Monday, October 30, 2017

October 2017

Regulatory Rigmarole

The Securities and Exchange Board of India’s rule asking mutual funds to re-categorise schemes based on investment strategy will help investors get a better idea of what they are buying into. The regulator’s objective behind the move is to reduce confusion for mutual fund investors, and deter asset management companies (AMC) from coming out with overlapping products merely to boost their assets under management. AMCs charge fees on the assets managed, and so larger the assets under management, greater will be the income. Over the years, this has led to AMCs launching a slew of schemes without much to distinguish them from the existing offerings in the portfolio. While they would not want to say it publicly, many AMCs are unhappy with the new rule as the cap on one scheme per category will force them to merge many of their existing schemes. The new rule requires investment objective, investment strategy and benchmark of each scheme to be "modified to bring it in line with the categories of schemes mandated therein." A change in the “type of scheme” alone would not be considered as a change in fundamental attribute, but modification of investment objective and investment strategy entails a change in fundamental attributes requiring an exit option. It remains to be seen as to who bears the costs of exit option, the scheme or the AMC. If the scheme bears the cost, this would be additional expense to the scheme, reducing the NAV for investors to that extent. SEBI has broadly divided mutual funds into five categories – equity funds, debt funds, hybrid funds and solution-oriented funds and other funds. Within equity funds, there can be 10 offerings – multi cap fund, large cap fund, large and mid cap fund, mid cap fund, small cap fund, dividend yield fund, value fund and contra fund, focussed fund, sectoral/thematic fund and ELSS. Fund houses have to fit in their schemes in any one of the prescribed categories. Within the hybrid category, too, there can be multiple offerings-- conservative, balanced and aggressive--based on the equity component in the scheme. On the face of it, prescribing only five scheme categories makes it simple for a lay investor to make up his mind. At the same time, it also runs the risk of oversimplification. There could be ambiguity about capital protection schemes. In capital protection schemes, which have a mix of equity and debt, and are close-ended, the emphasis is on capital protection at maturity. The strategy is not tied to an allocation percentage, but rather flows from its asset structure depending upon maturity duration. It remains to be seen if, in future, a capital protection scheme would be mis-sold as a simple hybrid category product, which it is not. The circular also requires the benchmark index of scheme performance to be modified to fit into one of the prescribed categories. The investment judgment of an investor on existing schemes is based on the scheme performance vis-a-vis its existing benchmark index. If benchmark is tweaked for existing schemes, scheme performance across the years will lose a meaningful comparison. This requirement would be better suited to new scheme proposals only.

AMFI has approached SEBI requesting to make MF Utilities a market infrastructure institution for the mutual fund industry. If SEBI recognises MF Utilities as the market infrastructure institution, all the transactions in mutual funds will go through a single gateway i.e. MF Utilities. The platform has to provide guaranteed clearing and settlement functions for transactions in mutual funds. This will lead to significant improvement in the transaction efficiency, transparency, liquidity and risk management practices in mutual funds along with added benefits like reduced settlement and operational risk and savings on settlement costs. In simple words, MF Utilities will become Clearing Corporate of India (CCI) of the mutual fund industry. Currently, fund houses use different payment gateways to settle transactions. The move would help MF Utilities get funding from fund houses through IAP corpus.

SEBI has allowed debt fund managers to execute imperfect hedging through interest rates futures (IRFs). This will help fund managers reduce interest rates risk in debt portfolios. Under imperfect hedging, fund managers do not necessarily hold a debt security in the portfolio to buy interest rate futures of that particular security. For example, fund managers can buy interest rates futures of a 10 year G Sec even without having exposure to 10 year G Sec in the underlying portfolio. So far, fund managers could only hold interest rate futures of a security if they had the security in their underlying portfolio. Fund managers can now hold such imperfect hedged IRFs up to 20% of net assets of the scheme. However, the fund managers will have to maintain 90% correlation between the underlying securities and the interest rates futures. In a circular, SEBI said, “Mutual Funds are permitted to resort to imperfect hedging, without it being considered under the gross exposure limits, if and only if, the correlation between the portfolio or part of the portfolio (excluding the hedged portions, if any) and the IRF is at least 0.9 at the time of initiation of hedge. In case of any subsequent deviation from the correlation criteria, the same may be rebalanced within 5 working days and if not rebalanced within the timeline, the derivative positions created for hedging shall be considered under the gross exposure computed in terms of Para 3 of SEBI circular dated August 18, 2010. The correlation should be calculated for a period of last 90 days.” The move will help fund managers reduce interest rates risk by taking a call on interest rates movements. If a fund manager believes that interest rates will go down, he may take a long duration call by putting a small premium. If the call goes right, the gain is unlimited; however, if it goes wrong, the portfolio will lose only a nominal amount.

