Banking funds are good for every portfolio

In the past few years, the banking sector has given great returns. On January 14, 2008, it touched a high of 12,678.98. Four years ago it was hovering at around 3,000 levels. Over these years, the BSE Bankex has delivered an annual return of 35 per cent. Last year it impressed with a 61 per cent return, far ahead of the 47 per cent delivered by the Sensex.

From the turn of the century, the industry has been growing at 20 per cent per annum. And it is estimated that in the coming years, Indian banks are expected to grow at 35 per cent per annum.

In a growing economy, this sector is a direct beneficiary. What's even better is that its net non-performing assets (NPAs) have come down considerably from 8 (in the year 2000) to 1 per cent today.

To fund this growth, banks would need funding to the tune of $14 billion. This is one of the reasons the Reserve Bank of India (RBI) is opening up the sector to foreign players next year. From 2009 onwards, foreign banks would be allowed to acquire up to 74 per cent of any Indian bank.

The domestic players will benefit from the essential capital and expertise while the foreigners would get a foothold into this lucrative sector (for new players) and have the ability to reach a larger audience (for the existing ones).

In recent times there has been considerable investment by international banks like Citigroup, HSBC, Bank of America and Deutsche Bank to scale up their operations in India. Moreover, foreign institutional investors (FIIs) are also betting on this sector. As many as five public sector banks (PSB) have exhausted their limit of FII investment, with three more along with four private sector banks in the caution zone.

The only way out for FIIs is to now tap the banking exchange traded funds (ETFs) and sector funds focussed on the banking sector. This could explain why in the past 12 months the average monthly growth in the units of equity banking funds has been around 24 per cent.

At present, there are three open-ended equity banking funds in the market, while another two should be available for investment soon. Four more are still in the approval stage. But each of the existing three have their own character, the similarity begins and ends with the common sector.

Their investment strategy, market cap preference, choice of scrips and type of stocks vary. And these banking sector funds don't have a mandate limited to pure banking players. Financial institutions and brokerage stocks also find a place here.

While we look at the three equity funds in our analysis, there are also three ETFs available for investment. Like its cousins in the equity category, the Banking BeES, the largest ETF has rewarded its investors by giving a return of 36 per cent since inception.

So if none of the equity funds appeal to you, you could even look at this option. All said and done, this sector deserves a presence in any portfolio.

JM FINANCIAL SECTOR FUND – UP AND DOWN

The newest entrant to the pack got itself noticed in the very first year of its existence. Though it trounced the competition in 2007, its performance was not consistent all the year through. And while investors celebrated with a 95 per cent return in 2007, in the March 2008 quarter they had to grapple with negative returns of 33.36 per cent.

It can be argued that the fall was the logical outcome of the entire sector plummeting and the market going downhill, but JM Financial fell harder than its peers (Reliance fell by just 22.26 per cent).

This fund has always been very bullish on ICICI Bank. Soon after launch, this scrip cornered 32.49 per cent of the portfolio. It is the only stock in the portfolio that has been there continually since launch. Even now, it is the top-most holding at 11.57 per cent.

The fund manager chases growth so momentum stocks like Reliance Capital, Indian Infoline and Srei Infrastructure are more favoured than stocks like Bank of Baroda, Corporation Bank and Federal Bank which are prominent in the portfolios of the other two funds. It has more or less avoided public sector banking stocks like Maharashtra Bank, Jammu & Kashmir Bank and South Indian Bank.

Though the fund manager continuously held on to stocks like ICICI Bank, HDFC Bank, Yes Bank, IDFC, PFC and Mahindra & Mahindra Financial Services for fairly long periods of time, it does not indicate that he adheres to the buy-and-hold strategy. He has entered and exited stocks like Axis Bank, Bank of India, IDBI, Karnataka Bank, Kotak Mahindra Bank and

Reliance Capital only to once again get into them at a later date. Of course, the small size of the fund has given the fund manager the leeway to be a nimble player.

This investing style of chasing growth and selling once a price objective has been achieved, only to re-enter later, is typical of fund manager Sandeep Neema.

