FUND FULCRUM (Contd.)

October 2018

The latest S&P Indices Versus Active (SPIVA) India Scorecard suggests that 88% of Indian equity large-cap funds underperformed their benchmark in the one-year period ending June 2018. Beating benchmark post introduction of total return index (TRI), a benchmark that captures dividend income, has become difficult. Asia Index, a joint-venture between BSE and S&P Dow Jones Indices, runs the SPIVA scorecard. The large-cap equity funds witnessed a low survivorship rate (68%) and a low style consistency (13%) over the 10-year period ending in June 2018. Over the 10-year period, the return spread for actively managed large-cap equity funds between the first and the third quartile break points of the fund performance, stood at 3.6%, pointing to a relatively large spread in fund returns. In line with the historically volatile nature of the mid-/small-cap segment of the Indian equity market, the return spread for actively managed mid-/small-cap equity funds was even higher at 5.1% over the same period. Simply put, the spread in fund returns shows the difference in fund performance. The asset-weighted return for large-cap equity funds was 51 bps higher than the equal-weighted return over the 10-year period. In contrast, the margin between asset- and equal- weighted returns for ELSS funds was only 40 bps. (Asset weighted returns factors in the AUM size of the schemes whereas equal-weighted returns is the arithmetic mean of the returns of the schemes). Over the three-year period ending in June 2018, the asset-weighted return of large-cap funds was 1.3% lower than their benchmark, the S&P BSE 100. During the same period, the asset-weighted return of Indian Equity Mid-/Small-Cap funds was 3.1% lower than their benchmark, the S&P BSE 400 Mid Small Cap Index.

Regulatory Rigmarole

In a recent letter to all public sector banks (PSBs), the Department of Financial Services, Ministry of Finance has asked these banks not to incentivise their employees with commission for cross selling of financial products such as insurance and mutual fund products. In fact, the ministry said that there is no need to incentivise the employees as they work for a fixed salary. Any income accrued of third party product sales is the income of banks. A few years back, Central Vigilance Commission (CVC) had recommended the finance ministry that PSBs should stop the practice of incentivizing their employees with cash benefits. The commission for the cross selling is received by the bank and booked as an Income. The bank in turn runs reward and recognition programme for its employees. The parameters for such schemes involve performance in bank’s core business and cross sell.

The GST council is likely to defer the implementation of reverse charge mechanism (RCM) until March, 2019. Distributors earning less than Rs.20 lakh a year are likely to avail RCM benefits until the government issues a notification to withdraw these benefits. The expected deferment will benefit distributors earning less than Rs.20 lakh who do not have GST registration. In case they are earning less than Rs.20 lakh, but have GST registration, they can cancel their GST registration by visiting this link https://services.gst.gov.in/services/login. For distributors with GST registration, AMCs continue to follow forward charge mechanism, i.e., AMCs will pay the gross commission to them. These distributors can avail of the benefits of input credit. Earlier in October 2017, the GST council had first introduced RCM to benefit small businesses until March 2018. Later, the Central Board of Indirect Tax and Custom (CBIC) had extended RCM benefits until June 2018 and then September 2018.

In a major setback for online distributors relying on Aadhaar based eKYC to onboard new clients, the Unique Identification Authority of India (UIDAI) has asked KYC registration agencies (KRAs) to immediately stop doing Aadhaar based authentication for eKYC. In fact, the UIDAI has asked KRAs to give them in writing that they have stopped using Aadhaar based authentication for eKYC. Ever since the Supreme Court has come out with its verdict on Aadhaar, there has been lack of clarity among fund houses, R&T agents and distributors on using Aadhaar based eKYC for onboarding new clients. In fact, a few distributors and fund houses continued with Aadhaar based eKYC to onboard new clients. With this, new age distributors would be affected the most as they completely rely on Aadhaar based eKYC to onboard a new client. UIDAI has been reportedly exploring ways to help companies relying on Aadhaar based eKYC to onboard new customers. eKYC may become operational once again. UIDAI is said to have been exploring ways to help companies relying on Aadhaar based eKYC to onboard new customers, which includes fund houses and online distributors. One approach being considered is to use a live picture of customer with time stamp and photo of a government-issued ID card. Customers can upload their live photograph along with the valid ID proof to complete the KYC process.

Following the Supreme Court’s verdict on Aadhaar, AMFI has discontinued online registration and renewal of ARN for mutual fund distributors with immediate effect. This has come after the UIDAI has asked AMFI, R&T agents and KRAs to give them in writing that they have stopped using Aadhaar based authentication. So far, distributors used to furnish Aadhaar number to register and renew their ARN number through online process. AMFI has assured that they will start the online process soon. Currently, even for online renewal of ARN and EUIN, Aadhaar was required for fetching the photograph of the ARN/ EUIN holder from Aadhaar database. However, since Aadhaar based authentication is no longer permissible, AMFI is in the process of modifying the online ARN/ EUIN renewal facility to facilitate uploading of the photograph by the ARN/ EUIN holder (in lieu of fetching the same from Aadhaar database). Till then, distributors can continue to register or renew their ARN through physical process. Currently, distributors have to undergo a mandatory six hours of classroom training in order to renew their ARN. To ease the registration renewal process, NISM has already introduced an online CPE training for distributors. Once distributors take this training, NISM issues a certificate. Distributors have to send their certificates to CAMS along with a DD of Rs.1,500 in favour of AMFI as renewal fee. Typically, the entire physical process of ARN renewal takes around two months. Earlier in June 2017, AMFI had introduced an online ARN registration and renewal facility for distributors.

