FUND FULCRUM (contd.)

February 2016

Individual investors hold 45% or Rs. 6.13 lakh crore of the total Rs. 13.54 lakh crore AUM of the mutual fund industry as on January 2016, according to the latest AMFI data. Individual investors include HNIs who invest Rs. 5 lakhs or above. They have mostly invested in equity funds. AMFI data shows that 83% of equity assets is held by individual investors. However, overall share of individual investors in the industry has not seen any growth in the last two years. As on December 2014, individual investors’ AUM share in the industry stood at 46% which has come down slightly to 45.3% in January 2016. Of the Rs. 13.54 lakh crore total AUM of the industry, the remaining 55% AUM is held by institutions, banks, and FIIs. Institutional investors have mainly invested in liquid and money market schemes (93%), debt oriented schemes (61%), and ETFs and FOFs (73%). AMFI data shows that the AUM of institutional investors has grown faster as compared to individual investors. Institutional assets have grown by 18.3% from Rs. 6.26 lakh crore in January 2015 to Rs. 7.41 lakh crore in January 2016. On the other hand, retail assets have grown by 14% from Rs. 5.37 lakh crore to Rs. 6.13 lakh crore during the same period.

Regulatory Rigmarole

The government’s ambitious central KYC (CKYC) project, which was announced in the Union Budget 2012-13, is expected to be operational soon. This essentially means that all investor data will be stored at one 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. Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) has been entrusted with the task of setting up the Central KYC Registry. CERSAI has appointed DotEx International Limited, a NSE group company, as its managed service provider for the Central KYC Registry. Ten financial institutions, including insurance companies, banks and mutual funds, have already done a pilot testing on their platforms. Banks currently spend anywhere around Rs. 150 - Rs. 200 to store KYC data of customers and DotEx will provide the same service an average cost of Re. 1 per upload, download or for making any data modification. Similarly, the cost of performing customers KYC will come down drastically for fund houses which currently have to spend around Rs. 25 - Rs.30 per KYC. In addition, the turnaround time to complete KYC will be much faster as compared to the current practice.  The access to DotEx platform will be limited to financial institutions which are regulated by SEBI, PFRDA, and IRDAI. The system will allow financial institutions to upload KYC data in bulk and DotEx will take up to 24 hours to process this data. In case the records of investors already exist or there are any discrepancies, DotEx will alert the financial institution within 24 hours. If you have already done CKYC or if someone applies with the different ID proofs/different address then we will be able to flag it to the financial institution based on demographic details. To begin with, DotEx will use Aadhar and PAN to authenticate the ID proof submitted by investors. It will be extended to passport and driving licenses later on. The verification will happen online. CKYC number will be provided in one day. The new KYC platform is also expected to be of great help to investors who move to different cities for work. You can provide your permanent and temporary address. You have to provide a proof of address for permanent address and no proof will be required for temporary address. Those who move to different cities always face problem with banks as they require proof of address for changing the address in their records which can be at times cumbersome. In this platform, if you are moving to another city you can just change your correspondence/temporary address without any proof. Once this record is changed at one bank an update notification will be sent to all financial institutions which are linked to that CKYC record.   To begin with, the KYC data will be used for financial transactions only. Going forward, this database can also be used by other competent authorities to verify customer records which can perhaps virtually eliminate the need to submit physical documents. The launch of central KYC is expected to be of great help for distributors, financial institutions and especially investors who have to undergo multiple KYC for investing in different financial products.

To safeguard investor interest, SEBI has notified a stricter set of norms for mutual funds, wherein it has capped the investment limit in bonds of a single company at 10%. The move comes after JP Morgan Mutual Fund got into trouble due to its exposure to debt securities of Amtek Auto, while a few other fund houses have also faced similar problems with regard to corporate bonds of other distressed firms. Under the norms, mutual fund houses will not be able to invest more than 10% of a scheme's corpus in debt securities of a single company. However, it can be extendable to 12% of net assets value (NAV) after trustee's approval. Currently, the limit is 15%. The investment within such limit can be made in mortgage backed securitised debt, which are rated not below investment grade by a credit rating agency registered with SEBI. However, such limit will not be applicable for investments in government securities, treasury bills and collateralised borrowing and lending obligations. The new norm -- Securities and Exchange Board of India (Mutual Funds) Regulations, 2016 -- has come into force from February 12, 2016 when the regulator notified it. The regulator said that schemes already in existence shall within an appropriate time and in the manner, as may be specified by the Board, conform to such limits.