But what's also typical is that when his fund outperforms, it is streets ahead of the competition, but when it does not, it falls much lower than its peers. If you are considering this fund, get mentally prepared to ride the ups and downs.

RELIANCE BANKING FUND – STEADY RETURNS OVER TIME

As the oldest and largest banking sector fund, it has not disappointed investors. Over the past five years, it has delivered an annual return of 42 per cent. Historically too, this fund has been less volatile than its peers or its underlying index.

Despite being a good performer, the fund took second place to JM Financial in 2007. In the December 2007 quarter, Reliance Banking delivered 19.43 per cent as against 28.52 per cent of JM Financial. But in the following quarter (March 2008), Reliance Banking fell by just 22.26 per cent, as against JM Financial's fall of 33.36 per cent.

The reason was two-fold. Reliance Banking stayed away from high PE stocks — Axis Bank, HDFC Bank, Yes Bank, Cholamandalam DBS Finance and Srei Infrastructure. As a result it lagged in 2007 but fell much less when the market tanked.

Reliance Banking's high cash component also proved to be a buffer when the market fell. Like all the sector funds from Reliance AMC, this one too has the leeway to go fully into cash, should the need arise.

While it has not exercised that option, it does have the tendency to hold larger cash positions than its competitors. Its cash component had consistently increased from 14.52 per cent (November 2007) to 32 per cent (February 2008). Since January 2008, it has averaged at around 25 per cent.

In March 2008, when the prices fell and valuations looked to be more reasonable, the fund manager picked up Axis Bank and Kotak Mahindra Bank which he avoided earlier because they were too expensive.

What's interesting about this fund is its penchant for broking stocks — India Infoline, Indiabulls Financial Services, IL&FS Investsmart and Motilal Oswal Financial Services. But financial institutions stocks like IDFC and IFCI are not courted.

What we like about this fund is its consistency. The fund manager's strategy may not deliver headline grabbing returns but it has led to a solid record over the long haul.

UTI BANKING SECTOR – IN LINE WITH INDEX

UTI Banking Sector has been, by and large an average performer.

Fund manager Gautami Desai has not been an opportunistic investor and prefers to invest in large banking stocks. This fund has avoided brokerage stocks and prefers financial institutions like Power Finance Corporation, LIC Housing Finance and IDFC.

This strategy has certainly not resulted in the fund shooting out the lights and last year it was behind its peers in terms of returns. And what was even more disappointing was that in the recent bear run it fell by 30.16 per cent, compared to Reliance Banking Fund's -22.26 per cent and JM Financial Services -33.36 per cent returns (March 2008 quarter).

What's amazing is that when UTI Banking Sector is compared to a banking exchange traded fund Banking BeES - there has barely been any addition of alpha. The two-year annualised returns are around 32 per cent, while Banking BeES delivers a higher three-year return. So logically, why would an investor pay 2 per cent more as annual expenses (with this sector fund) when the return is virtually identical?

Risk-averse investors fancy capital-protection funds

The term ‘risk’ is slowly finding its way back into investor lexicon. This is evident from the rising demand for capital-protection products offered by brokerage houses in their portfolio management schemes (PMS). Of several such products, the one which uses bonds and the recently-introduced long-dated options, is the most sought after for now.
What differentiates this capital-protection product from others is the use of long-dated options, that SEBI introduced in January this year. The product has been structured in such a way that a major chunk of an investor’s capital is put into highly-rated bonds, while the rest is used to buy Nifty call options, which expire 1-3 years from now.
So, for instance, if a client puts in Rs 100 into such a product, the fund manager of the PMS would invest, say, Rs 90 in bonds at a fixed interest rate to protect the capital. Rest of the money is used to buy (pay the premium for) a long-dated Nifty call or put that expire in 2009, 2010 or 2011.

