Fund Fulcrum
(September 2007)

The size of the Indian mutual fund industry is expected to double by 2010 assuming a plausible CAGR of around 17%, according to a study conducted by The Associated Chambers of Commerce and Industry of India. But short-term brakes do seem to be applied …

The asset base of the mutual fund industry dwindled by Rs 18,506 crore in August from the levels of the previous month, according to the data released by the Association of Mutual Funds in India (AMFI). Debt and gilt funds have led the decline in AUMs.The industry now manages Rs 4,67,623 crore in assets compared to Rs 4,86,129 crore in July. The decline can be attributed to a combination of factors like hardening call money rates and volatility in the equity market. But some of the mutual funds with large portfolio of assets under management such as Reliance, ICICI Prudential and HDFC showed a net increase. Reliance Mutual Fund remains the largest fund house, with an AUM of Rs 67,597 crore, while ICICI Prudential Mutual Fund and UTI Mutual Fund are at second and third positions with AUMs of Rs 50,611 crore and Rs 41,698 crore respectively. HDFC Mutual Fund is at the fourth position with an AUM of Rs 40,871 crore.

Piquant parade

German financial services group Allianz, Belgium's KBC Asset Management, Qatar's Doha Bank (with a 49 % stake in Investnet) and Bharti Enterprises and AXA Investment Managers and AXA Asia Pacific Holdings (with 25% and 75% stake in the joint venture respectively) have indicated plans to enter the asset management business in India.

UTI International Ltd, a wholly-owned subsidiary of UTI Asset Management Company, and Shinsei Bank Ltd of Japan signed a joint venture agreement to set up UTI International (Singapore) Pte Ltd, to manage funds and undertake investment activities jointly. The JV would also launch and manage structured investment products to cater to the Japan-South East Asia corridor. Tata Mutual Fund has tied up with Invesco, a UK-based global investment management house, for the former’s new scheme, ‘Indo-Global Infrastructure Fund’.

Vijaya Bank plans to sell its 5% stake in Principal Pnb Asset Management Co. Pvt Ltd.. Principal Financial Group and Punjab National Bank are the other partners in the joint venture. GIC Mutual Fund has transferred all its schemes to Canbank Mutual Fund.

ICRA Online Ltd, a wholly-owned subsidiary of credit rating major ICRA Ltd (an Associate of Moody's Investors Service Inc.), announced the launch of ICRA Mpower, a web-based platform for mutual fund distributors and financial advisors, which provides all the tools required for making the distribution business more effective and efficient.

Regulatory Rigmarole

The proposal of SEBI to remove entry load on direct Mutual Fund investments is good news for informed retail investors. This facility would be available for investors who apply directly to the AMC either through the Internet or by visiting the premises of the fund house without involving the services of agents. At present, this option is only available to large investors (Rs 5 crore or more) or for investments in funds belonging to Benchmark and Quantum.This move is progressive as entry loads only reduce overall returns earned by mutual fund investors. It might apply brakes on initiatives of fund houses to improve penetration and reach out to the masses. In India, the role of a distributor in advising the investors becomes crucial, especially in non-metros. Apart from online medium and distribution, branches as a channel for mutual fund products have assumed importance with Reliance Mutual Fund planning to double its branch network from the existing 300 in the next few months, UTI Mutual Fund planning to add 150 branches within one year and HDFC Mutual Fund targeting 75 branches by the year-end. However, expansion of branches might not be an appropriate option as it affects the financial health of funds. As far as distribution business is concerned, it is going to be an integral part of the system. Applications received directly are only 0.02 per cent of the total. So the mutual fund industry has a long way to go and distribution houses will have to play a major role in that.

SEBI issued a circular stating that 'micro pension schemes' will be exempt from producing PAN cards. UTI MF had launched one such scheme, where rural investors could invest in its retirement benefit pension fund. What this means is that micro SIP schemes launched by ICICI Prudential and Reliance Mutual - would still have to face the PAN card rule.

The developments on the fund and regulatory front have sent mixed signals this month with minor hiccups. But with the stockmarkets reaching dizzy heights and still marching ahead, the overall scenario is positive.

