Monday, December 30, 2019


FUND FULCRUM (contd.)
December 2019

Mutual funds have added over Rs 4 lakh crore to their asset base in 2019 and the industry expects the growth trajectory to continue in 2020 on the back of strong inflows in debt schemes and measures taken by regulator SEBI for boosting investors' confidence. It was the strong inflows into debt-oriented schemes that saved 2019 from being a "dark-dull year of investing" as inflows into equity funds dropped this year due to a volatile market. Going ahead, the industry should witness growth in the range of 17-18 per cent in 2020 and equity funds should see robust inflows as expectations are high about improved equity markets and a revival in economic growth. The asset under management (AUM) of the industry rose by 18 per cent (Rs 4.2 lakh crore) to an all time high of Rs 27 lakh crore in 2019 by November-end itself, up from Rs 22.86 lakh crore at the end of December 2018, as per the latest data available with the Association of Mutual Funds in India (AMFI). The final December-end figure might be slightly lower than the November-end level, as liquid funds could see some dip due to the quarter-end phenomenon. The investor count is estimated to have grown by over 62 lakh during 2019, to 8.65 crore this year. In 2018, investors' folio grew by more than 1.3 crore. The 18 per cent AUM growth seen by the 44-member mutual fund industry in 2019 is significantly higher than 7.5 per cent witnessed in 2018. However, the growth was much higher at 32 per cent in 2017, when the asset base expanded by over Rs 5.4 lakh. The growth in AUM can be attributed to three factors -- first, SEBI, as a regulator, consistently created rules and regulations that boosted investors' confidence in the industry, then to distributors and thirdly to the mutual funds for managing risk-return balance well. The year 2019 marks the seventh consecutive yearly rise in the industry AUM after a drop for two preceding years. The AUM of the industry has grown from Rs 8.22 lakh crore in November 2009 to Rs 27 lakh crore in November 2019, indicating an over three-fold jump in 10 years. The growing SIP book has contributed to the positive sales and SIPs will continue to be one of the most important parameters for the growth of net sales for the industry as a whole. The industry is poised for a significant growth in 2020 as sentiment improves with economic growth reviving and the credit crisis shows signs of being resolved.

Regulatory Rigmarole

SEBI has recently released norms for debt ETFs and index funds that restricted any single issuer from having more than 15% weight in the index that they replicate. The circular has come ahead of the proposed issue of the first debt ETF catering to the borrowing needs of public sector enterprises. Edelweiss AMC will manage this debt ETF.  Here are some other notable norms: The constituents of the index need to be aggregated at the issuer level. The index should have at least 8 issuers. The rating of the constituents of the index needs to be investment grade. The constituents of the index have a defined credit rating and maturity as specified in the index methodology. If the rating of an issuance falls below the investment grade or rating mandated in the index methodology, rebalancing by debt ETFs and index funds needs to be done within 5 working days. On replication of the index by debt ETFs and index funds: Debt ETFs and index funds will replicate the benchmark index completely. In case this replication is not feasible due to non-availability of issuances of the issuer forming part of the index, the debt ETFs and index funds will be allowed to invest in other issuances issued by the same issuer having deviation of (+/-) 10% from the weighted average duration of issuances forming part of the index, subject to single issuer limit. Further, at aggregate portfolio level, the duration of debt ETF and index fund need not deviate (+/-) 5% from the duration of the index. Even after this, if the replication is not feasible, the Debt ETFs/Index Funds can invest in issuances of other issuers within the index having duration, yield and credit rating in line with that of the non-available issuances of the issuers forming part of the index, subject to single issuer limits. The duration of debt ETF and index funds shall not deviate (+/-) 5% from the duration of the index. The rationale for any deviation needs to be recorded. SEBI said that these norms will not be applicable to debt ETFs and index funds, which only track debt indices having constituents as government securities, treasury bills and tri-party repo.

SEBI relaxes norms related to group level exposure in debt and liquid funds. In a mild relief to fund houses with respect to their debt holding in their group companies, SEBI has given an option to fund houses to hold debt papers issued by the their group companies until maturity. However, this relaxation is only applicable to debt instruments, which was in the portfolio of debt funds and liquid funds before October 1, 2019. In a circular issued, SEBI said, “The investments of mutual fund schemes in debt and money market instruments of group companies of both the sponsor and the AMC of the mutual fund in excess of the limits specified therein, made on or before October 1, 2019 may be grandfathered till maturity date of such instruments. The maturity date of such instruments shall be as applicable on October 1, 2019.” Earlier in October, SEBI had put a restriction on such exposures to 10% of the net assets of the scheme. Such investment limit can touch 15% of the net assets of the scheme with the prior approval of the board of trustees. SEBI has asked fund houses and AMFI to publish list of such holdings on their respective websites from January 1, 2020.

