FUND FULCRUM

October 2014

The mutual fund industry's total assets under management rose 7.24% to a new record high of Rs 10.59 lakh crores in the September 2014 quarter, boosted by a surge in equity plans and gains in short-term debt schemes. This was revealed in the data released by CRISIL quoting Association of Mutual Funds in India (AMFI) numbers. Industry assets were primarily boosted by a sharp rise in equity AUM besides being supported by gains in short duration debt funds. Equity funds boosted industry assets in the latest quarter, with the category average AUM up 23.49% (highest rise since September 2010 when AMFI started declaring quarterly average AUM) to its fresh record high of Rs 2.91 lakh crores. Shorter duration debt funds, which include money market funds, ultra-short term and short-term debt schemes, reported a rise in assets (consolidated) for a fourth consecutive quarter as investors continued to prefer these categories since they are less sensitive to interest rate uncertainty vis-à-vis longer duration plans. Consolidated assets of the short-term debt category rose 8.34% to Rs 4.79 lakh crore. Assets of fixed maturity plans (FMPs) slipped 4.85% to Rs 1.65 lakh crore from a record high of Rs 1.74 lakh crore. The fall is an outcome of the change in taxation announced in the July 2014 Budget. Gold ETFs marked their fourth consecutive quarterly fall, slipping 6.65%, to Rs 7,698 crore in the July-September 2014 period. The average AUM of direct plans rose 3.85% to Rs 3.53 lakh crore in the same period. Mutual funds managing the lion’s share of the industry - HDFC Mutual Fund, ICICI Prudential Mutual Fund, and Reliance Mutual Fund - logged highest absolute gains in the September 2014 quarter. HDFC Mutual Fund maintained its premier position both in terms of AUM and gain in assets, followed by ICICI Prudential Mutual Fund, and Reliance Mutual Fund.

According to the Securities and Exchange Board of India data on investor accounts with 45 fund houses, the number of equity folios rose to 2,96,85,807 at the end of September 2014 from 2,91,80,922 at the end of the last fiscal (March 31, 2014), registering a gain of 5,04,885 during the April- September 2014 period. The additions came at a time when the market was scaling new highs. April 2014 saw the first rise in more than four years. Prior to that, the equity mutual fund sector had seen a continuous closure of folios since March 2009 after the market crashed due to the global financial crisis in late 2008. Since March 2009, it has seen a closure of 1.5 crore folios.

Investors pumped around Rs 30,500 crore into various mutual fund schemes in September 2014, making it the third consecutive month of inflows. As per the latest data available with the Securities and Exchange Board of India, investors put Rs 30,517 crore in mutual fund schemes in September 2014 after pouring in, a staggering Rs 1,00,181 crore in August 2014. Investors had poured in Rs 1,13,216 crore in mutual fund schemes 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 54.1 lakh crore in September 2014, while there were redemptions worth Rs 53.8 lakh crore as well. This resulted in a net inflow of Rs 30,517 crore. Overall, during the current financial year so far (April-September), mutual funds on a net basis have mobilised over Rs 3 lakh crore as compared to Rs 53,783 crore garnered in the entire 2013-14 fiscal.

Fund managers showed strong preference for equity schemes over debt as the money market category saw a massive outflow of over Rs 67,000 crore in September 2014. In comparison, equity mutual fund schemes attracted a net amount of Rs 7,789 crore during the month. As per the latest data available with the Association of Mutual Funds in India (AMFI), debt-oriented mutual fund schemes (liquid or money market category) saw an outflow of Rs 67,318 crore last month. There was withdrawal of Rs 5,800 crore from the liquid or money market segment in August 2014. The outflow can be attributed to diversion of funds from debt to equity schemes as well as to increase in long-term capital gains tax on debt-oriented mutual funds. The government increased the long-term capital gains tax on debt-oriented mutual funds from 10% to 20% and changed the definition of 'long term' for debt mutual funds to 36 months from 12 months.

