FUND FULCRUM

October 2015

Buoyed by strong inflows in equities, the asset base of the country's mutual fund industry surged 7% to an all-time high of Rs 13.16 lakh crore in the July-September quarter of the current fiscal. The country's 44 fund houses together had an average asset under management (AUM) of over Rs 12.28 lakh crore in the September quarter of 2014-15, according to the latest data of the Association of Mutual Funds in India (AMFI). The quarterly rise in AUM is largely on account of inflows in equities. Besides, retail participation in equity schemes has risen significantly in recent months. HDFC Mutual Fund has retained its numero uno position with an average AUM of Rs 1.71 lakh crore, up 3.53%, while ICICI Prudential Mutual Fund's asset base grew 5.86% to Rs 1.65 lakh crore. The top league features Reliance Mutual Fund (Rs 1.53 lakh crore), Birla Sunlife Mutual Fund (Rs 1.33 lakh crore), and UTI Mutual Fund (Rs 1.04 lakh crore) in terms of average AUM in the second quarter of 2015-16. Mutual funds' assets base rose Rs 87,239 crore, or 7.1%, during the quarter primarily due to huge net inflow in equities. India's mutual fund sector lost about 5.5% of its assets in September 2015 as its AUM dipped to Rs 11.87 lakh crore as against Rs 12.55 lakh crore in August 2015 — a drop of Rs 68,000 crore. Further, with this decline, the sector has lost one-tenth of its assets ever since it hit a high of Rs 13 lakh crore in July 2015.

Investors pulled out over Rs 77,000 crore from mutual fund schemes in September 2015, making it the highest outflow in six months, with liquid and money markets contributing the most to the outflow. This comes on top of net outflow of about Rs 46,750 crore from mutual fund products in August 2015. According to data from AMFI, investors withdrew a net Rs 77,142 crore in mutual fund schemes in September 2015. This was the highest outflow in a single month since March 2015, when the industry had seen a withdrawal to the tune of Rs 1,09,897 crore. Liquid or money market fund category witnessed Rs 60,861 crore being pulled out in September 2015, income funds too saw net outflows of Rs 26,717 crore.

Equity mutual funds witnessed an addition of over 21 lakh investor accounts or folios in the first six months of the current fiscal (2015-16), primarily because of strong retail participation. This follows an addition of 25 lakh folios for the entire last fiscal, 2014-15. According to the Securities and Exchange Board of India (SEBI) data on investor accounts with 44 fund houses, the number of equity folios jumped to 3,38,40,981 in September 2015 from 31,691,619 at the end of March 2015, a gain of 21.5 lakh. April 2014 saw the first rise in more than four years. Mutual funds have reported net inflows of Rs 53,666 crore in equity schemes in the first six months of 2015-16, helping the industry grow the folio count. Besides, addition in equity folios helped increase overall base to 4.44 crore in September 2015 from 4.17 crore at the end of March 2015.

Piquant Parade

Forward Market Commission (FMC) has finally been merged with SEBI as announced in the budget 2015. This is the first time when two regulators have been merged in India. This merger may enable fund houses to come up with commodity mutual funds. Commodity funds invest in metals like copper, aluminium, oil, gold, silver, platinum, and agriculture produce. In India, mutual fund houses are not permitted to invest in commodities other than gold. However, a few fund houses have thematic funds which invest in companies engaged in commodity businesses. 

In an effort to increase financial awareness among children, all four financial regulators of India – RBI, SEBI, IRDAI, and PFRDA have joined hands to conduct national level test called National Financial Literacy Assessment Test (NFLAT) for school students of class VIII to X. The test will be conducted on November 28 and 29 across the country. The regulators have appointed National Institute of Securities Markets (NISM) which has further set up National Centre for Financial Education (NCFE) to carry out this exam. 

Two new domestic players – Yes Bank and Mahindra Finance are likely to foray into asset management business soon. While Yes Bank has received RBI nod to set up an AMC, Mahindra group has formed its senior management team to set up their AMC. Incidentally, both Yes Bank and Mahindra Finance are mutual fund distributors. AMFI data shows that Yes Bank and Mahindra & Mahindra Financial services have assets under advisory of Rs.678 crore and Rs.1,552 crore respectively as on March 2015. 