In a gazette notification issued recently, the government has reintroduced stamp duty tax on financial securities transaction. With this, investment in direct stocks, mutual funds, ULIPs and NPS will become a bit more expensive for investors from January 9, 2020. Since mutual funds deal with shares, every time a fund manager executes transaction, the fund has to pay stamp duty along with securities transaction tax. Mutual fund industry executes transaction of Rs.5 lakh crore each month in equity and debt markets. Clearly, the impact of stamp duty would be large. The government has clarified that there will be a common rate for all states. The government also said that stock exchanges will have to track origin of investors to distribute stamp duty among states. Government has announced the new stamp duty rates in which it has imposed stamp duty of 0.0001% on transfer and re-issue of equity and equity related instruments. For debt instruments, the government will levy stamp duty tax of 0.015% on delivery transactions and 0.003% on intraday and option transactions. In case of equity IPOs and fresh issuance of debt papers, the government has imposed stamp duty tax of 0.005%. The stamp duty tax on futures both equity & commodity and currency & interest rate derivatives would be 0.002% and 0.0001, respectively. There will be no stamp duty tax on transaction of government securities. Finally, the government would levy stamp duty of 0.00001% on transaction of repo on corporate bonds. These rates will be common for all investors irrespective of their physical location. Since mutual funds deal with shares, every time a fund manager executes transaction, the fund has to pay stamp duty along with securities transaction tax. Clearly, the impact would be more on funds with high turnover ratio.

SEBI releases new norms for AMCs providing management and advisory services to FPIs. AMCs can provide management and advisory services only to specified categories of FPIs. SEBI has now specified the categories of FPIs that AMCs can provide management and advisory services to:
a. The FPIs can be government and government-related investors such as central banks, sovereign wealth funds, international or multilateral organizations or agencies. Here the government-related investors also include entities in which the government owns (directly or indirectly) at least 75% stake
b. The FPIs can also be appropriately regulated entities such as pension funds, insurance or reinsurance entities, banks and mutual funds
c. Appropriately regulated FPIs wherein the above-mentioned entities hold more than 50% of shares or units
The new norms have come into force with immediate effect for all AMCs. However, SEBI has given a relaxation period to AMCs that already have an agreement to provide management and advisory services to FPIs that do not fall in any of the above categories. Such AMCs can continue to provide the services until December 16, 2020 or as mentioned in the agreement, whichever is earlier.

SEBI has asked fund houses not to allow transactions i.e. accepting fresh money or honouring redemption after minor turns major and does not submit KYC details. Currently, the industry does not have a uniform policy to deal with minor to major accounts. Hence, a few AMCs allow transactions or accept fresh money even after the minor turns major. SEBI has further asked AMCs to put a mechanism to discontinue SIPs, STPs and SWPs on such accounts. Parents or guardians can invest in mutual funds on behalf of their children through a minor account. Since children do not have income and mandatory documents like PAN, Aadhaar and bank account, AMFI rules mandate parents to invest in mutual fund through their KYC details. Now, when a minor becomes a major on attaining 18 years of age, she has to complete the KYC process in her own capacity and notify each of the concerned mutual funds by filling up a prescribed ‘minor attaining majority form’ in order to be able to transact further in her folios. Typically, in such a scenario, most ‘minor turns major’ investors take a little while to complete their KYC.

SEBI has simplified the process of transmission of units in mutual funds due to absence of nominations or death of unitholders. Among its key measures include bringing uniformity across fund houses in dealing with transfer of assets due to demise of unitholders and spreading awareness about importance of nomination in mutual funds through IAPs. Here are some of the other key changes:
•             Introduction of image based processing wherever the claimant is a nominee or a joint account holder in the investor folio
•             AMCs to set up a dedicated central help desk and a webpage carrying relevant instructions to provide assistance on the transmission process
•             AMCs to introduce a common transmission request form and NOC form
•             A uniform process across fund houses to deal with unclaimed funds to be transferred to the claimant including the unclaimed dividends
•             AMCs cannot accept requests for redemption from a claimant until the units are transferred in his favour
•             Claimant has to pay stamp duty tax

SEBI has made it mandatory for all MFs and AIFs to follow a ‘Stewardship Code’ in relation to their investment in listed equities. Institutional investors such as MFs and AIFs should enhance monitoring and engagement with their investee companies. For instance, institutional investors should engage with investee companies on operational performance, financial performance, strategy, corporate governance, remuneration, ESG guidelines and so on. The regulator feels such increased engagement would improve corporate governance and benefit clients of institutional investors. SEBI defines such activities as ‘Stewardship Responsibilities’ of the institutional investors. The ‘Stewardship code’ is a principles-based framework to fulfil these responsibilities. The code mandated by SEBI today is based on six principles and would come into effect from April 1, 2020. Principle 1 - Institutional Investors should formulate a comprehensive policy on the discharge of their stewardship responsibilities, publicly disclose it, review and update it periodically. In case any of the activities are outsourced, the policy should provide for the mechanism to ensure that in such cases, stewardship responsibilities are exercised diligently. Principle 2 - Institutional investors should have a clear policy on how they manage conflicts of interest and publicly disclose it. The policy should ensure that the interest of the clients come before the interest of the entity. The policy should also address how matters are handled when the interests of clients or beneficiaries diverge from each other. Principle 3 - Institutional investors should monitor their investee companies. Among other things, they should monitor company strategy and performance, quality of company management, board, leadership etc. SEBI stipulates that the investors should identify the levels of monitoring for different investee companies, areas for monitoring, mechanism for monitoring etc. The investors may also specifically identify situations where they do not wish to be actively involved with the investee companies e.g. in case of small investments. Principle 4 - Institutional investors should have a clear policy on intervention in their investee companies. Institutional investors should also have a clear policy for collaboration with other institutional investors to preserve the interests of the ultimate investors. Principle 5 - Institutional investors should have a clear policy on voting and disclosure of voting activity. This requires a comprehensive voting policy to be framed by the institutional investors. It includes details of mechanisms of voting, circumstances in which voting should be (for/against/abstain), disclosure of voting, etc. The voting policy and voting decisions including rationale for decision should also be disclosed to public. Principle 6 – Institutional investors should report to their clients periodically on how they have fulfilled their stewardship responsibilities. Different principles can be disclosed with different periodicities. For example, voting may be disclosed on quarterly basis while implementation of conflict of interest policy may be disclosed on an annual basis.

