Thursday, February 21, 2019

February 2019

According to the Association of Mutual Funds in India (AMFI), Assets Under Management (AUM) of the Indian mutual fund industry increased 2.24% mom and 4.28% yoy to Rs 23.37 lakh crore in January 2019. The upside reflects inflows in the liquid/money market and income categories. AUM under the equity (including ELSS), balanced, and other ETFs came in at Rs10.57 lakh crore in the month under review as against Rs10.73 lakh crore in December 2018. The mutual fund industry saw net inflows of Rs 65,439 crore in January 2019 as against net outflows of Rs 136,951 crore in December 2018. Net inflows from the liquid/money market category came in at Rs 58,637 crore as against net outflows of Rs 148,906 crore in December 2018. The upside likely reflects investment by corporates to park short-term cash. Income category’s net inflows stood at Rs 2,080 crore in January 2019 as against net outflows of Rs3,407 crore in December 2018. The category has seen outflows consistently for the past eight months. Inflows in equity funds (including ELSS) fell for the third consecutive month and plunged 6.78% MoM to Rs 6,158 crore amid volatile capital markets and political uncertainty wherein the broader indices remained under pressure. This marked the lowest inflows in almost two years. Meanwhile, net outflows in the balanced category came in Rs 952 crore as against net inflows of Rs 45 crore in December 2018. This is the first net outflow since May 2014 for the category. Inflows in equity funds have been declining since November 2018. Inflows reduced to Rs 5,206 crore in January 2019 as against Rs. 6,651 crore in December 2018 and Rs. 8,629 crore in November 2018. Lower inflows in pure equity funds and net outflow of Rs. 952 crore in balanced funds contributed to this decline. ELSS funds meanwhile saw an increase in their inflows because of the tax season.

Industry added 22.91 lakh retail folios last quarter taking the total folio count to 7.53 crore in December 2018, according to AMFI data. HNI folios too grew by 82,105 to reach 45.43 lakh folios during the period. The industry folios have nearly doubled from 4.03 crore to 8.03 crore in the last four years (ending December 2018). Retail folios saw a steady growth from June 2016 to March 2018 before slowing down in the last few months. The market volatility in the last few months may have contributed to this slowdown. Compared to retail folios, the increase in HNI folios has been more erratic with intermittent spurts and slowdown. Despite both retail and HNI folios growing at a slower rate in the last few months, the total growth continues to be positive. Overall, retail investors account for 94% of the industry’s folios while retail and HNI investors combined account for 99.5% of the industry’s folios. The dominance of individual investors (retail + HNI) in folios is reflected in the asset class wise folio division as well. Retail investors primarily invest in equity schemes. Similarly, majority of the folios are in equity schemes (84%). Meanwhile liquid category, which sees maximum institutional money, accounts for just 1.9% of the folios and debt fund have 12.2% of investor folios. The last quarter saw a marginal increase in equity ticket size from Rs. 1.49 lakh to Rs. 1.51 lakh. However, there was a significant uptick in ETF and fund of fund (FoF) ticket size on account of CPSE NFO. The ETF ticket size grew from Rs. 7.98 lakh to Rs 8.68 lakh during the period. Liquid also saw a slight increase in average ticket size from Rs. 28.16 lakh to Rs. 28.65 lakh. Debt however saw a slight fall in average ticket size from Rs. 7.43 lakh to Rs. 7.16 lakh. The average ticket size, of both institutional (Rs. 78.83 lakh) and retail investors (Rs. 5.01 lakh), is highest in liquid funds and lowest in equity funds with Rs. 5.02 lakh institutional and Rs. 1.32 lakh individual investor average ticket size.

Industry added 6.62 lakh folios in January 2019, an increase of 92,284 compared to the preceding month, according to the latest SEBI data. Demand for ELSS funds increases during the tax season, typically the last quarter (Jan-Mar) of the financial year. The category added 1.74 lakh folios during the month, equaling 26% of the industry’s new folio creation in January 2019. A similar uptick was observed in net inflows in ELSS funds too. Overall, all equity funds added 5.72 lakh folios in January 2019. Balanced funds too added nearly 18,000 folios despite the category recording net outflows of Rs. 952 crore during the month of January 2019. Liquid funds continued to see a consistent increase in their folios. In the last four months the category has added 2.08 lakh folios and has been amongst the fastest growing category in terms of percentage folio growth. In January 2019, liquid fund folios grew by 3.06%. Following liquid funds in the second place were gilt funds which saw a 2.8% increase in folios last month. Expectation of stance change by RBI on account of low inflation led to the increase in folios in the category during the last two months. A likely recovery in debt category was also reflected in income fund numbers which reported an increase of 37,917 folios and inflows of over Rs. 2,000 crore during the month. All categories of funds saw an increase in their folios except gold ETF category which saw its folios contract by 8467 folios during the month. Overall, industry has nearly 8.1 crore folios as at the end of January 2019.

