Fund houses fail to cash in on market boom

Launch 14 schemes compared with 19 during the recent slump.

Considering over 100 per cent price appreciation in the secondary market since March 9 this year, mutual fund (MF) houses have failed to cash in on the boom as they launched only 14 equity schemes to mobilise Rs 3,841 crore. Surprisingly, in a down market, fund houses had launched 19 equity schemes between April and August 2008 and mobilised Rs 2,489 crore.
The Securities and Exchange board of India’s (Sebi) order banning entry load and another order asking fund houses to differentiate new schemes from the existing ones acted as a barrier. After the Sebi order, distributors were reluctant to sell new fund schemes, while fund houses avoided relaunching of schemes, said Surajit Misra, national head (mutual fund), Bajaj Capital.
The participation of retail investors in new schemes was much lower this time as compared to the boom period of 2007 when they invested huge sums in both initial public offers (IPOs) and new fund offers (NFOs), Misra added. Retail investors seem to have changed their investment strategy by shifting focus from equity funds to IPOs or investing directly through the secondary market.
With a buoyant secondary market, 11 IPOs have hit the capital market this year so far and they have received tremendous response from retail investors. These investors applied for shares worth of Rs 11,327 crore and ,in turn, were allotted shares worth Rs 3,925 crore. The IPOs from NHPC (Rs 6,570 crore), Adani Power (Rs 2,518 crore) and Oil India (Rs 1,275 crore) were well received by retail investors, while the remaining eight received application worth of Rs 983 crore.
Sundeep Sikka, chief executive officer, Reliance Mutual Fund, said retail investors have become more selective now. Now, they check the track record and brand name of a fund house and look at the kind of product before investing. New and innovative products would definitely attract retail investors. Timing of the fund launch is also very important, Reliance Infrastructure fund was new and innovative theme and it were launched at the right time because of that it attracted large number of investors and able to moped up Rs 2,300 crore.
In the past, fund houses were getting good response for NFOs. In March 2005, when the Sensex was around the 7,000 level, 8 new schemes raised Rs 7,016 crore. In March 2006, Rs 10,228 crore was raised by 12 schemes when the Sensex moved above the 10,000 level. In January 2008, when markets hit an all-time high, 6 new schemes raised Rs 9,000 crore.

Source: http://www.business-standard.com/india/news/fund-houses-fail-to-cash-inmarket-boom/372548/

Bank funds lead Indian mutual fund gainers in Sept

*Bank funds gain an average 15.8 pct vs 9.3 pct in BSE index *Diversified funds lag on lower gains from cap goods, FMCG
*Debt funds jump 0.75 pct as federal bond yields drop 25 bps

Indian funds investing in bank stocks recorded the sharpest jump in net values in September as shares of financial firms rose on prospects of better corporate results and hopes the credit growth would start ticking up.
Banking sector mutual funds gained an average 15.8 percent during the month, outperforming the 9.3 percent rise in India's benchmark 30-share index .BSESN, data from global fund tracker Lipper, a Thomson Reuters company, showed.
"If you are betting that the Indian economy will do well despite the global meltdown... this is the sector which will obviously outperform," J. Venkatesan, a fund manager at Sundaram BNP Paribas Asset Management, said.
"Valuation comfort is much more better here than any other sector," Venkatesan added.
He said most state-run banks were available at a reasonable 1.5 times their price to book value, while returns on equity were about 18 percent and improving.
Indian firms will start releasing their quarterly results from the second week of October, and advance tax payments indicate robust profits.
That should ease pressure on likely bad loans for banking firms and also boost prospects for credit off-take as corporates return to health and revive expansion plans.
Top lender State Bank of India climbed little over a quarter in September to 2,195.70, its highest close since February last year, as investors expected strong corporate earnings to boost the bank's profits and ease bad debt worries.
No. 2 lender ICICI Bank rose 21 percent to 904.80 rupees during the month, its highest close since May 21, 2008.
Actively managed diversified equity funds, the biggest category of stock funds by number and assets, recorded a 7.2 percent return, underperforming the main share index.
More tha 90 percent of them underperformed the benchmark index on lower returns from their large exposure in sectors such as capital goods, consumers and energy as well as exposure to small and mid-cap stocks.
The three sectors collectively controlled about a third of the equity investments of diversified funds at the end of August, data from fund tracker ICRA Online showed.

BOND, GOLD FUNDS

Indian fixed income funds investing in government securities recorded a 0.75 percent jump in net values in September as federal bond yields IN069019G=CC dropped 25 basis points. The prospect of an increase in the hold-to-maturity (HTM) limit for banks had supported prices in September on a view it would enable banks to buy more bonds and help the market better absorb the government's record borrowing programme in 2009/10.
The government plans to sell 1.23 trillion rupees of bonds in the second half of the fiscal year after raising 2.95 trillion rupees in the first half.
Gold exchange traded funds gained 3.4 percent during the month as the yellow metal rose primarily due to a weak dollar overseas, which spurred buying in the alternative investment.
Gold futures on the continuation chart MAUc1 ended September at 15,703 rupees per 10 grams, up 3.8 percent during the month.

