FUND FULCRUM
(December 2009)

The mutual fund industry hits another milestone, crossing Rs 8 lakh crore in asset under management in the month of November 2009. The average asset under management currently stands at Rs 8.07 lakh crore which is about 6% jump from October 2009 and 100% jump over the AUM in November 2008. 2009 has been a great year for the industry – the AUM rose from Rs 6 lakh crore in May to Rs 7 lakh crore in August and now 8 lakh crore in November.

According to the latest statistics from AMFI, the AUM of top fund houses has increased by two to 10 per cent. HDFC Mutual Fund has emerged as the fastest growing fund house in November among the top players, registering a growth of 9.73 per cent. With its AUM crossing Rs 1 lakh crore, HDFC has joined Reliance Mutual Fund in managing an AUM of over this landmark level. The AUM of Reliance Mutual Fund for November stood at Rs 122,252.42 crore, up 4.7 per cent against the previous month’s AUM of Rs 116,781.9 crore. The AUM of Birla Sunlife Mutual Fund grew 7.04 per cent to Rs 69,631.9 crore, whereas the assets of UTI Mutual Fund in November jumped by four per cent to Rs 76,847.3 crore. ICICI Prudential Mutual Fund was the slowest in adding assets in November among its peers. Its AUM rose only two per cent to Rs 82,138 crore. Some other fund houses which saw an increase in their average AUM in November include Benchmark Mutual Fund, Shinsei Mutual Fund, Tata Mutual Fund, Kotak Mahindra Mutual Fund, and Deutsche Mutual Fund. Fidelity Mutual Fund, Religare Mutual Fund, and LIC Mutual Fund which recorded fall in their average assets in October 2009, have witnessed a rise in AAUM for November 2009. AAUM of Baroda Pioneer Mutual Fund, ING Mutual Fund and JP Morgan Mutual Fund declined, 11.38%, 8.83%, and 8.37% respectively in the month of November.

Mutual Fund assets grew primarily on account of continuous inflows into Ultra short term debt funds. Mark to market gains in equity funds also contributed to asset gains to some extent. Banks were among the key investors and held a fifth of the industry AUM. However, equity funds continued to bear the brunt of outflows for the fourth month in a row. These outflows were on three counts - profit booking, lower sales as a result of lower distributor interest in selling equity funds following the SEBI ban on entry loads post August 1, 2009, and lack of new fund offers. Equity scheme purchases have dropped by over 50 per cent from Rs 9,000 crore levels in July to about Rs 4,500 crore in November inspite of the scintillating performance by the equity markets.

Piquant Parade

Of the 39 existing players in the mutual fund space, the top 10 account for 82 per cent of the total assets under management as of November 30, 2009, according to data by the Association of Mutual Funds of India. The five largest fund houses — Reliance Mutual Fund, HDFC Mutual Fund, ICICI Prudential, UTI Mutual Fund and Birla Sun Life — manage 57 per cent of the industry’s total AUM. The mutual fund industry in India, with 39 AMCs at present, is set to grow bigger.


The 53-year-old Peerless General Finance & Investment Company (PGFI) has received the green signal from SEBI to launch its own AMC. It will become the first east India-based AMC. The company is in a reasonable state of launch preparedness. PGFI already distributes products of AMCs such as ICICI Prudential AMC, Tata Asset Management, SBI Funds Management, Reliance Capital Asset Management, and Sundaram BNP Paribas AMC, apart from servicing various insurers.

Axis Bank was the newest entrant to the industry, to be followed by PGFI, and there are nine others waiting in the wings, in different stages of getting into the AMC space or have announced intentions of initiating an AMC. Those wanting to enter the AMC space are Bank of India, IDBI Bank, Mahindra & Mahindra Financial Services, SREI Infrastructure Finance, Bajaj Allianz, Indiabulls Financial Services, L&T Finance and Motilal Oswal, while India Infoline and Union Bank of India have announced their plans of initiating an AMC. Since mutual funds have reached a good level of penetration in the urban market, the only way to go is semi-urban and rural. There is good opportunity there since a bulk of bank deposits come from rural India. Entering a crowded space where big players account for a disproportionately large chunk of the market, new mutual funds are setting their sights on the hitherto ignored semi-urban and rural markets.

Quantum Mutual Fund, India's first direct to investor mutual fund, has increased its reach to 212 Karvy centres across the country. As a result of this initiative, investors located across the country will be able to avail of information regarding Quantum Mutual Fund’s products and submit their applications at these 212 service centres. These centres cover all major cities and Tier II towns.

Dena Bank and Shinsei Asset Management have announced a distribution tie-up. The extensive network of nearly 1,100 Dena Bank branches across India would allow Shinsei an opportunity to reach out to a wider base of investors, besides increasing business opportunities for Dena Bank.

Shinsei AMC that had launched its funds in July 2009 may see one of its stake holders exiting. Shinsei Bank, which holds 70% of the AMC business in India, is looking to move out and is in talks with Daiwa, another financial services player. The other stake holders in Shinsei AMC are Rakesh Jhunjhunwala who owns about 15%, and Sanjay Sachdev who holds about 10%. Right now they are in talks with Daiwa Securities which is a Japanese financial firm.

The two premier stock exchanges have launched the mutual fund buying and selling platform - NSE Mutual Fund Service System (MFSS) and BSE Star Mutual Fund platform. The NSE has started with UTI Mutual Fund and has been joined by four other funds. The NSE depends on NEAT technology to power its MFSS. The BSE Star Mutual Fund is a web-based access programme, which can be accessed by brokers outside the reach of the BSE network. Both the platforms will facilitate purchase and redemption of mutual fund units by investors through any NSE or BSE brokers and sub-brokers across its network. Though stock exchanges provide an easy route for mutual fund investors to buy and sell schemes, it will be an expensive proposition for investors who do not have demat accounts and those who frequently churn their portfolios.

Managing mutual funds is all set to be a simpler task with top AMCs deciding to go mobile with their offerings. A host of fund houses are in the process of setting up ‘mobile digital platforms’ which will allow investors to purchase, redeem, or switch their portfolios using a simple Java-enabled cell-phone. The setting up of mobile digital platforms is seen as a method to bring investors closer to asset management companies by eliminating the extra layer of local distributors and stock brokers. HDFC Mutual Fund has already set up a cell phone platform for its investors, and top fund houses like Reliance Mutual Fund, Bharti Axa Investment Managers, UTI Mutual and ICICI Prudential Mutual are at various stages of structuring the mobile platform. Broad requirements for using a ‘mobile digital platform’ includes a java-enabled cell phone (priced above Rs 3,000 in India), an existing folio with the fund house (which negates the need for KYC while buying funds through cell phones), a net-banking option, a fund house-allotted PIN, a link-up with a mobile payment vendor like Ngpay, Obopay or Meramobi and permanent account number (PAN).

CAMS & KARVY, the two largest Registrar and Transfer Agents of the mutual fund industry, have joined hands to launch ‘FINNET’, “an all in one engine’ product which facilitates transacting (order placement), execution and customer service on a single platform. The product, designed for mutual fund distributors, will enhance the services to stakeholders in increasing geographical footprints, improving operational efficiencies, and most importantly reducing cost significantly.

The BSE has introduced AMFI-Mutual Fund (Advisors) Certification module through the BSE Training Institute, to enable members and sub-brokers to build a cadre of mutual fund advisors and disseminate knowledge about working of mutual funds to investors. The module was introduced with effect from December 21, 2009 through the BSE Training Institute and will be available through BSE Certification on Financial Markets (BCFM).

Regulatory Rigmarole

SEBI has made it possible for investors to shift from one distributor to another without hindrance. Earlier, even if an investor was not satisfied with the services of a distributor he/she could not leave as rules required that they first get a no objection certificate (NOC) from their current distributor. Understandably, almost all distributors would be reluctant to do so and that meant, investors' fortunes were tied to their distributor. The only approach open to them was to exit the market entirely. SEBI has now issued a circular to all AMCs that they should not compel investors to obtain NOCs from their existing distributors. In fact, AMFI had asked AMCs in 2007 to go by what the investors wanted, if they sought to leave their distributor, but this was not being followed, forcing SEBI to step in.

In a move to make the mutual fund industry more transparent, SEBI has asked asset management companies to stop paying commissions to intermediaries, including banks and other distributors, who did not keep proper documents of their clients. The documents relate to know-your-client (KYC) and power of attorney (PoA) norms for the industry. All documents related to investors, including KYC, PoA, in respect of transactions or requests made through some mutual fund distributors are not available with AMCs and registrar and transfer agents. The same are to be maintained by the distributors. SEBI further said that AMCs would have to seek documents for all past transactions and ask for confirmation of folios from investors. The regulator has also asked fund houses to set up a separate customer service mechanism for queries and grievances of unit-holders.

