FUND FULCRUM

January 2014

Following a smart turnaround in 2013 with an increase of over Rs 1 lakh crore in its asset base to nearly Rs 9 lakh crore, the mutual fund industry is looking forward to 2014 in the hope that it would be even better. Mutual fund industry's AUM hit a record high of Rs 9.58 lakh crore in August 2013 and was hovering around Rs 9 lakh crore as 2013 drew to a close. Fund houses are upbeat about an even better performance in 2014 on account of various measures initiated by market regulator SEBI as well as plans of individual players to expand the distribution network across the country, particularly to smaller cities. In 2013, the total assets under management of all fund houses put together soared by 11% on strong inflows in categories such as bonds and liquid funds. With inflows of a staggering Rs 1.4 lakh crore, AUM of liquid funds surged to Rs 2.46 lakh crore. A similar trend was seen in income funds, where inflows rose to around Rs 23,000 crore taking the assets managed by the fund to Rs 4.31 lakh crore. This was the second consecutive yearly rise in the mutual fund industry AUM, after a drop in the assets base for two preceding years.

The assets managed by mutual funds jumped by nearly Rs 85,000 crore or about 11% to Rs 8.78 lakh crore in 2013, with HDFC Mutual Fund retaining its top position. The country's 44 fund houses together had an average AUM of Rs 7,93,331 crore at the end of 2012, which increased to Rs 8,77,973 crore in 2013, as per latest data available with industry body Association of Mutual Funds in India (AMFI). Of the 44 fund houses, 26 saw their AUMs rise during the period, while 17 witnessed a decline. During 2013, the performance of the mutual fund industry has, to an extent, mirrored the performance of the Indian economy, the stock markets and the FII investment flows. This year, not a single new licence was issued and the sector has not witnessed any fresh foreign investment. On the contrary, 2013 was a year of consolidation for the industry. HDFC Mutual Fund, with assets of over Rs 1 lakh crore, agreed to buy all eight schemes of Morgan Stanley with combined assets of Rs 3,290 crore. Besides, Daiwa sold its assets to SBI Mutual Fund for an undisclosed amount. 

Among the large funds, ICICI Prudential MF was the biggest gainer followed by Reliance MF, while HDFC MF saw the smallest growth. In terms of total funds, HDFC MF managed to retain the top slot, followed by Reliance MF and ICICI Prudential. HDFC MF had an average AUM of about Rs 1.09 lakh crore at the end of 2013, a 7.5% rise from the preceding year. ICICI Prudential's AUM rose by an impressive over 19% to Rs 97,200 crore, while Reliance MF's AUM climbed by 13% to Rs 1.02 lakh crore. Besides, Reliance MF has surpassed Rs 1 lakh crore mark after a gap of two quarters. Mutual funds, which saw a gain in AUM, included UTI, SBI, Axis, Baroda Pioneer, Birla Sun Life, and Franklin Templeton. However, Canara Robeco, Goldman Sachs, Edelweiss, IDBI, Indiabulls Mutual and Tata Mutual Fund, among others witnessed a decline in their AUMs from the levels seen in 2012. Interestingly, 57% of industry growth has been contributed by top five mutual fund houses, while Reliance MF and ICICI Prudential together provided 31% of this increase.

Choppy markets and folio consolidation see the number of equity fund folios drop to 2.98 crore from 4.11 crore in 2009. The industry has seen a continuous exodus of investors since 2009 which is evident by the rapid dip in equity folios. The industry received a record net inflow of Rs. 46933 crore in FY 2007-08 when the industry launched 46 new equity funds. Despite distributors and AMCs efforts to educate investors to remain invested and continue their SIPs, the trend of equity fund closure continues, albeit at a slower pace. The BSE Sensex gained 379 points in December to reach 21171. From April to December 2013, equity funds have seen net outflows of Rs. 8341 crore. Investors poured in Rs. 30929 crore in equity funds and pulled out Rs. 39271 crore during the same period which resulted in a net outflow of Rs. 8341 crore. Many AMCs are launching close end funds to bring investors. AMCs have launched nine close end equity funds so far which have mopped up close to Rs. 1500 crore. More such funds are expected to be launched. Apart from equity funds, balanced funds and ETFs also saw a dip in folios. There was so much desperation among investors that no single month of the year saw any rise in folio numbers. The average monthly folio losses were close to 350,000. The most shocking period for the equity segment was the month of May 2013, which saw a record high number of folio closures at a massive 700,000 - an erosion never seen in the sector’s history. The only category which has seen growth in folios is debt funds. Debt funds added 40,290 in December 2013 and from April till December 2013, the category has seen a growth of more than five lakh folios. Debt funds have received net inflows of Rs. 87391 crore during the same period.