Source: http://in.reuters.com/article/companyNews/idINBOM50357820091006?sp=true

Change is good

Over the past few months, I have often written about the Securities & Exchange Board of India’s (Sebi’s) regulatory moves that have been made to make the Indian mutual fund industry more investor-friendly. The elimination of investors paying for issue expenses, the reining in of maturity limits for debt funds, the perennial improvements in the transparency of fund portfolios and the most recent – the biggest change – abolishment of entry loads are some of the regulatory changes that have been undertaken to further the interests of investors.

The heart of these changes is the fact that fund industry needs to evolve with time. Sebi’s commendable quick-footedness in incorporating changes has enabled quite a bit of dissatisfaction in the way funds are run to be stemmed. A few weeks back, the Reserve Bank of India also expressed some dissatisfaction pertaining to the fund industry in its annual report. The observations made by RBI pointed towards a desire to see mutual funds being treated like banks. One suggestion that caught my eye was that the total assets managed by a fund company should be based on the number of schemes it can float.

RBI’s observations and Sebi’s numerous corrections have come from the fact that the basic premise, the original purpose, of a mutual fund – to provide professional fund management services to retail investors – has gone awry. The reason being that mutual funds are now largely used by businesses to park their short-term money. Only about 30 to 40% of the fund industry’s assets come from individual investors. The rest comes from corporates that find mutual funds more attractive, returns-wise as well as tax-wise. Given the regulatory and tax framework of our country, this doesn’t really come as a surprise. The other factor is that businesses have more money than individuals to plan and invest.

As far as mutual funds are concerned, they are in the business of managing money and hence will accept funds from wherever they come. Another reason why they end up managing more corporate money than individual money is because a large number of people are still skeptical about investing in funds. Saving habits are hard to change, and in most cases they don’t ever change. The new generation might adopt new saving methods, but the older one will look at new modes of investing only from an arm’s length. India’s centuries old saving culture will prevent this situation from changing anytime soon, but SEBI’s regulatory moves will certainly make more investors think in that direction.

While many of the changes seem to appear to be a burden on the fund industry, in the long run, they will only strengthen the business of mutual funds. Over the past year or so, these changes have definitely helped in placating individual investors and the problems that still remain are quite minor in nature. And as far as funds managing more corporate money is concerned, well, maybe that would change if bank deposits are made more attractive. The irony about this is that currently banks themselves are using mutual funds to park crores of rupees.

Source: http://www.financialexpress.com/news/change-is-good/524905/0

'Banks have not developed the system model to distribute third-party products'

Italy-based Pioneer Investments, which signed an asset management joint venture agreement with Bank of Baroda (BoB) last year in a major move to extend its presence in India’s mutual fund market, is set to increase its presence in 300 branches of BoB in the next year. Its CEO-Asia, Angus W Stening, puts emphasis on the need for banks to be the main distribution channel after the Securities and Exchange Board of India (Sebi) tweaked norms, in a conversation with Chandan Kishore Kant. Excerpts:

What impact would Sebi’s new norms on entry load have on the Indian mutual fund industry?

It will definitely be a catalyst for the change in the distribution dynamics. The independent financial advisors (IFAs) will always play a role for all sorts of products. This industry has been an IFA-driven market from the start. However, have we seen a change in the first two months? No, we have not.
Now the question is, will the financial advisors move away from mutual funds to deposits or life insurance products? Absolutely, they will. But will the investors stop buying mutual funds, as they have to give commissions to the advisors? No, that will not happen.

Which part of the distribution channel will have to be more active now?

It will be the banks. I think this is one regulatory change which will make banks more active in the distribution side of the business, particularly the public sector banks. How they do that and how they structure has to be seen. The banks now have to be a part of the process.

Why banks? Why not the financial advisors?

The banks are more trusted and regulated institutions. The national reach of the branch network of banks and their customer base is amazing in India.
The public sector banks, in particular, have the reach which a foreign bank may not be able to achieve. Why is there a lower penetration in distribution of mutual fund products? A concern which Reserve Bank of India (RBI) rightly pointed out in its annual report. It is because the banks have not developed the system model to distribute and the processes to manage the distribution of third-party products. And this change in norms will require that.

What’s your plan for expansion in India?

Our target is to have presence in 300 branches in the next 12 months. These will be access points for the investors to buy our products.
Clearly, we want to take that number up as time goes on. Bank of Baroda (BoB) is a good partner and has provided us access to public sector space. We need to create a distribution channel. Since July last year, we focussed on the training of staff in the Baroda branches. At the same time, we are very focused on costs. We don’t want to take a conservative approach but a measured approach.

Won’t you look for channels outside Baroda branches?

I don't have a retail chain outside Baroda and I don’t plan one for at least the next 12 months. Our focus is to support Baroda. We both feel we need to invest in our point of sales locations.
What you do in this business is develop a prototype model and replicate it around the nation. When we start to see some traction, then only can we start opening up and broadening our distribution base to non-Baroda for retail.

What portion of your asset under management comes from retail and institutions?

Currently, institutional participation is as high as 95 per cent. For the retail space, we need to have a product pipeline.

You are hugely dependent on institutions.

Absolutely, yes. I think initially in the first six months, else could we go across Rs 5,000 crore in equities? No.

Where do you see your retail participation in future?

India has not got a 50-year track record in equity investment. I will be happy to get 25 per cent of the assets from retail and 75 per cent from the institutions.

