Monday, May 30, 2011

FUND FULCRUM (contd.)
May 2011


The domestic mutual fund industry may see decline in assets under management (AUM) following the recent regulatory changes, according to ICRA Ltd. While 2010-11 proved challenging with decline in the AUM levels on introduction of new valuation guidelines from August 2010 and a tight liquidity regime, ICRA expects the pressure to continue in 2011-12 on account of increase in the dividend distribution tax for corporate investments in liquid/debt funds and cap on banks' investments in select debt mutual funds. Nonetheless, the crucial factors such as higher returns, ease of transaction and liquidity may arrest the decline of inflows in the debt schemes and thereby the overall industry AUM levels.


Mutual funds have lost 22.61 lakh folios over a period of two years. There has also been a huge outflow of Rs1,365 crore from equity mutual funds in April 2011—the highest outflow since October 2010. The total number of folios in equity-oriented mutual funds for the retail category (which was 4.03 crore at the end of financial year 2009-10), has declined to 3.87 crore at the end of 2010-11. This decline has been continuous over the past two years. The financial year 2009-10 saw an exit of 6.13 lakh folios from equity-oriented schemes. The following year witnessed an exit of another 16.48 lakh accounts. This just shows that retail investors are withdrawing from equity investing in a big way at a time when income and prosperity are rising. In the past two quarters, from October 2010 to March 2011, the folio tally for equity-oriented funds increased marginally by 21,573 accounts. Proving this right, the addition of new folios has not made any difference in the total number of folios; in fact, the total number of folios has declined over the years. According to the CAMS report, the average new folio creation over a period of two years, from August 2007 to July 2009, was 4.6 lakh new folios per month and from August 2009 to July 2010, the period post the ban on entry load, it averaged just 2.8 lakh new folios per month, even when the markets were doing well. All these symptoms point to a much deeper problem. The equity market has turned hollow and the equity cult is shrinking, instead of spreading.


Piquant Parade


SBI Funds Management Private Limited (SBI FMPL), the asset management company of the SBI Mutual Fund, is a joint venture between State Bank of India (SBI) and Societe Generale Asset Management S.A. (SGAM), a subsidiary of Societe Generale S.A (SG). On 9 July 2009, SG and Credit Agricole SA, entered into an agreement to undertake a global merger of their fundamental asset management business. Pursuant to the global merger, SBI FMPL will shortly become a joint venture between SBI and Amundi S.A. (Amundi), a leading European asset management company.


SBI Funds Management Pvt. Ltd. & UCO Bank have entered into an agreement on 20 May 2011 for distribution of SBI Mutual Fund products through UCO Bank's network of 2202 branches.


Retirement fund body EPFO will not take into account the past performance of previously engaged ICICI Prudential, HSBC, SBI and Reliance Capital while finalising the new asset management companies (AMCs) for managing its Rs 3 lakh crore corpus. Since the returns on investment provided by four fund managers was above the benchmark level of 8.52%, past performance as EPFO's fund manager would not be given any weightage while making fresh appointments. EPFO is in the process of appointing multiple fund managers for managing its funds for a three year period beginning July 1, 2011.


Regulatory Rigmarole


The Securities and Exchange Board of India is doing its bit to boost infrastructure funding in the country. The market regulator is working on a proposal for an infrastructure debt fund, specifically for mutual fund. The budget 2011 allowed FIIs to invest up to USD 25 billion in corporate infra bonds. FIIs will be investing their money into this proposed mutual fund infra debt fund. In turn, the fund houses will invest FIIs money into the various infrastructure projects across the country. However, the paper or security of the proposed fund would have a minimum residual period of maturity of five years at the time of investment. The budget had also promised that FII investments into infra funds will be exempt from the 20% withholding tax.


The authorisation given by the clients to stockbroker to run and maintain their accounts would continue to stand for ever, unless he/she asks for revocation of such authorisation. According to SEBI's earlier direction, it was necessary to get the authorisation from clients every year to maintain running accounts.


A panel set up by SEBI to boost mutual fund investments through distributors is considering a new incentive model, wherein investors could be asked to pay a service fee and commissions would be borne by fund houses. The proposals also involve a single-cheque payment for the combined amount of the agreed investment and service fee or transaction cost, which could be capped at an amount between Rs 100-200 per transaction. However, the distributors might be subjected to a stricter regulatory framework along with their new payment structure, so that they refrain from misleading investors.


