Thursday, December 22, 2016

December 2016

Mutual fund industry's asset base surged to an all-time high of Rs 16.5 lakh crore at the end of November 2016, aided by strong inflows in income and equity segments as a result of buoyant investor sentiment. Comprising 43 active players, the industry had assets under management (AUM) of over Rs 16.28 lakh crore at the end of October 2016. Overall inflows in mutual fund schemes stood at Rs 36,021 crore at the end of November 2016 compared to Rs 32,334 crore at the end of October 2016. Income funds, which invest in government securities, saw an inflow of Rs 18,306 crore, while equity and equity-linked saving schemes witnessed an infusion of Rs 9,079 crore. Balanced funds, which invest in equity and debt instruments, saw an inflow of Rs 3,632 crore. However, Gold exchange traded funds (ETFs) witnessed a pull out of Rs 69 crore during the period under review.

Piquant Parade

FundsIndia, an online advisory MF portal has launched their own research-driven, in-house funds rating service – FundsIndia ratings (FI ratings). With this launch, FundsIndia claims to become the first investment service provider to rate and analyze mutual funds. Currently, the portal has their own basket of researched funds called as FundsIndia Select Funds. With FundsIndia ratings, investors would not only have access to Select Funds, but also get an idea of where their other current holdings stand, in relation to category peers.

MF Utiity has launched e-CAN (Common Account Number) facility which allows distributors and investors to open a CAN online for individual investors. Since launch, more than 72,000 CAN requests have been processed on MFU. The  average AUM as on October 31, 2016 held by the CAN holders is close to 45,000 crore. Currently, on an average more than 300 CAN requests are received each day. With the convenience offered by eCAN, this number is expected to grow substantially. Until now, to open a CAN, investors had to submit a signed physical form with necessary attachments. With the launch of e-CAN, investors and their advisors can open a CAN with the help of a single form and single payment for initiating multiple transactions. Here’s how your clients can open an e-CAN. Investors have to fill the CAN registration data online on MFU website and submit electronically. The supporting proof documents can also be submitted electronically, by using an upload link. The CAN number is allotted instantly. eCAN is also available in the form of API, to enable distributors to facilitate creation of CAN for their clients online. New investors can also make use of the eCAN option to fill and submit the CAN registration data online to get the CAN number allotted instantly and later submit a signed CAN form with necessary documents to their intermediaries or at any of the MFU Point of Service (POS).

BSE has started levying transaction fee on its BSE Star MF platform. The transaction fee is applicable from December 1, 2016. This cost will be borne by AMCs. “In order to cover the costs of operations, all participating Mutual Funds/AMCs are hereby informed that transaction charges shall be levied on all orders being routed through the BSE Star MF platform”, states the circular issued on November 30, 2016. BSE Star MF is a browser based automated online order collection system which can be accessed through web from anywhere. Distributors can initiate a number of transactions like invest, redeem and start a SIP through this platform on behalf of their clients. BSE StAR MF has around 2400 registered distributors using this platform.

Investing in mutual funds through SIP without any upper limit just got simpler and faster. BSE StAR MF has launched paperless SIP service called ISIP through which IFAs can initiate SIPs on behalf of their clients without submitting any form and NACH mandate. This new facility can be activated through a net banking platform or mobile application. Distributors will have to generate Unique Registration Number (URN) from the platform for their investors. Investors will then be required to key in this number in the add biller option on their net banking or mobile application. This facility is available in most of the large banks. Typically, banks take three days to activate this facility. Currently, registering a SIP through NACH mandate takes up to 10 days.  In addition, distributors can register multiple SIPs through one mandate. This is a cost effective and paperless way to initiate SIP. To start with, BSE has enabled this facility for four fund houses – Mirae, ICICI Prudential, Tata, and Quantum. The platform will extend this service to other fund houses soon. Further, BSE has said that they are ready with the infrastructure of accepting payments through e-wallets like Paytm, FreeCharge, and Mobikwik. This service would be operational once it gets a nod from SEBI.

Regulatory Rigmarole

In order to give a fillip to startups, SEBI has relaxed investment norms for Angel Funds. The minimum ticket size of Angel Funds has been slashed from Rs.50 lakh to Rs.25 lakh. Angel Fund is a sub-category of Venture Capital Funds under AIF Category I. As the name suggests, such funds can raise capital from angel investors who invest in startups to support them during initial days. Earlier in March 2015, SEBI had constituted a committee headed by NR Narayana Murthy, co-founder of Infosys, to suggest measures to boost the startup ecosystem in India and develop the AIF industry. Based on the recommendations of the committee, SEBI has made amendments in the AIF regulations. Here are some of the key amendments in AIF regulations introduced by SEBI:
·         Maximum number of angel investors has been increased from 49 to 200
·         Lock in period of three years has been slashed to 1 year
·         Angel Funds will now be allowed to invest in startups incorporated within five years. Earlier, it was three years.
·         Angel Funds are allowed to invest in overseas venture capital undertakings up to 25% of their investible corpus in line with other AIFs.

Total wealth held by individuals in India grew by 8.5% to Rs.304 lakh crore in FY16, and is expected to grow to Rs.558 lakh crore over the next five years. That projection, which translates into a compounded annual growth rate of 12.9% over the next five years, is the assessment of the wealth management arm of financial services firm Karvy, as presented in its seventh India Wealth Report. The total individual wealth in financial assets grew by only 7.14% to Rs.172 lakh crore in FY16, much slower than in FY15, when wealth grew nearly 19%. The relatively poor performance of direct equities may account for this. However, Karvy predicts that financial assets will grow at a faster pace of 14.73% CAGR, nearly doubling in five years. Individual wealth in physical assets stood at Rs.132 lakh crore, a 10.32% growth in FY16 against a 2% decline in FY15. Individual wealth in gold stands at Rs.65.90 lakh crore, whereas wealth in real estate (excluding primary residences), comes in second at Rs.55.47 lakh crore. The report noted that India is “considered the bright spot among emerging economies.” However, it said that the economy is bound to slow a bit in the short term, given the government’s recent efforts to demonetise old, high-value notes. However, in the long run, India is expected to outshine its emerging market peers, including China, owing to changing positive dynamics, especially the government’s reforms push (the Goods & Services Tax (GST), Real Estate (Regulation and Development) Act, and the Bankruptcy Code, among others.