60% of SIPs in the mutual fund industry have been active for more than 5 years, according to the latest AMFI data. Of the 2.54 crore SIP accounts as on December 2018, nearly 1.53 SIPs are active for more than five years. This indicates that SIP investors focus on financial goals and stay put for long term. This trend can be attributed to increasing awareness about the benefits of long term investments in equity funds through SIPs. In addition, the investment horizon of people has increased due to goal based investment. If we look at absolute terms, the industry manages AUM of Rs.44,000 crore from such SIPs that is 18% of the total SIP AUM. Each of these SIP folios has roughly over Rs.29,000 as on December 2018. AMFI data also shows that the industry mopped up close to Rs.64500 crore in April-December through SIPs. In addition, the mutual fund industry has added 9.31 lakh SIP accounts each month on an average during the first nine months of FY 2018-19. In fact, the total AUM of SIP stood at Rs.2.40 lakh crore as on December, i.e. 10.5% of the overall AUM of the mutual fund industry. Most of these SIPs have come through distributors. AMFI data shows that regular plans constituted 89% or 2.26 crore SIP accounts while 28 lakh SIPs were in direct plans. The AUM of SIPs under regular plan is Rs.2.16 lakh crore whereas the AUM of SIPs through direct plans stood at Rs 23500 crore.

Piquant Parade

Google trends for the search term ‘mutual fund’ reveals a growing interest amongst investors from Andaman and Nicobar Islands and Daman and Diu in mutual funds over the last one year ending January 2, 2019. The two union territories were followed by Maharashtra. Even though around 40% of the industry’s AUM comes from Maharashtra, it ranks third amongst Indian states in terms of web searches for mutual fund. In the fourth place was another union territory Dadra and Nagar Haveli while Jharkhand was in the fifth position. This data reflects the growing popularity of mutual funds beyond top 30 cities. Analysis of AMFI AUM reveals a similar trend too. In the last one year ending November 2018, AUM in all the five regions except Maharashtra grew substantially: Andaman and Nicobar Islands (34%), in Daman and Diu (20%), Dadra and Nagar Haveli (36%) and Jharkhand (26%). But assets in Maharashtra alone contracted marginally by 1%. AMFIs mega campaign ‘Mutual Funds Sahi Hai’ can be credited with spreading awareness about mutual funds in the hinterlands. Good performance of equities in the last few years also attracted investors in small towns to mutual funds.

Regulatory Rigmarole

Soon retail investors may be able to invest in Real Estate Investment Trusts (REIT) and Infrastructure Investment Trusts (InvIT). SEBI recently proposed lowering the minimum investment threshold in these schemes to Rs. 15,000 - Rs. 20,000 as against Rs.2 lakh currently. Despite, the InvIT and REIT regulations coming in to effect from September 2014, there has been limited growth in these products. So far, only three InvITs have been introduced which raised Rs. 10,000 crore while any REIT is yet to be launched (Kotak Mutual Fund had filed the Offer Document. In a recent consultation paper, SEBI has proposed some changes in the InvIT and REIT regulations on the basis of feedback received from market participants. According to the paper, SEBI has proposed lowering the minimum application and transaction amount, increasing the leverage limit for InvIT and changing the structure of privately placed unlisted InvITs. Currently, investors have to invest a minimum of Rs. 10 lakh in the InvIT during the offer period and the minimum lot size for trading is Rs. 5 lakh. In case of REITs, the minimum subscription amount is Rs. 2 lakh while transaction can happen in lots of Rs. 1 lakh. According to industry representatives, REITs and InvITs tend to be stable, income yielding investment vehicles and the current investment requirements are not in line with its risk profile. In the consultation paper, SEBI has proposed to lower the minimum application and trading amount to Rs. 15,000 - Rs. 20,000, which will be a lot of 100 units. Lowering the investment amount will allow retail participation in these products. SEBI has proposed to increase the leverage limit for InvITs from current 49% to 70% with an approval from 75% of unrelated unit holders. However, the InvIT can apply for the increased limit only after three years of continuous distribution post listing. Moreover, the credit rating for the project must be AAA. In addition, the increased debt can be used for purchase of new infrastructure assets and there will be additional disclosure requirements from the InvIT. Earlier, SEBI allowed for listing of privately placed InvITs. However, as listing made them quasi-public in nature, the regulations for both public and private InvITs was similar. In the paper, SEBI has disallowed listing and raised minimum investment limit to Rs. 1 crore. Consequently, such InvITs will have greater flexibility in terms of structure. As per the draft proposal, the issuer of such InvITs can determine the number of investors and single investor investment limit. The amount of leverage will also be decided by the issuer in consultation with the investor. Even current privately placed InvITs can choose to migrate to the new framework with more than 90% investor approval. Consequently, they will be delisted. Conversely, a privately placed unlisted InvIT may choose to list its units on stock exchanges after complying with the necessary requirements.