SEBI has said that the fund houses will have to launch additional plans as separate schemes for any ongoing open-ended scheme, other than dividend and growth plans, which differ from the main scheme in terms of portfolio or maturity. The new guidelines will be applicable to all the additional plans that have been launched in the past and the plans / schemes to be launched in the future as a part of existing schemes, unless the fund house obtains a confirmation from the regulator that the additional plans do not have substantially different characteristics from the existing schemes.

2009 would certainly be remembered as a year that sparked a major change in the way India’s mutual fund industry functioned. Market regulator SEBI can take credit for this, possibly in the long run, for laying the platform for this change by altering the manner in which fund houses and distributors sold mutual fund schemes. 2010 could turn out to be a ‘year of revolution’ for the industry, with an array of path-breaking reforms having been implemented or underway.

NFO Nest
(December 2009)

From a drizzle to a downpour?

After a prolonged lull, there are quite a few NFOs which have opened up. Investors are not getting as excited about NFOs as they used to be in the latter half of 2007 or early 2008. Moreover, the economics of selling funds has changed with the abolition of entry load. This apart, there has also been a marked change resulting in the disappearance of plain vanilla NFOs (which pretend to be different) by the existing fund houses. Investors get excited only when the markets go up. This time around, the indifference to existing funds sales or NFOs can be attributed to the fact that the market spiked in a rather short period. Most investors are still in the process of making their exit (as confirmed by the AMFI data) because a large number of first time investors entered in 2007 and early 2008 and are now breaking even. Net flows into equity mutual funds have actually been negative for the entire industry but when viewed from a customer perspective, mutual funds are now the cheapest way to grow wealth using markets - both equity and debt. So, interest is coming back, but a tad slowly. A couple of months ago, investors felt that the markets had run-up quite a bit. In the current range bound environment they seem a lot more positive.

It has started raining NFOs …Two out of the three funds that figure in the NFO Nest in December, 2009 are PSU Funds! Fidelity Value Fund and DSP Blackrock World Mining Fund do not figure in the December 2009 NFO Nest since they closed a few days ago.

Sundaram BNP Paribas PSU Opportunities Fund

Opens: November 25, 2009

Closes: December 24, 2009

Stock markets have been upbeat over government disinvestment in public sector companies ever since the UPA government returned to power without the support from the Left parties. As more PSUs head for a listing, there is an expansion of investment opportunities. Since initial public offerings offer a different kind of opportunity, almost the entire investor fraternity is keen to get a piece of this action. Sundaram BNP Paribas mutual fund seeks to offer an entry pass to this PSU party by launching the thematic offering — Sundaram BNP Paribas PSU Opportunities Fund. The fund aims to capture the wealth creation opportunities over the long term presented by public sector undertakings (PSU) that account for almost 30 per cent of the market capitalisation on the National Stock Exchange. The fund has identified wealth creation triggers in the form of disinvestment process, growth, valuation re-rating, and high-dividend payouts. The fund will invest at least 65 per cent of assets in the equity and equity-related securities of companies in the targeted theme. The fund manager can consider investing beyond the theme universe to the extent of 35 per cent of the assets. At any given moment, the overseas investments are capped to the extent of 35 per cent of the assets. Of course, such securities must be a part of the target theme. Funds can seek investments in debt and other fixed income instruments to the extent of 35 per cent of the total assets. CNX PSE Index is the benchmark for the scheme.

PSUs are focused on the high-growth sectors of the economy, have been resilient in tough periods with robust financials, and have demonstrated ability to create shareholder value. The market cap of the PSU universe has risen from about Rs 90,000 crore to Rs 15,10,254 crore in this decade as PSU stocks outpaced the broad markets as well as private sector players. PSUs trade at a discount of about 25 per cent to the broad market, and 40% discount to the private sector. If there is a 50 per cent re-rating of PE multiples, potential increase in value of listed PSUs could increase by about $58 billion. But there is a flip side to investing in public sector companies. They will be affected by the government policies on PSUs. The stable Government at the centre and the imminent third wave of disinvestment augurs well for the fund. As a thematic fund, there will be concentration risk compared to a diversified fund. But the fund will invest in the companies falling under the public sector, which straddle segments as diverse as banking, insurance, oil, power, mining, defense, engineering, and transportation, infrastructure and services. All said and done, it is interesting, differentiated, and there is a quality universe. A fund for the long haul…

Baroda Pioneer PSU Bond Fund

Opens: December 7, 2009

Closes: December 21, 2009

Baroda Pioneer Mutual Fund has launched a new open ended debt scheme named Baroda Pioneer PSU Bond Fund. The portfolio of the fund will predominantly consist of PSU bonds and government securities of varying yields and maturities. The fund will invest upto 65 per cent of the assets in debt or debt related instruments issued by PSUs and public financial institutions. The balance 35 per cent will be invested in treasury bills or government securities. Liquidity will be managed through investments in PSU Bank CDs. The core portfolio will consist of papers having a maturity of two to three years. The fund has been benchmarked against the CRISIL Bond Fund Index.

The scheme has been rated mfAAA by ICRA - the highest-credit quality long-term rating assigned by ICRA to debt funds. The portfolio aims to generate alpha through active duration management. The scheme will look to ride on the yield curve as well as benefit from high accrual income in the event of a change in the interest rate scenario. The fund will look to deliver competitive return on investments by designing a portfolio that will track interest rate movements with low credit risk due to its exposure to PSU bonds. However, a wrong call on the macro picture can jeopardise the returns offered by the fund. PSUs have strong fundamentals and sustainability required to maintain long-term growth. By focusing on high grade debt instruments issued by the government and state-owned companies operating in sectors such as capital goods, oil and gas, power, financial services, etc, the fund intends to bring down the credit risk. This will ensure return of capital in a world that teeters on the threshold of a recovery.


Axis Tax Saver Fund

Opens: December 17, 2009

Closes: December 21, 2009

Axis Mutual Fund has launched a new scheme Axis Tax Saver Fund, an open ended equity linked savings scheme. The scheme will allocate 80% to 100% of assets in equity and equity related instruments with high risk profile. On the other side, it will invest upto 20% of assets in debt and money market instruments with low to medium risk profile. Debts include investment in securitized debt upto 20% of the net assets of the scheme. The scheme will not invest in foreign securitized debt. Benchmark Index for the scheme is BSE 200.

Birla Sunlife Capital Protection-oriented Fund, Principal Precious Metal Fund, Reliance Liquid Exchange Traded Fund, Sundaram BNP Paribas Capital Protection-oriented Fund, Shinsei Government Securities Fund, Tata Gold Fund, Tata Gilt Mid Term Fund, Religare Gold Monthly Income Fund, Optimix Multi Cap Fund, Axis Arbitrage Fund, and Axis Offshore Fund are expected to be launched in the coming months.

Gem Gaze
December 2009

Debt begins its journey on the tight rope…

The debt funds were back in vogue about a couple of years ago after lying on the sidelines for the preceeding three years. The interest rate cycle that peaked out is now headed downwards with the trough not visible in the immediate future. In this environment of hardening yields, gilts and income funds that have put up a decent performance are now walking the tight rope but the situation is still far from bleak.

There has been a sea change in the list of debt funds enjoying the GEM status. Birla Income Fund, UTI Bond Fund, and LIC Bond Fund have failed to live up to our expectations and have been shown the door. They have been replaced by the effervescent Fortis Flexi Debt Fund, Canara Robeco Income Fund, and Birla Sunlife Dynamic Bond Fund. A complete overhaul in the list of debt dynamites…

Kotak Bond Regular Fund Gem
Expensive quality

With an aggressive tilt, this ten-year-old Rs. 229 crore fund has outperformed its category (Debt-medium) every year since its launch. It has consistently bettered its benchmark, the CRISIL Composite Bond Index during the past five years. While investors have been well-recompensed from this aggression, the fund manager seldom compromises on quality. In December 2008, when yields started falling, the fund manager audaciously increased the average maturity of the portfolio to 11.93 years. He moved up the exposure to G-Secs from just 3.66 per cent in September 2008 to 53.42 per cent in December 2008. The result was yet another constructive step as the fund did benefit from this move turning in an astounding 15.49 per cent in December 2008 against the category's 7.59 per cent. But as yields started moving up suddenly from January 2009, the fund experienced a fall of 5.54 per cent against the category's 3.30 per cent in the quarter ending March 2009. The fund has invested a majority of its portfolio in Government securities and debentures while investing small portions in commercial papers intermittently. It has amassed AAA and sovereign instruments which prop up the quality and hence the safety of the portfolio. The fund is a tad high on the expense side (expense ratio of 2%), compared to its category. The fund will reward those investors who hang on for the long run as it has delivered an annualised return of 11.15 per cent against the category's 7.84 per cent over three years. The fund’s performance is truly noteworthy. In a nutshell, Kotak Bond Regular is a reliable fund which delivers high returns, with average volatility. A reduction in expenses will make it a truly quality offering.