You don’t sound bullish on growth from smaller cities and towns, which is in contrast with what the local CEOs talk of.All I’m saying is that we are not there now. And, possibly could not be there, as we are very much at the beginning. Managers have to look at this for a long-term business and turn away from short-term opportunistic goals. The structural change from Sebi in terms of front-end load is going to have long-term implications.

Will you invest in the branding of your JV with BoB?

We don’t have to do a joint venture brand. Since we have a strong brand and Bank of Baroda is equally a strong brand, then why the need to invest in a third brand?

Source: http://www.business-standard.com/india/news/%5Cbanks-have-not-developedsystem-model-to-distribute-third-party-products%5C/371452/

Money flows back into MFs

If the number of draft offer documents filed with Securities and Exchange Board of India (SEBI) is any measure, mutual funds (MFs) seem particularly cheerful despite stricter new rule on entry load.
Market players say AMCs are on a high, thanks to renewed retail investor interest in equity, flow of new money and maturing of fixed deposits where wary investors had parked their funds during the recent trough.
MFs’ offer documents filed with SEBI rose 32-fold between August and September 18 from a single document filed in the seven months to July, 2009. September alone saw 22 offer documents being filed.
“This has to be because of the up move witnessed in markets and improvement in the economy. Fund houses now foresee higher retail investor interest,” said Apurva Shah, VP and Head of Research — Institutional Equity, Prabhudas Liladhar.
Though it appears that the downturn is behind, figures indicate that the market rally was initially not spurred by retail participation. There was no new money flowing into the market.
“The old money had depreciated during the downturn and investors were shying away from investing. Now, with people recovering losses made during the slowdown, they are eager to participate in the rally and invest in equity and Mutual Funds,” said Gopal Agarwal, Equity Head — Mutual Fund, Mirae Asset.
“Also, high-cost fixed deposits, in which investors had parked their funds during tough market conditions, are now going to mature and would flow to mutual fund and equity market,” said Agarwal.
Shah feels that the new SEBI norm on entry load would stem the flow of old money, as distributors would not see any incentive in channelling it into mutual funds.
Indian economy is perceived as resilient, and its cyclical nature of downturn attracts foreign institutional investments, said Agarwal, adding: “Both internal and external factors are in favour of Indian economy and markets. That is why, despite stricter norms by SEBI, MFs are buoyant.”

Source: http://www.hindustantimes.com/Money-flows-back-into-MFs/H1-Article1-456124.aspx

Aggressive Intent

JM Financial Mutual now functions without any CIOs for either equity or debt.
The fund managers report to the Investment Advisory Committee, which comprises of board members.

Poor performance of equity schemes in the market downturn has hit the fund's reputation. And with the banning of entry loads, this AMC, known for its high upfront commissions, has a tough task ahead.
Bhanu Katoch, CEO JM Mutual Funds, shares his views on these very issues.

JM Financial Mutual Fund was the blockbuster during of the bull run of 2006 and 2007, only to hit rock bottom after that. What will you be doing to revive performance?
When the equity markets were in the bullish phase in 2006-2007, most of our mid-cap and large-cap schemes performed extremely well. They surpassed the indices by a huge margin. In the year 2007, Sensex delivered 47 per cent and the BSE Midcap index returned 68 per cent. Our large-cap category of funds gave a 1-year return in the 45-50 per cent range while our flagship funds delivered in the 90-111 per cent range. In fact, a few of our schemes figured in the top 50 Lipper world rankings.
The year 2008 witnessed the most severe fall in the history of the Indian stock markets. Sensex fell by 52 per cent and BSE Midcap index fell by 67 per cent. Against this, our flagship funds fell by around 65 to 75 per cent.
We believe that in India, growth as a strategy will tend to do exceptionally well over a longer period of time. So a high beta/alpha strategy portfolio will always deliver. We believe that our investment style will offer substantial alpha as and when confidence starts to come back and money starts chasing growth countries and growth stocks! If you look at the recovery period between March 5, 2009 and June 4, 2009 and even the period following that, JM schemes have done much better than the indices and even the peers. JM Basic Fund delivered 154 per cent during that period and JM Emerging Fund delivered 135 per cent. Our other equity schemes gave returns in the 70-150 per cent range. During this same period, the Nifty returned 77 per cent and the Sensex, 83 per cent.

Was that the reason for your relative underperformance in 2008?
Our underperformance was due to lack of cash and also due to our high beta/alpha strategy that definitely did hurt us in an exceptionally bad year.

What stopped you from going into cash?
Had we taken one, we would have performed better but having said that, a 2008 kind of year comes only once in 50 years or so and, therefore, it can't become the basis for any change in our fund management style. We do not believe in taking aggressive cash calls and only in extreme conditions will we use cash as a strategy.

What are you saying to your investors right now?
Our equity funds will stay true to their respective mandates. But we will ensure that while we stay with a high beta/alpha strategy, we do that with more liquid names.
So funds where the mandate is growth will continue to focus on growth even at the cost of short-term volatility. Most of our schemes have a mandate to chase growth and we will stay true to that even in the future. We believe the growth approach will provide maximum rewards to investors as India continues on its path to becoming an economic superpower.
So you are basically saying that your schemes will do well when the market picks up.
We feel that after a bit of consolidation the market will move up and we may see 17,000 within the next 6 months. In the next 2 years time we expect Sensex to rise above 25,000. Our schemes are well positioned for this kind of an upturn.