Piquant Parade

Investors can check the value of their investments, access their account balances, know the current valuation and get a summary of all their investments via KTrack. Karvy Computershare has launched first of its kind smartphone app for mutual fund investors called KTrack. The application provides quick and simple access to investment information to investors. This free app is available on Android iOS and Blackberry platforms, providing investors with instant investment updates on their mobile devices. 60-70% of the calls received from investors are about information regarding their investment value. KTrack© is a pioneering innovation in this regard. Through this application, investors can check the value of their investments in an instant, access their account balances, know the current valuation, get a summary of all their investments, and access a host of other things. The idea is to render sheer convenience and cost effectiveness.

Gone are the days when SIP registration took almost a month. With the advent of National Automated Clearing House system (NACH) platform developed by National Payment Systems Corporation India (NPCI), transacting in mutual funds has become much more convenient and faster. NACH is an online end-to-end electronic system which helps fund houses register SIP mandates swiftly. The concept is new to India, having become operational in December 2012. Currently registering a SIP ECS mandate takes 21 to 30 days and there is no process to track if the ECS has been confirmed at the bank’s end. The new system helps fund houses to register SIP mandates in just five days. Earlier distributors had to register multiple mandates if their clients wanted to invest through SIP in say four different schemes. With the new system, distributors can register four SIPs through one mandate. The process has become simpler even in case of lump sum investments. NACH can be utilized to pay utility bills, insurance premiums and mutual fund SIP ECS. Five fund houses – DSP BlackRock, UTI, Pramerica, HSBC, and Reliance have joined NACH platform so far.  ICICI Prudential is also evaluating the technology. Based on this technology, DSP Black Rock recently launched a One Time Mandate (OTM) facility which virtually eliminates any paperwork while investing. OTM allows an investor to authorize his/her bank to debit up to a certain amount daily based on the instructions given to DSP BlackRock Mutual Fund. Even if investors wish to transact physically (by filling up a transaction slip) they need not cut a cheque. In case investors are investing through DSPB’s website they do not need to use internet banking or debit cards and they can they instead can use the OTM facility. Even internet banking facility is not required. Further, net banking has restrictions on the number of transactions one can do which is not the case with NACH.

Pramerica has launched a facility called ‘Anywhere Transact’ based on the same platform which allows investors to invest in multiple ways. Investors can make a transaction through a phone call or through SMS.  Investors need to register for this facility by authorizing a debt mandate. Investors get a SMS and email from fund houses after every transaction. Once registration is done, investors can invest through phone, SMS or through internet. With the new technology in place, even investors who do not have smart phones can transact by simply sending an SMS. It is not that investors did not have an option to invest through SMS or phone call earlier. However, the earlier methods of investing through SMS or phone call required investors to remember their folios and scheme codes. Many fund houses had launched mobile based applications which allowed investors to transact through their phones. However, one drawback of these mobile applications was that investors were required to have smart phones with internet connection. Moreover, there were certain restrictions on the number of folios and schemes one could transact in. With fund houses having fixed some of these flaws of ‘anywhere transacting’, the investment process is likely to become much smoother for investors and reduce paperwork for distributors.

Regulatory Rigmarole

Fund managers are finding it a challenge to comply with a SEBI diktat which requires them to reduce debt funds exposure to a single sector to 30%. Fund houses have complied with this rule in all open end debt schemes like dynamic, short term, and income funds. However, fund managers are finding it difficult to offload their holdings in older FMPs to bring portfolio exposure to one sector below 30%. Fund managers say that there is a possibility that they could end up buying securities which offer lower yields which in turn could hamper the performance of their funds. The regulator had given one year’s time to AMCs to comply with this diktat. Due to the difficulties faced by fund managers in offloading their existing paper in FMPs, SEBI has given an extension to comply with its rule till March 2014. 

