FUND FULCRUM

January 2015

The year 2015 gets off on a high note for the Indian mutual fund industry. The industry's AAUM exceeded the Rs 11 lakh crore mark during the December 2014 quarter. Average AUM rose by 4.34%, Rs 45946 crore, to Rs 11.06 lakh crore (excluding fund of funds) in the quarter ended December 2014, according to a CRISIL report. The industry's average assets increased by 26.14% or Rs 2.29 lakh crore in 2014. Growth in the third quarter was primarily driven by rise in assets of equity funds. Equity funds' average AUM gained 15.53% or Rs 45121 crore to hit record high of Rs 3.36 lakh crore. During the year 2014, the category gained 71.68% or Rs 1.40 lakh crore. For 11 months of the year, the category registered inflows of Rs 49726 crore, compared with outflows of Rs 12705 crore in the similar period of 2013. Long-term debt funds' average AUM gained 6.37% or Rs 4191 crore to Rs 70030 crore, while gilt funds' assets rose 22.86% or by Rs 1299 crore to Rs 6984 crore. For the calendar year, long-term debt and gilt funds' assets declined 35% and 9 % respectively. Short-term debt funds rose for the third consecutive quarter, up 11.04% or by Rs 9530 crore to Rs 95831 crore. Ultra short-term debt funds rose for the fourth consecutive quarter, up 7.48%, or Rs 7970 crore, to Rs 1.15 lakh crore. In 2014, short-term debt funds and ultrashort-term debt funds witnessed 32% and 42% rise in assets respectively. Liquid funds were the biggest drag on industry assets, with the category falling 5.25 %, or Rs 15025 crore, to Rs 2.71 lakh crore. The category witnessed 17% rise in assets in 2014. Assets of fixed maturity plans (FMPs) fell for the second consecutive quarter, down 4.29%, or Rs 7085 crore, to Rs 1.58 lakh crore. Gold exchange traded funds (ETFs) continued the downtrend as the category marked its fifth consecutive quarterly fall. The category's AUM fell 6.76%, or Rs 521 crore, to Rs 7178 crore. This is due to persistent outflows despite a marginal rise in price of underlying assets during the quarter. Average AUM of direct plans rose 4.14%, or Rs 14619 crore, to Rs 3.68 lakh crore at the end of 2014. The share of direct plans, however, remained steady at 33% of the industry's AUM (excluding fund of funds) in the reported quarter compared with the previous quarter but was higher compared with 30% a year ago.  Equity mutual funds reported an addition of over 12 lakh accounts of investors in the first nine months of the current fiscal (2014-15). The number of equity folios rose to 3,0,392,991 till December 2014  -- the nine month period of the current fiscal from 2,91,80,922 for the entire last fiscal ended March 31, 2014, according to SEBI data. Mutual funds industry reported net inflows of over Rs 50,000 crore in equity funds in the April-December period of the current fiscal (2014-15), which helped the industry grow its folio count.

HDFC Mutual Fund has retained its top position across fund houses in the December 2014 quarter with respect to total assets managed as per data released by the Association of Mutual Funds in India (AMFI). The fund's average AUM was up by Rs 8987 crore or 6.35%, to Rs 1.50 lakh crore -- an industry milestone. ICICI Prudential Mutual Fund maintained its second position at Rs 1.37 lakh crore, up by 7.13%, or Rs 9100 crore. Reliance Mutual Fund was ranked third at Rs 1.26 lakh crore as its average AUM rose by Rs 4001 crore or 3.28%. Of the 43 mutual fund houses that declared their average AUM, 30 fund houses posted a rise. The share of the top-five fund houses was 55%, which is same as the previous quarter. 

Piquant Parade

PSU behemoth SBI 's mutual fund arm has evinced interest in acquiring the country's oldest fund house UTI MF -- a deal that could create the country's biggest mutual fund with assets in excess of Rs 1.5 lakh crore. The deal, if it happens, would also be the biggest ever M&A transaction in the Indian mutual fund industry, which has over 45 players together managing Rs 11 lakh crore. There have been a few M&A deals, but mostly involving smaller players. UTI MF at present is the fifth largest fund house of the country, while SBI MF ranks sixth. Interestingly, SBI is also one of the four sponsors of UTI Mutual Fund. UTI MF was carved out of the erstwhile Unit Trust of India (UTI) in February 2003. At that time, UTI was bifurcated into Specified Undertaking of Unit Trust of India (SUUTI) and UTI MF. UTI Mutual Fund is promoted by the four of the largest public sector institutions -- SBI, LIC, Bank of Baroda, and Punjab National Bank, with each of them presently holding a 18.5% stake. US-based T Rowe Price had acquired a 26% stake in UTI Asset Management Company Limited, which runs UTI MF. If a deal goes through for UTI MF's acquisition by SBI MF, the merged entity can overtake HDFC Mutual Fund as the country's largest fund house. Currently, UTI MF has average asset under management of Rs 87,390.13 crore, while that of SBI MF was Rs 72,140.63 crore at the end of 2014.