In an email sent to distributors, AMFI Unit of CAMS has requested mutual fund distributors to ask new investors to submit National Automated Clearing House (NACH) form which will replace Electronic Clearing Services (ECS) form to invest in mutual funds through SIPs. This comes into effect immediately. The email says that banks may not accept ECS mandate forms from new investors for SIP registration. Earlier in February 2016, National Payments Corporation of India (NPCI) said that ECS which is used for servicing mutual fund SIPs will soon be replaced by NACH forms. This was supposed to be implemented from March 1, 2016. As of now, registering a SIP through ECS mandate takes up to 30-35 days and there is no way to track if the ECS has been confirmed at the bank’s end. However, most banks, especially private sector banks issue mandates within 15-20 days. With NACH, the turnaround is expected to reduce to only up to 10 days as banks have to answer within T+5 days to confirm the transaction. Also, NACH is cost effective as compared to ECS as it entails less paperwork. While new investors are required to submit NACH forms to invest in mutual funds through SIP, ECS mandate of existing investors will automatically be migrated on NACH platform, clarified the CAMS email. That means, distributors need not collect NACH form from existing investors even if their SIP expires. Also, NACH on its own does not replace existing direct debit arrangements. NACH can help investors and distributors in a big way. Earlier, distributors had to register multiple mandates if their clients wanted to invest through SIP in say, four different schemes. With the new system, distributors can register four SIPs through one mandate. The process has become simpler even in case of lump sum investments. NACH can be also utilized to pay utility bills and insurance premiums. NACH is a one-time registration process which gives flexibility to investors to invest lump sum and through SIP without having to make individual payments each time.

SEBI has allowed the new cadre of distributors to sell Mutual Fund Linked Retirement Plans (MFLRPs) and liquid funds. This has come into effect immediately. So far, the new cadre of distributors was allowed to canvass diversified equity funds, index funds, and FMPs having track record which equals to or is better than their benchmark for at least three years. In a circular, SEBI has said, “New cadre of distributors was allowed to sell simple and performing mutual fund products. It has been decided that simple and performing mutual fund schemes shall also comprise of retirement benefit schemes having tax benefits and liquid schemes/money market mutual fund schemes.”

From April 1, 2016, SEBI has allowed fund houses to invest the unclaimed redemption and dividend corpus in a separate plan of a liquid scheme which is meant exclusively for deploying unclaimed amounts. However, AMCs will not be allowed to charge any exit load in this plan and the TER will be capped at 50 bps. To ensure that mutual funds play a pro-active role in tracing the rightful owner of the unclaimed amount, SEBI has asked fund houses to publish a list of names and addresses of investors in whose folios there are unclaimed amounts. AMFI will also publish a consolidated list of such investors on its website. Also, fund houses will have to publish information about the process of claiming the unclaimed amount on their websites. Investors who claim the unclaimed amount during a period of three years from the due date will be paid initial unclaimed amount along with the income earned on its deployment. Investors who claim these amounts after three years will be paid the initial unclaimed amount along-with the income earned on its deployment till the end of the third year. After the third year, the income earned on such unclaimed amounts will be used for the purpose of investor education. Today, most investors opt to receive their dividend or redemption proceeds directly in their bank accounts through electronic clearing service (ECS). But there are instances where the dividend or redemption cheques return to the fund house because investors have not updated their address with the fund house.

The Budget 2016 did not have much for individual taxpayers and investors. There were no changes in Income Tax slabs, no extra tax deductions on investments, and no change in long-term capital gains tax on equity.  In fact, it did not have any specific provisions for mutual fund investors.

FUND FULCRUM

February 2016

Assets base of the country's mutual fund industry dropped to Rs 12.74 lakh crore at the end of January 2016, making it the third consecutive monthly decline, due to slowdown in inflows in equity and equity linked saving schemes. As of January-end, over 40 fund houses in the country together had an average AUM of Rs 12,73,714 crore as against Rs 12,74,835 crore in the preceding month, according to the latest data of the Association of Mutual Funds in India (AMFI). The industry's AUM was at Rs 12.95 lakh crore in November 2015, while it had touched an all time high of Rs 13.24 lakh crore in October 2015. In comparison, the assets base stood at Rs 11.87 lakh crore in September 2015.

