Fund Fulcrum - January 2008

Fund Fulcrum
(January 2008)

2007 turned out to be a momentous year for mutual funds in India fired by a meteoric rise in the stock market. It reflected in a phenomenal growth of 61.94% (from about 3.39 lakh crore in January 2007 to 5.49 lakh crore in December 2007) in asset under management of the mutual fund industry. About 177 equity schemes outperformed the Sensex, which posted 47.15% returns in 2007. Overall 13 schemes doubled the investment with returns of about 90% - 124%. Indian mutual funds stormed into the Lipper list of the world's 100 top-performing funds of 2007, with 40 funds making a mark compared with none a year ago. Globally, funds that have a track record of at least one year and are covered by Lipper, showed an average return of 2.52 per cent, but the 306 Indian funds among them delivered an average gain of 55.64 per cent.

Boston consulting survey has pointed out that managed assets of Indian mutual funds will be 1 trillion by 2015. The AUM for December registered a marginal increase of 2.2 per cent (from Rs 5,37,812 crore to Rs 5,49,941 crore), reversing their growth decline in November. The leader of the pack continues to be Reliance Mutual Fund, whose asset base has gone up by more than three per cent to Rs 80,779.83 crore. UTI Mutual Fund overtook ICICI Prudential Mutual Fund to take the second position, registering a 8.95 per cent rise in AUM which now stands at Rs 56,854.10 crore. ICICI Prudential Mutual Fund’s asset base grew 3.4 per cent in December, closing the year at Rs 56,772.58 crore. Out of the 32 mutual fund houses, 11 of them registered a decrease in their asset base, whereas in November there were 22 fund houses which had reported a decline in their AUM.

Piquant Parade

BlackRock Inc, the largest quoted asset management company in the world, managing assets in excess of US$ 1.3 trillion, in line with the realignment of Merrill Lynch's asset management business globally and subject to regulatory approvals, will acquire a 40% stake in DSP Merrill Lynch Fund Managers. DSP Merrill Lynch Fund Managers will be renamed "DSP BlackRock Investment Managers" while DSP Merrill Lynch Mutual Fund will be renamed "DSP BlackRock Mutual Fund".

UTI Mutual Fund has entered into an agreement with Repco Bank for providing members of self help groups associated with Repco Foundation for Micro Credit, an investment opportunity through a micro-pension initiative under UTI-Retirement Benefit Pension Fund. The micro-pension initiative aims to provide social security cover for the low income group during their old age. Under the initiative, members of SHGs associated with Repco Foundation for Micro Credit, will contribute a minimum amount of Rs 100 every month towards UTI-Retirement Benefit Pension Fund up to the age of 55 years so as to enable them to receive pension in the form of periodical income after they reach the age of 58 years.

The Government has asked UTI AMC to make a fresh issuance of 16,000,000 shares by way of a private placement to Qualified Institutional Investors, including existing shareholders, other Indian institutions and a few Foreign Institutional Investors in addition to the sale of 48.5mn shares to the public through an offer for sale by the selling shareholders - State Bank of India , Bank of Baroda, Punjab National Bank and LIC. Of the 20% fresh shares to be issued by UTI AMC, about 5-6% will be issued to employees, while the balance will go to strategic investors.

To enhance its distribution reach, HDFC Mutual Fund has entered into a strategic alliance with South Indian Bank to distribute its mutual fund schemes across India. As per the agreement, South Indian Bank will offer the entire bouquet of HDFC Mutual Fund products at its select 100 branches across the country.

Regulatory Rigmarole

SEBI has issued a circular exempting entry load for direct Mutual Fund applications. Mutual Funds usually charge an entry load of 2.25% for investment in equity funds. With effect from January 4, 2008, this entry load will be waived off for those investors who do not use the services of the distributors and instead invest directly by submitting their application at the AMC’s office, Investor Service Centres or Online through the internet. The exemption is for investments in existing & new schemes and also for additional buys by investor under same folio. Investors switching-in to a scheme from other schemes will also get an exemption. Distributors bring in more than 95% business for fund houses while less than 5% investors apply directly or approach fund houses. This move may affect the business but all in all, it is a favourable move for investors.

The Reserve Bank of India has permitted Foreign Institutional Investors and sub-accounts registered with Securities and Exchange Board of India to short sell, lend and borrow equity shares of Indian companies from February 1. The RBI notification follows the SEBI’s permission for short selling of shares by all classes of investors.

The Government has clarified that a mutual fund should have more than 50 per cent holding by State-owned financial institutions or banks (individually or collectively) and also has to be regulated by the Securities and Exchange Board of India to be classified as a public sector mutual fund. The clarification follows the Government allowing navratna and mini-ratna public sector companies to invest surplus funds in public sector mutual funds.

