Mutual Fund NEWS Group: September 2012

Thursday, September 27, 2012

Cheaper option may not be better

Retail investors, I am afraid, may end up losing more than they gain.

The introduction of "direct" plan, which will come into effect from 1 January 2013, in all mutual fund (MF) schemes has started to give insomnia to distributors. In a circular that the capital markets regulator, Securities and Exchange Board of India (Sebi), issued on 13 September, it said that all fund houses have to provide a "direct" option in all their schemes, catering to investors who wish to invest with a fund house directly without any distributor's help. The direct plan will, therefore, have a lower expense ratio and a different net asset value (NAV). Typically, while the asset management companies pay upfront charges to distributors from their own pockets, they pay the trail fees (for as long as the investor stays invested in the scheme) out of the total expense ratio (the current upper limit is 2.5%) that fund houses charge you, the investor. Sebi thinks that if investors avoid distributors, they should not pay agent charges.

The first brunt, as I pointed out in one of my earlier columns (http://tinyurl.com/96svjhn), will be felt by debt funds, especially liquid funds. Typically, at least 95% of investors in liquid funds are companies and institutions. So distributors who service these clients—let us call them institutional distributors—will face a direct threat to their livelihood and existence.

Assume a liquid fund's total expense ratio (TER) is 60 basis points (bps), of which 15 bps is trail fee paid to distributors. Its direct plan, therefore, will have a TER of 45 bps. If a large company invests Rs.1,000 crore in the normal plan, it gets Rs.1,065.5 crore after a year, assuming the fund returns 7%, in the direct plan compared with Rs.1,064 crore in its normal plan (with embedded distributor charges). That's a saving of Rs.1.50 crore, straightaway.

Why will institutions then go via distributors? Once the board of directors come to know of the massive savings, industry sources feel they will mandate their treasury departments to save these costs, shun the distributors and invest directly. High net worth individuals and savvy investors may follow suit.

Institutional distributors, such as Mata Securities India Pvt. Ltd, SPA Capital Services Ltd, JM Financial Services Ltd and Enam Securities Pvt. Ltd, are running scared right now. If their clients shift to the direct option, these distributors stop earning trail fees. Years spent, if any, in acquiring the client, retaining and servicing them will now lead to the client opting for a cheaper option, just because there is one.

But will the clients shift? I won't be surprised if they do. A former employee in the sales and marketing division of Franklin Templeton Asset Management (India) Pvt. Ltd tells me that when they had launched an institutional plan (a first in the MF industry at that time) in one of their debt funds (whose expense ratio was just 10 bps cheaper than the normal plan, which later on came to be known as the "retail" plan), almost "the whole industry" launched a similar plan. "There is zero doubt in my mind that, of the 40-50% of investors that constitute the institutional pie, about 80% will move to the direct option," he says, on condition of anonymity. At most, the companies will hire a person or two to look specifically into its treasury investments into MFs.

There is a twist. If fund houses feel that they need to go that extra mile to service institutional clients, they may add a charge to the direct plan, which would not otherwise apply to the normal (distributor) plan. As a result, the difference in the TER of the two plans may not be much after all.

In the meantime, three people associated with the distribution and MF industry (an MF industry professional-turned-banker, the head of one of India's largest national distributors and the head of one of India's largest institutional distributor) met a senior Sebi official last week to suggest an alternative. Their plan: let investors opt for the direct plan if they wish, but allow them to route their investments through their distributors who should be allowed to put his agent code on the application form. That way, distributors can charge a fee to clients and continue to service them since the investments will be under the distributor's radar. The Sebi official seems to have told them that he will look into it.

Is it fair? In theory, a cheaper option for direct investments is a good idea. If you do not take the distributor's help, why should you pay them? But a carte blanche introduction of direct plan may lead to misuse more than genuine benefit for the right people. Fund houses such as Quantum Asset Management Co. Ltd, which charge lower fees because they don't pay distributor fees have survived so far. If, like in the US where fund houses are free to adopt either a no-load or a load model, the Indian MF industry is given a choice, then firms will be free to go the Quantum way if they feel strongly about agent compensation.

While retail investors may have been in Sebi's minds when it thought of the "direct" plan, it is the institution that will reap the benefits. Retail investors, I am afraid, may end up losing more than they gain. Operational problems as well as lack of adequate knowledge in selecting the right fund may come to haunt them at a later date. A good agent can always guide and help the investor. But once an investor takes the direct route, there's little an agent can do later if there's a problem. Cheaper options may not be the better option, after all.

Source: http://www.livemint.com/Money/vOG97J9ZSYOddJUa09eb6O/Cheaper-option-may-not-be-better.html?google_editors_picks=true

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'I made my money by selling too soon.'

Website: http://indianmutualfund.co.cc/

Blog:http://indianmutualfund.wordpress.com/
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We continue to like the consumption theme: Anand Shah

Interview with Chief investment officer, BNP Paribas Mutual Fund

With global liquidity on the rise due to measures by the US Federal Reserve and European Central bank, investors are beginning to favour riskier stocks. Anand Shah, chief investment officer of BNP Paribas Mutual Fund, tells Puneet Wadhwa he is bullish on the cement sector and select stocks from the auto and banking packs. Edited excerpts:

Besides positive global cues, key reforms/policy actions are driving the recent rally. Are we being over-optimistic?
We do not believe markets are being more optimistic. But they are definitely less pessimistic. At the beginning of 2012, expectations were quite low and nobody believed that Indian equity markets could deliver positive returns.

Over the first seven months of 2012, the news flow further deteriorated with GDP (gross domestic product) numbers continuing to remain sluggish and macroeconomic indicators projecting a very weak growth. Policy making had further slowed down and policy uncertainty further increased (post the coal crisis). On the back of very low expectations, these very minimal reforms/policy actions helped the market sentiments and provided the much-needed boost.

Has the investment strategy changed from 'sell on rise' to a 'buy on dips'? Has the government averted the ratings downgrade?
We believe what has come through as policy reforms/policy actions so far has to be followed up with further measures to revive the infrastructure sector, investments and GDP growth. Until then, we are recommending investors to use the systematic investment plan (SIP) route to invest in equity funds.

Should investors have a debt strategy as well?
For debt schemes, with an expectation of interest rate cuts, we believe investors should invest in corporate bond funds having a maturity of around two-three years.

Are you still betting on the consumption theme, even though high inflation and the rupee might dent the spending and consumption patterns? What about sectors like telecom, cement, infrastructure and capital goods?
We continue to like the consumption theme. Though this sector has massively outperformed the market over the last three-four years, even from here, due to sustained earnings growth, a select few companies in the consumption theme can continue to deliver good returns to investors over the next three-four years as well. The earnings of these companies are helped by a growing middle class in India, its rising per capita income and pricing power.

The telecom sector will be a key beneficiary of consolidation in the industry and rising tariffs. We continue to like the cement sector as it benefits from a rising housing demand in India. For sectors like infrastructure and capital goods, we continue to remain cautious due to high leverage and over capacity.

Is the time now right to look at stocks from auto and banking sectors, given the outlook for the economy and interest rates?
We like a select few companies in both the auto and the banking space and agree that in a falling interest rate environment they will be the key beneficiaries.