Franklin Templeton Mutual Fund is planning to acquire Deutsche Mutual Fund. Both the parties have completed the due-diligence process. DWS AMC is valued at 3-4% of its AUM, i.e. not less than Rs. 680 crore. Franklin Templeton Mutual Fund manages AUM of Rs. 63,643 crore while DWS AMC manages Rs. 22,670 crore as on December 31, 2014. If the deal goes through, Franklin Templeton Mutual Fund will overtake SBI Mutual Fund to become the sixth largest AMC in terms of AUM.

Goldman Sachs is in advanced talks to sell its mutual fund business, including the central public sector ETF launched with great fanfare last year. The firm is in talks with Wisdom Tree, a US-based exchange-traded fund (ETF) asset manager. Goldman may sell the business for about Rs 120 crore, the same price it paid to acquire Benchmark Asset Management in July 2011.

Four Indian fund houses – BNP Paribas, Baroda Pioneer, ICICI Prudential, and HSBC have won awards at Best of the Best Awards 2014. Asia Asset Management’s Best of the Best Awards gives recognition to financial institutions and pension funds for outstanding achievements over the past calendar year. Best of the Best Awards is broken down into three divisions: a) performance, b) country, and c) regional awards, to acknowledge each and every area where excellence has occurred. ICICI Prudential has won the award for India’s best fund house. Similarly, Baroda Pioneer and HSBC bagged awards for the best investor education and the best pension fund manager respectively. While Anand Shah of BNP Paribas bagged the CIO of the year award, Nimesh Shah of ICICI Prudential was adjudged as the CEO of the year. Meanwhile, Chennai based financial service provider, IFMR Investment Managers won award for the most innovative product.

Regulatory Rigmarole

  

Keeping in view the challenges faced by the fund managers in managing offshore pooled assets, market regulator SEBI may relax the restriction of appointing a separate fund manager, the requirement to replicate portfolio, and the criteria of minimum 20 investors (with no single investor holding more than 25%). To make it easier for domestic mutual funds to manage offshore pooled assets, SEBI proposed to drop '20-25 rule', which requires a minimum of 20 investors and a cap of 25% investment by an individual investor in a particular scheme, for certain foreign entities. Besides, SEBI has suggested to do away with the rule that requires appointment of separate fund manager for managing an offshore fund and replication of portfolio in regard to Category I and Category II FPIs (Foreign Portfolio Investors). Category I FPIs includes government and government related entities and Category II FPIs includes both broad based entities such as mutual funds, investments trusts and persons such as portfolio managers, investment managers, asset management companies, banks among others.

With the tax-saving season under way, mutual funds have started aggressively promoting their equity-linked savings schemes (ELSS). These get a benefit under the Section 80C limit of Rs 1.5 lakh.  However, investors are to no longer get the dividend reinvestment option. The Association of Mutual Funds in India (AMFI) has written a letter to asset management companies (AMCs) to stop offering this option.  The reason: Rising complaints during withdrawals. Fund houses already have Rs 36,257 crore in ELSS. The letter says investors often forget to tick the ‘Dividend payout sub-option’, resulting in reinvestment of the dividend by default. Since the original amount invested qualifies for deduction under section 80C, even though the dividend reinvested does not qualify for any such deduction, the lock-in period rule is often misconstrued by investors, who expect to withdraw the entire balance of units (including dividend reinvested) at the time of redemption, after a three-year lock-in period of the original investment. They cannot do it, due to lock-in of each transaction of dividend re-investment, leading to investor grievances.