Intermediaries like Point of Presence – Service Providers (POP-SP) and Retirement Advisers (RAs) will have to compensate their clients if they delay KYC verification, execution and update service requests. The pension fund regulator will levy a penalty of Rs.10 or the bank rate + 2% of the contribution amount on POP-SPs and RAs for such delays in service requests with effect from October 1, 2017. Through a circular issued recently, PFRDA said, “In case of any delay or violation in the service standards in respect of prospective/ existing NPS subscriber, the POP including POP-SP or POP–SE as the case may be, shall be liable to compensate the loss to the subscriber.” The penalty fee will be credited to the subscribers’ permanent retirement account number (PRAN).

AMFI has directed fund houses to ensure Aadhaar linking of existing folios before December 31, 2017 to avoid account freezing. In line with the Ministry of Finance rules on prevention of money laundering, Aadhaar has been made mandatory for mutual fund investments with effect from January 1, 2018. In an email communication, AMFI has said that no new folios can be opened from January 1, 2018 if Aadhaar is not provided at the time of making an investment in mutual funds. AMFI has also directed fund houses to ensure linking of Aadhaar details with existing folios before December 31, 2017. AMFI has asked fund houses to freeze non-Aadhaar compliant accounts with effect from January 2018. This means, non-Aadhaar compliant investors cannot execute fresh mutual fund transactions. Though fund houses can allow investors to invest in mutual funds without furnishing Aadhaar details at their discretion, they will have to update such details before December 31, 2017. Investors can link their Aadhaar number with mutual fund folios through R&T agents such as CAMS and Karvy. The RTAs have enabled online submission of Aadhaar and PAN details by investors on their websites for collection and authentication of Aadhaar number. You may provide such details at any of the RTA's websites. Physical forms will soon be available at all the investor service centres (ISCs) of the AMCs and RTAs. AMCs will send emails to distributors and investors with a weblink to update Aadhaar. Investors can send SMS from registered mobile number to link Aadhaar.

India's capital markets regulator is likely to allow mutual funds to trade in commodity derivatives and a decision is expected within six months. Such a move would help deepen the market and provide hedging opportunities to large companies that trade overseas due to limited liquidity at local exchanges. Portfolio management services and foreign trading houses that export or import from India could also be allowed to participate in commodity futures. The participation (of mutual funds) is in an advanced stage of examination. Asia's third-biggest economy allowed commodity futures trading in 2003, but has so far kept out foreign investors, banks and mutual funds, among others. In June, SEBI for the first time allowed institutional investors to trade in commodity derivatives as it said hedge  funds registered as category III Alternative Investment Funds (AIFs) can invest in the segment.

Although India stands alongside US in terms of mutual fund disclosures, it earns a top grade for disclosing the fund manager’s remuneration, states Morningstar’s recent report titled, ‘Global Fund Investor Experience Report 2017’. The report grades the experience of mutual fund investors in 25 countries across North America, Europe, Asia and Africa. Thanks to SEBI’s regulatory norms, India scores over US in terms of better mutual fund disclosure policies. The report says, “Disclosure in India earns a Top grade. Transparency of portfolio holdings remains the best of any market, with monthly disclosure required and those portfolios typically released after 10 days. It is now mandatory for asset managers to disclose fund manager compensation levels as well as manager investments in their funds. Regulations have also been introduced requiring the disclosure of commissions earned by distributors. Point-of-sale documents include details around fund risks, but our analysts observe that the descriptions of investment strategies are often insufficient.” In terms of disclosures, we are ahead of many major markets. However, we can level up our disclosure standards by making a few more changes. For instance, AMFI currently publishes Quarterly AUM of fund houses data, it could instead publish it share class level AUM data monthly for more transparency. Also, the recent categorization of the mutual fund schemes will now make investment mandates more clear for investors.” While the US is the most investor friendly market, India has retained an overall grade of ‘Average’ in terms of investor friendly market, said the report. The report further highlights that investment advice has improved over time. It attributes the improvement to a range of initiatives starting from Investment Advisory Regulations in 2013 and more-recent moves to put caps on upfront commissions paid by product providers. The report also states that India’s ‘Fee and Expenses’ grade is below average. “It reflects some of the highest expense ratios for equity funds in the study and the reliance of ongoing trailing commissions to pay for advice”, the report said.

