt instruments. This approach also helps the fund to minimise losses extremely well during market dips. Redeployment of cash during rallies has also been fairly swift. Although its approach is defensive, over the long term, it has been a top-notch performer deftly deploying idle cash, capitalising on attractive debt instruments and entering or booking profits in stocks at the right time. The fund’s strategy has worked well over the long term. The fund managed a good 27% annual return since its launch in October 2002, way ahead of the 14.4% return of its benchmark S&P Nifty. In the last five years, when the markets witnessed quite a bit of volatility, the fund has managed to beat its benchmark 87% of the time. Its top bets have been on proven large-cap names, which lend it a fair degree of stability. Despite going heavy on debt or cash to the tune of 15-18% of its portfolio, the fund has rarely lost out on any prolonged rallies. The fund has outperformed both the benchmark and the category (represented by CRISIL-AMFI Diversified Equity Fund Index) across multiple timeframes — one, three, five, seven, and 10 years. Over the longer time frame of 10 years, the fund gave an annualised return of 24.99% vis-à-vis 17.32% and 20.09% by the benchmark and category, respectively. The one year return of the fund is 55.17% as against the category average of 57.78%. The fund has maintained an average 85% exposure to equity over the past three years, with an average equity derivative exposure of five per cent. At the sectoral level, overweight exposure to software and pharmaceuticals compared with the benchmark has helped the fund. The top three sectors are finance, energy, and technology. There are 48 stocks in the portfolio with 34.9% of the assets in the top five stocks. While the expense ratio of the fund is 2.23%, the portfolio turnover ratio is 105%.

DSP Blackrock Equity Fund Gem

The Rs 2004 crore DSPBR Equity Fund, which has been in existence for more than 17 years, has outperformed its benchmark, the CNX 500, over one-, three- and five-year timeframes. Over the last five years, it has delivered compounded annual returns of 15.2%, which is better than several peers in the category. The fund has given good returns in market rallies and also limited the downsides during market declines. Over long periods, the blend of large- and mid-caps tends to deliver category-beating returns. It has delivered compounded annual returns of nearly 25% over the past 10 years, which is among the best in its category. DSPBR Equity invests predominantly in large-cap stocks while mid-cap exposure is to the tune of nearly 50% of its portfolio. It seeks to reduce the risk profile significantly by taking low exposure to individual stocks, to the tune of only around 3.5% of its portfolio. While the focus on large-cap stocks protects the fund in volatile markets, the mid-cap portion ensures a fair degree of outperformance for it. The fund’s key exposures have been to the banking, software, and energy sectors across timelines. While the expense ratio of the fund is 2.34%, the portfolio turnover ratio is 83%. Few managers are adept at investing in stocks across market segments but Apoorva Shah easily makes the cut. He uses his skills to good effect by running a multi-cap strategy that works across market cycles and over the long haul. The fund ranks among the best in its peer group and it can hold long-term investors in good stead.

Birla Sunlife Frontline Equity Fund Gem

The Rs 5039 crore Birla Sun Life Frontline Equity Fund is one fund which will not only cushion your portfolio during turbulent times but also deliver healthy returns over a three- to five-year timeframe. The fund has managed to sustain healthy top-quartile returns over three-, and five-year timeframes. It has bettered its benchmark, the BSE 200 Index, and its category average across one-, three- and five-year time periods. The fund also scores high on consistency. In the last five years, the fund’s one-year returns have been higher than the benchmark almost 96% of the time. The one, three, and five-year returns of the fund are 56.28%, 22.44%, and 16.25% as against the category average of 57.84%, 19.49%, and 14.02% respectively. It has not only outperformed the BSE 200 Index during bull phases but has also been successful in containing downsides during corrective phases. 82% of the assets are invested in large cap stocks. Finance, technology, and automobile constitute the top three sectors. The fund currently holds 70 stocks in its portfolio; this reduces concentration risk. The top five stocks constitute 20.46% of the portfolio. The fund’s expense ratio of 2.17% is much lower than that of its peer funds. The portfolio turnover of 45% can be justified since swift sector moves during volatile times helped the fund stay ahead of competition.

FUND FLAVOUR

September 2014

What is in a name?

Diversified funds are those equity funds which have a diversified portfolio with at least 75% investment in equity. Being a diversified fund it cannot have more than 5% of the investment in one security and not more than 10% of the outstanding share in one security. Equity is their second name and that is where the bulk of their money goes. But, they also have the mandate to invest in debt and cash (including money market instruments).Within the equity asset class, there are a lot of differentiating factors too. Since diversified is their first name, that is what you can expect from such funds. The fund manager enjoys the flexibility to research the market and based on the research which takes into account market inputs, economic conditions, and political environment, he can modify his portfolio and vary the proportion. What you need to see is how diversified they are and whether or not they cater to your investment taste. Has your fund manager invested in too few stocks? Or is he very heavy on one market cap? Besides market cap and cash allocation, the funds will also differ on the number of stocks that each fund manager decides to invest in.