SEBI has banned upfront commission in mutual funds with immediate effect. In fact, the market regulator has directed fund houses to follow all-trail model to compensate their distributors. In line with its earlier proposals, the market regulator has clarified that fund houses will have to pay such commissions from scheme and not from AMC book. In addition, SEBI has asked fund houses not to do upfronting of any trail commission. However, fund houses can do upfronting of trail commission on SIPs subject to fulfilment of the following pre-defined conditions.

• ·         Upfronting of trail commission is allowed only for first time investor based on Pan

• ·         Fund houses can pay 1% upfronting on SIP of up to Rs.5000 for a maximum period of 3 years For instance, if a first time investor starts SIP of Rs.5000 for three years, distributors will get close to Rs.1800 as upfronting of trail commission

• ·         Fund houses can claw back such a commission on a pro-rata basis from distributors if investors discontinue SIP for which the commission is paid

• ·         SEBI will take appropriate action if it finds irregularity in this practice

SEBI believes that shifting to all trail model can bring transparency in expenses, reduce portfolio churning and reduce mis-selling in mutual funds.

In a bid to increase transparency in mutual funds, SEBI has asked fund houses to disclose investment and advisory fees and other expenses along with the gross commission of distributors with immediate effect. Simply put, the half yearly consolidated account statement (CAS) will now have two more columns for the disclosure of management fees and other expenses along with the gross commission paid to distributors. However, the market regulator has not clarified if such disclosures will be in percentage terms or absolute terms. In a press release SEBI said, “The scheme’s average total expense ratio (in percentage terms) along with  the  break  up  between investment  and  advisory  fees,  commission  paid  to  the distributor and other  expenses  for  the  period  for  each  scheme’s  applicable plan  (regular  or  direct  or  both)  where  the  concerned  investor  has  actually  invested in.” This commission figure includes all direct monetary payments and other payments made in the form of gifts/rewards, trips, event sponsorships etc. by AMCs to distributors. Also, this disclosure comes with a footnote that reads, “The commission in Col 9 above indicates gross commission received by the distributor against the respective investment and does not exclude costs incurred by distributors such as service tax (wherever applicable, as per existing rates), operating costs, etc.”

SEBI has asked fund houses to publish daily performance report of their schemes on AMFI website. In a recent circular, SEBI has asked fund houses to upload their daily scheme performance data on AMFI website. Currently, AMCs update their scheme performance reports on monthly basis on their own website. However, this data is of no use in volatile markets. Having daily performance data will help an investor make a more informed decision. On the flip side, daily tracking may end up scaring jittery investors further during volatile markets. While investors could access daily performance on mutual fund tracking websites, the AMFI website will make scheme comparison easy for investors and assure investors about authenticity of data. SEBI said that CAGR returns of all plans of a scheme and their corresponding (TRI) benchmark will be available on the AMFI portal. The returns will for the 1-year, 3-year, 5-year, 10-year and since inception time periods. In addition, AMCs will also have to upload 7 days, 15 days, 1 month, 3 months and 6 months performance of overnight funds, liquid funds, ultra-short duration funds, low duration funds, and money market funds on the portal. The returns will be calculated based on previous day’s NAV. Other relevant data such as scheme AUM and previous day NAV will be included in the disclosure. To increase the ease of understanding, the data will have filtering options based on scheme-type, plan-type as well as sorting feature based on return period. SEBI has given a month’s time to fund houses to comply with these regulations.

The regulator has clarified that it would make changes to the MF regulations before introducing new TER slabs. The SEBI circular says, “All other decisions of the Board with respect to ‘Review of Total Expense Ratio (TER)  of  Mutual  Fund  Schemes’ as  mentioned  in  the  press  release  dated September  18,  2018  issued  by  SEBI  would be implemented pursuant  to amendment to SEBI (Mutual Funds) Regulations, 1996. Earlier in September, SEBI has announced fresh AUM slabs and given a roadmap to fund houses on how they can make changes to their TER based on asset size of the scheme. While the market regulator has capped TER at 2.25% in equity funds and 2% in other than equity funds, SEBI has followed economies of scale to reduce TER systematically. Similarly, fund houses cannot charge more than 1.25% in close end equity funds and 1% in close end debt funds. SEBI has also asked fund houses to charge a maximum TER of 1% on passive funds such as index funds and ETFs. On fund of funds (FOFs), SEBI has said that FOFs investing in liquid, index and ETFs cannot charge over 1%. On the other hand, FOFs investing primarily in actively managed funds can charge up to 2.25% in equity funds and 2% in other than equity funds.