The staggering statistics painting a rosy picture coupled with SEBI at the forefront to make Mutual Funds a better product signals a scintillating start for 2008.

NFO Nest - Jan 2008

NFO Nest

Infrastructure and global funds stole the limelight in 2007, with a total collection of Rs.27,500 a tad lesser than Rs. 28,970 cr in 2006. 2008 has started with a slew of tax saving mutual fund schemes (with the financial year-end approaching) but infrastructure funds still seem to be ruling the roost.

The following funds find their place in the NFO nest in January, 2008.

Reliance Natural Resources Fund Opens: 1 Jan , 2008 Closes: 30 Jan, 2008

This open-ended equity fund will invest at least 65% of its corpus in shares of companies engaged in discovery, development, production or distribution of natural resources in the domestic market. It also has provision to invest up to 35% in foreign securities, especially those listed on the London Stock Exchange, New York Stock Exchange, Toronto Stock Exchange and Australian Stock Exchange. A custom benchmark has been created using the BSE-200 to the extent of 65% of portfolio and MSCI World Energy Index for balance 35% of portfolio.

AIG Infra and Economic Reform Fund Opens:10 Jan ,2008 Closes:31 Jan, 2008

AIG Infrastructure and Economic Reforms Fund is an open-ended equity fund that aims to generate long-term capital appreciation from a diversified portfolio with at least 65 per cent in equity and equity-related securities of companies involved in economic development of India as a result of potential investments in infrastructure and unfolding economic reforms. AIG Infrastructure’s key distinguishing feature may be its plan to identify companies that have ‘multi-year opportunities’ that would outlast the primary infrastructure development. These companies may participate in infrastructure building but later branch out to complementary areas once the primary infrastructure needs are met.

The ICICI Prudential Fixed Maturity Plan Opens:8 Jan ,2008 Closes:8 Feb,2008

The ICICI Prudential Fixed Maturity Plan is the country’s first ever equity linked fixed maturity plan. The fund is a close-ended debt fund providing an opportunity to gain from equity market linked returns.

ICICI Prudential Fusion Fund Series-III Opens:8 Jan ,2008 Closes:21 Feb,2008

ICICI Prudential Fusion Fund is a three-year close-ended diversified equity fund designed to invest in companies across market capitalisations and having long-term growth prospects through a fusion of investment approaches. Approaches such as pre-IPO investment, companies participating in secular growth opportunities due to the growth in demand, taking stakes in select small companies to facilitate their market re-rating and early identification of companies that are set to transition into a new growth orbit. This fund will be investing up to 80 per cent in equity-linked debentures. The balance will be invested in debt securities with fixed and floating interest rates. This product is specially targeted towards investors who are risk averse and do not invest in equity markets due to fear of losing their money.

JM Core 11 Fund - Series II Opens :14 Jan ,2008 Closes:15 Feb, 2008

JM Core 11 Fund - Series II is a three-year close-ended scheme and will have a concentrated portfolio with not more than 11 stocks in the portfolio with each stock being invested to the extent of 9.09 percent of the NAV (net asset value) of the scheme.The fund would invest at least 65 percent of the assets in equities and the rest in debt and money market instruments.

Lotus India Mid N Small Cap Fund Opens :7Jan ,2008 Closes:19 Feb, 2008

Lotus India Mid N Small Cap Fund is a three year close-ended equity scheme. Exposure in mid-cap companies will be in the range of 65-100 per cent while in the case of small cap companies it would be 5-40 per cent. The market capitalisation of mid-cap companies would fall within the range of highest and lowest market cap in the CNX Midcap Index. For small-cap companies the range would be the within the highest and lowest market cap of BSE Small Cap Index.

HDFC Infrastructure Fund Opens :8 Jan ,2008 Closes:21 Feb, 2008

HDFC Infrastructure Fund is a three year close-ended equity scheme with automatic conversion into an open-ended scheme upon maturity. The scheme aims to invest in sectors like airports, banking and financial services, cement and cement products, construction and related industries, electrical and electronic components, energy, oil & gas and allied industries, petroleum and related industries, ports, power and power equipment, telecom, industrial capital goods, etc.

Reliance Equity Linked Saving Fund Opens:18 Dec,2007 Closes:17 Mar, 2008

Reliance Equity Linked Saving Fund is a 10 year close-ended Equity Linked Savings Scheme. The performance of the scheme will be measured against BSE 100.

JM Tax Gain Fund Opens:24 Dec , 2007 Closes:25 Mar, 2008

JM Tax Gain Fund aims at generating long-term capital growth from a diversified and actively managed portfolio of equity and equity related securities and to enable investors a deduction from total income, as permitted under the Income Tax Act, 1961 from time to time. The fund will invest 80%-100% in equity and equity related instruments with medium to high-risk profile and 0%-20% in money market instruments / debt instruments such as bonds and debentures.