Monday, December 19, 2016

December 2016

Equity NFOs reduced to one-third in 2016

After two consecutive years of high number of new fund offers (NFOs) in the equity segment, India's mutual fund industry has seen a substantial decline in new launches. With stricter norms on the commission structure, rising preferences among investors for existing funds with a performance of track record, regulator's tough stance on merger of similar schemes, and more importantly a lack of a strong stock market rally put together have taken a toll on new offerings.

ICICI Prudential Capital Protection Oriented Fund – Series XI Plan B

Opens: December 6, 2016

Closes: December 20, 2016

ICICI Prudential Mutual Fund has launched the ICICI Prudential Capital Protection Oriented Fund-Series XI-Plan B 1222 Days, a close ended income fund. The investment objective of the fund is to protect capital by investing a portion of the portfolio in highest rated debt securities and money market instruments and also to provide capital appreciation by investing the balance in equity and equity related securities. The debt securities would mature on or before the maturity of the fund. The fund’s performance will be benchmarked against CRISIL Composite Bond Fund Index (85%) and Nifty 50 Index (15%) and its fund managers are Vinay Sharma, Rahul Goswami, Chandni Gupta, and Ihab Dalwai.

SBI Dual Advantage Fund – Series XVIII

Opens: December 7, 2016

Closes: December 21, 2016

SBI Mutual Fund has unveiled a new fund named as SBI Dual Advantage Fund - Series XVIII, a close ended hybrid fund. The tenure of the fund is 1211 days from the date of allotment. The primary investment objective of the fund is to generate income by investing in a portfolio of fixed income securities maturing on or before the maturity of the fund. The secondary objective is to generate capital appreciation by investing a portion of the fund corpus in equity and equity related instruments. The fund will invest 55%-95% of assets in debt and debt related instruments, invest upto 10% of assets in money market instruments with low to medium risk profile, and invest 5%-35% of assets in equity and equity related instruments including derivatives with high risk profile. Benchmark Index for the fund is CRISIL MIP Blended Fund Index. Rajeev Radhakrishnan shall manage debt portion and Ruchit Mehta shall manage investments in equity and equity related instruments of the fund.

Sundaram Select Micro cap Fund – Series 11

Opens: December 8, 2016

Closes: December 22, 2016

Sundaram Mutual Fund has launched a new fund named as Sundaram Select Micro cap Fund - Series 11, a close ended equity fund. The tenure of the fund is 4 years from the date of allotment of units. The investment objective of the fund is to provide capital appreciation by investing primarily in equity and equity related securities of companies that can be termed as microcaps. 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. Benchmark Index for the fund is S&P BSE Small Cap Index. The fund managers will be S. Krishna Kumar and Dwijendra Srivastava.

BNP Paribas Enhanced Arbitraged Fund

Opens: December 8, 2016

Closes: December 22, 2016

BNP Paribas Mutual Fund has launched the BNP Paribas Enhanced Arbitrage Fund, an open ended growth fund. The investment objective of the fund is to generate income and capital appreciation by investing in a combination of diversified portfolio of equity and equity related instruments, including use of equity derivatives strategies and arbitrage opportunities with exposure in debt and fixed income instruments. The fund will invest a minimum of 90% in equities, equity related instruments and derivatives and a minimum of 10% in debt securities and money market instruments with maturity of up to 91 days. The fund’s performance will be benchmarked against CRISIL Liquid Fund Index and its fund managers are Karthikraj Lakshmanan and Mayank Prakash.

Axis Emerging Opportunities Fund – Series 1

Opens: December 9 , 2016

Closes: December 23, 2016

Axis Mutual Fund has launched the Axis Emerging Opportunities Fund-Series 1 (1400 Days), a close ended growth fund. The investment objective of the fund is to generate long term capital appreciation by investing in a diversified portfolio of equity and equity related instruments of midcap companies. The fund’s performance will be benchmarked against S&P BSE Midcap Index and its fund managers are Jinesh Gopani and Anupam Tiwari.

IDFC Balanced Fund  

Opens: December 12 , 2016

Closes: December 26, 2016

IDFC Mutual Fund has launched a new fund named as IDFC Balanced Fund, an open ended balanced fund. The investment objective of the fund is to generate long term capital appreciation and current income from a portfolio that is invested in equity and equity related securities as well as in fixed income securities. The fund will allocate 30% to 60% of assets in equity and equity related instruments, invest 5%-35% of assets in Net Equity Arbitrage Exposure with medium to high risk profile, and invest 35% - 60% of assets in debt securities and money market instruments with low to medium risk profile. Benchmark Index for the fund is CRISIL Balanced Fund Index. The fund managers are Punam Sharma (equity portion) & Anurag Mittal (debt portion).

Reliance CPSE ETF, Sundaram Arbitrage Fund, Axis Corporate Debt Opportunities Fund, and IDFC BFSI Fund are expected to be launched in the coming months. 

Monday, December 12, 2016

December 2016 

Average investors need a balanced investment portfolio in order to earn reasonable returns at an acceptable level of risk. This is achieved by investing money in debt funds besides diversified equity funds.

