FUND FULCRUM (contd.)

April 2018

Reliance Mutual Fund has added the highest retail AUM of Rs.20,559 crore in FY 2017-18, shows the data collated from AMC websites. The retail AUM of the fund house increased to Rs.73,215 crore from Rs.52,657 crore in March 2017, a growth of 39%. The fund house manages total AUM of Rs.2.45 lakh crore as on March 2018. This indicates that 30% of its AUM came from retail investors. However, HDFC MF still tops the retail market share with assets of Rs.73,365 crore as on March 2018. The fund house added Rs.18,956 crore last fiscal. SBI Mutual Fund saw the third highest increase in retail AUM. The retail assets of the fund house increased by Rs.15,601 crore to Rs.45,214 crore in March 2018. UTI Mutual Fund added Rs.9,325 to its retail AUM kitty in FY 2017-18. The fund house witnessed 20% increase, which is less than that of other top six fund houses. UTI MF managed retail AUM of Rs.55,326 crore as on March 2018. In percentage terms, Aditya Birla Sun Life Mutual Fund witnessed the highest growth in retail AUM.  Retail AUM increased to Rs. 43,835crore from Rs.28,406 crore last year, a growth of 54%.

Piquant Parade

Earlier, SEBI had asked Sahara Mutual Fund to wind up its mutual funds business by April 21, 2018. However, the fund house was allowed to run its ELSS Sahara Tax Saving Gain Fund for four more months as such funds come with a lock-in period of three years. Following the SEBI order, Sahara Mutual Fund had approached the tribunal. In a minor reprieve for Sahara Mutual Fund, the Securities Appellate Tribunal (SAT) has stayed SEBI’s order against the asset management company till it issues further notice.

Regulatory Rigmarole

SEBI has reduced the expense ratio in open-ended mutual funds. Now, fund houses can levy only up to 5 bps in lieu of exit loads in open-ended schemes as against 20 bps. So far, SEBI had allowed fund houses to charge an additional TER to the extent of 20 bps with effect from October 2012 in lieu of exit loads. In addition, the market regulator had mandated fund houses to credit back the entire exit load to the schemes. Since SEBI does not allow fund houses to charge exit loads in close end schemes and ELSS, the move will make open-ended mutual funds cheaper.

In another move, SEBI has launched ‘Go Green’ initiative in mutual funds to reduce the use of paper. Under this initiative, SEBI has done away with the requirement to publish daily NAV, sale/repurchase prices in newspapers and sending of physical copies of the scheme annual reports and statement of scheme portfolio on half-yearly basis to unit holders. However, fund houses will be required to publish these details on their own websites and AMFI website.

Aadhaar is not required for fresh mutual fund transaction till further notice. AMFI asks AMCs and R&Ts to maintain status quo and not reject fresh mutual fund transaction on account of Aadhaar. AMFI, in consultation with SEBI, has deferred the requirement of Aadhaar for fresh mutual fund transaction from April 1, 2018 until further notice. “We have approached SEBI for guidance in the matter informally and it is understood SEBI is also trying to get clarity from Department of Revenue, MoF. In view of the confusion with respect to requirement of Aadhaar for new accounts, AMFI Ops Committee as well as Board of Directors are of the view that it would be prudent to maintain status quo, until there is absolute clarity in the matter,” said AMFI in its communication.

 Now, investors can lodge their complaints and grievances against any fund house through SEBI Complaints Redress System (SCORES) platform. SEBI has introduced a new facility under its existing platform SCORES to enable investors to lodge a complaint directly with the fund house concerned. The fund house will have to redress such a grievance within 30 days, failing which it will attract SEBI intervention. Sharing the rationale for this, SEBI said that investor grievances can be resolved faster if investors approach the company concerned or intermediary directly. SCORES is a web based centralised system to capture investor complaints against listed companies and registered intermediaries. Investors will require to open an account with the platform using their PAN and contact details. Once the platform activates the account, investors can lodge complaints against AMCs and RIAs. If investors are not satisfied with the redressal, they can lodge a complaint with SEBI through SCORES within three years. SCORES also has a mechanism that allows investors to monitor the status of their complaint. The markets regulator has already put in place a ‘Complaint Review facility’ under SCORES through which investors can request for review of their complaint within 15 days from the date of closure. SEBI has asked AMFI to issue a circular on this to all mutual funds.
 