SEBI has begun the process to standardise demat of mutual fund units. Mutual Funds will provide demat option to all investors from October 1, 2011. Demat option will be given for open and close-ended schemes. All mutual fund schemes should have international securities identification number (ISIN) from October 1 and mutual funds should display ISIN in all scheme statements to investors.


India's policy-makers are considering putting a cap or ceiling of between $5 and $10 billion on investment by foreign investors in Indian mutual funds to possibly limit the impact of any surge in inflows once this route is opened up soon. The government had announced in 2011 budget that it would allow overseas individuals to invest in equity schemes of Indian mutual funds as part of a move to diversify the class of foreign investors in the local equities market. The way the scheme will operate is that a foreign investor will have to open a dematerialisation or paperless trading account and a bank account here for which the Know Your Customer norms will be done by a local bank or intermediary registered with regulators here. Once this is done, foreign investors can buy into over 400 equity schemes.


For a change, SEBI and mutual fund distributors are fighting for the same cause — simplification of mutual fund products. Mergers are important because that will help and simplify the process in the mutual fund industry. U K Sinha, the new SEBI chairman, recently said the mutual fund committee would explore ways of “incentivising the industry and aiding growth”. He also talked about looking at models around the world and “in other financial products sold in India”. Constructive change is in the air!

Monday, May 23, 2011

FUND FULCRUM
May 2011


Mutual funds have witnessed a massive outflow of Rs 1,365 crore in April 2011. But the problem is not just with the fund industry, or investor behaviour, but with the so-called equity cult itself. Equity mutual funds enjoyed rising inflows from December 2010 to February 2011, with collections peaking at Rs2,495 crore in February 2011. It was after this that the decline started. In March 2011, net inflows were just Rs 454 crore, which was mainly due to ELSS schemes which collected Rs578 crore, whereas pure equity saw redemptions amounting to Rs124 crore. April 2011 has seen the highest outflow since October 2010. But, whether we can expect to see money return to equity schemes anytime soon is still in doubt.


The real problem is that fund mobilisation by mutual funds from the investing public is weak. Investors still prefer bank fixed deposits and categories other than the stock market in spite of the fact that the market has gone up by more than 20 times. Ever since the Securities and Exchange Board of India (SEBI) put a ban on entry load, equity funds have suffered redemptions. Distributors have found fund-selling unviable and nearly 50% of them have moved out of the business. There are about 80-85 thousand active numbers and those who were actually, very active in selling mutual funds were only 30% of it.


The other serious issue is that of poor retail participation. Volumes in the cash market have declined to historic lows. In April 2011, the daily average cash market turnover dropped to 11% of the overall volume, compared to 18% in the month a year ago. Official studies have shown a decline in the investor population, during a decade which has been the best period for the markets. This is also because of the fundamental problem with the way the market functions.


So, investors are happy to put their money in bank fixed deposits. Data from the Reserve Bank of India (RBI) shows that 50% of the household savings goes into bank deposits. In 1990, the percentage of savings in shares, debentures and investment in UTI was 14%, and this went down to 13% in 2007-08, even while the market has climbed by 20 times in this period.


Mutual funds that invest in highly liquid instruments (liquid funds) may face redemptions in excess of Rs 60,000 crore over the next six months, amounting to a third of their assets. In a move to prevent the circular flow of money between mutual funds and banks, the RBI, in its recent monetary policy, asked banks not to hold more than 10 per cent of their net worth in liquid mutual funds. Indian scheduled banks had a combined net worth of nearly Rs 5 lakh crore, based on a rough calculation extrapolating the data for listed banks. RBI data show that these banks held Rs 1.18 lakh crore in liquid funds as of April-end. Given that the RBI caps the investment in liquid funds at Rs 50,000 crore (10 per cent of net worth), this suggests excess investment of Rs 68,000 crore in liquid funds. Redemptions of this size may significantly dent liquid funds as a category. According to the latest data from the mutual funds' body, liquid funds manage total assets of Rs 2.2 lakh crore. The banks' excess investments amount to almost a third of this. With banks unlikely to be a major source of assets, debt fund houses may also have to scout for other clients. However, debt fund managers clarify that liquid funds will have no problem meeting the redemption requests, as the category has traditionally seen huge inflows and outflows. Over the last few months, these funds routinely saw both inflows and redemptions in excess of Rs 5,00,000 crore every month.


