Fund Fulcrum
(April 2008)

Indian mutual fund industry's average assets under management declined by 6.6% to Rs 5.31 trillion in March 2008 (the lowest in the past three months), from Rs 5.69 trillion recorded in February 2008. Falling equity markets, corporate advance tax outflows, and redemption from short term debt plans by institutional investors ahead of the financial year end on March 31, took a toll on mutual funds' assets in the month. To some extent, this was cushioned by inflows through fixed maturity plans offering double indexation benefits. But if past trends are any indication, much of that money should flow back in April. Barring Birla Mutual Fund (average AUM up Rs 12 billion), all fund houses registered a dip in their AUM in March. Reliance Mutual retained its top position in the asset tally, with average assets of Rs 909 billion. It’s AUM dropped by Rs 25.93 billion from Rs 935.32 billion in February. ICICI Prudential saw its assets shrink by almost Rs 50 billion and its assets under management stood at Rs 543.22 billion at the end of March. State-run fund UTI Mutual Fund witnessed a fall of Rs 34.81 billion in its AUM of Rs 489.82 billion at the end of March as compared to Rs 524.65 billion in the previous month. As the market continues to yo-yo, fund managers have decided to play it safe. Mutual Funds are sitting on Rs 23,545 crore of cash, which is waiting to be deployed in the market. Of this, Rs 19,214 crore lies with existing Mutual Funds, while the remaining Rs 4,331 crore has been mobilised through new fund offers.

Piquant Parade

Nearly half a dozen brokerages are awaiting regulatory approval to break into the 33-member Indian funds industry. Edelweiss, ASK Group and Bajaj Financial Services are planning to join the 33-member asset management business, while Bharti AXA gets SEBI nod for Mutual Fund foray.

Tata Mutual Fund ties up with UK’s New Star to advise on India dedicated equity fund to be launched in the second quarter of 2008. New Star, which is a retail fund management company, will garner funds from retail investors in UK and invest in India through the FII route. However, the India-dedicated fund will be managed based upon non-binding discretionary investment advisory inputs provided by Tata Asset Management.

The asset management arm of global banking major Deutsche Bank and iFast Corporation Singapore have entered into an agreement to set up an independent mutual fund distribution platform in India. The distribution platform will be for retail investors and Independent Financial Advisors. The venture's first offering will be the online mutual fund distribution portal Fundsupermart.com, which will allow retail investors to invest in mutual fund products of various asset management companies in India. The portal will offer tools to users to compare mutual fund products, check the value of their holdings and perform calculations.

UTI Mutual Fund opened a new UTI Financial Centre at Patiala. The fund reaches clients through a number of distribution channels, including retail distribution consisting of regional offices, UTI Financial Centres, satellite offices, district representatives and collection centres and independent financial advisors.

Principal PNB AMC strikes alliance with Cosmos Bank and South Indian Bank, Sundaram BNP Paribas Mutual Fund inks pact with Central Bank, ICICI Prudential ties up with dist co-op bank, where the entire bouquet of the AMCs’ products will be offered across the network of branches of the respective banks.

Regulatory Rigmarole

SEBI, vide Notification dated April 16, 2008 has amended SEBI (Mutual Funds) Regulations, 1996 to permit mutual funds to launch REMFs. Existing Mutual Funds are eligible to launch real estate mutual funds if they have adequate number of experienced key personnel / directors. Sponsors seeking to set up new Mutual Funds, for launching only real estate mutual fund schemes, shall be carrying on business in real estate for a period not less than five years. They shall also fulfill all other eligibility criteria applicable for sponsoring a Mutual fund. Every real estate mutual fund scheme shall be close-ended and its units shall be listed on a recognized stock exchange. Net asset value (NAV) of the scheme shall be declared daily. At least 35% of the net assets of the scheme shall be invested directly in real estate assets. Balance may be invested in mortgage backed securities, securities of companies engaged in dealing in real estate assets or in undertaking real estate development projects and other securities. Taken together, investments in real estate assets, real estate related securities (including mortgage backed securities) shall not be less than 75% of the net assets of the scheme. Each asset shall be valued by two valuers, who are accredited by a credit rating agency, every 90 days from date of purchase. Lower of the two values shall be taken for the computation of NAV. Caps will be imposed on investments in a single city, single project, securities issued by sponsor/associate companies etc. No mutual fund shall transfer real estate assets amongst its schemes. No mutual fund shall invest in any real estate asset which was owned by the sponsor or the asset management company or any of its associates during the period of last five years or in which the sponsor or the asset management company or any of its associates hold tenancy or lease rights. A real estate mutual fund scheme shall not undertake lending or housing finance activities.