ICICI Prudential Gilt Investment Gem
Consistent conservative

This Rs 482 crore decade old fund has turned in a sterling performance. The fund has generated an annualised return of 12.2 per cent since its inception and this period spans varying trends in the interest rate cycle. A conservative investor might find the liquidity of the fund and the sovereign guarantee that backs its securities attractive. The fund has consistently outperformed the benchmark I Sec I-Bex by a comfortable margin over different cycles in interest rates. Even as equity markets were struggling to generate a positive return, ICICI Prudential Gilt has piggybacked on rising gilt prices to generate a return of 25.3 per cent over a one-year period. A major part of this return has been achieved during the past few months, amid the sharp slide in yields. Though returns of this order may not be repeated, returns are likely to remain healthy (in the 10-11 per cent range) over the next one year, given the softening bias to interest rates. Though they are debt oriented funds and are free from credit risk, gilt funds do expose investors to price risk – the risk that yields may spike, hurting NAVs. According to the fund manager, the fund intends to hold 70 per cent of the assets in long term instruments and 25-30 per cent will be churned to generate higher yields. With the interest rate heading south, ICICI Prudential Gilt Investment has a potential to generate better returns.

Fortis Flexi Debt In
True to its name!

One scheme that stands out for sticking to its mandate of creating alpha by constantly changing its duration based on interest rate calls is the five-year-old, Rs. 405crore Fortis Flexi Debt. The fund manager has been able to generate above par performance even in times of rising interest rates by reducing its average maturities and vice versa. The fund manager has taken short trading calls with stop loss triggers in place. He has been nimble footed thanks mainly to his investments in liquid papers like either Government securities, AAA rated corporate papers, or money market instruments which gives him the flexibility to reduce/increase duration by having a very liquid portfolio in his scheme. Fortis Flexi Debt Fund has about half of its money invested in government bonds, while the rest is spread over instruments issued by quasi-government institutions. Nimble footedness of the fund manager can be gauged from the average maturity and Government securities/corporate bonds/money market holdings based on his view of the interest rate scenario. When the view on interest rate is neutral, the fund manager prefers to hold short duration portfolio, as the flexibility to realign is higher. Hence, over various time horizons of both rising or falling interest scenarios, this scheme has outperformed its peers and generated huge positive higher single digit/lower double digit (even when most of its peer schemes were negative) & performed as well as the others when debt markets were on a roll. In addition, it has beaten its bench mark, the CRISIL Composite Bond Fund Index.

Can Robeco Income In
Cash(ing) in on the interest rate cycle

The word 'consistency' seems to sink into oblivion on looking at the annual performance of Canara Robeco Income Fund over the past five years. Its history is interspersed with periods of impressive results in 2004 and 2005, and dismal performances in 2003, 2006 and 2007. But ever since February 2008, the fund has been ahead of its peers. The new fund manager is doing a great job, with smart bets towards the interest rate outlook. Canara Robeco Income Fund, with an AUM of Rs. 234 cr does not take applications above Rs 1 crore so as to ensure that it does not have any volatile inflows or outflows. Having realised quite early into the interest rate cycle in 2008 that rates were headed lower, it loaded on to higher duration papers from August to December-end, 2008. With a strong belief that markets have priced all possible positive news and there is a chance of government overshooting on its borrowing programme, it added a lot of cash to the portfolio. The allocation of 50 per cent in cash/call money had actually helped the fund with handsome monthly returns of 4.44 per cent (category average: 0.76%). Canara Robeco Income Fund invests a major portion of its assets in AAA and sovereign instruments. Nearly 70% of the assets enjoy a maturity profile of 12 months and below, suggesting a relatively lower sensitivity to interest rate fluctuations. The expense ratio is 2.07%.

Birla Sunlife Dynamic Bond Fund In
Dynamism at play…

Birla Sun Life Dynamic Bond Fund, launched in 2004 and sporting a high AUM of Rs. 5493 cr, is amongst the top performing debt funds of Birla Sun Life Mutual Fund and has been well recognized for its performance. It has been awarded seven star rating for its performance by ICRA at the ICRA Mutual Fund Awards 2009. Birla Sun Life Dynamic Bond Fund presents an opportunity that can make flexible asset allocation across various maturity profiles and debt asset classes, thereby, taking investments high up the ladder, ensuring optimum returns. Its expense ratio is only 1.48%. For investors who cannot actively manage their debt portfolios, Birla Sun Life Dynamic Bond Fund is a good option. The fund, positioned neither as a long-term bond fund nor as a short-term one, promises to actively manage the tenure and composition of securities in its portfolio to suit changing debt market conditions. The fund has been deftly managed, delivering a 12.3 per cent return over a year, and figuring within the top quartile of debt funds over three- and five-year time-frames. The fund has comfortably beaten its category average over all these terms. It offers the twin benefits of earning high interest rates payment and then capital appreciation, as interest rates fall. It intends to offer investors a high quality portfolio with predominant investment in government owned PSU bonds & AAA bonds. This offers improved risk protection to the portfolio--a portfolio with higher stability. Thus the fund is less susceptible to adverse interest rate movement and hence less volatile.

Tax efficiency and liquidity are the forte of debt funds. However, debt funds are neither risk-free nor assured-return. If you want to invest in debt funds for the long-term, you can consider investing in income funds, which have the flexibility to switch between corporate bonds and gilts. Because of this, not only do they benefit from falling interest rates but also gain from shrinking spreads between corporate bonds and gilts.

FUND FLAVOUR
(December 2009)

The see sawing penchant for debt funds…

The share of debt funds in the Indian mutual funds universe has risen from 69 per cent in December 2008 to 77 per cent in February 2009 and fallen to 66 per cent in September 2009 indicating a shift in investor preference for and against debt funds due to the change in market dynamics. In the past 6-9 months, stock markets have risen by over 100 per cent. Even interest rates, which were at double digits during October 2008, have slipped considerably. However, with both CPI & WPI indices on the rise, there are indications that interest rates will not fall further. In its credit policy review recently, RBI has given some signals of the possibility of hardening of interest rates due to increased inflation. It has increased SLR & has taken back the facility given to banks for liquidity needs of mutual funds and NBFCs at the height of the global financial crisis.

For investors in debt mutual funds, it is imperative to select that category which suits their risk taking ability and time horizon.

Gilt Funds
Double edged sword!

For most part of 2008, gilts were habitual non-performers, or chalked up nothing spectacular. Not much was expected of them either. This changed only when the Reserve Bank of India (RBI) got into the active mode to combat the liquidity crisis with a series of rapid cuts in the repo rate between October and December 2008. This had a dramatic influence on gilts. With a cut of 2.5 per cent in repo rate and a cut of 3.5 per cent in Cash Reserve Ratio, gilt funds' returns just shot through the roof. This over-performance was mainly due to the 20.69 per cent returns registered during the last quarter of 2008, in particular, the 12.43 per cent gain logged from just the month of December 2008. These fabulous gains got investors excited. Gilts looked the obvious means to recoup losses made in equity. Gilt funds' assets almost doubled from Rs 2500 crore in November 2008 to Rs 4800 crore at the end of February 2009. However, things changed again for gilt funds as falling inflation numbers and increasing uncertainty in the economy forced the RBI to announce a cut in the repo rate by 50 bps in March 2009. But to the dismay of many, the yields refused to budge in response. The gains expected by investors were nowhere to be seen. The reason for this was the on-going borrowing program of the government. 2009 has not been a very exciting year for gilts as the category is down by 7.16 per cent.

Fixed Maturity Plans
Like Phoenix from the ashes…

FMPs witnessed a purple patch in the 2006-07 period when bond yields were on the rise. Fund houses launched a host of FMPs, investment advisors did their bit to promote the cause of FMPs as ‘assured return’ investments and investors gleefully lapped up the FMPs on offer. The fact that FMPs are market-linked investment avenues and are subject to risks like credit risk, the actual yield not matching the indicative yield, among others were all but ignored. However, these risks were brought to the fore by changing market conditions. Factors like a slowdown in the economy and the ensuing liquidity crunch meant that the creditworthiness of some companies whose debt instruments FMPs had invested in came under the scanner. Then there were instances of some fund houses making investments in illiquid instruments in a bid to clock higher growth. In some cases, longer tenured instruments found place in FMPs with a shorter maturity profile. Such investment strategies were tested when liquidity dried up and investors (in a panic mode) rushed to redeem their FMPs, forcing fund houses to make distress sales. This in turn had a telling effect on the performance of FMPs, which further contributed to the panic.

FMPs that controlled more than a fifth (22%) of the Indian mutual fund industry's assets in September 2008 lost out (17% in December 2008 and 13% in February 2009) to a series of regulatory changes that make them a tough sell for fund houses. Ban on pre-maturity withdrawals and mandatory listing raised cost for the low margin FMPs and made them less liquid. The regulator also instructed fund houses to stop declaring indicative yields on such funds, a key factor that lured large corporates to FMPs, removing the predictable nature of returns. But now, fund managers in India are scrambling to launch fixed maturity plans on hopes of the prospect of better returns than liquid funds. Falling short-term rates and regulatory changes have dented returns on liquid funds, which park funds in instruments up to 91 days, helping boost demand for FMPs which invest in medium-term and long-term papers as well. Liquid, liquid plus (fund) returns which were earlier probably in the range of 6-7 percent have now fallen to... 4-5 percent. An analysis of the performance of 100 top FMPs during the past year shows that at least 30 per cent of these funds have given returns in the range of 15-33 per cent. By comparison, banks were giving 10.5 per cent interest for one-year maturity a year ago. Such high returns were possible because several of these FMPs invested in equity-linked debentures issued by foreign banks in September-October 2008.