AMFI has named Leo Puri, MD, UTI Mutual Fund as its new Chairman. Puri has replaced Sundeep Sikka who was appointed as the AMFI Chairman in 2013. A Balasubramanian, CEO, Birla Sun Life Mutual Fund will continue to be the Vice Chairman of AMFI. Meanwhile, Kailash Kulkarni, CEO, L&T Mutual Fund has been appointed as the Chairman of the Financial Literacy committee. Currently, there are 15 members in AMFI board of which seven are from top ten fund houses and four each from mid and small sized AMCs.

To make it easier for investors to buy or sell mutual fund products, fund houses are offering an electronic, or e-KYC, initiative to first-time investors. This new service will help investors buy or sell mutual fund products in a simpler and faster way. Quantum Mutual Fund and Reliance Mutual Fund are already off the block, which offer e-KYC (Know Your Customer) that allows first-time investors to fill a simple form and complete the formalities in a paperless manner. Others are likely to follow suit. After completing the KYC formalities, fund houses schedule a video conference with the investor over Internet to do in-person verification (IPV). Once the IPV is done, fund houses send a confirmation. Currently, lengthy paperwork for the KYC process demands several documents to be submitted as proof, which takes a lot f time. Furthermore, fund houses are in discussion with market regulator SEBI to allow investors to invest in mutual fund products by using the Aadhaar number. Fund houses are taking several steps to raise their share through this route. They have been tapping social media platforms like WhatsApp and Facebook and a host of other calling and messaging apps to facilitate transactions in mutual fund products.

In addition to regular and direct plans, SEBI is said to be looking to introduce a third plan in mutual funds called e-commerce plan to be sold through e-commerce websites like Flipkart, Amazon, and Snapdeal. The TER of such schemes would be somewhere between direct plan and regular plan.

Reliance Capital Asset Management is set to acquire Goldman Sachs Asset Management’s (GSAM) onshore business in India for Rs. 243 crore. The acquisition would add Rs. 7,132 crore to Reliance Mutual Fund’s kitty. Reliance Mutual Fund manages Rs. 1.52 lakh crore as on September 2015. The transaction is expected to be completed by the end of this fiscal year, subject to regulatory approvals. RCAM will extend offers of employment to substantially all of GSAM India’s employees dedicated to supporting the ETF business. Reliance is open to acquiring more businesses to strengthen its market share. GSAM currently manages 12 schemes, including 10 ETFs, and is the largest ETF provider in India. It has a total AUM of Rs. 7,132 crore which includes Rs. 2,172 crore in the Central Public Sector Enterprises (CPSE) ETF.

Japanese financial services firm Nomura is looking to sell its stake in LIC Nomura Mutual Fund. Nomura holds 35% in LIC Nomura Mutual Fund. LIC Housing Finance and LIC of India which hold 20% and 45% respectively, would reportedly buy Nomura’s 35% stake. LIC Mutual Fund has been in existence for the last 25 years. LIC's partnership with Nomura began in January 2011. Most of the funds managed by them (LIC-Nomura MF) are performing extremely well and looking at the wide experience of their fund managers, it will only get better from here.

Regulatory Rigmarole

Nandan Nilekani, former chairman of UIDAI and co-founder of Infosys is heading a SEBI committee which has been formed to look into cost reduction in mutual funds. SEBI has constituted a committee to suggest measures to reduce cost structure in mutual funds. Bose committee has recommended that SEBI should lower the cost caps (within the TER) with growth in AUM. The committee has also recommended that fungibility within the TER should be done away with. The committee will oversee systems and processes in the mutual fund industry and suggest measures to reduce cost structure. 

SEBI has formed a committee on Disclosure and Accounting Standards (SCODA) to seek recommendation on improving disclosure standards of financial products including mutual funds through offer documents, application forms, and advertisements. The committee will also give its recommendation on improving disclosure requirements of financial intermediaries registered with SEBI like Registered Investment Advisers (RIAs) and stock brokers. The committee was formed following the recommendations of the Finance Ministry Committee headed by Sumit Bose, former Union Finance Secretary. 