Most of you must be aware of UTI Mastershare Unit Scheme. It is the first market linked equity scheme, which did not guarantee returns. Earlier, funds like UTI Unit Scheme 64 either offered assured returns or indicated returns. However, it was the industry’s first market linked product but was a close end scheme listed on stock exchanges. In those days, there was no concept of open ended, daily NAV and trail commission. Fund houses used to launch close end funds or interval funds to collect fresh money. However, the course of Indian mutual fund industry has changed with private players. Kothari Pioneer was the first private mutual fund that many believe has laid the foundation stone of the modern mutual fund industry. Be it an open end fund or SIP, this fund house has brought numerous innovations in the industry that we are today proud of. Fund management too came with its unique set of challenges. The prospect of meeting large scale redemption in open end structure was a daunting one. To mitigate these risks, Mutual Funds used to maintain cash levels of 10% then. However, the biggest challenge was doing research on companies. There were no quarterly reports then. They used to wait for annual reports of the companies. A few companies were more generous as they came out with half yearly report. There was no concept of analyst meetings in companies. They used to approach company secretaries with their stock holding proof seeking appointment with the senior management of the companies. Also, they used to attend AGM just to ask questions to management. At that time, it was rare for brokers to share their reports with them. In fact, there was a misconception in many minds about stocks with some equating stock market with gambling. A lot of innovations that we are witnessing today have come from private mutual funds. Private mutual funds were the ones to start the practice of sharing rationale for stock selection and holdings through monthly factsheets. Right from open end funds and daily NAVs to sectoral funds, debt funds or even SIPs, private mutual funds have strengthened the foundation built by the public sector players.

FUND FULCRUM

October 2018

The average assets under management of the 41-player mutual fund industry rose 14% to Rs 24.29 lakh crore in July-September 2018, according to the Association of Mutual Funds in India (AMFI) data. In comparison, the total AUM of the industry in April-June 2018 stood at Rs 23.4 lakh crore. Mutual fund managers attributed the rise in quarterly AUM to strong participation from retail investors. In addition, continuous flows from systematic investment plans helped the industry to register growth in the AUM. Joint efforts of investor awareness campaigns by AMFI and fund houses have driven growth in the industry. Among top 10 asset management companies, ICICI Prudential Mutual Fund with a marginal rise in assets continued to remain the top fund house in the industry with AUM of Rs 3.10 lakh crore. While average AUM of HDFC Mutual Fund fell 0.16%, it managed to maintain the second position and Aditya Birla Sun Life Mutual Fund continued to remain at the third slot. SBI Mutual Fund with nearly 9% rise in its average AUM took the fourth position relegating Reliance Mutual Fund to fifth spot. The total AUM of top 10 asset management companies rose 3.68% to Rs 19.63 lakh crore of the total 24 lakh crore. Of the 41 fund houses, as many as 33 mutual funds witnessed growth in their asset base in the July-September quarter of 2017-18, while eight saw a decline in their AUMs. The profit before tax as a percentage of revenue of large mutual funds has also stood at a very healthy rate of 40-50%. In the last 12 years, a growth of 6.5% has been seen in the mutual fund industry from Rs 3.53 lakh crore of AUM in March 2007 to Rs 23.05 lakh crore in March 2018. The number of players in the mutual fund industry has grown from 34 in March 2007 to 46 in March 2013. However, it reduced to 42 by March 2016 and to 41 at present.

Despite the volatile equity markets, the industry witnessed positive equity inflows in September 2018. HDFC Mutual Fund continues to hold the top position in terms of equity AUM. An analysis of quarterly AUM disclosed on the AMC website shows that HDFC MF has the highest equity AUM at Rs.1.57 lakh crore as on September 2018.  Despite the fall in key equity indices, the company has witnessed a growth of 2% in its equity AUM i.e. from Rs.1.55 lakh crore in June 2018. ICICI Prudential MF and Reliance MF followed HDFC MF for the second and third position with equity AUM of Rs.1.46 lakh crore and Rs.91800 crore respectively. In absolute terms, SBI Mutual Fund recorded an impressive growth of 8% by adding Rs.6,155 crore in assets in July-September 2018. Axis Mutual Fund and ICICI Prudential Mutual Fund followed SBI Mutual Fund by collecting Rs.5,348 crore and Rs.3,411 crore respectively in July-September 2018. Whereas HDFC MF’s AUM increased by Rs. 2,384 crore. In percentage terms, Invesco Mutual Fund, Tata Mutual Fund and Axis Mutual Fund recorded double digit in their equity assets last quarter. However, three fund houses - Edelweiss Mutual Fund, DSP BlackRock Mutual Fund and DHFL Pramerica Mutual Fund recorded a marginal decline in their quarterly AUM. Overall, the total equity AUM of the top 20 fund houses grew 4% from Rs. 9.27 lakh crore in June 2018 to Rs. 9.64 lakh crore in September 2018.

