FUND FULCRUM (contd.)
January 2012

Piquant Parade

Reliance Mutual Fund has mopped up Rs. 1,500 crore by issuing more than 3 lakh ATM money cards to investors since its launch in 2006. The facility is a first of its kind initiative from Reliance, which competes directly with debit cards, which are widely used for cash withdrawals. The main advantage of this card is that it offers higher interest rates compared to saving bank account combined with the flexibility to invest in other Reliance mutual fund schemes. Further, it allows investors to withdraw and spend at visa-enabled ATMs and merchant outlets across the world. Investors can withdraw as per the limit set by bank or 50% of the balance in scheme account or Rs. 50,000 (whichever is lower). They can spend up to 50% of the balance in the primary scheme account or Rs. 1 lakh per day (whichever is lower) at PoS terminals. The facility is available for all Reliance Mutual Fund investors. New investors need to invest in Reliance Liquid Fund - Treasury Plan or Reliance Money Manager Fund which acts as primary scheme account and can be accessed at all visa ATM and merchant establishments across the world. Once investors open a folio in either of the two schemes, they can transfer investments into debt, equity and gold funds. Other schemes act as secondary scheme account and can be accessed at HDFC Bank ATMs for cash withdrawal or balance enquiry. There are no charges for using this facility except for international cash withdrawals and international balance inquiry, which are Rs. 69 (plus service tax of 10.30%) and Rs. 21 (plus service tax), respectively.

Regulatory Rigmarole

‘Qualified Foreign Investors' (QFIs) - a foreign individual, a foreign pension fund or even a foreign trust will be able to invest directly in the Indian equity market w.e.f. January 15, 2012. This has been done in order to widen the class of investors, attract more foreign funds, reduce market volatility and deepen the Indian capital market. At present, foreign institutional investors (FIIs) or foreigners, through sub-accounts with registered FIIs, can invest in the equity market. Unregistered foreign individuals and institutions invest through participatory notes (PNs). However, investment is restricted to QFIs from countries that are compliant with the Financial Action Task Force (FATF) recommendations and are signatories to the international body of securities market, IOSCO's, memorandum of understanding. This condition will allow investors from over 80 countries to access the Indian equity market, save Pakistan and some other countries. The QFIs will have a separate ceiling from FIIs and non-resident Indians (NRIs). A QFI can hold up to 5% of paid-up equity of a company and all QFIs put together cannot hold more than 10% in a company. All QFIs will first need to open a demat account with any of the depository participants (DPs), as sale and purchase of equity will be allowed only through such an account. Moreover, one QFI will be permitted to open only one account. The Central Board of Direct Taxes (CBDT) will issue a separate form for Permanent Account Number and KYC, especially for the QFIs. The depository participant can facilitate the QFIs to fulfil all these statutory requirements.

SEBI has streamlined the KYC process by putting in place guidelines for common KYC agencies through its circular issued on December 23, 2011. The KRA system shall be applicable for all new client accounts opened from January 1, 2012. SEBI has permitted wholly-owned subsidiaries of stock exchanges, depository and SROs registered with SEBI as eligible entities to become KYC Registration Agency (KRA) for a period of five years. The KRA has to have a net worth of Rs. 25 crore. Market regulator SEBI has appointed CDSL Ventures Ltd. (CVL) as the KYC Registration Agency (KRA). CVL already possesses the database of all KYC compliant mutual fund investors. Now, it is mandatory for intermediaries – distributors, scheduled commercial banks or RTAs to carry out in-person verification (IPV) of its new investors. Investors need not have to undergo the KYC process again if they are KYC compliant with any of the above-mentioned SEBI registered entities. However, fund houses can demand a fresh KYC of the investor, if required. Fund houses can also undertake enhanced KYC process depending on the risk profile of investors. SEBI has urged existing investors to complete IPV, though it is not mandatory. KRA will send a confirmation letter to the investor about the receipt of the initial/updated KYC documents by the fund house within 10 working days. Fund houses will upload the details of the investors on the system of the KYC Registration Agency (KRA). Distributors can download the new KYC forms from AMC websites.

New investors will now have to make some investment in the form of SIP or STP or lump sum from January 1, 2012. New mutual fund investors cannot open zero balance folios from January 1, 2012.

SEBI has asked the brokers/distributors to stop offering any incentive, whether direct or indirect, in any manner, whether in cash or kind or services or otherwise to any individual for making an application for allotment of the public issues of debt securities. According to SEBI, passing on part of the brokerage/commission gives an unfair advantage/bargaining power to a certain set of investors and distributors while on the other hand it also adds to the cost of issuance for the company.