Stringent compliance requirements under the Foreign Account Tax Compliance Act of the US have led to several mutual fund houses avoiding fresh investments from American investors. To lower the reporting burden, many mutual funds including HDFC MF, ICICI Prudential MF, Quantum MF, Baroda Pioneer MF, and DSP Blackrock MF have even barred investment from residents of US and Canada for some of their schemes, while others are not very keen on investments from such entities. Moreover, some MFs may even stop taking investments from NRIs till clarity emerges over FATCA agreement between India and the US. FATCA is a US law whereby foreign financial institutions across the world would have to report to the US Internal Revenue Service (IRS) on any transactions of clients who could be subjected to American tax laws. The non-compliance with FATCA entails 30% withholding tax on the US source payments. Moreover, wrong or incorrect reporting may also have similar consequences. While India and the US had agreed "in substance" last year to sign an Inter-Governmental Agreement over FATCA, the final pact could not be signed within the earlier deadline of December 31, 2014 and it had to be extended. All financial institutions with exposure to the US were also required to register with the US tax department IRS under FATCA before January 1, 2015, but many Indian entities are yet to do so. The US taxpayers under FATCA include US citizens, US residents (green card holders) and non-residents who own foreign financial accounts or other offshore assets. The FATCA provisions will have a big impact on flows from US. The Indian mutual fund industry, which is attracting a significant flow from NRIs is likely to be impacted by new FATCA.

Despite exponential growth of India’s mutual fund sector in 2014, the sector has gone through consolidation with a slew of mergers and acquisitions. The Rs 11-lakh crore sector saw three foreign entities selling out to domestic peers. The year began with the surprise exit of Morgan Stanley, acquired by HDFC MF for an undisclosed sum. It was the second US-based fund house, after Fidelity, to exit India operations in recent years. Then, in May 2014, Birla Sun Life Mutual Fund acquired ING MF, again for an undisclosed sum. The third deal was between Kotak MF and Pinebridge Investments in September 2014. The exit of the three smaller fund houses was due to the challenging landscape in MFs, dominated by larger entities. Small fund houses find the cost structure too high to sustain in a tightly-regulated sector. A higher net worth norm of Rs 50 crore introduced by the Securities and Exchange Board of India was also blamed for the exits. The year had begun with 46 asset management companies but the year ended with three less after the exits.

NFO NEST

January 2015

The NFO comeback

From a mere 10 equity-oriented NFOs in 2012 and 22 in 2013, 2014 saw 48 NFOs. Inspite of the fact that the money collected was just a fraction of what the NFOs had collected in the years 2005 to 2007, the number of NFOs launched in 2014 was among the highest, on a yearly basis, in the past decade. Most of the NFOs launched were of three-to-five-year period closed-end funds. NFOs of various hues continue to flood the market in the January 2015 NFONEST.

BOI AXA Capital Protection Oriented Fund – Series 3

Opens: January 7, 2015

Closes: January 21, 2015

BOI AXA Mutual Fund has launched a new fund as BOI AXA Capital Protection Oriented Fund – Series 3, a close-ended capital protection oriented fund. The tenure of the fund will be 41 months from the date of allotment. The investment objective of the fund is to generate income by investing in a portfolio of fixed income and money market instruments maturing on or before the maturity date of the fund. The fund will invest 75%-100% of assets in debt and money market securities with low to medium risk profile and invest up to 25% of assets in equity and equity related instruments with high risk profile. The benchmark index for the fund is CRISIL MIP Blended Fund Index. The fund managers will be Alok Singh and Surabh Kataria.

Baroda Pioneer Credit Opportunities Fund

Opens: January 8, 2015

Closes: January 21, 2015

Baroda Pioneer Mutual Fund has launched Baroda Pioneer Credit Opportunities Fund, a close ended debt fund. The primary objective of the fund is to generate returns by investing in debt and money market instruments across the credit spectrum. The fund will invest 50%-100% of asset in debt instruments of companies with long-term credit rating of less than AAA and debt instruments of companies having no long term rating with medium to high risk profile, invest up to 35% of asset in debt instruments of companies with long-term credit rating of AAA and government securities with low to medium risk profile and invest 5%-50% of asset in money market instruments including CBLO and cash with low risk profile. The benchmark index for the fund is CRISIL Short Term Bond Fund index. The fund managers will be Alok Sahoo and Hetal Shah.