Piquant Parade


Union Bank of India has forayed into the crowded mutual fund space joining hands with KBC Asset Management of Belgium to launch Union KBC Asset Management Company. Union Bank of India holds 51 per cent stake and KBC Asset Management owns 49 per cent stake. Union KBC AMC has floated its first open-ended equity scheme called Union KBC Equity Fund, which is currently open.

Bajaj Finserv, a financial services company, is planning an investment of Rs. 50-75 crore in the asset management business in partnership with Allianz. While the business would be launched in calendar year 2012, the investment would be made over 2-3 years. The firm will invest Rs 50-75 crore in the AMC business with its joint venture partner Allianz.

Bank of India will be re-entering the mutual fund business by January 2012 and is presently in talks with multiple players for a strategic partnership for the venture.

Dutch financial services group Aegon intends to surrender its licence to operate in India's mutual fund industry. This is the first instance where a mutual fund has expressed its intention to the market regulator to give up its licence. Aegon is yet to launch a mutual fund product in India since receiving the licence from SEBI in October 2008 to start an asset management venture with New Delhi-based Religare Enterprises. But a month later, Aegon and Religare parted ways amid speculation of a rift between the two. The two companies continue to be partners in their life insurance joint venture, Aegon Religare Life Insurance. Aegon has been hunting for a partner, especially a bank, for the asset management business since the split, but did not manage to find one. The speculation is that the inability to find a joint venture partner could have contributed to the proposal to give up the mutual fund licence.

The ambitious plan of market regulator SEBI to make stock exchanges a selling point for mutual funds is yet to find favour among investors. Broker apathy towards selling mutual funds, along with overdependence of asset managers on traditional distributors, is preventing exchange platforms from taking off in a big way. The Bombay Stock Exchange on an average logs about 193 fund buy or sell orders worth about Rs 1.79 crore every month while the National Stock Exchange (NSE) executes about half the number of buy or sell orders worth about Rs 70 lakh, according to exchange data.

The initial enthusiasm of mutual fund houses to promote micro-systematic investment plan, or SIP, an investment route to attract low-income individuals to invest regularly in equities, is waning due to high costs and regulatory hiccups. Higher costs to service such accounts without adequate growth in investor base had been deterring mutual funds from promoting this channel. Now, the Securities and Exchange Board of India's decision to make know-your-client, or KYC, norms mandatory for even investments of less than Rs 50,000 in mutual funds has hit the final nail in the coffin of micro SIPs.


to be continued…

Monday, May 16, 2011

NFO NEST
May 2011

Spiced Up!

The aroma of spices is flooding the NFO market. Variety is the spice of the NFO market. Akin to NFOs in April 2011, four funds from diverse categories make their appearance in the May 2011 NFO NEST.


Sundaram Equity Plus Fund
Opens: May 4, 2011
Closes: May 18, 2011


Taking advantage of the love Indians have for gold, Sundaram Mutual Fund has launched Sundaram Equity Plus, a fund that would invest in a mix of stocks and gold. The fund is an open-end scheme, which will invest between 65% and 85% in equity and a maximum of 15% to 35% in gold exchange traded funds (ETFs). The fund is the first of its kind to offer a mix of equities and gold. The scheme will primarily focus on opportunities in Indian equities with the addition of gold ETF to provide diversification and exposure to the yellow metal in certain phases. The equity portion of the fund will be invested primarily in large caps, benchmarking itself to the Nifty. Given the fact that the Indian economy is expected to grow at 8% for the next few years, and India's attractiveness amongst emerging markets, equities are expected to do well over the long term. Gold, on the other, has been shining in recent times. It has outperformed other asset classes such as equity and debt over one-year as well as 10-year periods. The performance of the scheme shall be benchmarked to the S&P CNX Nifty index for the equity and equity- related investments (65% of the portfolio) and to the price of Gold in INR terms for the rest of the portfolio i.e. 35%. The fund manager for the scheme will be Srividhya Rajesh and S Bharath.