With the Rajiv Gandhi Equity Savings Scheme including exchange-traded funds and mutual funds, do you see this generating enough enthusiasm among investors?
We believe that actions/policy changes directed at increasing the reach and penetration of mutual funds among retail investors are positive and welcome. Since these changes have just been announced, we will wait to see the impact of these in enthusing retail investors to participate in mutual funds.

Source: http://www.business-standard.com/india/news/we-continue-to-likeconsumption-theme-anand-shah/487726/

US-based Inveso picks up 49% stake in Religare AMC for a tad below Rs 450 crore

US-based Invesco Ltd, a leading global player in the mutual fund industry has picked up 49% stake in Religare asset management company (RAMC) for about Rs 460 crore, valuing the company that has assets under management (AUM) of Rs 14,600 crore at about Rs 950 crore.

"The deal value is based on 6.4% of the closing AUM at the time of receiving regulatory approval. The fund house is currently managing AUM of Rs 14,600 crore, which is expected to cross Rs 15,000 crore by the time the approval comes," said a top executive of the company.

Invesco is a NYSE listed firm with asset under management of about $670 billion and market capitalisation of $11 billion.

"This investment is a validation of Religare's belief in the long term growth potential of the Indian financial services industry. We believe that both our retail and offshore businesses would be propelled to the next level of their growth journey," said Shachindra Nath, Group CEO, Religare Enterprises Limited. However, he refused to divulged the valuation of the deal.

"Our agreement with Religare will expand the comprehensive range of investment capabilities Invesco provides to our retail and institutional clients around the world, and further position both firms for long-term success," Invesco's President and CEO Martin L. Flanagan said in a statement.

This would be fourth transaction in last nine months in the mutual fund industry sending a strong signal that the Indian mutual fund industry is going through a consolidation phase. Tough business conditions are prompting Indian fund houses to strike partnership deals with stronger foreign institutions or cash- rich domestic companies that can bring in advisory and investment mandates.

This would be the first transaction in the mutual fund industry after market regulator Sebi gave a major relaxation to the mutual fund industry in August this year. Sebi has allowed asset management company to charge additional expense ratio (the charge levied by fund houses towards fund management fees and other expenses) for catering beyond a threshold limit in the smaller cities. It had also decided that service tax would be charged to ultimate investor, not to the AMC.

RAMC's valuation is rich compared to most deals involving domestic mutual funds in recent past. In January this year, Japan's Nippon Life Insurance bought a 26% stake in Anil Ambani-controlled Reliance Capital Asset Management, India's second-largest mutual fund in assets, for roughly Rs 1,450 crore, valuing the fund house at 6.8% of its total assets under management of Rs 82, 305 crore on December 31.

In April his year Britain's largest asset management company Schroders had picked up a 25% stake in Axis Bank-promoted Axis Mutual Fund for an undisclosed amount. The deal will help the Indian fund house access Schroders' global distribution network and advise overseas funds invested in Indian securities. A month before, L&T Mutual bought out Fidelity's India fund business for an undisclosed amount.

In December 2010, Paris-based Natixis Global Asset Management bought a 25% stake in IDFC Mutual Fund at 5.5% of its total assets. Earlier that year, US-based investment management firm T Rowe Price acquired a 26% strategic stake in UTI Asset Management Company for about 3.6% of its assets under management. In June 2010, Japan's Nomura bought a stake in LIC Mutual Fund for about 2.5% of fund's assets.

Religare had acquired the then ailing Lotus Mutual Fund in 2008 and subsequently renamed as Religare AMC. At the time of acquisition, Lotus had just over Rs 5,000 crore of AUM.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/us-based-inveso-picks-up-49-stake-in-religare-amc-for-a-tad-below-rs-450-crore/articleshow/16568230.cms

Sebi notifies mutual fund reforms

Market regulator Sebi today notified wide-ranging reforms for mutual fund sector, which would provide incentives to fund houses for expanding to small cities but might result in additional costs for investors.

The changes, which would come into effect from next month, would require fund houses to make half-yearly financial results within one month of the end of every six-month period, Sebi said in a notification.

The decisions were approved by Sebi's board in its last meeting on August 16 with an aim to re-energise the mutual fund industry, by expanding its distribution network among other steps.

Notifying the proposals approved by its board, Sebi said today that the fund houses might charge investment and advisory fees on their schemes, which would have to be fully disclosed in the offer document.

In case of a fund of funds scheme, the total expenses of levied on the scheme would be capped at 2.50 per cent of the daily net assets of the scheme.

In addition to the total expenses already levied on schemes, Sebi would allow the fund houses to levy brokerage and transaction costs, which is incurred for the purpose of execution of trade and is included in the cost of investment, with a ceiling of 0.12 per cent in case of cash market and 0.05 per cent in case of derivatives transactions.

Besides, mutual funds can charge additional expenses of up to 0.30 per cent of daily net assets, if the new inflows from places other than top-15 cities are 30 per cent of the gross new inflows in the scheme, or are 15 per cent of the average assets under management (year to date) of the scheme, whichever is higher.

Sebi further said that the expenses charged under these clauses would have to be utilised for distribution expenses incurred for bringing inflows from such cities, and the amount incurred as expense on account of inflows from such cities would have to be credited back to the scheme in case the said inflows are redeemed within a period of one year.

Among other measures, the fund houses would have to calculate the Net Asset Value (NAV) of the scheme on daily basis and publish the same in at least two daily newspapers with nation-wide circulation.

Also, any exit load charged by the fund houses would have to be be credited to back to the scheme.

This measure, along with capping of the total additional expenses at 0.2 per cent in normal case, would encourage long term holding and to reduce churn and align the interests of the fund houses and distributors with that of the investors.

These particular steps would not result in any additional cost to the investors, but the provision for additional expenses of up to 0.3 per cent for inflows from smaller cities could make the investments costlier at the investors' end.

Sebi's board has approved certain additional proposals for mutual funds, including for regulation of distributions and for allowing cash transactions of up to Rs 20,000 without PAN requirement, which are expected to be notified later.

Source: http://www.indianexpress.com/news/sebi-notifies-mutual-fund-reforms/1008315/0

Mutual fund houses likely to announce tailor-made schemes

The mutual fund industry may look at launching equity schemes tailored for first-time investors in the Rajiv Gandhi Equity Savings Scheme (RGESS).

The Government has granted approval for equity mutual fund schemes and exchange-traded funds to be included in the ambit of the RGESS. First-time investors have been defined as those who do not have a demat account or have a demat account but have not as yet transacted in stocks or derivatives.

The new MF schemes may help achieve the objective of higher investor participation sought by the Securities and Exchange Board of India. However, it clashes with its objective of reducing the number of schemes in the industry.

'Simplify schemes'

SEBI has been asking mutual fund houses to merge schemes with similar mandate to simplify the process of scheme selection for investors.

However, industry experts feel that not all existing equity schemes qualify under the RGESS norms. Most equity schemes are diversified equity schemes which invest across sectors and market-caps. For new investors this may not be the safest route, they said.