ICICI Prudential Growth Fund – Series 8

Opens: January 9, 2015

Closes: January 23, 2015

ICICI Prudential Mutual Fund has launched a new fund as ICICI Prudential Growth Fund – Series 8, a close ended equity fund. The investment objective of the fund is to provide capital appreciation by investing in a well-diversified portfolio of equity and equity related securities. The fund will invest 80%-100% of its assets in equity and equity related instruments with medium to high risk profile and will invest up to 20% of assets in debt, money market instruments and cash with low to medium risk profile. Investment in securitized debt can be up to 50% of debt allocation of the fund. The benchmark index for the fund is CNX Nifty Index. The fund is proposed to be listed on BSE. The fund manager will be Chintan Haria. The investments under ADRs/GDRs and other foreign securities will be managed by Shalya Shah.

Reliance Capital Builder Fund II – Series B

Opens: January 9, 2015

Closes: January 23, 2015

Reliance Mutual Fund has launched a new fund as Reliance Capital Builder Fund II - Series B, a close ended equity oriented fund with the duration of 3 years from the date of allotment. The investment objective of the fund is to provide capital appreciation to the investors, which will be in line with their long term savings goal, by investing in a diversified portfolio of equity and equity related instruments with small exposure to fixed income securities. The fund will allocate 80%-100% of assets in diversified equity and equity related instruments with medium to high risk profile and invest up to 20% of assets in debt and money market instruments with low to medium risk profile. The benchmark index for the fund is S&P BSE 200 Index. The fund managers of the fund are Samir Rachh and Jahnvee Shah (Fund manager-overseas investments).

Birla Sunlife Manufacturing Equity Fund

Opens: January 13, 2015

Closes: January 27, 2015

Birla Sun Life Mutual Fund has launched a new fund as Birla Sun Life Manufacturing Equity Fund, an open ended manufacturing sector fund. The primary investment objective of the fund is to generate long-term capital appreciation to unit holders from a portfolio that is invested predominantly in equity and equity related securities of companies engaged in manufacturing activity. The fund would invest 80%-100% of assets in equity and equity related securities of manufacturing sector companies with high risk profile and invest up to 20% of assets in cash, money market, and debt instruments with low risk profile.  The benchmark index for the fund is S&P BSE 500.  The fund manager will be Anil Shah.

JP Morgan Economic Resurgence Fund

Opens: January 13, 2015

Closes: January 27, 2015

JPMorgan Mutual Fund has launched a new fund as JPMorgan India Economic Resurgence Fund, an open ended equity fund. The investment objective of the fund is to generate long term capital appreciation from a diversified portfolio that is substantially constituted of equity and equity related securities of companies with focus on riding economic cycles through dynamic allocation between various sectors and stocks at different stages of economic activity. The fund would allocate 80%-100% of assets in equity and equity related securities with high risk profile and invest up to 20% of assets in debt and money market instruments with low to medium risk profile. The benchmark index for the fund is S&P BSE 200. The fund managers will be Harshad Patwardhan and Karan Sikka.

Axis Hybrid Fund – Series 19

Opens: January 15, 2015

Closes: January 27, 2015

Axis Mutual Fund has launched a new fund named as Axis Hybrid Fund Series 19, a 42 months close ended debt fund. 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 that are maturing on or before the maturity of the fund whilst the secondary objective is to generate capital appreciation by investing in equity and equity related instruments. The fund will allocate 70% to 95% of assets in debt instruments including securitized debt with low to medium risk profile, invest up to 25% of assets in money market instruments with low risk profile and it would allocate 5% to 30% 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 Fund Index. The fund managers are Devang Shah and Jinesh Gopani.

DSP BlackRock Dual Advantage Fund Series 34 – 36M

Opens: January 15, 2015

Closes: January 28, 2015

The primary investment objective of DSP BlackRock Dual Advantage Fund Series 34 – 36M is to generate returns and seek capital appreciation by investing in a portfolio of debt and money market securities. The fund also seeks to invest a portion of the portfolio in equity and equity related securities to achieve capital appreciation. As far as investments in debt and money market securities are concerned, the fund will invest only in securities which mature on or before the date of maturity of the fund. The performance of the fund will be benchmarked against CRISIL MIP Blended Index. The fund manager will be Dhawal Dalal.

Sundaram Value Fund – Series II

Opens: January 15, 2015

Closes: January 29, 2015

Sundaram Mutual Fund has launched a new fund named as Sundaram Value Fund Series - II, a close ended equity fund with the duration of 5 years from the date of allotment of units. The objective of the fund is to provide capital appreciation by investing in a well-diversified portfolio of stocks through fundamental analysis. The fund will allocate up to 80% of assets in equity and equity related securities with high risk profile and invest up to 20% of assets in fixed income and money market instruments with low to medium risk profile. The fund's performance will be benchmarked against S&P BSE 500 Index. The fund managers are S. Krishnakumar, Dwjendra Srivastava, and S. Bharath (dedicated fund manager for investments in overseas securities).

