Monday, March 30, 2015

FUND FULCRUM (contd.)

March 2015

Regulatory Rigmarole
It is normal to look towards a budget with some hopes and expectations of a direct tail wind to one’s areas of interest. From that perspective, the mutual fund industry, like any other industry, had hopes from Budget 2015 - the usual ones regarding higher tax exemptions for mutual funds investing or reduction in applicable tax rates on dividends and capital gains etc. Let alone, meeting these expectations, the budget has created some headwinds for mutual funds’ distribution by removing the service tax exemption for commissions paid out to distributors. Since the total expense to be charged on a scheme is capped by regulation, this charge will potentially result in reduced earnings for distributors and AMCs’ share of retention. But all said and done, mutual funds are capital market entities. Tax exemptions, commissions, surcharge on tax etc. are relevant if there are incomes and earnings in the first place. Equity markets produce returns based on the earnings of the corporate sector. How the budget is effective in managing the entire economy and what it does to corporate sector as a whole is more important than what it does directly for the mutual funds sector. Budget 2015 provides tailwinds for growth in top lines with the government highlighting a pro-growth approach. Increased outlay on infrastructure spends with thrust on infrastructure development from the government and capex from the public sector, will result in increased demand in the economy. Already we are witnessing reduced input costs and lower expected inflation. With the direction of reduction in corporate tax rates over the next four years, we now not only have growth in top line and reduction in costs, but we also have reduced tax on the earnings. Combination of these three working in tandem over the next few years could result in rerating for Indian equity markets over the years to come. If markets reward investors, their willingness to invest and allocation to equities will be higher.

Union Budget 2015 has proposed to hike the dividend distribution tax in debt funds by 40 bps to 28.75%. In the Budget document, Union Finance Minister Arun Jaitley has proposed to increase the surcharge by 2% from 10% to 12% on additional income-tax payable by fund houses on distribution of dividend. Debt funds currently pay DDT of 25%+ 10% surcharge + 3% cess or 28.325% on gross basis when they distribute income to resident individuals. Now, after factoring in the hike in surcharge, DDT will increase to 28.75%.  It does not make sense to opt for dividend payout option for individuals irrespective of their tax bracket. Investors should simply go with growth option. Firstly, they will have indexation benefit if they remain invested for over three years. In addition, they will be taxed on marginal rate of taxation in case of redemption within three years, just like bank deposit. In July 2014, Finance Minister had revised the computation method of DDT on gross basis which had increased the actual DDT payout by almost 5%. With the proposed revision in DDT, the dividend payout option in debt mutual funds has certainly become less attractive.

The mutual fund industry is likely to witness more scheme mergers after the government in its Budget proposed to change the tax treatment on such mergers. So far, merger of one scheme with another was treated as a normal transfer of units, which led to capital gains tax liability for an investor in the former fund, provided the NAV at the time of transfer of units was higher than at the time of purchase. From now on, such a merger of two or more schemes will be exempted from capital gains tax and will not be treated as a mere 'transfer' of the mutual fund units. This is likely to encourage fund companies to go in for further consolidation of schemes in their portfolio.  Scheme mergers will no longer be considered as fresh investments, allowing investors to make exits earlier without incurring taxes. For instance, long-term mutual fund investors were deemed fresh investors the moment a scheme was merged with another one. As a result, these investors ended up paying short-term capital gains (STCG) of 15% on equity products if they sold their units within a year of the scheme merger. The STCG is 20% on fixed income products if the investor exits the scheme before three years. This anomaly is now being rectified as the budget has offered tax neutrality for scheme mergers.

The budget has, however, brought mutual fund agents under the service tax net and has proposed a marginal increase in dividend distribution tax for debt funds. These moves would increase transaction costs for investors. Exemptions are being withdrawn on services provided by a mutual fund agent to a mutual fund or assets management company, according to the budget memorandum. This means that fund houses would deduct a service tax of 14% on commissions paid to distributors in the forthcoming financial year. The finance ministry had exempted mutual fund distributors from service tax, which stood at 12.36% in 2012. 

The budget has done away with a major uncertainty for the mutual fund industry, regarding offshore fund management. Domestic asset managers, who have been pining for the ability to manage foreign money can now take heart as the government has changed the taxation structure relating to domicile of the fund manager. So far, a foreign portfolio investor making use of local fund management expertise faced tax issues on account of 'permanent establishment' (PE) norms. Location of such a fund manager in India for managing offshore funds constituted permanent establishment of the fund in India, which exposed the fund profits to tax in India at a rate in excess of 40%. This prevented foreign portfolio investors from handing over money to local asset managers and instead provided the same to managers abroad. Now, the government has modified the norms to the effect that mere presence of a fund manager in India would not constitute PE of the offshore funds resulting in adverse tax consequences. This is expected to help local fund companies to attract more foreign money. 