Birla Sunlife Capital Protection-oriented Fund – Series 6
Opens: May 18, 2011
Closes: May 30, 2011


Birla Sun Life Mutual Fund has launched Birla Sun Life Capital Protection Oriented Fund - Series 6, a close-ended capital protection oriented scheme with the duration of 761 days from the date of allotment of units. The investment objective of the scheme is to provide capital appreciation linked to equity market with downside protection at the end of the tenure. The fund expects to achieve down side protection by investing in debt securities with tenure comparable with the tenure of the plan, subject to the credit risk. The fund expects to achieve the market-linked appreciation (upside) by investing in premium of exchange traded options. The fund proposes to restrict its derivative exposure only to the extent of buying of call options. Hence the maximum loss could be equivalent to the premium paid, not any more. Moreover, the premium paid will be equal or lower to the coupon receivable from fixed income securities after providing for fund expenses. The scheme would allocate 80% to 100% of assets in debt securities and money market instruments and up to 20% of assets in options premium with high risk profile, but limited to the premium paid. Benchmark Index for the scheme will be CRISIL Balanced Fund Index. The fund manager for the scheme will be Satyabrata Mohanty and Ajay Garg.


ICICI Prudential Multiple Yield Fund - Plan A
Opens: May 20, 2011
Closes: May 31, 2011


ICICI Prudential Mutual Fund has launched a new close-ended income fund - ICICI Prudential Multiple Yield Fund Plan A. The tenure of the plan is 1100 days. The investment objective of the scheme is to generate returns by investing in a portfolio of fixed income securities/ debt instruments. The performance of the scheme will be benchmarked against Crisil MIP Blended index and will be managed by Mr. Chaitanya Pande.


Union KBC Equity Fund
Opens: May 20, 2011
Closes: June 3, 2011


Union KBC Equity Fund, an open ended equity scheme, is the maiden launch by Union KBC Mutual Fund. The investment objective of the scheme is to achieve long-term capital appreciation by investing substantially in a portfolio consisting of equity and equity related securities. The scheme would allocate 75% to 100% of assets in equity and equity related instruments including equity linked derivatives with medium to high risk profile. On the other side, it would allocate upto 25% of assets in debt and money market instruments with low to medium risk profile. Benchmark Index for the scheme is BSE 100. Ashish Ranawade will be the fund manager for the scheme.

Axis Gold Fund, Union KBC Liquid Fund, Religare Gold Fund, DSP Blackrock World Agriculture Fund, DSP Blackrock Latin American Fund, DSP Blackrock New Energy Fund, HDFC Gold Fund, DSP Blackrock China Fund, L & T Capital Protection Oriented Fund – Series I, II, and III, Sundaram Capital Protection-oriented Fund 3 years- Series 4,5 and 6, Axis Metal ETF, Axis FMCG ETF, Axis Banking ETF, Axis Energy ETF, Smallcap Benchmark Exchange Traded Fund, SBI Gold Fund, SBI Capital Protection-oriented Fund – Series III, Baroda Pioneer Dynamic Bond Fund, and Baroda Pioneer Credit Opportunities Fund are expected to be launched in the coming months.

Monday, May 09, 2011

GEM GAZE
May 2011


Index investing has not gained the requisite momentum as active investing in India. Nevertheless, for the benefit of those who believe in passive investing, we have culled out the GEMs in the Index Fund category that can adorn your portfolio.

With two funds joining the “GEMGAZE” bandwagon, the May 2011 GEMGAZE sparkles with five GEMs in all.

Benchmark Banking BeES Gem

Incorporated in May 2004, Benchmark Banking BeES has an AUM of Rs 271.2 crore, an increase of nearly four times in the past year. A predominantly largecap fund, the fund has 99.83% in equities from the banking sector. The one-year return of the fund is 16.91% when compared to the category average of 15.80%. The fund is benchmarked against the CNX Bank Index. The expense ratio of the fund is very low at 0.5% and the portfolio turnover ratio is 389%.

ICICI Prudential Index Fund Gem

ICICI Prudential Index Fund, incorporated in February 2002, sports an AUM of 92.01 crore. A predominantly largecap fund, as is the case with all index funds, 96.33% of the assets are in equities. The top three sectors, finance, energy, and technology, constitute 54.01% of the portfolio. The one-year return of the fund is 10.14 % when compared to the category average of 8.92 %. The fund is benchmarked against the S&P CNX Nifty. The expense ratio of the fund is high at 1.5% and the portfolio turnover ratio is 67%.

