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.