FUND FULCRUM
December 2010

Things seem to be looking up for the mutual fund industry as it saw a net inflow in November 2010. The mutual fund industry saw an inflow of Rs 18,379 crore in November 2010 as against a total outflow of Rs 5,742 crore in October 2010. Income funds experienced an inflow of Rs 11,307 crore in November 2010, as against an outflow of Rs 5,305 crore in October 2010. The equity funds saw an outflow of a mere Rs 41 crore while they saw an outflow of Rs 2,869 crore during the previous month. In September 2010, the figure stood at Rs 7,011 crore. Total sales of all schemes during November 2010 touched Rs 7.77 lakh crore, while redemptions were Rs 7.59 lakh crore. Redemptions have been decreasing month after month since September 2010. The heavy profit-booking spree of investors has finally shown visible signs of abatement. Arresting downtrend, the assets under management (AUM) of the mutual fund industry have also shown an increase of about 3% in November 2010 to Rs 6.65 lakh crore from Rs 6.46 lakh crore in October 2010.

The domestic mutual fund industry recorded its highest profit after tax (PAT) in 2009-10. According to a report by the fund industry tracker, Morningstar, fund houses’ consolidated profit after tax in 2009-10 stood at Rs 911 crore as against Rs 224 crore in 2008-09. The industry profitability, measured by dividing the consolidated profit by total average assets for the financial year, rose sharply to 13 basis points in 2009-10 as against four basis points in the previous year. HDFC Mutual Fund emerged as the most profitable fund house, with a PAT of Rs 208 crore, followed by Reliance Mutual Fund at Rs 195 crore. The gross income of fund houses has risen substantially, resulting in higher profitability for the industry this year. Other fund houses that recorded strong profit growth in FY10 were ICICI Prudential, Birla Sunlife, Kotak, and LIC, among others. The 10 largest asset management companies (in terms of assets) accounted for 80% of the industry’s gross income. In 2009-10, their consolidated profit rose 83%, while the consolidated gross income climbed 41%. Smaller players, such as Quantum, Edelweiss, AIG, and Mirae, managed a decent performance on the back of improved profitability. The players whose profits dropped include Benchmark, Shinsei, Morgan Stanley, IDFC, Sahara, and Baroda Pioneer. Of the 38 AMCs, 15 were in the red during 2009-10, though their losses fell.

Piquant Parade

Shinsei Asset Management (India) Private Limited has entered into an agreement with Daiwa Securities Group Inc. (DSGI) and Daiwa Asset Management Co. (DAM), to divest their stake. As per the agreement, the parent company of DAM will be acquiring 91% of the equity share capital of the Asset Management Company (AMC) and the balance 9% of the AMC will be acquired by DSGI. Accordingly, Shinsei Mutual Fund will be renamed as Daiwa Mutual Fund and Shinsei Asset Management (India) Private Limited shall be renamed as Daiwa Asset Management Co. Ltd. (DAM). The name of the schemes will also be changed to Daiwa Liquid Fund, Daiwa Treasury Advantage Fund, and Daiwa Industry Leaders Fund. Investors, who do not agree to the revision, will have an option to redeem their units from December 8, 2010 to January 11, 2011 without paying any exit load.

Bharti Enterprises, which has a 25% stake in Bharti-AXA Mutual Fund, a unit of Axa SA , is likely to sell its stake in the mutual fund firm to Bank of India.

L&T Mutual Fund has formalised its tie-up with Central Bank of India, a leading public sector bank. This tie up would make the L&T Mutual Fund schemes available at all 3600 retail branch locations of Central Bank of India and the partnership will strengthen their distribution network.

Nikko Asset Management Co (Nikko AM) has reached an agreement with DBS Bank (DBS Bank) to acquire DBS Asset Management (DBSAM), the asset management arm of DBS Bank. In return, DBS Bank will become a strategic minority shareholder in Nikko AM, taking a 7.25% stake in the Tokyo-based firm. This transaction will add USD 7 billion in assets under management to Nikko AM and significantly broaden the firm’s distribution capabilities in Asia. The agreement also establishes a strong strategic alliance between Nikko AM and DBS Bank, bringing together two firms with complementary strengths across products, investment platforms, distribution channels, and geographies. The strategic alliance with DBS Group will strengthen the ability to distribute investment products in the rapidly growing Asian markets and further enhance the wealth management products offered to the bank’s clients.