NFO Nest

The fledgling funds ready to soar into the sky fill the nest in an ongoing basis with winged wonders taking to the sky as they get adopted by the teeming millions in the fond hope of enhancing their fortunes!

The following funds find their place in the NFO nest this September.

ABN AMRO China India Fund Opens: 3 Sept, 2007 Closes: 1 Oct, 2007

This is an open-ended fund which will invest 65 to 75 per cent of its assets in Indian equities and 25 to 35 per cent of it assets in Chinese equities. The fund will follow both top down and bottom up approaches in identifying promising stocks. It will look for companies that may benefit from the anticipated secular growth of the Chinese and Indian economies.

Birla Sunlife International Equity Fund Opens: 17 Sept, 2007 Closes: 16 Oct , 2007

The Fund is open-ended and has two plans. Plan A will invest in a portfolio of international stocks from across the globe, whereas Plan B will be a combination of domestic (65-75 per cent) as well as international (25-35 per cent).

Fidelity India Growth Fund Opens: 3 Sept, 2007 Closes: 26 Sept, 2007

It is an open-ended equity fund that will invest in growth-oriented companies in the Indian and international markets without any sector or cap bias. The fund managers will follow a bottom-up stock picking strategy. The focus will be on companies that offer best value relative to their respective long-term growth prospects, returns in capital and management quality. However, while investing in the international markets, the fund managers expect to identify such investments which can provide opportunity to participate in the Indian economy. For example - Indian businesses that are listed in international markets or international companies that participate in the Indian economy.

ICICI Prudential Indo Asia Equity Fund Opens: 23 Aug, 2007 Closes: 21 Sept , 2007

It is a diversified equity fund that will invest 65 per cent or more directly into Indian equities, and will initially invest up to 35 per cent in Asian Equity Fund (an open ended equity fund managed by Prudential Asset Management, Singapore) that invests in equity markets across the Asia-pacific region ex-Japan.

LICMF Systematic Asset Allocation Fund Opens : Aug 16, 2007 Closes: Sept 14, 2007

A closed-end hybrid equity fund, this fund would automatically be converted into an open ended fund after the completion of 36 months from the date of allotment.The fund seeks to achieve long term growth by investing initially in debt & money instruments and in a systematic and progressive manner allocating it to equities over the close-ended period. This will help to reduce the risk of volatility of the equity market. The investment approach adopted by the fund will be a mix of top down and bottom up approach. The stock selection will be based on the fundamentals of the business, the industry structure, the quality of management, corporate governance trends, sensitivity to economic factors, the financial strength of the company and the key earnings drivers. At present, there is only one fund available in the market under a similar investment style i.e Tata Sip Fund.

Lotus India Overnight Fund Opens: 12 Sept, 2007 Closes:13 Sept, 2007

The fund aims to provide a high level of liquidity and safety. The corpus of the fund will be predominantly deployed in overnight instruments with some allocation to short term securities having maturity upto 91 days. The average portfolio duration shall normally be upto 15 days. The fund may invest upto 70% in reverse repo, debt instruments, including floating rate instruments, with overnight maturity/ daily put/call option and upto 30% in debt & money market instruments with residual maturity of upto 91 days.

Tata Indo Global Infrastructure Fund Opens: 3 Sept, 2007 Closes: 16 Oct , 2007

A three year closed-end equity fund, it will automatically be converted into an open ended scheme after the expiry of three years from the date of allotment.The scheme aims to generate long term capital appreciation by investing predominantly in equity and equity related instruments of companies engaged in infrastructure and infrastructure related sectors in Asia Pacific Region including India, Europe and Latin America and other growing economies.The equity component will range between 65%- 85% of the portfolio while 15% - 35% will constitute foreign securities, debt and money market instruments will be in the range of 0% - 35%.

A majority of the NFOs during September 2007 seem to have a flair for something foreign…

AIG Infrastructure and Economic Reform Fund ,AIG Mid Cap-fund, ING Liquid Call Plus Fund, JP Morgan India Smaller Companies Fund, Lotus India AGILE Tax Fund, Sahara Real Fund and Sahara Classic Funds, UTI Dynamic Bond Fund and UTI Savings Bond Fund are expected to be launched in the coming months.