RBI allows mutual funds to invest USD 7 bn abroad which will enable Mutual Funds to have greater opportunities for investment overseas.

SEBI allows institutional clients to have direct market access (DMA) without brokers’ manual intervention if suitable infrastructure is created by brokers, according to a SEBI circular addressed to the BSE and the NSE. DMA offered clients direct control over orders, faster execution, reduced risk of errors associated with manual orders and better audit trails. Institutional investors (such as FIIs, mutual funds, insurance companies, banks and hedge funds) too, could have a trading terminal similar to that of sub-brokers, in their offices. The move will reduce the cost of transaction besides improving confidentiality of trade. It would lead to further consolidation in the institutional segment of broking business.

SEBI allows Mutual Funds to sell G-Secs without taking delivery, in accordance with the guidelines issued by the RBI. This is subject to the transaction being guaranteed by an approved central counterparty, namely Clearing Corporation of India Ltd. This decision by the SEBI board will put mutual funds on an equal footing with other market participants such as banks, primary dealers and insurance companies as they can now go in for net settlement of government securities transactions. Moreover, it is likely to improve liquidity in the government securities market and reduce the price risk on the part of market participants.

Navratna and miniratna central public sector enterprises (CPSEs) will have the autonomy to invest their surplus funds in mutual funds of their choice. The government has allowed CPSEs to park 30% of their cash surplus either in equity or debt instruments or money market mutual funds.

SEBI has handed out a note of caution to various Art Funds saying that the launching or floating of art funds or schemes without obtaining registration from SEBI would amount to violation of SEBI Act and Regulations.

Take heart if you are losing money in the markets. If you stay invested for a five-year term, it may just pay off. There are reports that 87% of India's oldest mutual funds have outperformed their benchmark indices over a 5-year period. The deluge of funds making a foray into the Indian mutual fund market, regulations rife with life speak volumes of the bright path ahead!

NFO Nest - April 2008

NFO Nest

The resurrection of the NFO market is definitely on the cards, hand in hand with the bounce back in the stock market (so it seems!).

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

ICICI Prudential Focused Equity Fund Opens: 8 April, 2008 Closes: 7 May, 2008

ICICI Prudential Focused Equity Fund is an open-ended fund that aims to maximise long-term capital appreciation by investing in equity and equity-related securities of about 20 companies. The fund’s stock picking universe comprises top 200 companies in terms of market capitalisation, without any sector bias, from the companies listed on the National Stock Exchange. The fund may also invest in depository receipts including American Depository Receipts (ADRs) and Global Depository Receipts (GDRs), debt securities convertible into common shares, preference shares and warrants.The fund will focus on the potential to generate alpha from being over weight on large cap, high conviction picks after through groundwork.

AIG World Gold Fund Opens: 15 April, 2008 Closes: 14 May, 2008

AIG World Gold Fund is an open-ended fund of funds scheme, that will invest in companies engaged in extracting, processing and marketing gold, through an international fund. The primary investment objective of the scheme is to provide long-term capital appreciation by a minimum investment of 80 per cent in units of AIG PB Equity Fund Gold based in Zurich.The maximum exposure in this fund or other similar overseas fund can be up to 100 per cent.The scheme may also invest 0-20 per cent of its corpus in debt and money market securities or units of debt/liquid schemes of domestic mutual funds. When gold prices rise, the profitability of gold companies tend to increase more than proportionately, thereby, providing long-term capital appreciation as stocks of gold companies have the potential to outperform gold prices by a significant margin over the long run. For the Indian investors, in addition to benefiting from the ongoing gold run, investing in an international fund will also help them fetch the benefits of diversification. Financial Times Gold Mines Total- Price Index, in USD is the benchmark of AIG PB Equity Fund Gold. The above translated to INR using the RBI Reference Rate will be the benchmark of AIG World Gold Fund.