Piquant Parade

Birla Sun Life Asset Management Company Ltd. has completed acquisition of all mutual fund schemes and portfolio management accounts of ING Investment Management India. Following the acquisition, six equity and six debt schemes acquired from ING Investment Management India have been merged with existing schemes at Birla Sunlife AMC as per the no-objection received from SEBI. A few schemes, including multi-manager funds, have however been retained in line with Birla Sunlife AMC's strategy to grow and serve even more investors. The current acquisition is the third by Birla Sunlife AMC as it has already acquired schemes of Alliance Mutual Fund in 2004 and Apple Mutual Fund in 1999.

The government plans to monetise it’s holding in Specified Undertaking of UTI, or Suuti, through an ETF. Top fund houses including Reliance Mutual Fund, SBI Mutual Fund, Birla Sunlife Mutual Fund, and Goldman Sachs are expected to submit bids. This will be the second time the government will use the ETF route to meet its disinvestment target. Last year, the government had mopped up Rs 3,000 crore through central public sector enterprise (CPSE) ETF by selling small quantity of its holdings in ten companies. Goldman Sachs and ICICI Securities were appointed as the manager and advisor respectively for the CPSE ETF, which was launched in March 2014. ICICI Securities has once again been appointed as the advisor for Suuti ETF. As a result, sister firm ICICI Prudential AMC will not be able to apply for being the manager for the ETF. The request for proposal (RFP) floated by the government states that the Suuti ETF will have seven underlying PSU stocks, besides Axis Bank, IT, and Larsen & Toubro - the three companies in which Suuti holds sizeable stake. The government-owned Suuti owns 11.27% stake in ITC, 8.18% L&T, and 11.66% Axis Bank. The stake at current market price is valued at more than Rs 55,000 crore. The exact shareholding that the government will divest in each of the companies has not yet been ascertained. The proposed ETF will serve as an additional mechanism for the government to monetise its shareholdings in Suuti and other selected CPSEs that eventually form part of the ETF basket. The NFO for the Suuti ETF is expected to hit the market in March 2015. Just like the CPSE ETF, the new ETF too will be a close-ended scheme and will have a tap structure.

Regulatory Rigmarole

Investors redeeming mutual fund units might end up paying higher fees, as most fund houses have revised the exit load structure by increasing the limit of the investment tenure. The changes are across fund categories, including the debt segment. Now, an investor will have to pay three per cent as exit load on redemption of units in less than a year, against only one per cent earlier. To pay one per cent exit load, one will have to remain invested for three years. The move follows tax changes to debt mutual fund schemes. In the 2014-15 Budget, the government had introduced a flat 20% tax on debt funds. It had also extended the period of investment from 12 months to 36 months.

SEBI may add two more colours to the existing list of three colours used to denote product suitability for investors. AMFI is said to have communicated that SEBI is working on streamlining product-labelling guidelines. Currently fund houses assign brown, yellow, and blue to indicate the degree of risk in a scheme. According to SEBI guidelines, schemes with low risk are denoted with blue colour, those with medium risk are assigned yellow, and schemes with high risk brown colour mark.

The revision in computation of dividend distribution tax (DDT) for debt funds proposed in the Union Budget FY2014-15 becomes effective from October 1, 2014. Fund houses pay DDT for dividend income distributed by debt funds, which is tax free in the hands of investors. Debt funds currently pay DDT of 25%+ 10% surcharge + 3% cess on net basis when they distribute income to resident individuals. Calculation on net basis reduces the actual pay out to 22%. Now, fund houses are required to pay DDT on gross basis, which will hike the actual DDT payout to 28.32% for retail investors. For corporates, the DDT will be 33.99% in liquid and debt funds. Since the DDT is 28.325% now, the post-tax return will be less. Fund houses and distributors are likely to promote growth plans of debt funds from now on. There is no point opting for dividend payout option for an individual falling under 10% and 20% tax bracket if investment horizon is less than three years. However, investors who fall in the highest tax slab of 30% can still opt for dividend option since they have to pay 28.32% in debt funds compared to 30.90% in bank fixed deposit. Short-term capital gains are taxed as per the investor’s tax slab. If your time horizon is more than three years, you can invest in growth options of debt funds as you can benefit by paying a less tax of 20% with indexation. An alternative is to opt for systematic withdrawal plan (SWP) if you need a regular income. SWPs are more tax efficient. Investors belonging to the highest tax slab will have to pay 10.3% on the SWP income compared to 30.9% for withdrawing from bank fixed deposits.

