FUND FULCRUM
September 2011

Even as equity markets are in the firm grip of a bearish sentiment, retail investors appear to be opting to invest in increased numbers, presumably in anticipation of returns when the scenario improves. The number of retail folios in equity schemes rose by 138,000 in August 2011, a month when the benchmark indices fell by 12%. There was an exodus of investors in July 2011, with 330,000 equity folios being closed. During August 2011, the overall increase in mutual fund folios was 175,000, of which pure equity schemes contributed 138,000. Net inflows into equity funds in August 2011 were close to Rs 2,000 crore. However, the total industry AUM dipped 4% to Rs 6.96 lakh crore mainly due to the market fall and redemptions in income and liquid schemes. The combined net outflows from all types of schemes stood at Rs 14,597 crore.

According to a report by brokerage and investment group CLSA Asia-Pacific Markets, titled, 'Fat Cats in Fast Lanes: Surge in High Net-Worth Individuals', Asia is likely to get richer, with the number of high net-worth individuals in the region pegged to touch the 2.8 million-mark in the next four years, driven by robust economic growth, a high savings ratio and the rise of Asian exchange rates. Millionaires in India are likely to see their wealth grow by a whopping 405% over the next decade -- the fastest in the world, according to a study by global consulting major Deloitte. Among emerging markets in 2020, India is likely to have the highest per capita wealth among millionaires with $4.25 million - placing it ahead of the US.

Piquant Parade

Expanding its partnership with Nippon Life, Reliance Capital signed a deal for exploring stake sale in its mutual fund and other businesses to the Japanese firm, to which it has already sold 26% equity in the life insurance venture. The MoU would entail Nippon Life evaluating various collaboration opportunities, including strategic partnership, across all Reliance Capital-promoted financial businesses, including mutual fund.

Taurus Mutual Fund has signed an agreement with Punjab & Maharashtra Cooperative Bank for distribution of its schemes through the bank’s network of more than 90 branches across the country.

UTI has tied up with Canara Bank Securities to sell UTI Mutual Fund products through their online platform.

India’s two leading online mutual fund distribution platforms - Fundsupermart and FundsIndia have decided not to charge a transaction fee from its investors. SEBI through its circular had said that distributors could either opt in or opt out of transaction charge of Rs 100 and Rs 150.

Union KBC launched two investor centric initiatives: Prabodh, a series of investor awareness programs and ATMfunds@Union Bank, which would allow investors to conduct mutual fund transactions through Union Bank of India ATMs. Prabodh is a commitment to provide 1000 AMFI investor awareness programs for ordinary investors across India over the next 12 months. It is a multi-layered initiative, which not only focuses on education, but also on the practical goal of getting more informed clients to invest in mutual funds.

CRISIL Research launched its first index in the commodities space named “CRISIL Gold Index”. CRISIL expects the index to serve as an independent and common benchmark for evaluating the performance of Gold ETFs and other investment products with gold as underlying investment. This index will be freely accessible in the public domain.

Private sector mutual fund company, ICICI Prudential Mutual Fund is eyeing to increase its retail penetration in Gujarat, where the company has largest presence among other states. ICICI Prudential Mutual Fund has total assets under management worth Rs 78,000 crore, of which Rs 1,443 crore is managed from Gujarat.

Regulatory Rigmarole

Investors will get consolidated account statements from October 1, 2011 every calendar month. In a bid to bring cost effectiveness in printing and despatching scheme annual reports, SEBI has asked AMCs to send these reports to investors via email. Fund houses will have to inform all their unit holders that the scheme annual reports will only be sent through email henceforth. However, investors will have a choice to continue getting these reports physically. SEBI has also directed AMCs to prominently display the link of scheme annual reports or abridged summary on their websites and make sure that physical copies are available at their registered offices at all times.

Mutual fund houses are likely to outsource the due diligence process related to regulation of distributors to a third party agency. The task of compliance may be outsourced to an audit firm or a common agency to the industry. The task is likely to increase the compliance cost for the fund houses. The cost will be borne by all AMCs. Fund houses are mulling the creation of a pool of money for this purpose. The AMFI committee will chalk out the extent of due diligence process which will be outsourced to the audit firm after receiving a formal go ahead from the AMFI board.