"As of now, it is too early to decide whether the industry would launch new funds aimed at the RGESS. We are still awaiting SEBI guidelines on this matter. The regulator does not allow launch of schemes with similar mandates," said R.S. Srinivas Jain, Senior Vice-President and Chief Marketing Officer of SBI Mutual Fund.

"Schemes under the RGESS are only for first-time investors. We need to ensure that their investment is in companies from the large-cap segment that are safe. The idea is to expand the market by targeting new investors," said the marketing head of a mid-sized asset management company.

Modification, easier option

The RGESS norms state that investors should only invest in companies which are part of the BSE-100 or CNX-100 indices or public sector companies which are Navaratnas, Maharatnas and Miniratnas.

Industry officials said that modifying existing schemes was also an option. Compared to launching of a new scheme, modification of an existing one was an easier and cheaper option.

Some fund officials wonder whether it is worth the effort.

Investors up to Rs 10 lakh income bracket are eligible for RGESS and the permissible investment limit is Rs 50,000. Such investors would get a 50 per cent deduction on the amount invested from the taxable income for that year.

But, with the levels of financial literacy in the country, industry officials wonder if this would have an impact. "Would someone in that income bracket want to invest in equities even if it is for tax rebate? Educating the investor is more important. Relationship managers and IFAs need to ensure that the investors understand what they are buying," said an official of a small-sized fund house.

Source: http://www.thehindubusinessline.com/markets/stock-markets/article3938610.ece

Niraj Bhatt: How you can invest in Google, Apple and Exxon

Investing abroad is quite easy through the mutual fund route and can bump up your total portfolio returns.

It's been difficult to make money from equities in the last three years. The BSE Sensex has largely traded between 15,500 and 21,000 in the past two years, and if you'd not got your timing right on the broad market, it would have been tough to beat even fixed deposit returns. Yes, there have some money-making opportunities like in the fast-moving consumer goods sector or stock-specific stories, but otherwise it's mostly been range-trading.

A spate of positive news from the government in the past few weeks has taken the stock market indices to a 15-month high and the Sensex is up 15.5 per cent over the last 12 months. But over a two-year period, the Sensex has lost 6.75 per cent. Even the three-year compounded return is a measly 3.85 per cent, which is less than the yield on expensive real estate.

But one investment category that has done very well this year is international mutual funds. There has been the kicker of 8-9 per cent rupee depreciation in one year, which adds to the returns, but even without it international funds have given reasonably good returns. Eleven of 32 international funds tracked by Value Research have earned over 25 per cent. The best performer is the Motilal Oswal MOSt Shares Nasdaq-100 ETF (exchange-traded fund), which is up 40 per cent in one year. This Nasdaq-100 index ETF offers domestic investors an option to invest in the best tech companies of the world. Apple has nearly 20 per cent weightage in the index, and since the stock has gained 50 per cent over the past year, the index has managed to reach a 12-year high. If you think Apple is going to crack the four-figure mark from the current $673.5, then this ETF may make a good investment. Along with Apple, the other heavyweights of this index include Microsoft, Google, Oracle, Amazon and Intel, and all of these add up to 46 per cent of weightage.

The other international funds available for Indian investors through the mutual fund or ETF route invest in Hong Kong's Hang Seng index, China, Asean, other emerging markets and even Brazil by geographies. Others such as gold mining, real estate, mining, agriculture, commodities and energy offer sector or thematic options. Some of these are index funds, while the others are fund of funds. The JP Morgan JF Asean Equities Off-shore fund, a fund of fund investing in South East Asian companies, has posted 36.5 per cent annual gain with Singapore's DBS Group being its top holding. Fidelity Global Real Assets, up 33.5 per cent in a year, is a fund of funds investing in commodities, property, industrials, utilities, energy, materials and infrastructure, with Exxon being its top holding.

Investing abroad gives an option of geographical diversification. For a long time, Indian investors didn't have the option of buying foreign securities, which is now opened up. Also, the Indian market was providing better returns than many other global markets, which isn't the case right now. Even as our current market rally progresses, investors could think of starting to learn the ropes.

Domestic investors also need to look at global investments more seriously considering that when our government was hit with policy paralysis, there was little money-making opportunity besides gold and a handful of stocks and sectors. Yes, the currency is a risk but one can factor that in or even invest abroad as a currency play. The existing funds and ETFs provide good opportunities to access global markets in a tax-efficient manner. Derivatives of the Dow Jones Industrial Average, the S&P 500 and the FTSE 100 are traded on the National Stock Exchange but unlike the mutual funds, these are not exempt from long-term capital gains tax. And if you want to buy Turkey, lumber or natural gas ETF, you can always open a brokerage account to trade abroad up to an investment of $200,000 (Rs 1 crore) per person a year.

Source: http://www.business-standard.com/india/news/niraj-bhatt-how-you-can-invest-in-google-appleexxon/188515/on

Thursday, September 20, 2012

Schroder Singapore acquires 25 per cent stake in Axis AMC

Private sector Axis Bank today said Schroder Singapore Holding has acquired 25 per cent stake in its subsidiary, Axis Asset Management Company.

The transaction provides Axis AMC access to Schroders' global distribution network and to advise overseas funds invested in Indian securities, Axis Bank said in a statement.

Private sector Axis Bank today said Schroder Singapore Holding has acquired 25 per cent stake in its subsidiary, Axis Asset Management Company.

The transaction provides Axis AMC access to Schroders' global distribution network and to advise overseas funds invested in Indian securities, Axis Bank said in a statement.

Source: http://articles.economictimes.indiatimes.com/2012-09-18/news/33926311_1_axis-amc-schroders-overseas-funds

FII inflows strong, DIIs continue to sell

Experts expect domestic flows after market touches new high

Even as foreign investors have stepped up buying, owing to the announcement of bold reforms in the last few trading sessions, domestic institutional investors (DIIs) continue to sell.

Market experts believe portfolio flows from foreign investors would remain strong due to reforms and stimulus programmes announced by the US Federal Reserve and the European Central Bank (ECB). However, DII flows could continue to languish due to redemption pressure on mutual funds and lack of retail participation in the market.

In the last three trading sessions, foreign institutional investors (FIIs) bought net shares worth Rs 6,135 crore after the government increased diesel prices and opened up the retail and aviation sectors to foreign direct investment (FDI). In contrast, DIIs, which include entities like mutual funds and insurance companies, sold net shares worth nearly Rs 2,200 crore during these three sessions.

Strategists at several foreign brokerages like Morgan Stanley, Citigroup and Deutsche Bank have increased their Sensex targets due to the improved domestic sentiment and the global liquidity scenario. Some brokerages expect a rise of about 10 per cent from the current levels, with the Sensex surpassing 20,000.

According to Securities and Exchange Board of India data, so far this year, FIIs have invested about Rs 61,000 crore ($13.7 billion) in Indian equities. However, DIIs sold shares worth about Rs 32,000 crore during the same period — the highest since 2005.

In a report, Aditya Narain, head of India research, Citigroup, stated the market would continue to rise, primarily due to foreign flows. He added domestic flows would only start coming in after the market rose another 10 per cent from its current levels.