AMFI has modified the format of self-certification form of distributors, which would be applicable for FY15-16. Distributors are required to send this self-certification annually to AMFI, vouching that they adhered to AMFI code of ethics and SEBI guidelines. This is a mandatory compliance requirement for all distributors. As a part of this compliance, distributors are supposed to disclose the percentage of commission offered by AMCs for different scheme categories to their clients. The form has undergone a change in keeping with the new Investment Advisor Regulation, which came into effect in 2013. Earlier distributors were supposed to send this form to each R&T. AMFI has eased this process. Distributors now have to send this form only to the AMFI unit of CAMS, which then circulates the data to all AMCs.

AMFI has put forward a proposal to AMCs to do away with upfront commissions. The idea of moving to an all trail model is not new. This issue has been debated for a long time in the industry to control the menace of churning. During the entry load era, upfront commission was considered as the main incentive behind churning. The introduction of claw back rule in 2013 has been able to control this unhealthy practice to some extent. Currently, AMCs pay upfront commissions from their own pockets. Smaller AMCs grudge that the big guys have deeper pockets to pay upfront commissions, which creates an unfair advantage in mobilizing assets in NFOs. To keep up with the competition, even medium sized players have to hike commissions to remain competitive.

A major part of the financial year 2013-14 was bad for the Indian mutual fund industry, but that did not stop the top seven asset managers from registering healthy profits. Stringent cost control measures in the wake of redemptions from equity schemes helped these mutual funds to stay profitable during the year. The profits of these seven fund houses contributed 66% to the industry’s total assets under management of Rs 9.05 lakh crore as on March 31, 2014. HDFC Mutual, the country's largest asset management company in AUM, reported a net profit of Rs 358 crore for the year ending March 31, 2014, up 12% from the previous year. ICICI Prudential, the second largest, posted a net profit of Rs 183 crore during the year, up 66% from the previous year. SBI Mutual Fund's net profit grew 82% to Rs 156 crore during the year. The numbers are healthy given the fact that there were redemptions from equity schemes to the tune of about Rs 7,600 crore during the year.

NFO NEST

October 2014

Equity funds engulf the NFO market

It is raining equity NFOs. So far in 2014, the Rs 10 lakh crore Indian mutual fund sector has launched 45 new equity offers, the highest since 2007, when 48 NFOs (the highest so far) had hit the market. In terms of asset mobilisation, however, fund houses have managed to raise only Rs 6,426 crore, about a fifth of Rs 29,284 crore raised during the peak of the bull market in 2007. Nevertheless, the amount garnered in 2014 is the highest since 2008. Most of the NFOs launched in 2014 are close-ended schemes, with a lock-in of three to five years. Of the Rs 6,426 crore raised in 2014, 80%, or Rs 5,000 crore, has been mobilised through the close-ended route. In a way, it marks a reversal of fortune for new mutual fund products, which had lost favour among investors in recent years. A sharp increase in stock prices through the past year, as well as good returns generated by existing mutual fund schemes, has helped regain investor interest.