Can Robeco Nifty Index Fund Gem

Can Robeco Nifty Index Fund, incorporated in October 2004, sports an AUM of a paltry Rs 4.98 crore. A predominantly large cap fund, as is the case with all index funds, 97.35% of the assets are in equities. The top three sectors, finance, energy, and technology, constitute 58.59% of the portfolio. The one-year return of the fund is 9.02% when compared to the category average of 8.92 %. The fund is benchmarked against the S&P CNX Nifty. The expense ratio of the fund is 1 % and the portfolio turnover ratio is a mere 8%.

Franklin India Index Fund Gem

Incorporated in July 2000, the AUM of Franklin India Index Fund – Nifty and Sensex have remained almost stagnant at Rs 130.07 crore and Rs 60.74 crore since 2010. A predominantly large cap equity fund, 59.06% and 59.9% of the assets are invested in the top three sectors- finance, energy, and technology. The one-year return of the fund is 9.15% and 9.43% respectively as against the category average of 8.92%. The fund is benchmarked against the S&P CNX Nifty and the Sensex respectively. The expense ratio of the fund is 1% and the portfolio turnover ratio is only 12.74 % and 19.02% respectively.

Principal Index Fund Gem

Principal Index Fund, incorporated in June 1999, sports an AUM of a paltry Rs 18.38 crore. A predominantly large cap fund, as is the case with all index funds, 99.6 % of the assets are in equities. The top three sectors, finance, energy, and technology, constitute 58.88% of the portfolio. The one-year return of the fund is 8.95% when compared to the category average of 8.92 %. The fund is benchmarked against the S&P CNX Nifty. The expense ratio of the fund is 1 % and the portfolio turnover ratio is a mere 0.6%.

Birla Index Fund

Incorporated in September 2002, the AUM of Birla Index Fund has been almost stagnant at Rs 34.71 crore since 2010. A predominantly largecap equity fund, 50.04% of the assets are invested in the top three sectors - finance, energy, and technology. The one-year return of the fund is a mere 8.08% as against the category average of 8.92%. The fund is benchmarked against the S&P CNX Nifty. The expense ratio of the fund is very high at 1.5% and the portfolio turnover ratio is 153%.

UTI Index Equity Fund

Incorporated in March 2000, the AUM of UTI Index Fund has dipped marginally to Rs 204.18 crore from 2010. A predominantly largecap equity fund, 59.92% of the assets are invested in the top three sectors- finance, energy, and technology. The one-year return of the fund is a mere 8.81% as against the category average of 8.92%. The fund is benchmarked against the S&P CNX Nifty. The expense ratio of the fund is very high at 1.5% and the portfolio turnover ratio is 44.17%.

Tata Index Nifty Fund

Incorporated in February 2003, the AUM of Tata Index Nifty Fund has been almost stagnant at Rs 7.72 crore since 2010. A predominantly largecap equity fund, 58.97% of the assets are invested in the top three sectors- finance, energy, and technology. The one-year return of the fund is 8.73% as against the category average of 8.92%. The fund is benchmarked against the S&P CNX Nifty. The expense ratio of the fund is very high at 1.5% and the portfolio turnover ratio is 21%.

SBI Magnum Index Fund

SBI Magnum Index Fund, incorporated in January 2002, sports an AUM of a paltry Rs 25.76 crore. A predominantly large cap fund, as is the case with all index funds, 98.19 % of the assets are in equities. The top three sectors, finance, energy, and technology, constitute 59.19 % of the portfolio. The one-year return of the fund is 9.04% when compared to the category average of 8.92 %. The fund is benchmarked against the S&P CNX Nifty. The expense ratio of the fund is high at 1.5 % and the portfolio turnover ratio is 150%.


Monday, May 02, 2011

FUND FLAVOUR
May 2011


Index Funds - one up on Active Funds!