AMFI is in talks with rating agencies like CRISIL and ICRA to construct new benchmarks to enable fund houses to comply with the new guideline on performance disclosure in advertisements of debt funds. The recent SEBI circular requires that debt schemes are required to display the returns of 10 year government security and 1 year T-Bill. Fund houses say that the only roadblock is that currently there are no benchmarks which track the 10 year government dated security and 1 year Treasury Bill. G-Sec Funds are currently benchmarked against I-Sec LiBex. Liquid funds will have to be benchmarked against 1 year T-Bill. Currently all liquid funds are benchmarked against CRISIL Liquid Fund Index while open-ended debt schemes are benchmarked against CRISIL Short Term Bond Fund Index.

In a bid to ensure higher volumes, New Pension Scheme (NPS) fund managers have told the Pension Fund Regulatory and Development Authority (PFRDA) that they should be allowed to use their respective distribution networks (mutual fund agents) to sell the pension plan. In a meeting with PFRDA, the managers had mooted the idea of training their existing sales agents on the NPS product. They had also proposed a commission of at least two-three per cent to the agents for selling the product. This follows the pension fund regulator seeking feedback from fund managers on the Bajpai Committee report. The report had recommended pension fund houses float a separate distribution company for marketing the products.

SEBI has asked fund houses to disclose the performance of all schemes managed by a single fund manager. This pressure tactic is one of the attempts by the regulator to bring about a consolidation of current schemes that now number over 3,000.

In a move which could improve the fund flow and provide some stability to the choppy Indian bourses, the finance ministry has relaxed norms for foreign nationals and foreign institutional investors (FIIs) to obtain Permanent Account Numbers (PAN) that could also double as KYC (know your customer) compliance for any investment they make in Indian stocks. Till now, FIIs or foreign nationals had to obtain a PAN and separately meet KYC requirements prescribed by the market regulator before investing in stocks. The tax obligation on any transaction is twice the due amount if they fail to mention PAN. In the revised rules that come into effect from October 1, 2011 a foreign national will have to only produce either his/her citizenship number or taxpayer identification number to obtain a PAN.

The growth of the financial services industry has attracted retail investors in greater numbers. Financial markets are dynamic and it is difficult for anyone to predict the outcome. Financial literacy among investors about mutual funds is quite low. The regulator has rightly built safeguards, ensuring greater transparency and disclosures from industry players, so that the investor has enough awareness to make an informed decision. The primary objective of regulation is to encourage greater retail participation in the capital markets, and channelise household savings via mutual funds. Several regulatory measures have been consistently introduced to protect the interests of the small investor. The need of the hour is constructive dialogue between industry stakeholders and the regulator, so that there is ease of implementation of regulations.

NFO NEST
September 2011

Safety First!

There is a dearth of equity NFOs this month. Three out of the six funds figuring in the September 2011 NFO NEST are capital protection-oriented funds, one is a hybrid fund and another is a gold fund of fund. Only one is an equity fund. Capital protection-oriented funds are designed to keep your money safe. At the same time it allows you an opportunity to take a small exposure to the equity market. The returns of such funds are also more tax-efficient as compared to traditional deposits. Such funds combine investment avenues and cater to the prime requirement of all of you who want returns along with safety.

Peerless Equity Fund
Opens: September 7, 2011
Closes: September 21, 2011

Peerless Equity Fund is a multi-cap diversified equity fund. The portfolio will have optimal blend of large, mid and small cap stocks based on prevailing macro-economic and socio-political environment, both domestically and globally. The primary investment objective is to generate long term capital appreciation by investing in an actively managed portfolio predominantly consisting of equity and equity related securities diversified over various sectors. The fund will invest between 80 to 100% in equity and equity related securities and up to 20% in debt and money market securities. The investments would not have any industry, sector or market capitalization bias. The strategy would be to invest in stocks and sectors that seem attractive, exhibit strong growth or have the potential for strong growth in the medium to long term. The performance of the scheme will be benchmarked against S&P CNX Nifty. The scheme will be jointly managed by Mr. Kaushik Dani for the equity portion and Mr. Ganti N Murthy for the debt portion.