SEBI has revised reporting norms for mutual funds. The new Monthly Cumulative Report (MCR) will capture details such as number of folios in each scheme, gross inflows, net inflows/outflows, net AUM, average AUM and so on. AMCs will have to do such reporting at scheme level. The revised MCR is in line with the categorization and rationalization of mutual fund schemes that aims to eliminate duplication in offerings across schemes within the fund house. The new report directs fund house to put one scheme in each category. The new reporting norms will come into effect from April 1, 2019. AMCs will have to ensure that they share the report within three working days of the month.

AMCs claim that daily disclosure of scheme AUM could trigger unhealthy market competition and unwarranted media hype. In a letter sent to SEBI, AMFI has requested the market regulator to do away with the requirement of publishing daily AUM of scheme. Sharing the rationale for this, AMFI said, “In our view, it is not desirable to publish daily absolute AUM, as the same could trigger unhealthy competition and also unwarranted media scrutiny. We therefore request SEBI to kindly consider dropping the aforesaid requirement of disclosure of scheme AUM on a daily basis.” Currently, AMCs are required to disclose average AUM (AAUM) of their schemes on AMFI website.

It is once again possible to complete the KYC process of clients in minutes, thanks to video KYC feature offered by NSE NMF II. Earlier, advisors could instantaneously on board clients using biometric eKYC. NSE NMF II platform used to offer this facility along with digital IIN creation to make the process seamless. However, after the Supreme Court verdict on Aadhaar, UIDAI had asked KRAs (KYC registration agencies) to stop using Aadhaar based authentication for KYC process making the KYC process lengthy again. To speed up the process, NSE NMF II has collaborated with CAMS to offer a paperless KYC facility for advisors. The exchange platform claims that KYC process will be completed within 72 hours of the submission of documents. However, advisors need not wait to initiate a transaction. Immediately after successful submission of the documents, advisors can help their clients make online transaction. The platform offers both Aadhaar based and non-Aadhaar based KYC. Under Aadhaar based KYC, the client can submit his eAadhaar. The software will scan the QR code on the eAadhaar document to complete the KYC. The non-Aadhaar KYC allows the advisor to submit the client’s proof of identity and proof of address digitally. In addition, the advisor will have to upload scanned copy of the client’s signature on NSE NMF II.

Investment in direct stocks, mutual funds, ULIPs and NPS is likely to become a bit expensive for investors. Hidden in the fine print of the interim Budget document, the government would levy stamp duty on financial securities transactions, which includes financial instruments like direct stocks and mutual funds. Stamp duties would be levied on one instrument relating to one transaction and get collected at one place through the stock exchanges. The duty so collected will be shared with the state governments seamlessly on the basis of domicile of buying client. Initial reading of budget document implies that government would re-introduce stamp duty tax in demat transactions. However, the impact would be marginal due to low rate of the stamp duty tax. Though government is yet to announce the rate at which stamp duty will be levied on demat transactions, it was 0.01% in delivery transactions and 0.002% in intraday, future and option transactions. Since mutual funds, ULIPs and NPS deal with shares, investors investing in these financial instruments will have to bear this tax.  Also, investors having exposure to mutual funds with high turnover ratio will be affected more due to re-introduction of stamp duty. Earlier, the government had waived off stamp duty in transaction of securities in demat form. However, the government has proposed to re-introduce this duty. Also, stock exchanges will have to track origin of investors to distribute stamp duty among states.

Currently, Artificial Intelligence gives an edge when it comes to trading but not long-term investment decisions. Fans of Terminator will remember how machines dominated the earth, replacing humans in the series. With the rapid development in machine learning and big data techniques, one question that needs to be answered is “Will machine replace investment managers?” While high frequency, short-term trading is almost fully automated, machines are not yet capable of taking correct long–term investment decisions independently. Why is it so? These techniques tend to over-fit data, create spurious patterns and correlations. In addition, these algorithms struggle in times of economic turmoil or during changing macroeconomic conditions and they are unable to capture complex human responses. Furthermore, it is difficult to integrate these techniques with the traditional investment management processes. Despite this, acceptance of AI is increasing among asset managers. When Alex polled top hedge fund managers on their plans to include inputs from AI in their investment decisions, most of them responded in the affirmative. In fact, a third of them had already integrated an element of machine learning in their investment process. At the heart of it, machine learning helps asset managers spot patterns that humans cannot easily spot given the sheer amount of data being created in the world today. But what does it mean for alpha generation? Data shows that over the one, three and five year periods, hedge funds using some form of AI inputs have outperformed their peers using traditional investment methods. What this means is that there is huge scope to use big data and AI to augment the decision-making process of fund managers by analysing vast quantities of data to identify patterns. Typically, the first movers will benefit the most. However, the end point that is full automation of the entire life-cycle of investment decision making is still many years away.