SEBI may relax the recently introduced advertisement rules, which require AMCs to display the performance data of all the other schemes managed by the fund manager of that particular scheme in advertisements. Performance advertisement shall be provided since inception and for as many twelve month periods as possible for the last 3 years, such periods being counted from the last day of the calendar quarter preceding the date of advertisement, along with benchmark index performance for the same periods. The circular states that fund houses should display the top three and bottom three funds if the fund manager is managing more than six schemes. It also mandates AMCs to mention the number of schemes managed by that particular fund manager. For the sake of standardisation, SEBI has also mandated fund houses to show point to point return on a standard investment of Rs. 10,000 and benchmark equity schemes against Sensex or Nifty in addition to scheme’s existing benchmark. For long-term debt schemes and short-term debt schemes it has asked AMCs to benchmark against 10 year GoI security and 1 year Treasury bill respectively. To comply with this rule, AMFI had asked CRISIL to construct two benchmarks.

The Association of Mutual Funds in India (AMFI) is exploring the possibility of redrafting the disclaimer – “mutual fund investments are subject to market risks. Please read the scheme information document carefully before investing” – to add a positive flavour and encourage more investors to park their funds in such schemes. The disclaimer along with mutual fund advertisements and offer documents were acting as a hindrance in attracting new investors. Disclaimers were essential to safeguard the fund house from the possibility of getting entangled in litigations. However, there needs to be some redrafting in order to give it a positive flavour.

The government may make it mandatory for all taxpayers to provide details of their overseas assets, including bank accounts, while filing their annual tax returns. The proposed Direct Tax Code, or DTC, has a provision for this but the government is now considering a proposal to amend the Income Tax Act to incorporate this provision, as the DTC may not come into effect from April 1, 2012. India's income-tax laws do not specify that locals have to disclose their foreign assets or income. But there are provisions in the law that state global income of an Indian citizen is taxable in India. Failure to report this is a punishable offence. The government now thinks it will soon be able to generate more information about global financial activities of Indians than in the past, thanks to tax treaties and agreements it has signed with countries and regions dubbed as tax havens earlier.

Market regulator SEBI plans to allow mutual funds and insurance firms to subscribe to preferential issues of companies even if they have traded the shares of the issuing corporates in the past six months, to boost liquidity in the markets and make it easier for firms to raise funds. Such transactions are currently banned, blocking a key source of funds for companies. But this restriction will continue to be in place for promoters. Institutional investors such as mutual funds and insurance companies play an important role in ensuring liquidity in the secondary market. It is felt that they should be differentiated from promoters while applying the lock-in relating to pre-preferential issue. This unduly restricts the trading ability of institutional investors.

SEBI is planning to tighten the valuation norms of liquid and liquid plus funds. The regulator is planning to impose mark-to-market (MTM) requirements for instruments with a residual maturity period of 60 days and more. SEBI, eventually, wants all instruments irrespective of their tenure and type to be quoted on market rates and the net asset value (NAV) calculated accordingly. This move is likely to make liquid and liquid-plus funds more volatile because of the fluctuations in underlying assets.

SEBI has hiked the minimum investment limit in the portfolio management scheme (PMS) to Rs 25 lakh per client from the current Rs 5 lakh. This may result in portfolio management services soon going out of the reach of many retail investors. The decision to hike the minimum investment limit comes despite valiant efforts by portfolio managers and wealth managers to retain the minimum investment level at Rs 5 lakh per client. In portfolio management services, investors get a range of specialised investment strategies to capitalise on opportunities in the market. Portfolios are suited to individual client needs and risk appetite. The enhanced investment threshold will apply on a prospective basis. It will apply only for new investors and existing accounts will not get affected. However, existing investors in PMS are welcome to increase the investments in such schemes if they have the capacity to do so.

To facilitate speedy grievance redressal, SEBI has mandated all stock exchanges – functioning on their own and through other exchanges — to set up an investor grievance redressal committee (IGRC) at every investor service centre. For claims up to Rs 25 lakh, the IGRC will comprise one person, and for claims higher than Rs 25 lakh, the committee would have three members. Further, the three-member committee shall have independent persons qualified in the area of law, finance, accounts, economics, management or administration. They will also have experience in financial services especially the securities market. In addition, one member of the committee should be a technical expert capable of handling complaints related to technology issues such as internet based trading, algorithmic trading, etc). Finally, the members of the IGRC should not be associated with a trading member in any manner. SEBI has advised large exchanges NSE, BSE, MCX and USEIL to open investor services centres in other large cities in a time-bound manner. Exchanges have been asked to submit a list of such centres. The circular comes into effect immediately and exchanges have to communicate the implementation status of this circular in their monthly report to SEBI.