Monday, October 23, 2017

October 2017

Despite volatility in key market indices, the quarterly assets under management (AUM) of the mutual fund industry touched an all-time high of Rs.21 lakh crore in the second quarter of the financial year 2017-18. AMFI’s latest data shows that quarterly AUM of the mutual fund industry has reached Rs.20.95 lakh crore in the quarter ended September 2017. The quarterly average AUM of the mutual fund industry grew by 7% in September 2017 compared to the preceding quarter. In just three months, the quarterly assets of the mutual fund industry have reached an all-time high from Rs19.52 lakh crore in June 2017, a growth of over Rs1.43 lakh crore. Quarterly AUM is the average assets of the entire quarter, which is calculated by factoring in all working days of three months.
L&T Mutual Fund crossed the milestone AUM of Rs.50,000 crore in the second quarter of FY 2017-18. The fund house added close to Rs.8,265 crore to its kitty to reach Rs.52,750 lakh crore AUM in September 2017 as against Rs.44,484 crore in June 2017, a growth of 19%. In terms of size, fund houses like ICICI Prudential, HDFC, Reliance and Birla Sun Life, are still at the top, with the highest recorded AUM for the last quarter at Rs2.79 lakh crore, Rs2.70 lakh crore, Rs2.31 lakh crore and Rs2.25 lakh crore, respectively. However, in absolute terms, the fifth largest fund house SBI MF saw highest AUM growth of Rs.19,241 crore to reach 1.88 lakh crore in September 2017. The fund house saw 11% increase in its quarterly AUM. Other large fund houses such as ICICI Prudential Mutual Fund and Birla Sun Life Mutual Fund also witnessed healthy AUM growth in absolute terms. These fund houses added over Rs18,000 crore to their AUM kitty. In terms of percentage, emerging fund houses like IDBI, Motilal Oswal and Mirae Asset have recorded growth of 31%, 25% and 20%, respectively. The growth is largely due to sustained inflows in equity funds through SIPs and market gains. While fund houses have been receiving close to Rs.5,000 crore each month through SIP, BSE Sensex crossed the 31,000 mark in the second quarter of FY 2017-18. Of 39 AMCs, only four fund houses –DHFL Pramerica, IIFL, Sahara and Taurus – witnessed a decline in their quarterly AUM.
HDFC Mutual Fund continues to be the top player in equity AUM. The fund house manages a quarterly AUM of Rs.1.24 lakh crore in equity funds as on September 2017, shows the data collated from the AMCs website. Pure equity funds, balanced funds, ELSS and other ETFs have been included in equity funds. Of the total AUM of Rs.2.70 lakh crore, HDFC MF manages 46% of the assets in equity funds. Equity AUM of the fund house has increased by over 58% from Rs.78,511 crore in September 2016 to Rs.1.24 lakh crore in September 2017. The fund house manages Rs.79,413 crore in pure equity funds. ICICI Prudential Mutual Fund, which currently manages the largest AUM in the industry, stood at the second position with equity AUM of Rs.1.16 lakh crore. Its equity AUM increased by 56% from Rs. 74,551 crore in the quarter ended September 2016. SBI MF has overtaken Reliance MF to become the third largest fund house in terms of equity AUM. The total equity AUM of the fund house stood at Rs.93,891 crore in September 2017. Its equity AUM increased by 88% or Rs.44,051 crore  in the last one year making the fund house one of the fastest growing fund houses. The growth in its equity AUM is largely due to contribution from EPFO in ETFs. While the fund house manages Rs.40,052 crore or 43% of total equity AUM in pure equity funds, its AUM in ETFs is Rs.32,000 crore or 32% of total equity AUM. In terms of percentage, Kotak Mahindra Mutual Fund recorded highest growth in its equity AUM. The fund house witnessed a 102% growth in total equity AUM from Rs.18,255 crore to Rs.36,892 crore in the last one year. Its AUM in pure equity funds witnessed an increase of 94% to 29,830 crore in September 2017.  Overall, the total equity AUM of the top 10 fund houses stood at Rs.6.80 lakh crore as on September 2017. This shows that the top 10 fund houses account for nearly 80% of the total equity AUM in the industry. The total equity AUM of the industry stood at Rs.8.50 lakh crore in September 2017. 
Investors are taking advantage of the downfall in the equity markets to accumulate units of equity funds. Despite volatility, the mutual fund industry has witnessed impressive net inflows of Rs.29,045 in equity funds including pure equity funds, balanced, ELSS and equity ETFs in September 2017. However, equity funds had received the highest net inflows of Rs.30,658 crore in August 2017. The total equity AUM has increased by Rs.25,000 crore to reach a record high at Rs.8.49 lakh crore in September 2017. In the pure equity funds category, the industry has received Rs.18010 crore in September 2017. This can be attributed to increased participation of investors through equity funds as and when markets decline and inflows in arbitrage funds. Balanced funds followed pure equity funds. Investors have put Rs.8,141 crore in balanced funds in September 2017. The AUM of balanced funds has reached Rs.1.35 lakh crore. Most of the inflows in balanced funds are due to increasing participation of HNIs through balanced advantage funds.