Monday, February 18, 2019


NFOs of various hues  adorn the February 2019 NFONEST.

SBI Debt Fund Series C 44
Opens: February 14, 2019
Closes: February 20, 2019

SBI Mutual Fund has launched the SBI Debt Fund – Series C 44, a close ended capital protection oriented scheme that matures 1175 days from the date of allotment. The scheme endeavours to provide regular income and capital growth with limited interest rate risk to the investors through investments in a portfolio comprising of debt instruments such as government securities, PSU and corporate bonds and money market instruments maturing on or before the maturity of the scheme. The scheme’s performance will be benchmarked against CRISIL Medium Term Debt Index and its fund manager is Ms. Ranjana Gupta.

ICICI Prudential Retirement Fund
Opens: February 7, 2019
Closes: February 21, 2019

ICICI Prudential Mutual Fund has launched ICICI Prudential Retirement Fund, an open ended solution oriented scheme having a lock-in of 5 years or till retirement age (whichever is earlier). The investment objective of the scheme is to provide capital appreciation and income to the investors which will help to achieve retirement goals by investing in a mix of securities comprising of equity, equity related instruments, fixed income securities and other securities. Investment objectives of the four investment plans under the scheme are as given below:
Pure Equity Plan: To generate long-term capital appreciation and income generation to investors from a portfolio that is predominantly invested in equity and equity related securities (at least 80%).
Hybrid Aggressive Plan: An open ended hybrid scheme predominantly investing in equity and equity related securities to generate capital appreciation. The scheme may also invest in debt; gold/gold ETF/units of REITs & InvITs and such other asset classes as may be permitted from time to time for income generation / wealth creation.
Hybrid Conservative Plan: To generate regular income through investments predominantly in debt and money market instruments (at least 70%). The Scheme also seeks to generate long term capital appreciation from the portion of equity investments under the Scheme (at least 5%).
Pure Debt Plan: To generate income through investing in a range of debt and money market instruments of various duration while maintaining the optimum balance of yield, safety and liquidity.
The benchmarks of the four investment plans of the ICICI Prudential Retirement Fund are as follows:
Pure Equity Plan: NIFTY 500 Index
Hybrid Aggressive Plan: CRISIL Hybrid 35+65 - Aggressive Index
Hybrid Conservative Plan: NIFTY 50 Hybrid Composite Debt 15:85 Index
Pure Debt Scheme: NIFTY Composite Debt Index
Mrinal Singh and Ashwin Jain will manage the equity portion while Manish Banthia and Anuj Tagra will manage the debt portion of the scheme. In addition, Priyanka Kandelwal will be looking after the overseas investment for the fund.

IDBI Healthcare Fund
Opens: February 8, 2019
Closes: February 22, 2019

IDBI Mutual Fund has launched IDBI Healthcare Fund, an open-ended sectoral equity scheme. The investment objective of the scheme is to achieve capital appreciation by predominantly (minimum 80% of the portfolio) investing in companies engaged in healthcare and allied sectors. The scheme may invest up to 50% of net assets of scheme in equity derivative instruments. Investment in derivatives shall be for hedging, portfolio balancing and such other purposes as may be permitted from time to time. The scheme will not invest in securitized debt/ ADRs/GDRs, foreign securities. The scheme may also enter into repurchase (repo) agreement and reverse repurchase agreement in government securities held by it as per the guidelines and regulations applicable to such transactions. The scheme will not invest in repo in corporate Debt Securities. Ms. Uma Venkatraman will manage the scheme. S&P BSE Healthcare - Total Return Index (TRI) will be the scheme’s benchmark.

Invesco India Equity Savings Fund
Opens: February 14, 2018
Closes: February 28, 2018

Invesco Mutual Fund has launched the Invesco India Equity Savings Fund, a close ended capital protection oriented scheme. The investment objective of the scheme is to generate capital appreciation and income by investing in equity and equity related instruments, arbitrage opportunities and fixed income instruments (including debt, government securities and money market instruments). The scheme’s performance will be benchmarked against NIFTY Equity Savings Index and its fund managers are Mr. Taher Badshah, Mr. Amit Ganatra and Mr. Krishna Cheemalapati.