Index mutual funds are about investing in securities of a particular (targeted) index in an equal proportion. These investments tend to be passive by nature and so it would mean that the manager of the portfolio would distribute the assets of the fund across several stocks that are part of the index. This distribution is done in equal proportion as the weights in a particular index. The idea behind these investments is to reflect the movement of the index. There are several good reasons to invest in index mutual funds. For one, the expenses involved are much lower. In addition, these investments have very low recurring expenses. Secondly, these investments are made up of stocks of a very high quality, which include liquid, much traded, large cap and blue chip stocks. In addition, with these investment vehicles, you can also diversify your portfolio and this means that you also stand to enjoy all the benefits that are normally associated with diversification. Finally, when dealing with index mutual funds, you also stand to exercise maximum control over your portfolio’s risk. This is because you are shielded from fads as well as trends, which are normally associated with active investing.


Statistics Support


Indexing has legions of diehard believers. A parade of studies has shown why: Index funds, which try to simply match the performance of a broad market sector, have consistently beaten "actively managed" funds, where professional money managers attempt to outperform the market by picking the hottest stocks and bonds. Over the 23 years ending in 2009, actively managed funds trailed their benchmarks by an average of one percentage point a year. If a benchmark like the Standard & Poor's 500 returned 10%, the average managed fund investing in similar stocks would, therefore, have returned 9%, while an index fund would have returned 9.8% to 9.9%, giving up only a small amount for fees.

Alpha on Active Funds

But if this is so, why do a majority of investors still choose active management? Indexing, or "passive management," accounts for only about 13% of assets in mutual funds holding stocks. It does not seem to make sense. Experts have offered a variety of explanations all of which point the index finger to the gullible investor. Investor preferences between passively managed and active funds appear to be dictated less by their intrinsic appeal than by the marketing tactics of banks and fund managers. Banks are aggressive in marketing their active funds, and they compare their funds to the historical returns of 40% or more with the 8% on their fixed deposits. Banks have 56% of public savings with them. If banks themselves market the funds, there could be a decent shift [away from bank deposits to mutual funds] in the next few years. But new research shows that investors who embrace active management may, in fact, be behaving perfectly rationally. Investors are in a kind of eternal struggle each hoping the others will withdraw to make it more likely that the remaining managers will find the nuggets. For active managers, the Holy Grail is "alpha," the industry's term for a return that exceeds the market average when the investment's risk is taken into account.


Fighting for shelf space


Unfortunately, Index Funds have not really taken off in India so far. According to the Association of Mutual Funds of India (AMFI) data, index funds comprise of only 0.3% of the total industry assets. In comparison, index funds comprise about 9% of the mutual fund industry in the US. Why have index funds not taken off then? Agents have traditionally sold products that fetched higher commission. Index funds are low-cost products and hence do not pay much commission. Hence the market did not take off as much as we had anticipated. Index funds are not a paying proposition. But that is not the only reason why index funds did not pick up. Contrary to developed markets such as the US where fund managers have repeatedly found it tough to beat indices, in India actively managed funds have outperformed passive funds, consistently. There is immense talent in the Indian mutual fund industry. We have more than 6,000 listed companies on our stock markets; it is not very tough for a capable fund manager to pick about 100-150 stocks of these that can outshine the market.


Raring to go…


Benchmark’s acquisition by Goldman Sachs has not deterred others from launching ETFs and index funds in India. India Infoline Asset Management Co. Ltd, that got its mutual fund licence recently, aims to launch passive funds initially and manage them for about a year. Motilal Oswal Asset Management Co. Ltd that started its operations in 2010 also aims to stick to ETFs, as will IDBI Asset Management Co. Ltd that will mainly focus on index funds. ICICI Prudential AMC may get aggressive and apart from educating stock brokers to recommend ETFs to investors who need them, will also look at launching specialized ETFs such as country-specific ETFs.

…aiding the much-needed transition

Active funds are set to dominate the Indian market for a few more years until investors get better educated about passive funds. Many investors invest in mutual funds assuming that they provide higher returns. But the concept of mutual funds is to diversify risk, and that is not widely understood in India. The lack of an independent rating agency in India like Morningstar in the U.S is another dampener. There is respite coming on that front with the Indian markets regulator, the Securities and Exchange Board of India, setting up the National Institute for Securities Markets, which is working to set up something like Morningstar to [form] a central database, to independently assess mutual funds or stocks and disseminate information about them. In the Indian context, participation of retail savers is low in the stock market. So index fund is the simplest of product to understand as it has minimum post purchase dissonance.