The latest SEBI data shows that the Rs.21 lakh crore mutual fund industry has added 12 lakh new retail folios in September 2017. A rough calculation indicates that the industry has added an impressive 63,000 folios each day in the month of September. As a result, the total folio count has reached over 6.20 crore at the end of the second quarter of FY 2017-18. SEBI data shows that there has been a consistent surge in the number of folios in equity funds. Of the 12 lakh folios, the mutual fund industry has added over 8 lakh folios in pure equity funds. The category has received inflows of Rs.18010 crore in September 2017. Overall, the industry has added over 11.50 lakh retail folios in equity funds if we include pure equity, ELSS, balanced funds and ETFs that track indices. Balanced funds continued the positive momentum by adding 2.16 lakh folios. The category received net inflows of Rs. 8,141 crore in September 2017. Also, the AUM of balanced funds has reached Rs.1.35 lakh crore. Most of the inflows in balanced funds are due to increasing participation of HNIs through balanced advantage funds. Equity ETFs witnessed a marginal drop of 312 folios in September 2017. However, the category saw inflows of Rs.1,968 crore in September 2017 due to increased participation from EPFO. The Gold ETF category lost 5,564 investor folios and witnessed an outflow of Rs.74 crore. Debt funds added more than 67,000 folios last month. While income funds added nearly 43,100 folios, liquid funds added close to 23,500 folios. The category saw an addition of 633 folios last month. However, the debt funds category witnessed outflows of Rs. 50,350 crore mainly due to corporate redemptions.
Retail participation in mutual fund industry has been increasing though marginally. AMFI’s latest data shows that the retail investors account for 23% of the total industry AUM as on September 2017. In September 2016, retail AUM of the mutual fund industry was at 21% of overall industry AUM indicating an increase of 2% in retail participation. Retail AUM has increased by 41% in one year, shows AMFI data. The data shows that the retail AUM rose to Rs.4.69 lakh crore in September 2017 from Rs.3.31 lakh crore in September 2016. During the same period, the overall AUM has increased by 29%. The data also shows that retail participation in the equity funds has increased 44% in the last one year. It increased to Rs.3.80 lakh crore as on September 2017 from Rs.2.63 crore in September 2016. This increase can be attributed to the increasing appetite for equity funds and the growing popularity of SIP among retail investors. Rising retail AUM is a healthy sign for the industry as retail investors stay put for long term. If we compare the retail equity AUM to the overall equity AUM, it accounts for 45% of the overall equity AUM. The total equity AUM of the industry was at Rs.8.49 lakh crore in September 2017. Pure equity, ELSS, balanced funds, and equity ETFs have been included as equity funds. Among equity funds, pure equity funds witnessed the highest change in retail AUM.  The retail AUM of pure equity fund increased by Rs.71,154 crore from September 2016 to reach  Rs.2.69 lakh crore. However, in terms of percentage, balanced funds saw the highest change in the AUM. Retail AUM in balanced increased by 124% to Rs.46,433 crore in September 2017. The retail AUM in balanced funds stood at Rs.20,745 in the corresponding period last year. This can be attributed to the relatively smaller base of balanced funds. Moreover, many investors have started putting money in balanced funds as they have the potential to give more attractive returns than debt funds with the tax efficiency of equity funds. In addition, many distributors have been promoting balanced funds among first time investors to make them comfortable with mutual funds. Debt schemes are also catching the eye of retail investors. AUM under open-ended debt schemes except gilt funds stood at Rs.68,325 crore. It increased by over Rs.18,000 crore in the past one year. This constituted nearly 10% of the industry’s income funds. Investors are looking for other avenues after the reduction of interest rates of fixed deposits. Distributors typically suggest debt funds as an alternative for fixed deposits to investors with low risk appetite.
Of the total 1.59 crore SIP account in August 2017, more than 55% or 88.2 lakh SIP accounts have been active for over five years. These SIP accounts have assets of Rs.37,000 crore as on August 2017. SIP investors stay put for long term. AMFI data shows that almost six out of 10 SIP account are active for over 5 years. Of the total 1.59 crore SIP account in August 2017, 88.2 lakh SIP accounts have been active for over five years. Currently, the mutual fund industry has AUM of Rs.1.72 lakh crore through SIP.