It is learnt that majority of fund managers are buying long-dated Nifty calls, mostly in 2011, an indication that they expect the bull rally to resume by 2011. When an investor buys a call option, he expects the market to rise. The advantage of buying options is that the risk of losing money is limited to the premium paid. By using long-dated options, an investor takes a longer-term bet on the direction of the market, which helps him ignore short-term losses. Here, the investor does not need to roll over his positions every month or quarter, thereby saving on rollover costs.
“The gaining acceptance of this capital-protection product is driving activity in long-dated options,” said JM Financial Mutual Fund’s fund manager-derivatives, Biren Mehta.
Industry officials said PMS arms of ICICI Prudential Asset Management, Kotak Securities PMS and Emkay Shares and Stockbrokers are among the few, which are offering such products. This could not be individually verified with these players. But, some in the industry said the existing market conditions have made it difficult for them to sell this product to potential clients. “When we approach clients with such a product, the product is designed in such a way to suit market conditions at this moment. When the client finally approves to buy it, the situation might have changed,” said a top official with a brokerage’s wealth-management arm.

Equilibrium in MFs is in investor interest

As a kid, I had this toy that worked on the principle of balancing. It had two arms and no matter what contortions one subjected it to, it would sway, swing, wobble and come to a stop in the upright position.
It’s the same with the market — equilibrium would be reached as the various constituents act out their parts sensibly and the valuations are discovered, after factoring in all that is known - I have since realised.

Mutual funds are a very important component of the investment landscape. They act as a buffer between the investors and the stock market and reduce the risk by diversifying the investment, offering the services of a professional fund manager, ensuring liquidity at all times, etc.
But somehow, mutual funds have been portrayed as villains by the media and Sebi also seems to see the industry as fleecing the investors, which is unfortunate. The no-load-direct mode, introduced a few months back, was touted as a great step forward for the investors.
And now, there is this proposal to legitimise passback of commission, so they can legitimately get back some of the money their distributor earns. Also the investor may benefit.
But, that being the case, why are so many unit linked insurance plans (Ulips) being sold, where the first-year charges can be well over 70%? These schemes have so many charges, and are so well-packaged, that even people from financial services often fail to decipher them.
On top of it all, innovative handling of queries on charges and mis-selling are par for the course for insurance agents. After all, they earn double-digit commissions for a product that looks like a mutual fund scheme and offers insurance as an after thought.
Wouldn’t it be in the investors’ interest to be allowed to go direct in insurance plans, too? Clearly, that would allow them to save on a lot of costs. Also, unlike in MFs, one cannot change the agent easily in insurance.
When insurance companies are allowed a free run, why is the market regulator after the mutual fund industry? The question is pertinent because although these are competing products, there is no restriction on the charges on insurance.
Representations of the Association of Mutual Funds of India for a higher allowance of expenses to create a level playing field have been rebuffed. This is a problem with having multiple regulators rather than a single one for all financial services.
Given the disparity, MF distributors would gladly start selling Ulips, for they can earn a lot more there. The individual MF advisor earns 2-2.25% from selling MF schemes, on which he has to pay service tax, income tax and meet sales and operational costs. At the end, he may be left with barely 40% of the gross commission.
Intermediaries need to earn. An industry will remain healthy and vibrant only if the constituents are able to earn reasonable returns. Why else would be there in the first place?
But, clearly, the regulators do not think this applies to the mutual fund industry. Going by them, these players need to be controlled and disciplined as opposed to being just regulated. That’s a flawed premise.
Take the telecom industry. When it was government controlled, one had to register for a phone and wait endlessly. All that changed with the arrival of private operators and the ensuing competition. In a matter of years, the charges have come down from Rs 16 a minute to as low as 10 paise a minute.
This was achieved by creating an ecosystem with healthy competition, not by passing a diktat. Throttling the players with legislation would have killed what has grown into a vibrant industry and a major employer.
That’s precisely what the mutual funds industry needs, too. The regulator could look at other ways of deepening the market, broadening the reach and protecting investors’ interests.
The following constructive measures may be considered:
The regulator could look at ensuring that MF money stays invested longer, so people start participating in the growth story as investors, rather than buccaneers.
Introducing punitive exit loads, of say 5% for exits less than 12 months, could ensure that investors develop a long-term outlook, which is good for the industry and the economy at large. This will curb churning and ensure that investment in mutual funds is not 'hot money' that keeps moving in and out, such as those of the hedge funds.
This will bring stability in the market and give the fund manager the stability he needs to do his job properly, without constantly looking in the rear view mirror, for signs of redemption pressures.
Long-term investors can be incentivised. Lower expense ratios (of say, a maximum of 2.25% as opposed to 2.5%) for those staying invested for three years or more can be a tangible incentive.