Fears of a liquidity crunch following the IL&FS crisis hit the mutual fund industry in September 2018. Cash plans or liquid funds were the worst hit. Liquid funds registered massive outflows in liquid funds and left the mutual fund industry short of Rs. 2.3 lakh crore in September 2018. Going by the AMFI data, outflows from liquid funds alone totalled Rs 2.11 lakh crore. Liquid funds invest in cash assets such as treasury bills, certificates of deposit and commercial paper for a shorter horizon.

Equity fund folio addition has boosted domestic mutual fund industry helping it register over 13.20 lakh more investor accounts in September 2018, according to SEBI data. Total investor accounts stand at 7.78 crore in September 2018. Equity funds added 10.90 lakh accounts last month, taking the total equity fund folios to 4.81 crore. Fund managers attributed the addition in equity fund folios to the matured behaviour of retail investors who were seeing the market fall as an opportunity to invest their surplus money. Folios are numbers designated for individual investor accounts, though one investor can have multiple accounts. The addition comes even though the AUM of the 41-member-strong MF industry has seen a sharp drop to Rs 22.06 lakh crore in September 2018 against record Rs 25.20 lakh crore in August 2018. Despite steep fall in equity markets, equity and equity-linked saving schemes (ELSS) saw an infusion of Rs 11,250 crore. Besides, balanced funds witnessed an inflow of Rs 731 crore. About 1.25 lakh folios were added in the ELSS segment. The S&P BSE Sensex lost more than 2,400 points, or 6.2% in September 2018 — the worst fall in the month of September since 2008. The Sensex had fallen by about 10% in September 2008.

The latest AMFI data shows that the mutual fund industry has been receiving an average monthly inflow of Rs.7,650 crore through SIPs. This is the average monthly inflow of three months for the period July to September 2018. In the preceding quarter, i.e., between April and June 2018, the average monthly SIP inflow was Rs.7,182 crore. In September 2018 alone, the monthly inflows in mutual funds through SIP reached an all-time high of Rs.7,727 crore. Overall, the data shows that the industry mopped up close to Rs.44,500 in the last six months through SIPs, which is much higher than the first six months of SIP inflows in FY 2017-18 and the entire year SIP inflows of FY 2016-17. Moreover, mutual fund SIP accounts stood at 2.44 crore in September 2018. AMFI data shows that the mutual fund industry had added about 10 lakh SIP accounts each month on an average during the FY 2018-19, with an average SIP size of about Rs.3,200 per SIP account. In terms of average AUM (AAUM), the mutual fund industry crossed Rs.24 lakh crore in September 2018. AMFI’s latest data shows that AAUM of the mutual fund industry has reached Rs.24.31 lakh crore in September 2018, which is slightly lower than the AAUM of August 2018 at 24.70 lakh crore. However, the monthly AUM of the industry stood at Rs.22.04 lakh crore in September 2018 due to large-scale redemption from corporates and institutional investors from the debt funds to pay advance tax. While AAUM is the average assets of the entire month, which is calculated by factoring in all working days of the month, month end AUM is the assets of the industry as of the last working day of the month. Growth has come largely because of higher inflows in balanced funds, arbitrage funds and equity funds through SIPs.

Piquant Parade

AMFI has elected Nimesh Shah, Managing Director and CEO, ICICI Prudential Mutual Fund as its Chairman. Shah has replaced A Balasubramanian, CEO, Aditya Birla Mutual Fund who was appointed as the AMFI Chairman in 2016. Kailash Kulkarni, CEO, L&T MF will continue to be the Vice Chairman of AMFI for the second consecutive year. There has been only one change in the AMFI committees. Radhika Gupta, CEO, Edelweiss Mutual Fund will now head registration of distributors committee. Last month, AMFI had inducted three new faces - G Pradeep Kumar, Prathit Bhobe and Vishal Kapoor as directors on its board. Currently, there are 15 members in AMFI board of which seven are from the top ten fund houses and four each from mid and small sized AMCs.

Non-banking finance company, Muthoot Finance, has received an in-principle approval from the Securities and Exchange Board of India to commence asset management operations, according to the latest data on ‘Status of Mutual Fund Applications’. The company had approached the market regulator for an AMC licence in March 2017. At present, it has a mutual fund distribution arm:  Muthoot Securities. Muthoot Finance is listed on BSE and NSE as gold financing NBFC. In July 2018, SEBI had given an in-principle approval to Yes Bank and it is expected to start operations this year.  SEBI has also given consent to Fortune Financial Services and Fortune Credit Capital this year to start their MF business. Fortune Financial Services has already filed draft offer documents with SEBI to launch its schemes under the name of ITI Mutual Fund. Data on the SEBI website shows that Trust Investment Advisors, Karvy Stock Broking, Samco Securities, and Equity Intelligence are awaiting approval from SEBI to launch their mutual fund business in India. As per the SEBI norms, a sponsor applying for a mutual fund licence is required to be in the financial services business for five years and must have a positive net worth for five years.  Also, the sponsor should have earned profits in three of the previous five years, including the latest year. SEBI conducts an on-site due diligence of sponsors before granting approval.