LIC Nomura MF RGESS Fund – Series 3

Opens: January 16, 2015

Closes: January 30, 2015

LIC Nomura Mutual Fund has launched a third series of its Rajiv Gandhi Equity Saving Scheme (RGESS) called LIC Nomura MF RGESS Fund – Series 3. RGESS is designed to provide 50% deduction from income for investments of up to Rs 50,000 which is over and above deduction of Rs 1 lakh under Section 80C of Income Tax Act. Benchmarked against S&P BSE 100 index, LIC Nomura Rajiv Gandhi Savings Scheme Fund – Series III aims to provide capital appreciation from a portfolio that is substantially constituted of equity securities which are specified as eligible securities for RGESS. The fund will invest in stocks of BSE 100 and CNX 100. The investment strategy involves the analysis of the fundamentals and evaluation of the attractiveness of investment opportunities. Such analysis includes historical as well as current financial condition of the company, quality of the management, business prospects and valuation. Nobutaka Kitajima and Ramnath Venkateswaran are the fund managers.

Tata Dual Advantage Fund Series 2 – Scheme C

Opens: January 16, 2015

Closes: January 30, 2015

Tata Mutual Fund has launched a new fund named as Tata Dual Advantage Fund Series 2 - Scheme C, a close ended income fund. The tenure of the plan is 1099 days from the date of allotment. The primary objective of the fund is to seek to generate income and/or capital appreciation by investing predominantly in portfolio of fixed income instruments having maturity on or before the date of the maturity of the fund. The fund will invest small portion of the fund assets in equity/equity related instrument including derivative instruments. The fund will allocate 70%-95% of assets in debt and money market instruments and securitized debt with low to medium risk profile and it would allocate 5%-30% of assets in equity and equity related instruments including derivative instruments (options/futures) with medium to high risk profile. Of the investments in debt instruments, 81% to 86% would be invested in AA rated non-convertible debentures/government securities. The fund is proposed to be listed on BSE. The benchmark index for the fund will be CRISIL MIP Blended Index. The fund managers are Amit Somani (Debt) and Rupesh Patel (Equity).

HDFC Focused Equity Fund

Opens: January 15, 2015

Closes: February 13, 2015

HDFC Mutual Fund announced the launch of its HDFC Focused Equity Fund - Plan A, a 3 year close-ended equity fund investing in eligible securities as per Rajiv Gandhi Equity Savings Scheme (‘RGESS’). HDFC Focused Equity Fund - Plan A would invest in a portfolio of diversified equity securities – either from the list of BSE-100 or CNX-100, public sector enterprises categorized as Maharatna, Navratna, Miniratna by central government, and also in follow on public offer of all eligible securities and IPOs of public sector undertaking, where government shareholding is at least 51% which is scheduled for getting listed in the relevant previous year and annual turnover is not less than Rs. 4,000 crore during each of the preceding three years. The fund shall predominantly invest in the eligible securities of RGESS (minimum 95%) and shall invest in cash and cash equivalents and money market instruments and liquid schemes (maximum 5%), only to the extent necessary to meet the liquidity requirements for honouring redemptions (at the time of maturity)/expenses. From the tax benefit point of view, investment in HDFC Focused Equity Fund - Plan A is eligible for 50% tax deduction of the invested amount under section 80CCG of the Income - Tax Act, 1961 for new retail investors investing up to Rs. 50,000 and having gross total annual income less than or equal to Rs. 12 lakhs. This deduction is over and above the Rs. 1 lakh limit offered under section 80C of the Income - Tax Act, 1961. The maximum permissible investment for claiming deduction under section 80CCG of Income-tax Act, 1961 is Rs. 50,000 and the investor would get a 50% deduction of the amount invested from the taxable income for that year. HDFC Focused Equity Fund - Plan A would benchmark its investment performance against S&P BSE 100 Index. The units of the fund will be listed on both NSE and BSE. The fund will be managed by Srinivas Rao Ravuri.

Canara Robeco Capital Protection Oriented Fund - Series 4 & 5, ICICI Prudential Capital Protection Oriented Fund Series VIII – Plan A to J, Union KBC Trigger Fund - Series 2, ICICI Prudential India Recovery Fund – Series 1 to 3, IDFC Corporate Bond Fund, and Peerless Midcap Fund are expected to be launched in the coming months. 