You spoke about more liquid names. Have you put any process in place to ensure that you do not have undue exposure to illiquid stocks?
All the liquid names in 2007 became illiquid in 2008. And what happened took the entire market by surprise. But several measures have been put in place since then. We have strengthened our parameters on stock and sector concentration, and stop-loss limits. Our risk parameters now have multiple "flag-off" levels which are more stringent than the regulatory requirements. We also have a more pragmatic approach towards risk management with multiple checks and balances. All these act as pointers for the fund management team to proactively balance the risk-reward aspects of their respective portfolios. And the IAC now has a greater role to play.

How do you want investors to perceive JM Mutual Fund?
We manage funds in 4 broad categories: equity, long-term debt, short-term debt and arbitrage.
On the equity side, we will stick to a high beta/alpha strategy. We believe that our investment style/growth approach will offer substantial alpha to investors in a growth market like India.
We are well known for our debt fund management capabilities. Even in the liquidity crunch crisis of October 2008, we did not resort to availing credit from the RBI's special window. We were the first to start arbitrage funds and are doing well in that category. We will soon be launching our PMS. Unfortunately in India, PMS is more a structured product with passive strategies. We may also start with similar products, but over a period of time we will look to innovate in this space.

You are a very small fund house whose equity returns got hammered in the fall of 2008. The competition is huge and that too from large and well established players. Is that not challenging?
I believe that the potential for growth of mutual fund industry in India is huge. One can easily compare that to any emerging market where the industry is large. If we take average AUM as a percentage of GDP, it is pegged at around 10 per cent in India compared to 80 per cent in the U.S. Even if you look at mutual fund AUMs as a percentage of bank deposits, it is only around 20 per cent in India as compared to 140 per cent in the U.S. Big-to-small is a wrong way to look at things. Finally, it will be the fast that will beat the slow! We want to focus on delivering performance and offering superior service standards to our investors and partners.
Recently, JM Financial Asset Management Pvt. Ltd. divested an 8 per cent stake equally to two global institutional investors, Valiant Mauritius Partners FDI Limited and Blue Ridge Affiliates, namely BRLP Mauritius Holdings II and BROMLP Mauritius Holdings II, respectively. This sale of stake brought in Rs 63.86 crore. Prior to this, the AMC's paid up equity capital was Rs 54 crore. These players will add significant value from a global markets perspective.

How big is the investment team?
The equity team comprises of 10 members 4 fund managers, 2 dealers and 4 research analysts. On the debt side, we have a 5 member team comprising of 2 fund managers, a credit appraisal head, a dealer and a research analyst.

With no CIO in place for either debt or equity, who oversees the team and guides them?
Our fund management team is very strong and has substantial experience. They are accountable to the CEO and the IAC.
The team works very closely with the IAC that meets once every 15 days.

Your fund house is supposed to pay the highest upfront commission of 1.50 per cent. Will that hold you in good stead now that entry loads have been banned?
Because of the banning of the entry loads businesses will become more capital intensive. In the short term we will all need to work hard to adjust. But soon the industry will move from a high-margin-low-turnover model to a low margin-high-turnover one.
The institutional segment still contributes some 50-60 per cent of the AUM. In the coming days you will see retail contributing big time to the growth of the industry. Mutual fund penetration is still restricted to the top 8 cities and about 3 per cent of the households have invested in funds. There are 5,545 urban towns and 6,40,000 villages with a rural-urban mix to the ratio of 70:30. Incrementally, prosperity levels and literacy levels are going up and that means huge scope for growth.
IFAs will play a very critical role in the industry's growth. Once the PSU banks start selling mutual fund products, the penetration levels will only increase. There are 300 commercial banks with 72,000 branches.

Source: http://new.valueresearchonline.com/story/h2_storyview.asp?str=100796

MF industry to see consolidation, says Mirchandani

In an exclusive interview with Harsha Jethmalani of Myiris.com, Mohit Mirchandani, Head Equity, Taurus Asset Management gave his views on equity markets and investment strategies.

>Do you expect the euphoric mood of the stock markets to last much longer?

Depends on the time horizon, short term, I expect a decline that will dent the euphoric mood temporarily. Medium and long term, we will be back on track to scale higher levels.

>Given the current trends in equities, which are the sectors you are watching closely?

We like the agro space, infrastructure theme, healthcare and consumption themes, oil and gas.

>Coming more specifically to your funds - what is your investment strategy? What are the key criteria you have in mind while selecting a stock?

The underlying philosophy is to look for favorable risk reward ideas. Constructing our portfolios involves multiple steps…
Step 1: We identify themes and sectors that we believe will play out over the next 12 – 24 months.
Step 2: We then select stocks on a bottom up basis within these high conviction themes.
We may also identify stocks that do not fit any larger theme, but are very good companies with good prospects, managed by capable professionals and have clean financials.

>As far as Taurus Ethical Fund is concerned you are overweight on the consumer non durables sector. Can you elaborate?

We are optimistic on the consumption theme in India. The companies within this space are high quality companies with huge cashflows, high ROE`s. We are optimistic on the consumption story.