Regulatory Rigmarole

From January 2011, mutual fund investors will get a weekly consolidated statement of their transactions instead of the monthly statement they get at present. Investors will get one consolidated statement having transaction details across funds, including scheme or fundwise NAV and even the overall portfolio value. This service is ideal for investors who have more than one investment folio. CAMS, Karvy, and Franklin Templeton RTA are already despatching consolidated monthly statements to investors, having their money in schemes managed by 25 asset management companies. The registrar group is expecting non-participating mutual funds to join in when the weekly despatch of consolidated statements commence. SIP investors will get consolidated accounts once in every three months. The statement will be mailed to investors in a paper-and-envelope format.

With gold ETFs (exchange-traded funds) gaining popularity among investors, the Securities and Exchange Board of India (SEBI) is making the norms for verification of underlying assets (physical gold) tighter. Physical verification of gold underlying the gold ETF units should be carried out by statutory auditors of mutual fund schemes and reported to trustees on half yearly basis. The confirmation on physical verification of gold should also form part of half yearly report by trustees to SEBI. The new norm on half yearly reporting of statutory audits will come into effect from April 2011.

Intense competition and more regulation prompt smaller fund houses to position themselves as niche players, with focus on a select group of products. Amid increasing regulatory control and competition, mutual fund houses are differentiating their products and simplifying things for investors. This trend is likely to intensify. Benchmark, Motilal Oswal, DSP BlackRock, JP Morgan, and Quantum are among those carving out a niche position. Benchmark has established itself in the ETF (exchange traded fund) category. Benchmark mutual fund constantly looks at what additional value they are bringing to investors. Motilal Oswal Mutual Fund has taken a measured approach. Rather than going ahead with seasonal products, they concentrate on select products which are fully research-based, simple, and low cost. JP Morgan and DSP Blackrock are bringing their international products to domestic investors. These fund houses are pursuing a trend of positioning selective but strong products. Quantum has a unique strategy. It is straight selling of products to investors, without intermediaries. The rules of the game have substantially changed. The mutual fund market is getting crowded, with so many products, and so new entrants are trying new strategies. The era of offering NFOs (new fund offers) and garnering funds is no more there. Small niche players are emerging.

NFO NEST
December 2010

A brief reprieve in the NFO rain!

It is raining NFOs in the mutual fund industry. According to Value Research, an independent mutual fund tracking firm, more than 200 NFOs have managed to mobilise Rs 43,251 crore in the past five months. The fund houses launched NFOs across the spectrum, including 14 equity funds, 20 debt funds, 2 gold funds, 15 hybrid funds, and a host of FMPs. The corresponding figure for the previous year was 100 schemes which managed to mop up around Rs 14,077 crore. In short, there is no denying the abundance of NFOs in the mutual fund industry. However, all NFOs are not great money-making opportunities for retail investors. In fact, SEBI has chided the mutual fund industry for launching schemes with little distinction and making the selection process difficult for the average investor.

With the deadline for KYC compliance less than two weeks away and the herculean task involved in getting the compliance, there has been a temporary lull in the NFO market in December 2010, with a single fund figuring in the December 2010 NFONEST.

Religare Medium Term Bond Fund
Opens: December 13, 2010
Closes: November 24, 2010

Religare Medium Term Bond Fund, an open ended income fund, seeks to generate regular income and capital appreciation by investing in a portfolio of medium term debt and money market instruments. A minimum of 80% of assets and up to 100% will be invested in high quality debt securities having residual maturity of up to five years. The investment strategy of the Religare Medium Term Bond Fund particularly rests on three pillars. This is intended for investors who have got a moderate risk appetite with a minimum investment horizon of six months towards bond fund. This portfolio will be constructed based on good quality assets of both corporate bonds and securities. Secondly, it is biased towards holding assets until maturity. Thirdly, it will play down on the rolled out effect on the yield curve and it will also capture the positive valuation changes given the changes in the yield curve. With the increasing stock market volatility, investors have turned cautious. Portfolio diversification is the key and bond funds aim to provide regular income and lower volatility and can act as a cushion against the unpredictable ups and downs of the stock market. The Benchmark Index for the scheme will be CRISIL Composite Bond Fund Index. The Fund will be managed by Mr. Nitish Sikand and Mr. Pranav Gokhale.