 

Morgan Stanley's exit from the Indian mutual fund  industry has revived the debate on the existence of smaller, loss-making asset management companies. The global financial giant - the first foreign mutual fund in India, launched in 1994 - sold its local schemes with assets worth around Rs 3,290 crore to HDFC Mutual Fund for approximately Rs 170 crore, about 5% of its AUM. Its corpus is less than 0.5% of the 44-member industry's total AUM of over Rs 8 lakh crore. HDFC's price was in line with earlier deals in the industry, as more than 40% of Morgan Stanley's AUM was equity - usually retail money, considered "sticky". The step raises a larger question: how long can many other funds with moderate assets and small marketing networks stay in business? They may not be as lucky as Morgan Stanley. Reportedly, many promoters of mutual funds outside the top 15 are entertaining prospective buyers. Perhaps six or seven mutual funds, both foreign and domestic, are actively looking for a buyer but are unable to find one. This is partly because most of the smaller mutual funds predominantly manage debt - institutional money, susceptible to sharp exits. This highlights the woes of the domestic mutual fund industry, where the share of the top 10 funds in the industry's total AUM has risen to almost 80%, and 70% of funds are still loss-making. Over the last four years, the strong players in the business have become stronger, while the weak got weaker. The ban on entry load - an upfront fee that funds charged investors to pay distributors - by the regulator in August 2009 was a turning point. Weak market conditions only hastened the slide. Without entry load, many mutual funds could not convince distributors to sell their products. That may have reduced mis-selling, but it meant large funds with deep pockets could market their schemes better. The mutual funds that have lost out in the race are the ones without strong products and a good investment team. Promoters of most mutual fund houses are unwilling to invest more in their ventures owing to uncertainty over growth. US-headquartered Fidelity Mutual Fund's sell-off of its Indian mutual fund business to L&T in 2012 may have triggered a panic among promoters. Fidelity's India operations were reeling from losses, but its schemes were on the buy list of most distributors because of their superior performance. Promoters of loss-making mutual funds asked: if Fidelity could not survive, how will they? That has aggravated the situation for foreign funds that do not see India as part of their core business strategy, especially in challenging times such as these. Some local fund houses - especially those that started after 2007 - are not in a hurry to exit but have trimmed their operations to the minimum. Their logic is that the business can be revived once market conditions improve. India has, however, seen several foreign entities entering as well. T Rowe Price, Schroders, Invesco and Nippon are prominent ones. However, all these acquired a sizable chunk, 25-26 per cent, in Indian entities; they did not start on a standalone basis.

NFO NEST

January 2014

 

FMPs losing flavour?

Fund houses are finding it difficult to mop up the requisite target of Rs 20 crore in their FMPs and as a result of which five fund houses had to extend their NFO period. In fact, in November 2013, two fund houses failed to collect the minimum corpus (Rs 20 crore) and ended up by returning back the money to investors. This slowdown in FMPs is largely on account of volatility in bond yields, growing appetite for tax free bonds, decreasing credit quality of papers, and unavailability of double indexation benefit on FMPs less than 15 months. SEBI rules state that NFOs of FMP can be kept open for subscription for a maximum of 15 days; however, many fund houses prefer to launch such schemes with a shorter NFO window of 1-3 days keeping in mind the interests of institutional investors. The short NFO window in FMPs ensures that the money collected from institutional investors is not kept idle.  FMPs with NFO period of 8-10 days are typically designed for retail investors. Investors cannot reap the benefits of double indexation in less than 15 month tenor FMPs by investing in December. Most of the funds which had extended their NFO period have a maturity period of less than 15 months. Over a period of time, FMPs have lost their flavor. In addition, equity market has showed some recovery in the recent past signaling a shift of investment sentiment.

Fund houses are now rushing to launch funds of all hues, with the dozen funds figuring in the January 2014 NFONEST being equity-oriented, debt-oriented, capital protection-oriented, and opportunity funds.