After Flipkart and Paytm, Mobikwik has forayed into online distribution business by acquiring online direct plan platform Clearfunds. Bajaj will now be the CEO of MobiKwik's wealth management business. Mobikwik would invest $15 million (approximately Rs.112 crore) over the next one year to expand its wealth management business. The 107 million plus customers will soon be able to start saving in mutual funds seamlessly from their MobiKwik app in just a few clicks. The company would continue to look at strategic investments through acquisitions. Currently, Clearfunds charges Rs.99 a month from investors as wealth management fees.

MF Utility or MFU - an online platform - is in the process of joining hands with more fund houses. Launched in 2015, MF Utility is fast gaining acceptance among distributors and investors. With over 3.50 lakh transactions being executed every month, close to 90% of these transactions are paperless. MF Utility has tied up with 30 fund houses which handle almost 97% of the industry’s AUM. Currently, the 41-player mutual fund industry manages a little over 24 lakh crore AUM. Since MF Utility is a not for profit organisation, fund houses will have to come forward and help MF Utility sustain business. AMFI can consider selling it to the existing players. In fact, BSE had shown its interest in acquiring MF Utility. In 2016, AMFI had constituted a group to discuss the possibility of selling stake in MF Utility to BSE. It would be worthwhile to examine the proposal received from BSE. Seeking a mutually beneficial alliance between MF Utility and strategic parties like BSE Star MF platform with shared governance can enhance the value and business volume for MF Utility. The merger can help bring down cost per transaction for participating AMCs. Currently, the participating AMCs have to cough up Rs.2.50 lakh every month. Due to this flat fee structure, the cost per transaction depends on the volume of transaction and hence varies every month. Higher the volume, lower the transaction cost.

AMFI has postponed its proposed campaign highlighting debt investments, amid scepticism triggered by default in repayment by IL&FS. The new campaign focusing on the fixed income category was a sequel to the ‘Mutual Funds Sahi Hai’ drive, and slated for launch in September 2018. AMFI’s first promo was focused on equity. During the current fiscal, AMFI is planning to spend Rs 150-175 crore to promote mutual fund investments. In 2017-18, it had spent Rs 200 crore for the purpose.

ET Money has announced that the company aims to help 17 million investors who have invested in mutual funds through regular plans to switch to direct plans for free. The company said that it would allow an estimated 1.7 crore existing mutual fund investors to convert their regular mutual fund investments into zero-commission, direct mutual funds and start saving lakhs in commissions. The company claims that this is one of the biggest initiative by any company in the space to simplify investing. By shifting to direct plans, users can save up to 1.5% in commissions every year compared to regular plans. In recent scenario of volatile stock markets, if investors believe in holding back new investments, then converting one’s regular mutual funds to direct mutual funds can be a great option. The process to switch to direct funds is simple. Investors just need to upload their mutual fund statement on the app and within 30 seconds they will be shown the option to shift their regular funds to direct plans. It also shows possible savings in commissions, applicable exit loads and taxes, so that they can take an informed decision. The app also assists them in getting the transaction statement by providing a step by step guide. Once converted to direct mutual funds, the investors will also be able to continue investing in them from the app at no additional cost.

In a major setback for online distributors relying on Aadhaar based eKYC to onboard new clients, UIDAI has asked KYC registration agencies (KRAs) to stop immediately doing Aadhaar based authentication for eKYC. In fact, the UIDAI has asked KRAs to give them in writing that they have stopped using Aadhaar based authentication for eKYC. Ever since the Supreme Court has come out with its verdict on Aadhaar, there has been lack of clarity among fund houses, R&T agents and distributors on using Aadhaar based eKYC for onboarding new clients. In fact, a few distributors and fund houses continued with Aadhaar based eKYC to onboard new clients. With this, new age distributors would be affected the most as they completely rely on Aadhaar based eKYC to onboard a new client.

…to be continued

NFONEST

October 2018

The capital market regulator laid down specific terms and conditions for launching New Fund Offers (NFOs), while it even nudged fund houses to merge similar schemes. Following this, mutual fund houses in India performed a massive exercise of re-categorising and repositioning their scheme offerings. These actions had a common objective to achieve - to do away with scheme duplication which can help investors in scheme selection. But as they say, old habits die hard. Mutual fund houses have launched NFOs again. And many of them are launching the closed-ended ones, since the latest SEBI rules are not applicable to them. Are these fund houses not concerned about the consequences of scheme duplication? And launching NFOs particularly when valuations appear stretched exposes investors to very-high risk.

NFOs of various hues adorn the October 2018 NFONEST.