Income Funds

In the red…

Overall, 2009 has not been the year to remember for this category. It is still languishing in the red with a return of -0.05 per cent. 27 funds out of 56 funds under-performed the category with eight funds falling into red. The longer-term variant of debt funds continued providing positive returns with a return of 0.27 per cent. But compared to October 2009 it was down by 28 basis points in November 2009.

Floating rate funds
Head floating just above water….

From April, 2009 onwards the Long-Term Floating Rate funds are dominating their shorter-term variants. Long-term Floating Rate funds in comparison to their Short-Term counterparts continued to post better returns in November 2009. The latter posted 0.33 per cent returns in comparison to 0.48 per cent posted by Long-Term Floating Rate funds.

Liquid funds

A temporary parking slot….

Unless, you want a temporary parking option for your money, liquid funds would not be a good investment option at this point. Gilt funds have returned an average of 5.4 per cent over the last five years, while the best among them returned over 10 per cent. From January 2009 till date liquid funds have fallen by 8 per cent on an average.

… not to see saw asset allocation

Stick to a fixed allocation between equity and debt investments for your portfolio. Within each portion, allocate a certain percentage to aggressive and passive options, depending on your risk profile. Do not switch from equity to debt funds in an effort to “chase” returns, as that may prompt you to move into each asset at the wrong time. Right now, you can invest a portion of your debt fund portfolio in gilt funds. They may deliver reasonable gains, but of a much lower order over the next one year. But FMPs have risen to the occasion. This essentially means that a portfolio with a judicious mix of gilt and FMPs may hold higher potential for returns over a one-year plus period, rather than pure gilt funds.

Keep an eye on indicators that can be precursors to a fall in interest rates - a slowdown in GDP growth, rising inflation, a decline in IIP (Index of Industrial Production) and expectations of a fall in corporate earnings, to name a few. Broadly speaking, a situation when interest rates have peaked and a downturn seems imminent, would be an opportune time to invest in debt funds. Of course, you must understand that to make the most of your debt (gilt and other long term) fund investments, being invested for the long haul (to cover an interest rate cycle) is important.

FUND FULCRUM (contd.)

(November 2009)

Indian mutual funds booked Rs 12,639 crore profit in the first half of the financial year 2009-10 by selling equity. In the same period last year, fund houses had booked losses of Rs 3,858 crore. Their total loss on sale of investments in 2008-09 was Rs 25,000 crore. Of the 35 mutual funds that have declared half-yearly financial results for the period ended September 2009, six booked a profit of Rs 8,005 crore while the other 27 booked a combined profit of Rs 4,634 crore. The remaining two took a loss of Rs 254 crore. The V-shaped recovery in stock prices from the March 2009 lows has given profit-booking opportunities to fund managers. When markets worldwide fell sharply in the second half of 2008-09 owing to financial crisis in the US, fund managers booked losses to check further value erosion. The fund houses that have booked hefty profit are Franklin Templeton Mutual Fund (Rs 1,470 crore), HDFC Mutual Fund (Rs 1,388 crore), DSP BlackRock Mutual Fund (Rs 1,317 crore), Sundaram BNP Paribas Mutual Fund (Rs 1,313 crore), ICICI Prudential Mutual Fund (Rs 1,287 crore), and Reliance Mutual Fund (Rs 1,229 crore).

Piquant Parade

Bharti AXA Investment Managers has been awarded “The CMO (Chief Marketing Officer) Council Innovating Marketing Strategy Award” for Liq-uity Facility at the recently held CMO Council Awards. Liq-uity, introduced in June 2009, is a facility where the Daily Gains (Daily Dividend/Growth Option), if any, from Bharti AXA Liquid Fund or Bharti AXA Treasury Advantage Fund get transferred to Bharti AXA Equity Fund on all business days.

Regulatory Rigmarole

SEBI has paved the way for investors to buy and sell mutual fund units through stock brokers, thereby, extending the present convenience available to secondary market investors. The existing stock exchange infrastructure, with its reach to over 1500 towns and cities through more than 2,00,000 terminals, can be used for facilitating transactions in mutual fund schemes. Every mutual fund has to disclose the locations of its official points of acceptance in its offer documents and web sites. Stockbrokers will be eligible to be considered as official points of acceptance provided they get the AMFI certification and become empanelled distributors. Such a move is bound to widen the geographical reach of the mutual fund industry, which at present is concentrated on the top 10 cities. From the point of view of the investors, the choice of their transacting mutual fund deals has widened. The fee structure under this new system, however, is still unclear. The market regulator has asked the stock exchanges to provide detailed operating guidelines for facilitating transaction in mutual funds on their platform by their member-brokers.

The National Stock Exchange (NSE) plans to launch a new mutual fund service system or MFSS today. All trading members of the exchange who are registered with AMFI as mutual fund advisors and who have signed up with the specific AMC of a mutual fund are eligible to participate in the new MFSS. For this purpose, trading members shall have to register with NSEIL as participants by submitting an undertaking. Orders will be placed via NEAT-MFSS order collection system between 9 am and 3 pm. The investors have a choice of two modes of investments­­­­­­––the physical and the depository.

The NSE, which pioneered electronic trading in India, and NSDL will together develop a trading platform where mutual fund units could be bought or sold back to funds without an intermediary. To avoid a monopoly, the Association of Mutual Funds in India has also chosen Central Depository Services, a BSE sibling, and registrars CAMS-Karvy to develop a similar platform. The first phase of this online platform will be in place by March 2010. Initially, this would be an order-entry platform and not a trading platform. The second phase, which will see payments being made directly to exchanges, will kick off within three months of the completion of the first phase. This platform will change the way mutual funds are bought and sold in India.

AMFI has constituted a Committee to discuss the impact of extended trading hours on mutual funds and has asked the industry to suggest new mechanisms for a transition into a longer trading day. Over 60% brokers, out of the 395 surveyed by the Association of National Stock Exchange Members of India (ANMI), expressed displeasure at the move.

Fund accountants and administrators, who have been providing back-office services to the mutual fund industry for close to a decade, may soon come under the regulatory framework of SEBI. SEBI is planning to introduce the concept of professional fund accountants and administrators (prevalent in countries like Indonesia and Thailand) in India. Barring a few top fund houses which do fund accounting in-house, most fund houses have outsourced their back-office activities to custodians, who are outside the ambit of regulations as far as fund accounting and administration are concerned.

Domestic mutual funds may soon find themselves playing a bigger role in public shareholder activism. SEBI wants fund houses to play an active role in ensuring superior corporate governance of public listed companies in order to restore faith and protect the interest of investors.

SEBI plans to appoint a Committee to examine if service tax in mutual fund transactions should be borne by investors or mutual funds. While the market regulator does not want investors to bear additional costs, industry body AMFI has been lobbying that service tax should be separately charged to unit holders, as they are the beneficiaries of the service.

SEBI is also examining the issue of the number of investors that every mutual fund scheme should have in order to mitigate risks in case of a huge exodus. The regulator plans to increase the minimum number of investors in a scheme to 50, while reducing a single investor holding to 10-15% from 25% of the assets under management. It plans to extend this structure to a scheme’s sub-plan level (institutional and retail).

The Reserve Bank of India, in a move to curb mis-selling of financial products and ensure transparency, has asked banks to disclose to their customers details of the commissions and other fees received by them while selling mutual funds and insurance policies.

The RBI governor has expressed his concern about the exponential growth in bank’s investment in mutual funds. Banks have been parking in excess of Rs 1 lakh crore (Rs. 1.2 lakh crores on an average) in debt funds in the past few months, which sometimes circulates from mutual funds back to banks with only a portion of it flowing to the corporates. RBI wants banks to directly lend funds to corporates and not through mutual funds.

The Associated Chambers of Commerce and Industry of India (ASSOCHAM) has proposed to the government to create a “Sovereign Fund”, proceeds of which are proposed to be utilized to rescue and arrest possible volatility in domestic capital market as also encourage its orderly growth for a stable and progressive financial system. Worldwide there has been tremendous debate to put in place an institutional mechanism having sovereign back up to strengthen and support the capital market shocks. The recent example is that of sovereign fund of Singapore and China. These funds have come handy during the huge panic selling in the domestic market to ward off unprecedented losses. Since the Indian capital market has grown tremendously with an average turnover scaling to Rs. 90,000 crore per day and contributing about Rs. 108 crore per day to the exchequer in the form of STT, a time has come when a quarter of which can be used for setting up of the proposed fund.