 

Sundaram Select Microcap – Series II

Opens: January 7, 2014

Closes: January 21, 2014

There are a handful of equity funds dedicated to micro-caps, and now Sundaram Mutual Fund has also decided to throw its hat in the ring with a fund named Sundaram Select Microcap Series II . This is a five-year closed-end fund and the fund's definition of micro-cap is linked to a rank on the NSE. It defines the beginning of micro-cap at the 301st rank on the NSE. By this definition, all companies that are smaller in capitalisation than number 301 ( currently, HDIL - Housing Development & Infrastructure Ltd. with Rs 2082 crore capitalisation) are micro-cap. The fund need not have a pure micro-cap strategy--according to the prospectus, micro-cap exposure can vary from 100% down to 65%, the remaining 35 % could be deployed in other equities or fixed income by the fund manager. The fund managers are S. Krishnakumar (Equity) and Dwijendra Srivastava (Fixed-Income).

 

HDFC Capital Protection Oriented Fund – Series II (36M)

Opens: January 8, 2014

Closes: January 22, 2014

HDFC Mutual Fund has launched a new Fund named as HDFC Capital Protection Oriented Fund- Series II - 36M January 2014, a close ended capital protection oriented fund with the duration of 36 months from the date of allotment. The investment objective of the fund is to generate returns by investing in a portfolio of debt and money market securities which mature on or before the date of maturity of the fund. The fund also seeks to invest a portion of the portfolio in equity and equity related securities to achieve capital appreciation. The fund would invest 75% to 100% of assets in debt securities and invest up to 25% in equity and equity related instruments (including equity derivatives) with high risk profile. Benchmark Index for the plan is CRISIL MIP Blended Index. The fund managers are Anil Bamboli (Debt Portfolio) and Vinay R kulkarni (Equity Portfolio). Rakesh Vyas will be the dedicated fund manger for Overseas Investments.

 

IDFC Equity Opportunity Fund – Series 2

Opens: January 13, 2014

Closes: January 24, 2014

IDFC Equity Opportunities Fund – Series 2 is a close-ended Fund of three year tenor and the primary investment objective of the fund is to seek to generate capital appreciation from a portfolio that is invested in equity and equity related securities of companies. The Fund will invest in either growth stocks or value stocks or both without any capitalization bias and will be diversified across sectors. As and when the fund manager is of the view that the investment has met its desired objective, the same shall be liquidated and distributed by way of dividend. The fund will be managed by Ankur Arora.

 

DWS Inflation Indexed Bond Fund

Opens: January 16, 2014

Closes: January 27, 2014

The DWS Inflation Indexed Bond Fund will invest in Inflation Index Bonds (IIBs). These are predominantly issued by the Government of India. The Fund is an open ended debt fund and will predominantly invest in these securities with the intention of delivering above inflation returns to investors. The returns are therefore linked to inflation rate. The Fund also aims to benefit from the accrual income and potential capital appreciation from IIBs. By investing through the mutual fund route, investors have the added benefit of ease of investment and liquidity along with tax efficient returns. The benchmark for the fund is I-Sec Composite Index. The Fund will be managed by Nitish Gupta.

 

ICICI Prudential Multiple Yield Fund – Series 5 – Plan D

Opens: January 14, 2014

Closes: January 28, 2014

ICICI Prudential Mutual Fund has launched a new close ended income fund named "ICICI Prudential Multiple Yield Fund - Series 5 - 1100 Days - Plan D" with maturity period of 1100 days from the date of allotment. The asset allocation of the fund will be in such a way that the objective of the fund to generate returns will be met by investing in a portfolio of fixed income instruments. Hence, the fund will allocate 70 to 95% of asset in debt securities, 0 to 20% in money market securities, cash and cash equivalent and 5 to 30% in equity or equity related securities. The performance of the fund will be benchmarked against CRISIL MIP Blended Index. Rajat Chandak, Rahul Goswami, Aditya Pagaria and Abhishek Pathak will be the Fund.

 

Birla Sun life Capital Protection Oriented Fund – Series 18

Opens: January 15, 2014

Closes: January 29, 2014

Birla Sun Life Capital Protection Oriented Fund – Series 18 seeks capital protection by investing in fixed income securities maturing on or before the tenure of the fund and seeks capital appreciation by investing in equity and equity related instruments. The fund will be benchmarked against CRISIL MIP Blended Index. Prasad Dhonde and Vinet Maloo will be the designated fund managers of the fund.