The Finance Minister has proposed to set up a common financial redressal agency which will address grievances against all financial services companies. Simply put, an investor can lodge his/her complaint against any financial service provider such as an insurance company, bank, mutual fund, stock broker and so on, at a single point. Though the Budget has not given clarity on how the government will take this forward, the proposal was in line with the recommendation of Financial Sector Legislative Reforms Commission (FSLRC), a committee headed by Justice BN Srikrishna. FSLRC had recommended creation of a new statutory body to redress complaints of consumers through a process of mediation and adjudication. The redressal agency will function as a unified grievance redressal system for all financial service providers. To ensure complete fairness and avoid any conflicts of interest, the redressal agency will function independently from the regulators.
The Finance Minister’s announcement to merge the commodity market regulator Forward Markets Commission (FMC) with capital market regulator SEBI may enable fund houses to come up with commodity mutual funds. Commodity funds invest in food crops, spices, fibers, copper, aluminium, oil, gold, silver, and platinum. In India, mutual fund houses are not permitted to invest in commodities other than gold. However, a few fund houses have thematic funds which invest in companies engaged in commodity business.
The Reserve Bank of India (RBI) is likely to adopt a zero tolerance policy on Know Your Customer (KYC) and Anti-Money Laundering (AML) norms. The move follows a series of violation of norms by banks, which were identified by the RBI in the recent past. The regulator also feels that the quantum of penalties for such violations is small. It is currently looking at a proposal to increase this. Another proposal is to put operational curbs such as not allowing a bank to disburse loans for three months or not allowing them to take part in treasury operations for a limited period. Branch expansion is another area where restrictions could be imposed. The central bank discussed these issues at a recent meeting with chief compliance officers of several south and western India-based banks.

Association of Mutual Fund Industry in India said that upfront commission should not exceed 100 basis points (1%) for the first year. Further, upfront commission shall not exceed distributable TER (Total Expense Ratio) of the scheme if the same is below 100 basis points. The upfront commissions paid to distributors selling schemes would be capped at 1% from April 1, 2015. There is no cap on trail commission. These rules do not apply to applications sourced from B15 locations. The commission will be paid on distributable TER, which is gross TER minus operating expense. Assuming the distributable TER (net TER) of a scheme is 2% then maximum upfront commission will be 1%. This upfront commission will include expenses incurred on distributors in the form of junket, loyalty program etc. However, training has been reportedly excluded from such expenses. Gross TER on 15th of every month will be considered for such calculations. The decision comes against the backdrop of concerns raised by market regulator SEBI about high commissions being doled out to mutual fund agents. Introduction of cap on commissions would help ensure a level playing field and curb instances of exorbitant payments. At present, there is no limit on upfront commission and some fund houses pay upfront commissions of up to 8% to their distributors for selling a mutual fund scheme. 


To attract retail investors, mutual fund houses are tapping social media platforms like WhatsApp and a host of other calling and messaging apps to facilitate transactions in mutual fund products. These new facilities will help investors in buying or selling mutual fund products in a simpler and faster manner. Mutual fund houses that have adopted digital modes such as internet and mobiles for increasing distribution of mutual fund products include Axis MF, Reliance MF, UTI MF, L&T MF, Quantum MF, and ICICI Prudential MF. Besides, several fund houses are allowing customers to invest, redeem, and switch funds using their mobile phones and a host of mutual funds are gearing up to adopt digital technology to tap investors. Quantum MF is offering WhatsApp facility to either transact or see mutual fund portfolios. L&T MF has introduced a new service--Goinvest--where customers can track their investments on Facebook. Besides, Axis MF's Easy Services that includes EasyCall, EasySms, EasyApp provide customers an option to invest in mutual fund schemes through an SMS, using a dedicated application or by calling up on a designated mobile number. At present, many fund houses are offering facility for online investment, but industry insiders say that there is a need to promote and make it more user friendly for investors by improving the infrastructure and efficiencies. Further, SEBI had also set up an expert panel to suggest measures for increasing distribution of mutual fund products through digital modes. According to an estimate, number of internet-enabled mobile phones in the country is expected to increase from 1-1.5 crore in 2010 to 30-40 crore in 2015. The Securities and Exchange Board of India is of the view that a greater use of internet as a distribution channel can help increase the penetration of mutual funds, especially among young investors. According to the regulator, the online phenomenon is growing rapidly as more and more people, especially the younger generation, prefer to carry out most of transactions online such as internet banking, shopping, and ticketing.