Investors pumped in over Rs 22,500 crore into various mutual fund schemes in January 2016, with debt segment contributing the most to the inflow. With this, the total net inflow in mutual fund schemes has reached Rs 1.84 lakh crore in the April-January period of the current fiscal. In comparison, mutual funds had witnessed an inflow of Rs 1.95 lakh crore in the same period, a year ago. According to the data from the Association of Mutual Funds in India (AMFI), investors have poured in a net of Rs 22,569 crore in mutual fund schemes last month as compared to an outflow of Rs 22,567 crore in the preceding month. The latest inflow has been mainly driven by contribution from income funds or debt schemes. Besides, equity schemes continued to witness positive inflow. Income funds witnessed Rs 15,014 crore being poured in last month, equity and equity linked schemes too saw net inflows of Rs 2,914 crore. In addition, liquid or money market segment and balanced fund saw net inflows of Rs 2,455 crore and Rs 880 crore, respectively. Overall, the asset base of the country's fund houses slipped to Rs 12.74 lakh crore last month from Rs 12.75 lakh crore in December.

Equity mutual funds witnessed an addition of over 34 lakh investor accounts, or folios, in the first 10 months of the current fiscal (2015-16), primarily on account 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 all the fund houses, number of equity folios jumped to 3.51 crore (3,51,38,492) last month from 3.16 crore (3,16,91,619) at March-end, a gain of 34.47 lakh. April last year had seen the first rise in folios in more than four years. Prior to 2014-15, the equity MF sector had seen a continuous closure of folios since March 2009, following the global financial crisis in late 2008. Since March 2009, as many as 1.5 crore folios were closed. Growing participation from retail investors has led to a sharp increase in folios. Besides, optimism in investors too helped raise the number of investors' account in the equity segment. Moreover, addition in equity folios helped increase overall investors' base to a record high of 4.64 crore in January from 4.17 crore at the end of March. Mutual funds have reported net inflows of over Rs 69,000 crore in equity schemes in the first 10 months of 2015-16, helping the industry grow the folio count.

Growing retail participation for the fifth straight quarter helped mutual funds close 2015 with their highest-ever folio count of 4.59 crore, a growth of 13.84% (or 55.76 lakh folios) over 2014. Of this, the retail count was 4.37 crore, which is an increase of 13% or 50.69 lakh folios, according to a CRISIL-AMFI release. The industry added 14.09 lakh (up 3.17%) folios in the December quarter sequentially, or over the September quarter. Of this, retail accounted for 12.93 lakh folios, which is lower than the 15.11 lakh added in the September quarter. Equity-oriented funds got the lion's share of retail folios despite market volatility. Retail folios in the segment were up 13.33% (39.53 lakh folios) at 3.36 crore despite the fact that the market as represented by Nifty 50 closed the year down 4%. The latest quarter saw a rise of 2.45% (8.04 lakh folios), also marking the fifth consecutive quarter of gains. More high networth individuals (HNIs), or those investing Rs 5 lakh or more, preferred mutual funds. The HNI segment recorded an absolute rise of nearly 4 lakh folios in 2015 and 0.88 lakh in the December quarter, pushing its total base to 17.21 lakh. Balanced funds as a category added 4.55 lakh folios (up 24.1%) year-on-year and 1.26 lakh folios (5.7 %) quarter-on-quarter to close 2015 at 23.45 lakh folios. Within balanced funds, retail and HNI folios posted a rise of 1.08 lakh folios and 0.14 lakh folios, respectively, for the quarter. Debt funds' share of total mutual fund folios looked up a notch to 16.43% compared with 16.06% at the end of September 2015. The category logged the fourth consecutive quarterly rise, adding 3.96 lakh folios to take the tally to 75.33 lakh. This included 3.68 lakh retail folios compared with 2.47 lakh the previous quarter.

Contribution of small towns - known as beyond the top 15 cities (B15) - to mutual funds' asset base in India has surged 13.5% to Rs 2.14 lakh crore in the first nine months of the current fiscal. Mutual Funds' assets under management (AUM) from B15 grew from Rs 1,89,014 crore in March 31, 2015 to Rs 2,14,528 crore at the end of December, according to data from the Association of Mutual Funds of India (AMFI).
Piquant Parade

Religare Enterprises has received approval from the Competition Commission (CCI) to sell a controlling 51 percent stake in its mutual fund business, Religare Invesco AMC, to foreign partner Invesco. Religare held 51 percent in the JV while Invesco had 49 percent ownership. Invesco had purchased 49 percent stake in March 2013, wherein it was also given an option to further increase its stake before March 2016. While a number of foreign fund houses have exited the Indian mutual fund industry, there have not been many cases where Indian entities have sold the asset management business.