All the GEMs from the 2015 GEMGAZE but two have exhibited a dismal performance and have been shown the exit door in the 2016 GEMGAZE. Birla Sun Life Dynamic Bond Fund and Birla Sun Life Floating Rate Short-term Fund have retained their esteemed status as GEM.

Birla Sun Life Treasury Optimizer Fund Gem
Birla Sun Life Treasury Optimizer Fund was launched nearly a decade ago in 2008. The current AUM of the fund is Rs. 9,048 crore. Its return in the past one year is 12.97%, almost on par with the category average of 12.35%. The number of holdings in the fund’s portfolio is 130 with an average yield to maturity at 7.56%. The expense ratio of the fund is fairly low at 0.65%. The fund is benchmarked against the CRISIL Short-term Bond Index. The fund is managed by Mr. Kastubh Gupta since September 2009.

Birla Sunlife Dynamic Bond Fund Gem
Birla Sunlife Dynamic Bond Fund manages assets worth Rs. 15,568 crore, making it the largest fund in the income category. This fund is a steady top quartile performer with low volatility. It has delivered returns across interest-rate cycles and is among the top few in its category. The one-year return of the fund is 16.02% as against the category average of 14.15%. A veteran in the dynamic-bond-fund category, this ten-year-old fund has the distinction of beating both its benchmark and the category consistently over three interest-rate cycles. The fund does not rely on duration calls alone for alpha and uses a mix of G-secs and corporate bonds to take advantage of rate movements. The fund's track record shows that it has beaten its benchmark and category by a convincing 1.40 percentage points annually over 10 years and by over 1 percentage point in five and seven years. Returns in the last one year have been slightly below the benchmark, given a more conservative portfolio positioning. But it has managed this with good risk control, given that its worst one-year returns, at 3.3%, have not slumped into the negative territory like some of its peers. In recent months, the fund has stretched its maturity with the view that further transmission of recent rate cuts will bolster bond prices. Though the fund has taken credit calls in the past, it has reduced exposure to lower-rated corporate debt in the last one year. In May 2015, the fund had a 59% exposure to G-secs and 15% to AAA corporate bonds, with a 20% plus exposure to bonds that were AA-rated and below. But by March 2016, G-sec and AAA exposures had been pegged up to over 86% of assets and AA exposures trimmed to just 6%. The number of holdings in the fund’s portfolio is 55 with an average yield to maturity at 8.15%. The expense ratio is 1.5%. The fund has 58 holdings with the yield to maturity of 7.8%. The fund is benchmarked against the CRISIL Short-term Bond Index.  Maneesh Dangi is the fund manager since September 2007.

SBI Magnum Gilt Fund - Long term Plan Gem 
Launched in December 2000, the fund has an AUM of Rs 2,205 crore. The one-year return of the fund is 16.93% as against the category average of 16.50%. The fund has outperformed its benchmark over one-, three- and five-year timeframes. It has delivered a compounded annual return of 11.5% over the last three years. The fund is benchmarked against the I-Sec Li-Bex. The fund has seven holdings with the yield to maturity of 7.02%. The expense ratio of the fund is 0.97%. Dinesh Ahuja has been the fund manager since January 2011.

Birla Sunlife Floating Rate Short term Fund Gem

This relatively young fund, launched in October 2005, boasts of a massive AUM of Rs 4950 crore.  In the past one year, this liquid fund has returned 7.82% as against the category average of 7.58%. The number of holdings in the fund’s portfolio is 42 with an average yield to maturity at 7.04%. The expense ratio is a mere 0.27%. The fund is benchmarked against the CRISIL Liquid Index. Sunaina da Cunha and Kaustubh Gupta are the fund managers.

Monday, December 05, 2016

December 2016
As a community, investors have traditionally harboured misguided notions about debt mutual funds. Some consider them to be fixed interest bearing securities, whereas others understand gilt funds to be low risk, as they invest in sovereign bonds. Although it is true that debt funds are less volatile and have a lower risk than equity funds, it is vital for mutual fund investors to have a basic understanding of how they work, and especially the risks involved. With interest rates in traditional instruments falling in line with declining interest rates (PPF rates have been dropped to 8.1%, SCSS to 8.6%, and PPF to 8.1%), risk-averse investors need to necessarily consider debt mutual funds in order to continue beating inflation while avoiding risks.

An integral part of the portfolio

Debt funds should form an integral part of any investment portfolio for two major reasons: One for stable returns, and two, to spread across risks so that there is a cushion when rates fall and equities tank. In addition to equities, prudent fund managers often shuffle portfolios across varying maturities in debt, depending upon market conditions. Today, in the Indian context, interest rates are seen downward in the longer time frame, though near-term could be steady to firmer. There are, however, inherent risks involved if two facts – volatility and time frame – are not taken into consideration.

Volatility: It is a factor that leads to a sharp rise or fall in the prices of debt instruments when interest rates dip or rise respectively. Interest rates and bond prices are inversely proportional, meaning if interest rates drop, bond prices soar, and the reverse occurs when interest rates rise.