Monday, March 23, 2015

FUND FULCRUM

March 2015

The Indian mutual fund industry's assets under management rose 1.76% or by Rs 20,840 crore to Rs 12.02 lakh crore in February 2015, according to the monthly numbers released by the Association of Mutual Funds in India. This is the first time the industry's assets have crossed the Rs 12 lakh crore mark. Gains were led by inflows into equity, balanced, gilt, and liquid funds, according to CRISIL Research. Positive sentiment for the underlying asset class helped equity funds attract net inflows for the tenth consecutive month in February 2015. The category's assets rose 1.41% to close at a record high of Rs 3.46 lakh crore. The underlying asset class, represented by the benchmark CNX Nifty Index, gained 1.06% in the month on positive cues from announcements in the Union Budget 2015-16, upbeat domestic GDP growth estimate, and encouraging international developments. Balanced funds, which invest a major portion of their AUM in equity, also continued to benefit from the upbeat sentiment in the equity market and attracted net inflows for the ninth consecutive month. The category's AUM was up by Rs 715 crore to Rs 26,507 crore  - its record high asset tally. Hopes of easing interest rates by the Reserve Bank of India pushed gilt funds to touch a new peak of Rs 13,180 crore in February 2015. AUM increased 19% or by Rs 2,105 crore primarily due to inflows of Rs 2058 crore (sixth consecutive rise) in the month. Liquid/ money market funds reported net inflows of Rs 8,784 crore, giving a boost to the total industry assets. Inflows into the category are a part of the cyclical inflows which occur in the first two months of the quarter (January-February) before being withdrawn for quarter-end requirements (to pay corporate advance tax) in the last month of the quarter (March). The category's AUM rose 4.04% or by Rs 10,712 crore to Rs 2.76 lakh crore. Income funds' assets rose to a new high of Rs 5.22 lakh crore, up 0.41% or Rs 2,132 crore, due to mark-to-market (MTM) gains in the underlying assets. Open-ended and interval schemes posted net inflows of Rs 8,486 crore and Rs 164 crore, respectively, while closed-ended schemes posted net outflows of Rs 8802 crore, resulting in net marginal outflows of Rs 152 crore for the category. Gold ETFs' assets fell 5.53% or by Rs 401 crore to Rs 6844 crore due to persistent redemption pressure and MTM losses; the latest asset tally is the lowest for the category since July 2011. The category registered net outflows of Rs 74 crore for the twenty-first straight month as subdued performance of the underlying asset discouraged investors. The price of gold (represented by the CRISIL Gold Index) fell 4.26% in February 2015.

Mutual funds pumped in Rs 5,200 crore in equity schemes in February 2015, taking the total inflow to over Rs 61,000 crore in the first 11 months of the current financial year on the back of positive returns. It was the twelfth consecutive month when equity mutual funds witnessed an inflow. According to the latest update available with Association of Mutual Funds in India, equity funds saw net inflow of Rs 5,217 crore in February 2015 as compared to Rs 5,850 crore witnessed in January 2015. The latest inflow takes the total fund infusion in equity mutual fund schemes to Rs 61,089 crore at the end of February 2015. However, equity funds witnessed an outflow of Rs 5,526 crore during April-February 2014. This inflow has helped in increasing mutual fund equity assets base to Rs 3.07 lakh crore in February 2015 from Rs 1.57 lakh crore a year ago. Equity markets have delivered positive returns that attracted retail investors into such schemes.

According to the latest data on investor accounts with 45 fund houses, the number of equity folios rose to 3.14 crore last month, from 2.94 crore during the full fiscal 2013-14, a gain of 20 lakh folios. April 2014 saw the first rise in folio count in more than four years. Prior to that, the equity mutual fund sector had seen a continuous closure of folios since March 2009 after the market crashed in late 2008 due to the global financial crisis. Since March 2009, the sector has seen a closure of 1.5 crore folios. The investor base reached its peak of 4.11 crore in March 2009, while it was 3.77 crore in March 2008. A strong rally in equity markets and the consequent rise in investors' interest led to a sharp increase in retail folios. The addition in equity folios is in line with BSE's benchmark Sensex surging by 31% in the period under review. Moreover, mutual funds industry reported net inflows of over Rs 61,000 crore in equity funds in April-February period, which helped the industry grow its folio count. Overall, industry's retail folios surged to 4.2 crore at February-end 2015, from 4.05 crore at end of March 2014. 

Piquant Parade
MF Utility system has been launched across India on March 4, 2015. The transaction facility started from February 13, 2015 in Bangalore and Delhi, February 20, 2015 in Ahmedabad and Pune, and February 27, 2015 in Chennai and Kolkata. So far, 25 AMCs have signed up with MF Utility. Around 3,300 distributors from 460 cities have already signed up with MF Utility. User ids have been provided to distributors. Any distributor who has signed up with MFU can transact in 25 participating AMCs across 360 POS spread across the country. Distributors will be able to submit multiple transactions like purchases, redemptions, switches, etc. using a single application (Common Transaction Form-CTF). They need to open a common account number (CAN) for their clients using the CAN registration form (CRF) and submit these forms at the MFU POS. CAN is a single master number applicable to all AMCs participating in MFU system. Through CAN, distributors can submit multiple transactions across schemes of various AMCs using a single application (CTF). The payment has to be made to MFU. Mutual fund investments will become simpler with the introduction of the common account number (CAN) by MF Utilities India (MFUI). The benefits of transacting by using CAN are multifold. CAN provides one reference number for all mutual fund investments made besides doing away with the need for opening an account with each fund house to invest in their schemes. In addition, investors get a single view of all their MF investments besides having the convenience of submiting change requests (such as change of address) at a single point. MF Utility provides a single transaction form for transacting in multiple schemes across mutual funds. A single time-stamp is given for all transactions appearing in the form. A single payment instrument for multiple investments does away with the burden of handling multiple instruments. All these can be done through a common mandate registration form where one can mandate for multiple SIP (systematic investment plan) registrations, lump sum investments and multiple modes of payment. A single window for complaint redressal — registering a complaint, tracking and redressal — has also been provided. For those who are not KYC (know your customer) compliant, proof of identity and proof of residence should be furnished for completion of the KYC process. Individuals/entities that are already KYC-compliant with a SEBI registered intermediary (broker/ DP/ mutual fund and the like) have to quote their permanent account number (PAN), which is immediately verified by an MFUI representative.