Mahindra Asset Management Company, which has received an approval from the market regulator to set up mutual fund business, looks to start operations within the next 3-4 months and will focus on rural and semi-urban markets where its non-bank lender parent Mahindra Finance has a strong presence.

In order to simplify on boarding process of new investors in mutual funds, Karvy Computershare has started facilitating Aadhaar based eKYC on the website of Quantum MF. Very soon, the R&T will extend this facility across all its serviced fund houses. Under this facility, new investors having Aadhaar card and PAN can easily complete their KYC process. All they need to do is key in their details in a KYC form and submit it. The system will detect that KYC status is not verified as per latest KYC norms and ask them to key in their Aadhaar card number. Once they enter the number, the system will land them on transaction page. After completing transaction, the customer relationship officer of Karvy Computershare will contact them to complete the eKYC process. Simply put, investors can invest in mutual funds at a click of button without submitting KYC forms and doing in-person verification (IPV). Investors can open a folio and start transacting in direct and regular plans. Guardians on behalf of minors can also invest through this procedure. The similar process will be applicable to all joint holders too, if they are not KYC compliant. However, SEBI rules say that investors can invest up to Rs.50000 per financial year per mutual fund through this facility. Investors who wish to invest more than this limit need to undergo IPV or biometric either through online authentication or visiting Karvy’s point of service. Aadhaar based eKYC provides a great opportunity for AMCs and distributors to target the untapped segment of non-KYC compliant population. It will help distributors and AMCs to build additional assets. CAMS too has launched Aadhaar based eKYC of mutual fund investors. Recently, three fund houses – Reliance, Quantum, and Birla Sun Life have introduced the eKYC service which aims to expedite the process of client verification and reduce paperwork for distributors. Banks and insurance companies are already using Aadhaar linked e-KYC service to carry out their KYC verification procedure. However, many banks and insurance companies insist on submitting physical documents even after carrying out e-KYC.

In order to reduce the turnaround time for generating Common Account Number (CAN), MF Utilities has introduced a new facility called ‘FillEezz’ for distributors and investors which enables them to fill up the CAN form online. However, distributors and investors are still required to submit the printout of CAN along with signature and supporting documents to MF Utilities POS. To expedite transactions across mutual funds, MF Utilities will move to complete online creation of CAN very soon. Through a CAN, investors can invest in multiple schemes. In other words, CAN is a repository for investors to hold multiple folios across the mutual fund industry. The CAN is mapped with investors PAN. Over time, this will give the industry a more accurate data on the number of unique investors. While opening a CAN online, those who want to enter the details now and complete the formalities later, there is a provision to save the details and retrieve it at a later date. Moreover, investors can also “clone” the data already filled and available in FillEezz when the same investor intends to open another CAN with different combination by reusing the existing data. This helps in avoiding unnecessary effort of re-entering the data when a CAN is opened for another family member. FillEezz provides a convenient way to open a CAN. MFU is evolving and we are looking at creating more and more convenience for distributors. Also, MF Utilities will soon launch eKYC facility to enable new investors to open CAN seamlessly, added the release.

…to be continued

NFO NEST

February 2016

Equity NFOs with lock-in back with a bang

Mutual funds are back with a bang, launching equity schemes with lock-ins, after a gap of almost a year because the stock market has witnessed sharp erosion in value. ICICI Prudential Mutual Fund, Birla SunLife Mutual Fund, and Sundaram Mutual Fund have introduced close-ended equity products and more are likely to follow suit soon. The new fund offer of ICICI Prudential India Recovery Fund - Series 4 (36 months tenure) opens on February 8, 2016 while Birla Sunlife Emerging Leaders Fund - Series 7 (42 months tenure) opens for subscription on February 5, 2016. Sundaram Value Fund - Series 4 has just concluded its NFO.

Close-ended NFOs, in general, and ELSS Funds (dealt with in the last few editions of NFONEST), in particular, continue to adorn the February 2016 NFONEST.