Experts say flows from retail investors and DIIs would improve once the market stabilises or crosses the previous all-time high. "When the 2003 rally began, domestic investors started coming into the market only when the market crossed its then all-time high in 2004. This time, too, domestic investors would start investing only after the market crosses its all-time high. I expect this to happen in the January-March period next year," said Sandip Sabharwal, chief executive (portfolio management services), Prabhudas Lilladher.

"The way the market has moved up, it has not given anybody a chance to enter. Domestic participation would only be seen if the market stabilises at current levels," said Prashanth Prabhakaran, president (retail broking), India Infoline. "Equity mutual funds are facing huge redemption, signalling fear is still there," he added.

Heavy redemption pressure on equity mutual funds this year also led to heavy selling by domestic institutions, especially mutual funds. In August, equity mutual funds recorded their second-highest outflow — about Rs 2,300 crore. So far this year, net outflow from equity funds stands at about Rs 7,800 crore.

"The right time to invest was in December 2011, when there was gloom and doom. Since then, the market has given returns of about 20 per cent. Unfortunately, the money comes only after the market moves up," said Anand Shah, chief investment officer, BNP Paribas Asset Management India.

Source: http://www.business-standard.com/india/news/fii-inflows-strong-domestic-institutions-continue-to-sell/486867/

IT, pharma mutual funds shine in August

Volatile mkt conditions also prompted investors to flock to pharma and FMCG sector shares

IT sector funds were the top performers in August among Indian mutual funds that focus on domestic stocks as lower valuations of the sector's shares after their sharp declines in July revived investor interest.

The BSE Sensex gained 1.1 percent in August, but IT stocks outperformed as the BSE IT index surged 8.3 percent after falling 7.3 percent in July, with shares in India's top software services firm TCS rising 8 percent, and rival Infosys gaining 6 percent.

"IT is now fast becoming a stock-specific scenario," said Waqar Naqvi, chief executive of Taurus Mutual Fund, adding that the outlook for the sector will be "neutral" in the coming months.

In August, IT funds gained almost 6 percent on average, with Franklin Infotech Fund registering a rise 7.5 percent to top the category, data from fund tracker Lipper, a Thomson Reuters company, showed.

Volatile market conditions also prompted investors to flock to defensive sectors, helping the pharma and the FMCG (fast-moving consumer goods) category of funds to appear among the top gainers for the month.

Gains of 4.6 percent in the BSE healthcare index helped pharma funds clock an average rise of 5.1 pct, while FMCG funds gained 4.8 percent in August, on the back of a 6.9 percent rise in the BSE FMCG index.

Among other schemes, international companies-focused AIG World Gold Fund gained more than 10 percent to end as the month's best performer, on the back of rising yellow metal prices in August.

Banking funds were the worst hit during the month, ending with average losses of 4.5 percent. Five of the six top India fund losers were banking funds, Lipper data showed.

DIVERSIFIED EQUITY FUNDS

India's quarterly GDP grew at a slightly better-than-expected 5.5 percent in the June quarter, dashing investor hopes of an early rate cut by the RBI, as inflation continues to remain at stubbornly high levels.

Slowing growth in Asia's third-largest economy and uncertainty about passage of reforms after a parliament deadlock over the CAG's report on misallocation of coal blocks kept investors on the edge in August.

Diversified stock funds, which represent the biggest category of stock funds in India by number and assets, ended with small gains of 0.4 percent in August.

While the main index managed to eke out gains, the BSE mid-cap index ended marginally in the red while the small-cap index lost almost 1 percent.

These losses also weighed on such funds' unit values as mid- and small-cap stocks accounted for more than a third of their assets as of end-July, data from Morningstar India showed.

Some analysts said Indian markets will continue to be range-bound going ahead, and the political deadlock is likely to hurt sentiment.

"Politics as of now is a more important reason rather than economics as far as the markets are concerned," Naqvi of Taurus Mutual Fund said.

Source: http://www.business-standard.com/india/news/it-pharma-mutual-funds-shine-in-august/185285/on

Monday, September 17, 2012

Mutual funds assets base grows, thanks to liquid schemes

Equity funds continue to see outflow; SIPs too 'losing interest'

The mutual fund industry has for the second month in a row seen an increase in its assets under management (AUM). At the end of August, AUM — the total investment corpus available with the mutual fund industry — stood at Rs 7.52 lakh crore, up three per cent. As at end July, the industry AUM was Rs 7.3 lakh crore.

Between June and August this year, the industry AUM has grown by about 10 per cent from Rs 6.88 lakh crore (June 2012) to Rs 7.52 lakh crore. Fund house officials said the industry AUM is on the rise due to the increase in liquidity in the system. This increase in liquidity finds its way into the mutual fund liquid schemes as banks and corporations park their excess money in theses schemes.

Liquid and money-market schemes see regular inflows at the beginning of a quarter and outflows (for advance tax payment) at the end of the quarter. The three per cent rise in August is a reflection of the same, they said.

2nd half unpredictable

"Monetary policy is supporting liquidity. However, it is difficult to foresee what the second-half will bring as typically it is a busy season. Usually, liquidity during this season is tight," said Ramanathan K, Chief Investment Officer, ING Investment Management (India).

The second half of a financial year witnesses liquidity constraints as the borrowing and credit requirements increase. Therefore, mutual funds see lower investments from institutions. But lowered income fund participation still brings in more business for the industry which is starved for retail participation.

Retail participation has always been low in the industry. However, in the last couple of years, it has gone down further as equity market performances have weakened. Equity schemes continue to see redemptions along with a decline in value in line with the market performance. Even incremental SIP flows, which were robust till about a few months ago, have become weak, said analysts.

According to industry officials, the industry has about 4.6 crore folios of which less than two crore are unique investors. This includes both retail and institutional participants.

In the last one year period (August 2011-2012), the equity AUM has fallen by 1.5 per cent while that of the income schemes has increased by 9.8 per cent. During the same period, liquid and money market schemes have seen a rise of about 14 per cent.

Source: http://www.thehindubusinessline.com/markets/stock-markets/article3885670.ece

Thursday, September 13, 2012

Reliance Mutual Fund in distribution tie-up with IOB

Reliance Mutual Fund, a part of Reliance Capital, today said it has entered into a distribution tie-up with Indian Overseas Bank (IOB).

As per the agreement, IOB will sell Reliance MF products through its 2,689 branches.

"This agreement would help us expand our customer base, especially in tier II and III cities, leveraging on the wide network of the bank," Reliance Capital Asset Management chief executive Sundeep Sikka said adding this tie-up will help the company reach around 24 million customers of IOB.

Referring to the distribution tie-up, IOB chairman and managing director M Narendra said, "this would enable the bank to operate as a financial super market and help in strengthening the relationship of the existing and potential customer base, providing an opportunity to cross-sell."

