Fund houses merge schemes to save overhead costs

Simplify choice, offer better clarity for investors.

Fund houses are merging their less successful schemes with the more robust ones, ridding themselves of what werereduced to a clutter in the current market. In the process, they have saved overhead costs.
In July, Kotak Mutual Fund, Principal Pnb Mutual Fund and Fidelity Mutual Fund merged some of their select schemes into their much larger schemes. Some of the other fund houses to have merged schemes in the recent past are UTI Mutual Fund, JM Financial Fund and ING Mutual Fund.
Merging schemes helps the fund houses bring down costs and manage funds better, said Mr Dhirendra Kumar, Chief Executive Officer of Value Research.
Sometimes schemes are so similar that it amounts to duplication, and it makes economic sense for AMCs to merge them and simplify matters.
Both Principal’s JuniorCap and Emerging Bluechip, which were merged, are mid-cap funds and had similar objectives and mandates, said Mr Rajat Jain, Chief Information Officer of Principal Pnb Mutual Fund.

Better choices

The investor either has the choice to exit the scheme which is being closed or opt to accept fresh units of the scheme into which it is being merged. Also, according to a notice of one fund house, the transaction of getting new fresh units would be considered as redemption from the scheme which is being merged and may entail capital gain or capital loss and securities transaction tax.
For the investor this simplifies choice and offers better clarity, said a fund manager.
The recent fund mergers have seen Kotak Technology fund, Kotak MNC and Kotak Global India being merged with Kotak Opportunities; while Principal JuniorCap was merged with Principal Emerging Bluechip fund.

Open plans

In the debt category, two plans of Principal Child Benefit Fund, (an open-ended balanced scheme) were merged; two plans of the Principal Government Securities Fund, (an open-ended dedicated gilt scheme) were merged; while Fidelity Multi Manager Cash was merged with Fidelity Cash Fund. Sometimes mergers happen as there are some schemes whose mandate does not allow them to participate in a diversified range of stocks, said Mr Krishna Sanghvi, Head of Equities at Kotak Mutual Fund.
Some schemes have specific mandates which in the current market environment do not give returns, explained another fund manager. For example, a sector-specific fund will not do well if the respective sectoral stocks are not faring well.

Size that matters

According to some fund managers, the small size of a scheme could also lead to its merger with another.
According to Value Research data, Kotak Tech had a fund size of Rs 18.74 crore, Kotak MNC Rs 26.70 crore, and Kotak Global India, Rs 51.48 crore as at June end, while Kotak Opportunities (into which these were merged) had a fund size of Rs 903.48 crore.
Principal Junior Cap had a fund size of Rs 53 crore, while Principal Emerging Blue Chip Fund stood at Rs 71 crore as on June end. In some cases, the merger of schemes helps asset management companies to gracefully exit from a scheme which is not performing well by extinguishing it through merger with a better performing one.

Source: http://www.thehindubusinessline.com/2009/07/24/stories/2009072451701200.htm

Sebi cap on investment period hits liquid funds' assets

The Securities and Exchange Board of India’s (Sebi’s) guideline that liquid funds can no longer invest in papers of more than 91 days’ tenure has led to a sharp fall in their assets under management (AUM).