ICICI Prudential Multiple Yield Fund – Series 10 – 1103 Days Plan D

Opens: February 1, 2016

Closes: February 15, 2016

ICICI Prudential Mutual Fund has launched a new fund as ICICI Prudential Multiple Yield Fund - Series 10 - 1103 Days Plan D, a close ended income fund. The primary objective of the fund is to seek to generate returns by investing in a portfolio of fixed income securities/debt instruments. The secondary objective of the fund is to generate long term capital appreciation by investing a portion of the fund's assets in equity and equity related instruments. The fund will allocate 65%-95% of assets in debt securities (including government securities) with low to medium risk profile. It would allocate up to 30% of assets in money market instruments, cash and cash equivalents with low to medium risk profile and it would allocate 5% to 35% of the asset in equity or equity related securities with medium to high risk profile. Of the investments in debt instruments, 83%-88% would be invested in AA rated non-convertible debentures. The fund will be benchmarked against the combination of CRISIL Composite Bond Fund Index (80%) and Nifty 50 Index (20%). The equity portion of the fund will be managed by Vinay Sharma. Rahul Goswami and Chandni Gupta will jointly manage the debt portion. The investments under the ADRs/GDRs and other foreign securities will be managed by Shalya Shah.

Birla Sunlife Emerging Leaders Fund – Series 7

Opens: February 5, 2016

Closes: February 19, 2016

Birla Sun Life Mutual Fund has launched Series 7 of its Emerging Leaders Fund, a close-ended equity fund with a tenure of 3.5 years that seeks to invest in equity and equity-related securities of companies in the small and mid-cap segment. The fund is benchmarked against Nifty Midcap 100 Index and will be managed by Mahesh Patil, Co-Chief Investment Officer, Birla Sun Life Asset Management Company, jointly with Pranay Sinha and Milind Bafna.

HDFC Retirement Savings Fund

Opens: February 5, 2016

Closes: February 19, 2016

HDFC Mutual Fund has launched Retirement Savings Fund. There are three plans – Equity Plan, Hybrid-Equity Plan, and Hybrid-Debt Plan. The investment objective of the Investment Plans offered under the fund is to generate a corpus to provide for pension to an investor in the form of income to the extent of the redemption value of their holding after the age of 60 years by investing in a mix of securities comprising of equity, equity related instruments and/or Debt/Money Market instruments.  The benchmark for the Equity Plan is Nifty 500 Index, that of the Hybrid-Equity Plan is CRISIL Balanced Fund Index, and that of the Hybrid-Debt Plan is CRISIL MIP Blended Index. The fund managers are Mr. Chirag Setalvad (for Equity Portfolio), Mr. Shobhit Mehrotra (for Debt Portfolio), and Mr. Rakesh Vyas (Dedicated Fund Manager for Overseas Investments).

ICICI Prudential India Recovery Fund – Series 4

Opens: February 8, 2016

Closes: February 22, 2016

ICICI Prudential Mutual Fund has launched the ICICI Prudential India Recovery Fund-Series 4, a close ended growth fund. The investment objective of the fund is to provide capital appreciation by investing in equity and equity related securities that are likely to benefit from recovery in the Indian economy. The fund’s performance will be benchmarked against S&P BSE 500 Index and its fund managers are Manish Gunwani, Rajat Chandak, and Shalya Shah.

Reliance Korea Equity Fund, Sundaram Value Fund (Series IV – VI), Peerless Investment in Debt Equity and Arbitrage (IDEA) Fund, ICICI Prudential Capital Protection Oriented Fund – Series X (Plans A to H), DSP BlackRock Dual Advantage Fund – Series – 44 to 48, SBI Debt Fund Series B – 31, and Peerless Balanced Opportunities Fund  are expected to be launched in the coming months. 

GEMGAZE

February 2016 

How do you fancy having your own fund manager to try to boost your long-term savings? They would keep a close eye on where you are invested, sell funds that were failing and buy new ones that are about to soar. It sounds ideal — and it is possible. Increasing numbers of investors are turning to ‘fund of funds’, a type of investment where one fund manager picks a whole range of funds for you based on how much risk you are willing to take. Typically, the money is invested in other investment funds — these in turn invest in other companies. These types of funds help you take less risk because your cash is spread across a greater number of funds and companies. So if one fund’s performance starts to fall off a cliff, you should, in theory at least, be able to rely on some of the others to prop it up. Of course, the fund manager is not actually working just for you — but you and a host of other like-minded investors. For many investors, fund of funds take away the headache of deciding on which funds to buy and which to sell. Instead you hand those decisions over to a full-time fund manager.