To give a leg-up to the National Pension Scheme, the regulator for pension funds has changed the incentive mechanism for distributors by fixing it at 0.25% of the contribution made by subscribers, subject to a ceiling of Rs 25,000. At present, the distributors are allowed to charge only Rs 20 every time a subscriber contributes to the scheme. This is one of the main reasons the NPS has failed to take off since it was opened up for all citizens in May 2009.

After a series of investor-friendly measures, SEBI plans to back it up with a first-of-its-kind advertising campaign to be launched next month. The primary objective of the campaign will be to spread investor awareness and increase penetration. SEBI plans to do so by trying to demystify the securities market and highlighting some recent initiatives, such as the toll-free helpline. The campaign will be in various languages and across platforms like print, radio and television. One-time KYC for opening trading accounts, setting up investor grievance redressal centers, circuit filters and extension of call auction to IPO and relisted scrips and increasing inspection and monitoring of intermediaries are the other highlights of the campaign. The regulator has earmarked about Rs 12 crore for the media campaign and investor awareness programmes for 2011-12.

SEBI had constituted International Advisory Board (IAB) in September 2011 to guide SEBI by bringing in global experiences and emerging developments and challenges. The IAB took note of the initiatives taken by SEBI for enhancing the retail participation and for increasing penetration beyond top-10 cities and observed that there is a need to widen the reach of the mutual fund industry in the country, both horizontally and vertically. It emphasized that in order to enhance the participation of households, the mutual fund industry has to educate the investors of the attractiveness of mutual funds in terms of returns and cost effectiveness, compared to other financial products. Offering life cycle products along with plain vanilla products, an effective framework for regulation of distributors, risk-based customer due diligence processes without granting any sort of exemptions to any category of investors, ways to pull in domestic savings into securities market, the development of a vibrant corporate bonds market, and introduction of securitized debt instruments and real estate investment trusts with appropriate risk management were some of the recommendations of the Board. All the recommendations are pragmatic and if practised by all participants, it will definitely lead to the growth of the mutual fund industry.

FUND FULCRUM
January 2012

The mutual fund industry took a hit of more than Rs 16,000 crore on its asset size during 2011, even as the market leader HDFC Mutual Fund grew in size and consolidated its top position. As per the latest quarterly data released by Association of Mutual Funds in India (AMFI), the cumulative average Asset Under Management (AUM) of all fund houses stood at about Rs 6,87,640 crore in the last quarter of 2011. This marked a decline of Rs 16,040 crore from a total of Rs 7,03,680 crore in the first quarter or January-March period of 2011. The fall can be attributed to the sharp losses in the stock markets, as also to the withdrawals by investors. The loss was even larger for the cumulative asset base of the top five fund houses (HDFC, Reliance, ICICI Prudential, Birla Sunlife and UTI Mutual Funds), as their total average AUM declined by Rs 31,741 crore in the same period to end the year at Rs 3,60,733.14 crore. At the end of 2011, HDFC Mutual Fund retained its leadership position with total average AUM of Rs 88,737.07 crore. It marked an increase of Rs 2,455 crore from the levels in the first quarter of 2011. HDFC Mutual Fund was the only one among the top five fund houses to register an increase in this period, as the remaining four saw their AUMs decline. Reliance Mutual Fund's average AUM dipped by Rs 17,417 crore to Rs 84300.35 crore, while that of ICICI Prudential Mutual Fund dipped by Rs 4,080 crore to Rs 69472.08 crore. Birla Sunlife Mutual Fund's average AUM dipped by Rs 3,327 crore to Rs 60406.30 crore, while the decline was larger at Rs 9,371 crore for UTI Mutual Fund, whose average AUM stood at Rs 57817.34 crore in the October-December quarter of 2011. At the end of 2011, there were a total of 44 fund houses in the country, as against 42 in the first quarter.

Mutual fund folios, a parameter for gauging the number of investors, declined by nearly 700,000 between March and November 2011, as weak market sentiment prompted investors to redeem equity schemes. However, the number of equity fund folios through the systematic investment plan (SIP) route rose by about 600,000 during the period, an indication that investors are keeping up hope to get better returns in the longer term. According to data collated from mutual fund registrars, CAMS and Karvy, total number of fund folios have fallen to 4.16 crore in November 2011 from about 4.23 crore in March 2011. During the period, equity SIPs - that form a part of the total number of fund folios - rose by nearly 9% to 65 lakh. Fund marketers attributed the fall in total fund folios to merger of smaller equity schemes with larger funds and shifting of investments from equity mutual funds to high-yielding debt assets. In addition, the average SIP ticket size has gone down to Rs 1,650 per SIP in November 2011 from Rs 1,750 in March 2011.