SBI Capital Protection-oriented Fund Series III
Opens: September 15, 2011
Closes: September 29, 2011

SBI Mutual Fund has launched a close-ended capital protection oriented fund called SBI Capital Protection Oriented Fund – Series III. The tenure of the fund will be 3 years from the date of allotment. The primary objective of the fund is to protect the capital invested on maturity of the fund through focused investments in equity, debt and money market instruments while also seeking to provide investors with opportunities for long-term growth in capital. The fund will allocate 82 to 100% of assets in debt, debt related instruments and money market instruments with low to medium risk profile. It would further allocate up to 18% of assets in equity and equity related instruments including derivatives with high-risk profile. Investment in debt will be in Government Securities and securities rated AAA. The equity investment will be in stock listed on NSE and BSE having a market cap equal to or higher than the market cap of the least market capitalized stock of the BSE 100 Index. The fund will be jointly managed by Rajeev Radhakrishnan and Rama Iyer Srinivasan. It will be benchmarked against CRISIL MIP Blended Index.

Birla Sunlife Capital Protection-oriented Fund Series 7
Opens: September 15, 2011
Closes: September 29, 2011

Birla Sun Life Mutual Fund has launched a close-ended fund called Birla Sun Life Capital Protection Oriented Fund - Series 7. The tenure of the fund will be 36 months from the date of allotment. The investment objective of the fund is to provide capital appreciation linked to the equity market with downside protection at the end of tenure. The fund would allocate 80 to 100% of assets in debt securities and money market instruments with low to medium risk profile. It would further allocate up to 20% of assets in option premium with high-risk profile. The fund will be jointly managed by Satyabrata Mohanty and Ajay Garg. It will be benchmarked against CRISIL Balanced Fund Index.

Axis Hybrid Fund Series 3
Opens: September 16, 2011
Closes: September 30, 2011

Axis Mutual Fund has launched a new fund named as Axis Hybrid Fund Series 3, a 3-year close-ended income scheme. In order to provide liquidity, the units of the fund will be listed on the capital market segment of the NSE and/ or any other Stock Exchange. The primary objective is to generate income by investing in high quality fixed income securities whilst the secondary objective is to generate capital appreciation by investing in equity and equity related instruments. The fund will allocate 65% to 95% of assets in debt and money market instruments including securitized debt with low to medium risk profile. On the other side, it would allocate 5% to 35% of assets in equity and equity related instruments with high-risk profile. Investment in securitized debt would be up to 50% of the net assets of the fund. The fund shall not invest in foreign securitized debt. Benchmark Index for the fund is Crisil MIP Blended Index. The fund will be managed by Mr. R. Sivakumar and Jinesh Gopani.

Sundaram Capital Protection-oriented Fund Series 6 (3 years)

Opens: September 16, 2011
Closes: September 30, 2011

Sundaram Mutual Fund has launched Sundaram Capital Protection-oriented Fund Series 6, a close-ended scheme for a period of three years. The objective of this fund would be to seek income and minimise risk of capital loss by investing in a portfolio of fixed-income securities. The fund may invest up to a maximum of 20% in equity to seek capital appreciation. The fixed income component of the fund shall be invested only in Government of India Securities and/or other fixed income instruments rated AAA. Majority of the equity allocation will be in CNX 500 index companies, and will maintain diversity. There will be no excessive stock or sector specific exposure that will enhance the risk of the portfolio. Dwijendra Srivastava is the fund manager for the debt portion and Srividhya Rajesh is the fund manager for equity portion of the scheme. The fund is benchmarked against the CRISIL MIP Blended Index.

ICICI Prudential Regular Gold Savings Fund
Opens: September 20, 2011
Closes: October 4, 2011

ICICI Prudential Regular Gold Savings Fund, is an open ended Fund of Funds scheme with the primary objective to generate returns by investing in units of ICICI Prudential Gold Exchange Traded Fund. ICICI Prudential Gold Savings Fund is a direct feeder into ICICI Prudential Gold ETF. The fund Manager is Chaitanya Pande.

