Monday, October 15, 2018

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.

Monday, October 08, 2018

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.

Monday, October 01, 2018

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!