Axis Growth Opportunities Fund

Opens: October 1, 2018

Closes: October 15, 2018

Axis Mutual Fund will launch Axis Growth Opportunities Fund, an open-ended equity scheme that will invest in domestic equities as well as foreign securities. The scheme will invest 30 to 35% of its assets in domestic large caps and up to 35% in foreign securities, which would be predominantly large caps, making a total of 35 to 65%. The company can also deploy up to 35-40% in midcap stocks. The overseas allocation will be made by directly investing in foreign securities advised by Schroder Investment Management.  Overseas investment philosophy is aligned with domestic Axis philosophy of bottom-up investing in high-quality stocks with high growth prospects. The target of the high-quality portfolio construct is to generate sustainable long-term performance while keeping risk contained. The fund uses S&P BSE 200 Total Return Index as the base index. Jinesh Gopani and Hitesh Das are the fund managers for the firm.

Invesco India Small Cap Fund

Opens: October 10, 2018

Closes: October 24, 2018

Invesco Mutual Fund has launched a new fund named as Invesco India Small Cap Fund, an open ended equity scheme predominantly investing in small cap stocks. The investment objective of the scheme is to generate capital appreciation by investing predominantly in stocks of Smallcap companies. The scheme will invest 65-100% assets in equity and equity related instruments of small cap companies with high risk profile and invest up to 35% of assets in equity and equity related instruments of companies other than smallcap companies with high risk profile and up to 35% assets in debt and money market securities with low to medium risk profile. The scheme’s performance will be benchmarked against S&P BSE 250 Smallcap Index. The fund managers of the scheme are Taher Badshah and Neelesh Dhamnaskar.

Sundaram Long Term Tax Advantage Fund - Series VI

Opens: September 25, 2018

Closes: December 24, 2018

Sundaram Mutual Fund has launched a new fund named as Sundaram Long Term Tax Advantage Fund - Series VI, a closed-end equity linked saving scheme with a statutory lock in of 3 years and tax benefit. The tenure of the scheme is 10 years from the date of allotment of units. 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 scheme will invest 80%-100% in equity and equity related securities with high risk profile and invest up to 20% of assets in fixed income and money market securities with low to medium risk profile. The scheme’s performance will be benchmarked against S&P BSE 500 Index. The fund managers of the scheme are S Krishnakumar and Dwijendra Srivastava.

ABSL Bal Bhavishya Yojna, Essel Focused Equity Fund, UTI S&P BSE Sensex Next 50 Exchange Traded Fund, ICICI Prudential Retirement Fund, Invesco India Equity Savings Fund, Indiabulls Nifty 50 Exchange Traded Fund, Aditya Birla Sunlife Overnight Fund and Reliance Capital Protection Oriented Fund I are expected to be launched in the coming months.

GEM GAZE

October 2018

Many people believe that if you pick the fastest growing sector or sectors in which to invest, you get a leg up on the investing competition and can outperform the general markets. Over the long haul, you can expect sectors to move based upon the strength of the revenue growth and the demand for the products and services sold by the companies within a sector. The October 2018 GEMGAZE would provide some of the best sector mutual funds which can fetch you phenomenal returns provided you ride the cycle at the appropriate time.

The consistent performance of all five funds in the October 2017 GEMGAZE is reflected in all the funds holding on to their esteemed position of GEM in the October 2018 GEMGAZE.

Canara Robeco Infrastructure Fund Gem

Focus on fundamentals

Canara Robeco Infrastructure Fund, incorporated in December 2005, is a thematic fund completely focused on identifying growth-oriented companies within the infrastructure space. The fund, with an AUM of Rs 133 crore, aims at having concentrated holdings with 85.85% of the assets in the top three sectors and a bias towards large market capitalization stocks at 50.06%. Some other infrastructure schemes also invest in companies that are proxy play on the infrastructure theme. This is one of the important factors, which has helped the scheme beat its peers by a wide margin. The scheme's fund manager avoids companies operating in segments that have high entry barriers. 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.  The fund benchmarks the performance of its portfolio against the S & P BSE India Infrastructure TRI. Canara Robeco Infrastructure has been among the better performers in its category. The fund’s one-year return is -12.73% as against the category average return of -8.88%. In the past five years, the scheme has given 17.39% returns, while its category has given 17.54% returns in the same period. In the past ten years, category has given 7.98% returns, while the scheme has given 11.66%. At present, the scheme is invested in companies which have relatively leaner balanced sheets, robust order book and dominant market share. The expense ratio of the fund is high at 2.49% while the portfolio turnover ratio is 32%. The fund is managed by Mr. Shridatta Bhandwaldar.