Time frame: It is the period for which funds are parked or invested. One can even invest in debt for a period ranging between a day and as long as 30 years. Broadly speaking, investment options in debt can be divided into short, medium or accrual, and long-term debt funds.
Short-term funds: These are liquid funds where one can earn returns of 200-250 basis points above the savings bank rates of 4-6%. Liquid funds, as the name suggests, are as good as any saving account, the only difference being one would perhaps need a day or two for the funds to come into the kitty. It has been often observed that many savers let funds idle in bank savings as a protection for future eventuality or emergency, little knowing that liquid funds offer the same benefit and even earn a higher rate than savings. The instruments in which such funds invest are short-term government papers like treasury bills and other money market instruments of shorter maturities of three months or less. There are cases where smart investors park their salaries in such instruments till their regular outflows like SIPs, home loan installments, insurance premiums, etc., begin. For example, if your home loan EMIs are slated for the tenth of every month and the salary is credited to the account on the first of every month, by parking the same funds in liquid funds, you stand to enhance your interest accruals by at least 200 basis points for that nine-day period instead of the 4-6% earned in a savings account.
Medium term/accrual schemes: These schemes typically invest in government bonds and corporate bonds while maintaining the average maturity of around 3-5 years. The corporate bonds in this case need not necessarily be AAA rated bonds, but a notch or two lower as they offer higher returns to the fund. The view of the investor, on the other hand, is one of a shorter duration. Three years or more is recommended for tax exemptions and typically syncs with the investors' need for future requirements. The reason why fund managers recommend investments with a duration of three years and above is that the returns are as good as tax-free. Such funds are also called accrual funds. These funds maintain a higher yield to maturity (YTM) through exposure to sub-AAA assets while AAA assets of 5-10 year maturity are taken as a hedge to provide the benefit of price appreciation should interest rates fall. Higher the accruals, lower will the corporate bond maturities be, and therefore, lower the interest rate risk. For example, if the interest rate view of a fund manager is that of a softening trend, in such a case, besides earning the interest rates or coupon on the bonds, the portfolio would appreciate if the view holds good. However, if the view held turns wrong, which is, the rates firm up, prices of underlying securities begin to slide. This is when fund managers recommend systematic transfers to average out the costs of the underlying.
Long-term investments: The longer the duration, the more will be the volatility in the near-term, but returns get adjusted with time if rates are stable or easing. In such a case, the key driver of returns is the fluctuation in interest rates. Given that macroeconomic fundamentals and long-term interest rates are poised downward, long-term investors stand to gain from price appreciation of the underlying securities. However, there could be intermittent blips where the returns could be lower.

To get debt funds’ mix right…

Though debt funds are relatively less risky than equity funds, interest rate movement can create volatility in short term. While equity funds have the ability to generate blockbuster returns in bullish times but may turn volatile in bearish markets, debt funds can help generate relatively more stable steady returns in good and bad times given that underlying portfolio in a debt funds consists of instruments which have generated some yield at all times. The terminology and names used to define different types of debt funds can be confusing to a layman. This might even lead to investors shunning debt funds. For any investor, therefore, it is important to get the mix right.

…solve the jigsaw puzzle

Getting the mix right is a bit like a jigsaw puzzle. Once you have the pieces come together, the full picture emerges and this gives clarity on how the portfolio is shaping up. The four pieces in this jigsaw when it comes to debt funds is investment horizon, risk appetite, level of diversification (scheme and AMC level), and return expectation.

Investment horizon
Typically an investor should break up his investible surplus into that which could likely be redeemed within one year (short-term) and those which can be kept for longer tenors (more than 1 year). Those investments which are meant for short term should be invested in debt funds which ideally do not have exit load and have low maturity and hence would be subject to low short-term volatility (due to movement in interest rates). Two typical types of debt schemes which fall in this category are liquid funds and ultra-short term schemes. Investors should also keep in mind the tax applicability so as not to be hit adversely by short-term capital gains in the event of exit less than three years in debt funds. Hence taxation would also be a key determinant of investment horizon. Here a comparison between liquid/ultra-short term debt funds and arbitrage funds (equity) would be worthwhile as arbitrage funds enjoy favourable tax treatment. Tax treatments for various types of mutual funds do undergo changes during the presentation of Union Budget, so one should be updated about investments done post Budget especially in the new financial year before making fresh allocations.

Risk appetite
Although debt funds are relatively less risky than equity funds, however, interest rate movements can create volatility in the short end. We call this interest rate risk. This risk is measured typically a measure called modified duration. Every debt scheme portfolio would have a modified duration which is a weighted average of the modified duration of individual debt instruments in its portfolio. Schemes with higher modified duration can generate high returns in bullish times (when interest rates head lower and prices rise) but also give low returns in bearish times. Also, different types of debt instruments carry different yield based on credit of the issuer. For example, a 10-year sovereign government bond would today yield 7.75% annualised yield. A 3-year AA rated NBFC bond could yield 9%. We call this credit risk. So credit funds or high-yield debt funds which invest in relatively lower rated papers carry higher credit risk but can also generate higher returns. While individual debt instruments also have varying levels of liquidity risk, for the investor this should not be much of a concern as mutual fund open-ended debt schemes typically offer daily liquidity. So investor can redeem money any day. The only exception to this rule is FMPs (Fixed Maturity Plans) or capital protection oriented schemes or other hybrid debt-oriented close-ended schemes. There should be therefore a balanced allocation to short-term and long-term debt funds and credit or high yield/accrual bond funds depending on one’s risk appetite.

Level of diversification
How many debt schemes and how many AMCs does one need to have in one’s portfolio? Not too little and not too much! There is no one golden number or rule. It depends entirely on each individual investor and how well you can manage and juggle your investments.

Return expectation
It is important to have expectations of realistic returns and be ready for disappointments. It is quite possible that even after figuring out the above three factors, some debt schemes at some point in time could underperform or disappoint you in terms of returns being offered. A practical approach would be to take a decision on whether to continue to investment or redeem and put the money to work elsewhere. For this you need to differentiate on whether the underperformance is due to fund manager level issues or market-related issues. If the former, one may need to switch the AMC and if the latter, one need to move into a different type of debt scheme or wait out. If the above is bogging you down, think of taking help of a distributor or adviser. Advisers who work on a fee basis and invest your funds in direct plans rather than those who do not take a fee but invest your funds in regular plans would be a better option. Also active monitoring of your investments on a periodic basis is a must to take a mid-course correction if required.