SEBI issues uniform norms to disclose past performance of Mutual Fund schemes post-merger. Many fund houses have merged their schemes in the last few months. Ever since fund houses have merged schemes, there was confusion on how they disclose past performance of their schemes. In order to create a level playing field, SEBI has directed fund houses to follow uniform rules to disclose past performance of their schemes post-merger. Earlier Mutual Fund Advisory Committee (MFAC) has recommended SEBI to issue uniform guidelines on this. Here is how past performance of the schemes would look post-merger. If two schemes have similar features, fund house will have to disclose the weighted average performance of both the schemes. If two schemes have different features, fund houses can highlight the weightage average performance of the surviving or retained scheme. However, fund houses can also disclose the past performance of scheme which was not retained post-merger on request of investors. If two schemes merged to form a different scheme altogether, fund houses need not disclose any past performance. The circular comes into effect from May 1, 2018.

 AMFI asks distributors to submit declaration of self-certification by June 30, 2018. Distributors who do not submit DSC will not get brokerage from July 1, 2018. In an email communication sent to distributors, “Distributors are required to submit the annual declaration of self-certification for the financial year ending March 31, 2018 to CAMS with the definite timelines in line with code of conduct prescribed by AMFI. Please ensure to submit the relevant declaration of self-certification (DSC) form at the earliest to enable us process the same and share the details through the 'Central Distributor Management Services' to all RTAs for necessary updations.”All you need to do is fill the prescribed form available with AMFI and send it to them through the point of sales office of CAMS. Distributors who registered with AMFI after October 1, 2017 are exempted. However, they will have to submit their DSC of the last financial year by the next one, i.e. FY 2018-19.

AMFI has hiked ARN registration and renewal fee for mutual fund distributors by the extent of GST i.e. 18%. Mutual funds will now have to pay GST on their ARN/EUIN registration and renewal fee with effect from April 1, 2018. In an email communication, AMFI has said that while the existing fee structure for new ARN registration and renewal will remain unchanged, the applicable GST on ARN/EUIN registration and renewal will be levied on distributors. Simply put, AMFI has hiked the ARN/EUIN registration and renewal fee by the extent of GST i.e. 18% of the total fee. So far, such fees were inclusive of GST. The current fee structure for ARN Registration/Renewal has been in force since November 2012, when it was revised downwards, while the EUIN Registration/Renewal fees structure was last rationalised in November 2015. The fee structure was therefore reviewed by AMFI, and it has been decided that while the existing fee structure shall be continued without any change, the applicable GST on ARN/EUIN Registration/Renewal fees shall be levied/collected from the applicants/ARN/EUIN holders, additionally, effective from April 01, 2018. So far, distributors needed to pay ARN registration fee of Rs.3,000 and ARN renewal and EUIN registration/renewal fee of Rs.1,500. However, distributors will now be required to pay an additional fee of Rs.540 on ARN registration and Rs.270 on ARN renewal and EUIN registration or renewal. This means, from April 1, 2018, distributors will have to pay ARN registration fee of Rs.3,540 and ARN renewal fee of Rs.1,740.

The mutual fund industry has two crore unique investors. AMFI’s latest data shows that less than 1.5% of Indians invest in mutual funds. Of the total 134 crore people in the country, the mutual fund industry has 2 crore unique PAN indicating that the industry has 2 crore investors. Currently, there are 29 crore PAN card holders in India. Going by these numbers, you can say that the penetration of the mutual fund industry in India is close to 7% (based on the number of PAN card holders, which is mandatory to invest in mutual funds). These 2 crore investors have 6.60 crore folios. This means, each investor holds at least 3 folios in mutual funds. However, the number of mutual fund investors is much lower than the number of investors in banks and insurance. While 75 crore Indians have bank accounts, 35 crore people have insurance policies. Recently, AMFI launched the Mutual Funds Sahi Hai campaign to urge citizens to take a pledge to invest one day’s income in mutual funds every month. The campaign, which is a unique collaborative initiative of the industry would help to get 2% of India's population to invest in mutual funds in the next one year.