Lastly, the anomalies should be corrected. When there were loads, the distributor was not expected to invest in his name and if he did, he had to inform that he was doing so to exclude those investments from commissions. Now that the no-load direct option is in, this system is redundant. Yet this continues.

It goes without a saying that equilibrium would eventually be reached, much like the toy I had. Only, whether it would be in the interests of the investor is another matter.

Only the nature of equity market had changed, not its potential

Most people would view the current situation of the Indian economy as the beginning of a horror story for investors – the inflation rates are soaring rather uncontrollably, global cues are dismal and the equity markets are plummeting.
No cause for panic, say investment experts. Those with the qualifications and the technical know-how to assess the present situation assert that this is just the beginning of a new phase and investors will have to change their habits and attitudes accordingly.
Experts refuse to see the recent decline as a bear market. They rather term it as a correction in a bull market. They are confident that once the inflation concerns and the political uncertainty are past – and they will be sooner than later – the Indian equities will regain their flavour.
Their confidence stems from the facts that amidst all the gloom Indian businesses have continued to display very strong fundamentals. What’s needed to stabilize the proceedings is a stable government. Everyone is waiting for the first bit of good news to set the markets on an upward path.
Until that happens, though, experts say the markets will be range bound in the 10 to 15 percent band. The growth will be slow as compared to previous times. There are not too many positive triggers in the market at present. In the past, investors (read speculators) have become used to making a lot of money. There is no quick-money to be made in the market now. Investors will have to stay invested for the long-term to make fairly reasonable returns.
Over the last four years, there was a combination of positive factors working for the economy. Those fundamental factors have now changed. It will take time for the fundamentals to stabilise and people will have to patient during this phase. From now on, at least in the foreseeable future, there will be no instant money. The gains will certainly be there, but for those with an investment horizon of at least two to three years.
Wisdom therefore lies not in shying away from the market but entering it in small calculated steps. One good way to do this is through mutual funds.
With the booming stock market remaining volatile in the recent times, more and more investors are seeking mutual fund (MF) route to invest in the market. This can be seen from the number of investor folios rising faster than the growth in asset under management (AUM) of the MF industry. The Indian MF industry has grown at the compounded Annual Growth Rate (CAGR) of 47 percent between 2003-08, which is next only to Russia at 97 percent and China at 67 percent during the same period. There are reports to say that in the next 2-3 years, the MF sector will grow at 35-40 percent.
A report from McKinsey & Company titled “Indian Asset Management: Achieving Broad-based Growth,” suggests that by 2012, the total money managed by mutual fund houses in India will be between $350bn and $440 bn. That’s a growth of 26-33 percent every year for the next four years.
McKinsey believes that the penetration of mutual funds is very low as compared to other markets. The current AUM amounts to 8 percent of GDP in India compared to 79 percent in the US and 39 percent in Brazil, according to the report. “About 3-4 percent of Indian households have invested in mutual funds and 42 percent of these households are located in the top eight cities,” it further elaborates, underscoring the underpenetration.
To capitalise on this growth opportunity, many new players have recently entered the fray, and at least 10 more are in various stages of launching their mutual fund businesses.
According to Lipper, an international fund tracking firm, Gulf investors earned substantial gains last year from both debt and equity funds.
Funds registered for sale in the Gulf region recorded an average gain of 19.26 percent in 2007, with equity funds from India emerging as the second best performing category after equity funds from China, said a recent Lipper report. Nineteen Among the top 20 GCC-registered funds were Indian. These included six funds from the Reliance Mutual Fund stable, four schemes each of UTI Mutual Fund and Birla Sun Life, three DSP-Merrill Lynch schemes and two HDFC Mutual Fund schemes.
Among the Indian funds, the rupee-dominated bond funds were the best performers in the bond category with about 20 percent return while equity funds gave an average return of 71.08 percent, against the overall average of 26.40 for all the equity funds.
Returns from the rupee-denominated general bond funds and government bond funds stood at 21.56 percent and 19.79 percent respectively. This, compared with an overall average return of 9.94 percent for the bond funds. Investors from the Gulf region were aggressively betting on the Indian market, the study said.
One must remember that the best time to enter the market is when the Sensex plunges. This may be a good time to buy stocks as most scrips are trading at very low prices. But the bigger question is whether you want to enter the equity market directly or opt for the mutual funds’ route.
According to one expert, investing directly in the stock market is good. You should look at splitting your money among 5-6 blue chip companies. However, if (and it’s a big if) you don’t have the expertise, then a diversified equity fund will be a safe bet. It’s better for new investors to enter the market in tranches. If you enter the market today and it falls by another 10 percent tomorrow, it will pinch you. So it’s better to spread your moves when the stock market looks bearish.