If you manage to put the pieces of the jigsaw puzzle together, it would ensure your money is put to work really hard and you are on course to meet your investment and saving targets.

Debt fund performance with promises of a better future

If you have any financial goal(s) which is less than five years away, which can be met with 8% to 10% rate of return or when you are not comfortable with high volatility (risk) then you can definitely consider investing in debt mutual funds. The returns from debt funds are mainly dependent on the interest rate scenario prevailing in the economy. Some of the debt mutual funds, especially dynamic bond funds, gilt funds, and long-term debt funds have given better returns than bank fixed deposits over the last one to two year period in view of the downward trend in interest rates. The average liquid fund category returns in the last three months and one year are 1.5% and 6.8% respectively. The ultra short-term debt funds, also known as liquid plus funds or cash/treasury management funds, as a category, have generated 2% and 7.9% in the last three months and one year respectively. Short-term funds, also known as short term credit opportunities fund, have returned 8.8% and 7.9% over the past one and three years respectively. The average returns generated by the funds which are in the dynamic and long-term income bond funds category are 9.2% and 8.8% during the last one and three years respectively. The average category returns of gilt funds for the last one, three, and five years are 10.08%, 9.4%, and 7.8% respectively.

Changing investment pattern: Debt funds to rule the future

The Indian mutual fund industry is almost Rs 16 lakh crore strong with fixed income or debt having a two-third share at about Rs 10 lakh crore, the rest being largely equity. The share of debt funds has not changed much from a decade ago when the industry size was less than Rs 2 lakh crore. Another characteristic which has not changed is the institutional dominance (mainly corporates and banks) of the category despite having grown by about 7 times since 2005. However, tax arbitrage and lower expenses for institutional plans now being history, the ratio is bound to shift towards retail investors over the next 5-10 years. But we still have a long way to go as RBI data indicates that about Rs 90 lakh crore is parked in bank deposits, 10 times the money in debt mutual funds and over 35 times the retail debt AUM. This is mainly due to lack of awareness about the benefits offered by debt funds besides the ‘assured returns’ psyche of retail investors. This is bound to change as overall interest rates are likely to fall as India grows. In fact, many investors already shop for higher interest rates by moving from nationalised to cooperative banks. Two factors stand out in favour of debt mutual funds — variety and convenience. In terms of variety, debt funds are available across horizons and risk appetites. Accordingly they can be broadly classified into short term and long term debt funds. For short term investment horizons one may choose between liquid funds (3-6 months), ultra short term debt funds (less than one year) and short term debt funds (less than 3 years). One may choose income and gilt funds if investment horizon is more than 3 years. On the basis of risk, one needs to look at interest rate risk and credit risk. The former is due to change in rates in the economy. This risk can be gauged by average tenure of portfolio holdings — longer the tenure, higher the interest rate risk. Accordingly, liquid funds carry the least interest rate risk while gilt funds carry the highest interest rate risk. In terms of credit risk (risk of default or delay in payment of interest and principal), gilt funds carry nil credit risk as they hold sovereign bonds. So why not invest in only sovereign bonds. Higher yields do matter to investors whether it is FDs or debt funds. Government bonds fetch yields of 7.44-7.77% over 1-10 year bonds. One therefore needs to invest in corporate bonds to beat these yields. But AAA bonds only offer about 0.45% more for 10-year bonds while this is about 2% if is an A+ rated bond. This clearly shows the inverse relation between credit rating and yields as highest rated companies borrow at lowest cost. Mutual funds thus invest in AAA, AA and A rated bonds, all of which are within investment grade rating of BBB(-). Last but not the least is convenience. Most mutual funds are highly liquid. One can even start a monthly systematic investment plan or SIP for as low as Rs.500 per month. The most pertinent question then is how to choose the right funds. The easier way out is to consult your professional financial advisor. Once you have zeroed on the debt fund category, narrow your choice by looking for a pedigreed fund house and fund management team besides looking at its vintage. If they have been around for 1 or 2 decades, it surely gives a lot of confidence having seen multiple market cycles.

Monday, November 28, 2016

November 2016

Mutual fund managers have pumped in over Rs 1.78 lakh crore in the debt market during the April-October period of the current financial year, primarily on account of strong participation from retail investors. Besides, they invested a net amount of Rs 21,000 crore in equity markets during the period under review. The inflows can be attributed to increased participation from retail investors and positive sentiment that was boosted after the long-stalled GST Constitution Amendment Bill was passed in Parliament in August 2016. Monthly net contributions through SIP (Systematic Investment Plan) led to higher positive net inflows in equity markets. As per the data released by the capital markets regulator Securities and Exchange Board of India (SEBI), mutual fund managers invested a net sum of Rs 1.78 lakh crore in April-October period of 2016-17. They had pumped in Rs 2.03 lakh crore between April and October in 2015-16. For the entire 2015-16 fiscal, fund managers had put in a net amount of Rs 2.73 lakh crore in the debt market. This inflow has helped the mutual fund industry to reach the over Rs 16 lakh crore mark in assets under management (AUM) at the end of September 2016, as per the latest data. In comparison, Foreign Portfolio Investors made a net investment of just Rs 3,000 crore into debt markets during the first seven months of the current fiscal (2016-17). Balanced funds saw net inflow of Rs 3,385 crore. However, liquid or money market segment saw an outflow of over Rs 34,800 crore. Overall, the asset under management of the country's 42 active fund houses increased to a historic high of Rs 16.3 lakh crore at the end of October 2016 from Rs 15.8 lakh crore at the end of September 2016.