JP Morgan India Focus Fund, JP Morgan E.D.G.E. Fund, Pramerica Banking and Financial Services Fund, Pramerica Dynamic Bond Fund, IDBI Income Fund, Birla Sunlife Gold Fund, Union KBC Ultra Short term Debt Fund, AIG Monthly Income Plan, AIG Monthly Income Plan, L&T Interval Fund, DSP Blackrock Global Dynamic Equity Fund, DSP Blackrock Global Allocation Fund, DSP Blackrock Global Emerging Europe Fund, Daiwa Equity Fund, Union KBC Tax Saver Scheme, SBI Global Emerging Market Fund, India Bulls Blue Fund, India Bulls Liquid Fund, UTI Credit Opportunities Fund, Sundaram Select Micro Cap Fund, Baroda Pioneer Gold and Mining Fund, Baroda Pioneer Gold Fund, and DSP Blackrock Dual Advantage Fund are expected to be launched in the coming months.

GEM GAZE

September 2011

The market carnage has finally taken its toll. Only four GEMs of September 2010 have retained their esteemed status by virtue of their consistent performance. Magnum Contra, contrary to expectations, has exhibited a dismal performance and has been shown the door. Sundaram Midcap Fund has occupied its coveted position in the September 2011 GEMGAZE.

HDFC Equity Fund Gem

Steady star

With net assets of Rs 9220 crore, the one-year return of HDFC Equity has been -11.84% as against the category average of –13.61%. Finance, energy, and technology form the top three sectors accounting for nearly 50% of the net assets of the fund, replacing healthcare, which occupied the third slot last year. Nearly 80% of the portfolio comprises of large caps with the remaining in mid and small cap stocks, a significant change from 60% last year. With less than 20 stocks in the portfolio till 2003, the fund manager increased it to around 60 stocks last year. At present, there are only 34 stocks in the portfolio. The top 10 holdings have averaged at around 30% over the past one year. The large corpus has led to it being more diversified. The expense ratio of the fund is 1.79% and the portfolio turnover ratio is 37.37%.

HDFC Equity is benchmarked against S&P CNX-500 — an index often considered tough to replicate or beat. The fund though, has beaten this index 78 per cent of the times on a rolling return basis in the last three years. Though the fund is oft perceived to be risky, given its short-term swings and concentrated sectoral bets, its returns on a risk-adjusted basis are impressive. An enviable track record of 16 years, during which the fund clocked a compounded annual return of 24%, multi-cap approach and the strategy of staying invested in equities across market cycles make HDFC Equity an ideal candidate for long-term investors.

Sundaram Midcap Fund Gem

Quality with Integrity

Sundaram Midcap Fund sports net assets of Rs 2191 crores. The one-year return of the fund is –9.72% as against the category average of –14.02%. Its three-year and five-year returns are 16.43% and 13.08% as against the category average of 10.61% and 8.74% respectively. The fund has recorded a compounded annual return of 35.9% since launch in July 2002, outpacing the BSE Mid Cap Index by 11.5 percentage points on an annual basis. Sundaram Select Mid Cap is a dedicated mid-cap fund. This style integrity, which has been maintained since launch in 2002, and the track record places the fund as an appropriate vehicle for defined asset allocation decision by investors. 35% of the assets are invested in sectors such as services, chemicals and engineering. The top ten stocks in the portfolio account for 42% of the assets. The fund’s massive diversification with 52 stocks dilutes risk to an extent. The expense ratio of the fund is 1.89% and the portfolio turnover ratio is 69%.

Sundaram Select Midcap has a strong track record of beating its benchmark, the BSE Midcap, in 4 out of the last 5 years, in 5 out of the last 6 quarters and in 5 out of the last 6 months. The fund focuses on valuations with emphasis on portfolio quality and profit booking.

ICICI Prudential Dynamic Fund Gem

All season play

With net assets of Rs 3814 crore, the one-year return of ICICI Prudential Dynamic Fund is –7.27% as against the category average of –11.23%. The fund's portfolio is well-diversified and represented by 85 stocks as against 37 last year. The top ten stocks accounted for close to 47% of the assets invested in equity. The top three preferred sectors were energy, banking, and software. The fund often prunes its holding in individual stocks when its objects are met. This is evident from its high portfolio turnover of 117%. The expense ratio is 1.82%.

lCICI Prudential Dynamic Fund provides an ideal choice to make the most of dynamic changes in a volatile market. It has the ability to capture upside opportunities across value and growth, large and mid-cap, index and non-index stocks. On the flip side, it also has ability to move into cash as markets get overvalued. This approach helps mitigate risks during a downside and also provides more stable return opportunity during the market rallies. ICICI Prudential Dynamic Fund has the flexibility to shift stances between “Attack” and “Defense” to ensure that you benefit from the market changes by investing across sectors, styles and capitalizations. ICICI Prudential Dynamic Fund thus an excellent option for investment in any market condition.