>What innovative products can we expect from the company in near future?

We are constantly working on product ideas. When the time is right, we`ll launch the appropriate products.

>Do you think an equity fund should be fully invested or it should take active cash calls?

I think a fund manager should not hesitate from taking cash calls. Protecting an investor`s wealth is equally important.

>In these tricky times, how should an investor plan his investment?

A financial advisor is best positioned to deliver that advise based on the individual investor profile and needs.

>Where do you see the mutual fund industry a couple of years from now?

There will be consolidation. The temporary effect of SEBI`s announcements will be overcome – its a painful transition.

Source:http://www.myiris.com/newsCentre/storyShow.php?fileR=20090915113742173&dir=2009/09/15&secID=livenews

Sundaram Rural India failed to keep up benchmark index

The rural India may have anchored the country out of the global economic storm last year, but one of the few mutual fund schemes that focus on the hinterland, Sundaram BNP Paribas Rural India, is all at sea with many investors abandoning it.
Launched in April 2006, the fund’s objective was to predominantly invest in companies that gain from an expansion in the economic activity in rural India. It has however seen its asset size shrink from more than Rs 1,000 crore in Dec ’06 to less than Rs 300 crore in Aug ’09.

PERFORMANCE
Since its launch Sundaram Rural India has delivered just about 22% absolute returns till date, which is nearly half of about 43% returns posted by the Sensex and Nifty, and even 37% returns by its benchmark index, the BSE 500, during this period. This despite the fact that this fund had earlier outperformed the market indices in the first two years after its launch. It generated about 20% returns in 2006 against BSE 500’s 16%, while in 2007 it posted more than 68% returns, way ahead of the BSE 500’s 62%, Sensex’s 46% and Nifty’s 53%.
The fund, however, saw its fund value tumble by 62% in 2008 when BSE 500 fell by around 58% and the Sensex and the Nifty lost about 52% each in that one year when markets around the world crumbled like a pack of cards.
Here one can conveniently argue that the fund’s high beta of 1.08 explains to some extent its larger-than-market fall in the bear run. However, a logical counter argument to this is that a high beta also implies that the fund ought to perform better than the market in an upturn. The same, however, is not reflected in the performance of Sundaram Rural India so far this year. The fund has managed to generate just about 50% returns since January against the market returns of nearly 64%.

PORTFOLIO
Despite its rural focus, it is difficult to distinguish this fund’s portfolio with that of any other diversified equity scheme. This is because almost all large companies have a presence in rural India as all of them are looking for a pan-India presence with the village folks driving demand in everything from mobile phones to cars and bikes. Sundaram Rural India’s portfolio also comprises popular companies like Bharti Airtel, Punjab National Bank, SBI, Tata Motors, Maruti Suzuki, L&T , Mahindra & Mahindra and Hero Honda Motors, among others – stocks highly popular with any other diversified equity scheme. Thus, Sundaram Rural India is not threads apart from any other diversified equity scheme. But what differentiates it from the rest is its sectoral allocation.
This fund has always been heavy on consumer goods segment and has been increasing its exposure in this particular sector since Jan ’09. Today, more than onefourth of its portfolio is dedicated to this sector that includes consumer goods and sugar stocks. Recently it has hiked its exposure in sugar to more than 10% of the portfolio. Given the rising demand for sugar, if the sugar stocks are to see a further run-up , this fund is sure to benefit. The other prominent sectors include fertilizers and automobiles that account for about 15% each of the fund’s portfolio. The fund currently is well-diversified to accommodate around 40 stocks.

OUR VIEW
A different investment theme is not enough to attract investors unless it is backed by a lively performance. Rural India may be categorised as a different thematic fund. It however fails to compete even with its sibling funds like Select Focus, CAPEX and SMILE that have been recognized amongst some of the outstanding diversified equity schemes of the country today. Sundaram Rural India, thus, needs to put in a lot of hard work to match the performance of other schemes in Sundaram’s basket.