SEBI has come out with code of conduct for investment advisors in which it has asked registered investment advisors (RIAs) not to accept advisory fee in cash. Instead, the market regulator has directed RIAs to accept fees through cheque, demand draft, NEFT, RTGS, IMPS and UPI. In a circular issued, SEBI said, “It is observed that investment advisers are receiving advisory fee in the form of cash deposit in their bank accounts or through payment gateways which does not provide proper audit trail of fees received from the clients.” The other things the code of conduct stipulates are RIAs will have to strictly ensure risk profiling and product suitability. RIAs can no longer give advice on free trial basis i.e. advising without considering risk profile of client free on cost (happens largely on phone calls). RIAs should obtain written consent of clients on completed risk profile through registered email or physical document and highlight their mobile number on homepage of their website. Such a phone number has to be prominently displayed (without scrolling) using font size of 12. To highlight details on status on complaints on website and mobile app prominently. All these guidelines will come into effect from January 01, 2020. Most of the regulations will only affect advisory firms who are primarily into stock advisory and trading business. In fact, many of these advisors do not deal with mutual funds at all. Most of these companies are based out of Indore and Bhopal.

From April 1, 2019, fund houses have rationalised TER based on asset size of the scheme. While the market regulator has capped TER at 2.25% in equity funds and 2% in all other   funds, SEBI has followed economies of scale to reduce TER systematically. The entire exercise has lowered margins of distributors as most fund houses have shared TER cut with their partners. An analysis of the commission structure shows that most fund houses have reduced trail commission by 15-20 bps largely due to reduction in overall TER. More research houses such as Citi India and CLSA said that the impact would be more acute on distributors. In fact, they have estimated that the reduction in earnings of distributors is 15 to 20 bps. However, AMCs reduced trail brokerage on assets of distributors twice due to reduction in TER in lieu of exit load and the TER cut. Since the trail commission on old assets was already close to 50 bps, the impact of these consecutive TER cuts is more acute on such assets. While IFAs claim that they get close to 80 bps trail commission on assets mobilized after 2015, they get between 15 and 30 bps on assets built before 2015. Post TER cut, the financial distribution has seen consolidation in business to reduce costs and grow business. Among some key benefits of such a merger are: reduction of costs by sharing various expenses such as execution platform, software, back-end operations, customer communication, marketing expenses and so on, learning and mentoring from each other and better commission structure compared to individual IFA. TER of all regular plans has come down drastically. In fact, in a few instances, the cost of the regular plan of a fund has come down to 0.30% largely because of reduced GST component. This is largely because of doing away with fungibility i.e. fund houses cannot spill over the cost from their AMC book. Now, fund houses have to disclose break up of their expenses such as management fee and other expenses separately. Earlier, expenses were fungible i.e. fund houses were allowed to disclose the base TER without giving segregation of various expenses. Now, with this going away, fund houses can charge GST component in management fees only instead of the entire cost. For instance, if a scheme had an expense ratio of 2.50%, the scheme used to charge GST on 2% (excluding distribution expenses of 0.5%) irrespective of actual management fees. However, now fund houses can charge GST only on fund management fees i.e. if management fee is 1.5% then the GST will be charged on 1.5% instead of 2% earlier.

The regulator is tending to see every facet of the asset management industry through the 'Mutual Fund' lens. With over 300 players, a savvy investor segment and a current robust regulatory framework, this industry is competitive enough to grow on its own steam – SEBI's proposed regulations will surely keep nudging it in the right direction. The markets will tend to surprise in the short run, and hence it is very difficult to have a '2020 vision', but the long-term trend of the industry looks very promising indeed!

Monday, December 23, 2019


FUND FULCRUM
December 2019

   
The mutual fund industry saw its total asset under management (AUM) hitting Rs 27 lakh crore in November 2019, from Rs 23.59 lakh crore a year ago, according to Association of Mutual Funds in India (AMFI) data. That represents a 15 percent growth in assets year-on-year (YoY). On a month on month basis, it rose by 3 percent. This is indeed remarkable, but the asset growth in November 2019 has been driven mainly by inflows into debt funds. Equity funds, a keenly tracked data point, recorded a significant drop in inflows. Equity flows may have tapered off, but the underlying trend is very positive, signaling that cyclicality in equity inflows, inherent to the MF industry, has largely reduced. Though the fortune of the industry will always be linked to vagaries of capital markets, the structural factors are driving growth. Net inflows into equity MFs, including closed-ended schemes, read a mere Rs 933 crore compared to Rs 6,015 crore in the previous month. The monthly net equity inflows have come off significantly from the peak of Rs 20,308 crore in November 2017. However, the underlying trend continues to be very encouraging. Gross inflows into equity funds in November 2019 remained almost stable compared to October 2019. It was increase in redemptions that led to weak net inflows. The Nifty touching an all-time high in November 2019 could have triggered some profit booking and withdrawals from equity funds. The increased redemptions can also be attributed to fading equity outlook amid domestic macroeconomic concerns and muted global cues. With fresh investments still flowing into equity funds, there should be no room for panic.