 

Religare Invesco Pan European Equity Fund

Opens: January 15, 2014

Closes: January 29, 2014

Religare Invesco Mutual Fund has announced the new fund offer of an open-ended fund-of-funds scheme- Religare Invesco Pan European Equity Fund. The fund will invest in Invesco Pan European Equity Fund (a Luxembourg domiciled fund), launched in 1991, which primarily invests in European stocks, with an emphasis on larger stocks. It follows a valuation led bottom up approach to select stocks. The fund has Rs 18,922 crores of assets under management. The fund is benchmarked to MSCI Europe - ND. The fund will be managed by Neelesh Dhamnaskar.

 

Union KBC Capital Protection Oriented Fund – Series 5

Opens: January 15, 2014

Closes: January 29, 2014

 

Union KBC Capital Protection Oriented Fund - Series 5 is a 36 month close ended capital protection oriented scheme that endeavours to offer an element of capital protection at the time of maturity of the fund and also aims to grow investors’ money. By investing a majority of the money in highly rated debt and money market instruments, the fund aims to protect the capital at the time of maturity. The remaining proportion of investors’ money shall be invested in equity and equity related instruments which may generate a positive return on initial investment and grow the money. The fund will be managed by Ashish Ranawade and Parijat Agrawal.

 

Canara Robeco Medium Term Opportunities Fund

Opens: January 17, 2014

Closes: January 31, 2014

Canara Robeco Medium Term Opportunities Fund is an open ended debt fund. The investment objective of the fund is to generate income and capital appreciation through a portfolio constituted of medium term debt instruments and money market instruments. The asset allocation of the fund will be in such a way that the objective of the scheme to generate income and capital appreciation will be met by investing in a portfolio of debt instruments and money market instruments. Hence, the fund will allocate 0 to 40% of asset in money market instruments and 60 to 100% of asset in GoI and debt securities. The fund shall not make any investments in foreign debt/securitized debt. The performance of the fund will be benchmarked against CRISIL Composite Bond Fund Index. Avnish Jain will be the Fund Manager. 

 

DSP BlackRock Dynamic Asset Allocation Fund

Opens: January 17, 2014

Closes: January 31, 2014

DSP BlackRock announced the launch of the DSP BlackRock Dynamic Asset Allocation Fund. This first-of-its-kind open ended fund of funds will dynamically manage the asset allocation between the specified equity mutual funds schemes and debt mutual funds schemes of DSP BlackRock Mutual Fund, based on the relative valuation of equity and debt markets. The fund would primarily invest in DSP BlackRock Top 100 Equity Fund and DSP BlackRock Equity Fund for equity exposure. While for debt exposure the fund will invest in DSP BlackRock Strategic Bond Fund and DSP BlackRock Short Term Fund. The fund would use the yield gap metric to assess market valuations. The fund will be managed by Dhawal Dalal.

 

 

 

ICICI Prudential Capital Protection Oriented Fund – Series V – Plan B

Opens: January 17, 2014

Closes: January 31, 2014

ICICI Prudential Capital Protection Oriented Fund V - Plan B - 1100 Days is a close ended Capital Protection Oriented Fund. The investment objective of the fund is to seek to protect capital by investing a portion of the portfolio in highest rated debt securities and money market instruments and also to provide capital appreciation by investing the balance in equity and equity related securities. The debt securities would mature on or before the maturity of the fund. Rajat Chandak, Rahul Goswami, and Aditya Pagaria will be the fund managers.

 

ICICI Prudential Equity Savings Fund – Series 1

Opens: January 20, 2014

Closes: February 7, 2014

ICICI Prudential Asset Management Company has announced the launch of ICICI Prudential Equity Savings Fund, a close ended equity fund that focuses on investing in equity securities of companies which are likely to see expansion in Return on Equity over the next 3 years. The fund aims at adopting a focused approach on select high conviction stocks which are likely to gain from factors such as the improving economy, a favorable regulatory change, change in the industry dynamics or company specific factors.  The fund will be adequately diversified while not restricting itself to the benchmark sector weights. The fund is also valid for tax benefit under the RGESS. The portfolio will be managed by Manish Gunwani and Venkatesh Sanjeevi. 