AMFI has issued uniform guidelines for fund houses to follow in order to ensure compliance with Foreign Account Tax Compliance Act (FATCA). FATCA is an anti-tax evasion law under 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 Model 1 (IGA-1) with US in effect from July 9, 2015. Simply put, the legislation is meant to prevent wealthy US individuals from parking money overseas to avoid paying taxes. AMFI had appointed KPMG to advice fund houses on FATCA compliance. Recently, AMFI in consultation with Karvy, KPMG, and other key stakeholders has come out with guidelines, declaration forms, and FAQs on FATCA. The new declaration form will capture information like type of address (residence, business, registered office, etc.), country of tax residence, tax identification number, Global Intermediary Identification Number (GIIN) and seek investors consent for sharing the information with relevant tax authorities. Distributors are expected to update the details of their existing foreign investors by adding this information. While many fund houses had stopped accepting fresh investments from US investors due to stringent compliance requirements under FATCA, a few AMCs had asked their distributors who have clients from USA to furnish the documentary evidences of tax residency and other information. US NRIs can potentially be a sizeable market for the Indian mutual fund industry. The new guidelines will help AMCs to seek mandates from US entities to manage investments in India. AMCs will have to follow AMFI’s guidelines on FATCA from November 1, 2015.

RBI has issued operational guidelines for Gold Monetization Scheme (GMS) in which it has allowed mutual funds to invest in these instruments. GMS enables households and jewelers to keep their gold with the banks and earn interest on it. The Finance Ministry intends to replace Gold Saving Scheme with the GMS. The deposits under the this scheme can be made for a short-term period of 1-3 years (with a roll out in multiples of one year); a medium-term period of 5-7 years and a long-term period, of 12-15 years. Like a fixed deposit, breaking of lock-in period will be allowed in either of the options and there would be a penalty on premature redemption (including part withdrawal). The amount of interest rate payable for deposits made for the short-term period would be decided by banks on the basis of prevailing international lease rates, other costs, market conditions, etc. and will be denominated in grams of gold. For the medium and long-term deposits, the rate of interest (and fees to be paid to the bank for their services) will be decided by the government, in consultation with the RBI. The interest rate for the medium and long-term deposits will be denominated and payable in rupees based on the value of gold deposited. The minimum deposit should be equivalent to 30 grams of gold of 995 fineness. There is no maximum limit for deposit under this scheme. The gold will be accepted at the Collection and Purity Testing Centres (CPTC) certified by Bureau of Indian Standards (BIS) and notified by the Central Government. The deposit certificates will be issued by banks in equivalence of 995 fineness of gold.

The AUM of the mutual fund industry can grow to Rs.40 lakh crore in the next five years according to C V R Rajendran, CEO, AMFI. He also expects that the unique investor count would double from the current 1 crore to 2 crore by FY 2020-21. Striking an optimistic note on the growth prospects of the industry, he said that mutual fund industry is likely to grow at a CAGR of 25%. He expects that the retail investor base would grow due to increasing awareness about mutual funds. Also, additional inflows from pension fund managers and EPFO will provide a fillip to the industry. Rajendran is of the view that the mutual fund industry can leverage investor awareness program to achieve a sustainable growth.

NFO NEST

October 2015

Equity NFOs to a grinding halt?

 

NFOs, a popular money mobilizing tool for mutual fund houses, came to a virtual halt in September 2015. A cap on commission paid to distributors and a rise in market volatility saw the Rs 13 lakh crore fund management sector launch just one equity NFO in September 2015, which mopped up a mere Rs 20 crore. Last year, a record 75 NFOs was launched. NFOs have been on a downward spiral since April 2015 when the curbs on commissions kicked in. SEBI has also been discouraging fund houses from launching new schemes unless they are different from existing ones. The first six months of this financial year saw an average of three NFOs per month. A majority of NFOs floated were and are still close-ended as is evident from the NFOs open at present.

BOI AXA Capital Protection Oriented Fund – Series 5

Opens: October 6, 2015

Closes: October 20, 2015

BOI AXA Mutual Fund has launched a new fund as BOI AXA Capital Protection Oriented Fund - Series 5, a close-ended capital protection oriented fund. The investment objective of the fund is to generate income by investing in a portfolio of fixed income and money market instruments maturing on or before the maturity date of the fund. The tenure of the fund will be 38 months from the date of allotment. The fund will invest 82%-100% of assets in debt and money market securities with low to medium risk profile and invest up to 18% of assets in equity and equity related instruments with high risk profile. The benchmark index for the fund is CRISIL MIP Blended Fund Index. The fund managers are Alok Singh and Surabh Kataria.