All the GEMs from the 2015 GEMGAZE have performed reasonably well through thick and thin and figure prominently in the 2016 GEMGAZE too. 

FT India Life Stage Fund of Funds Gem

Franklin Templeton AMC offers five plans based on life stages that will suit your age profile – FT India Life Stage FoF 20s, FT India Life Stage FoF 30s, FT India Life Stage FoF 40s, FT India Life Stage FoF 50s Plus, and FT India Life Stage FoF 50s Floating Rate. The first four plans were launched in November 2003 and the last plan was launched in July 2004. All these are plans of a single fund that has assets of around Rs 78 crore. The AUM of each plan is Rs 13 crore, Rs 7 crore, Rs 13 crore, Rs 10 crore, and Rs 35 crore respectively. The top three sectors in the portfolio are finance, chemical, and engineering. The allocation to equity tapers from 80% in the first plan to a measly 20% in the last plan. The one-year returns of the plans are -4.78%, -1.18%, 1.88%, 3.84%, and 4.6% respectively. While the expense ratio for the plans is 1.21%, 1.7%, 1.84%, 1.87%, and 0.79% respectively, the portfolio turnover ratio is 5%, 6%, 7%, 3%, and 3% respectively.

ICICI Prudential Advisor Fund Gem

ICICI Prudential Mutual Fund offers Fund of Funds through five plans launched in November 2003: ICICI Prudential Advisor–Very Aggressive, ICICI Prudential Advisor–Aggressive (ICICI Prudential Advisor Series – Long Term Savings Plan w.e.f. December 6, 2013), ICICI Prudential Advisor–Moderate, ICICI Prudential Advisor–Cautious, and ICICI Prudential Advisor–Very Cautious (ICICI Prudential Advisor Series – Dynamic Accrual Plan w.e.f. June 17, 2015). The AUMs of the Very Aggressive, Aggressive, Moderate, Cautious, and Very Cautious Plans are Rs 4 crore, Rs 6 crore, Rs 5 crore, Rs 2 crore, and Rs 5 crore respectively. The top three sectors in the portfolio are finance, technology, and energy. The allocation to equity is 19.8%, 58.84%, 40.65%, 34.49%, and 0% respectively. The one-year returns of the plans are -1.01%, -5.67%,-4.02%,-2.19%, and 9.78% respectively. While the expense ratio for the plans is 0.74%, 0.73%, 0.72%, 0.74%, and 0.64% respectively,  the portfolio turnover ratio is 4%, 8%, 6%, 3%, and 0% respectively.

Birla Asset Allocation Plan Gem

Birla Asset Allocation Plan is an open-ended fund of funds, launched in January 2004, which offers three plans – Aggressive, Moderate, and Cautious. The AUM of Aggressive, Moderate, and Cautious Plans is Rs 10 crore, Rs 6 crore, and Rs 3 crore respectively. The top three sectors for all the plans are finance, automobile, and healthcare. The allocation to equity is 74.1%, 48.55%, and 23.1% respectively. The one-year returns of the plans are -3.62%, -1.02%, and 0.81% respectively. The expense ratio for all the plans hovers around 0.02%.

FT India Dynamic PE Ratio Fund of Funds Gem

FT India Dynamic PE Ratio Fund of Funds’ investment strategy is unique. Its portfolio is invested in a mix of equity and debt. But unlike the usual balanced fund, it changes this mix based on market levels (the price-earnings multiple of Nifty) at the end of each month. If the Nifty PE is at a rock-bottom 12 times or less, 90-100% of the portfolio goes into shares, with very little in debt. If the PE crosses the danger zone above 28 times, the portfolio is fully switched into debt. At PE bands that fall in between, the equity portion can vary from 30-70%. This fund does not invest directly in stocks or bonds, but redirects your money into two other well-managed funds – Franklin India Bluechip Fund and Franklin India Short-term Income Plan, the former invested in large-cap stocks and the latter in long term gilts and bonds. At present, the fund holds 50.09% in Franklin Bluechip Fund and 49.91% in Franklin India Short-term Income Plan. The AUM of the fund is an impressive Rs 753 crore. The top three sectors in the portfolio are finance, energy, and technology. This predominantly large cap fund has an allocation to equity of 50.09% at present. The one-year return of the fund is -0.13% as against the category average of -2.19%. While the expense ratio is at 1.78%, the portfolio turnover ratio is 37%.