FUND FULCRUM

April 2018

Association of Mutual Funds in India (AMFI) expects the mutual fund industry’s assets under management to grow by almost five-fold to Rs 94.5 lakh crore by FY25 on the back of the increased distribution strength and reach and the joint efforts of SEBI, AMFI, fund houses and distributors. As at the end of February 2018, the asset base of the 43-player mutual fund industry stood at Rs 22.2 lakh crore. During the last one year mutual fund industry witnessed AUM growth of 25 percent, or Rs 4.25 lakh crore. During the same period, the total number of folios and SIP accounts saw a growth of 26 percent, or Rs 1.08 crore, and 52 percent (70 lakhs), respectively, while the monthly SIP contribution for the industry touched Rs 6,425 crore from 2.05 crore SIP accounts. The mutual fund industry has added 32 lakh new investors after the launch of ‘Mutual Fund Sahi Hai’ campaign one year ago. AMFI now aims to add 50 lakh new investors by the end of FY 2018-19.

Investors pumped in over Rs 1.7 lakh crore in equity-oriented mutual fund schemes in 2017-18, making it the fourth successive year of net inflows, according to data from the Association of Mutual Funds in India. Strong inflows have pushed the asset base of equity MFs by 38 percent to Rs 7.5 lakh crore during the period under review, according to AMFI data. The impressive inflow can be attributed to investor awareness campaign by the industry, role played by MF distribution platforms, demonetisation effect and strong retail participation from retail investors, especially from smaller towns. According to AMFI data, equity funds, which also include equity-linked saving schemes (ELSS), saw net inflows of Rs 1,71,069 crore in 2017-18, much higher than Rs 70,3674 crore infusion in the preceding fiscal. These funds had seen net inflows of Rs 74,024 crore and Rs 71,029 crore in 2015-16 and 2014-15, respectively. Prior to that, they had witnessed a withdrawal of Rs 9,269 crore. The AUM of equity MFs scaled a record high of Rs 7.5 lakh crore at the end of March 2018 from Rs 5.43 lakh crore at the end of March 2017.

The Indian equity market fell by over 3 percent in March 2018, and this was mirrored by a fall in mutual funds' AUM, which fell to Rs 21.36 lakh crore from Rs 22.20 lakh crore recorded in February 2018. The equity AUM, including equity linked savings schemes (ELSS), balanced funds, and other exchange traded funds (ETFs), came in at Rs 9.95 lakh crore, down from Rs 10.21 lakh crore seen last month. This is 47.9 percent higher than the Rs 6.73 lakh crore recorded in March last year. Domestic mutual funds bought stocks worth Rs 9,255 crore in 19 trading sessions. However, this was significantly lower than the Rs 16,180 crore seen in February. Fund managers bought 15 stocks for the first time in March 2018, which includes numerous recently-listed stocks like Bandhan Bank, ICICI Securities, Bharat Dynamics, Sandhar Technologies, Lemon Tree, Mishru Dhatu Nigam and Hindustan Aeronautics, among others. On the other hand, fund managers exited as many as 8 stocks for the first time, including Pokarna, Jay Bharat Maruti, Avadh Sugar & Energy, Welspun Corp, MBL Infrastructure, Hexa Tradex, Shreya Shipping and Arvind Smartspaces. Sequentially, AUM of equity funds decreased by 3.8 percent, or Rs 26,663 crore, to Rs 6.69 lakh crore in March 2018. Of the total, AUM in ELSS decreased by 0.5 percent, or Rs 398 crore, to Rs 80,583 crore. Equity funds saw a net inflow of Rs 2,954 crore, while ELSS saw a net inflow of Rs 3,703 crore. So the total inflow into equity mutual funds was around Rs 6,657 crore. Net outflow from the mutual fund industry stood at Rs 50,752 crore in March 2018, as against a net inflow of Rs 12,091 crore in February 2018. The month-on-month (mom) decline mostly reflects an end-of-quarter phenomenon, wherein companies tend to redeem investments in liquid funds for advance tax payments. Data shows that of the last 21 end-of-quarter months, AUM declined in 20 of them, according to an ICRA report.