Franklin Templeton Mutual Fund won as many as five awards at the Morningstar Fund Awards event held in Mumbai. Besides winning the best equity and multi-asset fund house award, FT won three more awards in the large cap (FT India Prima Plus Fund), small/mid cap (FT India Smaller Companies Fund), and short term bond fund (FT India Short Term Income Fund) category. Launched in 1994, FT India Prima Plus Fund has delivered a CAGR return of 20% since inception, according to Value Research data. FT India Smaller Companies Fund, which manages AUM of Rs. 1,959 crore as on February 2015, has delivered a CAGR of 16% since launch. A total of five fund houses won awards across eight categories. In the equity category, Axis Long Term Equity Fund won the best ELSS award. Launched in December 2009, this fund has delivered a CAGR of 25% since launch, according to Value Research data. The fund manages AUM of Rs. 4,424 crore as on February 2015. ICICI Prudential Balanced Fund and HDFC Multiple Yield Fund were the winners in the moderate and conservative allocation category. In addition, HDFC Floating Rate Income Fund - Long Term Plan won the best ultra-short term bond award, FT India Short Term Income Fund bagged the best short-term bond fund award while Birla Sun Life Dynamic Bond Fund bagged the award in intermediate bond fund category.

Foreign fund house JP Morgan Asset Management is believed to be mulling over sale of its India mutual fund business, which manages assets worth over Rs 14,000 crore. JP Morgan has begun discussions for a possible sale of its Indian mutual fund arm. JP Morgan could become the fourth foreign fund house in little over a year to exit the Indian mutual fund industry, although its asset base has grown rapidly in the recent past. The total asset base of Indian mutual fund business crossed Rs 12 lakh crore in February 2015, although the industry is highly scattered with nearly 45 players with most of them having small businesses. Only four found houses have average AUM of more than Rs 1 lakh crore each and these include HDFC, Reliance, ICICI, and Birla Sunlife Mutual Funds. The fund houses have seen robust capital inflows in the recent months, while their asset base has also been getting a major boost from the strong performance of their equity schemes. JP Morgan received capital markets regulator SEBI's approval to start mutual fund business in India in February 2007. It had average AUM of Rs 14,123 crore at the end of December 2014. Since December 2013, three international players -- Morgan Stanley, ING, and PineBridge -- have announced selling their mutual fund businesses in the country.


to be continued…

Monday, March 16, 2015

NFO NEST

March 2015


The NFO deluge


There is a deluge of NFOs with barely a fortnight before the proposal to cap upfront commissions to distributors is put into practice from April 1, 2015. It is raining NFOs. As many as 23 new fund offers (NFOs) are open for subscription or will be launched later this month as fund houses scamper to garner maximum money by paying steep commissions to distributors to sell their products. Of the new fund launches, 14 are equity schemes. Four of these NFOs are without any lock-in period, also known as open-ended funds; the rest are close-ended with a lock-in period of three or five years. Many fund houses continue to pay 5-6% upfront commission to distributors for getting fresh money from investors. The Association of Mutual Funds in India (AMFI), the industry body, has urged funds to limit upfront commission to 1% starting April 1, 2015.

Canara Robeco India Opportunities Fund – Series 2


Opens: March 2, 2015


Closes: March 16, 2015


Canara Robeco Mutual Fund has launched a new fund named as Canara Robeco India Opportunities Fund-Series 2, a close-ended equity fund. The tenure of the fund is 3 years (1095 days) from the date of allotment of units. The investment objective of the fund is to generate capital appreciation by investing predominantly in equity and equity related instruments of mid cap companies. The fund will invest 65-100% in mid- and small cap equity and equity related instruments, 0-35% in large cap equity and equity related instruments, up to 10% in microcap equity and equity related instruments with high risk profile and up to 25% in debt and money market instruments with low risk profile. Benchmark index for the fund is CNX Midcap. The fund managers will be Ravi Gopalakrishnan-Head Equities and Krishna Sanghavi-Senior Fund Manager - Equities. They will also manage the debt portion of the fund.

Baroda Pioneer Hybrid Fund – Series 1


Opens: March 2, 2015
Closes: March 17, 2015

Baroda Pioneer Mutual Fund announced the launch of Baroda Pioneer Hybrid Fund-Series I, a close-ended hybrid fund. The primary objective of the fund is to generate income by investing in fixed income securities maturing on or before the date of the maturity of the fund and to generate capital appreciation by investing in equity and equity related instruments. This fund is aimed at combining income generation with potential capital preservation. It is predominantly a fixed income product as more than 65% of the corpus will be invested in debt and money market instruments. A maximum of 30% will be invested in equity or equity linked instruments, with an endeavor to generate return. Mr. Dipak Acharya will be managing the equity segment while Mr. Alok Sahoo will be managing the debt part of the investment.

DWS Large Cap Fund – Series 1


Opens: March 4, 2015
Closes: March 18, 2015

Deutsche Mutual Fund has launched a new fund as DWS Large Cap Fund - Series 1, a close-ended equity fund. The tenure of the fund is 1281 days from the date of allotment of units. The objective of the fund is to generate capital appreciation from a diversified portfolio of equity and equity related securities of large cap companies in India. The fund will invest 70%-100% of assets in equity and equity related instruments of large cap companies, invest up to 30% of assets in equity and equity related instruments of non-large cap companies with high risk profile, and invest up to 10% of assets in debt and money market instruments with low to medium risk profile. The benchmark index for the fund will be CNX Nifty Index. The fund manager is Akash Singhania.