How have fund flows shaped up this year?

The markets are continuing to trade weak and lacklustre. So, how are flows- local and global - looking like?
Foreign institutional investors have sold Rs 8,430 crore this month. The outflows amount to nearly 10% of total FII inflows to India till date.
Fund outflows, at Rs 13,036, were the highest in January this year. This was followed by June at Rs 8,430, Rs 7,770 crore in August 2007, and Rs 7,354 crore in March 2006.
There were negative fund inflows this year in four out of the six months. Fund inflows in 2008 stood at negative Rs 13,063 crore in January, Rs 1,733 crore in February, negative Rs 130 crore in March, Rs 1,075 in April, negative Rs 5,012 in May, and negative Rs 8,430 in June.
Year-to-date, FIIs have sold USD 6.2 billion in equities in the cash market. They were net purchasers to the tune of USD 10.4 billion in futures and options. In total, they net purchased USD 3.76 billion year-to-date. Of this, around USD 3.55 billion has been sold since May 20.
However, domestic institutional investors were net buyers to the tune of Rs 41,246 crore year-to-date. Mutual funds invested Rs 8,178 crore while banks, domestic financial institutions, and insurance companies invested Rs 33,068 crore.
Reliance Mutual Fund has about 16% market share and is sitting on USD 1.5 billion cash. On the other hand, there is extremely selective buying coming in from bigger fund houses like DSP Merrill Lynch, SBI and HDFC.

We are not really seeing a break in the 13-15% average cash level in the fund portfolios. But if we take a look at the numbers, there is selective buying coming from fund managers that has led to buying of about Rs 2,000 crore worth of shares in this month and Year-To-Date we have seen about Rs 8,000 crore worth of shares bought by fund managers.

So, it is clearly not the kind of cash one would expect from mutual funds that would add any support levels to the markets. But on the other hand, on the investors’ side, fund managers are not facing any redemption pressures.

But if this volatility continues to sustain for a longer period of time, there is a possibility that fund managers will have to face a lot of redemption. At this point, they aren’t even seeing any inflows coming in. So, on the investor side, there is panic but no redemption pressures as such.