Reliance MF manages around Rs 1,40,000 crore across MFs, government, government-sponsored public funds, managed accounts and hedge funds.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/reliance-mutual-fund-in-distribution-tie-up-with-iob/articleshow/16382450.cms

Tuesday, September 11, 2012

Why the world has faith in gold

Gold continues to remain in a primary bull market since the last decade

Gold as an asset class is in vogue again with prices reaching a new high in rupee terms. With rising prices, the usual pitch from so called experts too has risen as to how gold is in an "ultimate bubble" phase and is all set to go bust. Frankly, it is nothing new. In 2010, George Soros, one of world's most accomplished investors, dumped his gold holdings at around $1,200 per ounce but interestingly, he recently surprised the markets by deciding to reinvest into gold at $1,600 per ounce. Pimco, the world's largest bond fund manager, also added gold allocation in its commodity fund as prices dipped lower around $1,500 per ounce. They are not the only ones to have turned buyers from being sellers. Central banks across the world including Russia, China and other emerging nations have become net buyers after a long time. According to a recent report from World Gold Council, June quarter recorded official sector (central bank sector) gold purchase was more than double compared with the purchases made in the same period last year. If you consider the fact that gold represents only around 1% of total global investment assets, it seems crazy to be not invested in the asset. It is thus important to understand what is driving gold prices before drawing conclusions on the future course of prices.

To start with one has to understand that strictly speaking gold has no value as it is a non-income generating asset. With no cash flows associated with gold it is always at a disadvantage to other income generating assets including real estate. Till few years back it was not widely accepted as an asset class because either fixed income or equity alternatively used to do well. Investor perceptions have, however, undergone a change in the recent past. In this era of negative real interest rates, investors are looking out for assets to protect their investments. While Indians have been among the largest savers, the trend is fast changing as deposit rates have remained below inflation (CPI) for some time now, rendering the real interest rate negative. The combination of low capital gains and low returns in equities on account of a "stagflationary" environment has further reduced investment options. Gold thrives well in this environment, especially given its enviable track record of 11 straight years of positive returns.

Gold continues to remain in a primary bull market since the last decade. History has shown that commodity prices move in cycles of 16-17 years which might mean four-five more years of gold bull market yet to capture. One also should not forget that corrections in bull markets of around 30% are a normal occurrence and have been observed in the past. Investors need to be aware that the last leg of any bull market is often the most profitable and the most volatile. Hence, one should periodically use corrections as opportunities and gain from investing in gold.

Indian investors, however, continue to remain puzzled that though globally gold prices are almost 10% below its all-time highs, the prices in rupee terms are at all-time highs. A large part of this can be attributed to fiscal mis-management in the country, which is reflected in 20% depreciation (yearly) of rupee. The recent doubling of import duty on gold has also led to investors paying higher for gold in rupee terms.

On the positive side, Indian investors are now exposed to more efficient investment options in gold. Other than most travelled route of physical gold or jewellery, mutual funds offer exposure to gold in different fund types such as hybrid funds, exchange-traded funds and fund of funds. Though we have seen demand from India dampening this year, we believe higher inflation would help retain demand in the long run. In India, inflation has played a crucial role in gold's popularity as an inflation hedge. In addition, globally gold has become more a proxy of the political stupidity and hence a crisis hedge.

One would still ponder on the question: how high is high enough for gold? It is very difficult to answer that question given the fact that it doesn't have a fundamental value attached to it. We believe that it isn't the gold prices that are moving up; it is the value of currencies that is depreciating which is pushing gold prices higher. Gold prices act as good proxy to lack of confidence in the fiat currencies. The crisis which started with companies being under financial stress has now moved on to countries. Gold acts as a hedge for investors in such times. If one believed that the future is bright, businesses will pick up and the real interest rates will turn positive, would one still buy gold? The answer would be no. But in the current market environment where the US, the world's largest economy, is running at more than 100% debt-to-GDP ratio and Europe is struggling to keep its union up and running, we can be reasonably comfortable in believing that good times are farther than they appear. Till then, have faith in gold!

Ritesh Jain is head of investments, Canara Robeco Asset Management Co. Ltd.

Source: http://www.livemint.com/Money/3w3MixfaIfkf2mEYEApBNJ/Why-the-world-has-faith-in-gold.html

We remain optimistic about Indian equities in long run: Nilesh Shetty

The month of August 2012 saw the BSE Sensex increase by 1.28% on a total return basis as compared to its level in previous month. The broader indices such as BSE 200 and BSE 500 underperformed the Sensex. IT, FMCG & Healthcare were among the sectors which performed better than the Index whilst cyclicals like Metals, Banking and Real Estate underperformed. Calendar year to date, the Sensex has seen an appreciation of 14.5% (total return basis).

India continues to attract significant FIIs flows, with the month of August seeing net FII inflows of USD 1.95 billion. So far in Calendar 2012, FIIs have purchased equity stocks worth USD 12.2 billion while Domestic Mutual funds have been the net sellers in equities to the tune of USD 1.85 billion. Indian rupee appreciated 0.2% during the month. News flow from Europe continues to remain troubling with the European financial system in a state of flux. Member nations face financial troubles while the European banking system remains in a state of turmoil.

On the domestic front, the month of August saw release of Q1FY13 GDP numbers. At 5.5%, even though it was above consensus expectations, it is still below Indiaâ€™s trend growth as well as substantially below the high GDP numbers of 8.5%-9.0% witnessed between FY05-FY08. WPI Inflation data was slightly subdued, primarily on the back of lower fuel prices. However, consumer level inflation remains elevated around 10% range. The rise in international crude prices remains a matter of concern and can possibly put further pressure on the Inflation. On the political side, announcement of P Chidambaram as the Finance Minister offers some hope of policy traction. However, the stalling of parliament after the CAG report on Coal allotments suggests, any major policy decisions in the current political environment is highly unlikely,`` said Nilesh Shetty, Associate Fund Manager, Quantum Long Term Equity Fund & Quantum Multi Asset Fund.

We remain optimistic about Indian equities in the long run. Despite the double digit rally in Sensex for Calendar year 2012, we see equity valuations as reasonable. We remain hopeful of India continuing to record GDP growth of 6.5-7% over next many years, irrespective of global uncertainties. Investors can consider allocating higher to equities at this point of time for good returns in the long term,`` he added.

Source: http://www.myiris.com/newsCentre/storyShow.php?fileR=20120910170446715&dir=2012/09/10

All you need to know about investing in exchange-traded funds

Exchange-traded funds (ETFs), which offer flexibility of a stock and protection of a fund , are catching on big time with Indian investors.

ETFs, which invest in stocks comprising an index, trade on exchanges. Financial planners are increasingly recommending ETFs to investors who have long-term goals and want to invest in equity without taking too much risk. This is reflected in average assets under management in the retail ETF category, which have risen from Rs 59 crore in March 2009 to Rs 394 crore in March 2012, according to the Association of Mutual Funds in India.

However, equity ETF volumes, unlike that of gold ETFs, are very small compared to the mutual fund industry's total assets. "ETFs became popular with gold ETFs, even though gold ETFs came much later than equity ETFs," says Lakshmi Iyer, head of products and fixed income, Kotak Mutual Fund.

An ETF invests in stocks that comprise an index. The proportion in which it will allocate money may be the same as individual stocks' weight in the index or differ. For example, a Nifty ETF will invest in 50 stocks comprising the Nifty, most likely in accordance with the weight of individual stocks in the index.

The investor can buy/sell on the exchange without approaching the fund house. Such trades attract a brokerage.