Total Assets Under Management (AUM) of the mutual fund industry has declined for the second consecutive month in December 2011. It declined by 10.3% (by Rs. 70253 crore) to Rs. 6.11 lakh crore in December 2011, as corporate and banks redeemed their investments from their liquid and income fund to meet their quarter end commitments.

In 2010-11, only a handful of the 44 asset management companies were profitable. Reliance Mutual Fund led with the highest profits of Rs 261 crore, followed by HDFC Mutual Fund's Rs 242 crore. The global environment is also changing fast. Many banks or big insurers, for one, are getting rid of ancillary businesses. For instance, American International Group has put many of its businesses on the block across the world. In India such a situation has not arisen still. Many banks still own AMCs, with some public sector banks like State Bank of India having their own AMC, plus stake in others like UTI Mutual Fund. As a result, there is an ability to absorb losses and plough more funds into the business. But standalone Mutual Fund houses are facing some serious challenges.

Piquant Parade

Japan based Nippon Life Insurance Company signed a Memorandum of Understanding (MoU) to acquire 26% stake in Reliance Capital Asset Management (RCAM). The deal is the largest FDI in the mutual fund space. Nippon Life will invest Rs. 1,450 crore to acquire 26% stake in RCAM. The transaction pegs the total valuation of RCAM at approximately Rs. 5,600 crore. They are already partners in the life insurance business.

“MF Utility” is a front-end portal to facilitate efficient and cost effective transaction processing. This facility will help customers, distributors and financial advisors to transact mutual fund schemes across all asset management companies, at one place. The MF Utility will provide order routing and payment mechanisms having connectivity to RTAs, AMCs, stock exchanges, DPs, banks, centralized KYC repository, etc. AMFI has shortlisted nine companies for developing MF Utility platform. AMFI has sent Request for Proposal (RFP) to these nine shortlisted players. The bidders are likely to revert to AMFI with their detailed plans by the end of January 2012. One point of view is that the MF Utility should be run as a commercial venture rather than as a not-for-profit unit. AMFI plans to charge a transaction cost for executing orders to fund its operational expenses. The MF Utility committee wants the venture to operate on a no profit - no loss basis. Their idea is to provide this platform as a value add-on to pull in more investors into the mutual fund fold and streamline the investment process by eliminating time, cost and money involved in physical investing. AMFI may also explore to appoint DPs as point of service for MF Utility. The MF Utility will be owned by AMFI.

SEBI has allowed UTI Asset Management, India's fifth-largest mutual fund, to launch new schemes again after a gap of almost five months. The move comes as a relief to UTI, which was barred by the regulator from launching any fresh scheme in August 2011, till it gets a new chief, as the mutual fund was losing out on opportunities to garner money for its short-term debt products in a firm interest rate regime. Rules do not permit a mutual fund to launch products without the approval of its chief executive officer. UTI Mutual Fund has appointed Imtaiyazur Rahman as the acting CEO. Rahman is a part of the four-member committee that has been looking after the day-to-day operations of the firm after Sinha stepped down as its CEO. The other members of the committee which worked under guidance of the committee of directors and the company’s board were Jaideep Bhattacharya (CMO), Anoop Bhaskar (Head – Equity) and Amandeep Chopra (Head - Fixed Income). The Board has also appointed PN Venkatachalam, retired Managing Director of SBI, as an independent director on the Board of UTI AMC.

Quantum Mutual Fund has tied up with Yes Bank to use its drop box facility across Mumbai in a bid to enhance investor convenience and ease of accessibility. Investors can now drop their subscription applications at any Yes Bank drop box having the Quantum Mutual Fund logo. These drop boxes are located at various locations across the city, including 37 locations at railway stations, 38 ATM sites and 5 airports. With 80 significant locations from Churchgate to Virar, Fort to Kalyan and all the way to Panvel, such drop boxes offered by Quantum, provide investors with an opportunity to drop off their applications on their way to the office or on their normal evening walk.

Motilal Oswal Financial Mutual Fund has introduced Smart Trigger Option (STO) facility under Motilal Oswal MOSt 10 Year Gilt Fund, with effect from 26th December 2011. STO is an add-on facility offered in Motilal Oswal MOSt 10 Year Gilt fund that enables investors to make the most of the market movements without the hassle of constant tracking. The various kinds of triggers available are full redemption, redemption to the extent of capital appreciation only and redemption to the extent of principal amount only.