The varied assortment

 

While we talk about diversified equity funds as a category, it will be inaccurate to assume that they all have the same focus. In fact, nothing could be further from the truth. Take a sample of what is on offer. Some funds like Magnum Midcap, Franklin India Prima, Sundaram BNP Paribas Select Midcap, and Birla Mid Cap are focused on mid-caps. DSP Top 100 Equity invests in the 100 largest corporates. Funds like DBS Chola Contra, Kotak Contra, Magnum Contra, Tata Contra, and UTI Contra employ contrarian investing. They buy into fundamentally sound scrips, which have underperformed in the recent past or have not been discovered. Birla Sun Life Frontline Equity targets the same sectoral weights as the BSE 200 but retains the flexibility of selecting stocks within those sectors. Templeton India Equity Fund invests in stocks (India and overseas) that have an attractive (current or potential) dividend yield. A look at their portfolios reveals that they differ in their asset allocation, sectoral weightages, market cap allocation, and number of stocks that they invest in.

Why invest in Diversified Mutual Funds?

Diversified mutual funds do not keep all the eggs in one basket. There are multiple sectors where your money is invested so your exposure is limited and the fund manager has the flexibility to switch to another sector in case he gets inputs about a sector not doing well.

Diversified funds are known to outperform other equity funds in the long term (period more than 5 years). Thus it makes sense to align investments in the diversified funds with your long term goals like retirement, child’s education etc. Investing in diversified mutual funds ensure that you do not have to monitor them very closely.

Portfolio construction of a diversified fund depends on the fund manager and his research team. An in depth research goes into creating a portfolio of a diversified fund where the fund manager takes an investment call after considering multiple factors. The fund manager either adopts bottom up or top down investment approach in stock selection. In the bottom up approach, he first tries to analyze company fundamentals, interacts with the management, studies the sector outlook and then does macro analysis at economy level. Top down approach is exactly reverse of this, as first the macro economic factors are studied then sectors get shortlisted and then the stocks get selected for investment. In a nutshell, the fund manager plays a very active role in stock/sector selection and paves way for superior stock selection and professional fund management.

As the fund manager plays a very active role in diversified funds, the possibility of earning market beating returns are high and risk reward ratio tends to be high. But dependence on the skills of the fund manager increases as far as the performance of diversified equity fund is concerned. So, to track the past performance of the fund manager, consistency with which the fund manager has generated returns in the past and cost in terms of fund management are few of the important factors to consider while selecting diversified fund.

A good long term bet

India’s diversified equity mutual funds rose in 2013 but underperformed the broader markets for the first time in five years, as returns were dampened by the losses in the mid- and small-cap shares as well as financial companies. These funds gained 4.8% on an average in 2013, according to data from fund tracker Lipper, delivering lesser annual returns than the benchmark BSE Sensex.  Funds were hurt because of the significant exposure to smaller shares — data from Morningstar India showed that 35.54% of equity funds’ assets on average were allocated to such stocks. Allocation to certain sectors also weighed on the performance of equity diversified funds in 2013.

Over the last 10 years, diversified equity funds have returned 22.29% on an average, much more than any fixed-income instruments could have offered. Even if one chose to invest in passively managed Index Funds, the return stood at 18.14% over the same period. However, the one-year, three-year and five-year returns of average diversified equity funds stood at 4.49%, 5.73%, and 4.23%, respectively, much lower than interest rates offered by banks or post offices.

Pearls of wisdom

It is plain wisdom that to invest in a diversified equity fund, you need to pick the right one that suits your requirement the best. It is of utmost importance that your investment objective is in tune with the diversified equity fund’s investment objective. When evaluating a large cap diversified equity fund for investment, you must compare its yield with other matching large cap diversified equity funds. Diversified equity funds are designed to deliver returns over long period of years; you should invest in diversified equity funds with a foresight. You can observe the consistency of the returns of a diversified equity fund by its performance during different market phases combined with the category average. It is mandatory for every diversified equity fund to mention a benchmark index in its offer document. This benchmark index is the signpost to judge if the diversified equity fund has fared well. Apart from peers and benchmark index evaluation, a diversified equity fund must be judged by its historical performance. Those warriors who brave rough times and display stability are the ones to add to your portfolio. Besides performance analysis, you must consider the costs involved with making investment in that particular diversified equity fund scheme as this affects your net returns from that scheme. If you overlook the risk factor, you might lose your hard-earned money. So you must do risk-return analysis of a diversified equity fund before you invest in it.

To sum it up, a diversified equity fund with a proven track record of at least three years (five years is better) and from a fund house having prudent investment systems and processes in place is able to broadly outperform other equity funds. It has lower or similar volatility but better risk adjusted returns. However, before taking any investment decision, you as an investor need to evaluate your risk appetite, investment goals, etc. Though an equity diversified fund is bound to outperform other equity funds due to its diversification across different sectors and market capitalisation and the fund manager’s liberty to change his strategy based on his view on the market, you should adopt a prudent and systematic approach towards selecting and investing in the right diversified equity mutual funds (as not all diversified equity funds are well managed and able to provide superior returns).