SBI Equity Opportunities Fund – Series IV

Opens: October 7, 2015

Closes: October 21, 2015

SBI Asset Management has launched a three year closed-end fund, SBI Equity Opportunities Fund - Series IV. Like the earlier series of closed-end funds, this fund too is a multi-cap fund and will invest in a mix of large and mid-cap companies. About 35% of the funds will be invested in large cap stocks with the balance in mid cap stocks. The fund manager will avoid investing in sectors which will be affected by global commodity prices and government policies. It will focus on structural themes which have high growth visibility. The fund shall have exposure to equity and equity related securities to the extent of minimum 80% of the total assets with a maximum exposure of 100%. The new fund would have exposure to securitized debt to the extent of 20% of the net assets and shall invest in debt and money market instruments which mature only on or before the date of the fund allowing safety net for the value earned for the investors. The benchmark index for the fund is S&P BSE 500. The fund manager is Mr. Dharmendra Grover.

 

ICICI Prudential Capital Protection Oriented Fund – Series IX – Plan A

Opens: October 9, 2015

Closes: October 23, 2015

ICICI Prudential Mutual Fund has launched a new fund as ICICI Prudential Capital Protection Oriented Fund - Series IX - 1101 Days Plan A, a close ended capital protection oriented fund. The tenure of the fund is 1101 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 70%-100% of assets in debt securities and 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 performance of the fund will be benchmarked against Crisil Composite Bond Fund Index (85%) and CNX Nifty (15%). The fund managers are Vinay Sharma (equity portion), Chandni Gupta and Rahul Goswami (debt portion) and Shalya Shah (for investments in ADR/GDR and other foreign securities).

UTI Capital Protection Oriented Fund – Series VI–III (1098 Days)

Opens: October 16, 2015

Closes: October 28, 2015

UTI Mutual Fund has launched a new fund named as UTI Capital Protection Oriented Fund - Series VI - III (1098 Days), a close ended capital protection oriented income fund. The duration of the fund is 1098 days from the date of allotment. The investment objective of the fund is to endeavor to protect the capital by investing in high quality fixed income securities as the primary objective and generate capital appreciation by investing in equity and equity related instruments as secondary objective. 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. Benchmark index for the fund is CRISIL MIP Blended Index. The fund managers are Sunil Patil and Srivatsa.

Sundaram Select Microcap – Series IX (1098 Days)

Opens: October 16, 2015

Closes: October 30, 2015

Sundaram Mutual Fund has launched a new fund named as Sundaram Select Micro Cap - Series IX, a closed-end equity fund. The tenure of the fund is 5 years 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 and 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 & Dwijendra Srivastava. 

Tata Resources and Energy Fund, Tata Make in India Fund, Tata India Pharma and Healthcare Fund, Tata India Consumer Fund, Tata Digital India Fund, Tata Banking and Financial Services Fund, HDFC Resurgent India Fund, Tata India Advantage Fund, SBI Enhanced Index Fund – Maximum Sharpe Ratio, BNP Paribas Balanced Fund, BNP Paribas India Consumption Fund, ICICI Prudential NV20 ETF, ICICI Prudential Midcap ETF, ICICI Prudential Oil & Gas ETF, ICICI Prudential Metal ETF, Sundaram Nifty Index Fund,  SBI Enhanced Index Fund  - Minimum Variance, Sundaram Developed Markets Fund, and Sundaram Credit Opportunities Fund  are expected to be launched in the coming months.

GEMGAZE

October 2015

John Bogle, the founder of Vanguard funds, is known to have said: "You could go your entire life without ever owning a sector fund and probably never miss it." An issue with sector funds is that investors rarely act on a well thought out strategy. They simply gravitate towards the flavour of the year, which means that they are already behind. For instance, energy funds put up a stellar performance in 2007 with a return of 105% that year. Investors piled onto funds in the sector. The next year the category average was -53%. No doubt, the mayhem that year hit every single sector. While it bounced back the next year, its returns in 2010, 2011, and 2013 were abysmal. Last year it made a comeback with a return of 47%, but still a far cry from its 2007 feat. One should never commit the grave error of investing in a sector fund simply because it has had a great run that year. Unlike a regular equity diversified fund, the fund manager does not have much latitude if the sector falls from favour. If one is invested in a sector fund based on a clear strategy, the hair-raising volatility should not prevent one from sticking to one’s investment strategy.