Currently, mutual funds have about 2.94 crore SIP folios through which investors regularly invest in the schemes. AMFI data also shows that the MF industry added, on an average, 9.55 lakh SIP accounts each month during the current financial year 2020, with an average SIP size of about Rs 2,800 per SIP account. This investment spree through SIPs despite intermittent bouts of volatility in the market suggests not only the confidence of investors in mutual funds but is also reflective of their matured behavior. In today's fast-paced era, ease and convenience of investing matters the most and that is why SIPs have been able to capture the mindshare of new age investors. Over the years, Indian retail investors have clearly made a shift in their investing attitudes and behaviour. As per RBI data, the share of currency and deposits holding in Indian households reduced from 55 percent in FY16 to 51 percent in FY18. And in fact, the share of equity in the pie of Indian household savings increased from 3 percent in FY16 to 8 percent in FY18. Fund managers attributed the all-time high AUM numbers to savvy investors who are sticking to their long term SIPs. The gradual but steady shift of household savings away from physical to financial assets is clearly visible. Overall, the monthly flows in November highlight one thing. Not just the asset management industry, but retail investors who historically invested at peak of market and withdrew funds following a year of negative returns have attained maturity.

Among the top 10 AMCs, HDFC, ICICI Prudential and Nippon India were the top three fund houses in terms of profits in FY 2018-19. HDFC AMC’s profit after tax for FY 2018-19 stood at Rs 930.60 crore. Next in the list was ICICI Prudential AMC with profit of Rs 613.79 crore followed by Nippon India AMC with Rs 487.07 crore. Further, a comparison with last year’s profit showed that Kotak AMC clocked the highest profit growth in percentage terms. In FY 2018-19, the company’s PAT stood at Rs 229 crore which was over 180% higher than Rs 81 crore in FY 2017-18. Of the top 10 AMCs, nine have clocked higher profits in FY 2018-19 as against FY 2017-18. Only IDFC AMC witnessed a decline in their profits. The AMC earned Rs 46 crore of profit, 55% less than Rs 104 crore in FY 2017-18. An analysis of earnings growth of these AMCs shows that the recent regulatory changes that banned upfront commission and asked AMCs to pay commission from the scheme instead of AMC book have helped fund houses reduce their expenses incurred on distribution commission. A key contributor for AMCs to increase profitability is growth in equity assets. In addition, AMCs derive profit from portfolio management, alternative investment funds and offshore advisory services among other things.

Piquant Parade

In June 2019, Toronto-headquartered Manulife picked up a 49 percent stake in Mahindra Asset Management for Rs 250 crore. Mahindra AMC entered the mutual fund industry in 2016. As of the September quarter, Mahindra Mutual Fund managed assets of Rs 5,221, up 5.02 percent from a quarter ago. Mahindra AMC currently has two lakh investors folios, from 400 cities (largely B30 - next 30 locations beyond the top 30 cities), and about 11,000 distributors. At present, Mahindra AMC offers five debt schemes, four equity funds, two hybrid funds, and an equity-linked savings scheme. Manulife primarily operates as John Hancock in the United States and Manulife in other nations, including their headquarters in Canada. Its offices are situated in countries across Europe and Asia. They provide financial advice, insurance, as well as wealth and asset management solutions for individuals, groups and institutions. The company has assets under management of around $394 billion. Several foreign players like Nippon Life, Prudential, Schroders, Sun Life and Amundi have entered the Indian asset management industry through joint ventures in the past. Manulife intends to bring in simple products to India through Mahindra AMC JV as they are keen to penetrate further in the hinterland. The mutual fund penetration to GDP in India is merely 5 percent, while that of Malaysia and Thailand stands at around 30 percent of GDP.

At present SBI, LIC, BoB, each hold nearly 18.5 percent stake in UTI AMC besides having their own independent mutual fund houses. The market regulator directed three public sector financial institutions -- LIC, SBI, and Bank of Baroda -- to dilute their stakes to below 10 percent by December 2020. In the case of non-compliance with directions, the shareholding and voting rights of these entities in UTI AMC and UTI Trustee in excess of 9.99 percent and corporate benefits will be frozen till the time they comply with the orders. The stakeholding of SBI, BoB, and LIC in UTI AMC is in contravention of an amendment to SEBI MF Regulations on March 13, 2018, requiring an asset management company (AMC) to be a sponsor and stakeholder holding 10 percent or more, of only one mutual fund, thereby reducing cross-holding in any other AMC at less than 10 percent. SBI, LIC and BoB defended their status saying divestment needed approval through Department of Investment and Public Asset Management (DIPAM), a government of India body.

UTI AMC IPO will hit the market soon. The fund house has prepared its draft red herring and will soon file it with SEBI. The fund house aims to raise at least Rs.3000 crore through the IPO. Currently, UTI AMC has five shareholders – T Rowe Price, Punjab National Bank, SBI, LIC and BoB. With this, UTI AMC is set to become fourth AMC to be listed. HDFC AMC and Nippon AMC got listed recently while Shriram AMC, the first listed AMC in India, is no longer listed. The Lead managers are Kotak Mahindra Capital Company, Axis Capital, Citigroup Global Markets India, DSP Merrill Lynch, ICICI Securities, JM Financial and SBI Capital Markets.