This, coupled with a fall in returns of short-term (three months) securities and bonds, has added to the woes of fund managers. Mahendra Jajoo, head, fixed income and structured product, Tata Mutual Fund, said, “Returns from short-term papers have slipped quite sharply, leading to a fall in returns from liquid funds by 275-300 basis points.”
Annualised returns from liquid funds have slipped from 7-8.5 per cent a year earlier to 4.5-5 per cent now, as per the industry estimates. According to data from the Association of Mutual Funds in India (Amfi), investors withdrew Rs 34,378 crore from liquid funds in June.
Navneet Munot, chief investment officer, SBI Mutual Fund, said, “As per Sebi guidelines, fund managers cannot invest in papers of more than 91 days, which has adversely impacted returns of these schemes.” Earlier, fund managers were able to generate higher returns from this category by investing in a judicious mix of short- and long-term papers.
However, fund houses may find themselves in a serious trouble if there is a run on liquid schemes because longer-term papers have to be sold at a discount. This is likely to hurt existing investors because of a fall in net asset value of these schemes. Liquid funds are short-term debt funds that offer investors the option of withdrawing their money at a very short notice, ranging from overnight to just over a week. Investors, especially companies and banks, prefer these schemes to park their short-term funds because of quick entry and exit options.
Experts said that money from liquid funds had shifted to ultra short-term funds (a reincarnation of liquid-plus funds). In ultra short-term funds, the lock-in period is five days (liquid funds have no lock-in).
Liquid funds face taxation on two fronts. First, there is a dividend distribution tax (DDT) of 28.32 per cent. Second, there is also a short-term capital gains tax of 33.9 per cent for the highest income bracket. For ultra short-term funds, while there is a lower tax incidence of 14.2 per cent of DDT, short term capital gains tax remains the same.
Also, the ability to invest in longer-term papers of say 150 to 180 days helps them generate better returns. For instance, while liquid funds, returns are at 0.33 per cent per month, ultra short-term funds return 0.44 per cent. “Ultra short-term funds were investing in papers of up to one year, which helped them generate better returns,” said Jajoo.

Source: http://www.business-standard.com/india/news/sebi-capinvestment-period-hits-liquid-funds%5C-assets/364730/

HDFC MF - INTRODUCTION OF NO ENTRY LOAD AND TREATMENT OF EXIT LOAD

No Entry Load for all Schemes with effect from August 1, 2009
The following changes will be effected to the Scheme Information Document(s)/Key Information Memorandum(s), wherever applicable for all the Schemes of HDFC Mutual Fund ("the Fund"). The provisions of the addendum shall be applicable on aprospective basis, effective from August 1, 2009.

Entry Load

In accordance with the requirements specified by the SEBI circular no. SEBI/IMD/CIR No.4/168230/09 dated June 30,2009, no entry load will be charged for purchase / additional purchase / switch-in accepted by the Fund with effectfrom August 1, 2009. Similarly, no entry load will be charged with respect to applications for registrations underSystematic Investment Plan/ Systematic Transfer Plan / HDFC FLEXINDEX Plan accepted by the Fund with effect fromAugust 1, 2009.

Exit Load/Contingent Deferred Sales Charge ("CDSC")

With effect from August 1, 2009, exit load/ CDSC (if any) up to 1% of the redemption value charged to the Unitholderby the Fund on redemption of units shall be retained by each of the Schemes in a separate account and will be utilizedfor payment of commissions to the ARN Holder and to meet other marketing and selling expenses.
To read the addendum, please click here

FUND VIEW-Shinsei sees 15-25 upside for Indian stx in 1 yr

* Correction possible but rules out return to March lows
* Valuations sustainable, sees corporate earning upgrades
* Expects boost in capex, pick-up in inventory levels

Indian shares may gain 15-25 percent in the next 12 months backed by earning upgrades, pick-up in the capex cycle and growing signs the global economy is on the mend, a top fund manager said. While a 10-15 percent correction was a possibility, stocks will not drop to 2009 lows hit in early March as every dip would attract investors sitting on the sidelines, David Pezarkar, head of equity at Shinsei'sIndian mutual fund unit said.
"Small corrections apart, I would say market continues in the upward trajectory," said Pezarkar, whose firm will launch its first equity fund in India next week.
"It doesn't look like we will see some shocking kind of changes happening. Plus, globally I think a lot of economic indicators will turn positive over the next six months and that will surprise a lot of people," he said.
The fund manager recommended investing in sectors such as auto, technology and metals, where he sees a bounce-back in the short-term, but prefers infrastructure as a long-term bet.
Indian shares .BSESN have staged one of the best comebacks in the world this year, rising more than 85 percent from a low hit on March 6. They now trade at nearly 17 times their forward 12 months earnings from close to nine times in March.