Sundaram BNP Paribas Financial Services Opportunities Fund
Opens:17 April, 2008 Closes:14 May, 2008

Sundaram BNP Paribas Financial Services Opportunities Fund is a thematic fund which will invest substantially in the BFSI sector. Around 65-100 per cent of the assets will be invested in equity instruments relevant to the theme (PSU banks, private sector banks and other verticals of business like financial services companies) (upto 35% could be in global companies in similar sector), and 0-35 per cent of the corpus will be invested outside the theme. Due to growing aspiration levels among young Indians who constitute 70 per cent of the population and are multiplying their earnings level, BFSI sector is anticipated to grow. There is huge potential in this sector in India as it has a long way to go in comparison to other economies like US, UK. The fund is benchmarked to CNX Bank Index.

Sundaram BNP Paribas Entertainment Opportunities Fund
Opens:24 April, 2008 Closes:20 May, 2008

Sundaram BNP Paribas Entertainment Opportunities Fund will initially invest in some niche media companies. It will invest in stocks of media houses, broadcasters, multiplexes, content providers, mobile & web-based services, convergence players, leisure and emerging entertainment business. The asset allocation pattern will be similar to its financial services counterpart.The scheme will be benchmarked to S&P CNX Media and Entertainment Index.

Standard Chartered Premier Equity Fund (open for subscription from Apr. 15, 2008)

Standard Chartered Mutual Fund announced that Standard Chartered Premier Equity Fund shall be available for subscription at the applicable NAV. The subscription opening is in line with the scheme offer document feature stating that the scheme would be open for subscription during periods when the fund manger feels that the stocks are reasonably valued. The fund will close subscription, once it collects the predetermined manageable corpus.

Tata Natural Resources Fund, JP Morgan India Active Bond Fund, HSBC Equity Linked Fund, ABN AMRO Infrastructure Fund, UTI-Global Emerging Market Fund, ING Latin America Equity Fund, Bharti AXA Equity Fund, Bharti AXA Treasury Plus, Birla Sun Life Enhanced Arbitrage Fund, Birla Sun Life 130-30 Fund and Mirae Asset Interval Fund are expected to be launched in the coming months.

GEM GAZE - GLOBAL FUNDS

Gem Gaze

Picking the pearls...

The world is our oyster - our investment universe! That is the message Indian mutual funds are trying to convey through the spate of “global” or “international” fund offers that hit the market following the new-found freedom since Budget 2007.

Principal Global Opportunities Fund

Principal Global Opportunities Fund, launched in March 2004, is the first fund in the industry that invests exclusively in overseas equities. Rather than investing directly in stocks, it has become a feeder fund whereby it invests all its assets in PGIF Emerging Markets Equity Fund, one of Principal's global offerings. PGIF Emerging Markets Equity was launched in February 1998 and has assets worth US $50 million. The fund invests across geographies - Latin America, Asia, Eastern Europe, the Middle East and Africa with exposure to 22 countries (including South Korea, Brazil, Russia, China and Taiwan) besides 5.1 percent allocation to India.

Templeton India Equity Income Fund

Launched in May 2006, Templeton Equity Income follows a value investing philosophy, focussing on stocks with a high dividend yield across Indian and overseas markets. The portfolio includes stocks from such countries as Korea and Taiwan to Turkey and Brazil. In India, focus on dividend yield invariably leads to a bias towards sectors such as oil or banking. However, its portfolio encompasses a wide range of sectors such as electronics (United Microelectronics Corporation, Taiwan), retailing (Edgars Consolidated Stores, South Africa) and construction.The fund has fared particularly well during the recent choppy phase in the market, gaining more than the index during the rallies and losing less than it, during the corrective phases.