Unlike a regular fund, where investors can buy a fraction of the unit, ETFs are available in multiples of one. Big investors can directly approach the fund house for sale/purchase if the lot size is big and the units are not available in the market. The lot size is determined by the fund house. Usually, it is more than Rs 15-20 lakh.

INDICATIVE NAV
Just like a mutual fund, ETFs have a net asset value (NAV), the price of each unit at the end of the day. But as ETFs trade in real time, funds provide an indicative NAV, or iNAV, which is the real-time NAV of an ETF. iNAV may be different from the market price.

Remember that buying or selling an ETF involves brokerage.

ADVANTAGE INSTITUTIONS
ETF prices depend on demand and supply on exchanges. "When there is more demand than the units on sale, the market price may be 25-50 basis points more than the iNAV. If there are more sellers than buyers, the price may be 25-50 basis points less," says Rajnish Rastogi, senior fund manager and co-head, equities, Motilal Oswal AMC.

Fund houses display iNAVs on their websites. iNAVs may be lower or higher than the market prices. So, there is a possibility of arbitrage. However, institutional or big investors move in fast to plug any price difference, putting small investors at a disadvantage.

Another thing to be kept in mind is that an investor can buy on an exchange and sell to the asset management company, or AMC, or sell on an exchange after buying from an AMC to gain from arbitrage

"The arbitrage opportunity may be there only if the difference between the market price and the iNAV is above 50-75 basis points. If not, no party will make money due to brokerage, securities transaction tax and inventory-carrying costs," says Rastogi.

However, a retail investor may not be able gain from arbitrage due to the difference between the iNAV and the market price. This is because AMCs buy in lot sizes. So, he will have to approach a marketmaker

Source: http://businesstoday.intoday.in/story/all-about-investing-in-exchange-traded-funds/1/187511.html

Thursday, September 6, 2012

Distributor groups give voice to IFAs

In the meeting that the finance ministry called in July 2012 which included chiefs of the top 10 asset management companies (AMCs), the head of the Association of Mutual Funds of India (Amfi) and the whole-time member of the Securities and Exchange Board of India (Sebi), there was one member in that meeting whose name not many may have heard. He is Dhruv Mehta, chairman, Foundation of Independent Financial Advisors (FIFA), a distributor association that is not even a year old. Call it a coup or sassy public relations, Mehta did what many IFAs over the years had only dreamt of—he managed to get invited by the finance ministry and had it as his audience. But FIFA is just the beginning.

There is strength in numbers. Mutual fund (MF) distributors, till now a dispersed lot, are recognizing the benefit of unity. After Sebi abolished entry loads in 2009 and in view of the changing distribution landscape, IFAs across the country got jolted out of their solitary existence and sought out one another. Reduced income forced some to leave the business, others changed their business models to charge the customer directly.

Several distributor associations were born: Karnataka Association of Mutual Fund Advisors (Kamfa) based out of Bangalore was formed in August 2009 with about 15 members (it has about 275 members, at present), Chennai-based IFA Galaxy started in September 2010 with about 20 IFAs (it has about 87 members at present) and the latest one, FIFA, kicked off its operations in February this year with about 30 members (it has about 200 members at present). And though Kolkata-based ASK Circle started in 2007, it too gathered steam in the past three years (it has about 85 members at present).

Is this some sort of a trade union? Are IFAs of these associations better off than their colleagues elsewhere?

Why do they even exist?

At the crux of their well-articulated objectives lies the burning desire to be heard. Although IFAs bring in a significant chunk of MF inflows into equity funds, Sebi, Amfi and the Indian MF industry was almost oblivious to their needs and concerns. Although top IFAs had some access to the power corridor, it was banks and national distributors that commanded much of the industry's attention, thanks to their organized structure. The IFA community was fragmented and had no formal representation as such.

Further, IFAs saw that the regulations were formed keeping in mind just banks and national distributors. In an earlier interview to Mint Money, Mehta said that although many bank-based distributors used to indulge in churning (a corrupt practice by MF distributors to nudge investors to buy and sell MF units frequently to earn higher commission), Sebi abolished entry loads. Most IFAs, claimed Mehta, do not indulge in churning; but their opinion was never considered. As a result, many IFAs—Mehta, and also Amfi, claim—have quit selling funds.

Apart from lending a voice, most of these associations simultaneously focus on working towards the upliftment of IFAs. They conduct training programs and seminars where they call speakers from AMCs to give lectures on issues such as how to adjust to the entry load ban, how to sell MFs, how to approach the customer and so on. Last week, at a seminar in Hubli, Karnataka, Kamfa had a training session for IFAs on the basics of taxation. Next day it held a training session on Microsoft Excel in Belgaum. Kamfa's secretary K.T. Suresh tells me that not many IFAs are proficient with Excel and such trainings help. With chief guests, including author Chetan Bhagat and James Norris, managing director, Vanguard International, one of the world's largest fund houses, at such events, they also liven up things.

IFAs too show support. L&T Investment Management Ltd's CEO Kailash Kulkarni tells me that at a recent seminar he attended, organized by ASK Circle in Bhubaneswar in Orissa, about 500 IFAs turned up, from 60 different cities over the weekend. "On a Sunday afternoon, after having lunch, if we have 500 IFAs paying attention, it says something," says Kulkarni. IFA associations regularly hold seminars in their state; most of them hold their annual conferences in large hotels where all their members converge, network with one another, meet AMC officials and, in a subtle way, present a show of strength.

AMCs are happy to oblige. They sponsor many events; in return they get to address and some advertising space. IFA associations also get better access to AMCs to share their operational grievances; IFAs had to earlier contact their regional offices.

How about bargaining—a united force compelling the AMCs to pay a better commission? All of the above associations categorically denied that they talk about commissions to fund houses. Some other IFA associations, AMCs say, do ask for a better bargain. As a result, upfront commissions in equity funds paid to some of IFAs have gone up to about 1%, up from about 0.50% earlier. But such bargaining is an exception; most associations avoid it.

All this noise and hard work seems to be bearing fruit, but gradually. Apart from Mehta's Delhi trip, IFA Galaxy met Sebi in Mumbai in May 2012 and presented its views on issues faced by the MF industry. Interestingly, one of the things it recommended was a higher incentive structure for penetration of funds in tier II and III cities; last month, Sebi allowed funds to charge 30 basis points extra for funds where at least 30% of total inflows came from "beyond top 15 cities".

Forming associations to protect IFAs' interest is fine as long as they don't drive hard for bargains. Getting their voice across is important though and Sebi should ideally engage them too since it anyways engages larger distributors such as banks because IFAs are the only distributor segment that can truly touch the retail segment. Your bank's relationship manager typically changes once a year, but a good IFA sees your family grow over time. With close to 37% of the total inflows coming from IFAs (as per figures provided by Computer Age Management Services; one of India's largest registrar and transfer agents) and 44% of total net inflows coming from IFAs, they want to be heard and counted.