Gem gaze

The glittering gems in the diversified equity space are on display! In a nutshell, consistency in performance over a 3 to 5 year period – beating the benchmark and powering peer pressure even during the market downturn – is what lends radiance to our prized collection. Fund Houses with strong systems and processes – religious adherence to investment mandate irrespective of market conditions, fund’s portfolio management style, the stock selection, consistency of holding, top holdings and sectoral concentration – score over the ones where fund managers call all the shots though the philosophy and mindset of the fund manager is accorded due importance.

HDFC Equity Fund

HDFC Equity, a large-cap tilted fund exhibiting sterling performance, is one of the most compelling options in the category of diversified equity funds. The fund’s portfolio management style epitomises its high risk nature. Its portfolio is characterised by concentrated stock and sectoral holdings. The top three sectors - technology, basic/engineering and automobile - account for almost 49 per cent of the portfolio. Though the portfolio tends to average around 30 stocks, the fund manager does not hesitate to take a big position. Concentrated stock holdings can expose a diversified equity fund to high levels of volatility; however it has uncannily managed to pitch in a reasonable performance on the volatility control front. If you have a moderate risk profile and are planning to build a long-term portfolio, your portfolio will be incomplete without HDFC Equity.

DSPML Opportunities

DSPML Opportunities Fund is an equity fund managed with a free flowing investment style, popularly known as an 'opportunities style' of investing. Given that it can take focussed exposures, the fund is better suited to investors with a high-risk appetite. However, in practice, the fund has been managed much like a diversified fund with well-spread-out sector exposures. The fund has 24 sectors in its portfolio with 35% of the assets in software, capital goods and petroleum and has restricted its exposure to any single stock to less than 7 per cent of the asset. Although, an opportunities fund, it is probably one of the more conservatively managed, predominantly large cap diversified equity funds.

Magnum Contra

Magnum Contra is a diversified equity fund that follows a contrarian strategy, the first to do so. It invests in scrips and sectors that are currently out-of-fashion, but hold potential. Usually, such scrips and sectors are available at cheaper valuations and tend to appreciate when the markets recognise their potential. A contrarian scheme in many ways works like a value fund that invests in undervalued scrips following a bottom-up stock-picking strategy. The fund management has demonstrated the ability to pick stocks ahead of others and exit some at the right time. The fund has slowly changed its strategy and is taking a higher exposure to large-cap stocks now, moving to 65 per cent large cap exposure from 50 per cent earlier. It continues to impress with its category beating performance but you must be patient to reap the gains.

Prudential ICICI Dynamic Fund

Prudential ICICI Dynamic aims to minimise downside risk by adopting a defensive strategy in a bull market. When markets are at a high, it builds cash position. Prudential ICICI Dynamic Fund follows a bottom-up stock-picking strategy and prefers to invest in companies that have the potential to compound their cash flows over the years.The equity portfolio of the scheme is well diversified; with around 20 sectors spread over 45 to 50 stocks. IT- Software, Consumer Non Durables and Industrial Products are the top three sectors contributing 38.17% of the overall portfolio. The fund portfolio is well spread out over larger, mid and small cap stocks.

Franklin India Flexi Cap

An equity fund with as limited a tenure as Franklin India Flexicap Fund (launched in January 2005) would not usually have figured so high on our list. But Franklin India Flexicap is no ordinary fund; it is backed by an experienced fund management team who have given us Franklin India Bluechip and Franklin India Prima. Franklin Flexicap was launched with a mandate to help it overcome the limitations of these illustrious predecessors. Unlike them, it can invest in companies regardless of the market capitalisation. Volatility being the name of the game in the market, it pays to invest in a solid scheme that benefits from companies of all sizes.

Consistent funds are the ones that should find a place in the core of your portfolio. The consistency displayed by these funds means that timing your entry or exit does not really matter with them. They survive the summit and the nadir of market cycles and emerge as the jewel in the crown paying due tributes to the prowess of fund management.

