FUND FULCRUM

February 2017

The year 2017 started on a positive note for the mutual fund industry. The Assets Under Management (AUM) of the Indian mutual fund industry is nearing the Rs. 20 lakh crore mark and could cross this important milestone in 2017. The AUM of the industry has already reached Rs. 17.4 lakh crore in January 2017, expanding 36.4% from Rs. 12.7 lakh crore at the end of January 2016, according to data from the Association of Mutual Funds in India (AMFI). In December 2016, the industry monthly AAUM crossed the landmark of Rs.17 lakh crore and highest ever quarterly AAUM of Rs.16.93 lakh crore for the quarter ended December 2016. The growth in mutual fund assets is largely due to renewed interest of investors in equity funds. If we take into account inflow in balanced funds (Rs. 3304 crore), ELSS (Rs. 1166 crore), and equity ETFs (Rs. 6748 Rs. crore), the combined inflow in equity category is close to Rs. 15,000 crore in January 2017. In fact, the equity AUM of the industry has now crossed Rs.6 lakh crore (including balanced, ELSS, and equity ETFs). In 2016-17, the overall net inflow into mutual fund schemes has nearly doubled so far to about Rs 3.86 lakh crore at the end of January 2017. Whereas, the net inflows increased more than 5.5 times to around Rs 1.66 lakh crore for income funds, it increased 84.5% to about Rs 1.03 lakh crore for liquid funds.

According to data from the Securities and Exchange Board of India (SEBI), the total folio count at the end of January 2017 stood at 5.4 crore, 1.8% higher than December 2016. Out of the 9.6 lakh folios added in the month of January 2017, 6.3 lakh folios were contributed by the Equity (including ELSS) and Balanced categories. De-growth in folio count was seen in Gold ETFs and fund of funds investing overseas.

In January 2017, the AUM of B15 towns reached 3.0 lakh crore, accounting for 16.7% of the total assets of the mutual fund industry. In the last 12 months, assets from B15 towns have grown 37.3% due to investor-friendly initiatives by regulators and campaigns by AMCs. In January 2017, the B15 assets grew by Rs. 0.1 lakh crore or 4.0% from December 2016. It is noteworthy that B15 locations are proving to be more lucrative for distributors as the share of direct plans in B15 towns is only 24.9% compared with 45.4% in T15 cities.

Piquant Parade

SEBI plans to leverage social and digital media to spread financial awareness and literacy. SEBI has said that enhancing engagement with people in the social and digital media would be among its key priorities in FY 2017-18. Using a digital platform is cheaper, quicker and a hit with young professionals.While SEBI has been strongly pushing the need to harness the digital and social platforms to promote investor awareness, only a combination of all mediums can help reach out to a wider section of investors. Going digital is good, but while many investors might have access to digital media, especially in certain B15 cities, they might not be aware of how they could use it for increasing their knowledge. Till a majority of investors become digital savvy, SEBI will need to mix all the mediums of communication to increase awareness.

Regulatory Rigmarole

The Union Budget 2017-18 has announced that SEBI would enable market intermediaries, which include fund houses and RIAs to apply for registration online. The budget document says, “The process of registration of financial market intermediaries like mutual funds, brokers, portfolio managers, etc. will be made fully online by SEBI. This will improve ease of doing business.” The paperless mechanism is expected to save time and effort of the applicants. Currently, applicants seeking registration are required to submit their application forms either through post or by visiting SEBI office. Since many intermediaries are not comfortable sending their details through post, they prefer to visit the SEBI office and get acknowledgement of receipt of their application forms. Although the proposal will ease the process by doing away with the physical documentation part, it does not claim to reduce the overall time of registration. In addition, there is no clause mentioned with respect to fund approval. Typically, the market regulator takes 2 to 3 months to complete the registration process.