To be continued…

Monday, October 16, 2017


October 2017

With mutual funds gaining traction among retail investors, asset management companies have filed draft offer documents with the regulator SEBI for 85 new schemes so far in 2017. In comparison, 106 draft papers were filed by the fund houses in 2016. Equity, debt, hybrid and fixed maturity plans (FMPs) are some of the themes for which the mutual fund houses have filed the applications. Fund houses like Mahindra, Axis, ICICI Prudential, Birla Sunlife, HDFC, UTI, Reliance, Edelweiss and SBI have filed the offer documents for new fund offers (NFOs) with the Securities and Exchange Board of India (SEBI). Many of the schemes are already being launched, while others will be opened for subscription soon after the necessary clearance. Interestingly, some mutual fund companies have approached SEBI for launching plans with Hindi names so that investors in rural areas understand the objectives of the schemes in a better manner. The move is seen as moving away from the old tradition of English names for investment schemes. Dynamic Bond Bachat Yojana, Pragati Bluechip Yojana, Unnati Mid & Small Cap Yojana are some of the schemes filed with SEBI by Mahindra Mutual Fund.

NFOs of various hues adorn the October 2017 NFONEST.

ICICI Prudential Value Fund – Series 18
Opens: October 3, 2017
Closes: October 17, 2017

ICICI Prudential Mutual Fund has launched a new plan named as ICICI Prudential Value Fund - Series 18, a close ended equity scheme. The scheme will have tenure of 1300 days from the date of allotment of units. The investment objective of the scheme is to provide capital appreciation by investing in a well-diversified portfolio of stocks through fundamental analysis. The plan shall offer direct plan and regular plan with dividend payout option. The plan would invest 80% to 100% of assets in equity and equity related instruments with medium to high risk profile and invest up to 20% in debt, money market instruments and cash with low to medium risk profile. Investment in derivatives can be up to 50% of the Net Assets of the scheme. Benchmark Index for the plan is S&P BSE 500 Index. The fund managers of the scheme are Sankaran Naren and Ihab Dalwai. The investments under ADR / GDR and other foreign securities will be managed by Priyanka Khandelwal.

India Bulls Tax Savings Fund
Opens: September 21, 2017
Closes: December 20, 2017

Indiabulls Mutual Fund has launched a new fund named as Indiabulls Tax Savings Fund, an open ended equity linked savings scheme. The investment objective of the fund is to generate long-term capital appreciation from a diversified portfolio of predominantly equity and equity-related Securities. The scheme shall offer tax benefits under Section 80C of the Income Tax Act. The scheme would allocate 80%-100% of assets in equity and equity related instruments as per ELSS guidelines with high risk profile and invest up to 20% of assets in debt, money market instruments, cash & equivalent with low to medium risk profile. The performance of the scheme will be benchmarked against S&P BSE 500 Index. The fund managers of the scheme are Sumit Bhatnagar (Equity) and Malay Shah (Fixed Income).

UTI Long Term Advantage Fund – Series VI
Opens: October 5, 2017
Closes: January 5, 2018

UTI Mutual Fund has launched a new fund named as UTI Long Term Advantage Fund - Series VI, a 10 year close-ended equity linked savings scheme. The investment objective of the scheme is to generate capital appreciation over a period of ten years by investing predominantly in equity & equity related instruments of companies along with income tax benefit. The scheme will allocate 80%-100% of assets in equities, cumulative convertible preference shares and fully convertible debentures and bonds of companies with high risk profile and invest up to 20% of assets in money market instruments with low to medium risk profile. The scheme's performance will be benchmarked against S&P BSE 100 Index. The scheme will be managed by Lalit Nambiar.

IIFL Capital Enhancer Fund, Mahindra Pragati Bluechip Yojana, ICICI Prudential Liquid iWIN ETFAxis Growth Fund, Mahindra Dynamic Bond Bachat Yojana, Indiabulls Dynamic Bond Fund, Aditya Birla Sun Life Nifty Next 50 ETF, Baroda Pioneer Dynamic Equity Fund, Bharat 22 ETF are expected to be launched in the coming months.

Monday, October 09, 2017

October 2017
Many of us think that mutual funds can give just 12% annualized returns and stocks would give very high returns. While this is true to some extent, there are a set of mutual funds that can double or triple your money. These are the sector based mutual fund schemes in India. The October 2017 GEMGAZE would provide some of the best sector mutual funds which can fetch you phenomenal returns.

The consistent performance of all five funds in the October 2016 GEMGAZE is reflected in all the funds holding on to their esteemed position of GEM in the October 2017 GEMGAZE.