FPSB has started a certification and rating services for financial planning and advisory services firms. The ratings aim to create quality standards and benchmarks across the financial advisory business. FPSB will rate the services of financial planner as (Level 1 to Level 5) based on their approach to financial planning process, policy on investors' interest, risk management policy and systems, resources & infrastructure. The rating will be valid for a period of one year. Financial planners have to shell out an initial fee of Rs. 1 lakh to get them rated and Rs. 50,000 as renewal fee after one year.

The Securities and Exchange Board of India has been in talks with the Central Board of Secondary Education (CBSE) to introduce financial literacy as a part of the school syllabus. The market regulator is adopting two strategies for creating awareness among the investors community. The first of it would be to “catch 'em young” — teach certain elements of financial markets to students. Countries such as the US and Australia had included financial literacy as a part of the curriculum for students in the fifth and sixth standard. On the other strategy to create awareness SEBI, in association with stock exchanges, their members and the Association of Mutual Funds in India, is in the process of identifying teachers and training them in investor education and intricacies involved in financial markets to enable them to provide financial literacy to young professionals.

A brochure on ‘Mutual Funds - Do's, Don'ts, Rights and Responsibilities' to protect the interests of investors has been released. SEBI is planning to launch a toll-free investor care number, and to introduce a computerised system to expedite the process of grievances redress.

To be continued…

NFO NEST
January 2012

NFOs at an eight-year low in 2011

The poor state of the stock market and the capital market regulator's tough stance against launch of a new fund have hit the launch of equity new fund offers (NFOs). Equity NFOs have hit an eight-year-low in 2011. Only 10 new schemes have been launched in 2011, garnering merely Rs 612 crore against Rs 4,659 crore in 2010. In a poor market it is not possible to raise money by launching NFOs. In 2011, domestic benchmark indices have seen erosion of a fifth of their values. All categories of equity funds, except those in fast moving consumer goods, have lost investors' wealth. In some cases, the losses have been 30% over the year. Further, the reduction of the time period given to launches, of 15 days, is another reason for the dwindling number of NFOs. The regulator has informally told the AMCs to collect minimum Rs. 10 crore in equity NFOs and Rs 20 crore in non-equity NFOs. Only new players who want to build up their product kitty could come up with new schemes. Existing players would prefer to continue with merging schemes to escape any duplication and overlapping of investment mandates.

In line with the bleak scenario for NFOs in 2011, the January 2012 NFO NEST unveils half a dozen NFOs of which only one is an equity fund.

ICICI Prudential Capital Protection-oriented Fund II – Series 6
Opens: January 4, 2012
Closes: January 17, 2012

ICICI Prudential Capital Protection Oriented Fund – Series II – 24 Months Plan is a close ended Capital Protection Oriented Fund. The objective of investment in the Fund is to try to protect capital by investing a portion of the portfolio in good quality debt securities and money market instruments (88%–100%) and also to provide capital appreciation by investing the balance in equity and equity related securities (0% – 12%). The performance of the fund will be benchmarked against CRISIL MIP Blended Index. Chaitanya Pande and Mrinal Singh will be the Fund Manager(s) of the fund. The former will take care of debt investment and the latter of equity investment.

Axis Constant Maturity 10 Year Fund
Opens: January 10, 2012
Closes: January 19, 2012

Axis Mutual Fund has launched a new fund named as Axis Constant Maturity 10 Year Fund, an open ended gilt fund. The investment objective of the fund is to generate returns similar to that of 10 year government bonds. The fund would allocate up to 100% of assets in Government Securities, Treasury Bills, Repo & CBLO with low to medium risk profile. The fund's performance will be benchmarked against Crisil 10-year Gilt Index. The fund will be managed by Mr. Sivakumar.

DWS Hybrid FTF Series 4
Opens: January 9, 2012
Closes: January 23, 2012

Deutsche Mutual Fund launched a new close ended debt fund “DWS Hybrid Fixed Term Fund - Series 4”, with maturity time of 3 years. The asset allocation of the fund will be in such a way that the objective of the fund to generate income will be met, through investments in high quality fixed income securities and capital appreciation by investing in equity and equity related instruments. Hence, the fund will allocate 75 to 100% of assets in domestic debt instruments including government securities, 0 to 25% in money market instruments, and 0 to 20% of assets in equity and equity related securities. The performance of the fund will be standardized against Crisil MIP Blended Fund Index. Aniket Inamdar and Kumaresh Ramkrishnan will be the Fund Manager(s) of the fund, in which the former will manage the equity portion whereas the latter will manage the debt portion.