The Union Budget also announced that the deduction available under the Rajiv Gandhi Equity Savings Scheme (RGESS) would be phased out from FY 2018. Individuals who have claimed a deduction under the RGESS in FY2017 will be allowed to avail of the same till FY2018.

With the Budget proposal to change the base year used for calculating indexation benefit from 1981 to 2001, investors in debt mutual funds may stand to benefit. Such funds qualify for long-term capital gains tax of 20% with indexation benefit if held for more than three years. With the base year change, the tax liability is likely to fall.

Scheme mergers are treated as sale of funds or redemption and long term investors are deemed fresh investors the moment a scheme is merged with another one and taxed accordingly. The Budget clarified that from April 1, 2017 scheme mergers will no longer be considered as fresh investments. There will be no tax impact at the time of merger. Only the holding period and the cost of acquisition of the units in erstwhile schemes will be taken into consideration for taxation purposes. The Union Budget 2017-18 clarified that the holding period will include the period held in the former scheme, and the cost of acquisition too, will be that of the former.

The government’s impetus to the affordable housing and infrastructure sectors in Budget 2017 seems to have increased the confidence of the market regulator in housing finance companies (HFCs). SEBI has issued a circular in which it has allowed fund houses to increase exposure in HFCs from 10% to 15% of the net assets of the scheme. The circular is applicable with immediate effect. “Presently, the guidelines for sectoral exposure in debt oriented mutual fund schemes put a limit of 25% at the sector level and an additional exposure not exceeding 10% (over and above the limit of 25%) in financial services sector only to HFCs. In light of the role of HFCs especially in affordable housing space and to further the government’s goal under Pradhan Mantri Aawas Yojana (PMAY), it has now been decided to increase additional exposure limits provided for HFCs in financial services sector from 10% to 5%,” states SEBI circular. In August 2016, the market regulator had increased this limit from 5% to 10%. SEBI has clarified that such securities have to be rated AA and above and these issuer HFCs are registered with National Housing Bank (NHB). However, the total investment in HFCs cannot exceed 25% of the net assets of the scheme.

SEBI has allowed fund houses to invest up to 10% of its corpus in Real Estate Investment Trusts (REITs) and Infrastructure Investment Trust (InvITs). However, the market regulator has clarified that fund houses can invest only up to 5% of its corpus in units of single issuer. In a circular, SEBI has said, “No mutual fund may invest in the units of REITs and InvITs shall not invest more than 10% of its NAV in the units of REIT and InvITs and over 5% of its NAV in the units of REIT and InvITs issued by a single issuer.” However, fund houses cannot invest corpus of index funds and sector specific funds in REITs and InvITs. Just like mutual funds, REITs pool money from various investors and invest in real estate ventures. REITs invest in commercial properties generating rental income.

Earlier, existing mutual fund schemes were required to obtain positive consent from a majority of the unit holders before commencing investment in derivatives. "It has been decided that for introduction of derivative investments in an existing scheme, whose SIDs do not currently envisage such investments, the requirement of obtaining positive consent from majority of unit holders shall no longer be applicable," SEBI said in a circular. All investors of such schemes would be given exit option with no exit load for 30 days as against the current requirement wherein exit option is only given to dissenting unit holders. Existing schemes of mutual funds, whose SIDs do not envisage investments in derivatives, can participate in that segment provided the risks associated with such participation would be disclosed and explained by suitable numerical examples to the unit holders. In addition, the extent and the manner of the proposed participation in derivatives should be disclosed to the unit holders. 

Acknowledging the role of mutual funds as an important savings vehicle for investors, the Union Finance Minister has appreciated the significant growth in the mutual fund industry over the past few years. By the end of 2017, fund houses are eyeing big on SIP investments to reach a mark of Rs 20 lakh crore AUM for the industry. Fund houses see B-15 cities contributing to some of the growth in SIP and few other SIPs are giving good performance, so the industry is confident that they will achieve the Rs 20 lakh crore mark.