GEMGAZE

January 2015

An ideal bet for first-time investors

Retail investors are usually the last ones to join the equity party. Those keen to jump in now may find, to their dismay, that the market has run up a bit too much for their liking. Balanced funds, however, may be a good option for them, especially first-time investors. Equity-oriented balanced funds typically invest 65% or more of their corpus into equities and the rest is invested in fixed income instruments. The downside protection in a balanced fund is higher than a pure equity fund, which makes it ideal for first-time equity investors.

All the GEMs from the 2014 GEMGAZE, save Sundaram Balanced Fund, have performed reasonably well in the past one year and figure prominently in the 2015 GEMGAZE too. ICICI Prudential Balanced Fund and Tata Balanced Fund, which have been showing creditable performance over the past few years, have been accorded a red carpet welcome.

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 8,081 crore. HDFC Prudence, with its long-standing track record of delivering 21.5% compounded annually over the last 10 years, towers over the performance of its benchmark of 12.8% annually over the same period. Over a three- and five-year period horizon, the fund returned an annualised 15.8% and 11.2%, respectively. Its benchmark, CRISIL Balanced Fund Index, returned 6.2% and 6%, respectively, over the same period. The return of 53.87% in the past one year as against the category average of 42.05% is heartening. The fund not only outperformed its benchmark but also delivered returns comparable with top diversified equity funds. HDFC Prudence Fund has a diversified quality portfolio with a blend of growth and value and maintains over 70% (73.7% at present) equity allocation before rebalancing. The allocation to a single stock has been capped at around 7%, with the highest currently allocated to State Bank of India. There are 76 stocks in the portfolio and the top three sectors are finance, technology, and engineering, which constitute 37.61% of the portfolio. The fund has higher exposure to mid and small-cap stocks compared with peers. The fund also takes an aggressive stance when it comes to holding debt. Even as early as last year, it held 15% in long-term government securities. While this did cause volatility, it paid off this year. This debt strategy is also one of the reasons for the fund’s overall superior performance in the last one year. The fund is managed by Prashant Jain. A consistent outperformer, the portfolio turnover is 34% and it has the lowest expense ratio of 2.29% in the category, making it a compelling pick.

ICICI Prudential Balanced Fund  Gem

ICICI Prudential Balanced Fund has earned a return of 47.48% over the past one year as against the category average of 42.05%. The three-year and five-year returns are also more than the category average of 22.65% and 12.64% respectively at 27.52% and 17.54%. The fund's superior performance can be attributed to three factors - extra conservatism in stock selection, avoiding any sector skew, and a bottom-up stock selection strategy. The fund has 69.45% of its portfolio invested in equity comprising 48 stocks. The debt component of ICICI Prudential Balanced Fund comprises mainly of bonds and debentures. This relatively higher preference for debt, together with a diffused allocation to stocks and sectors lowers the risk-profile of the fund. That its equity holdings are mainly in large-cap stocks, adds to the fund’s stability. ICICI Prudential Balanced Fund manages debt portion quite actively to ensure higher yields from its holdings. This Rs 1352 crore fund has 35% of the portfolio in the top three sectors, financial services, automobile, and engineering. The expense ratio of the fund is 2.59% while the portfolio turnover ratio is 52%. The fund is benchmarked against CRISIL Balanced Index.

Tata Balanced Fund   Gem

The tightrope walk between safety and returns that a balanced fund has to perform is not straightforward, but Tata Balanced has consistently done this better than most of its peers. This fund has handsomely outperformed the benchmark as well as the category over the last ten years. Ten year returns have been 16.7%. This compares very well with the category average of 13.5% and the benchmark's return of 10.7%. In terms of portfolio construction, equity comprises 74.07% of the portfolio mix, while fixed income securities comprises the rest. The fund has a predominantly large cap bias with a high growth focus. It is very well diversified with its top 5 holdings, Govt Bonds of 2019 and 2020 maturities, HCL, TCS, and United Spirits accounting for less than 19% of the total portfolio value. The quality of its debt portfolio is also quite high with limited interest rate sensitivity. The one-year return of this Rs 1785 crore fund is 50.74% as against the category average of 42.77%. Returns of 27.19% and 16.07% respectively, as against the category average of 22.23% and 12.79% during a three- and five-year period, reflects the fund's ability in stock selection. 41% of the portfolio is in the top three sectors, finance, construction, and engineering. The fund has 65 stocks in the portfolio, and has in recent times been more aggressive in churning its portfolio with a portfolio turnover ratio of 179%. The fund has a unique option that may help even relatively conservative investors looking for regular payouts. The fund has a monthly dividend payout option. Started in August 2010, this option has been paying dividends every single month since it was launched, although the quantum of dividends varied based on market conditions. Hence, for a retired investor with investments diversified across other fixed income products, this fund could be a good option to take exposure to the equity class. The expense ratio is 2.57%. The fund is managed by Mr Raghupathi Acharya since October 2013.