Aditya Birla Sun Life Mutual Fund has launched 24/7 WhatsApp service through which investors can register new SIPs, check NAVs, generate capital gains statement and so on. Investors can also map their advisor’s ARN to make new purchases. Considering that WhatsApp is one of the most widely used apps, the service provides convenience and ease of access to investors. It also automates the entire service process for them and gives a seamless experience. To initiate a SIP through WhatsApp, investors are required to key in basic details such as SIP registration mode, start and end date and so on. Investors can also check the payment status post transaction. A customer can complete the entire process in a few easy steps and will get an instant transaction confirmation. Investors can connect to the WhatsApp number of Aditya Birla Sun Life MF at 8828800033 from their registered mobile number. They will have to add Aditya Birla Sun Life Mutual Fund’s contact number to their contact list and then go on WhatsApp and initiate the transaction by sending ‘Hi’ on the chat and select the service they want to avail. The transactions can only be made if the customer is using WhatsApp through the registered number at Aditya Birla Sun Life Mutual Fund and is an existing customer.

DSP Mutual Fund has launched a web series ‘Cubicles’ in association with digital content and entertainment company The Viral Fever (TvF). ‘Cubicles’ is a fresh take on the life of millennials who are ready to dive into the corporate world and their experiences of the many firsts during this journey. The 5-episode series has released weekly on TVFPlay and TVF’s YouTube Channel. Cubicles emerged as a great fit to showcase investor educational concepts in a relatable, entertaining and slice-of-life manner. It is just a reflection of the lives of regular, 9-5 salaried, working professionals. ‘Cubicles’ is centred round the life of Piyush, a fresh entrant into the corporate world. The show depicts his work life and moments including his very first salary, working weekends, failures and successes that are a part of anyone’s corporate journey. Simultaneously, the series seamlessly integrates fundamental concepts on investing and mutual funds through the story.

SEBI has formed an 8-member committee to recommend investor education and protection activities. Among other things, the committee will recommend activities such as seminars, trainings, research programmes and publications to educate investors. Abraham Koshy, Ex-professor, IIM - Ahmedabad will chair the committee. From the MF industry, A Balasubramanian, MD and CEO, Aditya Birla Sun Life AMC is the lone member. The committee also includes three members from the market regulator:  Nagendraa Parakh, Executive Director of SEBI, V. S. Sundaresan, Executive Director of SEBI and N. Hariharan, Chief General Manager of SEBI. Apart from these five members, N. L. Bhatia, President Emeritus, Investor Education and Welfare Association, M. G. Parameswaran, Founder, brand-building.com and Ramesh Narayan, Founder, Canco are also part of the committee. SEBI Investor Protection and Education Fund will bear the expenses incurred for activities recommended by the committee.

…to be continued

Monday, December 16, 2019


NFONEST
December 2019

NFOs of various hues adorn the December 2019 NFONEST.
Motilal Oswal Nifty 50 Index Fund
Opens: December 3, 2019
Closes: December 17, 2019

Motilal Oswal AMC has launched Motilal Oswal Nifty 50 Index Fund, an open ended scheme replicating / tracking Nifty 50 Index.  The scheme seeks investment return that corresponds to the performance of Nifty 50 Index subject to tracking error. The fund is benchmarked against the Nifty 50 Index TRI. The fund is managed by Mr. Swapnil Mayekar.


Motilal Oswal Nifty Next 50 Index Fund
Opens: December 3, 2019
Closes: December 17, 2019

Motilal Oswal AMC has launched Motilal Oswal Nifty Next 50 Index Fund, an open ended scheme replicating / tracking Nifty Next 50 Index.  The scheme seeks investment return that corresponds to the performance of Nifty Next 50 Index subject to tracking error. The fund is benchmarked against the Nifty Next 50 Index TRI. The fund is managed by Mr. Swapnil Mayekar.


Principal Midcap Fund
Opens: December 6, 2019
Closes: December 20, 2019
Principal AMC has launched Principal Midcap Fund, an open ended scheme predominantly investing in midcap stocks. The scheme seeks long term capital appreciation by predominantly investing in equity and equity related instruments of midcap companies. The investment pattern is a maximum of 100% and a minimum of 65% securities in equity and equity-related midcap companies and in other than midcap companies, a maximum of 35% security. The debt and money market instruments are planned to a maximum of 35% security. The fund is benchmarked against the Nifty Midcap 100 Index TRI. The fund is managed by the Fund Managers – Mr. Ravi Gopalakrishnan and Mr. Sudhir Kedia.

Mahindra Top 250 Nivesh Yojana
Opens: December 6, 2019
Closes: December 20, 2019
Mahindra AMC has launched Mahindra Top 250 Nivesh Yojana, an open ended equity scheme predominantly investing in both large and midcap stocks. The scheme seeks growth through investments in equity and equity related securities of both large cap and mid cap stocks. The fund is benchmarked against the Nifty LargeMidcap 250 TRI Index. The fund is managed by Mr.V. Balasubramanian.

Bharat Bond ETF: April 2023
Opens: December 12, 2019
Closes: December 20, 2019
Edelweiss AMC has launched Bharat Bond ETF, an open-ended Target Maturity Exchange Traded Bond Fund predominately investing in constituents of Nifty BHARAT Bond Index - April 2023. The investment objective of the scheme is to replicate Nifty BHARAT Bond Index – April 2023 by investing in bonds of CPSEs/CPSUs/CPFIs and other Government organizations, subject to tracking errors. The fund is benchmarked against the Nifty BHARAT Bond Index - April 2023. The fund is managed by Mr. Dhawal Dalal and Mr. Gautam Kaul.