BNP Paribas Dynamic Equity Fund
Opens: February 14, 2018
Closes: February 28, 2018

BNP Paribas Mutual Fund has launched a new fund named as BNP Paribas Dynamic Equity Fund, an open ended Dynamic Asset Allocation Fund. The primary investment objective of the scheme is to provide capital appreciation by dynamically managing the portfolio of equity and equity related instruments (including arbitrage exposure), and fixed income instruments. The scheme would allocate 65%-100% of assets to equity and equity related instruments including derivatives with high risk profile and upto 35% of assets would be allocated to debt instruments & money market instruments (including cash and money at call) with low to medium risk profile and invest upto 10% of assets in units issued by REITs & InvITs with medium to high risk profile. Benchmark Index for the scheme is CRISIL Hybrid 35+65 - Aggressive Index. The fund managers of the scheme are Karthikraj Lakshmanan and Abhijeet Dey (for equity portion) and Mayank Prakash (for debt portion).

SBI Capital Protection Oriented Fund – Series A (Plan 1)
Opens: February 18, 2019
Closes: February 28, 2019

SBI Mutual Fund has launched the SBI Capital Protection Oriented Fund-Series A (Plan 1), a close ended capital protection oriented scheme. The investment objective of the scheme is to protect the capital by investing in high quality fixed income securities that are maturing on or before the maturity of the scheme as the primary objective and generate capital appreciation by investing in equity and equity related instruments as a secondary objective. The scheme is oriented towards protection of capital and not with guaranteed returns. The scheme’s performance will be benchmarked against CRISIL Hybrid 85+15-Conservative Index and its fund managers are Rajeev Radhakrishnan and Ruchit Mehta.

Reliance Junior BeES FoF
Opens: February 18, 2018
Closes: February 28, 2018

Reliance Mutual Fund has launched the Reliance Junior BeES FoF, an open ended fund of funds scheme. The investment objective of the scheme is to provide returns that closely correspond to returns provided by Reliance ETF Junior BeES by investing in units of Reliance ETF Junior BeES. The scheme aims to provide returns that closely correspond to the returns of securities as represented by the Nifty Next 50 Index, subject to tracking error. It will invest at least 90% of its total assets in the stocks of its corresponding underlying index. The scheme’s performance will be benchmarked against Nifty Next 50 (TRI) Index and its fund manager is Mehul Dama.

Canara Robeco Capital Protection Oriented Fund – Series 10
Opens: February 15, 2018
Closes: March 1, 2018

SBI Mutual Fund has launched Canara Robeco Capital Protection Oriented Fund – Series 10, a closed end fund. The scheme seeks capital protection by investing in high quality fixed income securities maturing on or before the maturity of the scheme and seeking capital appreciation by investing in equity and equity related instruments. The scheme will be benchmarked against CRISIL Hybrid 85+15 Conservative. The scheme will be managed by Mr. Cheenu Gupta and Ms. Suman Prasad.

Kotak Floating Rate Fund, DHFL Pramerica Overnight Fund, HSBC Large and Midcap Equity Fund, Tata Overnight Fund, Quantum Swachh India ESG Equity Fund, Indiabulls Banking and PSU Debt Fund, HSBC Overnight Fund, Baroda Equity Savings Fund, Kotak International REIT Fund, Motilal Oswal Large and Midcap Fund and Tata Banking & PSU Debt Fund are expected to be launched in the coming months.

Monday, February 11, 2019

February 2019

The consistent performance of all f our funds in the February 2018 GEMGAZE is reflected in all the funds holding on to their esteemed position of GEM in the February 2019 GEMGAZE.

FT India Life Stage Fund of Funds Gem

Franklin Templeton AMC offers five plans based on life stages that will suit your age profile – FT India Life Stage FoF 20s, FT India Life Stage FoF 30s, FT India Life Stage FoF 40s, FT India Life Stage FoF 50s Plus, and FT India Life Stage FoF 50s Floating Rate. The first four plans were launched in November 2003 and the last plan was launched in July 2004. All these are plans of a single fund that has assets of around Rs 67crore. The AUM of each plan is Rs 13 crore, Rs 7 crore, Rs 13 crore, Rs 6 crore, and Rs 28 crore respectively. The top three sectors in the portfolio are finance, automobile and construction. The allocation to equity tapers from 75.32% in the first plan to 51.96% in the next plan to 33.23% in the 40s plan to a measly 18.96% in the penultimate plan and 18.91% in the last plan. The three-year returns of the plans are 10.13%, 9.4%, 8.74%, 8.23%, and 7.98% respectively, while the expense ratio for the plans is 1.59%, 1.75%, 1.95%, 1.96%, and 0.79% respectively. The benchmark indices are S&P BSE Sensex TRI (65) CRISIL Composite Bond (20) Nifty 500 TRI (15), S&P BSE Sensex TRI (45) CRISIL Composite Bond (45) Nifty 500 TRI (10), CRISIL Composite Bond (65) S&P BSE Sensex TRI (25) Nifty 500 TRI (10), CRISIL Composite Bond (80) S&P BSE Sensex (20) and CRISIL Liquid (80) S&P BSE Sensex TRI (20) respectively. The fund manager is Paul S. Parampreet since March 2018.