HDFC Capital Protection Oriented Fund – Series III

Opens: October 7, 2014

Closes: October 20, 2014

HDFC Capital Protection Oriented Fund - Series III is a close-ended capital protection oriented fund with the duration of 1100 days from the date of allotment. The investment objective of the fund is to generate returns by investing in a portfolio of debt and money market securities, which mature on or before the date of maturity of the fund. The fund also seeks to invest a portion of the portfolio in equity and equity related securities to achieve capital appreciation. The fund would invest 75% to 100% of assets in debt and money market instruments with low to medium risk profile and invest up to 25% in equity and equity related instruments (including equity derivatives) with high risk profile. The benchmark index for the fund is CRISIL MIP Blended Index. The fund will be managed by Anil Bamboli (Debt Portfolio), Vinay R Kulkarni (Equity Portfolio), and Rakesh Vyas (Overseas Investments).

ICICI Prudential Capital Protection Oriented Fund VII – Plan A

Opens: October 7, 2014

Closes: October 20, 2014

ICICI Prudential Capital Protection Oriented Fund VII - Plan A is a close-ended capital protection oriented fund. The tenure of the fund is 1285 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 fund would allocate 70%-100% of assets in debt securities & money market instruments with low to medium risk profile and invest up to 30% 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 & Rahul Goswami (debt portion), and Ashwin Jain (For investments in ADR / GDR and other foreign securities).

Birla Sunlife Focused Equity Fund – Series 3

Opens: October 7, 2014

Closes: October 21, 2014

Birla Sun Life Focused Equity Fund - Series 3 is a close ended equity fund investing in eligible securities under Rajiv Gandhi Equity Savings Schemes, 2013. The tenure of the fund is three years from the date of allotment. The investment objective of the fund is to generate capital appreciation, from a portfolio of equity securities specified as eligible securities for Rajiv Gandhi Equity Savings Scheme, 2013 (RGESS). The fund does not guarantee/indicate any returns. The fund would allocate 95% to 100% of assets in equity securities specified as eligible securities for RGESS with medium to high-risk profile and up to 5% in cash & cash equivalents and money market instruments with low risk profile. The benchmark index for the fund is CNX 100. The fund manager will be Mahesh Patil.

 

IIFL India Growth Fund

Opens: October 8, 2014

Closes: October 21, 2014

IIFL India Growth Fund is an open-ended equity fund whose investment objective is to generate long term capital appreciation for investors from a portfolio of equity and equity related securities. The fund shall invest 75-100% in equity or equity related instruments with high-risk profile and up to 25% in debt and money market instruments with low to medium risk profile. The benchmark index for the fund is CNX Nifty Index. The fund manager will be Manish Bandi.

Sundaram Select Microcap - Series VII

Opens: October 8, 2014

Closes: October 22, 2014

Sundaram Select Micro Cap - Series VII, a closed-end equity fund, has a tenure of 1400 days from the date of allotment of units. The objective of the fund would be to generate capital appreciation by investing predominantly in equity/ equity-related instruments of companies that can be termed as micro-caps. The fund will invest up to 65%-100% in equity & equity related securities of companies of micro-caps with high-risk profile. On the other hand, it would 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’s performance will be benchmarked against S&P BSE Small Cap Index. The fund managers are S Krishnakumar (Equity Portion) and Dwijendra Srivastava (Fixed - Income).

ICICI Prudential Growth Fund – Series 4

Opens: October 13, 2014

Closes: October 27, 2014

ICICI Prudential Growth Fund - Series 4 is a close-ended equity fund, whose tenure is 1279 days from the date of allotment. The investment objective of the fund is to provide capital appreciation by investing in a well-diversified portfolio of equity and equity related securities. The fund will invest 80% - 100% of its assets in equity & equity related instruments with medium to high risk profile and invest up to 20% of assets in debt, money market instruments and cash with low to medium risk profile. Investment in securitized debt can be up to 50% of debt allocation of the fund. The benchmark index for the fund will be CNX Nifty Index. The fund is proposed to be listed on BSE. The fund managers are Manish Gunwani and Ashwin Jain (for investments in ADR / GDR and other foreign securities).