Source: http://www.livemint.com/2012/09/05200636/Distributor-groups-give-voice.html

Wednesday, September 5, 2012

Dollar Dreams: Merits and risks of investing in US equity market

How many times have you seen a college going teenager flash an iPhone 4S, even as his eyes remain glued to his Microsoft Window 7-loaded Intel i5 Dell laptop, in the neighborhood KFC outlet? Or a young girl in a Nike outfit pulling out her Citibank platinum card to pay for a bucket of Fiery Grill chicken?

Have you ever realized how many American products and services you use in your daily life? Not just gadgets and apparel, a wide range of US products, including toothpastes, soaps and food articles, besides financial services, occupies an important place in your daily life.

There are hundreds of products and services that originate in the US and are used globally. No wonder the country is home to some of the world's biggest companies in terms of market capitalisation and brand value.

How about dressing your portfolio with stocks of US companies, which own some of the world's most well-known brands? Does it make sense to invest in US companies? If yes, is it the right time to take exposure to the world's largest market?

A couple of Indian mutual funds recently launched US equity funds-ICICI US Bluechip Equity Fund and DSP Black Rock US Flexible Equity Fund-which will invest either directly (former) or through the feeder fund route (latter). Motilal Oswal Mutual Fund already has an exchange-traded fund which invests in Nasdaq 100 stocks.

We look into the merits and risks of investing in the US equity market in the present scenario.

A CASE FOR US EQUITIES?
The US gross domestic product (GDP), which measures production of goods and services, is $15 trillion (compared to India's $1.5 trillion). This is 21.67 per cent of the world GDP. Listed companies in the US account for more than 33 per cent world market capitalisation. Between 1980 and 2010, the US markets generated 14 per cent annual compounded growth in rupee terms.

According to DSP Black Rock Mutual Fund, US equities are the core of almost every major global equity or sector portfolio/index. "On an average, US equities represent close to 50 per cent of global equity indices," it says.

A global presence helps US companies not only mitigate country-specific risks but also take advantage of growth in emerging and other economies.

"American brands and companies are significant beneficiary of any emerging market growth story; most leading American companies earn over 50 per cent revenue from non-American markets," says Sankaran Naren, chief investment officer, ICICI Prudential Mutual Fund.

The US is also one of the most diversified equity markets in the world with the top two sectors, financials and technology, accounting for only 34 per cent market capitalisation.

The US is home to some of the most innovative companies such as Apple Inc, Google, etc, which have set global trends and generated immense wealth for shareholders. Investing in the US also gives exposure to such companies.

NOW OR NEVER?
Has the US equity market recovered from the 2008 financial crisis? Some experts say the country has shown signs of economic recovery in the past couple of years. "Over the past two years, economic fundamentals have improved. The unemployment rate has fallen from 10 per cent to 8 per cent, the CEO Confidence Index has risen from 1.5 to 6 and corporate balance sheets are stronger than they have been in many years," says Rakesh Goyal, senior vice president, Bonanza Portfolio.

US stocks outperformed non-US stocks for the third year in a row in 2011-12 amid the European debt crisis. In 2011-12, the Dow Jones Industrial Average Index rose 6.7 per cent while Nasdaq gained 10.8 per cent. India's Nifty and Sensex fell 9 per cent and 10 per cent, respectively, during the period.

Recently, rating agency Fitch observed that "greater rating outlook stability was shown in US public finance, corporates and infrastructure. The weak US recovery reflects the gradual rebalancing of the economy, such as unwinding of excessive household debt and housing market correction, rather than a permanent downshift in the growth rate of the economy."

In terms of valuation, US stocks are cheaper than their long-term average. The S&P 500 index is currently trading at 13 times forward earnings against its longterm average of 16.9 times.

RISKS AND DRAWBACKS
When you invest in foreign equities, you are exposed to country-specific risks, both economic and political, tax laws as well as the risk of changing currency rates.

Despite the global presence of US companies, the impact of local economic factors cannot be overlooked completely. Though the US economy has shown resilience in the past couple of years, short- and medium-term worries exist. For instance, the unemployment rate at 8.3 per cent (up from 8.2 per cent in June) is still above the Federal Reserve's comfort level.

The US economy grew just 1.5 per cent in the second quarter as against the 2.5 per cent required to keep the employment rate stable. The country's central bank recently observed that the economy 'decelerated somewhat' in July, in sharp contrast to its June assessment that the economy was 'expanding moderately'.

Since your investments will be in securities priced in US dollar, changes in rupee-dollar exchange rates may also have an impact.

Also, one disadvantage of investing in foreign equities is that you will have to forgo the tax benefits that your domestic equity investments get. In India, long-term capital gains are tax-free. However, capital gains from foreign equities are taxed like debt instruments, that is, long-term capital gains are taxed at 20 per cent with indexation and 10 per cent without indexation. Short-term capital gains are taxed at the normal rate of income tax. Indexation is adjusting the purchase price with inflation. It reduces real capital gains and, hence, the tax liability.

Tapati Ghose, senior director, Deloitte Haskins & Sells, says, "Since no securities transaction tax is charged on sale/purchase of stocks, long-term capital gains are not tax-free in the US."

{quote}Securities transaction tax (STT) is payable on every sale and purchase of shares. The tax gets added to the price of the stock. India levies STT on equity transactions and hence longterm capital gains on equities are tax-free.

DIRECT OR MUTUAL FUND ROUTE?

Investing directly in US equities could be a cumbersome process involving issues of foreign exchange, tax laws and tracking a wide range of factors. For retail investors, these could be a big deterrent.

However, those who still want to invest in US equities can do so through an Indian broker who has tie-ups with brokers, clearing corporations and exchanges in the US. An Indian investor can make purchases overseas up to $200,000 every financial year under the Reserve Bank of India's liberalised remittance scheme.

"Many investors who want to diversify their portfolio internationally use the overseas platform offered by brokerage houses for directly investing in global equities. Executives who are working in multinational companies and are eligible for employee stock options also use their overseas trading accounts," says Vishal Gulechha, head, equity product group, ICICI Securities. The company also offers a trading platform for direct investment in overseas equity.

However, those who want to avoid the hassle of direct investment may go through mutual funds which invest either directly or buy units of mutual funds that invest in such stocks.

{blurb}"Regular tracking of foreign markets while sitting in India is not easy even for an institutional investor. Retail investors, should, therefore, invest through mutual funds, which have the necessary wherewithal and expertise to keep track of overseas markets," says Raghavendra Nath, managing director and CEO, Ladderup Wealth.

FINAL CALL

US equity markets are one of the most developed in the world and offer an opportunity to invest in some of the most respected global companies. Investing in the country's equity market can offer a good geographic diversification to your portfolio.

Investors, however, should be aware of the local economic and political risks, tax laws as well as currency market trends before taking the plunge.

Retail investors would be better off taking the mutual fund route instead of direct investment to take exposure to global securities.

Source:

Indian bonds yields little changed

Indian federal bond yields ended little changed on Tuesday as dealers preferred to stay light ahead of a central bank rate meeting and the fiscal second-half borrowing numbers later in September.

Dealers are also waiting to see whether the government will increase diesel prices, a contentious political issue, as any rise will push up freight and input costs.

The Economic Times reported on Tuesday that the government may raise diesel prices by 4-5 rupees a litre after the current session of parliament ends on Sept. 7.