Mutual funds play it safe with cash

Equity schemes biding time for value picks in falling market

Even as the benchmark index, Sensex, breached 14,000 intra-day, on Tuesday, mutual funds with huge cash in their kitty, appear to be waiting for the market to fall further to pick up stocks at lower levels.
Analysts say lack of positive signals and fears of possible redemption pressure in the near future seem to be keeping mutual funds from making investment decisions.
“Mutual funds seem to be sitting on huge cash as they might need some liquidity to service redemptions which might happen in volatile times. On the other hand, there is lack of good opportunity to deploy funds," said Mr Srinivas Jain, Chief Marketing Officer and Senior Vice-President, SBI Mutual Fund.
However, there are select funds cherrypicking at lower levels on Tuesday, with domestic institutions including mutual funds buying sticks worth (net) Rs 476 crore.
BSE Sensex fell 1.31 per cent to close at 14106.58.
Mutual funds are waiting to invest at lower levels, as there are chances of the markets falling further, said Mr Alex Matthew, Head of Research, Geojit Financial Services.
By May-end, over 292 equity schemes that were in operation had a total cash position of close to Rs 23,240 crore according to data from NAV India. At the end of April, equity schemes had cash levels of Rs 15,615 crore.
The assets under managements for the month ended May was Rs 6,00,266 crore, while the same for April was Rs 5,69,686 crore.
Around 40-50 per cent of the total assets under management of the industry are in equity schemes. Out of this, if the industry is holding around 10-15 per cent in cash, it is not very high considering the turbulence in markets, he added.
According to a research report by Sharekhan Securities, for June 2008, the top 10 cash-rich funds, include UTI Spread Fund, Kotak Equity Arbitrage Fund, Reliance Natural Resources Fund, Birla Sun Life Pure Value Fund, Reliance Quant Plus Fund, ICICI Prudential Blended Plan, IDFC Fixed Maturity Arbitrage Fund-s1 and ING Dynamic Asset Allocation Fund.
These are some of the cash rich equity diversified funds waiting for right valuations to invest, the report said.
In fact, fund houses sitting in cash will reduce their mark-to-market losses, and the larger the sums of cash, the more insulated they are, said an analyst. Sensex lost more than 30 per cent since January 2008.

Not much redemptions
Investors too seem to be playing it safe, having understood that mutual fund investments are for the long term, and so there is not much redemption happening, say analysts.
“Also in most cases where the NAVs of schemes have fallen by around 50 per cent, the investors will not want to exit at such low levels”, observed Mr Rakesh Goyal, Head-Distribution, Bonanza Portfolio.

Mr Sanjay Sinha, Chief Investment Officer, SBI Mutual Fund Management Private Ltd

SBI Funds Management Ltd. is the investment manager of SBI Mutual Fund. SBI Mutual Fund is a joint venture between the State Bank of India and Société Générale Asset Management, one of the world’s leading fund management companies that manages over US$500bn worldwide. Today, the fund manages over Rs317.94bn of assets and has a diverse profile of investors actively parking their investments across 36 active schemes with an investor base of over 5.4mn.

Sanjay Sinha, Chief Investment Officer, SBI Mutual Fund Management Private Limited, he joined SBI Mutual Fund in November 2005 as Head of Equities. He has over 19 years of experience in the mutual fund industry. Prior to joining SBI Mutual Fund, he had a stint with UTI Mutual Fund and was managing a corpus of over Rs28bn (over US$600 mn). He is a graduate from IIM Kolkatta.
Speaking with Anil Mascarenhas and Fahima Shaikh of India Infoline, Sanjay Sinha says, “FIIs have behaved in a logical manner and we are sure they will not stay away from the Indian market for too long.”
Inflation has been skyrocketing and oil prices have been soaring. How do you read the situation?

We are set to face more hardships as far as oil prices are concerned. However, I don’t see it sustaining at higher levels for too long time. Oil was trading at around US$80 per barrel, before it spiked to $120 in a short span of time. A demand spurt from India and China has been cited as a reason. This is surprising, as these economies have been growing their GDP at a strong pace now for the last three to four years. Therefore this is not a logical justification for the spike in oil price by around 50% in a short span of time. Secondly, if you look at history, oil price spikes were caused due to supply interruptions on account of various global events. I therefore expect the surge in oil prices to be temporary in nature. Whenever prices have sharply moved higher, the shrinkage in demand has been far more structural. The demand could start coming down resulting in cooling of prices. In the longer term, oil prices will start moving down because of this. Supply side constraints are not the cause for rise in prices this time around. Any commodity, which moves at a very fast pace without any fundamental attribute definitely comes to a sustainable level. By the later part of calendar year 2008, we see prices of oil and other commodities cooling down from their highs and settling at sustainable levels. Inflation, which is at record highs, would moderate and consequently interest rates are also expected to soften putting into motion the entire virtuous cycle.

The rupee has been volatile. How do you see it moving ahead?