ICICI Prudential Multiple Yield Fund - Series 8 – Plan B

Opens: October 15, 2014

Closes: October 29, 2014

ICICI Prudential Multiple Yield Fund - Series 8 - Plan B is a close-ended income fund. 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 would allocate up to 20% of assets in money market instruments, cash and cash equivalents with low to medium risk profile and it would 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, 90%-95% would be invested in AA rated non-convertible debentures. The benchmark index for the fund will be CRISIL MIP Blended Index. The fund is proposed to be listed on NSE. The fund will be managed by Vinay Sharma (equity portion), Rahul Goswami and Aditya Pagaria will jointly manage the debt portion, and Ashwin Jain will manage all investment under ADRs/GDRs and other foreign securities.

SBI Inflation Indexed Bond Fund

Opens: October 17, 2014

Closes: October 31, 2014

SBI Inflation Indexed Bond Fund is an open-ended debt fund. The investment objective of the fund is to generate capital appreciation and income through investment in inflation indexed securities. The fund shall invest 70%-100% in inflation indexed securities and invest up to 30% in debt & money market instrument / units of debt & liquid mutual funds with low to medium risk profile. The benchmark index for the fund is I-Sec Composite Index. The fund manager will be Dinesh Ahuja.

Birla Sunlife Equity Savings Fund, Birla Sunlife Manufacturing Equity Fund, Birla Sunlife Emerging Leaders Fund – Series 5 & 6, DSP Blackrock Arbitrage Advantage Fund, Axis Equity Opportunities Fund, Sundaram Banking and PSU Debt Fund, LIC Nomura Mutual Fund Banking & Financial Services Fund, UTI Short Term Opportunities Fund, Mirae Asset Balanced Fund, ICICI Prudential Equity Advantage Fund – Series 1 to 8, Reliance Equity Saving Fund, L & T Resurgent India Corporate Bond Fund, IIFL Balanced Fund, SBI Equity MIP Fund, and LIC Nomura Mutual Fund Rajiv Gandhi Equity Saving Scheme Fund Series – 3 are expected to be launched in the coming months.

GEMGAZE

October 2014

The exuberance in the Indian stock market has lent colour and vitality to mutual fund performance, with sector mutual funds in crowning glory. This dazzling performance is reflected in all five funds in the October 2013 GEMGAZE holding on to their esteemed position of GEM in the October 2014 GEMGAZE.

Canara Robeco Infrastructure Fund Gem

Praiseworthy performer

Canara Robeco Infrastructure is an open ended equity mutual fund co-launched by Canara Bank and Robeco Groep N.V. Canara Robeco Infrastructure is a thematic fund focused on identifying growth-oriented companies within the infrastructure space. The fund, with an AUM of Rs 97 crore, aims at having concentrated holdings with a bias towards large market capitalization stocks at 57%. With a well-diversified portfolio of stocks in the energy, engineering, and construction space, it employs fundamental analysis with a focus on factors such as the industry structure, the quality of management, sensitivity to economic factors, the financial strength of the company, and the key earnings drivers. The fund benchmarks the performance of its portfolio against the BSE 100 Index. Canara Robeco Infrastructure has been among the better performers in its category. The fund’s one-year return is 64.02% as against the category average return of 59.28%. The expense ratio of the fund is high at 2.96% while the portfolio turnover ratio is as low as 7%.

SBI Magnum FMCG Fund Gem

Green shoots amidst the challenge

In the past one year, the Rs 210 crore Magnum FMCG Fund, is perched at the top with 64% of the assets in large caps. Owing to its small size, the fund could stay with a compact portfolio, an advantage given the limited universe of FMCG stocks. Volumes of the FMCG companies took a blow as high living costs blighted consumer sentiment. Meanwhile, the future brightened for the beleaguered infrastructure, manufacturing and banking sectors, taking the shine off the traditional ‘defensive’ FMCG sector making it lose its status as the apple of the market’s eye. Braving all odds, the one-year return of the fund is 20.11% as against the category average of 18.57%. Over the three and five year periods, the fund posted 27.39% and 28.33% of CAGR, respectively. The expense ratio is 2.68% and the portfolio turnover ratio is 16%.