ABN AMRO Sector Select Fund, AIG World Gold Fund, Escorts Power Fund, SBI Nation Builder Fund, Optimix Global Commodities Fund, ICICI Prudential Long Short Fund, Benchmark Structured Fund Series I & II and Benchmark S & P CNX 500 Fund are expected to be launched in the coming months.

Gem Gaze ..Lulled by the lustre?

Gem Gaze

Lulled by the lustre?

Over longer time frames, asset allocation can help you protect your portfolios on the downside and create wealth as well. Powered by investments in both equity and debt, balanced funds qualify as effective asset allocation tools. The debt component in balanced funds can insulate your portfolio from the volatility in the equity markets. The two steep market declines in the recent past (the ones in May 2006 and February 2007) demonstrate how valuable this debt allocation can be to preserve returns. But the Rs.10357.9 crore AUM of the 24 Balanced mutual funds in India, a paltry 5.29 % of the total industry size, is a sad reminder of their relegation to the less prominent pages of the media while equity funds grabbed the headlines riding high on the euphoria created by the meteoric rise in equities.

Your portfolio studded with these gems will strike the right chord and balance and reinstate the lost lustre.

HDFC Prudence Fund

It races like an equity fund but with utmost stability. This is what makes the fund stand out as safe and sure. HDFC Prudence Fund, formerly known as Zurich India Prudence Fund was the first balanced fund to be launched in India in February 1994. This pioneer and trendsetter has built an impressive track record with its consistent long-term performance, ably aided by the process-driven investment approach followed at HDFC Mutual Fund. A measure of its popularity is the fact that it is the only balanced fund with net assets exceeding Rs 1,000 crores. Its stock picks embrace large caps as well as mid caps and are not churned heavily. In terms of sectoral allocation, it pursues a concentrated investment strategy. Owing to a rising corpus (increase of 100 per cent since January 2006) combined with a mid-cap orientation, the count of stocks has increased from 30-35 (early 2006), to as many as 50 scrips. This has been accompanied by a steady decline in the concentration of holdings. Typically, it invests between 70%-75% of its assets in equities and equity-related instruments and the balance (25%-30%) is held in debt and money market instruments. It beats the category average despite being amongst the least volatile since it does not chase momentum stocks and buys stocks with good businesses with at least a two-year view. The fund manages its debt portion passively and prefers to hold securities with shorter maturities and hold them till maturity. The judicious use of the debt component enabled it to cut losses just before the tech crash.

FT India Balanced

This is one fund that will not give you sleepless nights. You may not get extraordinary returns here, but the fund's consistency since its launch in December 1999 and 15% annualised returns since launch make it a classic balanced fund. A glance at the fund's equity portfolio gives a different impression. Between 60% to 70% of total investments are in equity. This appears aggressive. But large caps constitute a major portion of the portfolio. The fund's exposure of 38 per cent in debt as of March 2007 reflects its optimism over the return potential in this space. The fund has gone for shorter maturity periods of its debt component with higher yield to maturity on the back of successive interest rate hikes. But over its tenure, the fund's track record has been inspiring. Cautious investors would like this portfolio.

Magnum Balanced Fund

This category beating performer is the conservative investor’s cup of tea. Launched in December 1995, Magnum Balanced Fund, has over the past year retained its equity allocations at broadly 65-85 per cent of its assets. The fund invests one-third of its equity portfolio in mid- and small-cap stocks and the rest in large-cap stocks. The portfolio is well-spread-out across sectors. IT continued to be the preferred sector, along with energy and industrial manufacturing. The top 10 stocks account for 32 per cent of the assets. In the latest portfolio, debt and money market instruments cornered 33 per cent. Taking advantage of the higher yields and spreads on corporate debt, the fund has invested close to 12 per cent of its assets in non-convertible debentures, with the rest in shorter-term debt.

Tata Balanced

Astute and agile stock picking and exposure to the right sectors at the right time makes Tata Balanced a worthwhile inclusion in your portfolio. This year, this outperformer has found itself near the head of the pack. A combination of low exposure to auto stocks, holdings in financial services and its long-term strategy in the basic-engineering, metals and energy space paid off. In the technology space, losses were minimised by astute stock picking and leveraging on smaller companies. By and large, the fund plays it safe and does not make any adventurous moves. This was not the case earlier though. Last year, when the market corrected, it got badly hit and lost 25 per cent in a single month (May 12-June 13, 2006). The outcome was a swift move to large caps from a dominant mid-cap portfolio. This was a well timed lesson because large caps began to rally soon after. Over the past one year, it has been doing well and frequently outperforms the average.