SBI Consumption Opportunities Fund (erstwhile SBI Magnum FMCG Fund) Gem

The best bet

In the past one year, the Rs 703 crore, SBI Consumption Opportunities Fund, incorporated in July 1999, is perched at the top with 52.37% of the assets in large caps. The expense ratio is high at 2.92% and the portfolio turnover ratio is a mere 58%. Braving all odds, the one-year return of the fund is 10.60% as against the category average of 3.41%. Over the five and ten year periods, the fund posted 15.29% and 23.43% of CAGR, respectively as against the category average of 16.47% and 15.92% respectively. SBI Consumption Opportunities Fund is benchmarked against the NIFTY India Consumption TRI. FMCG funds are, therefore a good bet. Mr. 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, incorporated in August 2008, invests predominantly in large and midcap financial companies. 58.42% 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 NIFTY Financial Services TRI but has also outperformed other banking sector funds. The current AUM of the fund is Rs 2,778 crores and the one-year return is -7.64% as against the category average return of -4.44%. Over the five and ten year periods, the fund posted 23.24% and 18.96% of CAGR, respectively as against the category average of 16.13% and 13.29% respectively. The expense ratio is 2.14% and the portfolio turnover ratio is 160%. The fund is managed by Ms. Priyanka Khandelwal since June 2017.

SBI Healthcare Opportunities Fund (erstwhile SBI Pharma Fund) Gem

Consistent healthy prospects

SBI Pharma Fund, incorporated in July 1999, sports an AUM of Rs. 1108 crores. The number of stocks held by the fund in the last few months has hovered around 25. The concentration analysis reveals that the fund has around 41.19% assets allocated towards the top 5 stocks while the top 10 stocks make up around 64.29%.  The one-year return of the fund is -3.02% as against the Benchmark of 2.20%. The five-year and ten-year returns of the fund are 11.34% and 16.33% as against the Benchmark of 5.59% and 13.46% 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, the S&P BSE Healthcare TRI, almost 84% of the time. The expense ratio of the fund is 2.52% while the portfolio turnover ratio is 51%. An average large-cap slant of about 50.62% 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 459 crore technology fund, which invests in large technology oriented companies. It invests in companies listed in the BSE Teck. Its portfolio has 93.22% 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 48.80% as against the category average of 44.28%. The five-year and ten-year returns of the fund are 18.92% and 20.99% as against the category average of 16.28% and 17.22% respectively. The fund is benchmarked against the S& P BSE IT TRI. The expense ratio of the fund is 2.88% while the portfolio turnover ratio is 14%. The fund is managed by Mr. Ashwin Jain since October 2016, Ms. Priyanka Khandelwal since June 2017 and Mr. Sankaran Naren since July 2017. Incorporated in March 2000, this fund which is one of the oldest technology sector funds available in market, has lived up to the expectation of investors over the past years and is one of the most popular in this category.

FUND FLAVOUR

October 2018

Sector Mutual Funds…

Sector funds and thematic funds belong to the category of equity mutual funds. These funds are a stark contrast to diversified equity funds. Sector funds focus on specific sectors or industry like banking, pharmaceuticals, information technology, infrastructure, real estate, energy, etc. Thematic funds, on the other hand, invest in stocks which are well-defined around a particular opportunity. These might look similar to sector funds but may consist of several sectors. You may perceive these to be much more diversified than sector funds because they invest in a theme (sectors associated with the theme), e.g. a thematic consumption fund may invest in sectors as diverse as automobiles, consumer durables, FMCG, financial services, media etc.

… a market performer?

The market is an aggregation of all the sectors – over any given period of time, some sectors will outperform the market and some sectors will underperform. No sector has been able to beat Nifty consistently over the last 5 years. If you are investing in sectoral mutual funds, there will be years in which your fund will underperform and there will be years in which you will get blockbuster returns. You need to have high risk appetite for sectoral mutual funds. When evaluating sectoral mutual fund performances, you should compare your fund’s performance with the scheme benchmark (as mentioned in the Scheme Information Document or SID) and not with Sensex, Nifty or other broader market indices. You should not look at year on year returns in sectoral mutual funds – rather you should focus on point to point return over your investment tenor. The performance of your sectoral mutual fund will depend on the sector’s performance. Relative performances of different sectors depend on stages of investment cycles (bull market and bear market), economic conditions (interest rates, foreign exchange rates etc.), political developments etc. For example, cyclical sectors perform well in bull markets (e.g. banks outperformed in 2014 and 2017) while defensive sectors (e.g. Pharmaceuticals, FMCG etc.) tend to outperform cyclical sectors and the market in bear markets. In India, generally, share prices of banks rise when interest rates fall, however, the opposite is true in the US. Export oriented sectors will be hurt by INR appreciating versus USD, while domestic sectors may benefit from INR appreciation. Oil exploration companies will benefit from rise in crude oil prices, while refineries and companies which depend on oil imports will be hurt by rising crude prices. Some sectors like banks and pharmaceuticals are subject to regulatory risks – favourable regulation changes benefit these sectors while unfavorable ones hurt them. Sectors like infrastructure benefit from favourable Government policies and vice versa. Therefore, when you are investing in a sectoral mutual fund, you should be aware of risk factors associated with the sector and take an informed decision.