The consistent performance of all five funds in the October 2014 GEMGAZE is reflected in all the funds holding on to their esteemed position of GEM in the October 2015 GEMGAZE.

Canara Robeco Infrastructure Fund Gem

Diversified performer

Canara Robeco Infrastructure Fund is a thematic fund focused on identifying growth-oriented companies within the infrastructure space. Urbanization in India (both organic growth and the migration story) would arrive with strong demand for infrastructure, specifically in public transport (metro rail, mono rail), roads, power stations, electricity grids, water supply and treatment plants, airports, bridges, telecommunications networks, affordable housing, hospitals, etc. The fund, with an AUM of Rs 106 crore, aims at having concentrated holdings with a bias towards large market capitalization stocks at 56%. With a well-diversified portfolio of stocks in the construction space, energy, and services 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 13.6% as against the category average return of 11.62%. The expense ratio of the fund is high at 2.99% while the portfolio turnover ratio is as low as 7%.

SBI Magnum FMCG Fund Gem

A good bet

In the past one year, the Rs 216 crore, Magnum FMCG Fund is perched at the top with 59% of the assets in large caps. The expense ratio is 2.9% and the portfolio turnover ratio is 19%. Braving all odds, the one-year return of the fund is 11.51% as against the category average of 14.15%. Over the three and five year periods, the fund posted 17.85% and 19.55% of CAGR, respectively as against the category average of 16.97% and 19.24% respectively. From the August 2013 low to July 2015, the Nifty index gained 37%. In contrast, the BSE Capital Goods index galloped 111%, with its PE multiple moving from 25 times to 37.2 times. Consumer companies, which had been the market favourites until that point, saw a far tamer performance. The CNX FMCG index, for example, rose just 11%. Most stocks that operate in this space have already moved up because revenue and profit growth for these companies were still better than firms in beleaguered sectors. Despite high valuations, companies in the consumption space still hold strong growth potential, thanks to lack of viable alternatives in the market. FMCG funds are, therefore a good bet. 

ICICI Prudential Banking & Financial Services Fund Gem

Outright outperformer

ICICI Prudential Banking & Financial Services Fund invests predominantly in large and midcap financial companies. 65% of the portfolio consists of large caps. This fund adopts a 'bottom-up' strategy, to identify and pick its investments across market capitalizations. 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 903 crores and the one-year return is 15.90% as against the category average return of 11.62%. The expense ratio is 2.67 % while the portfolio turnover ratio is 39%.

SBI Pharma Fund Gem

Stays fit and maintains lead

SBI Pharma Fund sports an AUM of Rs. 778 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 60.28% assets allocated towards the top 5 stocks while the top 10 stocks make up around 89.5%. After the splendid rally witnessed over the last three years, pharma stocks have taken a breather now. The BSE Healthcare Index has shed almost 11% in the last one month, higher than the 7% fall in Nifty. SBI Pharma Fund has held on to its numero uno position consistently over the past two-three years, and has been the only fund to deliver benchmark beating returns across all timeframes. Not only did the fund outdo peers — UTI Pharma and Healthcare Fund and Reliance Pharma Fund — on an absolute return basis, but it has also been more consistent than its peers over the last several years. SBI Pharma Fund has been able to beat its benchmark, the BSE Healthcare Index, almost 68% of the time in the last five years, even as other pharma funds managed to beat their benchmark barely 40% of the time. The one-year return of the fund is 41.62% as against the category average of 34.22%. The expense ratio of the fund is 2.68% while the portfolio turnover ratio is 20%. A higher large-cap slant (over 68%) should hold the fund in good stead even during volatile times.