 

Birla Sun Life Focused Equity Fund – Series 1

Opens: January 15, 2014

Closes: February 13, 2014

Birla Sun Life Focused Equity Fund - Series 1, a 3 year close ended RGESS fund, focuses on creating value by investing in shares of handpicked companies from BSE 100, CNX 100 and PSU Navratnas, Maharatnas and Miniratnas. The fund would follow a blend of bottom up approach (for stock selection) and top down approach (for sector allocation). The fund manager would primarily focus on long term growth for identifying stocks. The objective would be to identify business with superior growth prospects and strong management available at reasonable valuation and offering higher risk adjusted returns. The fund will be benchmarked against CNX 100. Anil Shah will manage the fund.

 

 

SBI Tax Advantage Fund – Series III

Opens: December 28, 2013

Closes: March 27, 2014

The investment objective of the SBI Tax Advantage Fund – Series III is to generate capital appreciation over a period of ten years by investing predominantly in equity and equity-related instruments of companies along with income tax benefit. The fund will be managed by Richard Dsouza.

HDFC RGESS – Series 2, Axis Hybrid Fund Series 11-13, UTI Multi cap Fund, Baroda Pioneer Credit Opportunities Fund, ICICI Prudential Retirement Income Fund, Reliance Close-ended Equity Fund II, Peerless Overnight Fund, Birla Sun Life CPO Fund Series 19 and 20, and ICICI Prudential Growth Fund – Series 1 and 2 are expected to be launched in the coming months.

 

GEMGAZE

January 2014

The perfect balancing act

 

Balanced funds are good investment options during volatile market conditions because of their well-defined asset allocation approach that not only protects investors from downside but also preserves much of the upside, thereby, serving investors well.

 

All the GEMs from the 2013 GEMGAZE, save DSPBR Balanced Fund, have performed reasonably well in the past one year and figure prominently in the 2014 GEMGAZE too. DSPBR Balanced Fund, which has been floundering over the past few years, has been shown the exit door.

 

HDFC Prudence Fund Gem

 

The top performer, by a wide margin, HDFC Prudence Fund, is also the largest fund in the category with assets amounting to Rs 5,201 crore. It is the best performing fund in the category over the past 10 years with annualised returns of 24.5%. In its 18-year history, this fund has outperformed the Sensex and Nifty on 14 occasions and in many years has outperformed some of the best performing diversified equity funds. The top three sectors are finance, technology, and automobile, which constitute 37% of the portfolio. Though the return of -1.08% in the past one year as against the category average of 3.64% is disheartening, the 10.59% in the past three months as against the category average of 5.3% is a positive sign. HDFC Prudence Fund has a diversified quality portfolio with a blend of growth and value and maintains over 70% equity allocation before rebalancing. The allocation is maintained irrespective of the market; for instance, even in 2008, the fund maintained high equity allocation. The high mid-cap allocation does have its pitfalls with the fund's performance dropping during market downturns. But, the fund manager increases the exposure to large-cap stocks at such times, which has helped check the falls in a better way; as was evident in 2011. As for the exact equity-debt balance mix, the fund manager looks into the prevailing interest rates, equity valuations, reserves position, need for capital preservation and the need to generate capital appreciation. The allocation to a single stock has been capped at around 6%, with the highest currently allocated to ICICI Bank. A consistent outperformer, the portfolio turnover is 34% and it has the lowest expense ratio of 2.25% in the category, making it a compelling pick.

 

Sundaram Balanced Fund Gem

Sundaram Balanced Fund has earned a return of 0.81% over the past one year as against the category average of 3.64%. The three-year and five-year returns are also less than the category average of 4.92% and 15.83% respectively at 1.52% and 14.08%. The fund has 68% of its portfolio invested in equity, and the large-cap orientation of the fund with nearly 75% has enabled it to impart the much-needed safety to the portfolio in the midst of a volatile market. The debt component of Sundaram Balanced Fund comprises mainly of bonds and debentures. The equity component of the portfolio comprises of 33 stocks. This Rs 36 crore fund has 38% of the portfolio in the top three sectors, financial services, technology, and energy. The expense ratio of the fund is 2.97% while the portfolio turnover ratio is 29%.