DSP BlackRock Equity Fund Gem

Consistent outperformer


DSP BlackRock Equity Fund, a diversified equity fund with assets under management of Rs 2516 crore, is among the few consistent performers. Its one-year return was –11.14% as against the category average of 13.61%. The top three sectors, finance, energy, and health care, constituted 37% of the portfolio. Exposure to the top 10 stocks is currently at 36%. From over 67 stocks a year ago, the number of stocks is 78 at present. The expense ratio of the fund is 1.86% and the portfolio turnover ratio is very high at 185%.

The long-term track record of delivering superior returns in addition to its ability to contain downsides well makes DSPBR Equity Fund a good investment option in this market. The fund offers exposure to stocks across market capitalisation categories and has beaten its benchmark CNX Nifty over one, three and five-year periods. DSPBR Equity has delivered a compounded return of about 12% and 28% over three- and five-year periods. Besides outperforming its benchmark over these periods, it also outperformed the bellwether on an annual basis in each of the last five years. It has also outperformed the CNX Midcap over three and five-year periods, helped by its multi-cap approach. However, a highly diversified portfolio in terms of both market capitalisation as well as number of stocks held, somewhat pegs up its risk profile over its large-cap benchmark.

Birla Sunlife Frontline Equity Fund Gem


Frontline performer


Birla Sunlife Frontline Equity Fund has net assets of Rs 2909 crore. Its one-year return is –10.4% as against the category average of 11.23%. But its three-year and five-year returns of 11.47% and 13.35% surpass the category average of 7.76% and 8.37% respectively. More than three-fourth of its portfolio is invested in large cap stocks. The top three sectors of finance, energy, and technology constitute 46% of the portfolio. The fund has 57 stocks in the portfolio. High returns, low risk and a diversified portfolio are the hallmarks of the fund. The expense ratio of the fund is 1.86% and the portfolio turnover ratio is 44%.

The fund is quite aptly named - BSL Frontline Equity Fund has been a frontline performer through good and bad markets - outpacing its benchmark each year over the last 5 years and almost every quarter over the medium term. As a testimony of its consistent performance, 83% of times, the fund has beaten the benchmark (BSE 200) in 1 year rolling returns. Birla Sun Life Frontline Equity Fund’s performance is attributable to dynamic sectoral allocation in the portfolio, stock selection and timely market calls. The scheme is managed using 3 key principles – discipline, bottom-up stock picking and profit booking at opportune moments.

FUND FLAVOUR
September 2011

Low risk in the long-term…

Diversified equity funds are those funds that spread investments across different sectors such as IT, pharma, banking, oil & gas, real estate, telecom and FMCG. One of the major advantages of this type of funds is that they minimise the risk of over-concentration in one particular sector. At any given point of time, if a part of the portfolio is down these funds ensure that a larger part of the portfolio is up and the investment is performing well. Diversified equity funds are best suited for investors looking for long-term wealth creation.

No-show in the short-term…

With the markets remaining patchy and volatile, the first half of 2011 has turned out to be almost a no-show for equity mutual funds. Only two diversified equity mutual funds have managed to remain in the green during January-June in 2011, the worst six-month performance since the second half of 2008 when the markets nosedived following the global recession. Incidentally, 294 out of the 310-odd diversified equity mutual funds were in the green in January-June 2010 with nearly 50 funds generating double digit returns. Diversified equity funds, the largest category of equity schemes by number and assets, lagged the benchmark return in the latter half of 2010, with funds having higher exposure to mid- and small-cap stocks significantly under performing their large-cap cousins. In all, 93 of the 335-odd equity funds dropped by more than 10% but a majority of them declined at a lower rate than the benchmark indices. Sensex and Nifty slipped 8.1% and 7.9% respectively in 2011 (till June 30). The consistently-high inflation and a series of rate hikes impacted market performance adversely. Moreover, stocks of several big companies have seen downgrades as their performance remained well below expectations. A lot of projects did not take off and inflows from foreign institutional investors also were mostly flat. Domestic institutional investments, which usually pick up towards the end of the fiscal year also remained sluggish.