While a surge in valuations was making many investors wary, Pezarkar said they were sustainable and would get a boost as economic activity picks up going ahead, and could spark faster earning upgrades, mainly in 2010/11.
Fears companies might apply the brakes on their capex spending because of a fund crunch or lack of demand had subsided.
"Now it seems at least the announced capex, which was under threat of not happening, at least that, will happen," he said.
Pezarkar, who managed about $2 billion for insurer Bajaj Allianz before joining Shinsei in October last year, said the government's thrust on infrastructure and stimulus targeted at raising consumption will boost economic activity.
Output of India's infrastructure sector, which accounts for a little over a fourth of industrial output, grew 6.5 percent in June from a year earlier, higher than an unrevised 2.8 percent in May, government data showed on Thursday.
Stake sales in state-run firms should add strength to the rally in Indian shares, said Pezarkar. He forecast a pick-up in inventory levels, where the drop outstripped the fall in sales on fears the global economic woes would linger for 3-5 years.
"If things stabilise then companies will have to build their inventories," he said, adding production, exports and trade figures should also see a sharp bounce-back.

Source: http://in.reuters.com/article/domesticNews/idINBOM15762420090723?pageNumber=2&virtualBrandChannel=11584&sp=true

MFs give arbitrage funds a break, stop fresh inflows

At a time when domestic mutual funds continue to aggressively scramble for more money to boost their asset base, they have made an exception for one category — arbitrage funds. Several top arbitrage schemes of mutual funds have stopped accepting fresh money from investors, as lack of sufficient arbitrage opportunities between the cash and futures markets have made it tedious for them to generate competitive returns to the existing unitholders itself.
Top schemes in the category, including Kotak Equity Arbitrage, UTI Spread, ICICI Prudential’s Blended Plans and Equity and Derivative Income Optimiser Plans, are no longer taking money, officials at these mutual funds told ET. Mutual fund distributors said HDFC Arbitrage, IDFC Arbitrage Plans and JM Arbitrage Advantage have also been closed to fresh subscriptions, though this could not be independently verified with them.
Sandesh Kirkire, CEO of Kotak Mutual Fund, which manages the biggest arbitrage fund of roughly Rs 1,000 crore, said: “We decided to stop accepting fresh money, keeping in mind the interests of the existing holders because the market is hardly conducive for arbitrage.”
Arbitrage schemes, considered relatively risk-free, aim to profit from the pricing anomalies between shares and equity futures. While they use at least 65% of their fund corpus to take advantage of such pricing anomalies, these hybrid schemes are structured to invest up to 35% of their corpus in money market papers such as certificate of deposits and commercial paper.
Arbitrage opportunities are at its best in a bull market, when futures trade at a premium to the underlying shares or indices. This allows traders to buy the underlying and sell futures. Analysts say nowadays, futures are mostly trading at a discount to the underlying, resulting in fewer opportunities to cash in on the price differentials. The interest rate scenario of late has also not been favourable for these funds, unlike last year when they switched to money market instruments to sustain returns in the absence of arbitrage opportunities. In the bull run, these schemes aimed at returning 9-11%, but in the last year, average returns from this category have been roughly 7%, according to Value Research, a mutual fund tracker.
Funds fear that the returns from this category would shrink further if assets grew more, with these schemes finding favour among the risk-averse investors, amid the existing uncertainty.
“It did not make sense to accept more applications at the expense of the existing unitholders. This is a temporary measure,” said Nilesh Shah, deputy MD and CIO of ICICI Prudential Asset Management.

Source: http://economictimes.indiatimes.com/MFs-give-arbitrage-funds-a-break-stop-fresh-inflows/articleshow/4809681.cms