Pramerica Treasury Advantage Fund, Pramerica Short Term Income Fund, Reliance Indonesia Opportunities Fund, MOST Shares NASDAQ-100 ETF, MOST Shares Midcap 100 ETF, Templeton India Corporate Bond Opportunities Fund, and IDBI Tax Savings Plan are expected to be launched in the coming months.

GEM GAZE
December 2010

The goal of any investor is to accumulate wealth to fulfill future wants and needs. For a conservative investor, protection of principal is of utmost importance. However, financial prudence lies in having liquidity for contingencies, as well as a means for capital appreciation. If you seek capital appreciation and tax comfort, along with reasonable safety of capital, then debt funds should find a place in your portfolio.

December 2010 GEMGAZE helps you zero in on the debt funds that you can include in your portfolio. All the five GEMs of December 2009 have retained their venerable status in December 2010.

Kotak Bond Regular Fund Gem
Optimum option…

Incorporated in November 1999, Kotak Bond Fund has an AUM of Rs. 87.83 crore. The average maturity of the fund is low at 2.42 years and the credit quality is high. The portfolio is diversified with 15 holdings and the top 5 holdings constitute 67.43% of the total portfolio. Bonds constitute 51% of the portfolio, Government of India securities 18% and Certificates of Deposit 15%. The fund has returned 4.47% in the past one year as against the category average of 4.33%. The returns since launch have been an impressive 9.37% and the expense ratio is 2.07%. Though the recent performance is not as dazzling as the previous year, the fund has bettered the category average and maintained an optimal portfolio against the backdrop of the current market conditions.

ICICI Prudential Gilt Investment Fund Gem

Long-term laurels…

Incorporated in August 1999, ICICI Prudential Gilt Investment Fund, a pure debt fund that invests only in government securities, has an AUM of Rs. 225.45 crore. The average maturity of the fund is high at 9.75 years, the Yield To Maturity (YTM) is 8.08%, and the credit quality is high. To cater to a long term horizon, the fund invests in securities of longer tenure. This helps in earning the higher yield associated with longer term investments. However, this also comes with a higher level of interest rate risk, in the short to medium term. This is because the portfolio's value is marked to market, and therefore responds to changes in market interest rates. The objective is to closely manage the downside risks of the portfolio arising out of changes in the market rates, by actively managing the duration of the portfolio. The portfolio is concentrated with 8 holdings and the top 5 holdings constitute 100% of the total portfolio, all Government of India securities. The fund has returned 4.07% in the past one year as against the category average of 3.55%. In recent times, the RBI has undertaken a series of rate cuts to infuse liquidity into the system. The falling interest rates have translated into an appreciation in prices of long-term bonds and government securities alike. Expectedly, this fund has benefited. The returns since launch have been a laudable 10.98%. The expense ratio is 1.25%.

Fortis (BNP Paribas) Flexi Debt Fund Gem
Aggressive activity…

Incorporated in September 2004, BNP Paribas Flexi Debt Fund has an AUM of Rs. 250.31 crore. The average maturity of the fund is medium at 6.33 years, YTM is at 6.15%, and the credit quality is high. BNP Paribas Flexi Debt is an actively managed debt scheme where the fund manager’s view is reflected clearly through the maturity profile of the securities and the subsequent duration of the scheme. The fund takes advantage of arbitrage between corporate and government bonds and between short and medium term corporate and treasury bonds. But the fund accords top priority to safety of the principal and selection of bonds that are liquid enough to buy and sell. The main objective of this fund is to generate income through a range of debt and money market instruments of various maturities to maximise income, while maintaining an optimum balance between yield, safety, and liquidity. The portfolio sports 10 holdings and the top 5 holdings constitute 93.82% of the total portfolio. Debentures constitute 49% of the portfolio, Government of India securities 32%, and Structured Obligations 15%. The fund has returned a mere 3.77% in the past one year as against the category average of 4.33%. The returns since launch have been 8.05%. The expense ratio is 2.08%. In view of its notable performance over the years, the fund still enjoys a GEM status.