Dubai-based mutual funds are keen to tap the Indian market – directly market and sell mutual funds in India. Dubai Financial Services Authority (DFSA) has indicated to SEBI that it is interested in an arrangement wherein Dubai International Financial Centre region’s mutual funds can be directly marketed and sold in India. DFSA’s proposal might mean a paradigm shift in the policy regime in India as far as mutual fund regulations are concerned. But the recent Dubai debt crisis casts a cloud on this proposal. Besides, the unearthing of this crisis has rocked the Indian stock market…volatility is in the air…

FUND FULCRUM

(November 2009)

According to data by the Association of Mutual Funds in India, the mutual fund industry touched a historic high of Rs 7.62 lakh crore, while the country’s largest fund house, Reliance Mutual Fund, saw a decline of over Rs 1,400 crore in its average assets under management at the end of October 2009. The average AUM grew by Rs 19,391 crore, or 2.61 per cent, in October, which can mainly be attributed to the increased inflows in fixed income plans. With the equity markets turning volatile, fund managers have chosen to hold more cash in October. Total cash balances across equity mutual fund schemes increased 12% to Rs 15,100 crore (about 9% of the corpus) in October 2009.

Reliance Mutual Fund maintained its position as the country’s largest fund house despite a decline of Rs 1,469.51 crore in its AUM during the month. At the end of October, the AUM of Reliance Mutual Fund stood at Rs 116,781.92 crore. The assets of the country’s second-largest fund house, HDFC Mutual Fund, inched closer to the Rs 1 lakh crore-mark and stood at Rs 93,316.03 crore with the addition of Rs 2,888 crore during October. ICICI Prudential Mutual Fund added Rs 405.36 crore to its assets, while UTI Mutual Fund witnessed the biggest jump of Rs 3,258.55 crore in its AUM, next only to SBI Mutual Fund, which emerged the highest gainer in terms of monthly accretion with assets growing by about Rs 3,400 crore during October. With a sharp decline of 7 per cent in the Indian equities during October, there has been a decline in AUMs of many fund houses. Of the 36 fund houses, as many as 10 reported a decline in assets.

While the equity asset bases of top fund houses paint a rosy picture, much of it have been due to the appreciation in value of shares rather than fresh inflow of money. An industry update by mutual fund registrar Karvy estimates a net outflow of over Rs 2,500 crore from equity mutual fund schemes (managed by them) in October 2009. According to Karvy Computershare Mutual Fund Services (which services 25 of the 36 AMCs), fund categories like ELSS and balanced funds have seen large withdrawals during October. The outflow has been more significant in the case of retail investors (investments below Rs 1 lakh), with nearly a few thousand crores flowing out of these schemes in October. Trust-based investors, too, have withdrawn money from equity schemes during the quarter. While SIP money is still coming in, fresh inflows (into equity schemes) are not picking up in a big way. People are not comfortable investing in volatile markets. Though not a direct factor, distributors are not really pushing equity schemes to investors, as they do not earn them enough commission. As per AMFI data, equity scheme sales have nearly halved in three months time, after SEBI abolished entry loads with effect from August 1, 2009. Inflow of money is primarily from HNIs and other classes of affluent investors. Retail investors are withdrawing money from mutual funds to invest in PE funds and PMS schemes run by mutual funds. Top mutual funds are secretly recommending their investors to shift investments from schemes to PE and PMS schemes promising higher returns.

Solid funds continue to accumulate awards and accolades. Crisil's Composite Performance Rankings (CPR) for July-September 2009 period saw Reliance Mutual Fund emerging as the fund house with most number of CPR 1 ranks, repeating its first quarter performance. HDFC Mutual Fund showed an improvement by bagging seven CPR 1 ranks compared to six in previous quarter. ICICI Prudential Mutual Fund and UTI Mutual Fund followed with six CPR 1 ranks each, while Birla Sun Life Mutual Fund and DSP BlackRock Mutual Fund were other strong performers bagging five CPR 1 ranks each. Crisil CPR is the relative performance ranking of mutual fund schemes within the peer group. The rankings are assigned every quarter with 21 different peer groups such as large-cap equity funds, mid and small-cap equity funds, balanced funds and liquid funds. Crisil-CPR is assigned on a scale from 1 to 5, with the top rank of CPR 1 indicating 'very good performance'.

Birla Sun Life Tax Relief 96 has been adjudged 'the Worlds Best-Performing Equity Fund' for the 13-year period ended September 30, 2009. This recognition is based on the study of 3006 equity funds as per Lipper global fund data, excluding ETF and closed-ended funds, having a minimum track-record of at least 13 years as of September 2009.

Piquant Parade

Mahindra Finance plans to enter the mutual fund business. It has lodged an application with SEBI to launch an asset management company. The company hopes to provide mutual fund products to vast untapped rural market customers in the next 4-6 months period.

Reliance Mutual Fund has bought 1.18% stake in the leading financial services provider, Edelweiss Capital for an aggregate amount of Rs. 38.8 crores.

UTI AMC has shed 26% in favour of T. Rowe Price Group Inc., for approximately Rs. 650 crores, thereby, valuing the fund house at Rs. 2500 crores. The deal that was struck was valued at 3.3% of UTI’s AUM. Industry deals prior to this were concluded below this price line.

Close on the heels of its strategic tie-up with T Rowe Price, UTI is making a massive effort to shore up its overseas operations to a new level, focused on the Middle East, Europe, and the rest of Asia. Plans include new funds based in Luxembourg and Singapore, to add to its existing palette of focused, generic, and feeder funds, managing T Rowe Price's existing $2-billion investments in India, and a thrust into the private banking and wealth management arena. UTI holds the distinction of running the world's oldest offshore fund set up for foreign investors. India Fund, set up in 1986, is rated as one of the best performing India funds globally, according to industry tracker Morningstar. UTI is also one of the few Indian fund managers with a $30-million Shariah fund based in Kuwait, and over $600 million of assets under management overseas. UTI is a big name in India, but it is not known outside India. It is difficult to sell the UTI brand to big overseas investors. So, the T. Rowe Price tie-up gives them access to both an internationally-respected brand and a huge distribution network. UTI International, UTI AMC's overseas arm, listed in Guernsey and headquartered in London with offices in the Middle East and Singapore, will be the main vehicle for UTI's major thrust to increase its global presence. In Asia, UTI International already has a tie-up with Shinsei Bank. As of now, the focus is on the Middle East, where the bulk of the money is expected to come from. UTI International is not yet entering the US market, but is planning to manage any India-focused funds that T Rowe Price may launch in the US market. UTI International is betting on a Luxembourg fund to shore up its share of the European market, because it is a jurisdiction investors are comfortable with. Most of UTI International's current funds are Mauritius-based.

…to be continued

NFO Nest

(November 2009)

The unrelenting NFO slow down…

AMFI data reveals that a mere 58 NFOs (only 14 equity funds with a majority being income funds) have been launched in the past seven months (April-October 2009). The mutual fund industry mobilized Rs 14,181 cr in the past seven months in contrast to Rs 93,285 cr during the same period in 2008 – a massive fall of 85%. In September and October 2009 alone 30 NFOs were launched out of which 23 were income funds, 5 were diversified equity funds, 1 each were ELSS and liquid funds respectively. The fund houses chose to go in for income funds as against equity funds, inspite of the euphoric rise in the stock markets since March, 2009 in view of the prevalance of a low interest rate structure, thanks to the easy monetary policy adopted by the RBI. Debt securities are lucrative and reap rich rewards in a low interest regime. The tight October 2009 monetary policy has sought to reverse this trend.

Against the backdrop of a tough environment for equity collections, the recently concluded Religare PSU Equity Fund has turned in a decent performance with a reasonable collection of Rs 230 cr.

Stringent regulations – abolition of entry loads and insistence on uniqueness in NFOs - rolled out by the market regulator in the past few months could explain the appearance of a single fund once again in NFO Nest in November, 2009.

Axis Equity Fund
Opens: Nov 11, 2009 Closes: Dec 8, 2009

After Axis Liquid Fund and Axis Treasury Advantage Fund, the fledgling fund house has now come out with Axis Equity Fund. It is a diversified scheme for investing in Nifty stocks. The fund seeks long term capital appreciation from a diversified portfolio of stocks across the market capitalization spectrum. The fund will focus on growth companies with a sustainable model and follow a bottom up stock picking system. The fund has enabling provisions to be fully invested in derivatives, up to 40% in overseas financial markets through ADRs, GDRs, and debt and its own or other mutual funds. The fund is benchmarked against the S& P CNX Nifty.

Industry data indicates that in the last five years (as on October 30, 2009), diversified equity schemes have given positive returns with the worst giving 12% p.a. and the best giving 34% p.a. Having noticed the demand for simple yet trustworthy products that are total solutions, the fund house has come out with a generic product in the most effective category, Diversified Equity Funds. The fund house’s proprietary four-step investment process and the team of experienced equity professionals will aid risk mitigation, besides offering a potential answer to the long term solution that the investor is seeking.