ICICI Prudential Advisor Series – Debt Management Fund (erstwhile ICICI Prudential Advisor Series – Dynamic Accrual Plan) Gem

ICICI Prudential Advisor Series – Dynamic Accrual Plan was launched in December 2003 as ICICI Prudential Advisor–Very Cautious as part of a five-plan Fund of Funds series: ICICI Prudential Advisor–Very Aggressive, ICICI Prudential Advisor–Aggressive (ICICI Prudential Advisor Series – Long Term Savings Plan w.e.f. December 6, 2013), ICICI Prudential Advisor–Moderate, ICICI Prudential Advisor–Cautious, and ICICI Prudential Advisor–Very Cautious (ICICI Prudential Advisor Series – Dynamic Accrual Plan w.e.f. June 17, 2015). ICICI Prudential Advisor Series – Dynamic Accrual Plan has been renamed as ICICI Prudential Advisor Series – Debt Management Fund w.e.f May 28, 2018. The AUM of the Debt Management Plan is Rs 229 crores. The scheme aims to provide reasonable returns, commensurate with low risk while providing a high level of liquidity, through investments made primarily in the schemes of Prudential ICICI Mutual Fund having asset allocation to money market and debt securities. The top two holdings are ICICI Prudential Floating Interest Fund and ICICI Prudential Short-term Fund. The one-year return of the plan is 6.36% as against the category average of 5.44%. The expense ratio of the fund is 1.05%. The fund is benchmarked against the CRISIL Composite Bond Index. The fund has been managed by Mr. Manish Banthia since June 2017.

Birla Sunlife Active Debt Multi-manager FoF Scheme Gem

Birla Sunlife Active Debt Multi-manager FoF Scheme, which sports an AUM of Rs.14 crores, is an open-ended fund of funds launched in December 2006. The scheme seeks to generate returns from a portfolio of pure debt-oriented funds accessed through the diverse investment styles of underlying schemes selected in accordance with the Birla Sunlife AMC process. The top two holdings are Franklin India Short-term Income Plan and Aditya Birla Sunlife Credit Risk Fund. The one-year return of the fund is 7.21% as against the category average of 5.9%. The expense ratio of the fund is 0.98%. The fund is benchmarked against CRISIL Composite Bond Index. The fund has been managed by Mr. Pranay Sinha since August 2018.

FT India Dynamic PE Ratio Fund of Funds Gem

Launched in October 2003, the AUM of Franklin India Dynamic PE Ratio Fund of Funds is an impressive Rs 913 crore. This is a fund of funds scheme which invests in funds from within the Franklin Templeton basket of funds. Through this structure it provides exposure to both equity and debt asset classes. The equity component is invested in Franklin India Bluechip Fund. The debt component is invested in Templeton India Income Fund. The Franklin India Dynamic PE Ratio Fund of Funds has a unique in-built “buy-sell” discipline based on market valuations. This gives less room for subjectivity or any error of judgment. The fund has a predefined monthly rebalancing mechanism based on the “PE” level of Nifty 50. It reduces equity exposure and increases debt exposure when PE levels are high and vice versa. This fund is suitable for those who are not only keen to take advantage of the growth opportunities in equities but also prefer to reduce the impact of market volatility. The scheme aims to provide long-term capital appreciation with relatively lower volatility through a dynamically balanced portfolio of equity and income funds. The equity funds allocation will be determined based on the month-end average PE Ratio of NSE Nifty. This predominantly large cap fund has an allocation to equity of 38.09%, with finance, technology and construction being the top three sectors at present. The one-year return of the fund is 5.14% as against the category average of 2.93%. The expense ratio is at 1.7%. The fund is benchmarked against the CRISIL Hybrid 35+65 Aggressive Index. The fund has been managed by Mr. Anand Radhakrishnan since Feb 2011.

Monday, February 04, 2019

February 2019

Fund of funds (FoFs) is one of the best mutual funds for investors whose investment amounts are not too large and it is easier to manage one fund (a fund of funds) rather than a number of mutual funds. In this form of mutual fund investment strategy, investors get to hold a number of funds under the umbrella of a single fund, hence the name fund of funds. Often going by the name of multi-manager investment, these funds enable investors to diversify themselves across a gamut of mutual fund schemes at a lower ticket size.

What are Fund of Funds?

In simple words, a mutual fund investing its collected pool of money in another mutual fund (one or maybe more) is referred to as fund of funds. Investors in their portfolios take exposure to different funds and keep track of them separately. However, by investing in multi-manager mutual funds this process gets more simplified as investors need to track only one fund, which in turn holds numerous mutual funds within it. Assume an individual has invested in 10 different funds having exposure to various financial assets like stocks, bonds, government securities, gold, etc. However, he finds it difficult to manage those funds as he needs to keep track of each fund separately. Therefore, to avoid such hassles, the investor invests money in a multi-management investment (or a single fund of funds strategy) which has its stakes in different mutual funds.