Source: http://economictimes.indiatimes.com/articleshow/5007660.cms

FMPs back by popular demand

Many a times, we have seen actors returning to screen under popular demand of their fans. Particularly popular on television, this is a tried and tested method of enhancing the actor’s as well the show’s popularity. In quite a similar fashion – although not in a similar context – a mutual fund category is back by popular demand as well. The fund category that I am talking about is the Fixed Maturity Plans (FMP).
FMPs were once a highly dominant product, but seemed to be breathing their last breaths last year. Somehow, they survived and managed to revive themselves and since then, they have seen a surprisingly fast-paced recuperation. The primary reason behind the FMPs’ revival has been that they are a set of products that cater to a real need and hence, the market has found ways of producing it.
For a long time, such fixed term funds were used primarily by large corporates to park money. However, over time, even smaller companies and high net worth individuals began opting for FMPs. Particularly with bank fixed deposits (FD) returns going down, FMPs have started to make sense as the better alternative. The recent high number of offer documents for fixed term funds filled with Securities and Exchange Board of India (Sebi) – 12 in the first half of August – is enough vindication for this category’s growing market.
Apart from their well know tax efficiency, FMPs have a number of other benefits over bank deposits as well. FMPs are closed-end funds, hence limiting liquidity. Investments in FMPs can be done only during the new fund offer (NFO) period and funds can be redeemed only after completion of the fixed term. Furthermore, returns on FMPs are also predictable. Until last year, fund companies gave out an indicative yield, which has now been disallowed by Sebi. Yet, investors get enough clues about the kind of returns an FMP is likely to fetch.
The expected returns of an FMP can be foreseen to a certain extent because these funds invest in debt papers with the intent of holding them till they mature. This means that despite any fluctuation in interest rates and the resulting impact on the market value of the paper, the actual returns that will be earned can be known. The only problem an FMP can face is a debt becoming bad. While this is a real risk, there have been no major fallouts because of it as yet. There have been FMPs that had invested heavily in papers of shaky real estate companies, but the previous year’s crisis has taught fund managers the importance of constructing FMP portfolios carefully.
All said and done, despite its issues, FMPs deliver a lot, to both its investors as well as the companies that these funds invest in. And herein lays the second reason behind the revival of the FMPs. In India, there is no active bond market. Companies need to find actual investors to invest in their debt and they do that through FMPs. In effect, FMPs become debt brokers. The fact there India should have a highly liquid debt market wherein bonds can be sold and bought is another story. We don't have such a market but FMPs have become a unique solution for it. So be it the first reason or the second, it seems like FMPs might encounter hiccups, but are here to stay.

Source: http://www.financialexpress.com/news/fmps-back-by-popular-demand/516582/0

Fund valuations head south

Entry load ban prompts many buyers to look at near-zero or pay-to-buy models.

Weighed down by a ban on charging investors entry load, mutual funds, specially those with low assets, have seen valuations nosedive.
Industry experts said valuations were down almost 50 per cent, from 5 to 6 per cent of assets under management (AUM) to 3 per cent after the October 2008 crisis because buyers were looking at asset quality rather than size.

MUTUAL STRESS POINTS

• Valuations hit because asset size does not ensure income.
• Cost of acquiring customers/assets hit by an upfront fee and higher trail commission.
• Many AMC balance sheets are already strained.
• Overdependence on debt where income is much lower.

In fact, unlike earlier years, asset size no longer warrants great valuations. “I don’t see why anyone should pay on sheer asset size anymore because it does not ensure income,” the chief of a leading fund house said.
In the heydays, asset management companies attracted high valuations. For example, Infrastructure Development Finance Corporation (IDFC) bought Standard Chartered Mutual Fund for around Rs 830 crore, or a whopping 5.7 per cent of its assets in April 2008.
But buyers can now expect to snap up funds at near-zero, or even be paid to buy a fund house. For example, last November, Lotus Mutual Fund had to pay Religare Rs 50-100 crore to take over its liabilities.
Things have worsened since then because of the entry loan ban by the Securities and Exchange Board of India (Sebi) on August 1. Experts said going forward, more such deals could take place, if not at pay-to-buy, but at 100 to 150 basis points of the AUM.
Already, there are talks that DBS Chola and Bharti Axa could be looking for buyers. And industry experts said there could be more players looking to exit. “Six to seven fund houses are looking for buyers, but valuation is the main issue,” said the chief investment officer (CIO) of a leading fund house.
After the entry load ban, Asset Management Companies (AMCs) face a catch-22 situation. To ensure fresh inflows and compete with big guns such as Reliance Mutual Fund and HDFC Mutual Fund, they need to pay distributors upfront fees plus a higher trail commission.
At the same time, the extra cost to ensure inflows will mean their already-strained balance sheets will continue to bleed. Sanjoy Banerjee, executive director, ICRA Online, said, “The industry's profitability was already extremely poor, according to the 2007-08 numbers. Things could get worse now.”
And although AMCs have only 25 per cent of their money in equities, it was their main source of income.
Earlier, the cost of garnering new clients was borne by the investor, in the form of the 2.25 per cent entry load on equity funds. As a result, fund houses were able to retain the 90 basis point to 1 per cent annual fund management fees in an equity scheme.
This income will be under severe pressure because the upfront payment of 50 to 75 basis points to distributors will have to be paid out of this.
Also, fund houses paying higher trail commission than the 0.50 to 0.75 per cent may have to bear the burden from management fees or the AMC’s capital.
In liquid and short-term debt schemes, in which most of the money lies, the average fund management fees range from 10 basis points to 50 basis points, depending on the type of fund.
And medium- and long-term debt schemes earn 75 basis points to 1 per cent.
Importantly, the upfront fees will have to be paid regularly by AMCs because of the high churn. “The average investor stays for only two or three years in equity and even less in debt.
The industry will have to continue incurring these high costs to acquire clients. Many AMCs may not be able to continue taking this hit,” said an industry expert.
Further, a large part of the assets is with a few top funds. At present, there are 36 AMCs. Out of the total Rs 7.48 lakh crore of AUM in August, 15 funds control Rs 6.72 lakh crore.
That means 21 AMCs have only Rs 75,000 crore, of which Rs 53,000 crore is in debt or debt-oriented schemes.
Industry experts blamed some fund houses for this mess. “Many fund houses went into the business with a ‘build-to-sell’ intention instead of a ‘build-to-operate’ motive. So assets were built using the wholesale route in debt funds where large-scale inflows and outflows take place making AMCs very unstable,” said a CIO.
Consolidation, thus, is on the cards. Banerjee felt that since small doesn’t make sense anymore, the industry could ultimately have 20 or 25 good players with staying power.
In fact, experts believed that the players waiting in the wings would have to do some serious rethinking because the timeline for becoming profitable would become much longer than the five or seven years which was the earlier target.
As Banerjee put it, “Sebi’s measures will means AMCs would have to work towards profitability. This, as a natural progression, would mean a healthier industry.