Arguments in favour…

If you invest your money in a sector that has high-growth potential, you will notice that the funds tend to increase substantially in price when the product demand is high. So, if the growth trend for that particular sector or theme predicts continual demand, then your investment is a good one.

It is true that different sectors outperform or underperform in different market conditions, but it is also true that over long investment tenures certain sectors have outperformed the market. Even in a matured market like the US, certain sectors have outperformed the S&P 500 over a 10 to 20 year period. In India certain sectors have outperformed not just the Nifty 50 but the broader Nifty 500, over a 10 year period. By investing in these sectors, through sectoral mutual funds, you could have got market beating returns. Timing is not all important in sector funds – sectoral mutual funds can be great long term investment options. If you have a medium term investment tenor like 3 to 5 years or so, then sectoral mutual funds can be risky but over very long tenors, sectoral mutual funds can enhance your portfolio returns.

…and against

While higher growth in the chosen sector represents good news for the investor, a downturn in the sector represents heavy losses. The reason behind this is the lack of diversification in holdings. Investing in a sector fund is equivalent to putting all of one’s eggs in one basket; if the basket were to fall, the eggs would all break. Thematic funds, although more diversified than sector funds, are also dependent entirely on one particular theme.

The most basic argument is that different sectors find favour in different market conditions. It is difficult for retail investors to guess, which sector will outperform in the near to medium term.

The other argument against sectoral mutual funds is that, retail mutual fund investors select funds mostly on the basis of past performance, i.e. they tend to invest in mutual funds which have given high returns in the last one or two years. This investment strategy may backfire with sectoral mutual funds because the sectors which gave high returns may quickly run out of steam and leave retail investors stranded. This can happen at bull market peaks like what happened with certain sectors in 2008 or when institutional investors rotate sectors by booking profits in stocks where they got high returns. Some sectors may go out of favour due to regulatory and political changes, which are outside the control of companies, e.g. pharmaceuticals over the last 2 years due to regulatory changes in the US. Overcoming regulatory challenges and changes in political scenario may take a long time.

The strongest argument against sectoral mutual funds is information or knowledge gap between the fund manager and an average retail investor. Fund managers of diversified equity mutual fund schemes are required to deliver alphas (higher returns than benchmark) and they do this by being over-weight / under-weight on sector allocations versus the benchmark and through stock selection.

Sector Mutual Funds – the caveats

If you believe that sector funds are the proverbial pot at the end of the rainbow in the mutual fund arena, then keep this in mind.

·    Like any other investment, you need to have clear financial goals for investing in sectoral mutual funds. You should not invest in sectoral mutual funds, simply because you have funds to invest and want to make a quick profit. Chasing quick profits in sectoral funds can burn your pocket, because timing can go horribly wrong with these funds.

·    Do not invest in sectoral mutual funds, simply based on last 1 year returns. You are likely to get disappointed, unless you have a very long investment tenor. If you have long investment tenors, then you should invest in sectors which are likely to play a critical role in India’s Growth Story. If you have a medium term investment tenor, then invest on the basis of 3 to 5 year outlook for the sector and consider risk factors before investing. Either way, you need to have knowledge of the sector before investing.

·       You need to have a high risk appetite. Some sector funds can underperform for a long time. You need to be patient for the sector to recover and your fund to deliver returns. You should allocate only your highest risk capital to sectoral mutual funds. Risk capital is the money, which you do not need to access for liquidity needs in the short to intermediate term – you should have sufficient capital in other investment options for your short to intermediate term liquidity needs.

·      You should have an absolute returns mindset when investing in sectoral mutual funds. You should not worry about year on year volatility. When you reach your target absolute returns, you should exit the investment. Do not worry about leaving money on the table because the returns may quickly fizzle out, if the sector goes out of favor in the market.

·      Diversified equity mutual funds should form the core of your investment portfolio. Sector funds can be good add-ons to your portfolio to enhance wealth creation.

·     Investment in equity mutual funds should be made with at least a 5 year horizon. Much can change within one sector which can lead to underperformance of a sectoral fund. Even a skilled fund manager will not be able to do much if restricted to a sector with significant headwinds and not allowed to switch to a sector with tailwinds. This is captured very well in Warren Buffet words, “Good jockeys will do well on good horses, but not on broken-down”

Are Sector Funds right for you?

You have heard that market timing rarely pays, but occasionally you would at least like the flexibility to be more tactical with your portfolio picks. Sector funds could be the tool to use, but are they worth the risk? The answer depends on how actively you follow the market and what you already own. You have to ask yourself why you want to buy into that particular sector, why you believe it is likely to outperform, and what your criteria are for getting rid of it. If you cannot answer those questions, you probably should not own it. Sectoral funds are meant for a sophisticated investor who can assess the structural movements in the particular sector. Sectoral funds are hyper sensitive to events such as government actions or regulatory changes. So, importance of timing the market is high. If you intend to invest in sectoral funds then you must study and research the sector well. Common man caveat emptor!