ICICI Prudential Multiple Yield Fund – Series 2 (Plan D)
Opens: January 19, 2012
Closes: January 30, 2012

ICICI Prudential Mutual Fund has launched a new fund named as ICICI Prudential Multiple Yield Fund - Series 2 - Plan D, a close ended income fund. The tenure of the plan is 1100 days. The primary objective of the fund is to seek to generate returns by investing in a portfolio of fixed income securities/ debt instruments. The secondary objective of the fund is to generate long term capital appreciation by investing a portion of the fund's assets in equity and equity related instruments. The fund will allocate 65% to 100% of assets in short term and medium term debt securities / debt instruments and securitized debt with low to medium risk profile. It would allocate up to 10% of assets in money market instruments with low to medium risk profile. On the flip side it would allocate up to 35% of the asset in equity or equity related securities with medium to high risk profile. The benchmark index for the fund will be Crisil MIP Blended Index. Debt portion of the fund will be managed by Chaitanya Pande and equity portion of the fund will be managed by Mr. Mrinal Singh. The investments of the fund in ADR/GDR and other foreign securities will be handled by Rajat Chandak.

Morgan Stanley Multi Asset Fund
Opens: January 17, 2012
Closes: January 31, 2012

Morgan Stanley Mutual Fund has launched a new open-ended debt fund named Morgan Stanley Multi Asset Fund. Plan A of the fund seeks to generate regular income through investments in debt & money market instruments, along with capital appreciation through limited exposure to equity and equity related instruments. The fund will invest 80%-100% in Debt and Money Market instruments with Low to Medium risk profile and 0%-20% in Equity and Equity related instrument with Medium to High risk profile. 80% of the fund will be benchmarked against CRISIL Composite Bond Fund Index, and 20% against S&P CNX Nifty and Domestic Price of Gold. Plan B of the fund seeks to generate regular income through investments in debt & money market instruments, along with capital appreciation through limited exposure to equity and equity related instruments and provide diversification by investing in Gold ETFs. The fund will invest 65%-100% in Debt and Money Market instruments with Low to Medium risk profile and 0%-35% in Equity & Equity related instruments and Gold Exchange Traded. 70% of the fund will be benchmarked against CRISIL Composite Bond Fund Index, 15% against S&P CNX Nifty, 15% against Domestic Price of Gold. The fund will be managed by Mr. Ritesh Jain and Mr. Jayesh Gandhi.

SBI Tax Advantage Fund – Series II
Opens: December 22, 2011
Closes: March 21, 2012

SBI Mutual Fund has launched a new fund named as SBI Tax Advantage Fund-Series-II, a 10 year close ended Equity Linked Savings Scheme. The investment objective of the fund is to generate capital appreciation over a period of ten years by investing predominantly in equity and equity-related instruments of companies across large, mid and small market capitalization, along with income tax benefit. The fund would allocate 80-100% of assets in equity and equity related instruments. The fund shall also invest up to 20% in debt and money market securities with low to medium risk profile. The performance of the fund will be standardized against BSE 100 Index and Jayesh Shroff will be the Fund Manager of the fund.

ICICI Prudential US Bluechip Equity, Axis Banking Debt Fund, Axis Focus 25 Fund, IDBI India Top 100 Equity Fund, IDBI Gold Fund, and Canara Robeco Gold ETF are expected to be launched in the coming months.

GEMGAZE
January 2012

Balance your portfolio with balanced funds

It is seldom that both debt and equity markets offer attractive buying opportunities to investors at the same time. We may be in just that situation now. As rising interest rates have resulted in 10 per cent-plus returns on safe 3-5 year debt options today, equity markets are in a free fall, offering buying opportunities to long term investors. Should you take the plunge into equities or opt for safe debt? You can do both, with good balanced funds as listed out in GEMGAZE.

All the GEMs in the January 2010 GEMGAZE have retained their preeminent position in the January 2011 GEMGAZE, thanks to their consistency and stability.

HDFC Prudence Fund Gem
Consistent Record holder…

HDFC Prudence has proved it mettle in beating pure equity funds over the long term, despite holding a fourth of its assets in debt. The assets under management of the fund stand at Rs. 6100 crore at present, equivalent to almost half of the category assets. The three and five-year compounded annualised return of 19% and 15% is superior to some of the top performing equity funds. The fund also outpaced its benchmark Crisil Balanced Index by a whopping 14 percentage points and eight percentage points respectively over the above time-frames. Financial services, technology, and energy are the top three sectors in the portfolio accounting for 29% of the total portfolio. 58% of the fund’s portfolio is in large caps. The fund has 74.24% in equity and 24.28% in debt. Though the fund sports a diversified equity portfolio of 80 stocks with none having an allocation of more than 5%, it is still an aggressive offering. HDFC Prudence returned -12.66% over a one-year period, ahead of the -13.84 % return of category. A SIP in HDFC Prudence over the last ten years would have yielded 26% compounded annual return — a feat very few equity-oriented funds have achieved over this period. Consistency is the name of game where HDFC Prudence is concerned. Of the total 16 years of its existence, the fund has just two annual under performances. A phenomenal record in fact! Despite being a balanced fund, it has outperformed Sensex and Nifty in 13 years. The expense ratio is 1.79% and the portfolio turnover ratio is 29.16%.