ICICI Prudential Multiple Yield Fund – Series 8 Plan G


Opens: March 5, 2015
Closes: March 19, 2015

ICICI Prudential Mutual Fund has launched a new fund named as ICICI Prudential Multiple Yield Fund - Series 8 - 1284 Days Plan G, a close-ended income fund. The tenure of the fund is 1284 days from the date of allotment of units. 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 95% of assets in debt securities (including government securities) with low to medium risk profile. It will allocate up to 30% of assets in money market instruments, cash and cash equivalents and it will allocate 5% to 35% of the assets in equity or equity related securities with medium to high risk profile. Of the investments in debt instruments, 83%-88% will be invested in AA rated non-convertible debentures. The benchmark index for the fund will be CRISIL MIP Blended Index. The equity portion will be managed by Vinay Sharma. Rahul Goswami and Chandni Gupta will jointly manage the debt portion of investments under the fund. The investments under the ADRs/GDRs and other foreign securities will be managed by Shalya Shah.

Canara Robeco Capital Protection Oriented Fund – Series 5


Opens: March 9, 2015
Closes: March 20, 2015

Canara Robeco Mutual Fund has launched Canara Robeco Capital Protection Oriented Fund- Series 5, a close-ended capital protection oriented fund. The fund will have the tenure ranging between 12 and 66 months from and including the date of allotment. The fund seeks capital protection by investing in high quality fixed income securities maturing on or before the maturity of the fund and seeks capital appreciation by investing in equity and equity related instruments. For tenure up to 18 months, the fund will invest 90-100% in Indian debt instruments and money market instruments and up to 10% in equity and equity related instruments. For tenure of more than 18 but less than or equal to 24 months, the fund will invest 85-100% in Indian debt instruments and money market instruments and up to 15% in equity and equity related instruments. For tenure more than 24 but less than or equal to 36 months, the fund will invest 80-100% in Indian debt instruments and money market instruments and up to 20% in equity and equity related instruments. For tenure of more than 36 months but less than or equal to 66 months, the fund will invest 70-100% in Indian debt instruments and money market instruments and up to 30% in equity and equity related instruments. The fund managers are Krishna Sanghavi and Suman Prasad.

ICICI Prudential India Recovery Fund – Series 1


Opens: March 9, 2015
Closes: March 23, 2015

ICICI Prudential Mutual Fund has launched a new fund as ICICI Prudential India Recovery Fund - Series 1, a close-ended equity fund. The investment objective of the fund is to provide capital appreciation by investing in equity and equity related securities that are likely to benefit from recovery in the Indian economy. The fund will invest 80-100% in equity and equity related instruments with medium to high risk profile and up to 20% in debt, money market instruments, and cash with low to medium risk profile. The benchmark index for the fund will be S&P BSE 500 Index. The fund managers are Mrinal Singh and Rajat Chandak. The investments under ADRs/GDRs and other foreign securities will be managed by Shalya Shah.

LIC Nomura MF Banking & Financial Services Fund


Opens: March 9, 2015
Closes: March 23, 2015

LIC Nomura Mutual Fund has launched a new fund named LIC Nomura MF Banking & Financial Services Fund, an open-ended banking & financial services sector fund. The investment objective of the fund is to generate long-term capital appreciation for unit holders from a portfolio that is invested substantially in equity and equity related securities of companies engaged in banking and financial services sector. The fund will invest 80-100% in equity & equity relates securities of banking & financial services companies with high risk profile and up to 20% in cash, debt and money market instruments with low risk profile. The benchmark index for the fund is S&P BSE Bankex. The fund manager will be Ramnath Venkateswaran.

Reliance Capital Builder Fund II – Series C


Opens: March 9, 2015
Closes: March 23, 2015

Reliance Mutual Fund has launched a new fund named as Reliance Capital Builder Fund II - Series C, a close-ended equity oriented fund with a 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 & equity related instruments with small exposure to fixed income securities. The fund will allocate 80%-100% of assets in diversified equity & 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. Benchmark index for the fund is S&P BSE 200 Index. The fund managers are Samir Rachh and Jahnvee Shah (Fund manager-overseas investments).

ICICI Prudential Capital Protection Oriented Fund VIII Plan A


Opens: March 10, 2015
Closes: March 23, 2015

ICICI Prudential Mutual Fund has launched a new fund named as ICICI Prudential Capital Protection Oriented Fund VIII - Plan A, a close-ended capital protection oriented fund. The tenure of the fund is 1300 days. 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 provide capital appreciation by investing the balance in equity and equity related securities. The securities would mature on or before the maturity of the plan under the fund. The fund will allocate 70%-100% of assets in debt securities & money market instruments with low to medium risk profile and invest up to 30% of assets in equity and equity related securities with medium to high risk profile. Benchmark index for the fund is CRISIL MIP Blended Index. The fund managers are Vinay Sharma (equity portion), Chandni Gupta & Rahul Goswami (debt portion) and Shalya Shah (for investments in ADR / GDR and other foreign securities).