Driven by addition in equity fund folios, mutual fund houses have registered a surge of more than 36 lakh investor accounts in the first seven months of the current fiscal, taking the total tally to 5.13 crore. This is on top of an additional 59 lakh folios in 2015-16 and 22 lakh in 2014-15. In the last two years, investor accounts increased mainly due to robust contribution from smaller towns. According to the data from the Association of Mutual Funds in India (AMFI) on total investor accounts with 43 fund houses, the number of folios rose to a record 5,1,287,934 at the end of October 2016 from 4,76,63,024 in March 2016, a gain of 36.25 lakh. Growing participation from retail investors, especially from smaller towns, and huge inflows in equity schemes have helped in increasing the overall folio counts. The equity category witnessed an addition of close to 15 lakh investor folios to 3.8 crore in April-October period of the current fiscal. Mutual funds have reported a net inflow of over Rs 31,000 crore in equity schemes in the first half of the current fiscal. Overall, funds have seen an infusion of Rs 2.67 lakh crore. The inflow is in line with the Sensex surging 10% during the period under review.

Piquant Parade, an investment platform, has launched a first-of-its-kind innovative tool - ‘Gamification in Mutual Fund Investing’ for its investors. This feature will encourage good investing behavior and ensure that investors stay on the right path to investing successfully. Gamification is a concept of applying game mechanics and game design techniques to engage and motivate people to achieve their investment goals.’s approach towards gamification is to engage with existing investors and provide a seamless blend of fun and real investing. Keeping with its mission of creating and providing the friendliest investment platform to their customers, has developed a new feature - ‘Gamification’. It is a feature that ranks investors among their peers, so that they know where they stand among other investors similar to them. It is like an instant financial health check up for them. It is called gamification because it introduces game thinking and game elements into investing. It encourages good investment choices and discourages bad ones. Investors will be able to see this on their dashboard in the form of their ‘Peer Ranking. It is the percentile rank that tells investors where they stand among their peers. Apart from the score, the exciting new feature allows investors to earn badges. Positive investing behavior, which FundsIndia believes will make people better investors, will earn investors badges, recognizing their efforts toward disciplined investing. 

Regulatory Rigmarole

Market regulator SEBI has come out with detailed guidelines relating to rating criteria, process, and disclosures for credit rating agencies (CRAs). The regulator has asked rating agencies to disclose the criteria used for rating instruments, rating process and policies, all rating history, press releases and rating reports assigned by the CRAs including ratings withdrawn on their websites. Rating agencies have to implement these guidelines within 60 days. SEBI’s move comes in the wake of sharp downgrade in ratings of Amtek Auto which forced JP Morgan AMC to restrict redemptions in two of its funds.

SEBI has asked entities regulated by it, including registered investment advisers (RIAs), to upload the KYC data of all individual accounts opened on or after August 1, 2016 by March 31, 2017 on Central KYC Registry (CKYCR) platform. In this regard, SEBI has drawn a timeline for the AMCs to upload these documents. According to the timeline, AMCs have to ensure 30% completion of uploading existing KYC documents by November 30, 2016, another 30% by January 31, 2017 and the rest 40% by March 31, 2017. The government’s ambitious central KYC (CKYC) has gone live from July 15 in a phased manner. This paves way for a single bank KYC which will suffice to invest in all financial products, including mutual funds. This was announced in the Union Budget 2012-13. A month back, all the financial regulators - SEBI, PFRDA, RBI, and IRDAI have issued circulars instructing their respective regulated entities to upload KYC data of their customers on the CKYCR platform. Over a period of time, all investor data will be stored at a single place which can be accessed by all financial institutions to verify the KYC. All investors need to do is obtain a central KYC number from Central KYC Registry through the financial institutions and use it to invest in any financial product.  There will be no need to do multiple KYC.

In order to check insider trading, SEBI has come out with a circular to provide clarity on how AMC officials can invest their own money. Among the key changes are cooling period of 15 days for employees to invest in stocks and relaxation in disclosure of certain investments.
Here are the key investment guidelines for the AMC officials
·         Employees need not disclose their investments in fixed deposit instruments like bank FDs, PPF, NSC, and Kisan Vikas Patra, investment in non-financial instruments like gold, and investment in government securities, liquid funds.
·         However, no officials can buy/sell stocks without taking prior approval from compliance officer of the AMC.
·         If an employee wants to buy a particular listed security, he/she has to take prior approval of the compliance officer. The compliance officer has to check with the fund management team if they have executed any trade in that stock for the period of 15 calendar days. If no trade has been executed within 15 calendar days, compliance officer will give approval. The employee has to execute trade within 7 days of receiving such approvals. Moreover, the fund manager cannot execute trade in that particular stock within 15 calendar days if an employee has executed trade. This 15 days is termed as cooling period.
·         Employees can invest in IPOs through public placement route without taking prior approval from the AMCs.
·         Employees will have to intimate the compliance officer if they participate in preference or right issue.
·         Front running is strictly prohibited. Front-running is a practice where a person or a group of persons buy or sell shares in their own account taking advantage of advance information about orders from clients. Front-running is detrimental to the interests of investors and is, therefore, an illegal practice.
·         Employees are expected not to book any profit from the purchase or sale of any security within a period of 30 calendar days. However, in cases where it is done, the employee will have to provide suitable explanation to the compliance officer.
·         Employees will have to disclose their mutual fund investments except liquid fund holding to the compliance officer within 7 calendar days from the date of transaction. However, employees need not disclose their investments with the other fund houses.
·         Employees will have to disclose their SIP investments in mutual funds at the time of making first installment.
·         Employees cannot execute transaction in the scheme if investors have not been communicated about changes in fundamental attributes like change in investment objective, fund manager etc.
AMCs will have to maintain a record of all transactions of their employees made during the financial year and ensure compliance within 30 days from the end of the financial year. The Board of the AMC and the trustees will have to review the compliance of these guidelines. This will come into effect from December 1, 2016.