FUND FLAVOUR

February 2016

The flexible fund manager

Fund of funds (FOF) invest in other mutual funds that hold promise and regularly rebalance their portfolios if the performance of one or more funds they have invested in is lacklustre. For investors, it allows an entry into many different funds with a small investment. And it also does away with the need to keep tabs on your asset allocation. In a nutshell, they offer off-the-shelf asset allocation. A readymade asset allocation solution, compared to investing directly in a varying portfolio of shares, bonds, and mutual funds saves time.

Pros and…

Simplified investing: If you are a first-time investor, choosing the right mutual fund can be a tough decision. There is no way to ensure that your funds will outperform. Opting for the best performing fund is not always a solution. A fund may do very well one year but slip the next year. Last year's laggards can be this year's winners. The FoF takes care of this problem by making the decision for you. You do not have to analyse individual schemes and find which ones suit your needs and goals. You also need not track the performance of the schemes in your portfolio. If the fund manager thinks a certain scheme has not been doing well, he will exit from the fund.

Multiple diversification: FoFs take diversification to a new level. FoFs reduce the risk for the investor by spreading the corpus across several different schemes. This gives a multi-cap flavour to the FoF. For instance, an equity FoF may have a mix of small-cap, mid-cap, and large-cap oriented funds in its portfolio, thus providing enough diversification. In fact, some feel that a well-chosen FoF can be your one-stop shop for equities. Investors can meet their diversification needs merely by holding one such scheme. The FoF makes sure that the risk gets spread across different types of equity schemes, thus offering better risk-adjusted returns. Keep in mind that some FoFs pick funds from across the spectrum, while others restrict themselves to the schemes from their own fund house. From the diversification point of view, the schemes that pick from different funds appear a better bet than those with a restrictive mandate. The ING Optimix Five Star Multi Manager FoF invests in five equity diversified funds from four fund houses as well as a Nifty ETF.

Convenience: The investors who put their money in a FoF do not need to monitor the performance of different schemes constantly. It also saves them from churning their portfolios, that is, frequently moving from equity to debt schemes, or vice versa, depending on the market outlook. The fund manager of a FoF will take care of the churning that is necessary.

Affordability: FoFs often invest in sought-after institutional funds that are beyond the reach of retail investors. This also makes investing affordable for the investors. So, if you want to invest in five equity funds and five debt funds, and the minimum investment requirement for each fund is Rs 5,000, you will need Rs 50,000 to invest in these schemes. On the other hand, in the case of a FoF, you can invest in 10 such funds with just Rs 5,000.

Despite the advantages they offer in asset allocation, this category has not yet caught on with the average investor. All FoFs have a total corpus of about Rs 7396 crore, with Rs 5373 crore invested in domestic FoFs and Rs 2023 crore in overseas FoFs. This is minuscule compared to the close to Rs 13 lakh crore of assets under management in the entire mutual fund universe. There is hardly any awareness about fund of funds and their advantages. This is like a fill-it-shut-it-forget-it investment vehicle, as the asset allocation is done by FoF service provider at no ‘extra’ tax impact or load on investors.

…Cons of FoFs

Additional layer of costs: The convenience and benefits of an FoF come at a cost. The investor pays a higher fund management fee than that for an equity fund.  Investors are effectively burdened with two layers of costs—fund management fee charged by the fund (around 0.75% a year) as well as the expenses of the underlying schemes in its portfolio (another 1.5-2% per year). For the investor, the total cost can add up to nearly 3% per year. This does not hurt when the market is giving a return of 20-25%, but if the market is going to rise by barely 10-12% and the expense ratio shaves off 3% off your return, you cannot ignore this aspect.

Duplication: Besides, there is a likelihood of duplication in the holdings of the funds in the portfolio. The mother fund could be investing in the same stocks through its underlying schemes since there is a high degree of overlap in the portfolios of the top equity schemes. You may be paying the fund manager for investing in the same stocks through four to five different schemes.