ICICI Prudential Oil Fund, Birla Sunlife T-20 Fund, IDFC Real Estate Equity Fund, Mirae Asset Korea Discovery Fund, Canara Robeco Active Money Manager, Canara Robeco Gilt Short-term Fund, HDFC Medium term Opportunities Fund, Baroda Pioneer Infrastructure Fund, and Canara Robeco Large Cap+ Fund are expected to be launched in the coming months.

GEM GAZE

November 2009

Gem chase!

Tax planning is an exercise that needs to be evenly spread through out the financial year. April is the ideal time to start this much-needed exercise. November, though a tad better than March, is, no doubt, late…but better late than never…

With Birla Sun Life Tax Plan and Principal Personal Tax Saver Fund failing to consistently beat the category average, they have been shown the door. Principal Personal Tax Saver makes an exit after a brief stint of one year as a GEM. The effervescent Canara Robeco Tax Saver Fund has been accorded a red carpet welcome. All the other funds that figured in the November 2008 GEM GAZE have rightfully retained the status of a GEM in November 2009 too.

Magnum Taxgain Gem

Slow and steady…

It is the oldest and largest ELSS Fund launched in 1993 with assets worth Rs 4962 crores at present - almost 40% of the ELSS category. It is one of the best tax saving funds in the long-term with a good portfolio and a consistent track record. With returns of 36.25% over the past five years for the period ending September 30, 2009, it has been awarded the ICRA Mutual Funds Awards in 2009. The churn in management has not affected the consistency of returns. The current strategy is to take long term calls in stocks and sectors with a view to minimising volatility and risk in the fund. It has a decidedly large cap orientation with muted returns when the market is rising and limited downside when the going gets tough. In the bear hug of 2008 and the first quarter of 2009, the fund took refuge in debt and cash. While the fund fell with its peers in 2008, in the opening months of 2009, the fund stood head and shoulders above its category. Its timely shift to equity and its presence in the key sectors, namely, metals, finance, and engineering, enabled the fund to maintain the lead during the recent rally from March 9, 2009. It has broadened its portfolio from as low as 30 in 2006 to 89 in 2007 and 69 at present. The allocation to the top 10 holding has been brought down to an average of 32% over the past year as on August 2009. The fund’s expense ratio at 2.5 is marginally on the higher side. A radical transformation has been noticed in the fund in recent months with a pronounced tilt towards conservatism. Its long term record speaks volumes and makes it a worthy pick.

HDFC Tax Saver Gem

Daring duel…

Launched in December 1995, HDFC Tax Saver Fund, with an AUM of Rs 1947 crores, has performed handsomely over the longer term horizon, posting annualised returns of 19.23 per cent over the last five years. The fund has strong leanings towards mid-cap stocks (44 per cent of the total portfolio), particularly in sectors such as banking and engineering. The fund has been quite selective in its picks in which it invests with conviction. The number of stocks in the portfolio is restricted to a mere 20 or 25 though recently, it has touched 30, with the top five accounting for more than 30%. After taking advantage of the mid cap rally in the past two and a half years, the fund is back to its large cap tilt. It has a comparatively low expense ratio of 1.98. It has never been rated below four stars in its entire rating history. In 2009, the fund is up 27% as against 23% by its peers. It has a glorious history of beating its average peer by more than 10% barring a few lacklustre years.

Fidelity Tax Advantage Gem

On the fast track…

In its short life of three years it has accumulated awards and accolades…Fidelity Tax Advantage has won the CNBC TV 18 CRISIL Award for 2009 as well as the ICRA Seven Star Gold Award 2009, besides being rated as a 5 Star fund by Value Research. The fund has outperformed its benchmark, the BSE 200 for the one year, three years as well as since inception. It has turned in a promising performance with 25% in mid caps and 11% in small caps. 45% of the fund’s assets are invested in the top three sectors, namely, financial services, energy, and healthcare. Its expense ratio is relatively low at 2.18 with an AUM of Rs 1117 crores.

Sundaram BNP Paribas Tax Saver Gem

Driver with a drive…

It has proved its mettle time and again. While the returns have been consistent on an year to year basis, the returns cannot be termed astounding. It was, however, in 2008 when the global financial crisis reached a cresendo, that the fund gained an edge over its peers and its benchmark, the BSE 200 by exhibiting remarkable resilience. The fund cushioned its fall to about 48% as against a fall of 52% in the Sensex. The category average fall was a dismal 56%. The fund lagged its peers in the 2009 bull run, by clocking an average of 68% as against market returns of over 70%. It has exhibited a sterling performance record, thanks to its good portfolio/sector mix - a rewarding multi cap portfolio mix with 35% in mid caps and right moves at the right time. The fund has been highly skewed towards sectors such as financial services, energy, and FMCG, with the top three sectors constituting about 52 per cent of the fund's net assets. Flexibility is the key…Its adaptability is appealing. Its nimble asset allocation took the cash to almost 36% in 2008. The fund manager keeps moving in and out of cash. In September 2008, it was 28.75%, it was brought down to 8.84% in October only to raise it to 36.53% the following month. It averaged 24% in the three-month period ending March 2009. As the markets started its upward journey since March 9, 2009, the cash level slid to 6% and has been hovering at that level ever since. It is not uncommon to see it move in and out of different sectors in a short span of time. The fund manager is quick to capitalise on opportunities available in sectors or stocks. But rarely does the fund manager take an exposure exceeding 5% in a single stock. In fact, this ELSS fund has the highest Sharpe ratio among its peers, meaning, it delivers the highest returns per unit of risk taken. This versatile fund tries to look at the bigger investment picture. Its expense ratio of 2.06 is lower than the category average of 2.32. The fund has earned the Morningstar award for 2008 in the ELSS category. With a mere Rs 3.8 cr in 2001, the AUM at present is Rs 1213 cr. The fund’s AUM has been surging at a mind-boggling rate of nearly 300 times.

Canara Robeco Tax Saver In

Turbo charged…

The fund has come of age to emerge as the compelling option in the ELSS category on the back of robust returns. A year ago, this fund did not make it to our elite list of GEMs. However, a dramatic turnaround since 2007 has catapulted it to an enviable position with an impressive 22.86% (10.38% category average) in the past three years. It has consistently beaten the category average since 2006, thanks to its aggressive mid cap orientation. In 2008, when the market tumbled, it shed a mere 46.85% as against the category average of 55.67%. Some of the sectoral bets, especially construction, worked in favour of the fund. The fund has left behind the days when its top 10 holdings accounted for the entire portfolio (January 2001). With an average of 34 stocks since 2007 and the top 10 holdings accounting for around 43% of the portfolio (in line with the category average), the fund looks fairly diversified. This tiny Rs 67 crore fund has an expense ratio of 2.5.

The ELSS collections in the last quarter of the financial year 2008-2009 dipped by a whopping 73% when compared to the corresponding period in the last financial year. This was a direct consequence of the free fall of the stock market during the global economic crisis. Irrespective of market gyrations, a systematic investment in these ELSS GEMs will ensure effective and stress-free tax planning and wealth creation!

FUND FLAVOUR
(November 2009)

ELSS on the march…

According to a study, if you remained invested in Sensex shares for any block of three years during the past 27 years, your average annual return would have been 26.95%. The potential of ELSS Funds to create long-term wealth has not escaped taxpayers’ notice. Ever since Section 80C removed the sub-limit of Rs 10,000 per year on tax saving funds four years ago, the category has grown exponentially. From 18 funds managing about Rs 900 crore in January 2005, it has grown to nearly 30 tax saving funds managing over Rs 15,000 crore today. The only other tax saving option, which has grown at such a scorching pace is insurance. There, too, growth has largely come from unit-linked insurance plans (ULIPs), which is more of a mutual fund than an insurance plan.

Brief grief

During the past year (October 2008 – October 2009), ELSS funds were in doldrums in the first half of the year in line with the dismal performance of the stock market, but bounced back in the latter half. ELSS Funds collected Rs 3,808 crore between January and March 2008. During the fourth quarter of 2008-09, they managed to mop up Rs 1,134 crore – representing a fall of 70.20%. In March 2009, fund houses collected Rs 547 crore, which was 73% lower than the Rs 2,071 crore raised in March 2008. The ELSS Funds have more than made up for the lacklustre performance by displaying a scintillating show in the second half of the year under consideration.