Bharat Bond FOF: April 2023
Opens: December 13, 2019
Closes: December 20, 2019


Edelweiss AMC has launched Bharat Bond FOF, an open-ended Target Maturity fund of funds scheme investing in units of BHARAT Bond FOF – April 2023. BHARAT Bond FOF – April 2023 is a fund of funds scheme with the primary objective to generate returns by investing in units of BHARAT Bond ETF – April 2023. The fund is benchmarked against the Nifty BHARAT Bond Index - April 2023. The fund is managed by Mr. Dhawal Dalal and Mr. Gautam Kaul.

 

Aditya Birla Sun Life PSU Equity Fund
Opens: December 9, 2019
Closes: December 23, 2019
Aditya Birla Sunlife AMC has launched Aditya Birla Sun Life PSU Equity Fund, an open ended equity scheme following PSU theme. The investment objective of the scheme is to provide long term capital appreciation by investing in equity and equity related instruments of Public Sector Undertakings (PSUs). The fund is benchmarked against the S&P BSE PSU TR Index. The fund is managed by Mr. Mahesh Patil.
ITI Balanced Advantage Fund
Opens: December 9, 2019
Closes: December 23, 2019
ITI AMC has launched ITI Balanced Fund, an open ended dynamic asset allocation fund. The investment objective of the scheme is to seek capital appreciation by investing in equity and equity related securities and fixed income instruments. The allocation between equity instruments and fixed income will be managed dynamically so as to provide investors with long term capital appreciation. The fund is benchmarked against the CRISIL Hybrid 50+50 – Moderate Index. The fund is managed by Mr. George Heber Joseph and Mr. Pradeep Gokhale.

 

ITI Small Cap Fund, ITI Banking and PSU Debt Fund, ITI Large Cap Fund, ICICI Prudential IT ETF, PGIM India Money Market Fund, IIFL Overnight Fund and UTI Bank Exchange Traded Fund are expected to be launched in the coming months.


Monday, December 09, 2019


GEMGAZE
December 2019

The consistent performance of three out of four funds in the December 2018 GEMGAZE is reflected in the three funds holding on to their esteemed position of GEM in the December 2019 GEMGAZE. Birla Sunlife Dynamic Bond Fund has been shown the door in view of its lacklustre performance and Kotak Dynamic Bond Fund has been accorded a red carpet welcome in the December 2019 GEMGAZE.

Birla Sun Life Banking and PSU Debt Fund (erstwhile Birla Sunlife Treasury Optimiser Fund) Gem

Birla Sun Life Banking and PSU Debt Fund was launched nearly a decade ago in April 2008. The current AUM of the fund is Rs. 8,720 crore. Its return in the past one year is 10.13%, almost on par with the category average of 9.98%. The number of holdings in the fund’s portfolio is 157 with an average yield to maturity at 6.51%. The expense ratio of the fund is fairly low at 0.63%. The fund is benchmarked against the NIFTY Banking and PSU Debt TRI. The fund is managed by Mr. Kaustubh Gupta since September 2009 and Manish Dangi since April 2017.

Kotak Dynamic Bond Fund (erstwhile Kotak Flexi Debt Fund) Gem

Kotak Dynamic Bond Fund, launched in May 2008, manages assets worth Rs. 871 crore. The one-year return of the fund is 11.54% as against the category average of 7.38%. The expense ratio is 1.08%. The fund has 24 holdings with the yield to maturity of 7.46%. The fund is benchmarked against the NIFTY Composite Debt TRI. The fund manager is Mr. Deepak Agrawal since May 2008.

SBI Magnum Gilt Fund (erstwhile SBI Magnum Gilt Fund - Long term Plan) Gem 

Launched in December 2000, the fund has an AUM of Rs 1,944 crore. The one-year return of the fund is 11.99% as against the category average of 10.30%. The fund has outperformed its benchmark over three- , five- and ten-year timeframes. It has delivered a compounded annual return of 9% over the last five years. The fund is benchmarked against the CRISIL Dynamic Gilt TRI. The fund has 8 holdings with the yield to maturity of 6.06%. The expense ratio of the fund is 0.96%. Dinesh Ahuja has been the fund manager since January 2011.

Birla Sunlife Money Manager Fund (erstwhile Birla Sunlife Floating Rate Short term Fund) Gem

This relatively young fund, launched in October 2005, boasts of a massive AUM of Rs 10,452 crore.  In the past one year, this liquid fund has returned 8.28% as against the category average of 7.97%. The number of holdings in the fund’s portfolio is 66 with an average yield to maturity at 5.53%. The expense ratio is a mere 0.28%. The fund is benchmarked against the NIFTY Money Market Index. Kaustubh Gupta and Mohit Sharma are the fund managers since July 2011 and April 2017 respectively.


Tuesday, December 03, 2019


FUND FLAVOUR
December 2019


Debt Funds…

Debt mutual funds invest a major portion or the entire corpus in debt instruments to earn fixed income and a small portion in money market instruments to maintain liquidity. Examples of debt instruments include government securities, corporate bonds, and debentures. The money market instruments are treasury bills, commercial papers, and certificates of deposits. The prime objective of debt mutual funds is to generate a regular fixed income stream and grow corpus through stable and steady appreciation of fund. This makes it suitable for risk-averse investors who have a 1-5 year investment horizon. Investing in a debt fund means that the investor is looking for stability over returns as that is what is more important for short term financial goals. The returns from debt funds are lower than the equity funds but higher than bank fixed deposits.