NFO NEST

February 2017

With mutual funds gaining traction among retail investors, asset management companies such as ICICI Prudential Mutual Fund, Reliance Mutual Fund, DSP BlackRock Mutual Fund, SBI Mutual Fund, HDFC Mutual Fund, and IDFC Mutual Fund have filed draft offer documents with market regulator SEBI for as many as 10 new schemes this month. Equity, debt, and fixed maturity plans (FMPs) are some of the themes for which the mutual fund houses have filed the applications. Last year, close to 106 draft papers were filed with the capital market watchdog.

Debt fund NFOs adorn the February 2017 NFONEST.

SBI Debt Fund Series B - 46

Opens: February 21, 2017

Closes: February 22, 2017

SBI Mutual Fund has unveiled a new fund named as SBI Debt Fund Series B - 46, a close ended debt fund. The tenure of the fund is 1155 days from the date of allotment. The investment objective of the fund is to provide regular income, liquidity, and returns to the investors through investments in a portfolio comprising of debt instruments such as Government Securities, PSU & Corporate Bonds, and Money Market Instruments maturing on or before the maturity of the fund. The fund will invest 70%-100% of assets in debt and invest upto 30% of assets in money market securities with low to medium risk profile. Exposure to domestic securitized debt may be to the extent of 40% of the net assets. Benchmark Index for the fund is CRISIL Composite Bond Fund Index. The fund manager is Rajeev Radhakrishnan.

ICICI Prudential Capital Protection Oriented Fund – Series XI – Plan C

Opens: February 10, 2017

Closes: February 23, 2017

ICICI Prudential Mutual Fund has launched a new fund named as ICICI Prudential Capital Protection Oriented Fund - Series XI - Plan C, a close ended capital protection oriented fund. The tenure of the fund is 1255 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 would allocate 65%-100% of assets in debt securities & money market instruments with low to medium risk profile and invest upto 35% of assets in equity and equity related securities with medium to high risk profile. The performance of the fund will be benchmarked against Crisil Composite Bond Fund Index (85%) and Nifty 50 (15%) Index. The fund managers are Vinay Sharma, Chandni Gupta, Rahul Goswami, and Ihab Dalwai (for investments in ADR / GDR and other foreign securities).

IDFC Credit Opportunities Fund

Opens: February 14, 2017 

 Closes: February 27, 2017

IDFC Mutual Fund has launched a new fund named as IDFC Credit Opportunities Fund, an open ended income fund. The investment objective of the fund is to generate returns by predominantly investing in a portfolio of corporate debt securities across the credit spectrum within the investment grade. The fund will allocate upto 100% of assets in debt securities (including G-Sec) across maturities & ratings with medium to high risk profile and money market instruments with low to medium risk profile. The performance of the fund will be benchmarked against AA Medium Term Bond Index (80%) + AAA Short Term Bond Index (20%). The fund manager is Arvind Subramanian.

ICICI Prudential Capital Protection Oriented Fund – Series XI – Plan D

Opens: February 17, 2017

Closes: March 3, 2017

ICICI Prudential Mutual Fund has launched a new fund named as ICICI Prudential Capital Protection Oriented Fund - Series XI - Plan D, a close ended capital protection oriented fund. The tenure of the fund is 1247 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 would allocate 65%-100% of assets in debt securities & money market instruments with low to medium risk profile and invest upto 35% of assets in equity and equity related securities with medium to high risk profile. The performance of the fund will be benchmarked against Crisil Composite Bond Fund Index (85%) and Nifty 50 (15%) Index. The fund managers are Vinay Sharma, Chandni Gupta, Rahul Goswami, and Ihab Dalwai (for investments in ADR / GDR and other foreign securities).