Fidelity International Opportunities Fund

Launched in May 2007, Fidelity International Opportunities Fund, invests up to 35% of its corpus in foreign securities, with the balance in the Indian market. The Fund has a “go-anywhere” mandate, but focuses on the Asia Pacific region excluding Japan. Its performance is benchmarked against a special benchmark, created using the BSE 200 (for 65 per cent of the portfolio) and MSCI Asia Pacific ex-Japan (for the rest 35 per cent).

DWS Global Thematic Offshore Fund

DWS Global Thematic Offshore Fund, launched in July 2007, predominantly invests in the DWS Strategic Global Themes Fund domiciled in Singapore.The scheme identifies themes that are driven by long-term secular change - global agribusiness and the importance of talent and ingenuity being the current themes. Over the past three years, DWS Global Thematic returned 22% annualized, an average of eight percentage points per year better than the average global stock fund and good enough to rank in the top 10% of its category.

Sundaram BNP Paribas Global Advantage Fund

Launched in July 2007, this fund of fund spreads its investment universe to include emerging markets across Asia, Eastern Europe and Latin America. The fund invests 85 to 100% of its assets in mutual fund and exchange-traded funds listed on overseas stock exchange and up to 0 to 15% in domestic money market instruments. FundQuest, a specialist in multi-manager and multi-asset class products, takes views on asset classes, geographies and funds and chooses suitable best-in-class options for deploying the assets of Sundaram BNP Paribas Global Advantage. The fund has a tailor-made benchmark: 40% MSCI EM Asia + 15% MSCI EM Latin America + 15% MSCI EM Emerging Europe + 15% FTSE EPRA/NAREIT Global Property + 15% Goldman Sachs Commodity Index.

ICICI Prudential Indo Asia Equity Fund

Launched in August 2007, the Fund is a diversified equity scheme that invests 65 per cent or more directly into Indian equities, and 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. Presently the Asian equity fund is invested 22.6 per cent in Korea, 21.2 per cent in Hong Kong, 19.9 per cent in Taiwan, 8.1 per cent in China, 5.9 per cent in Singapore, 5.7 per cent in Australia, 4.8 per cent in Thailand, 4.1 per cent in India and the rest in other Asian countries. The Asian equity fund has returned 41.13 per cent in last one year and 31.18 per cent annualised over the last three years. The fund offers an opportunity to buy into industries not otherwise available and to own global leaders like Samsung Electronics, one of the largest consumer electronics company in the world, Taiwan Semiconductor, largest semiconductor manufacturing company in the world and Industrial and Commercial Bank of China, the largest bank in the world. The benchmark for the scheme will be 65% S&P CNX Nifty and 35% MSCI AC Far East Free ex - Japan Index.

Kotak Global Emerging Market Fund

Funds focussed on Asia allow the advantage of complementing one’s portfolio with stocks of hardware exporters, consumer electronics makers, travel companies or online portals and other consumption plays, for which there are few listed options in India. Similarly, emerging market funds that invest in countries such as Brazil and Russia offer exposures to mining, precious metals, oil, natural resources and other commodity stocks that are not so plentiful in India. Launched in September 2007, the three-year close-ended Kotak Global Emerging Market that widens its investment universe to include emerging markets across Asia, Eastern Europe and Latin America has the best of both worlds. Luxembourg domiciled T.Rowe price SICAV- Global Emerging Markets Equity fund, in which the money is invested has consistent performance track record. The Fund is benchmarked against MSCI Emerging Market Index.

ABN AMRO China India Fund

Launched in October 2007, this open-ended scheme invests 65 to 75 per cent of its assets in Indian equities and 25 to 35 per cent of it assets in Chinese equities. China and India have different strengths. China's strength, for example, lies in low cost manufacturing and the domestic infrastructure needed to meet the demands of its huge population. India's strength, in contrast, lies in areas like pharmaceuticals and IT. This provides greater diversification within an investment portfolio. The benchmark constitutes 65 per cent of BSE 200 and 35 per cent of FTSE China index.