Rupee weakness is coinciding with a spurt in oil price. However, we cannot be sure that if crude falls, rupee may appreciate by the same extent. The proposition that oil prices may come down is also based on the assumption that dollar will strengthen. This may get triggered by the expectations of a Fed rate hike in September 2008. At the same time rupee might also see some appreciation, as oil prices cool. It is difficult to get a clear view regarding the rupee on account of these conflicting factors.

To what extent could these factors impact corporate earnings?

If one believes that advance tax numbers are a genuine reflection then the coming quarter appears to be set for above expectation results. I think the true test will lie in seeing the actual quarterly results because many a times the advance numbers are a little deceptive.

If the first quarter results are relatively positive then the bane of high prices may pass on to the second quarter. High interest rates and inflation could be a dampener in the second quarter. But the third and fourth quarter results may be much better compared to the earlier quarters as companies would have a positive effect of cooling of oil prices and softening interest rates.

Even after a correction, global investors see India as expensive compared to other emerging economies. What kind of FII inflows are you expecting?

Equity as an asset class remains a risky proposition. Emerging economies are even riskier. To that extent, FIIs have reacted in very logical pattern and have behaved in a similar manner worldwide. They have sold 2.5% of their total holding in India, which is not a significant proportion. We are sure they will not stay away from the Indian market for too long. In April 2008, when markets were moving up from its lower levels, we saw some positive response from FIIs. They too look at the trend and act accordingly. Post the new P-note guidelines; there was a fear of FIIs slowing down their activities in India. However, the number of FIIs investing in India is on the rise and around 1400 FIIs have registered with SEBI.

Mutual funds have been sitting on large amount of cash. Yet they have been slow in deployment. Are the current levels still comfortable for investment?

Mutual fund participation has been higher this calendar year. In 2007, MF houses were net buyers of Rs67bn of equities whereas this year till mid of June 2008, mutual funds have bought equities worth Rs75bn. Yes, we are sitting on a cash pile of around 13% of our average equity assets, which is much higher than the normal levels.

We had built a cushion to absorb the shocks of redemption, which is normal during a downturn. However, this time, we were surprised that there was no outflow. On the contrary, almost everyday we are witnessing net inflows even in these turbulent times. As part of our investment strategy, we are looking into moving into new sectors and stocks. We have been a little slow in deploying this cash in a falling market and that explains the reason why our funds are sitting on cash for a longer time.

Which sectors do you expect to outperform and under-perform in the coming months?

Opinion on this can be divided. One choice would be the sectors which are the flavour of the day like IT, pharma and FMCG, that are considered to be defensive sectors. Other choice for investment would be contrarian bets in the present scenario. Though these funds would not give an immediate result, disciplined investors can get fruitful gains for their patience. Currently, sectors one can look at need not be just the ones which have corrected sharply. Investors should look at stocks which have corrected and at the same time hold good promise when the situation turns benign.In such a scenario, sectors like banking, financial services, engineering and capital goods could be contrarian bets.

Last calendar year contra fund delivered outstanding returns of 65%. Would it be wrong to make a comparison for the short term as the contra funds have been underperforming in recent months?

Our SBI Magnum Contra fund has been in line with its objective. It was in the first quartile among its peers last year. In terms of five and three years’ returns, it is among the top five performing funds. This is an indication of a typical contrarian fund behavior, which is supposed to unfold its story over a longer period of time. Hence one should stay invested over a long term period in a contrarian fund. Short term gains can not be expected from contrarian bets.

In two of your funds, Contra & Tax Gain you have seen to be liberal and constant in declaring dividends. However, in Comma, Index and Pharma funds you have not been rewarding investors with dividends in the last two years?

In case of index funds, which are passive in nature, getting distribution surplus is less likely.
We have a practice to declare at least one dividend in actively managed funds every year. In case of sectoral funds, if we are able to capture any event in the industry, we would definitely part the surplus with our investors in terms of dividends.

Recent guidelines on REMF (Real Estate Mutual Fund) by SEBI expanded the asset class for investment. Any plans in the near future to launch such funds?