SBI Equity Opportunities Fund – Series VII to IX, ICICI Prudential Value Fund – Series 13 to 16, Union Capital Protection Oriented Fund – Series 7, Union Focused Largecap Fund, DSP BlackRock Nifty 50 ETF, ICICI Prudential Multiple Yield Fund – Series 13, Sundaram Long Term Micro Cap Tax Advantage – Series V–VI, Sundaram Hybrid Fund Series U-V, IDBI Small Cap Fund, SBI Twin Opportunities Fund – Series I, and Sundaram Select Micro Cap Series XIV-XV are expected to be launched in the coming months. 

GEMGAZE

February 2017

All the GEMs from the 2016 GEMGAZE have performed reasonably well through thick and thin and figure prominently in the 2017 GEMGAZE too. 

FT India Life Stage Fund of Funds Gem

Franklin Templeton AMC offers five plans based on life stages that will suit your age profile – FT India Life Stage FoF 20s, FT India Life Stage FoF 30s, FT India Life Stage FoF 40s, FT India Life Stage FoF 50s Plus, and FT India Life Stage FoF 50s Floating Rate. The first four plans were launched in November 2003 and the last plan was launched in July 2004. All these are plans of a single fund that has assets of around Rs 78 crore. The AUM of each plan is Rs 13 crore, Rs 7 crore, Rs 13 crore, Rs11  crore, and Rs 34 crore respectively. The top three sectors in the portfolio are finance, energy, and automobile. The allocation to equity tapers from 80% in the first plan to a measly 20% in the last plan. The allocation is 79.92%, 54.94%, 34.73%, 19.81%, and 19.75% in the five plans respectively. The one-year returns of the plans are 22.36%, 18.14%, 14.96%, 12.58%, and 11.22% respectively, while the expense ratio for the plans is 1.4%, 1.47%, 1.55%, 1.57%, and 0.79% respectively.

ICICI Prudential Advisor Series – Dynamic Accrual Plan Gem

ICICI Prudential Advisor Series – Dynamic Accrual Plan was launched in December 2003 as ICICI Prudential Advisor–Very Cautious as part of a five-plan Fund of Funds series: ICICI Prudential Advisor–Very Aggressive, ICICI Prudential Advisor–Aggressive (ICICI Prudential Advisor Series – Long Term Savings Plan w.e.f. December 6, 2013), ICICI Prudential Advisor–Moderate, ICICI Prudential Advisor–Cautious, and ICICI Prudential Advisor–Very Cautious (ICICI Prudential Advisor Series – Dynamic Accrual Plan w.e.f. June 17, 2015). The AUM of the Dynamic Accrual Plan is Rs 24 crores. The scheme aims to provide reasonable returns, commensurate with low risk while providing a high level of liquidity, through investments made primarily in the schemes of Prudential ICICI Mutual Fund having asset allocation to money market and debt securities. The top three holdings are ICICI Prudential Gilt Investment PF, ICICI Prudential Savings Fund, and ICICI Prudential Corporate Bond Fund. The one-year return of the plan is 11.07% as against the category average of 11.27%. The fund has been managed by Mr. Mrinal Singh since October 2010.

Birla Sunlife Active Debt Multi-manager FoF Scheme Gem

Birla Sunlife Active Debt Multi-manager FoF Scheme, which sports an AUM of Rs.85 crores, is an open-ended fund of funds launched in December 2006. The Scheme seeks to generate returns from a portfolio of pure debt-oriented funds accessed through the diverse investment styles of underlying schemes selected in accordance with the Birla Sunlife AMC process. The top five holdings are SBI Magnum Gilt Fund LT Fund, Birla Sunlife Medium Term Fund, IDFC Dynamic Bond Fund, Birla Sunlife GSF Long-term Fund, and ICICI Prudential Gilt Investment PF Fund. The one-year return of the fund is 13.94% as against the category average of 11.27%. The expense ratio of the fund is 1.11%. The fund has been managed by Mr. Shravan Kumar Sreenivasula since December 2014.