SBI Dynamic Asset Allocation Fund


Opens: March 10, 2015
Closes: March 24, 2015


SBI Mutual Fund has launched a new fund as SBI Dynamic Asset Allocation Fund, an open-ended dynamic asset allocation fund. The investment objective of the fund is to provide investors with an opportunity to invest in a portfolio of a mix of equity and equity related securities and fixed income instruments. The allocation between fixed income and equity instruments will be managed dynamically so as to provide investors with long term capital appreciation. The fund will invest up to 100% in equity and equity related instruments including foreign securities with high risk profile and up to 100% in debt and money market instruments with low to medium risk profile. The benchmark index for the fund is 50% Crisil 1 year CD Index + 50% BSE S&P Sensex. The fund managers are Dinesh Balachandran and Nidhi Chawla.

Birla Sun Life Capital Protection Oriented Fund – Series 26


Opens: March 11, 2015
Closes: March 26, 2015

Birla Sun Life Mutual Fund has launched a new fund named as Birla Sun Life Capital Protection Oriented Fund - Series 26, a close-ended capital protection oriented fund. The tenure of the fund is 1101 days from the date of allotment. The investment objective of the fund is to seek capital protection on maturity by investing in fixed income securities maturing on or before the tenure of the fund and seeking capital appreciation by investing in equity and equity related instruments. The fund will allocate 70% to 100% of assets in debt & money market instruments with low to medium risk profile and up to 30% in options premium with high risk profile, but limited to the premium paid. The option premium will be for the purpose of exposure to derivative instruments which will be restricted to long call options. The option premium offers the actual equity market exposure. However, the cumulative gross exposure through debt and options premium will not exceed 100% of the net assets of the fund. For this exposure, cash or cash equivalents with residual maturity of less than 91 days may be treated as not creating any exposure. Benchmark index for the fund is CRISIL MIP Blended Index. The fund managers will be Prasad Dhonde and Ajay Garg.

JP Morgan Balanced Advantage Fund


Opens: March 12, 2015
Closes: March 26, 2015


JP Morgan Mutual Fund has launched an open-ended balanced fund called - JPMorgan India Balanced Advantage Fund. The fund aims to generate long term capital appreciation and current income from a portfolio that is invested in equity and equity related securities as well as in fixed income securities. The fund will invest 30%-60% in equity and equity related instruments, 5%-10% in net equity arbitrage exposure and 30%-60% in debt securities and money market instruments. The benchmark of the fund is CRISIL Balanced Fund Index. The equity portion of the fund will be co-managed by Amit Gadgil and Karan Sikka while the debt portion will be co-managed by Namdev Chougule and Ravi Ratanpal.


Quantum Dynamic Bond Fund, Sundaram Select Microcap Fund – Series XI and XII, ICICI Prudential Business Cycle Fund Series 1 to 3, Baroda Pioneer Equity Trigger Fund Series III, SBI Debt Fund – Series B 16 to 20, Kotak India Growth Fund - Series I & II, HDFC Equity Opportunities Fund, ICICI Prudential Bank ETF, Reliance Interval Fund Series IV (Series 1 to 5), BNP Paribas Focused 25 Equity Fund, Reliance MSCL India Domestic ETF, SBI-ETF 10 year Gilt, IDBI Focused Equity Fund, Edelweiss Exchange Trading Scheme – Banking, Edelweiss E-track – Nifty, and Edelweiss Exchange Traded Scheme – MSCI India Domestic are expected to be launched in the coming months. 

Monday, March 09, 2015

GEMGAZE

March 2015

 Whither Arbitrage funds?

Arbitrage funds are available a dime a dozen in the market today. As the name suggests, they exploit arbitrage opportunities available between the cash and futures markets to deliver returns to its investors. These funds are essentially a variant of balanced funds with the basic difference that the equity component is hedged in the futures market. The ability of these funds, treated at par with other equity funds for tax treatment, to generate higher returns depends on the volatility in the equity markets — the higher the better. The provisions of Budget 2014, aimed against debt funds, proved to be a boon for arbitrage funds, with the subsequent excessive demand for arbitrage funds turning out to be a bane…making the euphoria short-lived.

All the GEMs that figured in the March 2014 GEMGAZE, save UTI Spread Fund and HDFC Arbitrage Fund, have retained their esteemed position in the March 2015 GEMGAZE too. IDFC Arbitrage Fund and ICICI Prudential Equity Arbitrage Fund, by virtue of their exhilarating performance, have been accorded a red carpet welcome in the March 2015 GEMGAZE.

Kotak Equity Arbitrage Fund Gem

Incorporated in September 2005, Kotak Equity Arbitrage Fund has an AUM of Rs 2,556 crore. The one-year return of the fund is 8.73% as against the category average of 8.53%. The top three sectors are finance, energy, and healthcare. Top five holdings constitute 43% of the portfolio, with the equity exposure at 59% and debt constituting 35% of the portfolio. The portfolio turnover ratio is 237% and the expense ratio is 0.91%. The fund is benchmarked against the CRISIL Liquid Fund Index with Mr. Deepak Gupta efficiently managing the fund.