Canara Robeco Infrastructure Fund Gem
The Budget boost
Canara Robeco Infrastructure Fund is a thematic fund focused on identifying growth-oriented companies within the infrastructure space. The fund, with an AUM of Rs 154 crore, aims at having concentrated holdings with 80.26% of the assets in the top three sectors and a bias towards large market capitalization stocks at 52.21%. With a well-diversified portfolio of stocks in the energy, construction, and services sectors, it employs fundamental analysis with a focus on factors such as the industry structure, the quality of management, sensitivity to economic factors, the financial strength of the company, and the key earnings drivers. In the Union Budget 2017, the government proposed to assign infrastructure status to affordable housing projects and facilitate higher investments and better credit facilities, with an aim to provide Housing for All by FY 2022. The National Housing Bank will refinance individual housing loans of about Rs 20,000 crore in 2017-18. The Finance Minister proposed to complete 1 crore houses by 2019. All these developments are expected to boost cement demand. The fund benchmarks the performance of its portfolio against the S & P BSE 100 Index. Canara Robeco Infrastructure has been among the better performers in its category. The fund’s one-year return is 13.97% as against the category average return of 19.78%. The expense ratio of the fund is high at 2.73% while the portfolio turnover ratio is 42%. The fund has been managed by Mr. Yogesh Patil since December 2011.

SBI Magnum FMCG Fund Gem
The best bet
In the past one year, the Rs 344 crore, Magnum FMCG Fund is perched at the top with 54.6% of the assets in large caps. The expense ratio is high at 2.52% and the portfolio turnover ratio is a mere 16%. Braving all odds, the one-year return of the fund is 20.56% as against the category average of 18.89%. Over the three and five year periods, the fund posted 14.65% and 17.34% of CAGR, respectively as against the category average of 14.61% and 16.12% respectively. Magnum FMCG Fund is benchmarked against the S & P BSE FMCG Index. Most stocks that operate in this space have already moved up because revenue and profit growth for these companies were still better than firms in beleaguered sectors. Despite high valuations, companies in the consumption space still hold strong growth potential, thanks to lack of viable alternatives in the market. FMCG funds are, therefore a good bet.  Saurabh Pant has been managing the fund since June 2011.

ICICI Prudential Banking & Financial Services Fund Gem
An evergreen fund
ICICI Prudential Banking & Financial Services Fund invests predominantly in large and midcap financial companies. 71.04% of the portfolio consists of large caps. This fund adopts a 'bottom-up' strategy, to identify and pick its investments across market capitalizations. The fund has not only outperformed its benchmark, the S&P BSE Bankex but has also outperformed other banking sector funds. The current AUM of the fund is Rs 2,519 crores and the one-year return is 26.36% as against the category average return of 19.94%. The expense ratio is 2.37% and the portfolio turnover ratio is 149%. The fund is managed by Vinay Sharma since February 2015.

SBI Pharma Fund Gem
Consistent healthy prospects
SBI Pharma Fund sports an AUM of Rs. 981 crores. The number of stocks held by the fund in the last few months has hovered around 22. The concentration analysis reveals that the fund has around 41.92% assets allocated towards the top 5 stocks while the top 10 stocks make up around 63.44%.  The one-year return of the fund is -14.44% as against the category average of -11.71%. The three-year and five-year returns of the fund are 3.64% and 17.55% as against the category average of 2.71% and 15.48% respectively. SBI Pharma Fund tops the list of pharma funds across time periods. The outperformance of the fund has been quite consistent. For instance, in the last five years, the scheme’s annual returns have been better than its benchmark almost 84% of the time. The expense ratio of the fund is 2.26% while the portfolio turnover ratio is 70%. An average large-cap slant of about 30.2% should hold the fund in good stead even during volatile times. The fund has been managed by Tanmaya Desai since June 2011.

ICICI Prudential Technology Fund Gem
Driven by growth of new technologies

Consumers’ appetite for new technologies has been driving growth in the technology sector for years. This is providing good opportunities for technology companies. ICICI Prudential Technology Fund is a Rs 248 crore technology fund, which invests in large technology oriented companies. It invests in companies listed in the BSE Teck. Its portfolio has 74.3% exposure to large cap companies. The fund seeks to invest in knowledge sectors like IT and IT Enabled Services, Media, Telecommunications, and others. The one-year return of the fund is 4.27% as against the category average of 4.05%. The three-year and five-year returns of the fund are 1.23% and 15.96% as against the category average of 2.07% and 14.52% respectively. The fund is benchmarked against the S& P BSE IT Index. The expense ratio of the fund is 2.68% while the portfolio turnover ratio is 28%. The fund is managed by Ashwin Jain since October 2016 and Sankaran Naren since July 2017.