ICICI Prudential Banking & Financial Services Fund Gem

Consistency counts

ICICI Prudential Banking & Financial Services Fund invests predominantly in large and midcap financial companies. 50% of the portfolio consists of large caps. The Fund has not only outperformed its benchmark, the S&P BSE Bankex but has also outperformed other banking sector funds. The current AUM of the fund is Rs 448 crores and the one-year return is 60.01% as against the category average return of 51.26%. The expense ratio is 2.76 % while the portfolio turnover ratio is 37%.

SBI Pharma Fund Gem

In the pink of health

SBI Pharma Fund sports an AUM of Rs. 262 crores. The number of stocks held by the fund in the last few months has hovered around 15. The concentration analysis reveals that the fund has around 61.91% assets allocated towards the top 5 stocks while the top 10 stocks make up around 84.84%. The one-year return of the fund is 47.01% as against the category average of 48.77%. Given the defensive nature of pharma stocks, you can consider some investment in a good pharma fund with a consistent track record. SBI Pharma Fund scores on this count. The fund has bettered its benchmark, the BSE Healthcare index, across all time frames. The fund also raced ahead of peers Reliance Pharma Fund and UTI Pharma and Healthcare Fund over one- and three-year time periods. The expense ratio of the fund is 2.61% while the portfolio turnover ratio is 29%. A higher large-cap slant (over 75%) and lower exposure to MNC stocks should hold the fund in good stead even during volatile times.

ICICI Prudential Technology Fund Gem

Riding the boom

ICICI Prudential Technology Fund is a Rs 256 crore technology fund, which invests in large technology oriented companies. It invests in companies listed in the BSE Teck. Its portfolio has 58% exposure to large cap companies. The fund seeks to invest in knowledge sectors like IT and IT Enabled Services, Media, Telecommunications and others. The one-year return of the fund is 44.24% as against the category average of 35.55%. Over one-, three- and five-year timeframes, the fund has outperformed its benchmark (BSE IT) convincingly — to the tune of 4-9 percentage points over the long term. In the last five years the fund has managed to deliver over 25% annually, while over a 10-year period it is 21%, which compares favourably with even the best of funds from the diversified category. It has bettered peer funds such as Franklin Infotech and SBI IT. The expense ratio is 2.88% while the portfolio turnover ratio is 14%.

FUND FLAVOUR

October 2014

The investors’ fancy with sector funds continues unabated. Despite the higher risk associated with sector funds (compared to diversified equity funds) investors choose to focus on the higher returns that sector funds have registered over the last couple of years. Sector mutual funds are those mutual funds that restrict their investments to a particular segment or sector of the economy. These funds concentrate on one industry such as infrastructure, banking, technology, automobile, heath care and pharmaceuticals, FMCG, PSU, etc. The idea is to allow investors to place bets on specific industries or sectors, which have strong growth potential. These funds tend to be more volatile than funds holding a diversified portfolio of securities in many industries. Such concentrated portfolios can produce tremendous gains or losses, depending on whether the chosen sector is in or out of favour. Sector mutual funds come in the high risk high reward category and are not suitable for investors having low risk appetite. Some investors choose sector funds when they believe that a specific sector will outperform the overall market, while others choose sector funds to hedge against other holdings in a portfolio. So, one should select sector mutual funds only when there is a positive road map to a sector.