Among the top five players, ICICI Prudential MF led the pack with asset base of Rs 3,05,739 crore (excluding Fund of Funds) followed by HDFC MF (3,00,549 crore), Reliance MF (Rs 2,44,903 crore), Aditya Birla Sun Life MF (Rs 2,47,529 crore) and SBI MF (Rs 2,17,649 crore). The top 10 fund houses boast 81% market share. These fund houses jointly manage Rs.18.63 lakh crore as on March 2018. While two fund houses – ICICI Prudential and HDFC – have crossed the Rs.3 lakh crore milestone, Franklin Templeton has become the eighth fund house to enter the Rs.1 lakh crore club with assets of Rs.1.03 lakh crore last fiscal. HDFC MF, ICICI Prudential MF and SBI MF registered the highest growth in absolute terms with each of them adding over Rs.60,000 crore to their AUM kitty. Among the top 10 fund houses, SBI MF (39%) was the fastest growing fund house followed by Kotak MF (35%), Axis MF (34%) and DSP BlackRock (32%). Among the bigger fund houses, L&T MF too registered an impressive growth of 68%. In terms of percentage growth, emerging fund houses like Motilal Oswal and Mirae Asset have recorded maximum growth of 119% and 111% respectively. Of the 39 AMCs, six fund houses – DHFL Pramerica, LIC, Indiabulls, Taurus, Escorts and Sahara – witnessed a decline in their yearly AUM.

The total assets under management of the Indian mutual fund industry stood at Rs21.4 lakh crore as on March 31, 2018, according to the latest data from the Association of Mutual Funds of India (AMFI). The same had stood at Rs22.2 lakh crore on February 28, 2018. The inflows in equity mutual funds stood at Rs39,102 cr in March 2018, a 21% mom growth. However, the outflows grew a significant 105% mom to Rs36,148cr in March 2018, which, consequently, led to an 80% mom dip in net inflows to Rs2,954cr during the month. Since both inflows and outflows in equity mutual funds increased in March 2018, the slump in net inflows could be attributed to the following reasons:

•       Investors booked tax-free, long-term capital gains before April 01, 2018 (as 10% LTCG tax is in effect from April 01, 2018), and reinvested in equity mutual funds.

•      Investors switched from dividend option to growth option as 10% DDT on dividends from equity mutual funds is also applicable w.e.f April 01, 2018. Switching from one option to another option in the same scheme is counted as redemption and fresh investment.

In FY2018, equity mutual funds recorded a mammoth Rs1.57 lakh crore in net inflows against Rs60,270cr recorded in FY2017 as investors increased their equity allocation with hopes of higher returns.

Piquant Parade

CAMS has introduced a new feature in its investor mailback service that can help investors calculate long term capital gains tax liability. The R&T agent has launched a modified capital gain/loss statement to include LTCG for equity funds and consolidated statement for grandfathered equity schemes. The enhanced capital gain/loss statement will assist investors to comply with the new long-term capital gains tax for equity funds announced in the budget this year. The enhanced capital gain/loss statement will allow investors to view their consolidated capital gains/losses across all mutual funds that are serviced by CAMS. In addition to providing short term and long-term capital gain /loss, the statement will also provide the original cost and the net asset value as on 31st January 2018. As the statement will be available for perpetuity, investors can access the statement at any time in the future. With the Union Budget 2018 exempting gains accrued in equity-oriented schemes until January 31, 2018, this statement will serve investors with a single view of unit balance, net asset value (NAV) and fair market value as on January 31 2018 for grandfathered equity schemes across the CAMS serviced funds. Investors can use the statement as a ready reckoner to review their equity holdings with January 31, 2018 valuation. CAMS is the service partner to 15 mutual funds and serves 64% of the mutual fund industry assets.

   

Softbank-backed Paytm is planning to enter India’s mutual funds industry with the launch of a new digital platform by the end of April 2018. Paytm's upcoming Android and iOS applications will offer investors mutual funds from 12 of the 15 largest asset management companies (AMCs) in the first phase, with an aim to increase the number of investors to 25 by August 2018. The digital wallet's entry may add one more distributor in the list of asset management firms as Paytm claims to have a customer base of more than 30 crore. The firm plans to carry out distribution through Securities and Exchange Board of India (SEBI)-registered Paytm Money, another unit of One97 Communications Ltd, which also owns Paytm and Paytm Payments Bank. Paytm Money is considering options to include a very small transaction or subscription fee for its investment platform. To avoid distributor commissions embedded on higher expense ratios, Paytm is planning to sell only direct plans with lower expense ratios. Paytm aims to provide a direct plan for investors without the help of a distributor directly from an investment adviser who is registered with SEBI. Considering that half of Paytm’s transactions occur in small towns, Paytm's entry may help in the expansion of the mutual funds market beyond the top 15 towns, which has been on the rise. In 2017, only 28 percent of individual investors’ assets in mutual funds come from “B15”, or “beyond the top 15” towns according to Association of Mutual Funds in India.