FT India Dynamic PE Ratio Fund of Funds Gem

FT India Dynamic PE Ratio Fund of Funds’ investment strategy is unique. Its portfolio is invested in a mix of equity and debt. But unlike the usual balanced fund, it changes this mix based on market levels (the price-earnings multiple of Nifty) at the end of each month. If the Nifty PE is at a rock-bottom 12 times or less, 90-100% of the portfolio goes into shares, with very little in debt. If the PE crosses the danger zone above 28 times, the portfolio is fully switched into debt. At PE bands that fall in between, the equity portion can vary from 30-70%. This fund does not invest directly in stocks or bonds, but redirects your money into two other well-managed funds – Franklin India Bluechip Fund and Franklin India Short-term Income Plan, the former invested in large-cap stocks and the latter in long term gilts and bonds. At present, the fund holds 50.52% in Franklin Bluechip Fund and 49.48% in Franklin India Short-term Income Plan. Launched in October 2003, the AUM of the fund is an impressive Rs 762 crore. This predominantly large cap fund has an allocation to equity of 50.52% at present. The one-year return of the fund is 16.21% as against the category average of 19.01%. The expense ratio is at 1.7%. The fund has been managed by Mr. Anand Radhakrishnan since Feb 2011.

FUND FLAVOUR

February 2017

One of the many roads to asset allocation

Asset allocation funds are passively managed funds that help investors automatically buy low and sell high. They simply follow a formula-based process to determine the fund's bets on equity, debt, and money market instruments. This helps the fund to automatically “buy low and sell high.” If this appears to be quite a neat solution, such asset allocation funds have delivered widely differing returns to investors in recent times. The process that a fund uses to decide on asset allocation and the leeway they have to invest in equities, makes all the difference. The holy grail of good investing is maintaining a good asset allocation and FoFs do just that. Fund of Funds, that optimizes asset allocation, is one of the roads taken…

Fund of funds or multi-manager funds may sound interesting but do they deliver?

Fund of funds (FoF) or multi-manager funds, as they are known in developed markets, are funds which invest in other mutual funds. Simply put, instead of investing in stocks directly, a multi-manager fund will invest in the best schemes available in the industry. Thus, the performance of a fund of fund is directly linked to the performance of underlying mutual funds where the scheme has invested.

There are different types of FoFs in the market. For instance, some FoFs invest purely in equity funds while others diversify by investing in gold, equity and debt funds. The other category of FoFs invests in overseas funds which have exposure to international markets.

Why do we need a fund of funds?

Hedging, is a good answer. Investing in a fund of funds means greater diversification for the investor concerned - since he is hedging his risks across the sector. It works on the same principle as diversifying investments across a basket of securities.

Further, just a investing in a mutual fund scheme saves the investor the trouble of investing in the shares of so many companies and keeping track of them, investing in a fund of funds also saves the investor the bother of keeping track of all the schemes in the market as the fund manager does it for him.

All the investor has to do is to select his general risk profile - since fund of funds also need to be categorised according to the type of schemes they are investing in.

For instance an FoF can invest in other sector specific schemes - and as in the case of shares they can enter and exit schemes depending upon which sector they want to be weighted in at a particular point of time.

Let us talk about some of the benefits of a fund of funds. One point we have already touched upon is diversification which leads to risk mitigation.

FoFs allow investors to diversify risk by stage and size of investment and industry sector by investing across a wide spectrum of leading funds.

Fund selection is important and we assume that most funds would invest only in the top performing schemes. A lay investor would not always be able to distinguish a scheme which is an excellent performer and one which is mediocre.

It stands to reason that an experienced fund manager is in a better position to make superior fund selection decisions. FoFs also provide access to top-tier fund investments which are often inaccessible to small or new investors.

Fund of Funds also remove the requirement for a dedicated in-house team which would be expensive to recruit and retain. It allows the outsourcing tasks such as investment screening, due diligence, negotiation and monitoring to specialists.

Investors can track performance through one single window rather than accessing different accounts. Moreover, it takes away the pain of deciding in which fund to invest.