Reliance Regular Savings Equity Fund Gem

 

Reliance Regular Savings Equity has the flexibility to capitalise on market trends in volatile situations and a higher allocation to mid-cap stocks. The fund has no market capitalisation or sector bias. For instance, during bull runs, the fund will take aggressive sector bets and during bear phases, it will hold on to defensive stocks, diversify and use cash to hedge risk. This fund carries above average risk and is not for those who want a stable core portfolio investment. The fund is an equity-oriented balanced scheme and has managed to beat its benchmark – Crisil Balanced — over one-, three- and five-year timeframes. The level of outperformance has been to the tune of 5-8 percentage points. Over the last five years, the fund has delivered compounded annual returns of 12.1%, placing it among the top few funds in its category. The one-year return of this Rs 550 crore fund is -5.10% as against the category average of 0.5%. Returns of 1.23% and 19.65%, respectively, as against the category average of 2.48% and 19.19% during a three- and five-year period, reflects the fund's ability in stock selection. 36% of the portfolio is in the top three sectors, finance, technology, and automobiles. The fund has a very compact portfolio of 36 stocks, and has in recent times been more aggressive in churning its portfolio with a portfolio turnover ratio of 35%. The expense ratio is 2.86 %. The fund is managed by Mr Omprakash Kuckian since November 2007.

 

Canara Robeco Balanced Fund Gem

 

Canara Robeco Balanced Fund is by far the most consistent performer in the balanced fund category. It beat its benchmark 97% of the times on a one-year rolling return basis over the last three years. The fund also comfortably beat the large-cap equity fund average of 3% and 5% in the last three and five years respectively, thanks to a better performing debt market. The fund’s debt portfolio is reasonably liquid, what with 15% of its total assets in money market instruments. Another 15% is held in public sector and private company bonds. The one-year return of the fund is 2.01% as against the category average of 3.64%. 37% of the portfolio is in the top three sectors concentrated in finance, technology, and FMCG sectors. The expense ratio of this Rs 194 crore fund is 2.76% with a very high portfolio turnover ratio of 49%. The fund’s management changed hands and is now managed by Krishna Sanghavi and Suman Prasad. It was earlier managed by Soumendra Nath Lahiri.

FUND FLAVOUR

January 2014

We have been prodded by nutritionists to eat a balanced diet. We have been told by numerous groups that a key to workplace success is a work-life balance. Individuals weigh choices on a daily basis in an effort to determine what might be good or better for us than the alternative. Finding the right balance is no easy feat.

What is balance in investing?

The answer varies from investor to investor. What you own in your portfolio and are comfortable with might be wholly different from that of the person sitting next to you at work. Who you are impacts your individual balance, the clear line that determines how well you sleep with the investment choices you have made. Knowing that you might not have a clear indication of your own balance, mutual funds suggest an investment that can give you a sort of asset allocation opportunity that you may not have been able to accomplish on your own. Balance in investing suggests diversity using both equity and debt portfolio to both grow and protect your money.

A balanced fund…

Balanced funds are hybrid mutual funds that invest in equity and debt instruments, and usually balanced equity funds invest no more than 35% of their money in debt instruments. With debt markets turning volatile after a steady run over the past year, investors are in a dilemma over their allocation in key asset classes, viz., equity and debt. Balanced mutual funds offer a simple solution to this dilemma as they invest 65-80% into equity and the balance in debt instruments. Equity has the potential to deliver superior long term returns while debt provides stability to the portfolio. This diversification protects the portfolio from downside risks if either equity or debt enters a bearish phase. It is important for investors to look at an asset allocation approach; however the way it is executed is also equally important. Investors often tend to re-allocate assets based on market sentiments which may not be in their best interest. In comparison, balanced funds follow a well-defined asset allocation approach that offers a higher degree of protection on the downside but preserves much of the upside thereby serving investors well.

The rationale…

The main reason for investing in a balanced fund is to take advantage of the asset allocation strategy; as mentioned above, by having the debt portion cushion the fund during down markets, while also participating in the rally in equities when investor risk appetite returns. One interesting finding published by the fund research firm Morningstar in the United States shows that while equity funds outperform balanced funds in bull markets, investors holding equity funds may not actually be able to enjoy the gains fully. Morningstar explains that this is because equity fund holders might execute poorly timed trades that tend to erode their gains. Conversely, balanced fund investors who are more likely to stay invested even during market downturns experience returns much closer to what the performance numbers suggest.

On the flip side…

Of course, there is downside to balanced fund investing. First of all, fund factsheet of a balanced fund usually does not disclose separately the performance of the equity and debt components of the portfolio. As such, one is not sure about the individual performance of the equity and debt portions.