JM Arbitrage Advantage Fund Gem

The Rs 3125 crore JM Arbitrage Fund, incorporated in 2006, has earned a one-year return of 8.14% modestly trailing the category average return of 8.53%. Top five holdings constitute 39% of the portfolio with finance, healthcare, and auto forming the top three sectors. Equity constitutes 68% of the portfolio with 34% in debt. The portfolio turnover ratio is very high at 222%. The expense ratio is 0.75%. The fund is benchmarked against the CRISIL Liquid Fund Index. The fund is managed by Chaitanya Choksi since February 2011 and Asit Bhandarkar and Sanjay Kumar Chhabaria since July 2014.

SBI Arbitrage Opportunities Fund Gem

SBI Arbitrage Opportunities Fund, incorporated in October 2006, has an AUM of Rs 367 crore. Its one-year return is 8.57%, a tad higher than the category average return of 8.53%. The top five holdings constitute 47% of the portfolio. Finance, healthcare, and diversified are the top three sectors. 66% of the portfolio is made up of equity with 33% in debt. The portfolio turnover ratio of the fund is very high at 469%. The expense ratio is comparatively high at 1.32%. The fund is benchmarked against the CRISIL Liquid Fund Index. The fund is managed by Neeraj Kumar since October 2012.

IDFC Arbitrage Fund Gem

IDFC Arbitrage Fund is an eight-year old fund with an AUM of Rs 2194 crore. Its one-year return of 8.36 % is a tad lower than its category average of 8.53% at present. The fund is amongst the more consistent players in terms of beating the CRISIL Liquid fund Index over 70% of the times on a rolling – return basis. 68% of the portfolio is in equities, with finance, healthcare, auto being the top three sectors. The entire assets allocated to equity are in 66 stocks and 33% of the assets are in debt. While the portfolio turnover ratio is a massive 1896%, the expense ratio is very low at 1.01%, an icing on the cake, indeed. The fund has been managed by Yogik Pitti since June 2013. 

ICICI Prudential Equity Arbitrage Fund Gem

Incorporated in December 2006, ICICI Prudential Equity Arbitrage Fund has an AUM of Rs 1,193 crore. The one-year return of the fund is 8.53% at par with the category average of 8.53%. The top three sectors are finance, auto, and healthcare. Top five holdings constitute 36% of the portfolio, with the equity exposure at 64% and debt constituting 34% of the portfolio. The portfolio turnover ratio is 78% and the expense ratio is 0.85%. The fund is benchmarked against the CRISIL Liquid Fund Index with Mr. Manish Banthia and Mr. Kayzad Eghlim efficiently managing the fund since November 2009 and February 2011 respectively.


Monday, March 02, 2015

FUND FLAVOUR
March 2015

How about earning high returns from the stock market without bearing any risk? Surprised, aren’t you? Yes, it is true. There is something called as arbitrage that lets you eliminate risk from stock market investing. Fund houses have latched on to this strategy and introduced arbitrage funds. They have marketed these funds as “risk-free”. But are they really risk-free? Is there no likelihood of suffering a loss by investing in these funds?
The icing on the cake
Arbitrage mutual funds are taxed like equity mutual funds. Gains realised by holding units for more than a year are tax free.  Typically returns of arbitrage funds are similar to those of liquid funds and ultra-short term funds, that is, about 6-8%. Arbitrage opportunities abound in turbulent markets and they have done quite well in recent times. Returns should not be a factor for choosing them though. The tax-free and risk-free nature of such funds can be exploited in many ways:
  • They are ideal candidates for short-term goals where capital protection and minimum tax-outgo are more important than returns. Since losses can arise under unusual circumstances it is best to use it for non-crucial short-term goals.
  • They are decent candidates for parking a portion of your emergency fund. A SB account and liquid funds are ideal candidates in terms of liquidity. A small portion can be kept in arbitrage funds so that we can let it grow without worrying about tax. Note: Redemption can take about 10 days or so.
  • When we have a home loan going it is best to set aside about 3 months EMI as part of the emergency fund. This part alone can be put in an arbitrage fund since liquidity is typically not crucial.
The concept of arbitrage funds looks good but with high computing power and well developed algorithms, the arbitrage opportunities are limited, thereby, limiting their returns. These funds work well in volatile market conditions but when the markets are going in one direction, the performance suffers.

The modus operandi

The first qualification to invest in these funds is that you understand how they work. Why is this so important? For two reasons: one, if you are looking for substitutes for debt funds these really are not debt funds although their risk profile may mimic low-risk debt. Two, if you understood these funds as being equity funds, then you may wonder why they deliver low returns, when equity funds manage higher returns. Hence, it is important to understand that arbitrage funds primarily use hedging strategies. In the process, if they generate some profit as a result of mis-pricing, you benefit more. Else, you benefit about the same as you would with liquid or ultra-short-term funds.