SEBI is likely to ease investment guidelines for fund houses. The market regulator is looking to allow fund houses to take exposure to derivative instruments by just sending a notice intimating unit holders about this. This was discussed at the meeting of Mutual Fund Advisory Committee (MFAC). If this goes through, fund managers can take exposure to such instruments after 30 days of putting up a public notice. Also, fund houses need not wait for the SEBI approval. Currently, fund houses are required to take approval of at least 75% of unit holders to incorporate such a change in the scheme which is time-consuming. Typically, fund managers take exposure to derivative instruments to hedge their portfolio. This strategy works well in volatile market conditions. SEBI has asked AMFI to work on the modalities and send it to the market regulator soon. AMFI is likely to discuss in the upcoming board meeting scheduled to be held on December 13, 2016.

Financial Planning Standards Board India has welcomed SEBI’s consultative paper on the amendments to the SEBI (Investment Advisers) Regulations, 2013. It has forwarded its suggestions to SEBI on some of the points on the Consultation Paper. “Several recommendations by SEBI are indeed laudable and it will go a long way towards streamlining the financial advisory services in the country thus making it more consumer-centric.” SEBI’s efforts to bring the Financial Planning services, under any garb, within the purview of the IA Regulations are well appreciated. Terms such as Financial Planning, Financial Planner etc. are being used in India indiscriminately and that leads to a lot of confusion amongst the consumers. According to FPSB, the proposed removal of ‘incidental advice’ by the distributors and other professionals is a welcome step and it would protect the investors from getting advice that may not necessarily be in their best interests. Incidental or limited advice is prone to misuse and has been viewed in the context of the prevalence of mis-selling. The Association believes that bringing all investment advice, like medical advice, meted out in popular, public, and social media needs to be discouraged as this is best left to the experts. Thus, differentiating between generic comments and specific financial advice requires some clarity. These ‘investment advisory’ discussions under the ambit of regulations would indeed help towards investor protection. Several of the amendments proposed are commendable and would serve to fast forward the Financial Planning industry, and further help the investor community. At the same time, initiatives towards establishing clarity and initiating steps to enable as well as to facilitate professional growth would be a progressive move. FPSB India opines that risk profiling is an important constituent of financial planning and therefore in the regulations, there is a scope to define the tools and processes for the same to avoid any ambiguities with respect to its fitness and limitations. Additionally, there should be a single point Redressal Mechanism for consumer grievances pertaining to financial products and investment advice. FPSB India says, “SEBI’s Draft Paper is a welcome step and with some modifications it would go a long way in changing the way investors could access personal finance advice from those who are competent to offer.”

Monday, November 21, 2016


November 2016

There is a dearth of NFOs in the November 2016 NFONEST.

Birla Sun Life Resurgent India Fund – Series II

Opens: November 10, 2016
Closes: November 24, 2016

Birla Sun Life Mutual Fund has launched a new fund named as Birla Sun Life Resurgent India Fund - Series 2, a close ended equity fund. The tenure of the fund is 3.5 years from the date of allotment of units. The investment objective of the fund is to provide capital appreciation by investing primarily in equity and equity related securities that are likely to benefit from recovery in the Indian economy. The fund would invest 80%-100% of assets in equity and equity related securities with high risk profile and invest upto 20% of assets in cash, money market, and debt instruments with low risk profile. Benchmark Index for the fund is S&P BSE 200. The fund manager will be Mahesh Patil.

Axis Hybrid Fund – Series 35

Opens: November 11, 2016
Closes: November 25, 2016

Axis Mutual Fund has launched a new fund named as Axis Hybrid Fund Series 35, a 1359 days close ended debt fund. The primary objective is to generate income by investing in high quality fixed income securities that are maturing on or before the maturity of the fund whilst the secondary objective is to generate capital appreciation by investing in equity and equity related instruments. The fund will allocate 70% to 95% of assets in debt instruments including securitized debt with low to medium risk profile, invest upto 25% of assets in money market instruments with low risk profile and it would allocate 5% to 30% of assets in equity and equity related instruments with high risk profile. Investment in securitized debt would be up to 50% of the net assets of the fund. The fund shall not invest in foreign securitized debt. Benchmark Index for the fund is a combination of Crisil Composite Bond Fund Index (80%) and Nifty 50 Index (20%). The fund managers are Devang Shah (debt component) and Ashwin Patni (equity component).

IDFC Credit Opportunities Fund, Birla Sun Life Resurgent India Fund – Series 3, 4, and 5, UTI Long-term Advantage Fund – Series V, HSBC Capital Protection Fund – Series III (Plan I to IV), Mirae Asset Dynamic Bond Fund, Reliance Dada-Dadi Fund, Sundaram NIFTY 50 Equal Weight Fund, Reliance Nivesh Lakshya Fund, UTI Capital Protection Oriented Fund – Series IX, Sundaram Top 100 Series VI-VII, and Sundaram Value Fund Series VII - VIII are expected to be launched in the coming months. 

Monday, November 14, 2016

November 2016 
The combination of equity and tax-saving makes ELSS an ideal gateway to equity. There are many kinds of mutual funds and clearly, not all are suitable for every investor. However, ELSS funds are probably an exception. Everyone who is eligible for ELSS tax savings should invest in them. The benefits of ELSS go far beyond just the tax you save, or even the gains you make from the fund itself. ELSS funds' role as a gateway to equity investments makes them invaluable for everyone.