Reliance Regular Savings Equity Fund   Gem

Reliance Regular Savings Equity Fund is an equity-oriented balanced fund with 74.06% in equity and has managed to beat its benchmark – Crisil Balanced — over one-, three- and five-year timeframes. The one-year return of this Rs 915 crore fund is 48.12% as against the category average of 42.77%. Returns of 24.81% and 14.62% respectively, as against the category average of 22.23% and 12.79% during a three- and five-year period, reflects the fund's ability in stock selection. 41% of the portfolio is in the top three sectors, finance, automobile, and technology. The fund has a very compact portfolio of 32 stocks, and has in recent times been more aggressive in churning its portfolio with a portfolio turnover ratio of 82%. The expense ratio is 2.85%. The fund is managed by Mr Sanjay Parekh since April 2012.

Canara Robeco Balanced Fund Gem

Canara Robeco Balanced Fund is the oldest balanced fund that is still around. It registers substantial gains when the equity markets are doing well, and limits losses when the markets fall. Its recovery after the global financial crisis of 2008-09 is the perfect example. Canara Robeco Balanced Fund puts in around 70% of its portfolio into equities, with the remaining in debt. In both components, the fund follows a relatively safe strategy. Its current portfolio consists mostly of bluechips, which can serve it well if the markets take a breather now, with mid- and small-cap stocks having already galloped. In its debt component, Canara Robeco Balanced usually invests in medium-term corporate debt, short-term CBLO market, and certificate of deposits. Investments are made in AA or AAA-rated debt, adding another layer of safety. It has recently moved into longer-term debt, which may pay off as the interest rate cycle turns down. The one-year return of the fund is 48.16% as against the category average of 42.05%. The fund’s five-year return of 15.4% is higher than the category average of 13.2%. 38% of the portfolio is in the top three sectors, concentrated in finance, construction, and energy sectors. To be sure, in many of these years it has beaten the benchmark by only a small margin, but that is characteristic of a conservative fund. Unlike a peer which will have a big lead in six years and a lag in four, this fund will take a slow and steady approach. Surely, there are many investors who prefer the tortoise to the hare. All things considered, here is a conservatively run fund that will deliver mild positive surprises and almost no negative ones. The expense ratio of this Rs 286 crore fund is 2.8% with a portfolio turnover ratio of 69%. The fund is managed by Mr Krishna Sanghvi since September 2012.

FUND FLAVOUR

January 2015

Balance your portfolio with balanced funds

The task of investment planning is rather complex in today's arena. With a host of investment products available in each asset class - equity, debt and gold, the task gets all the more convoluted. Very often, many investors either in haste, confusion, or sheer exuberance created by brokers or agents invest in all these asset classes in a haphazard way, thus defying the objective of effective investment planning. The sheer exuberance created by glamorous business channels often sway you away from the core essence of allocation. Remember it is the hard earned savings that you invest, and hence it is imperative that you deploy your savings systematically in a disciplined manner. It is vital that you consider factors like age, income, expenses, nearness to goal, risk appetite, etc. which can facilitate prudent investment planning and asset allocation. This can be a daunting task as numerous exhaustive calculations need to be performed (for effective investment planning and asset allocation). But you have a way out as you can invest in a balanced fund that provides you several advantages along with the ultimate objective of wealth creation.