Tax treatment: One important shortcoming in the case of FoFs is that they do not get the generous tax treatment meted out to equity-oriented funds. The taxman regards them as debt funds even if they hold equity-oriented funds in their portfolio. Short-term capital gains (earned by selling the fund within one year) are added to the income of the investor and taxed at normal rates. So, if your taxable income is more than Rs 8 lakh a year, you would have to shell out Rs 300 as tax for every Rs 1,000 earned from the scheme (instead of Rs 150 in a regular fund). The long-term capital gains (sold after a year) from ordinary equity-oriented funds are tax-free. However, long-term gains from FoFs are taxed. There are a few tax benefits too. When an investor switches between individual schemes within one year of investing, he is liable to pay capital gains as well as exit load. However, in case of switching or rebalancing by the fund manager of a FoF, there is neither any tax implication nor any exit load.

The Central Board of Direct Taxes (CBDT) has exempted Alternative Investment Funds (AIFs) from the obligation to deduct tax at source  (TDS) at a rate of 10% from distributions made to fund of funds (FoFs) registered as AIFs. Obligation to deduct TDS at a rate of 10% continues to apply to income distributed by FoFs to their underlying investors. FoFs are permitted to register as AIFs under SEBI (Alternative Investment Funds) Regulations 2012 (AIF Regulations). FoFs registered as Category I AIFs are permitted to invest in other Category I AIFs of the same sub-category. FoFs registered as Category II AIFs are permitted to invest in other Category I AIFs and Category II AIFs.

Multi-manager Funds gradually gaining ground in India

Tata Mutual Fund recently launched several new equity funds under an umbrella theme—'Own a piece of India'. It is a basket of six thematic and sector-oriented funds (including an existing one) through which investors can participate in India's growth story. The scheme follows a multi-manager approach with a lead manager at the helm, supported by co-managers. The multi-manager approach taps the expertise of multiple individuals. Investors benefit from the combined experience of several people, minimising the dependence on a single money manager. A true multi-manager approach is one which provides exposure to different investment styles apart from asset classes. Otherwise, it is nothing more than just a hybrid fund. While the 'Own a piece of India' scheme offers exposure to different sectors or themes like Digital India, consumption, pharma and healthcare, banking and financial services, energy and infrastructure, the same can be achieved with a good diversified equity fund.

There are enough funds with proven track records which offer investors similar broad-based participation in the India growth story, at a lesser cost. Unlike other multi-manager schemes, Tata MF's offering allows investors to pick and choose from the available schemes in its basket. However, this customisation is good only if you have enough understanding of sector dynamics to take a call. Also, unlike others in this category, investors may incur tax and exit load in case they switch between schemes in the fund basket. The good part is that it will allow investors to exit any of the underlying funds if it is underperforming. Since the underlying schemes are within the same fund house, the benefit of investing across fund managers is diluted to some extent. A true multi-manager approach can be best tapped through a zero brand-bias offering. Even then, the ideal approach is to create your own portfolio of traditional funds by picking from the best-of-breed funds across different AMCs with the help of an adviser.

On your marks

When investing in a fund of funds, watch out for these factors.

·         Enter when the markets are down. It gives an opportunity to accumulate units at a lower cost

·         A flexible fund of funds will invest in debt and equity with an open mandate to switch between the two

·         They may react slowly to market conditions; hence, look for funds with dynamic asset allocation

·         Some funds have an in-built trigger mechanism based on pre-designated parameters such as PEs, asset allocation, or momentum. It helps discipline asset allocation

Look for funds that have an in-built asset allocation model, which performs better in a down market than a FoF that only invests in other equity funds. Investors must also keep an eye out for the type of assets an FOF invests in.

Some more filters

Before you embark on a FoF investment strategy, there are a few factors that you must consider. You may want a dynamic fund of fund that can take advantage of all types of market conditions. Funds with a flexible equity and debt mix may be your answer as the asset allocation reflect the regularly changing market conditions.

Assess the past performance, and whether the fund has kept up with its benchmarks. Also, check whether the FoF invests in funds across the industry or only in funds from its own fund house. The corpus size is a good indicator of its popularity. Also, watch for asset allocation models. For instance, Franklin Templeton’s P-E ratio FOFs essentially invest only in two of its own funds—the Blue Chip and the Templeton India Income Fund. But the asset allocation between the two depends on the Nifty’s index valuation. As the index valuation goes up, more funds are allocated to its income fund. ING Optimix’s Asset Allocator Multi Manager FOF scheme can move from 100 per cent equity to 100 per cent debt and vice versa. After all, in today’s topsy-turvy market, an investor needs all the flexibility he can get.