Gyrations in the year gone by…

As the Indian equity markets oscillated with an upward bias in October 2010, the diversified equity funds following quant models for investing, delivered appealing returns. The equity markets, however, ended the month marginally in the negative terrain, with all equity funds barring banking and mid cap funds ending the month with negative returns.

As the Indian equity markets, shivered due to the economic and political factors in November 2010, most diversified equity funds delivered negative returns.

Contrary to muted FII activity, the domestic equity mutual funds evinced interest in the Indian equity markets as the GDP growth rate data and the IIP number revealed a robust economic outlook. With the Indian equity markets ending the month of December 2010 in the positive terrain, diversified equity funds delivered appealing returns.

In January 2011, most open-ended equity funds felt the impact of the downturn of the Indian equity markets which were conscious about inflation and IIP numbers released, and washed out gains.

In February 2011, most open-ended equity funds felt the pressure as the bears tightened their grip. Diversified equity funds too were not spared despite having a fairly diversified portfolio.

In March 2011, diversified equity funds gave quite enticing returns as the Indian equity markets bounced back.

In April 2011, diversified equity funds led by those in the mid and small cap space gave enticing returns as buying activity was evident in mid and small cap space.

Despite the corrective phase in the Indian equity market in May 2011, most diversified equity funds did perform well. But diversified equity funds across styles and capitalisations (i.e. large caps, mid caps and small caps) on an average were losers.

As far as the performance of the funds in June 2011 are concerned, most diversified equity funds did manage to create wealth for investors, as the Indian equity market surged upwards. Amongst the diversified equity funds, those following a flexi style of investing (i.e. investing in large caps, mid caps and small caps) delivered pleasing returns.

In the diversified equity funds category only those in the mid and small cap domain managed to create wealth for investors in July 2011.

Despite a recovery in the last two trading days of August 2011 that helped in reducing losses, equity mutual funds ended with their worst monthly show since January 2011. Returns from diversified equity funds dipped 8.1% on an average during August 2011. A combination of factors including a slowdown in global growth and the impact of higher input and interest costs on corporate earnings led to the fall. But the overall mood is one of caution because of the global uncertainties. Despite the poor show, a vast number of diversified equity mutual funds and large-cap funds have declined at a much slower pace than key indices. More than 300 out of the 340-odd equity mutual funds, which are not focused on specific sectors, saw lower erosion in their values compared to Sensex and Nifty. While diversified funds and large-cap funds have dropped (net asset value) 16%- 17% so far in 2011, banking funds, which were among the worst performers, lost 20% as concerns about high inflation and interest rates spooked investors. But the recent drop offers a good entry point for investors, especially those with a long term investment horizon. This is a good time to start SIPs.

Global glory galore!

Even as their assets under management dwindle, equity mutual funds have something to cheer about. A study conducted by iFAST Financial has revealed that Indian diversified equity mutual funds are among the top performers globally in the last one year compared to their counterparts in other advanced markets. If one considers the returns given in the last one year as a benchmark, Indian and Indonesian funds clearly dominated the list of 20 top performing equity funds. There are 13 Indian funds in the top chart, followed by 6 from Indonesia and one from Philippines. The Indian funds that made it to the list include DSP Black Rock Small & Mid Cap, Reliance Equity Opportunity (growth), HDFC Mid Cap, UTI Mid Cap growth, ICICI Prudential Emerging STAR, IDFC Small & Mid Cap, Kotak Mid Cap growth, Franklin India Prima and Principal Emerging Bluechip. As per the study, the top performing Indian funds are those that maintained higher exposure to mid cap and small cap stocks. BSE Mid Cap and BSE Small Cap have delivered 40.8% and 58.03% returns respectively over a one-year period, which is the key to the success of diversified mutual funds with high exposure to mid and small caps. Cheerful indeed!