People who are not familiar with the term arbitrage might think it as another equity fund. This is not true. The main aim of this fund is to seek an arbitrage opportunity between the cash and the derivative markets and to generate an income. A major part of the fund’s portfolio is invested into equities and rest is used for arbitrage opportunities. There is always an arbitrage opportunity available in the stock market. What is needed is the knack to catch the opportunity. Suppose ABC stock is trading in the cash market at Rs. 1,000 and the future price of the same stock is Rs. 1,010. Now, the fund manager can see the arbitrage opportunity and will sell the future contract in the derivative market and at the same time buy an equivalent number of shares in the cash market. He will hold this position till the expiry. Now as it is definite that the cash price and future price will be the same on the expiry date, he will reverse the transactions. He will sell the shares in the cash market and will buy the future contract, thus making a definitive profit. Irrespective of the price, the fund manager will make a profit. It sounds very easy and simple but the problem lies in finding such opportunities very frequently.
Recent euphoria…

Arbitrage funds, first introduced in the Indian markets about a decade ago in 2004, managed limited assets in the initial years. After almost drying up in 2008, they again started attracting modest assets till June 2014. As on June 30, 2014, arbitrage funds had assets under management worth Rs. 5567 crores. Interestingly, just two funds - IDFC Arbitrage Fund - Regular Plan and Kotak Equity Arbitrage Fund account for more than half of these assets. Since June 2014, three asset management companies have launched arbitrage funds, taking the number of such funds in the Indian market to 14. Assets of arbitrage funds rose from around Rs. 6000 crores in June 2014 to more than Rs 14000 crores in August 2014. These funds have got a lot of attention as a substitute for short-term debt funds after the Union Budget 2014 reduced the tax benefits for investors in debt funds. Returns on investments up to 12 months are taxed at 15% and there is zero tax on investments held for more than a year. The government, in the Budget, increased long-term capital gains tax for all schemes, other than equity-oriented schemes, to 20% from 10%. In addition, the period defined as long-term was increased from 12 months to 36 months.

…and short-term disappointment?

Investors, who deployed money in arbitrage schemes soon after the government raised taxes on debt funds in July 2014, are a disappointed lot. Many of them are switching back to debt funds, due to a positive interest rate scenario. In the last six months, the arbitrage fund category underperformed fixed income schemes even as the stock markets rallied to new highs. Arbitrage schemes, which aim to benefit from price anomalies between shares and futures contracts, fetch returns similar to fixed income instruments. In the last six months, arbitrage funds have returned 3.93%, ultra-short term funds have given a return of 4.4%, and income funds gave a return of 8.66%, according to data from Value Research. But, does this make arbitrage funds a bad choice? Well, not quite. The change in tax rules for non-equity funds in Budget 2014 saw investors migrating from debt funds to arbitrage funds and, therefore, collections zoomed during July and August 2014 to see the assets under management (AUM) for arbitrage funds almost double. Since more money was chasing the limited arbitrage opportunity in the market, these funds witnessed a fall in returns. There are other reasons for the fall in returns of arbitrage funds. There has been an overall decline in the arbitrage opportunity in the market with the India Vix (Volatility Index) hitting an all-time low in August 2014. Trading activities shifting from large-cap companies, which are part of the F&O segment, to mid-cap companies outside the F&O segment, is yet another reason for the fall in arbitrage opportunity. This explains why the total value of stock futures is not moving up with the market indices in the last few months. The stock market getting into a correction mode is another reason for the fall in the arbitrage opportunity. The arbitrage spread will be more when the market is bullish and the spread declines when the market cools off. The fall in volatility is temporary and the returns from arbitrage funds should improve when volatility spikes once again. Returns from arbitrage funds will never have a steady pattern like that of liquid funds. There will be some months of low returns and some months of high returns. This is also not the first time that the returns of arbitrage funds have come down to these levels. The category average return had fallen to 6.28% in November 2013. The arbitrage opportunity has now started picking up and is expected to generate better returns for the category.

Safe bet in the six-month time frame

Arbitrage funds buy stocks in the cash market and sell an equivalent amount of futures. The returns would, however, vary based on the premiums at which the futures trade compared to the cash price. Therefore, these funds are safe with a minimum time horizon of six months. Moreover, since arbitrage opportunities are limited, we have seen returns from these funds trend low after the combined AUMs of arbitrage funds cross a certain threshold. Besides understanding the thesis behind these funds, if you are looking at a time frame of at least six months and are primarily looking for tax efficient ways to invest in low-risk options, arbitrage funds can work for you. Investors should invest in accordance with their risk tolerance, return expectation, and goals targeted. If investors or advisors can figure out some opportunities like expectation of fall in interest rates, then it is possible that you make good money from the same in short term. But when things are uncertain in stock market and even in debt market then arbitrage funds can be a good bet.
Points to ponder


  • Redeem your funds on the last Thursday of the month – there is no restriction on when you can withdraw your funds but as the derivatives settlement happen on the last Thursday of the month, it is good to redeem on that day.
  • Consider exit loads – Some funds have exit loads in the range of 0.25% to 1% if the exit is between 30 days to 6 months. Keep in mind your investment time frame while choosing the fund.
  • Taxation – the real tax benefit on arbitrage fund is realized when you are invested for more than a year. So plan accordingly.
  • Not for long very long term – these funds are meant for parking short term money, i.e. mainly for 1 -3 years’ time frame. For longer duration you should either look for equity funds or debt funds.
  • Go direct– The expense ratio difference between Direct and regular funds vary between 0.3% and 0.5%. So choosing “Direct” option would increase your return by 0.5%
  • No assured return – the returns from arbitrage funds are close to that of fixed deposits but there is no assurance of the same. It may vary widely at times.
  • Some risk is involved – there have been cases where arbitrage funds have given minor negative returns in a quarter. So these funds are not suited for parking very short term money.