From September 2007, I intend covering one Fund Flavour per month with Diversified Equity Funds earning the distinction of being the first flavour to be savoured. The first week will bring forth a bird’s eye-view of the category followed by gliterring gems within that category in the second week. The third week will be dedicated to NFOs open in the current month. The hot happenings during the month in the Indian Mutual Fund arena will be the subject matter of the fourth week.

FUND FLAVOUR

Diversified Equity Funds

What's in a name?

If sector funds sound suave, thematic funds trendy, then diversified equity funds can be dubbed as plain. Sure, they are not as boring as index funds but neither are they hot. If that summarises your line of thought, then it is high time you realize that you have grossly underestimated this evergreen fountain from which fabulous returns have flowed….

Varied assortment

Are your chances of finding a diamond better if you scan 10 heaps of charcoal or a thousand? More the coal you scan, higher your chances of finding diamonds. This is no rocket science. But the underlying rationale for Diversified Equity Funds. The 164 funds in this category manage Rs. 90998.81 cr with diverse investment focus - asset allocation, market cap allocation, sectoral weightages…

Take a sample of what is on offer.

HDFC Equity and Reliance Growth are growth funds which allocate a minimum of 90 % to equity.
Magnum Multicap and Franklin Flexicap invest across market caps – large caps, mid caps and small caps.
Birla Sun Life Frontline Equity targest the same sectoral weights as the BSE 200 but retains the flexibility of selecting stocks within those sectors.

Since diversified is their first name, that is what you can expect from such funds.They have a broad-based portfolio. The definition of “diversification” varies from product to product and fund manager to fund manager irrespective of the market condition. What you need to see is how diversified they are and whether or not it caters to your investment objective and taste. You can select multiple styles for yourself.

Along the meandering road to investment heaven you pass through varied avenues…

Narrow - Sector Funds

Diversified equity funds can rotate their portfolio according to changes in corporate fundamentals and other determining factors. Investing across different sector funds can help create a more diversified portfolio with a marginally higher risk-return equation than investing in well-diversified schemes or balanced funds. However, sector funds have to stick to their portfolio irrespective of whether that sector is doing well or not. The caveat, however, is that you must be able to understand the dynamics of the sectors you wish to invest in. If you cannot do that, then you are better off investing in diversified equity funds.

Wide - Thematic Funds

Managing sector funds can be as daunting as making money out of them. Mutual funds have been quick to adjust and a new breed of funds has come up. So what is this new animal? Thematic funds that aim to invest in a bunch of sectors woven by a common objective. These funds follow a theme rather than just one sector and are, therefore, not watertight. Say, infrastructure theme that runs across sectors like auto and auto ancillaries, computer software, metals and banking and finance or services industries that includes sectors like housing and construction, hotels, chemicals, plastics and pharmacheuticals. These funds look to bridge the gap between sector and diversified funds. Of course, sometimes the portfolios in these funds bear semblance to those of diversified equity funds and a clear demarcation is not possible. Just like sector funds, thematic funds have a flip side. Although a wide choice of sectors is available, thematic funds still follow a restricted strategy. This restrictive strategy prevents these schemes from participating in certain booming sectors. That explains the reason for their underperformance vis-a-vis diversified equity funds.

And widest - diverse, dextrous and dynamic Diversified Equity Funds

You could do well by allotting a major portion of your equity portfolio to diversified equity funds and only 15-20 per cent to sector and thematic funds.

The choice is yours…

There is no such thing as a universally valid investment proposition. The concept of “one size fits all” doesn't work while investing. For example, a mutual fund scheme which makes a perfect fit in an investor's portfolio could be grossly unsuitable for another. A diversified equity fund with a proven track record across longer time frames and market phases could merit inclusion in a 30 year old risk-taking investor's portfolio. However the same fund should perhaps not find place in a 60 year old retiree's portfolio who has no appetite for taking on risk and for whom capital protection and assured income is a priority. If you decide to invest in them, make sure you understand the objective of the scheme and see if it fits your investment needs. Don't just blindly invest in any fund or new fund offering that hits the stands.

The key to financial freedom may lie in this: if you are after robust long-term returns, go for diversified funds. They are better bets. Go forth and diversify.