Infrastructure Funds – back with a bang

The top performers in this category have given over 70% returns in the last one year. In the last six months, top funds in this category have given over 55% returns. The top performing infrastructure sector fund, in terms of last one year returns, Escorts Power and Energy (Growth Option), has given trailing return of nearly 85% in the last one year. While infrastructure sector funds, as a category, have outperformed diversified equity funds, it is important to note that, from a risk perspective, diversified equity funds offer more risk diversification compared to sector funds. Unlike diversified equity funds which aim to diversify unsystematic risks (i.e. stock specific and sector specific risks), infrastructure sector funds are exposed to sector specific risks. Infrastructure funds are affected by central government policies, either in a positive or in a negative way. These funds are also impacted in the short term by the monetary policy of the Reserve Bank of India. As such, investors with a short time horizon should stay away from infrastructure sector funds. However, for well-informed active investors, infrastructure sector funds can be good investment opportunities in the medium term.

Banking Funds – good long term prospects

Banking and Financial Services Sector has the highest weightage in both Sensex and Nifty. The performance of this sector is closely correlated with the overall economic growth in the country. Banking as a sector has underperformed with respect to the broader market over the last one year period. The returns, in fact, have been negative at -14.8% while the Sensex has delivered about 5.5%. Similarly the Bank Nifty, which is the NSE counterpart of the Bankex, has delivered -14.4%. The reason for the weak performance of this sector is well known. With economic slowdown the demand for credit has remained subdued. High inflation and interest rates have hurt the sector. The asset quality has worsened in this period, with increase in NPAs and write offs. However, from a long term viewpoint this sector presents attractive opportunities. There are also structural changes taking place in this sector. A set of new banks will get banking licenses from the RBI later this year. New norms of NPA recognition once implemented, will lead to improvement in asset quality in the future. As a result of these changes the health of the banking sector will surely improve. The returns of banking sector funds in the range of 25% to 40% in the past one year bears testimony to this fact.  

Technology Funds – stupendous show

The IT sector has outperformed the Sensex, on a consistent basis since July 2013. The primary reason for the outperformance has been the depreciation of the Rupee versus the US dollar which made the Indian IT sector competitive, in addition to the organic growth in dollar terms for the IT companies. In terms of returns, the BSE IT Index has delivered 43.7% returns in the last one year, while the Sensex has delivered only about 4.6%. It is only natural that savvy investors, invested in diversified equity funds may want to consider investing in IT sector focused funds to exploit the potential of superior returns. The IT sector funds have earned a return of 40% to 60% in the past one year. The future outlook of the IT sector remains very positive due to high current account deficit and lower capital inflows implying that the rupee will continue to be under pressure, which will ensure the continued competitiveness of the IT sector mutual funds in India.

Auto Funds – set to zoom

The automobile industry of any nation is a key indicator of its progress, and India is no different. According to estimates, this industry accounts for nearly 7% of India’s Gross Domestic Product and employs close to 1.9 crore people directly and indirectly. Research shows that India, which is the sixth largest automobile market in the world, is set to zoom ahead of its competitors in the near future. The UTI Transportation and Logistics Fund has earned more than double the benchmark index, a staggering 137% as against the benchmark return of 65%.

FMCG Funds – not out?

It is true that FMCG is a more secular sector as consumer goods will always see demand. Indian equity funds’ allocation to fast moving consumer goods (FMCG) is at nearly a four-year low. Once an over-owned sector amid economic uncertainty, it has slid in deployment of mutual funds’ equity assets. Data from the Securities and Exchange Board of India show allocations to FMCG stocks have dipped to 6.1% of equity assets, the lowest since September 2010. The current allocations to capital goods stocks is 3.3%, compared with 2.7% in January 2014. FMCG funds have been laggards in the last six months, with an average return of 5.32% against 12.13% offered by CNX Nifty, says Value Research, a mutual fund tracking entity. However, experts are not writing off the consumption theme due to the poor performance of FMCG segment. They continue to recommend investing in a broad-based consumption theme, which also includes FMCG. The strategy of sticking to a broad theme would help investors to tide over temporary blips, like the one witnessed in FMCG that is likely to occur from time to time. 