Monday, October 02, 2017

October 2017

Sector Mutual Funds: Risky but Rewarding

Although most mutual fund schemes swear by diversification, there are some schemes that do not diversify. They stick to one or few sectors and prefer to cash in on their performance. Sectoral and thematic funds fall in this space. But there still is a big difference between the two. Sectoral funds aim to invest their entire corpus in one sector and thematic funds invest in two or three sectors that are closely related to one another. As the name implies, a sector fund is a mutual fund that invests in a specific sector of the economy, such as pharmaceuticals, banking & financial services, FMCG, technology and other sectors like energy and infrastructure. Sector funds come in many different flavors and can vary substantially in market capitalisation, investment objective (i.e. growth and/or income) and class of securities within the portfolio. If you are an informed investor willing to take higher risks for higher returns, then sectoral funds may be just for you.

Volatility is the name of the game

The performance of sectoral funds has been volatile in recent times. All the pharma funds which were once celebrated as outperformers gave a negative return of -12 to -16% in the last one year. In comparison, many of the banking & financial services sector funds have given above 30% and some have given as high as 37%. The FMCG funds have a decent return profile of 14 to 15% whereas the technology funds have barely given any return at all as they were lingering at a combined average of around 2.2% in the last one year. Infrastructure funds have seen good returns but the long-term performance of the sector depends on several macro factors which can influence the stock prices in the near future.

The pros …

  •          A sectoral fund allows you to take a macro call on a sector.
  •          It is diversified well within a larger sector which gives it more breadth.
  •          It does not have to be micromanaged by the investors as the portfolio will be handled by the fund.
  •          A variety of similar funds allows you to choose from the better portfolios between funds.
  •          It allows you to choose between different sectors by buying multiple sector funds.
  •          A higher weightage is given to a sector which is not possible in regular diversified funds.
  •          It paves the way for absolute returns as opposed to relative returns.

and the cons…

  •          It has a higher volatility of returns when compared to equity diversified funds.
  •          If the decision turns out to be wrong, the drawdown can be significant.
  •          It is meant for knowledgeable investors who want to time the market albeit in the long run.
  •          There is not enough variety to choose from in India.
  •          You cannot customize the portfolios based on your preferences.

Sectoral funds do not find a place in most financial plans as these are considered risky because of their focused exposure. For wealth creation, a mix of diversified equity funds is prescribed. These are considered safer since the money is spread across companies from various sectors to limit the risk arising from a downturn in some industries. Given that sectoral funds are also capable of delivering high returns, are you losing out by staying completely clear of this category of funds? 

Better returns 

Even as investors in mid- and small-cap equity funds are sitting on handsome gains made over the past few years, sector-focused funds have delivered higher returns over a longer term. A look at the 10-year performance of mid- and small-cap schemes shows that these have delivered a return of 15% CAGR (compounded annual growth rate), compared with around 18% by funds focused on banking, pharma and FMCG sectors. 

Tactical standpoint

The main purpose of investing in a sectoral fund is to gain from the concentrated exposure to a pocket of the economy—FMCG, banking and financial services, infrastructure, pharma, technology—that is doing well and promises growth in the future. In effect, sectoral funds provide a tactical exposure to your portfolio. If you pick the right sector, you stand to reap higher rewards than you would by investing in the broader market. In the past five years, for instance, pharma and FMCG-focused funds, the so-called defensive bets, have clocked 22.7% and 19.8% CAGR, respectively. If you had adopted a tactical position and invested in these funds, your portfolio returns would have exceeded those of the broader market. Once you have the core portfolio in place, it can be a good idea to take an exposure to sectoral funds from a tactical standpoint. The additional exposure can provide a boost to the overall portfolio returns.

Higher risk 

Since this category of funds is exposed to a single sector and only a handful of stocks, it carries a higher risk compared with diversified equity mutual funds. In some funds, the top five stocks often account for more than 50% of the portfolio. A downturn in one or two portfolio holdings can hurt the return of the entire fund even if the broader sector fares well. A traditional diversified equity fund, on the other hand, will typically invest only 25-30% of the portfolio in its five largest bets, thus providing a cushion against a slide in any of its top picks. In addition, unlike a diversified fund, the fund manager of a sectoral fund does not have the liberty to move away from the sector even if its performance deteriorates. For example, if the infrastructure sector is doing poorly, an infra fund will have to remain invested in the sector because of its mandate. This leaves you with a struggling fund. In contrast, a diversified fund's manager has the flexibility to get out of a sector facing headwinds and shift his investments to a sector with better promise.