While such a move will be inflationary in the near term, the central bank itself has been arguing that the government raise subsidised fuel prices to cut its bloated deficit bill.

"The key trigger will be the second-half borrowing. Overshooting is a done deal with the market expecting 500-600 billion rupees of extra borrowing," said Mahendra Jajoo, head of fixed income at Pramerica Mutual Fund.

India is scheduled to borrow 5.7 trillion rupees in the current fiscal year that ends in March, 65 per cent of which will be completed during April-September.

But the government is unlikely to stick to its 5.1 per cent fiscal deficit target, and will have to borrow more to fund any further gap.

The central bank is unlikely to provide any relief by lowering rates as it views the current inflation levels as too high.

RBI is expected to keep its key interest rate steady this month, a Reuters poll showed.

Jajoo said the bond market will also await signals on liquidity from the RBI, specifically as to when it resumes its open-market bond purchase, which it stopped in end-June.

Liquidity remains comfortable with the overnight benchmark rate or Mumbai Interbank Offer Rate slipping below 8 per cent for the first time in 11 months.

However, the cash shortage is expected to accentuate in mid-September when corporates pay advance tax, which will result in outflows to the tune of 500-600 billion rupees from the banking system.

The benchmark 10-year bond yield ended 1 b asis point lower at 8.21 per cent.

Total volume on the central bank's electronic trading platform was less than usual at 160.25 billion rupees.

The benchmark five-year swap rate was unchanged at 7.16 per cent, while the one-year rate was down 1 bp to 7.79 per cent.

Source: http://economictimes.indiatimes.com/markets/bonds/indian-bonds-yields-little-changed/articleshow/16252338.cms?curpg=2

Monday, September 3, 2012

How not to evaluate a mutual fund scheme?

Often investors like showered with a lot of information on how to assess a mutual fund scheme but never are they guided on how not to evaluate a mutual fund scheme. PersonalFN highlights few points which many a times investors fail to consider while investing in a mutual fund scheme.

A lot of mutual fund advice/research now-a-days is focused on how investors must evaluate mutual funds. You must have come across a lot of literature on this in a newspaper or on websites of mutual fund houses. Even your distributor / relationship manager / agent must have showered you with a lot of information on how to assess a mutual fund scheme before investing in the same. Unfortunately, in our view that is often not enough. It is like knowing only half of the story, which then leads to mis-selling by self-centred distributor or advisors. As a result, a lot of investors who end up investing in mutual fund schemes which lacks consistency in performance are left very disillusioned with how their investments have performed. All this can be prevented if investors are armed with two golden rules to invest in mutual funds "guidelines on how to evaluate a mutual fund" and just as importantly "guidelines on how not to evaluate a mutual fund". Over here let us discuss the other half of the story i.e., guidelines on how not to evaluate a mutual fund which is generally very less discussed about.

1. Don't read too much into past performance

Read any mutual fund advertisement and there is likely to be a mention of the funds incredible performance over the years. At times the focus on past performance is so overwhelming that it leaves you with the impression that, past performance is all that matters while investing in a mutual fund. However, in our view, past performance is important, but it is just one of the factors that must be considered while investing in a mutual fund scheme. Among other factors that rarely find a mention in advertisements are the fund houses investment philosophy and processes, level of ethics, performance across market phases especially during the downturns of the stock markets.

2. Don't read too much into mutual fund ratings

In our view, mutual fund ratings get more than their share of attention from investors, which is unfortunate. This is especially true since in the Indian context mutual fund ratings are often biased towards returns with little or no room for evaluating among other factors, the fund house's investment philosophy, processes, track record on transparency, consistency, compliance and ethics. Such lopsided ratings cannot be the base for investors to take a decision whether to buy or sell or hold a particular mutual fund scheme. However, ratings can be considered as a reference point while evaluating different types of mutual fund schemes.

3. Don't read too much into CAGR performance

One of the many selling points for mutual funds is their performance in terms of compounded annualised growth rate (CAGR). Any student of mathematics can confirm this "CAGR is just an indicator of growth between two points" (or between two dates as in the case of a mutual fund investment). It tells you nothing about what transpired in the interval and more importantly it tells you nothing about the risk the mutual fund has exposed investors to and the investment process that generated that CAGR. At the end, the CAGR hides more than it reveals which is why investors should not read more in it than necessary.

4. Don't invest in a mutual fund just because its NAV is low

Many a times you perceive investment in a New Fund Offer (NFO) as a good investment just because the NFO is priced at Rs 10. On a similar footing, even existing mutual funds with lower Net Asset Value (NAV) appeal you more as compared to a mutual fund with a higher NAV. In our view, this approach to selecting a mutual fund is absolutely incorrect. Let us understand what constitutes or how NAV of a mutual fund is arrived at. The NAV of a mutual fund is expressed as total of all assets of the particular scheme less the liabilities of that scheme (excluding liability towards unit holders), divided by the total number of outstanding units.

Thus, when you invest in a mutual fund you invest at its existing NAV wherein you buy units at a price (i.e. the NAV). The calculation of the NAV is based on the current market price of all the assets that the mutual fund scheme owns less the liabilities. In other words, the NAV represents the mutual fund scheme's intrinsic value.

Unlike in stocks, wherein the stock price of a company is different from its intrinsic value due to fact that the investors evaluate the company's future profitability and accordingly pay a higher price or lower price as compared to its book value. This does not hold true for open-ended mutual funds - they always trade at their book value; so investors never buy them cheap or expensive in that sense.

5. Don't count on the star fund manager

Unlike other factors like past performance that merit some (positive) consideration, the presence of a star fund manager merits no such consideration. On the contrary a fund house must be given negative marks for attributing its success to a star fund manager. While over the short-term a star fund manager may bring about a dramatic change in the mutual fund's performance, over the long-term he can do more harm than good.

As a mutual fund's performance gets inseparably linked with the presence of the star fund manager, his existence in the fund house becomes a prerequisite for the fund's success. If the star fund manager quits the fund house, it could leave the fund and its investors in the lurch because the existing team is unlikely to be capacitated to deliver on the same lines as the star fund manager.

So what must investors do? Go for fund houses that institutionalize the fund management process by building teams that are guided by well-defined processes where individuals have a limited role to play.

6. Don't question every investment decision made by your fund manager

While it's good to be aware of what your fund manager is up to, it is only in the fitness of things that you let him do what he is good at doing, which is identifying the best investment opportunities ahead of the competition. As an investor you must do what you are supposed to do which is getting your financial planner involved in the process of keeping a tab on your investments. The financial planner (provided he is honest and competent) should be the one to tell you whether the fund manager is investing in line with his pre-determined investment mandate and philosophy. Once you understand the roles defined for all three parties over here "fund manager, financial planner and you", (i.e. the investor) you will not waste your time organizing over views like whether your fund manager is doing the right thing by investing in software stocks in the backdrop of a rising rupee and so on.

Thus, the next time you plan to invest in a mutual fund please take a note of the above 'must avoids' along with the guidelines on how to select a winning mutual fund for your portfolio.

Source: http://www.moneycontrol.com/news/mf-experts/how-not-to-evaluatemutual-fund-scheme_751874.html