In case you have invested the entire amount in balanced funds and you need some money for your emergency need, you have no other choice but to redeem from balanced funds. Therefore, for every redemption of Rs 100 you are actually redeeming Rs 65 from equity and Rs 32 from debt. Even if you are a long term investor in equity, your equity gets redeemed automatically.

Besides, balanced funds usually have target asset allocation between equities and debt (minimum 65% in equity). Fund managers have limited freedom as 65% is the minimum requirement to take the benefit of taxation. However, investors may have different risk appetites and needs. A balanced fund may be too rigid for an investor who has a flexible risk appetite that depends on current market conditions. As such, investors may need to include other pure debt or equity funds in their portfolio to achieve the optimal target allocation. The choices are limited. This essentially requires investors to construct their own portfolio and make the balanced fund redundant.

Standing the test of time…

CRISIL's study reveals that balanced funds (measured by the CRISIL – AMFI Balanced Fund Performance Index) have outperformed the CNX Nifty (equity markets) across 3, 5, 7 and 10 year timeframes. Balanced funds also witnessed lower capital erosion when equity markets declined and enabled investors to capitalize from gains in equity markets by delivering returns higher or similar to those of the CNX Nifty (equity markets). Balanced funds were also less volatile (a measure of risk) with 17% annualised volatility over a 5-year period compared to almost 25% for the CNX Nifty.

The CRISIL-AMFI balanced fund index declined 35.9% during the subprime crisis between January 2008 and March 2009. The Nifty fell 43.4% during the period. Similarly, they gained at a faster pace during the bounce-back that followed the sub-prime crisis. Balanced funds surged 51.7% between April 2009 and December 2010 compared to the 48.8% gains made by the Nifty. These funds have also managed to hold their ground when markets started their losing streak in the aftermath of the crisis in Euro-zone countries. Balanced funds managed to stay in the green during the period.

There are altogether 21 balanced mutual fund schemes available in the market today. All of them are benchmarked against the CRISIL Balanced Fund Index. Of the 21 balanced schemes, as many as 15 managed to beat the benchmark. The benchmark itself has yielded 16.35% returns till date. Overall, balanced funds have performed quite well. Many of them have been riding high on the robust performance of equities during the period. However, the real worth of a balanced fund is tested in tough times. So, if and when the market declines, taking down equity-heavy mutual funds with it, a balanced fund will have delivered on its objective if it succeeds in protecting your investments.

Helping you avoid mistakes

A research-documented reason to like balanced funds: They help you to avoid common behavior that leads to investing mistakes. To appreciate the evidence for this, you first need to understand the concept of investor returns as distinguished from fund returns. We are all familiar with the annual returns that mutual funds report in their glossy ads. But investor returns are what the average investor actually earns from the fund. Why would those numbers be different? Consider a fund that has a great quarter and goes up 5% early in the year. That is approximately a 20% annual return. Investors see that great return and pile in. Then the fund flat lines for the rest of the year. So it winds up the year by earning 5%, while most of its investors earned nothing. That is investor returns.

In 2011 Morningstar completed a study on the gap in investor returns — how individual investors do compared to their funds’ overall returns. Here is a snapshot of what they found: In 2010, the average domestic stock fund earned a return of 18.7% compared with only 16.7% for the average fund investor — a 2% difference. For the trailing three years, that gap was 1.28%. However it was a different story for balanced funds: The gap between investor and fund performance in 2010 was only 0.14%, and just 0.08% for the trailing three years. Results were even better for the trailing 10 years. And results were similar for target-date funds and moderate- and conservative-allocation funds — close kin to balanced funds. As anybody who has crunched retirement numbers knows, a 1-2% difference in annual return over long periods can easily add up to tens of thousands of rupees!

Why do individual investors do better when they are buying and holding balanced funds? It is probably because balanced funds do not tend to incite fear or greed — two emotions that can be lethal to investment performance. Balanced funds are easier to live with. It’s like the difference between a family sedan and a race car. The race car might have awesome performance, in the right hands. But, for those of us who aren’t full-time professional drivers, there are much better vehicles for driving around a city. It’s the same with investing: For most people, a vehicle with predictable behavior, that they can handle, will produce better results. Use balanced funds to start out investing. They are the best of both worlds.