Sundaram Balanced Fund Gem
Safe haven…

Safe Over one-, three- and five-year time-frames, the fund has managed to better the performance of its benchmark – Crisil Balanced Index. On a five-year basis, Sundaram Balanced has managed to deliver compounded annual returns of 16.4% which though reasonable, does not place it among the top few funds in that category. But over the last three years, its performance has improved, and, over the last year, the fund has been among the top few funds in returns delivered. Sundaram Balanced has delivered better returns than the Crisil Balanced Index during market rallies. The fund, on an average, has 60-80% of its portfolio invested in equity, and the blend of mid- and large-cap stocks has enabled it participate well in most market rallies. The debt component of Sundaram Balanced comprises mainly of certificates of deposits in banks such as ICICI, BoB, Dena and the rest in government securities. There is no exposure to CBLOs (collateralised borrowing and lending obligations) or other risky corporate instruments, which means that the debt profile of the fund is less risky. This Rs 62 crore fund has earned a return of -18.47% over the past one year. The fixed income portion of the fund is largely invested in corporate bonds followed by government securities. The equity component accounts for 69.96% of the assets and is spread across the cap curve and sectors. The top three sectors, accounting for 52% of the portfolio, are financial services, technology, and energy. 78% of the portfolio is in large caps, a dramatic rise from 58% a year ago. The expense ratio of the fund is 2.49% while the portfolio turnover ratio is 31.4%.

DSPBR Balanced Fund Gem
Well diversified…

Over one-, three- and five-year time-frames, the fund has kept beating the returns of its benchmark, the Crisil Balanced Fund Index. The fund has delivered a compounded annual return of 20.9% over the past five years, which places it among the top few funds in its category. The fund tends to spread its risk quite thin, given that there are more than 80 stocks in the portfolio across market cycles. Even the top 10-20 stocks each have less than four per cent exposure. This apart, exposure even to individual sectors is not heavy either. No sector accounts for more than 10% of the portfolio. DSPBR Balanced has a fairly high quality debt exposure, with the fund restricting its exposure to AAA and AA+ rated instruments. The top three sectors of this Rs 685 crore fund are financial services, energy, and FMCG, contributing 26% to the portfolio. 71% of the fund’s portfolio is in equity and 27% in debt. 56% of the assets are in large caps. The one-year return of the fund is -14.64%. The expense ratio is 2.09% and the portfolio turnover ratio is 1.89%.

Reliance Regular Savings Balanced Fund Gem
Active stock picker…

An actively managed equity portfolio has enabled Reliance Regular Saving Balanced Fund to consistently be a top quartile performer. Returns of 24% and 13.1%, respectively, during the three- and five-year period reflects the fund's ability in stock selection. The fund has also outpaced its benchmark BSE 100 by six percentage points. The fund's Net Asset Value lost 21.8% during the last one year, against 17.2% shed by its benchmark BSE 100. The fund could have posted better returns had it increased its exposure to consumer sector stocks, many of which delivered superior returns even in the down market. Its shift to large-cap stocks too, did not help much this time, as many large-cap stocks have shed higher value than their mid-cap peers. These decisions, that caused underperformance in the short term, nevertheless appear to be prudent in a volatile market. The fund has not taken concentrated exposure in stocks. The top ten stocks accounted for 32% of the assets of nearly Rs 666 crore now. 73% of the portfolio is in equity and 51% is in largecaps. The top three sectors in the fund’s portfolio are healthcare, energy and financial, accounting for 33% of the total assets. Historically, the fund had a condensed portfolio of less than 20 stocks within the equity portfolio, with a turnover ratio of 155% and the expense ratio is 2.14%.

Canara Robeco Balanced Fund Gem
Raring to go…

Over a five-year period, Canara Balanced recorded a compounded annual return of 12.2% that places it among the mid-quartile of balanced funds. But over the last three years, the fund has moved into the top quartile of funds in its category. The fund invests in debt instruments to the tune of 25-35% of the portfolio, which shields it somewhat during market volatility. The choice in this segment too is relatively safe, with investments made predominantly in certificates of deposits and corporate debts of institutions such as HDFC, LIC Housing Finance, IOC and Indian Railway Finance Corporation. The one-year return of the fund is -8.2% as against the category average of -13.84%. 62% of the portfolio is in large caps with 32% of the portfolio in the top three sectors concentrated in finance, energy, and FMCG sectors. The expense ratio of this Rs 179 crore fund is high at 2.38% with a very high portfolio turnover ratio of 160%.