AMFI and Times Network have jointly launched a new IAP campaign titled ‘Jan Nivesh’. Jan Nivesh campaign aims to educate and encourage people to change their financial habits by investing regularly in mutual funds. The campaign will urge citizens to take a pledge to invest one day’s income in mutual funds every month.

Computer Age Management Services (CAMS) has introduced a new facility called PAN based e mandate through which your client can set up SIP online by using eSign facility. The e-mandate facility will help MF distributors to reduce the SIP registration cycle to just two to three days, as compared to two to three weeks earlier. Currently, MF distributors register paper based mandates for their investors, which is time consuming as it involves obtaining signature of an investor on the form and submission of physical form at service centre for processing. The conventional method to set up SIPs with a mandate involved laborious practices like filling out forms, cheque copy, submission to bank via mutual funds / registrar, registration process at the bank and eventually starting the SIP only after 30 days. Investors had to repeat the process for every new SIP.  CAMS e Mandate will aim at transforming the way mandates are registered with a complete digital process.” You can use this facility on CAMS website and mobile app myCAMS. The company plans to avail this facility on the websites of AMCs and distributors in future. Here are the key features of e mandate facility

•      This is a completely paperless process. The only requirement is Aadhaar link in the bank account where the mandate has to be registered.

•         This will be free from restrictions like date and number of transactions as it will be set up for ‘As and when presented’ option. 

•          Currently, maximum limit for e-mandate is Rs.1 lakh

•          e-mandate can be registered for the banks enabled by NPCI 

•          Investors can also do lump-sum purchase through this facility.

SEBI has asked Sahara Mutual Fund to wind up its mutual funds business by April 21, 2018. However, the fund house can run its ELSS Sahara Tax Saving Gain Fund for four more months as such funds come with a lock-in period of three years. The fund house will have to return the money of all unit-holders by August 27, 2018. This means, Sahara MF will have to compulsorily redeem the units allotted to its investors and credit the respective funds to its investors without any additional cost, within the given date. SEBI clarified that the fund house cannot accept fresh business during this period. SEBI has directed its R&T Karvy Computershare to ensure the redemption proceeds of all unit holders reaches before the stipulated date. Sahara MF will surrender its certificate of registration to SEBI by August 27, 2018. The fund house manages AUM of Rs.64 crore as on March 2018.

…to be continued

NFONEST

April 2018

New Fund Offers of various hues adorn the April 2018 NFONEST.

Sundaram Long-term Tax Advantage Fund – Series IV

Opens: March 27, 2018

Closes: June 27, 2018

Sundaram Mutual Fund has launched Sundaram Long-term Tax Advantage Fund – Series IV. The investment objective of the fund is to generate capital appreciation over a period of ten years by investing predominantly in equity and equity-related instruments of companies along with income tax benefit. The fund is benchmarked against the S&P BSE 500 Index. The Fund Manager is Mr. S. Krishna Kumar.

UTI Capital Protection oriented Fund – Series X-II

Opens: April 2, 2018

Closes: April 16, 2018

UTI Mutual Fund has launched UTI Capital Protection Oriented Fund – Series X–II (1134 days). The investment objective of the fund is to endeavour to protect the capital by investing in high quality fixed income securities as the primary objective and generate capital appreciation by investing in equity and equity related instruments as secondary objective. The fund is 'oriented towards protection of capital' and not 'with guaranteed returns'. Further, the orientation towards protection of the capital originates from the portfolio structure of the scheme and not from any bank guarantee, insurance cover etc. The fund is benchmarked against the CRISIL Hybrid 85+15 Conservative Index. The Fund Manager is Mr. Sunil Patel.

Essel Equity Hybrid Fund

Opens: April 9, 2018

Closes: April 23, 2018

Essel Mutual Fund has launched Essel Equity Hybrid Fund, an open ended fund. The investment objective of the scheme is to provide periodic returns and capital appreciation over a long period of time, investing predominantly in equity and equity related instruments. The fund is benchmarked against the CRISIL Hybrid 35+65 Aggressive Index. The Fund Manager is Mr. Viral Berawala and Killol P Pandya.

SBI Long Term Advantage Fund Series VI

Opens: April 11, 2018

Closes: July 10, 2018

SBI Mutual Fund has launched SBI Long Term Advantage Fund Series VI, a 10 year closed ended ELSS fund. The investment objective of the scheme is to generate capital appreciation over a period of ten years by investing predominantly in equity and equity-related instruments of companies along with income tax benefit. The fund is benchmarked against the S&P BSE 500 Index. The Fund Manager is Mr. Anup Upadhyay.