Canara Robeco Income Fund Gem
Costly churning …

Incorporated in September 2002, this ICRA 5 Star Gold Award winning fund has an AUM of Rs. 227.62 crore. The average maturity of the fund is 8.23 years, the average YTM is 8.44%, and the credit quality is high. The fund maintains a well-diversified portfolio of 19 holdings with a mix of long- and short-term instruments. The top 5 holdings constitute 62.80% of the total portfolio. Debentures constitute 28% of the portfolio, Government of India securities 27%, and Commercial Paper 25%. The fund has returned 4.24% in the past one year as against the category average of 4.33%. The returns since launch have been 8.87%. The expense ratio is 2.12%. The fund manager actively manages the maturity of the portfolio. This nimble-footed strategy has amply rewarded the fund. But the churning has come at a cost and it is among the most expensive funds in the category.

Birla Sun Life Dynamic Bond Fund Gem
Deft delivery…

Incorporated in September 2004, Birla Sunlife Dynamic Bond Fund has a high AUM of Rs. 7095 crore. The fund seeks to optimise returns by designing a portfolio to dynamically track interest rate movements in the short-term by reducing the duration in a rising rate environment, while increasing it in a falling rate environment. To maximise returns and gain maximum value out of securities, the fund looks at curve spreads on both the gilt and bond markets. For investors who cannot actively manage their debt portfolios, Birla Sun Life Dynamic Bond Fund is an ideal option. The average maturity of the fund is low at 3 years, the average YTM is 8.13%, and the credit quality is high. The portfolio is diversified with 33 holdings and the top 5 holdings constitute 60% of the total portfolio. Bonds constitute 31% of the portfolio, Government of India securities 24%, and Structured Obligation 18%. A close scrutiny of the fund’s portfolio over the past year shows that it has juggled tenors and assets quite nimbly in what was a challenging year for debt managers. The fund has been deftly managed, delivering impressive returns over a year, and figuring within the top quartile of debt funds over the three- and five-year time-frames. The fund has comfortably beaten its category average over all of these terms. The fund has returned a commendable 5.14% in the past one year as against the category average of 4.33%. The returns since launch have been 7.81%. The expense ratio is very low at 0.98%.

FUND FLAVOUR
December 2010

A perfect fit…

Are you looking for debt instruments beyond bank fixed deposits and post office instruments? Debt mutual funds may fit the bill well. Debt mutual fund is a product whose main aim is capital preservation coupled with descent returns i.e. higher than savings account and bank fixed deposits. Debt fund returns is essentially a combination of capital appreciation and regular income. Capital appreciation is where a debt mutual fund has an edge over a fixed deposit. Capital appreciation is possible because the debt instruments that the mutual fund company invests in are tradable. Based on the interest rate, the bond yields move. When interest rates move southwards, yields on bonds increase making it profitable for mutual fund companies to sell the bond.

Fund Flavour analyses threadbare the performance of the entire gamut of debut mutual funds in the past one year.

Gilt Funds
Lacklustre…

Gilt Funds invest in government debt, namely, the debt issued by Reserve Bank of India on behalf of the government. They also invest in securities issued by state governments. The investments are done in ultra safe paper because they are backed by the government itself but that does not mean the Gilt Funds are risk free. They can go down in value because when interest rates rise, the value of the debt goes down. So, there could be a possibility that the debt funds lose some part of their NAV also. Short government funds invest in government securities with one- to three-year maturities. For one-year period, the category delivered marginal 2.2% return. The intermediate government bond category includes funds with residual maturities between three- to seven-years and generated 0.4% returns. Out of 11 funds shortlisted for analysis, three funds beat their category peers. Long government funds invest in government securities with average maturities of more than seven years. This category generated -0.1% return during the one-year period. Out of 8 funds selected for analysis, only three funds outperformed their peers. Gilt Fund returns have suffered a substantial slowdown over the past one year. Gilt funds, which lost their lustre due to hardening yields on government bonds, are slowly moving up the performance charts on the back of an increase in bond prices in recent months. The average return delivered by the 47 funds was 2.9% as against 11.5% a year ago. Of the 47 medium and long-term gilt funds, only 20 funds beat the I-Sec Composite Gilt index's returns of 2.9% while six funds delivered negative returns. In this scenario, gilt funds have witnessed a muted performance.