FUND FLAVOUR
January 2012

Balanced funds…sweet as ever

The fund industry never tires of concocting new products for investors looking for the perfect tradeoff between growth and stability. Absolute return, tactical allocation, target date ... those are just some of the impressive-sounding labels you are asked to decode. But if you are looking for a way to diversify across risky, uncertain and volatile equities and conservative assets, there is a simple solution that has been around for decades: the balanced fund.

Let us take a closer look at these balanced funds.

Balanced funds are also known as hybrid funds. They are a type of mutual funds that buys a combination of equity and debt instruments, to provide both income and capital appreciation while avoiding excessive risk. Such diversified holdings ensure that these funds will manage downturns in the stock market without too much of a loss as compared to an all equity fund. But on the flip side, balanced funds will usually increase less in value and provide lesser returns than an all equity fund during a bull market. Thus, these types of funds are meant to diversify away a little of your equity risk by exposure to debt, while maintaining decent returns as well. This one-stop-shop gives you adequate diversification without giving you the trouble of managing an assortment of investments yourself.

Under the microscope…

Though there is a vast difference in the strategy between a balanced fund and, say, a large-cap scheme within the same fund house, many fund houses model the equity portion of their balanced fund on the lines of one of their equity schemes. Balanced funds have to maintain their ratios of splitting between equity and debt by fixed percentage (a minimum of 65% equity to avail of the tax advantage). In order to do so, the fund has to keep on buying and selling from time to time, which leads to the concept of Asset Allocation. So, if a balanced fund has a ratio of 70:30 (equity: debt) and suppose it reached 77:23, the fund manager will make sure that he sells the excess part of equity to rebalance the fund back to 70:30. However in equity funds, if the ratio itself was 98:2 earlier, despite the big run in markets, the equity part will still remain around the same ratio and there is no question of asset allocation. So the conclusion is that the asset allocation is the internal advantage available to Balanced funds which leads to superior returns over longer term, but in short term, balanced funds will not out perform pure equity based funds in case there was a bull run. You always have to give balanced funds a long time to see the performance.

As balanced funds are lower on equity exposure, the fall in case of market crash is lower than pure diversified funds. For example, during the financial crisis of 2008, balanced funds lost only 42% as compared with 53% drop in returns by diversified equity funds. Balanced funds out performed pure equity funds by a considerable margin in the post crisis period also. A quick look at average returns of balanced schemes versus equity schemes shows that in the last six and 12-month periods, balanced funds have proved to be better than equity diversified funds. In the three-month period, the returns of both categories are similar at around 3%. Balanced schemes have given an average 6.8% gain in the last 12 months compared to 6% by equity diversified funds. In the six-month period, balanced schemes have fallen by 2.4% while its peers have fallen by 5.3% on an average. With debt instruments giving good returns, balanced funds give investors a cushion. It is true that equities have been volatile for quite sometime now but that is why balanced funds provide a slightly better platform. The sustained inflows into balanced schemes are borne out of the investors’ need to seek income as well as capital appreciation. Balanced funds returns are less risky than pure equity mutual funds.

Amid news of a slowdown in inflows that appears to have plagued the Indian mutual funds industry, there is one category in the equity space that seems to have consistently attracted money. In each of the past 12 months, balanced funds got net inflows (more money came in than went out) as per the data given by Association of Mutual Funds in India. Investors have pumped in around Rs 1,600 crore in the last eight months into balanced schemes. In the same period, for equity schemes, net inflows amount to around Rs 1,700 crore but with at least three times when net outflows were registered. The longest-running streak of net inflows into balanced schemes occurred in June 2007-2008 period when investors had pumped in Rs 6,100 crore in 13 months. The numbers are not significant, but these schemes—that invest across equity as well as debt markets—have matched performances given by equity funds. In the past three years, balanced funds returned 16% compared with 15% by large-cap funds and 17% by large- and mid-cap funds. However, only about 10% of the total equity inflows trickle down to balanced funds. Why are not distributors selling them enough? Do they still make sense?

Balanced funds to rule the roost in 2012

Balanced Funds are best placed to unleash a sustained rally in 2012. It is the best launch pad for novices to mutual fund investing. If you are looking at a time horizon of three to five years, moderate risk and decent returns, balanced fund is the answer.