Mutual fund industry is at its inflection point. To move into a new phase, the industry has to first spread geographically. Secondly, the investor should be offered a wide range of innovative products. At present, our industry offers broadly two classes of assets i.e. equity and debt. Hence, real estate mutual funds can offer a completely new set of asset class to the retail investors. We are very positive and excited about REMF. As this industry has its own dynamics and complications, we are first putting in place an infrastructure to suitably manage this asset class. Once we set up the entire plan, we would definitely launch products in REMF.

Why are pension funds in India not gaining popularity?

Pension funds are least popular in India. The last time a fund decided to raise money for a pension fund, the corpus collected was very low. A sporadic savings plan alone may not be able to satisfy an individual’s retirement need. Secondly, investors are not very conscious about planning for their retirement. Investors can actually go for life stage financial planning. This is where the mutual fund industry can play a vital role to offer products that suit investors and retirement needs. Here, the SIP route would be most preferred and suitable in building a diversified asset allocation for retirement.

Issue like bringing down the cost in fund houses has been in limelight in recent days. What is your suggestion on this issue?

There have been suggestions of creating a common platform so that mutual fund investors can be given a consolidated statement, where all the holdings with different funds are captured in one statement. Currently, paper work contributes a large extent to the cost pie. Any common platform or standardization will bring down costs to that extent. This would be another investor-friendly reform in the industry.

What is your advice to retail investors?

Currently, average income levels in the country have gone up. Investors have a wider choice of investments options as compared to old saving avenues like bank deposits and National Saving Certificates. The higher pool of money has to be judiciously saved and invested. This is where investors need to pay more attention to financial planning. Once a proper plan is made, investors have to choose a suitable approach to fulfill that financial plan with different asset classes. Investors should be disciplined and regular in investing. This will save them from the trap of timing the market which is not part of any proper financial planning process.

FII Activity on 24-06-2008 - June 25, 2008

The FIIs on Tuesday stood as net seller in equity and debt. The gross equity purchased was Rs2,273.90 Crore and the gross debt purchased was Rs0.00 Crore while the gross equity sold stood at Rs2,894.70 Crore and gross debt sold stood at Rs132.70 Crore. Therefore, the net investment of equity reported was (Rs620.80) Crore and net debt was (Rs132.70) Crore.

Fidelity to launch a distribution agency

Fidelity India is set to enter the mutual fund distribution business in India, a senior official at the fund house said. It will be the first fund house in the country to launch a separate agency of its own to distribute MF schemes of all fund houses in the country. The existing distribution companies like ones from Birla and HDFC are a part of the financial group, rather than set up by the fund house. Many other MF houses are now expected to follow the Fidelity example.
“Setting up the asset management company was the first step and we are now working on this new business initiative of distribution of third party mutual funds,” Ashu Suyash, managing director and country head, Fidelity Fund Management, told ET.
“The setting up of a platform to make available third party funds is a natural extension of our belief to help in customer choice that helps customers in meeting their lifetime goals,” she added.
The rapid growth of assets in the MF industry and the fact that the money is coming from primarily a few cities is prompting many fund houses to expand their network. While many fund houses are setting up their own offices, others are using the services of independent distributors for the same. Fidelity India seems to have taken a cue from ‘FundsNetwork,’ — Fidelity’s online investment supermarket, operational in the US and UK. It brings together over 1,100 funds from over 60 different fund management companies, offering varied choice to investors and their advisers.
The Boston Consulting Group forecasts that the industry could more than triple assets to $520 billion by 2015, a prospect that has attracted global players such as American International Group and JPMorgan and prompting many more like Japan’s Shinsei Bank and UBS to queue up for MF licence. Fund distribution was always a lucrative business due to the commissions that a seller earns while selling a scheme to a customer.
Recently, financial services behemoth Merrill Lynch invested a sizeable stake in Bluechip Corporate Investment Centre, a Mumbai-headquartered financial products distribution house. Bajaj Capital, Way2 Wealth, RR Finance and banks like Citibank and HDFC Bank control a large part of the distribution business in India.