ICICI Prudential Bharat Consumption Fund - Series 2

Opens: April 12, 2018

Closes: April 26, 2018

ICICI Prudential Mutual Fund has launched ICICI Prudential Bharat Consumption Fund - Series 2 is a closed ended equity scheme following the consumption theme. The investment objective of the scheme is to provide capital appreciation by investing predominantly in equity and equity related instruments of sectors that could benefit from growth in consumption and related activities. The fund is benchmarked against the Nifty India Consumption Index. The Fund Managers are Mr. Mrinal Singh and Ms. Priyanka Khandelwal for ADR/GDR and other foreign securities.

IIFL Capital Enhancer Fund - Series 1

Opens: April 23, 2018

Closes: May 4, 2018

IIFL Mutual Fund has launched IIFL Capital Enhancer Fund - Series 1, an annual interval scheme maturing 1300 days from the date of allotment. The investment objective of the fund is to achieve long term capital appreciation by investing in equity and equity related securities with strategy of hedging the portfolio with Nifty 50 put option and other equity derivatives. The fund is benchmarked against the CRISIL Balance Fund – Aggressive Index. The Fund Manager is Mr. Prashasta Seth.

Kotak India Growth Fund Series 7, BOI AXA Arbitrage Fund, Union Trigger Fund – Series 3, Mirae Asset Equity Savings Fund, ICICI Prudential Bharat 22 FOF, Baroda Pioneer Ultra Short Duration Fund, HDFC Equity Opportunities Fund – Series 4, Union Corporate Bond Fund, ICICI Prudential Bharat Consumption Fund – Series 4 to 6, Reliance Nivesh Lakshya Fund, Tata Value Fund Series 1 & 2 and UTI Corporate Bond Fund are expected to be launched in the coming months.

GEMGAZE

April 2018

All the GEMs from the 2017 GEMGAZE have performed reasonably well through thick and thin and figure prominently in the 2018 GEMGAZE too. 

Principal Global Opportunities Fund Gem

Incorporated in March 2004, Principal Global Opportunities Fund has an AUM of Rs 18 crore. The one-year return of the fund is 23.74% as against the average returns of 13.58% of the Benchmark Index MSCI World. It is a feeder fund and invests in Principal Global Investors – Emerging Market Equity. So, the fund invests primarily in the finance sector with 98.86% of the assets in equity.  The expense ratio of the fund is 1.05%. The fund is efficiently managed by Mr. Rajat Jain since its inception.

Templeton India Equity Income Fund Gem

The Rs. 1056 crore Templeton India Equity Income Fund, incorporated in May 2006, has earned a one-year return of 16.78% slightly ahead of the category average return of 14.78%. Top five holdings constitute 27.84% of the portfolio with finance, healthcare and auto forming the top three sectors. Equity constitutes 98.38% of the portfolio with the rest of the assets in cash. While the portfolio turnover ratio is 16%, the expense ratio is very high at 2.54%. The fund is benchmarked against the S&P BSE 200. The fund is managed by Vikas Chiranewal since its inception.

DHFL Pramerica Top Euroland Offshore Fund Gem

DHFL Pramerica Top Euroland Offshore Fund, incorporated in September 2007, has an AUM of Rs 5 crore. Its one-year return is 14.73% - lower than most of its peers. The fund invests in equities of issuers with headquarters in a member state of the European economic and monetary union (EMU). The fund management tries to identify current and future market leaders while laying special emphasis on the companies' structural growth and earnings momentum characteristics. Although the fund primarily invests in large caps, small and midcaps can make up 30% of the fund assets. 96.73% of the portfolio is made up of equity with the rest in cash. It is a feeder fund and invests in DHFL Pramerica Top Euroland Offshore Fund. So, the fund invests primarily in the finance sector with 96.73% of the assets in equity. The expense ratio of the fund is 2.04%. The fund is benchmarked against the MSCI EMU Index. The fund is managed by Alok Agarwal since July 2017.

Sundaram Global Advantage Fund Gem

Sundaram Global Advantage Fund is a ten-year old fund with an AUM of Rs 25 crore. Its one-year return is 16.2%, on par with most of its peers. The entire assets allocated to equity are 87.88% with finance being the prime sector in which the fund’s assets are invested. The expense ratio of the fund is moderate at 1.53%. The fund is benchmarked against the MSCI Emerging Markets Index. The fund has been managed by Shiv Chanani since July 2016.