Franklin Templeton Investment Opportunities Fund

Franklin Templeton Investment Opportunities Fund, launched in December 2007, invests in Asia ex-Japan equities. An Asia ex-Japan fund, it naturally includes an exposure to Indian stocks - 10-15% of the portfolio, with the ability to go to 20% in “extreme” situations. It can invest fully in overseas equities and equity-linked instruments or upto 30% in domestic bonds and cash instruments. Franklin Templeton invests directly and not through a feeder-fund structure. Sukumar Rajah, the firm’s Mumbai-based CIO, is the principal portfolio manager and his team handles Southeast Asian stock selection and research. Franklin Templeton’s investment teams in Seoul and Shanghai are responsible for North Asian stocks.

Many (money) flavoured menu !

Unlike earlier themes, such as infrastructure or multi-cap or small-cap funds, that have tended to spur a host of “me-too” fund launches, offerings within the “international investing” theme are now quite differentiated. Good news for investors, who can be selective in choosing funds that suit their diversification needs and risk profile. With most of the funds having been launched in the last few months, it is premature to judge them at this juncture. Moreover, as each fund has a different proposition, it is best to compare each fund to its benchmark rather than with the category average.

FUND FLAVOUR - GLOBAL FUNDS

FUND FLAVOUR

Global/International Funds

Poise with potential !

India's mutual funds, which have given heady returns over the span of a four-year bull run at home, are now making a tactical sojourn to markets abroad chasing new themes, diversification and cushion against volatility. More liberal investment norms from the government and the growing appetite of Indian investors for money-making opportunities abroad are fuelling the funds' future strategy. They are an excellent hedging tool today when Indian markets are viciously volatile.

There are opportunities to be found on the global platform, ones that may not be located at home. India, it is argued, has a "positive, yet low correlation with most developed markets - lower than what those markets have with each other - and a low correlation with many emerging markets as well". This, in plain English, implies that we will probably move along the same track as another nation, but probably not in the same manner. Summing it all up is this sure fire logic – the Indian stock market is just about half a per cent of the world's market capitalisation. You can chew on that after you have finished reading some trivia, all of which are eminently relevant.

• 
  No single country accounts for over 5 per cent of the global stock market. The exceptions are the US, the UK and Japan. The US makes up well over 40 per cent; the other two are heavyweights too, though their contributions are smaller.
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  Lots of tiny countries - compared to India, they are clearly midgets in terms of size and population - like Sweden, Korea and Spain are way ahead in this respect.
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  It is not that India has been a top performer every year (even during our most memorable bull run). There are markets that have given positive returns when we have faltered. But, like history, performance repeats.

Nascent Niche

Global funds are mutual funds that invest predominantly in foreign stocks or foreign mutual funds that invest in foreign stocks. Investing in these funds allows Indian investors to access foreign markets without having to face the hassles of remitting foreign exchange. There are basically two types of global mutual funds (GMFs) - those which invest only up to 35 per cent in overseas securities, and those which invest more than 35 per cent in overseas securities, going up to 100 per cent. For convenience let us call them GMF35 and GMF100 respectively.There are three differences between the two - One, GMF35 give you a relatively less exposure to overseas markets as compared GMF100. So, the opportunity for diversification is much more in GMF100. Two, GMF35 enjoy all the tax benefits enjoyed by domestic ‘equity oriented funds,’ that is tax-free dividends and tax-free long-term capital gains. GMF100 do not. So GMF35 are more tax efficient. Three, while GMF35 can invest directly in shares of foreign companies, GMF100 cannot; these have to necessarily invest in units of foreign mutual funds. This means, other things remaining the same, the risk is lower. But given their higher percentage of investment in overseas markets, they carry higher country and currency risks. GMF100 can be further divided into two sub-types -- one, those which invest in a particular fund abroad (an Indian GMF invests in only the units of one predetermined mutual fund abroad) and two, those which invest in units of many mutual funds abroad, changing the selection from time to time. The former are often called ‘feeder funds’.That should place the different types of GMFs in proper perspective. There is nothing good or bad about them per se. They serve different needs of different investors.