The consistent performance of two funds in the November 2015 GEMGAZE is reflected in those funds holding on to their esteemed position of GEM in the November 2016 GEMGAZE. Magnum Taxgain Fund, HDFC Tax Saver Fund, and Canara Robeco Equity Tax Saver Fund have been shown the exit door by virtue of their dismal performance while Birla Sun Life Tax Plan, Franklin India Taxshield Fund, and ICICI Prudential Long-term Equity Fund have been accorded a red carpet welcome.

Birla Sun Life Tax Plan Gem
Launched in 1999, the Rs. 422 crore Birla Sun Life Tax Plan is one of the oldest ELSS funds in the industry. Currently, large caps account for 47% of the portfolio. Portfolio allocations show the fund to be more small-cap oriented than its peers, with a 15-22% allocation to small cap stocks. With 51 stocks and the top 5 holdings accounting for 25.77%, the fund looks well diversified. The fund invests 52.23% in the top three sectors, i.e. finance, automobile, and services. The fund's investment strategy focuses on a diversified and high-quality portfolio, with parameters such as capital ratios and balance-sheet strength used to judge quality. It uses a combination of top-down and bottom-up approaches to take sector/stock positions. The fund avoids highly leveraged plays and offers superior growth opportunities.  After a bad patch from 2008 to 2010, Birla Sun Life Tax Plan has made a big comeback in the last five years, with a particularly good run since 2014. In the past one year, the fund has earned a return of 10.42% as against the category average of 11.57%. Since inception, it has given an annual return of 20%. The expense ratio is 3.01% and turnover ratio is 2%.

Franklin India Taxshield Fund Gem
Launched in April 1999, the 2442 crore Franklin India Taxshield Fund is one of the oldest ELSS funds in the industry with a proven track record in bull and bear phases. This ELSS fund’s strategy has been to buy quality large caps or emerging large caps at a reasonable price, even in a category crowded with multi-cap funds. Currently, large caps account for 81% of the portfolio. Outpacing the benchmark in 12 of the last 15 years, this fund has proved more adept at containing losses in bear markets than in really acing its peers in runaway bull phases. The last two years, however, have seen the fund widen its outperformance vis-a-vis the benchmark and the category. The fund's bottom-up picks in automobiles and ancillaries, ports and pharma may explain part of this, as also its underweight positions in PSU banks, metals, and energy. The fund also avoids momentum stocks and sticks to bottom-up fundamentals-based investing. Though this fund is from a growth-style fund house, it tends to be quite valuation conscious. The fund does not take cash calls and remains fully invested through cycles. With 55 stocks and the top 5 holdings accounting for 26.28%, the fund looks well diversified. The fund invests 52.65% in the top three sectors, i.e. finance, automobile, and technology. Since inception the fund has given returns of around 25%. In the past one year, the fund has earned a return of 10.14% as against the category average of 11.57%. The expense ratio is 2.4% and turnover ratio is 19%. 

ICICI Prudential Long-term Equity Fund Gem

At Rs. 3745 crore, ICICI Prudential Long-term Equity Fund is one of the largest ELSS funds in the industry. Currently, large caps account for 54% of the portfolio. With 37 stocks and the top 5 holdings accounting for 28.23%, the fund looks well diversified. The fund invests 53.06% in the top three sectors, i.e. finance, healthcare, and technology. The fund is valuation-focused and the portfolio is constructed around stocks across sectors and market-capitalisation ranges, based on cheaper valuation and reasonable growth expectations. Expensive stocks which cannot be explained by valuation tools are avoided. A fund which has outpaced its benchmark over not one but three different market cycles, it has beaten its benchmark in 13 of the last 15 years. In the past one year, the fund has earned a return of 10.4% as against the category average of 11.57%. The expense ratio is 2.3% and turnover ratio is 138%. 

Religare Invesco Tax Plan Gem

With a corpus size of Rs. 340 crore, Religare Tax Plan is one of the smallest schemes in its category, but it packs in quite a punch. The fund invests across market capitalisation and sectors and spreads its assets over 47 stocks without being overly diversified and the top 5 holdings constitute 29.17%. The top three sectors are finance, automobile, and technology. Even though the fund currently has a large cap bias with 69% allocation, it has not been hesitant about being heavily invested in smaller companies. In the past too, the mid-cap and small-cap allocation have been high. Its relatively small size makes an effective mid-cap strategy viable. The one-year return is 8.59% as against the category average of 11.57%. Despite its relatively short history, the fund has consistently delivered returns for the investors. A fund that has managed to beat its benchmark through markets ups and downs in seven out of the eight years since launch, the fund prefers quality businesses with healthy growth prospects. But it is careful about not going overboard on valuations. It does not take tactical cash or sector calls. Stock picking has been the key for success of this fund. The expense ratio is 2.49% and the portfolio turnover ratio is 31%.

DSPBR Tax Saver Fund Gem

Launched in 2007, DSPBR Tax Saver Fund has a fund corpus of around Rs 1496 crore. It has a growth-oriented multi cap portfolio with 69% of the corpus in large cap stocks. There are 65 stocks in the portfolio. The top 5 holdings constitute 22.32%. The top three sectors are finance, automobile, and healthcare. The fund follows an investment strategy that remains rooted to a bottom-up approach with a predominant focus on growth-oriented stocks. The manager uses sector-based model portfolios created by analysts as his initial reference point. He combines this with absolute and relative valuation measures to pick stocks. He scouts for stocks that have high/rising return on equity along with good scalability prospects. The manager shows a value bias by investing a small portion in companies that trade at close to half their book value. Top-down research is taken into consideration when taking sector bets, with the manager typically looking for sectors that demonstrate strong pricing power. The manager pays heed to portfolio construction, with strong emphasis on liquidity and risk mitigation. DSP BR Tax Saver fund has offered 18.64% returns for the last one year as against the category average of 11.57%. The expense ratio is 2.61% and the portfolio turnover ratio is 136%.