Balanced funds – a good way to start your mutual fund investments

If you are one of those who have not yet invested in equity mutual funds, although your risk profile allows you to invest, then you ought to rethink to obtain effective real returns over the long-term. While your proclivity to be invested only in fixed income investment avenues may help you safeguard against the implied volatility of equity markets, you may not be able to generate the desired wealth over the long-term by secluding equities. If you find yourself confused in choosing between safety and returns then you could find solace in "balanced funds". The "balanced funds" category in mutual funds, entails in them this benefit by providing you an effective asset allocation, while you are invested in a single avenue of investment, and offers you the following advantages:

• Shift across two asset classes depending upon the investment opportunities in the market
• Hedges your portfolio when one respective asset class experiences turbulence
  
  
• Enforces discipline by maintaining a pre-determined asset allocation (generally 65% in equity and the remaining 35% in debt, thus maintaining an equity orientation for tax status which other equity funds enjoy)
• In addition, balanced funds provide the benefit of diversification within each asset classes, i.e. equity and debt. More often than not, balanced funds are more conservative in their approach than a plain vanilla equity fund which runs with a sole objective of profit maximisation. A balanced fund, as the name suggests, tries to strike a balance between risk and returns by taking optimum exposure to debt as well as equity. This may, to an extent, boil down your concerns about investing in mutual funds managed by professional fund managers who have rich experience in research and analysis along with fund management.

Do balanced funds hold promise?

Balanced funds, which invest in a mix of debt and equity, are getting increasingly popular among investors. The assets under management in balanced funds have increased 64% from Rs. 13,376 crore in April 2014 to Rs. 21,940 crore in November 2014. This increase can be partly attributed to mark to market (MTM) gains. The BSE Sensex has run up 28% from April 2014 to November 2014. Apart from MTM gain, the category has also seen net inflows of Rs. 4,477 crore during the same period, according to SEBI data. The renewed interest in balanced funds is evident from the increasing folio count. Balanced fund folios have increased by 67,637 in the April-November period in 2014. The total number of folios has swelled from 17.96 lakh in April 2014 to 18.64 lakh in November 2014, according to SEBI data. After the changes in taxation structure of debt funds and increase in the tenure of holding period to 36 months to avail long term capital gains tax, financial advisors are increasingly recommending balanced funds to investors for a variety of reasons. But it is not advisable to shift to balanced funds solely for tax gains. Though not strictly comparable to debt funds, balanced funds offer investors the best of both worlds without having to remain invested for three years to avail long term capital gains tax. Balanced funds typically invest 65% of their corpus in equities and are thus treated as equity funds for the purpose of taxation. In equity funds, long term capital gains are tax free in the hands of investors. Thus, balanced funds are more tax efficient.

However, they come with their own risks as 65% assets are invested in equity. Moreover, the returns can be highly skewed if equity markets do not perform well. Balanced funds are a safe bet especially at a time when markets have run up so much. The returns of balanced funds are largely dependent on markets but when the market falls these funds can protect investors because of the debt exposure.

Value Research data shows that balanced funds have delivered 45% absolute return over a one year period. For instance, some of the oldest funds in the industry like Canara Robeco Balance Fund, HDFC Prudence Fund, Birla Sun Life 95 Fund, and UTI Balanced Fund have generated CAGR of 13%, 21%, 23% and 17% respectively. 

Get the balancing act right

Balanced funds have always been recommended to novices in the stock market. These funds invest in a mix of equity and debt and allows the fund manager to jiggle the portfolio and contain the turbulence in both equity and debt market. The basic idea is that investors will be able to take exposure to equity without fearing a total loss of capital. This can also be a product for maiden investors to start off with, owing to lower volatility and tax benefits. Being an evergreen product that works across market cycles, and offering the benefits of asset allocation, this product could form part of your core portfolio.

In a nutshell…

Balanced funds are an ideal investment fund if you are not ready to assume very high risk, but want to participate in the equity markets to add a zing to your return on investments. Therefore, if you want your portfolio to deliver a stable performance over the long term, and also have a mix of equity and debt to follow an asset allocation of say 70:30 (70% into equity and 30% into debt) or say 65:35 (65% into equity and 35% into debt), you should consider allocating some portion of your investible amount to balanced funds in addition to diversified equity funds. Have a healthy mix of different types of funds in your portfolio. For instance, debt provides paltry returns while the so called multi-bagger (mid cap) funds offer excellent returns. While debt at least protects your capital, the mid cap fund can hurt your capital too. In the case of equity, try to stick to the regular run-of-the-mill blue chip fund or index fund which should do the trick. In the case of debt funds you can pick up a debt fund with good ratings or stick to a bank fixed deposit. Maintaining a simple portfolio with balanced funds, diversified equity funds, and debt funds is far better than having dozen different items of which half are risky. One must not avoid equity or risky assets altogether, but at the same time going overboard on equities can be foolish too. Remember that investing with a balanced view is as important as sticking to a balanced diet.