 

The modus operandi...

Debt funds aim to generate returns for investors by investing their money in avenues like bonds and other fixed-income securities. This means that these funds buy the bonds and earn interest income on the money. The yields that mutual fund investors receive are based on this. This is similar to how a Fixed Deposit (FD) works. When you deposit in your bank, you are technically lending money to the bank. In return, the bank offers interest income on the money lent. However, there are many more nuances to debt fund investments. For example, a particular debt fund can buy only specific securities of specific maturity ranges - a gilt fund can buy only government bonds while a liquid fund can buy securities of maturity up to 91 days. Debt funds also do not offer assured returns but have market linked returns which can fluctuate. Rising interest rates can have a positive impact on yields / interest income but a negative impact on bond prices. The reverse is true when interest rates fall.

The types...

1.      Income Funds: 

Income funds are a type of debt mutual fund that attempts to provide a stable rate of returns in all market scenarios through active portfolio management. While it is a debt fund, income funds also run the risk of generating negative returns as many scenarios could play out - such as - interest rates may drop drastically, resulting in a drop of the underlying bond prices. It is even possible that the active fund manager could pick lower-rated instruments that could offer potentially higher returns.

2.      Dynamic Bond Funds: 

Through active and ‘dynamic’ portfolio management, dynamic bond funds seek to maximize the returns to investors by switching up the investment portfolio depending on market conditions and fluctuations.

3.      Liquid Funds: 

The entire point of investing in a liquid fund is to maintain a high degree of liquidity (i.e. convertibility to cash/cash value) in the investment. Securities and instruments that are invested in by liquid fund schemes have a maximum maturity period of 91 days. Usually, only very highly-rated instruments are invested in, through liquid funds. The benefit of these funds is primarily felt by those investors who have surplus funds to park in an income generating investment. The reason these are preferred is that they give higher returns than savings accounts and attempt to provide a similar level of liquidity.

4.      Credit Opportunities Funds: 

These funds are the riskier type of debt mutual funds. They undertake calculated risks like investing in lower-rated instruments to generate potentially higher returns. Anticipating a rise in ratings of papers through market analysis, credit opportunities fund managers invest in instruments rated under even “AA”, in the hope that they will rise to become higher-rated over time, and thus, increase in value.

5.      Short-Term and Ultra Short-Term Debt Funds: 

These fund schemes are popular among new investors who want a short term investment with minimal risk exposure. The securities, instruments, papers, etc. that are invested in by these schemes have a maximum maturity of 3 years and usually a minimum maturity of 1 year.

6.      Gilt Funds: 

These schemes invest primarily in government-issued securities which carry a very low level of risk and are generally rated quite high (as the default rate is very low and sometimes non-existent). What these schemes lack in risk-taking ability, they more than make up for, in security.

7.      Fixed Maturity Plans: 

Fixed maturity plans can be closely likened to fixed deposits. These schemes have a mandatory lock-in period that varies depending on the scheme chosen. The investment must be done once, during the initial offer period, after which further investments cannot be made in this scheme. The way in which it differs from FDs is that the returns are not guaranteed, but if they do generate positive returns, they will be most likely higher than any bank FD scheme.

The benefits…

1.      Stable income
Debt Funds have potential to offer capital appreciation over a period of time  While debt funds come with a lower degree of risk than equity funds, the returns are not guaranteed and subject to market risks.
2.      Tax efficiency
Many people invest money for the prime reason of reducing their annual tax outgo. So, if tax reduction is a crucial investment goal, you can consider investing in debt mutual funds. This is because debt funds are more tax-efficient than traditional investment options like fixed deposits (FDs).
In FDs, the interest you earn on your investments is taxed each year based on the income slab for which you are eligible irrespective of the maturity date being in that year or later. In case of debt funds, you pay tax only in the year you redeem and not before that. You also pay tax only on the redemption proceeds, even if it is a partial redemption. You pay Short Term Capital Gains (STCG) tax if you hold your mutual fund units for less than three years and Long-Term Capital Gains (LTCG) for investments beyond three years. LTCG are eligible for indexation benefits wherein you are taxed only on the returns which are over and above the inflation rate (embedded in cost inflation index {CII}). This helps to reduce your tax outgo as well as provides better post tax returns.
3.      High liquidity
Fixed deposits come with a specified lock-in period. If you liquidate your FD prematurely, the lender may charge you a penalty. While debt mutual funds have no lock-in periods, some of the funds carry an exit load which is a charge deducted at source for early withdrawals. The exit load period varies from fund to fund while some funds have nil exit load as well. However, debt mutual funds are liquid and you can withdraw your money from the fund on any business day.
4.      Stability
Investing in debt funds can also increase the balance of your portfolio. Equity funds (while offering higher return potential) can be volatile. This is because the returns on equity funds are linked directly to the performance of the stock market. By investing in debt funds, you can adequately diversify your portfolio and bring down overall risk (cushion the downside)
5.      Flexibility
Debt mutual funds also offer you the option of moving around your money to different funds. This is possible through a Systematic Transfer Plan (STP). Here, you have the option to invest a lump sum amount in debt funds and systematically transfer a small portion of the fund into equity at regular intervals. This way you can spread out the risk of equities over a specified period of a few months rather than investing the entire amount at one point. Other traditional investment options do not offer this degree of flexibility to investors.