 

ICICI Prudential Technology Fund Gem

Exemplary performance

ICICI Prudential Technology Fund is a Rs 438 crore technology fund, which invests in large technology oriented companies. It invests in companies listed in the BSE Teck. Its portfolio has 73% 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 14.24% as against the category average of 12.29%. 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 20% 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. Over five years, ICICI Prudential Technology fund has clocked a 20.8% return since it has focused on the top-tier IT companies instead of the second-tier companies. The expense ratio is 2.7% while the portfolio turnover ratio is 9%.

FUND FLAVOUR

October 2015

Mutual funds which invest in a particular sector or industry are said to be sector-specific funds. These funds seek to predominantly invest in the sector/theme stated in the offer document. A FMCG fund for instance, invests in consumer plays and their proxies while a banking fund invests in banking and financial services-oriented stocks. A theme, on the other hand, can be slightly broader – like investing in MNC stocks or lifestyle-related stocks, or investing in certain international regions and so on. That means, instead of taking limited exposure in sectors/themes the way diversified funds would, sector funds place all their eggs in one basket, taking focused bets, thereby increasing the concentration risk. To that extent their risk-reward ratio is expected to be higher than diversified equity funds. Since the portfolio of such mutual funds consists mainly of investment in one particular type of sector, they offer less amount of diversification and are considered to be risky. Their performance is aligned with the performance of the sector in which they are investing. As the exposure is not broad based, it carries a high degree of risk. This type of funds is normally suitable for a highly aggressive investor.

Performance of some of the sector-specific funds is elaborated below:

Infrastructure Funds – back in favour

Equity mutual funds that invest exclusively in shares of firms engaged in the infrastructure business are back in the reckoning. With the market rally sending infrastructure stocks higher, equity funds that invest in these sectors have emerged as the second biggest gainers among mutual funds gaining 18%, next only to the banking sector. The BSE Capital Goods Index posted the highest increase among stock indices in the current year, gaining 26%. Banking and infrastructure sectors are seen as the proxy for the economy. With the economy slowly climbing its way out of its worst slump in a decade amid expectations that the government at the centre would give the much-needed thrust to recovery, these sectors have gained traction. Since the economic slowdown has bottomed out, we would see growth. A revival in the investment cycle and moderation in interest rates would help infrastructure companies, which are highly leveraged, post higher growth. The sharp recovery in the past few months has, however, not helped infrastructure equity mutual funds to substantially improve their abysmal record over the long term. They posted measly 5.6% and 1.6% annual returns respectively during the three-year timeframe pushing them to the bottom of the performance chart. There is still value left in these stocks as they have taken a beating in the past few years.

Banking Funds – on a roll          

The banking sector, especially the PSU pack, was on a roll. Some recent measures taken by the government include that of capitalisation of PSU banks and the announcement of the seven-pronged PSU banks' revival plan ‘Indradhanush’. The markets reacted positively to these long-awaited measures for the growth of PSU banks. Capital infusion by itself may not help as has been seen in the past. Revamping management and governance in PSU banks also needed to happen. Both these steps concurrently may put some things in the right place but the biggest concern of the banking sector, the high and rising levels of non-performing assets (NPA), still remained unanswered by these measures. What matters the most in banking sector funds is the NPA. According to Economic Survey, 2014- 2015, gross NPA increased from 4.1% (March 2014) to 4.5% (September 2014). CNX PSU BANK index was up by nearly 6.19% with all 12 stocks ending on a positive note. Bank of Baroda and Canara Bank rose in double digits clocking 14.99% and 12.87% respectively. If one is optimistic about the economy by expecting it to do well over the next 2-3 years, banking sector funds should be a part of the portfolio. Choose funds that a have a mix of PSU and private sector banks. Since majority of such funds are heavily invested in ICICI Bank, HDFC Bank, and AXIS bank, careful choice is necessary for diversification.

Technology Funds – losing fancy?