Pharma Funds – anti-ageing formula

Healthcare or Pharmaceuticals is a sector that has outperformed the broader market over the last one year period. In terms of returns, the BSE healthcare Index has delivered a very healthy 28.1% returns in the last one year, while the Sensex has delivered only about 4.6%. The one year returns of the pharma funds range from 50% to 65%.While the depreciation of the Rupee versus the US dollar has helped exports in this sector, the domestic pharma market growing at double digits, has resulted in strong revenue growth for companies in this sector. The pharma sector funds are often seen as an excellent defensive bet in weak market conditions. However, there are certain risks associated with this sector, primarily due to government regulations both overseas and in India. Headwinds are seen from the demanding US FDA guidelines, which may potentially impact exports, unless the companies are able to ensure compliance with the guidelines in their domestic manufacturing plants. The Indian government’s drug pricing policies have also impacted margins. Despite the headwinds, the future outlook of the sector remains positive due to high current account deficit and lower capital inflows implying that the rupee will continue to be under pressure, which will ensure the continued competitiveness of the sector. A number of drugs will go off patent in the next few years. This augurs well for the generics segment and the Indian pharma sector. The government also plans to increase health expenditure to 2.5% of the GDP by the end of the 12th Five-Year Plan (2012-17), which will give the sector another big boost. Changes in government policies, industry specific issues and technological developments may impact the healthcare sector, either in a positive or a negative way. Pharma and Health care sector has been evergreen and is expected to continue to do well in the next few years.

PSU Funds – patience pays

PSU funds are the funds where investment is made in Public Sector Undertakings. The PSU funds despite being thematic are not sectoral as they invest in PSUs across sectors and also across balance sheet sizes. So by investing in a PSU fund you are likely to get exposure to oil and natural gas, banking, power, thermal power etc. PSU funds were very popular in 2009-10 and then they lost favour with the investors. Since March 2014, the BSE PSU Index has surged by 61%. The index was in a lull between October 2010 and August 2013, when public sector firms were beaten down to rock-bottom valuations. Bargain hunting from September 2013 onwards propelled interest in public sector companies once again. The biggest factor that is driving these funds up is the change in Central Government which has boosted the market sentiment towards Government companies. Change at the centre is expected to improve the functioning of the PSUs and the new government is expected to take more industry friendly decisions. The functioning of the PSU companies has been improving over the past years and is expected to continue in the future too. Mutual fund investment should not be made only based on market sentiments but should also look at facts and figures, industry etc. The potential of privatization also makes them a hug attraction especially over the long term. Divestment is expected to make these companies more profitable owing to reduction in red tape and introduction of professional management. Another draw towards PSU funds is the expectation of reduction in the subsidy burden especially in the gas and petroleum segment which will increase profitability of companies like ONGC, GAIL, etc. If you invest in PSU funds be sure to adjust the rest of your portfolio accordingly.

In the long-run, you would be better off investing the majority of your corpus in diversified funds rather than in sector-specific funds. Diversified funds have significantly lower downside risks. Sector funds are subject to concentration risks – the fund’s returns may suffer if the sector does badly. In contrast, a diversified fund invests in a variety of sectors. Thus, even if a single sector fares badly, the fund’s returns may not be as severely affected as other sectors in the portfolio may outperform. As a matter of fact, in diversified funds, most fund managers continuously rebalance their portfolios and are overweight on sectors expected to outperform and underweight on poorly performing sectors. Let a sector fund be part of a tactical allocation. Avoid adding them in core family goals such as education or retirement. Restrict allocation to about 10% of your fund exposure at the most. Sectors such as FMCG and pharma can contain declines to some extent but not others such as infrastructure or banking. Hence, be aware of what to hold for a defensive strategy. If you believe you have made decent money simply exit and do not look back at opportunity lost. It takes more than an expert to time sectors. In conclusion, you need to have high risk tolerance and a longer time horizon to invest in sector-specific funds.