So what should you do? Here are some time-tested tips that can help you benefit from this category of funds. 

Sectoral fund success strategies

Fund selection is key 

Fund selection within the chosen sector is, of course, critical. Even though the focus is on one segment, funds within a category come in multiple flavours. This is particularly true in the case of banking and infrastructure funds. For instance, some banking funds are tilted towards private sector banking stocks and NBFCs, which have better asset quality and higher profitability. These have delivered healthy returns, unlike some public sector bank-focused funds, which have yielded poor returns in recent times. There is an even greater disparity in the infrastructure fund basket. These funds are known to invest across a variety of businesses, even those remotely connected to infrastructure. Funds in the pharma, FMCG and technology basket, on the other hand, are of the same type. 

Take limited exposure 

If you do not have the stomach for the higher degree of volatility of sectoral funds, stay away from this category. Those willing to take the risk should go only for a limited exposure. Stick with only one or two sectoral funds. Having multiple sector funds within your tactical allocation will dilute the entire purpose of taking a focused exposure. These funds should not make up more than 10-15% of your portfolio. Sectoral funds should be used purely from a tactical viewpoint. They should not be a part of your core holdings, but used to complement the existing portfolio. 

Do not look at past returns 

Do not invest on the basis of past returns. Too often, you gravitate towards the flavour of the season and latch on to a sector when the rally is already under way. The investors who entered at the height of frenzy around the technology sector in 2000 or infrastructure in 2007, ended up participating only in the slide. That is not to say that you should take a contrarian approach and invest in a sector that is out of favour.  Invest only if you are convinced that the sector's prospects are improving or it is poised for growth. 

Size matters 

Opt for funds that are relatively large-sized and have a proven track record. If the scheme is too small or a chronic underperformer, chances are the fund house may merge it with another fund from its stables.

Do not invest via SIPs 

While investing in traditional equity funds, you are advised to take the systematic investment plan (SIP) route. SIPs help ride the volatility over a period of time through cost averaging. However, this approach would not serve well if you are hoping to make the most of a sector upswing. When the sector has picked momentum, there is no point averaging your cost as it will dilute your returns. At the most, you could stagger through 4-5 smaller investments, but not through a long-term SIP. Given the smaller quantum of exposure to the fund, you would do well to buy on dips rather than invest through an SIP.

Have an exit strategy 

Sectoral funds tend to perform differently across market phases and the winners keep rotating. It is not easy for a common investor to take a call on the future prospects of a sector and time the entry into a sectoral scheme and exit at the opportune time. Some funds, particularly those that are cyclical in nature like infrastructure or power, are not buy-and-hold type of investments. Also, do not assume that sectors with stronger fundamentals, such as FMCG and pharma, will always see a secular bull run. You should invest in such funds only till the time the sector's fundamentals are on a strong footing. Greed is not good. Conversely, do not hesitate to pull out of your investment at a loss, if it does not work out as you had hoped. Needless to say, you need to monitor your investment on a regular basis. 

The bottomline

The concentrated portfolios of sector funds can produce tremendous gains or losses, depending on whether the chosen sector is in or out of flavor. No particular sector can perform in all market cycles. Thus placing all your eggs in the same basket would never be a wise decision. A portfolio must be diversified across different sectors to ensure capital protection, reduce volatility and generate better returns in the long term. Before investing you need to analyze your portfolio and mark all sectors to which you already have a considerable exposure. A particular sector/stock can be added when you are sure about the performance of the sector /stock but your portfolio lacks the same. Now, investing in a particular sector/stock can also be done in two ways - direct stock picking and sectoral mutual funds. Direct stock picking requires an in-depth analysis and still would be a too risky bet. Against these, an advantage through sectoral mutual funds would be diversification across stocks in that particular sector with considerably lower amount of investment. This increases the overall width in the portfolio even with limited amount of funds. Buying individual stocks in a sector would neither be possible nor feasible but mutual funds allow buying units with small amounts and in turn the investor gets exposure to the diversified stock list of those particular sectors. Thus, sector funds should be kept as an add-on to your existing portfolio. Moreover, allocation to any particular sector should not go overweight in comparison to other sectors.

Sector funds expose your portfolio to concentrated risk, in fact, it can incur you a huge loss, if you do not keep yourself abreast of business cycles. On the other hand, if you are well-versed with the sector fundamentals and have the capability to assess the volatility that is bound with such funds, you can make a good profit. However, always be very careful when investing in sector funds and invest only a limited portion of capital!