Investors do not have to fret about changing their asset allocation. The fund manager takes a call on the level of exposure to each asset class depending on the prevailing market condition.

However one must not run away with the idea that fund of funds are the best thing to happen so far and the solution to all your problems.

For the funds the downside is that expense fees for such schemes are higher than in the case of ordinary schemes since management fees have to be paid twice - since their cost structure will include the fees already charged by the funds in which the investments are made.

For the investor the problem is how the FoF structures its cost based on its expenses and how much will be passed on to the investor. They have to pay the management fees twice.

Another flipside - since the fund of funds is investing in a whole host of schemes which are themselves invested in a wide range of stocks it is possible - sometimes inevitable - that it will be investing in the same stock through the different schemes.

In that keeping track of holdings, limits can be a problem. Of course, there will be regulations in place to check these nitty-gritty but still it is cumbersome.

In India, the Securities and Exchange Board of India has decreed that investments in the schemes which are under the same fund management should be restricted to five per cent of the asset of the fund.

Further in such a case no management fees should be charged for such investments.

The regulations have also put a ceiling on the expenses so this can probably take care of the final expense and the cost to the investor.

However according to industry circles it might be less expensive for an investor to invest in a fund of funds rather than a whole host of schemes individually.

The TER (Total Expense Ratio) is on the higher side as investors are charged for both the underlying funds and the primary fund. FoFs are allowed to charge 0.75% over and above the expense ratio of the primary fund.

FoFs are taxed as debt funds. Investors do not get exemption on capital gains after a year. Instead, investors can avail indexation benefits after three years, wherein gains are taxed at 20% after adjusting for inflation during the tenure of the investment.

Theoretically, FoFs may sound interesting but that may not be necessarily true. This is because not all funds normally invest in schemes of other fund houses. While some funds invest in in-house schemes only, others invest in a mix of funds offered by other AMCs and in-house schemes. For instance, Birla Sun Life Financial Planning Fund FoF - Aggressive Plan invests in Kotak Gold Exchange Traded, Birla Sun Life Cash Plus, Mirae Asset India Opportunities Fund, and Birla Sun Life Frontline Equity Fund, among others. FoFs typically invest in direct plans of other schemes. Quantum Equity FoF is the only fund which invests in schemes of other fund houses. These funds are typically designed for passive investors.

Things to Consider Before Investing in Fund of Funds

Though FOFs provide diversification and less exposure to market volatility in exchange for average returns, these returns may be lessened by investment fees that are typically higher compared to traditional investment funds. These investment and management fees include all the fees charged by the portfolio's underlying funds. After allocating the money invested to fees and other payable taxes, the returns of fund of funds investments may generally be lower compared to the profits that single-manager funds can provide.

Fettered Management vs Unfettered Management

There are different kinds of FOFs, with each type acting on a different investment scheme. An FOF may be a mutual fund, a hedge fund, a private equity or an investment trust. An FOF may be fettered, which means that it only invests in portfolios containing assets and funds managed by one investment company. It may also be unfettered, which means that it invests in external funds controlled by other managers from other companies.

Fund of Funds stands out 

The plethora of schemes launched by all mutual funds makes the choice extremely tricky. The myriad schemes and plans/options make the investment decision even more difficult for investors. Hence, the chances of selecting the wrong funds also increases. This highlights that investors require expert advice for selecting good mutual fund schemes. And this is where FoFs comes to their rescue. Like a mutual fund manager specialises in selecting stocks, a FoF manager specialises in selecting the right mutual fund scheme for his fund. Hence, the decision of investing or redeeming a scheme lies with the fund manager. Hence what investors get at the end is a portfolio of some of the best mutual fund schemes in the industry. However, it should be well understood that not all FoF schemes will offer an attractive investment proposition. Investors are best placed to benefit if they are invested in a well-managed FoFs scheme. Fund of Funds offer investors a unique and excellent investment proposition.