Fixed Maturity Plans
Towering over FDs…

Fixed Maturity Plans (FMPs) are quite similar to fixed deposits in the sense that these funds are usually closed ended, which saves you from interest rate risk, and even if rates move upwards the fund NAV does not go down. The way the fund works is that a fund house announces a new fund offer specifying the duration of the fund say 18 months or so, and then they collect money from you which is then invested in debt of the same duration. These funds have become popular because of a sort of a tax advantage where interest on fixed deposits is charged at a higher tax rate than dividends from FMPs for individuals who are in the higher tax bracket. The risk of investing in FMPs is that they might invest the money in lower quality debt, and then during times such as the last crisis might come under pressure, and in that sense your capital is not really assured as it is in the case of a fixed deposit. Most of the corporates prefer investing in fixed maturity plans, offered by mutual fund houses as these provide maturity at shorter terms while offering competitive profits. FMPs allow you to lock into prevailing market rates for debt via a professional manager. That is a unique benefit when other debt options such as bank deposits or small savings schemes do not dynamically adjust to market rates. One year FMPs have returned a minimum of 7% and a maximum of 14% over the past one year whereas one-year FDs have returned a maximum of nearly 7% only during the same time period.

Income Funds
The interest rate yo-yo…

Income funds are categorized on the basis of maturity period of the fixed-income instruments they invest in. The ultra short bond category with funds consisting of average maturities over 91 days but less than one year, posted 4.6% return in the past one year. Out of 21 funds analysed, 10 funds beat the category average. During the one-year period, the short-term bond category with residual maturities between one- to three-years, posted 6.1% return. Out of 15 funds considered, 8 funds outperformed their peers. The intermediate bond category, including funds with maturities between three and seven years, registered 4.5% return during the past one-year. Out of 20 funds shortlisted, 13 funds beat the category average.

Floating rate funds
An ace up the sleeve

A floating rate fund is a fund that by its investments in floating rate instruments seeks to provide stable returns with low level of interest rate risk and volatility.These debt securities peg their coupon or interest rate payable to a market-driven rate such as the Mumbai Interbank Offered Rate (Mibor). Hence, each time the benchmark rate fluctuates, the coupon rate is adjusted accordingly. The primary advantage of these funds is that they are less volatile than other types of debt funds. This advantage arises due to the inherent structure of the floating rate bonds. In case of fixed rate bonds when interest rates in the economy change, the price of the bond adjusts to make up for the fixed coupon of the bond. While this happens even in the case of floating rate bonds, the change in the price of the bond is less drastic due to the periodic change in the coupon of the bond. The fall in the price of the floating rate bond will depend upon the reset period. The lesser the gap between the resets, the lower will be the fall in price. The reset could be daily, monthly, quarterly, half-yearly, annually or any other periodicity specified by the issuer. These funds, in turn, ensure that the portfolio has a limited interest rate risk. Under normal conditions, floating rate funds intend to invest minimum 65% of net assets in floating rate securities. There are two types of floating rate funds — long term and short term. The portfolio of the short-term plan is normally skewed towards short-term maturities with higher liquidity, and the portfolio of the long-term plan is skewed towards longer-term maturities. However, even the longer-term funds are positioned more on the lines of short-term funds and are not very aggressive. Moreover, the volatility arising due to investment into long-dated fixed coupon bearing securities is offset by the presence of floating rate securities. The one-year return for the floating rate funds in the last one year was in the 5.3 to 6.1% range, and the 3-year returns range between 6.9% and 7.9%.

Liquid Funds
Short and sweet…

Liquid Funds are funds that are used by investors for extremely short time durations, such as 1-3 months and in most cases instead of a savings account. In the last one year, liquid funds have returned between 7.7% and 8.85%. Recent data shows that banks are taking fresh exposures in liquid funds which indicate a high degree of safety and confidence in liquid funds. This shows that liquid funds are a good product to invest in if you are looking to fulfill some short-term goals. The changed SEBI rules on liquid funds ensure that you cannot get your units allotted till your money actually reaches the fund by 2 pm (the revised cut-off time) and realistic valuation. Your fund manager’s skills would be tested to the hilt. Fund managers will have to sharpen their skills to be able to dynamically manage the duration of funds and debt papers.

…in a perfect portfolio

Debt funds should be a key constituent of your portfolio. They add more value than passive debt investments such as fixed deposits and other small-saving instruments. You may equate debt funds with liquid funds that offer low returns. But there are many actively-managed debt funds, as discussed, that deliver higher returns, albeit with higher volatility. These actively-managed funds target dislocations in the yield curve and position themselves to profit from them. Debt funds are usually meant for those of you who prefer less volatility, want a regular income, and are willing to take limited risk.