Mutual funds that focus on IT stocks have delivered much higher returns than the Nifty and Sensex across one, three, and five-year periods. For the last one year, the sector funds averaged a 9.6% return, while the Nifty and Sensex suffered losses of 3.6% and 5%, respectively. Three-year returns on these funds at 26% beat the bellwether by over 12 percentage points. And for the five-year period, IT funds managed 14.5% while the market has only delivered 7%. Investments made in IT funds as a diversifier would have paid off well in the last five years, due to the sector’s defensive nature and ability to gain from rupee depreciation. There are five technology funds and these funds have also managed good performance against the sector indices — the BSE IT index and the BSE Tech index. The sector was a strong performer from the low of 2013 until February 2015, with the BSE IT index hitting its all-time high at around 12,000 in March 2015. But thereafter, rupee volatility and disappointing earnings from the frontline players have eroded fancy for the sector. While there is a fair degree of earnings visibility, growth is likely to slow down over the next couple of years as the larger players grapple with stiff competition and reinvent themselves to move up the value chain. 

Auto Funds – early cyclical plays

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%. Autos, commercial vehicles, and other auto ancillaries would be early cyclical plays, with automobile sector mutual funds delivering outstanding returns.

FMCG Funds – getting expensive

The FMCG sector is performing well due to strong characteristics and dependence on consumption in the domestic market. In the last 15 months, the FMCG sector attracted many investors and gave strong returns to them. The other sector indices gave negative returns in the range of 2% to 38% due to slowdown in the economy, high interest rates, and rising inflation. BSE FMCG index is currently not cheap. It is trading at price to earnings ratio multiple of 27 times one year forward earnings as compared to BSE SENSEX now valued at around 13 times the forward earnings. The FMCG sector valuations are at 108% premium over the SENSEX. According to Nielsen’s research report entitled “Consumer 360”, the Indian FMCG market is estimated to grow to USD 100 billion by 2025 from USD 13 billion in 2012. According to the report, the key areas driving this growth would be increased sales and acceptance of branded products, regular consumption of FMCG goods, etc. However, this growth will not be smooth. There will be some untimely jerk led by economic slowdown, increase in inflation, etc. It is advisable to stay invested in this sector for long term to gain strong profits. 

Pharma Funds – a safe bet

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 – changing perceptions

PSUs come with some negative baggage and perceptions but this perception has changed over time and is slated to change more in the near future. For the period between October 2010 and August 2013 the BSE PSU fund was in doldrums as the public sector valuations were very low. Bargain hunting from September onwards propelled interest in public sector companies once again. BSE PSU Index has surged by 61% since March 2014. The change in trend was due to the expected change in Government. Over the past one year, these funds have delivered about 36% returns, which is 4-5 percentage points better than what the Sensex or the Nifty managed. All the PSU funds have a track record of less than five years. Most of them have beaten the BSE PSU index over the past three years by delivering an average return of 3.6% over the index return of 0.9%. But in the last one year Baroda Pioneer PSU Equity Fund - Plan A has outdone the benchmark index’s return of 37% by delivering 43%. Three other funds have underperformed the BSE PSU index. Religare Invesco PSU Equity, which has outperformed peer funds over three years, is among the lower performers over the one-year period. For all the funds, exposure to the stocks of companies such as ONGC, HPCL, Coal India and NTPC helped returns. Power and mineral companies too found favour. In addition, stakes were also increased in the banking space, which rallied strongly over the past couple of months. Baroda Pioneer PSU Equity Fund - Plan A took exposure to banks, oil, mineral and power, allocating 73.5% of its portfolio to such segments. Religare Invesco PSU Equity too was overweight on sectors such as banks, power, oil, mineral, petroleum products and gas over the past one year. SBI PSU fund too played the trend well, betting mostly on winning stocks. Sundaram PSU Opportunities churns its allocations constantly. Energy, Financial Services, and Metals are the top preferred sectors with an allocation of 80% of its portfolio.

If you are investing in a sector fund, do you know enough about the sector and believe it is a good time to invest? Are you willing to closely track performance of the sector vis-a-vis your fund’s? Would you know when the sector looks overheated and move out? Are you willing to book losses and exit if it becomes evident that the sector is not going to revive in a hurry? If you are willing to do these, then here are a few simple suggestions. 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. Avoid long periods of SIPs in sector funds (contrary to diversified funds) if you enter in an up-phase. There is little point averaging when the sector is headed in one direction – up. Similarly, do not keep averaging when a sector falls. You may be throwing good money after bad! Sectors such as FMCG and pharma can contain declines to some extent but not others such as infrastructure or banking or media and entertainment. Hence, be aware of what to hold for a defensive strategy.