Sundaram Balanced

Resolutely shunning all adventurism, Sundaram Balanced is well-disciplined and has stuck to the basic formula for a well-run balanced fund - consistent asset allocation; a well-diversified equity portfolio where stocks stay for the long haul; and in debt, the risk of high-yield bonds tempered by a low exposure to gilts. While the fund does fine-tune its portfolio to be a part of various sector-led rallies from time to time, its aversion to being overweight on any particular sector means that its gains-and risk-from such moves will be considerably less than its more aggressive peers. The debt portfolio has seen a shift towards quality, as the allocation to high yielding but below AAA rated bonds has come down. The fund seems to know its priorities well and is well poised to be a core holding for investors seeking protection from bear markets.

FUND FLAVOUR Balanced Funds

FUND FLAVOUR

Balanced Funds

Balanced Bet!

Does the fear of losing your money stop you from investing in the stock market? Then a mutual fund is a better bet. But by investing in both shares and fixed-return investments, balanced funds that seek the best of both worlds, is the best bet. They include the power of equities (shares) and the stability of debt market instruments (fixed return investments like bonds) and are most likely to take you to your goal safely. What makes balanced funds such a powerful investment tool is their inherent design, which allows them to maintain an effective balance between debt and equity.

Heroic Hybrids!

As the name suggests, hybrid funds are those funds whose portfolio includes a blend of equities, debts and money market securities. Balanced Funds, Growth-and-Income Funds and Asset Allocation Funds are the many flavours of hybrid funds. But balanced funds provide the most straightforward combination of exposure to both stocks and bonds. The balanced fund’s mandate is to generate conservative returns. These funds achieve this by parking 65 per cent (to enjoy the tax benefits of being an equity-oriented fund) to 80 per cent in equities (a slight deviation to take the maximum advantage of the performing asset class). Balanced funds are generally meant for a class of investors who are risk averse - returns from equities are veiled under the safety net provided by debt. This category of funds uses a balance of equity and debt investments to act as a hedge in the event of a downturn in either of the markets. They seldom fall at the battlefield!

The royal rebalancing act…

A rational investor needs to periodically review the performance of his portfolio and rebalance it as and when required and book profits, in tune with his risk appetite. Such an act of rebalancing may be required even if the original investment was made in accordance with a well-conceived plan and he does not deliberately increase his exposure to equities (equity investments appreciate over time). Tough as it might be (to redeem in a rising market), rebalancing imposes discipline and ensures that the portfolio remains diversified. Selling and buying equity funds at appropriate intervals attract transaction costs (STT and loads) and taxes reducing the returns. The crucial role of Balanced funds come into play - they continuously, cost-effectively, effortlessly (on your part!) and diligently (uncanny ability of the fund manager) rebalance the portfolio to ensure that the broad asset allocation is not disturbed. The balanced funds have 65% of their assets allocated to equity and so there is no tax on long-term capital gain as equity schemes are exempt from long-term capital gains tax and are subject to only 10% tax on short-term capital gains. You may rest assured that the profits earned from the stock markets are being encashed and invested in low risk instruments. Rebalancing is an effective way to increase the potential long-term return of a portfolio, while minimizing risk.

Retrogressing at times….

The following scenario is not atypical: A novice in the investment jungle with Rs. 5,000 to spend wants a stand-alone investment that spreads risk, protects capital and provides growth opportunities. Balanced funds score high on all counts, but are they as good in action as they are on paper?

• 
  Balanced funds tend to lag equity funds during a bull market.
• 
  While bonds give balanced funds more stability, they have their own risks. In general, the longer the bonds' maturities, the higher the interest-rate risk. Long-term bonds usually pay higher interest rates than short-term bonds, but if rates rise, a fund dominated by long-term bonds is locked in at a lower rate of return.
• 
  While balanced funds as a group are known for their stability, certain funds change the weightings in their portfolios radically and quickly. They indulge in over-exposure to equities with a view to earning superlative returns.

…but revered to this day

Balanced funds invest across equity and debt markets which leaves them well placed to serve three objectives:

• Shift across asset classes based on the best available investment
  opportunities.
• 
  Use the debt component intelligently to de-risk the equity portfolio during volatility in equity markets and salvage returns when the equities head south.
• 
  Book profits in equities regularly which again de-risks the equity portfolio by capping the level.

Balanced funds have proved their worth time and again and rewarded investors with reasonable returns and stability. The returns may not be as flashy as diversified equity funds, but balanced funds are the ultimate vehicle for long-term growth for the moderate risk taker. They will save you from bumpy rides and ensure a soft landing. In a falling market, when being fully invested in equities can prove perilous, a balanced fund with a 35% debt component might just be what the doctor ordered. Think of them as a good hedge against an overheated stock market or a global recession. They unrelentingly maintain composure of the riskiest asset class. History is on our side. Good old balanced funds!