The choice…

There are various debt funds to choose from. Selecting the right fund from different options can get complicated. So, here are a few factors to consider before you select a fund.

a. Fund Objectives

Debt funds aim at optimising returns by diversifying the portfolio of various types of securities. You can expect them to perform predictably. It is because of this reason that debt funds are accessible among conservative investors.

b. Fund Category

Debt funds are further classified under various categories such as liquid funds, monthly income plans (MIPs), fixed maturity plans (FMPs), dynamic bond funds, income funds, credit opportunities funds, GILT funds, short-term funds, and ultra short-term funds.

c. Risks

Debt funds are subject to interest rate risk, credit risk, and liquidity risk. The fund value may fluctuate due to the movement in the overall interest rates. There is a risk of default in the payment of interest and principal by the issuer. Liquidity risk is seen when the fund manager is not able to sell the underlying security due to lack of demand.

d. Cost

Debt funds charge an expense ratio to manage your investment. No fund house can charge above the limit set by the Securities and Exchange Board of India (SEBI).

e. Investment Horizon

An investment horizon of three months to one year is ideal for liquid funds. If you have a longer horizon of say two to three years, then you can explore short-term bond funds.

f. Financial Goals

Debt funds can be used to achieve a variety of goals such as earning additional income or for liquidity.

g. Market Outlook

The market outlook matters a lot. If inflation is likely to risk, then bond yields could risk too and that means your long term bond funds will see capital erosion. When inflation goes down, the reverse order works and you get capital appreciation on long dated funds. Position yourself accordingly.

h. Duration of the Fund

Duration of the fund also matters, especially if you are matching your debt funds with payables arising after time. For example, if you have a committed outstanding in 5 years from now, then you need to select a debt fund with an average duration of 5 years so as to minimize your interest rate risk.
i. Pedigree of the Fund
Style, pedigree and performance of the fund also matter. When you want stable returns do not go for dynamic funds with asset allocation discretion. Fund houses with pedigree generally avoid risky debt instruments. Focus on the past performance and benchmark to an index. Give more importance to consistency than to the CAGR returns.


The Evaluation…

a. Fund Returns

You need to look for consistent returns over long-term say three, five, or ten years. Choose funds that have outperformed the benchmark and peer funds consistently across different time frames. However, remember to analyse the fund performance, which matches your investment horizon to get results.

b. Fund History

Choose fund houses that have a strong history of consistent performance in the investment domain. Ensure that they have a consistent track record of at least say five to ten years.

c. Expense Ratio

It shows how much of your investment goes towards managing the fund. A lower expense ratio translates into a higher take-home return. Choose a fund which has a lower expense ratio and has the potential to give you superior performance.

d. Financial Ratios

You can use financial ratios such as standard deviation, Sharpe ratio, alpha, and beta, to analyse a fund. A fund having, higher standard deviation, and beta are riskier than a fund with lower beta and standard deviation. Look for funds with a higher Sharpe ratio, which means it gives higher returns on every additional unit of risk being taken.

The Performance…

The potential of debt funds to give higher returns than FDs remains intact. The one year return of Ultra Short Duration Debt Funds, Short Duration Debt Funds and Medium Duration Debt Funds are 7.18%, 5.82% and 5.97% respectively. The one-year average return on liquid funds (one of the lowest-risk debt fund categories) is 6.99%, for three years it is 6.79% and for five years, 7.42%. In comparison, the one-year FD rate State Bank of India Ltd offers is 7% and the three-year rate is 6.75%.

 

The steps…

Over the past few years, investing in debt funds in India has become effortless. Here are the steps to begin your investment journey in debt funds:
1.                  Identify the debt mutual fund you wish to invest. You can base this on factors like the past performance of the fund, charges involved, pedigree of the Asset Management Company (AMC), performance track record / experience of the fund manager, etc.
2.      Create an account with the AMC. These days, most funds allow investors to complete this step online.
3.      Submit your KYC documents (if you have not already done so)
4.      Specify the amount you wish to invest and the frequency of investment
5.      Invest the amount on the selected dates and relax. You can also give online instructions to your bank to transfer the required amount into the fund on the specified date each month.
6.      Monitor the performance of the fund regularly. If the fund’s performance is not up to the mark, you can shift your investment to another fund.

The Target Personnel…

You may want to invest in debt funds if:
1.      You have surplus funds to park for a while, and do not mind taking a small bit of risk for the possibility of returns higher than a savings bank account or a fixed deposit.
2.      You are not willing to place your money at as much risk as an equity fund.
3.      You prefer the possibility of small but stable returns over the possibility of large capital appreciation.
4.      You are unhappy with the current rate of returns provided by your savings bank account.
5.      You wish to earn higher returns than an average fixed deposit scheme.
6.      You wish to supplement your current income - i.e. if your current salary is not able to meet the demands of your lifestyle, you could invest in a debt mutual fund scheme to add a certain amount of “income” (in the form of returns) each month.

 

Risk-averse investors generally choose to invest in debt fund schemes. Investors who are happy with the possibility of a low, but regular rate of returns versus high-risk exposure capital appreciation equity funds choose debt fund schemes.