Attractive investment proposition

When you invest in ELSS, your money is locked for a period of three years (minimum). This acts as a blessing in disguise as tax saving funds generally yield high returns during a 3-year period. The common man is basically afraid of investing his money in equity shares as he is afraid of loosing money. But a look at the recent past shows that investors who have invested in ELSS funds have never lost out on their money. In fact, they have been the front runners in terms of returns to investors. A small illustration will clarify this. If you make an investment of Rs 1,00,000, then under section 80C this complete amount is deducted from your gross income for that particular year. If your annual income puts you in the highest tax paying zone, i.e 34%, then the investment of Rs 1,00,000 will ensure that you get an annual tax deduction of Rs, 34,000. So, logically speaking, you invest Rs 66,000 considering the deduction. Assuming that the mutual fund declares an annual dividend of 10% then your total return on Rs 66,000 is [(10,000/66000)* 100] = 15.15%. This particular dividend earned is also tax-free, thereby, enhancing profitability. Another profitable proposition out of this investment is that after a period of 3 years, the capital gain that you obtain out of the investment is also tax-free. This is what makes ELSS the most attractive investment for those who have the appetite for moderate risk. ELSS is considered to be the best tax saving mutual fund scheme in India.

One up on other savings schemes

If we travel backwards in time by five years, ELSS Funds have delivered an annualised return of not less than 12% on an average. This is much higher than the returns you get on other instruments under 80C, which offer an average return of 8 to 9% p.a.

When it comes to the lock-in period, ELSS scores high since its lock-in is a mere three years as against a minimum of five years in the case of the other 80C instruments.

The tax benefits are attractive – dividends are tax-free and when you sell the units after three years, you need not pay tax since there is no long-term capital gains tax on equity funds.

On the tax front, it outsmarts Fixed Deposits and National Savings Certificate. ELSS investments can be withdrawn after three years and there is no tax on profits. If you reinvest in the ELSS fund, you get tax exemption twice in six years compared to just once in case of NSCs and Fixed Deposits.

In terms of lock-in, returns, and regular income, it is one up on Public Provident Fund too. “Dividend Delight” is the correct synonym for ELSS Funds. They are known for showering dividends on investors. Considering the fact that investment amount is locked-in for three years, all ELSS Funds practise giving handsome dividends. ELSS investment is a great income generation tool.

The golden mean

However, ELSS funds invest in stocks and carry the same risk as any equity fund. The best way to invest in them is through monthly instalments called SIPs. They even out the ups and downs by averaging your cost of purchase over the long term. You can barely squeeze in two instalments before March 31. For instance, if you are planning to invest Rs 20,000 in ELSS funds for Section 80C benefits, invest Rs 10,000 right away and another Rs 10,000 a month later, just before the end of the financial year. For the period - January 1, 2008 to January 1, 2009 - possibly the worst phase of the current crisis, a systematic investment in an ELSS fund would have limited your losses to 34% as against the loss of nearly 50% suffered by the Sensex.

…blocked by an unexpected turn?

It is surprising that ELSS, the only all equity tax saving option open to investors, does not figure in the new tax code that will be taken up for discussion. What still defies understanding is whether that is by omission or design. It is highly sceptical that it is by omission since there are four aspects in all, out of which two are conspicuous by their absence. ELSS may cease to exist in its current form because if there is no 80C, there cannot be an 80C Fund (read ELSS Fund). The new tax code is not an amendment or revision, it is a replacement. It substitutes the existing tax system in the land. Apparently, it looks as if equity-linked savings scheme will not exist in its current form after the tax code comes into play.

ELSS is a very good instrument – cost-effective, well-regulated, and transparent. Its inclusion in the portfolio enhances the quality of the portfolio. A very strong case can be built by the Indian mutual fund industry in order to have it in a different form. The new Direct Taxes Code Bill might give rise to new tax-saving funds that are very long-term funds. Redemption might get linked to the retirement of an individual or his retirement age. A new product could evolve….the mutual fund industry will have to work harder and make its voice heard…

FUND FULCRUM
(October 2009)

The AUM of the mutual fund industry grew a mere 0.93% in September, 2009 to Rs 7,42,920 crore. A ban on the entry load, uniform exit load for different classes of investors, heavy redemption in debt funds, and profit-booking by investors due to a sharp rise in the stock markets were behind the flat growth of the industry. The heavy redemption in the debt funds in September 2009 should get reversed soon and mutual funds are expected to get back the entire flow in October 2009. Historical evidence suggests that debt funds face redemption pressure at the end of every quarter. This pressure is considerably higher at the end of the first as well as the second half of the financial year since advance tax payments are made at that time of the year.

The top five funds saw a miniscule rise in the AUM, with HDFC and UTI Mutual Funds registering a fall in assets. Reliance Mutual Fund rose by 0.79% to Rs 1,18,251 crore, HDFC Mutual Fund registered a fall of 3.67% to Rs 90,427 crore, ICICI Prudential Mutual Fund saw an increase of 2.76% to Rs 80,120 crore, UTI Mutual Fund dipped by 0.45% to Rs,73,589 core and Birla Sun Life Mutual Fund rose 0.3% to Rs 63,056 cr. Interestingly, it is the smaller fund houses that have shown a healthy rise in their asset figures for September, 2009. Fund houses like Taurus, Shinsei, and JP Morgan have reported around 25% increase in AUM while assets of Benchmark and Bharti AXA grew by 13% and 20% respectively.

In view of the sky-rocketing stock market, mutual funds are sitting on a whopping Rs 13,957 crore of cash, waiting to be deployed at the opportune time.

Piquant Parade

Close to 18 mutual fund applications – both domestic and foreign players – are pending with the market regulator, SEBI. Schroder Investment, Singapore, Kuwait’s Global Investment House, US-based PGLH of Delaware, and Nikko AM of Japan are among the overseas fund managers planning to enter the Indian asset management space, which is already crowded by global standards.

Union Bank of India has got SEBI approval to start mutual fund business. The Union Bank of India-led AMC will be a joint venture with Belgium-based KBC Group. Union Bank of India will have a 51% stake in the joint venture and contribute Rs 48.07 crore as against 49% by the KBC Group, with a contribution of Rs 46.93 crore. It is expected to roll out its first mutual fund product in February, 2010. Union Bank plans to use its 2700 branches for its service rollout. It also intends changing at least 200 branches as dedicated centres to sell mutual fund products.

Brokerage firm, India Infoline, is expected to launch its mutual fund at the end of the current fiscal, 2009-2010, after getting the necessary approvals from the market regulator. The first level of approval has already been obtained.

UTI AMC, having 1250 lakh shares valued at Rs 2500 crores, will sell 26% stake to US-based T Rowe Price. T Rowe Price will pay Rs 200 per share and Rs 650 crore for the 26% stake in UTI AMC. The deal would be valued between 3.2 and 3.3% of the AUM (AUM of UTI AMC in September, 2009 was Rs 73,500 crore).

The Postal Department, which had suspended the sale of mutual fund products since August, 2009 in retaliation to SEBI’s ban on entry load, has announced its decision to resume the sale of mutual funds in selected branches. The Postal Department is presently in talks with SEBI to chalk out the distribution norms related to selling of mutual fund schemes. The process is expected to be initiated once the modalities are worked out.

Regulatory Rigmarole

According to SEBI, AMCs can come out with NFOs provided they can justify investment strategy and risks (details discussed in NFO Nest dated October 19, 2009).

SEBI has announced that all trades in corporate bonds between mutual funds, FIIs, Venture Capital Funds, and other RBI-regulated entities would necessarily be cleared and settled through the National Securities Clearing Corporation or Indian Clearing Corporation effective from December 1, 2009. This announcement has been made with a view to bringing about transparency, enhancing liquidity, and improving efficiency in the bond market. In addition, it will help in the right price discovery, improvement in volumes, and doing away with counterparty risk. At present, mutual fund houses are either dealing in corporate bonds directly or through brokers.

SEBI has allowed the bourses to extend the trading hours from 9:55 a.m.-3:30 p.m. at present to 9 a.m.-5 p.m. so as to enable the market participants to align their trades to the happenings in the international markets.

SEBI has proposed that mutual funds offering retail and institutional plan options have to segregate their investment in two different portfolios. A substantial difference exist between both the plans in terms of initial investment amount and, hence, the corpus. At present, when corporate investors redeem, fund managers sell the most liquid investments to meet the outflows, thereby, affecting retail investors who remain loyal to the fund. This proposal, if implemented, is likely to benefit retail investors to a great extent.

Consolidation looms large for some asset managers as revenue declines continue unabated, according to McKinsey’s 11th Asset Management Survey. The Report states that the margin in 2009 has suffered a strong squeeze – 0.09% in 2009 down from 0.108% in 2008. The melting margins outweighed steep cost-cutting measures and can be attributed to higher rebates demanded by distributors in the wake of the abolition of entry load.

NFO Nest
(October 2009)

Clamping costly clones…

The Indian mutual fund industry has over 3400 products, which include both equity and debt schemes. Of this, 70% of the mutual fund products cannot boast of even a meagre AUM of Rs 50 crore as on September 30, 2009. Nearly 60% schemes have an AUM of under Rs 25 crore and less than 5% have an AUM of over Rs 1000 crore. If a fund house has about 50 schemes and each scheme has assets worth about Rs 2 to 5 crores, the cost structure shoots up since more funds mean more fund managers and more operational staff. Moreover, larger funds reap the advantages of economies of scale.