ICICI Prudential Indo Asia Equity Fund Gem

Incorporated in October 2007, ICICI Prudential Indo Asia Equity Fund has an AUM of Rs 183 crore. The one-year return of the fund is 13.98% lagging behind the category average of 16.67%. The top three sectors are finance, construction and chemicals. Top five holdings constitute 32.67% of the portfolio, with the equity exposure at 94.35% and debt constituting 5.65% of the portfolio. The portfolio turnover ratio is a towering 145% and the expense ratio is 2.54%. The fund is benchmarked against the Nifty 50 (65%) and MSCI AC Far East Free Ex-Japan (35%). The fund is managed by Shankar Naren and Atul Patel since February 2015 and Ihab Dalwai since October 2016.

FUND FLAVOUR

April 2018

“Risk comes from not knowing what you’re doing” – Warren Buffet.

These famous words could have been about Global/International Funds, funds that add an element of geographical diversification. A global fund primarily invests in markets across the world, including those in the own country of the investor. An international fund, on the other hand, has no investment in the home country of an investor, with all funds concentrated in global/international markets. In the case of an Indian investor, an international mutual fund would be a fund that invests in the equities of companies that are outside India. However, this is not for lazy or passive investors. International funds require careful and continual market research. The investor should be sure of his investment goals, both short-term and long-term, before venturing in. Check vintage and track records that will help you zero in on a fund that suits your sensibilities.

International mutual funds come in three types…

Domestic-International Hybrid: The domestic-international hybrid fund invests 65 per cent plus money in domestic equities and the balance around 35 per cent in international markets. In the case of the Indian investors, this is a good option because Indian markets are doing rather well presently and the road map for future looks good. 

Feeder Investments: These funds invest through “feeder” route into a particular country or region. Under this mechanism, the fund invests in another international fund, which in turn invests directly in foreign stocks.

Thematic Investments: These funds invest in stocks with an underlying theme based on sector and industry.

Rationale for International Mutual Funds

Investing in a global fund can be a smart move, provided one knows the basics of this fund. Individuals looking to diversify their portfolio, aiming to have multiple markets through which they can earn a profit might be suited for this fund. Smart investors have always been lured towards overseas funds for umpteen reasons. One, as you know, is diversification. Two, economic cycle varies for different countries, and simultaneous investment in different economies ensures minimal loss and possibly, smoother returns. Three, exposure to international markets can only broaden your experience and expertise.

The pros…

The biggest advantage of investing in international funds is diversification benefits. By adding international funds to your portfolio, you can reduce the overall volatility of your portfolio by as much as 5-10%. The primary reason for this is the co-relation of the domestic markets is lower with international markets, especially with that of developed markets. 

Another advantage is ability to take exposure to sectors or companies that you would ordinarily not have exposure to. Global companies like Amazon, Google, Facebook, Coca Cola, etc. are widely known and used brands in India; they derive a fair share of the revenues/users from countries such as ours. By investing in these funds, you can potentially gain exposure to such stocks. 

An international fund acts as a hedge against the fall in the rupee against dollar, thus minimising loss owing to the currency depreciation. 

Majority of the international mutual fund schemes have commendable reputation and provide adequate data on their past performance. All of this information empowers the investors to take a sound and informed decision. 

An investor has wide variety of schemes at his/her disposal. The investor can choose region-specific schemes or schemes based on particular theme. 

The cons…

The Indian economy is a bright spot for investment and it is one of the prominent economies among all emerging markets, investments made in the Indian markets have delivered hefty returns, while international economies are facing slowdown and some economies have reached stagnation point. In such a scenario, investing in low growth foreign funds instead of investing in the prominent economies of the emerging markets needs a careful consideration. 

One of the risks associated with investing in international funds is currency risk. If rupee strengthens, then it erodes your returns vis-à-vis a pure domestic investment. Also, if you are investing into country or region-specific funds, then you could be exposed to specific country/geopolitical risks. 

Another aspect, though not a risk, is the unfavourable tax treatment for international equity funds. Although these are equity funds, for tax purposes they are classified as non-equity, thus investors end up paying a capital gains tax which is higher compared to domestic equity funds.

Investments made in foreign funds are exposed to geopolitical risks, i.e. these are likely to suffer from political disturbances in the country or region in which investments are made. Keeping abreast of such developments is not easy for retail investors. By the time a retail investor decides to withdraw in panic to avoid losses, it might be too late.