The Modus Operandi…

An FoF is a mutual fund scheme that invests in other mutual fund schemes. It works like this: you invest in a mutual fund because you do not have the time, wherewithal and patience to go through individual companies’ financial statements and to understand their business dynamics to be able to successfully invest in their shares. Your fund manager does the research and picks stocks and sectors to invest in. But, you still need to select your mutual fund. Out of roughly 2,000 mutual fund schemes across equity, debt, gold, foreign equities and so on, on the street today, how do you make a basket of 6-10 mutual fund schemes, which is an ideal number to have in your portfolio? Some have financial advisers and distributors to help. But for others who wish to go direct, and yet do not have the time or wherewithal to select mutual fund schemes, an FoF does the job for you. Your FoF fund manager tracks the mutual funds industry and shortlists, what he believes is an, investment-worthy list of schemes after due research, and puts all your money there. An FoF can be equity-oriented, debt–oriented or a swing between both equity and debt mutual funds. Additionally, some FoFs also invest in gold funds.

For understanding the modalities of how multi-manager investment functions, it is important to understand the concepts of fettered and unfettered management. Fettered management is a situation when the mutual fund invests its money in a portfolio containing assets and funds managed by its own company. In other words, the money is invested in the funds of the same asset management company. In contrast, unfettered management is a situation where the mutual fund invests in external funds managed by other Asset Management Companies. Unfettered funds have an advantage over fettered funds as they can exploit opportunities from numerous funds and other schemes instead of limiting themselves to funds of the same family.

The FoF flavours on a platter…

Of the many fund of funds available in India, the four most sought-after FoFs include:

Asset Allocation Funds
Asset allocation funds are mutual funds that invest in a varied class of assets. These assets range from equity-oriented, debt-oriented or even other asset classes like gold, other metals, and commodities.

Gold Funds

These funds invest in various forms of gold, be it in the form of physical gold or in the form of stocks of gold mining companies.

Foreign or International Fund of Funds

International funds are investments in mutual funds comprising bonds and stocks of international companies.
Multi-manager Fund of Funds

A multi-manager fund is one that comprises of many professionally managed funds but is a single portfolio.

The Pros…

If you wish to rebalance your assets, there will be no tax on capital gains for this internal transaction. Therefore, when your Fund of Funds is rebalanced to maintain a said allocation between debt and equity there will be no tax on capital gains. Most fund of funds launched in India have seen muted investor interest because of their tax disadvantage vis-a-via equity funds. While dividends and long-term capital gain (LTCG) from equity schemes were tax free till last year, investors were forced to pay tax on LTCG from FoFs, even if the FoF portfolio comprised equity funds. However, with the Budget 2018 introducing a 10% tax on dividends as well as LTCG (without indexation benefit) from equity funds, FoFs’ comparative tax disadvantage has been levelled, which is now drawing investors’ interest in these funds. In fact, now FoFs have a distinct advantage over equity mutual funds as they can shuffle the funds in their portfolio without any tax incidence. As FoFs have pass-through status, their buying and selling of mutual funds does not result in a tax incidence. This works best for dynamic FoFs. Since there will not be any tax incidence till the FoF is redeemed, it will help investors compound their wealth without any interruption. 

Professional Fund Management Services
Investing in Fund of Funds allows you to try out investing in professionally managed funds before they can venture out on investing individually.

Ease of Handling

There is just one NAV to track and just one folio. This makes it easy to handle the reduced number of funds that require managing.

The Credibility of Portfolio Managers

Fund of Funds are expected to follow a due diligence process conducted by the fund manager where they need to check the background and credentials of the underlying fund managers before making an investment to ensure that the strategy is in-line with expectations. The process entails conducting background checks of new fund managers to know their history and if they have ever been involved in activities that may affect the performance of the fund. The FOFs may contact security firms to conduct background checks, along with reviewing the manager’s credentials. Through this process, a fund may weed out managers with a bad reputation or a history of underperformance.

Opportunity for investors with limited capital
A FOF aims at diversifying the risk of a single fund by investing in several types of funds. An investor with limited capital can invest in one FOF and get a diversified portfolio consisting of, for example, bonds, gold, equity, and debt. Such a portfolio combination is rarely found in the average mutual fund. This is a good option for retail investors who wish to venture into this investment avenue with a lower ticket size.

Gateway for diversified assets 
One of the key primary benefits is portfolio diversification. Here, despite investing in one single fund, the investment is made in several mutual fund schemes, where the fund is allocated in an optimal manner with the aim to earn maximum returns at a given level of risk. Multi-management investment helps retail investors to get access to funds that are not easily available for investments. A single fund of fund can take equity funds, debt funds or even commodity based mutual funds. This ensures diversification for the retail investor by just getting into one mutual fund.