SEBI has sought to nip the mushroom growth of unviable tiny funds in the bud by snapping at NFO clones. Hereafter, fund houses would have to make available details of NFOs in advance. SEBI has asked for greater responsibility and accountability from trustees of AMCs, especially since they are custodians of investor’s money. Therefore, before the board certifies, the trustee has to evaluate the new offering. The entire process is in sharp contrast to what happened two years ago when SEBI made it mandatory for the trustees to give a declaration that the new scheme was different but the trustees just used to give approval without any justification. They will now have to play an engaging role in delivering fiduciary responsibility.

This stringent regulation could explain the appearance of a single fund once again in NFO Nest in October, 2009.

Religare PSU Equity Fund

Opens: September 29, 2009 Closes: October 28, 2009

This is the first actively managed PSU fund in the mutual fund industry, with Kotak PSU Bank ETF and PSU Bank BeES being passively managed funds. More than 65% of the fund is slated to be invested in the stocks that constitute the benchmark index, the BSE PSU Index. Upto 35% of the assets can be invested in other PSU stocks, cash, etc. In addition, the fund can invest 20% of its assets in stocks of companies other than PSUs.

Nuggets to gnaw at…

The total income of the top eighteen PSU companies (called Navaratnas) is 15% of India’s GDP.

Nearly a third of the profits of PSUs in 2008 were paid as dividends.

Six out of the top ten companies in India are PSUs.

10 out of the 50 companies that constitute the Nifty are PSUs.

The following factors will drive the performance of PSUs going forward…

Most of the PSU companies are leaders in their respective fields and in some cases enjoy monopoly.

A majority of the PSU companies are present in sectors which constitute the core of the India growth story (the noteable exceptions being FMCG, Media, IT, and Pharma).

PSUs are currently available at reasonable valuations compared to broader markets (20 to 30% discount), thereby, offering a comfortable margin of safety for investors.

The Government focuses on listing of PSUs and further disinvestment of stake in existing companies.

The expected re-rating of these PSUs in the light of the expected disinvestment by the Government can lead to above average gains over a period of time.

The Indian market Indices and the MSCI India are on a free float basis where the PSUs score poorly. As the Government divests, fund managers across the world will have to increase their weightage in PSUs. But PSUs are subject to control of the Government of the day and policy risks though they were not hugely affected even during the worst period of the global financial crisis. While the Urban Indian population may have a poor perception of PSUs, their performance over the past decade has been worth mentioning, in fact, much better than the Sensex. The future holds promise too. With GDP growth being led by Government spending in the last year, and the trend expected to continue in the next 2 to 3 years, it augurs well for the PSUs who will be the natural beneficiaries.

Sundaram BNP Paribas Money Opportunities Fund, Sundaram BNP Paribas Dividend Fund, Taurus Nifty Index Fund, ICICI Prudential Banking and PSU Debt Fund, SBI Wise Fund, Axis Income Fund, Religare Arbitrage Plus Fund, and Tata Consumption Opportunities Fund are expected to be launched in the coming months.

GEM GAZE

Sector Funds

All the four sectoral GEMs of 2008 have withstood the onslaught of the crisis and are sparkling in 2009, thanks to their ‘diversified’ mandate and refuge in derivatives and/or cash.

DSP BlackRock TIGER Fund Gem

Cautious comfort…

Comfortable in all situations – the bear tear and the bull pull. Notwithstanding the bear hug, the fund emerged unscathed during the turbulent times that lasted till March, 2009. In the first quarter of 2009, the fund managed to stay in the positive territory with a positive return of 0.49% as against the category average return of -5.32%. The fund’s returns have remained more or less in tune with the category average in the recent bull run. The charm lies in the fund’s ability to consistently deliver risk-adjusted performance, despite being a sectoral fund. Its 3-year annualised return of 14.74%, positions it ahead of the category average returns of 11.03%.

The fund seems to be all over the place…but the fund was designed to pick stocks that benefit from growth related to economic reforms and continuing liberalisation. While maintaining a large cap exposure and reducing equity exposure, it increased its allocation to derivatives from 1.76% in January, 2008 to 17.96% in November, 2008. From December, 2008 to March, 2009, it was heavy on Nifty Futures. It has been increasing its equity exposure since March, 2009, in the light of the market rally.

In line with its objective, it has the highest exposure to the power sector (13.32%), followed by banks (11.33%), petroleum products (10.46%), and capital goods (9.71%). It has been gradually increasing its exposure to banking and power sector. Its top holdings have remained more or less the same with a portfolio turnover ratio of 1.44 times. Its expense ratio stands at 1.85%.

The broad mandate, the diversified portfolio (60 to 70 stocks), and consistent returns clear the way for the cautious. The sheer size of Rs 3500 crores prompts the fund to lean towards large caps. The fund abstains from aggressively moving in and out of sectors and stocks. Those who seek safety, will feel at home owning this fund.

Reliance Diversified Power Sector Fund Gem

Power packed…

With an AUM of about Rs 5,800 crores, Reliance Diversified Power Sector Fund comes next only to Reliance Growth Fund in terms of size. But as far as the performance is concerned, it is way ahead of its peers as well as those from its own fund house. The fund has amassed awards and accolades, by virtue of its scintillating performance. Its power to tower over the market in good times as well as bad has given this fund an edge over the other sectoral funds. The high alpha of the fund indicates its ability to beat its benchmark index. In 2008, it clocked -50.4% as against the sensex return of -52%. Its returns in 2009 has been 81% as against 73% by the sensex and 65% by the BSE Power Index. This high beta fund has made the best use of the opportunities that have been thrown open by the market. Though naturally dominated by power sector stocks, it has good exposure to engineering, metals, financial services, construction, and communication. Its diversification is marked down by about 30 stocks. The fund is wont to sitting on huge piles of cash, above 20%, on an average. It rose to 40% when the crisis was at its peak. It is 17.7%, at present, the lowest since April, 2007.

The fund has been a star performer but its high beta and aggressiveness call for caution. Rewards marry risk and if you are willing to play the game of probabilities, Reliance Diversified Power is the right answer.

ICICI Prudential Infrastructure Fund Gem

Allocating with alacrity…

With over Rs 4300 crore in assets, it is a theme fund that invests across infrastructure and allied sectors, thereby, increasing the universe of investments and facilitating the construction of a better portfolio. It plays it safe by maintaining a highly diversified portfolio. The highest alpha generator in the category, its returns are impressive. In 2008, it made the right moves. Its exposure to large caps rose to 77%. Its heavy exposure to debt and derivatives enhanced its ability to contain the downside. In the first quarter of 2009, it delivered 1.27% as against the category average of -5.32%. But the fund missed out on the March 2009 rally when it underperformed the category average. It had a 43% exposure to cash in May 2009. It cut cash in June 2009 to participate in the rally.

The successful sector rotation strategies adopted by the fund stood it in good stead. The fund actively changes its portfolio complexion with no qualms about going against the herd. The fund increased its exposure to financial services between September 2008 (9.3%) and December 2008 (23.26%). The fund manager had written a Nifty put option in April, 2009 and it augured well for the scheme. Between April 2009 and September 2009, the allocation to financial services sector dropped from 17% to 14.86%. The allocation to energy during these two months was increased from 15% to 40.39%. The fund includes every sector barring FMCG, media, IT, and pharma. Though the portfolio looked a little bloated in 2008, it has an averageof around 40 stocks in 2009. The fund manager rarely bets more than 8% on a single stock barring a few large cap names. It has a fair number of frontline stocks that augur well for the fund. One of the least expensive funds, its expense ratio is 1.86 as against the average of its infrastructure peers – 2.24%. This low ratio can mainly be attributed to the increase in the fund’s assets.

This fund has turned other infrastructure funds green with envy. The fund has stood tall amongst other infrastructure funds and has proved its mettle in its relatively short history.

DSP BlackRockTechnology Fund Gem

Broad breed…

Sector funds can at best stack money in cash, in case of absence of any lucrative opportunity in the sector. However, there was a discernible move to allocating funds to alternate sectors like telecom and entertainment. DSP BlackRock Technology Fund was a trend setter in this respect. The fund management had enough foresight to include a broader segment in its investment objective. The only fund that refrained from doing so was Franklin Infotech Fund. UTI and Kotak discontinued their technology schemes and merged them with their diversified equity funds.

This Rs 95 cr fund has invested 88% in equity and 8% in derivatives. 69% is in the software sector, 7% in industrial capital goods, and 5% each in media and hardware. It has allocated 23% to Infosys and 9% each to TCS and HCL. The allocation to all other stocks is 5% or less. Its one-year return has been 50% as against the category average of 46%. It has the impeccable record of having beaten the category average for the past five years with 2008 being the sole exception.

Include sector funds sparingly to spice up portfolio returns but refrain from making it the core holding. A maximum allocation of 10% would ensure that you boost your overall returns when the sector does well and develop the ability to withstand the steep slide when the sector underperforms.