The dramatis personae boasts of Principal Global Opportunities Fund, the pioneer that made its appearance in 2004, Franklin Templeton India Equity Income Fund, Fidelity International Opportunities Fund, to name a few . Nearly a dozen funds have followed suit catering to the assorted needs of the investing public evincing interest in this nacent industry…

The Legal viewpoint

The stringent restrictions that narrowed down the universe of stocks in which mutual funds could invest to just 40 has now broadened with the relaxation of norms. Mutual funds can make investments in ADRs/GDRs issued by Indian companies; equity of overseas companies listed on recognised stock exchanges overseas, foreign debt securities in the countries with fully convertible currencies, short-term and long-term instruments with highest rating. Investment will also be allowed in government securities of countries rated AAA and in units/securities issued by overseas Mutual Funds or unit trusts, which invest in the aforesaid securities or are rated and registered with overseas regulators. The Government had allowed investment of $7 billion by Indian mutual funds in various instruments overseas. Only Indian mutual funds, which are in existence for a minimum period of 10 years, would be eligible for investing in Exchange Traded Funds (ETFs) abroad. They should also follow a sub-ceiling for investing in ETFs, which prohibits them from investing more than 10 per cent of the net assets managed by them as on March 31 of each relevant year, subject to a maximum of $200 million per mutual fund.

Glorious Gamble?

Once you drill down from the top level of the economy into each country, you will find lots of wonderful businesses with strong stock performances.

Since each country offers distinct inherent strengths and each has differing growth characteristics, international investing offers diversification to investors by way of a single investment.

The yields of overseas securities are lower than that of India. Consider this. A top-rated 10-year corporate bond in the US may provide a yield of 7.5 per cent. A comparable bond in India may fetch a yield of, say, 10 per cent. Despite lower yields on bonds, investing abroad may generate higher returns, as the fund can hope to make money in the foreign exchange market and the sensitivity of the portfolio to interest rate risk can be reduced.

By and large, investors have not quite taken to global funds for a variety of reasons – Diluted diversification as a result of higher allocation to Indian equities and higher allocation to Asia/emerging markets and lack of transparency and mounting costs due to layered fund management.

Investment Nuggets …

If you are interested in investing abroad, do not just leap in the dark. International investing can be trickier than domestic investing. Most nations do not have corporate financial reporting requirements as stringent as ours and are not as stable as we are. Still, great money is being made out there. Global equity and bond markets are extremely volatile and, therefore, they signify a very high degree of risk for the uninitiated. The best option is to find top-notch Indian mutual funds focused on international investments and to invest not more than 10% of your portfolio in it.

Before investing in a global fund, you should focus on the following areas:

Expenses: The investors in these global funds have to pay higher expenses, as the global fund as well as underlying foreign fund charge a fee, that gets added up. But, an FoF reduces the transaction costs involved in shifting investments from one fund to another.
Currency risk: The rate of exchange when you buy global fund units may not be the same as the rate when you redeem the units. If the rate of exchange at the time of redemption is less than that at the time of purchase, you would incur a loss.
Country/market risk: The overall performance of a global fund can suffer if the particular country/market does not perform well.
Track record of underlying investments: It is important to check out the track record of the underlying mutual fund in which the global fund invests.
Taxation: Unlike mutual funds investing in Indian equities, global funds, which have less than 65% allocation in the Indian equity market, do not qualify for tax exemption. They attract 10% (with indexation) or 20% (without indexation) long term capital gains tax, and short term capital gains tax as steep as 30% if you are in the highest tax bracket.
Ensure that you have an adequate investment time frame of at least 3-5 years in equities and related assets.
Ideally, the Indian investor wants to diversify by investing in other markets (like developed markets for instance) that behave differently vis-à-vis emerging markets. So, go for global funds that invest across market segments.
Don’t rush into investing in global funds for whatever reasons (media hype, distributor’s persuasion). Evaluate a global fund across parameters (the investment proposition it offers, the fund’s investment processes, long-term track record across market phases, especially the downturns) by comparing it with other global funds of a similar nature.