Parameters prior to investment

There are a few things to consider while taking international fund exposure. Firstly, each investor needs to understand their risk and return requirements, basis their investment objectives and time horizon. Once these have been arrived at, an efficient portfolio is constructed, which decides the level of international fund allocations. The next decision would involve choosing the types of international exposure – country specific, regional, emerging markets, developed markets, etc. Most investors would be better-served taking exposure to developed markets funds or funds investing into the US or Europe, which are more broad-based.

Participation…

International funds from an Indian investor’s perspective have been a little bit of a hit-and-miss. Global fund investment options, albeit limited, have been around for a decade, with options to invest into the US, Europe, ASEAN, country-specific funds like Brazil and China and even funds investing into natural resources companies like gold mining companies or energy companies. The greatest amount of investor interest has typically been in gold mining funds and the US funds. In fact, in 2013, when the Indian equity markets were going through a prolonged lull phase, domestic equity funds too were witnessing stagnating growth. At the time, investors increased allocation into the US funds on the back of strong one year historical returns of these funds. Post that, though the story has been very different, with the start of the domestic equity market rally in 2014, domestic fund flows are reaching new highs, but global funds are witnessing a slow trickle of redemptions. As an effect of this, global funds currently form a minuscule proportion of investor’s equity portfolio at 0.27% from a high of 1.56% in Jan 2014. 

Performance & drivers…

Since the global funds available are quite diverse, we have compared the returns of some of the popular global indices with the Nifty. This gives you an idea that no one index/country can consistently outperform year-on-year. In fact, the returns can be quite divergent. The one-year, three-year, five-year and ten-year returns of international funds are 14.47%, 6.47%, 6.48% and 2.37% respectively. Understandably, the performances of International Funds have varied wildly depending upon the timeframe, theme, and geography in question. For instance - the NAV of Kotak World Gold Fund, a feeder fund into Falcon Gold Equity Fund, has dropped by 19.08per cent in the past year, whereas Mirae China Advantage Fund has delivered stellar returns of over 26per cent in the same period. However - a 3-year timeframe tells us a different story. Of the 60 international funds with a 3-year plus track record, only two have provided double digit annualized returns. As many as 23 funds have delivered a negative 3-year CAGR. Investors who are considering investing into International Funds need to bear in mind that they have a unique set of risks intrinsic to them. First, there's the risk of the target country's currency depreciating during your investment timeframe, leading to an equivalent loss in the rupee value of your units. Second, there's the risk of the fund's target country itself underperforming. Together, these two risks can potentially create a double whammy effect on returns. A case in point is the beleaguered HSBC Brazil Fund, which has delivered a 5-year annualized return of -7.26per cent.

Why International Funds warrant a place in your portfolio

Despite their risks, we believe that International Funds do warrant a place in your portfolio at this time. Valuation-wise, Indian equities are not exactly cheap anymore, and various signs are pointing to the fact that we may already be in the mid-stages of the current bull-run. A smartly selected International Fund can help balance out the risk in your portfolio by hedging you against a fall in the Rupee versus the Dollar, and by strapping on an additional layer of diversification outside of Indian assets. Additionally, some mature markets such as the U.S are generally more stable and trade at 3-4X lower earnings multiples than domestic indices; they can help stabilize your equity portfolio and smooth out your long-term returns.

The Bottom Line

Selecting the right International Fund portfolio can be a tricky task, and new investors with modest portfolios should ideally steer clear of them and opt for SIPs in domestic equity funds instead. Chasing historical returns or shying away from an International Fund based on past returns can both end up backfiring. At the very least, novice investors should avoid the second and third categories of International Funds, while making small & incremental investments into the first kind that combine domestic and international equities in a tax-efficient manner. If you are a savvier investor with a keen understanding of how domestic and global equity markets work, you could consider a 10-15 per cent allocation to International Funds. Chinese Funds, despite their stellar one-year returns, may have become too risky for comfort at this point. U.S is still considered well balanced in terms of risk and reward, whereas Japanese markets hold potential, with the country having implemented a three-pronged strategy for economic growth; comprising of fiscal stimulus, monetary easing and structural reforms. Use International Funds as a supplement to your core portfolio of domestic funds. Don't go overboard in your allocation to them. In all fairness, we will always be privier to market influencers that are closer home.