…and the Cons

High Expense Ratio
Fund of Funds incur expenses just like any other mutual fund schemes. But unlike mutual funds, there is extra cost involved. Apart from the usual management and administrative costs, there is an added expense pertaining to the underlying funds.

Tax implications
If you get a dividend in excess of Rs. 10 lakh, there is an income tax of 10%.

Too much diversification
Fund of Funds invest in many funds which further invest in a number of securities. This gives rise to the possibility of the Fund of Funds ending up owning the same stocks and securities through different funds. This reduces the potential for diversification.

FoFs in pure equity mutual funds – facing extinction?

What is unique about Quantum Equity Fund of Funds? It is the only remaining mutual fund scheme—specifically, a fund of funds scheme—that invests its entire corpus in equity mutual funds and those that belong to other fund houses. But there was a time when a few other such schemes did the same as well. What happened to them and why did they wither away? FoFs used to suffer in terms of taxation. Equity funds did not attract long-term capital gains tax if you sell units in them after a year. The short-term capital gains tax is just 15%. Also, dividends were tax-free. But debt funds attract short-term capital gains—at income-tax rates—if you sell them within 3 years. After 3 years, debt funds attract a long-term capital gains tax applicable at 20.6%, with indexation benefits. FoFs were always considered on par with debt funds for taxation purpose. Even if your FoF was in equity, you were, and still are, subjected to debt fund taxation. Fund houses waited for some years to get this anomaly corrected. But it never happened. At one time, there were a few schemes that invested in just equity mutual funds. For instance, ING OptiMix Equity Multi Manager FoF and ING OptiMix Equity Multi Manager FoF–Series II. Kotak Mahindra Asset Management Co. Ltd too had one such scheme called Kotak Equity FoF that used to invest in just equity schemes. In 2008, Optimix wound up and got merged into ING mutual fund. In 2014, Birla Sun Life Asset Management Co. Ltd acquired ING Investment Management (India) Ltd. According to Value Research, both the above Optimix schemes were redeemed in 2009-10. Meanwhile, Kotak Equity FoF became Kotak Asset Allocator in 2014 and started investing in the fund house’s own equity and debt schemes, though according to its offer document, it can still invest its entire corpus in equity schemes. That leaves Quantum Equity FoF as the only one that invests in equity mutual funds and also outside of its own fund house.


FoFs – how have they fared?

In the past one year, DHFL Pramerica Global Agribusiness Offshore Fund topped the list of FoFs in India with a return of 13.7%, followed by Aditya Birla Sunlife Global Real Estate Fund with a return of 12.9%, Franklin India Feeder – Franklin US Opportunities Fund at 12.1%, HSBC Brazil Fund at 11.6% and Axis Gold Fund at 10.1%.

FoFs – do they suit you?

While FoFs have become relatively attractive, there is no need for investors to rush into them. Investors need to see if the objective of the FoF is in line with their investment objective. The FoF structure works better for investors who follow strict rule-based investing. For instance, there are some FoFs whose asset allocation is strictly based on Nifty PE—Franklin India Dynamic PE Ratio FoF is one such scheme. So, if you too are a strict rules-based investor, then instead of taking the trouble of revising your equity allocation based on, say, Nifty PE, which will involve redemptions and hence tax on gains, you can simply invest in FoFs for the long term. How has the investing strategy based on Nifty PE worked? Franklin India Dynamic PE Ratio FoF has generated a return of 10.01% over the past 10 years, comparable to the large-cap equity fund category average of 10.45% over the same period. But Franklin India Bluechip, the equity fund in which Franklin India Dynamic PE Ratio FoF invests, has delivered 11.49% return during the past 10 years. Since the long-term return of the underlying fund is higher, should you invest in the FoF instead? The answer lies in the risks associated with the two schemes. The strategy of reducing the equity component during high market valuations has reduced the risk of the FoF significantly. While the annualised standard deviation (a measure of the volatility in the fund’s return) of Franklin India Bluechip is 22%, it is just 14% for the FoF. However, FoFs are not the only schemes that lower risk by changing their asset allocation. For asset allocation strategy, investors can also use asset allocation funds instead of dynamic FoF. While investors may appear to lose control over their portfolios by investing in FoFs, it should not be a cause of concern since rule-based FoF will be better at executing the strategy and at price discovery (compared to individuals investing in equity mutual funds). 

Fund of Funds can be a good investment choice for an investor with limited experience and limited funds. Fund of Funds like mutual funds are subject to market risk and therefore, the investor should acquaint himself/herself with the market risks and the strategies of investment. Fund of Funds rely on the principle of deriving the maximum benefit out of single but diversified investment plans. Select an experienced fund manager and know your risk tolerance, transactional timelines, tax implications, etc. As an informed investor you must weigh the pros and cons of FoFs before making any investment decision.