Source: http://www.business-standard.com/india/news/fund-valuations-head-south/370011/

Commission+fee likely in insurance, for now

Commission-based and fee-based models are likely to run simultaneously for financial products, especially from the insurance industry, during the transition to the new regime.

While commission is associated with agents, the fee-based model is meant for financial advisors. The transition to the new revenue model may take 18 months, but could even stretch to 24 months.
A view would be taken on an alternate revenue model soon, D Swarup, chairman of the Pension Fund Regulatory and Development Authority, told reporters on Wednesday.He said the committee headed by him will submit its final recommendation to the government by the end ofthis month.
The committee won't fix a price band or a cap on the fees for financial advisors, Swarup said. When suggested that this could lead to arbitrariness, he said, "It's more arbitrary for the regulator or the government to fix a band or a cap."
Fees should be driven by market forces, like in the case of other sectors, he said. "Bilateral negotiation between consumers and advisors would determine the fee."The insurance industry has been up in arms since the government-appointed Swarup Committee released its draft report favouring a phasing out of agents' commissions by April 2011. The idea is to make insurance a no-load product by then, as the New Pension Scheme and mutual funds already are.
Indications are that only one revenue model would operate after the transition period.After an open-house discussion with industry representatives, including severe objections to the proposed model, the PFRDA chief's tilt was clearly towards a fee-based system.
"One has to take a view on whether the US model is for us to follow," Swarup said, while stating that the pure-fee model of Australia held much more promise than the combination of fee and commission-based models in the US. The UK is also in the process of shifting to a fee-based model.
Swarup likened the proposed reforms in the financial sector to those in the telecom industry. The telecom sector has registered significant growth in India, while tariffs have continuously decreased, he said, adding, the same is expected in the financial sector as well.
The final call on the committee's recommendations will be taken by the government and the financial sector regulators, including Irda. The Swarup Committee's mandate is to suggest measures to protect and educate investors, rather than looking at the business side of things, Swarup said. More than 90% people dealing in investment products do not know how mutual funds work, also very few know the difference between equity and debt, he pointed out.
Estimates suggest that there are 30 lakh advisors and sellers in the country, and the number of investors is more than 19 crore. In 2007-08, as much as Rs 14,704 crore was paid out as commission to agents. The objective behind bringing in a fee-based structure is to introduce transparency in the market for investors.

Source: http://www.dnaindia.com/money/report_commissionfee-likely-in-insurance-for-now_1288920

Principal Large Cap Fund (G) Outperforms BSE 100 over All Time Periods

Background:

Principal PNB Asset Management Company (In Association with Vijaya Bank) Pvt. Ltd. is a joint venture between the Principal Financial Group - a Fortune 500 company, Punjab National Bank and Vijaya Bank. It has started the operation in India on September 2000. The fund house manages assets worth Rs 9450.83 crore at end of August 2009.
Principal Large Cap Fund (G) an open-ended equity scheme launched in September 2005. The Investment Objective of the scheme would be to provide capital appreciation and/or dividend distribution by predominantly investing in companies having a large market capitalization. The minimum investment amount is Rs.5000 and in multiples of Rs 500 thereafter. The unit NAV of the scheme was Rs 22.52 per unit as on 7 September 2009.
Portfolio:

The total net assets of the scheme increased by Rs 0.22 crore to Rs 428.25 crore in August 2009.
Principal Large Cap Fund (G) took fresh exposure to four stocks in July 2009. The scheme has purchased 4.99 lakh units (2.82%) of Sesa Goa, 70116 units (2.63%) of Hero Honda Motors, 8.32 lakh units (1.72%) of Allahabad Bank and 1.49 lakh units (1.16%) of GAIL (India).
The scheme exited completely from Lanco Infratech by selling 3.24 lakh units (3.05%), Bharat Petroleum Corporation by selling 2.00 lakh units (2.26%), Tata Steel by selling 1.99 lakh units (2.05%) and Cipla by selling 2.00 lakh units (1.33%) among others in July 2009.
Sector -wise, the scheme took fresh exposures in Automobiles – Motorcycles / Mopeds at 2.63%.
Sector-wise, the scheme did exit completely from Engineering at 3.05%, Steel – Large at 2.05%, Pharmaceuticals – Indian – Bulk Drugs Formulation at 1.33% and Construction at 1.23% in July 2009.
The scheme had highest exposure to Reliance Industries with 1.19 lakh units (5.48% of portfolio size) followed by State Bank of India with 1.19 lakh units (5.08%), Oracle Financial Services Software with 1.09 lakh units (3.95%) and Oil & Natural Gas Corporation with 1.40 lakh units (3.81%) among others in July 2009.
It reduced its exposure from Reliance Industries by selling 55187 units to 1.19 lakh units (by 3.81%), Bharti Airtel to 2.79 lakh units (3.11%), Tata Consultancy Services by selling 2.00 lakh units to 1.49 lakh units (1.74%) and Dabur India by selling 5.00 lakh units to 2.97 lakh units (1.68%) among others in July 2009.
Sector-wise, the scheme had highest exposure to Banks – Public Sector at 11.25% (from 8.24% in June 2009), followed by Refineries at 10.17% (17.39%), Computers - Software – Large at 8.20% (9.51%) and Mining / Minerals / Metals at 6.59% (1.59%) among others in July 2009.
Sector wise, the scheme had reduced exposure from Refineries to 10.17% (by 7.22%), Telecommunications – Service Provider to 2.68% (by 3.11%), Computers – Software - Large to 8.20% (by 1.31%) and Personal Care - Indian to 4.31% (by 1.11%) among others in July 2009.
Performance:

The performance of the scheme is benchmarked against BSE 100. The scheme has outperformed the benchmark index over all time periods.
The scheme has posted returns of 7.03% outperformed the BSE 100 that increased by 6.46% over 1 month period ended 7 September 2009. Over 3 month's period, the scheme advanced by 12.88% outperformed the BSE 100 that gained 6.39%. It rose by 22.19% outperformed the benchmark index that was up by 10.95% over 1 year period.

Source: http://www.apollosindhoori.com/Default.htm

Systematic investments work well in MF scheme

You don’t have to tell anyone these days that mutual funds (MFs) are the most convenient form of investing, especially for small or individual investors. However, when it comes to options available within MFs—for example, systematic withdrawal or systematic transfer—most people would plead ignorance. Its the same with trigger option available with mutual funds.
However, most people would be somewhat familiar with systematic investment plan or SIP, thanks to the publicity given by most financial experts . “It is true that most of our clients are familiar with the concept of SIP, but the others are yet to catch up in a big way,’’ informs Suresh Sadagopan, chief financial planner, Ladder7 Financial Advisories. Let us start with Systematic investment plan or SIP.
For those who came in late, SIP is very similar to a regular recurring deposit in a bank account. You draw a cheque in favour of a particular MF scheme and specify you want to invest for, say, next 12 months. The money will be taken from your bank account every month and invested in the scheme of your choice.
Why is this method preferred by financial experts? One, this gives you discipline. Two, you wouldn’t be unnecessarily influenced by stock market movement, and stop or increase your investments. Three, you would benefit from cost averaging. That is, when you buy MF units at regular intervals, the average purchasing cost could give higher returns.

Systematic investment plan can be used by any investor eyeing the market in a particular period of time. However, it is not the case with systematic withdrawal or transfer plan or using triggers. These tools would work only for a particular class of investors. “Systematic withdrawal plans are useful for particularly retired people, whereas systematic transfer plans are useful for people with large amount, but don’t want to invest in the market at one go,’’ says Suresh Sadagopan.
Systematic transfer plan allows an investor to withdraw a certain sum from the scheme at periodical intervals. “It is often used somewhat like annuity by retired people. However, the concept is yet to take off,’’ says a MF investor. Systematic transfer plans, on the other hand, is useful for investors who suddenly find themselves flush with funds.

Since it is not considered wise to invest in the market in lump sum, especially when it is up or volatile, they can park the money in a debt scheme and transfer a particular amount over period of time to an equity scheme of their choice. “It is a good option, which investors should make use of,’’ says Sadagopan.
Triggers, on the other hand, is the latest tool offered by a few mutual funds to risk averse investors . For example, if an investor is looking for 10% returns from his investment in a year, he can set the trigger at that particular point. He would have the option of either transferring his return or the entire investment to a safer (read debt) avenue once he gets 10% returns . “But it can also rob them of a chance to make more money from the market. Also, they have to be very clear whether they want to transfer the returns or the entire investment,’’ says an MF advisor.

Source:http://economictimes.indiatimes.com/Personal-Finance/Mutual-Funds/Analysis/Systematic-investments-work-well-in-MF-scheme-/articleshow/4966296.cms?curpg=2

Common platform for all MF investments likely from March

Tired of filling several application forms to invest in different mutual fund schemes? Wait till March 2010, and you’ll just click this cumbersome process away.

The advisory committee of the Association of Mutual Funds in India (Amfi) has finalised a proposal containing recommendations for a common platform to provide easy access to investors and distributors to reduce costs, improve efficiency and save time. To begin with, investors will have to register with a designated agency that will give them unique identification numbers, which could be their permanent account numbers, and passwords. Through this, they can log on to a website, transact and access information, including the value of all their mutual fund investments.
The system is akin to the one adopted by the Pension Fund Regulatory and Development Authority (PFRDA), where you can approach a designated point of presence, register for the New Pension Scheme (NPS) and receive a Permanent Retirement Account Number (PRAN). The number also entitles you to track your investment, for which records are maintained by a central recordkeeping agency.
Amfi Chairman AP Kurian said, “We are working on a technology-driven common platform to provide easy access to investors and distributors. It will help fund houses improve their efficiency. Besides, transactions will be faster, thereby saving time and costs. And ultimately, it will provide a wider reach to investors.”
Currently, there are many mutual fund offices, distributors and franchisees in the industry. Investors submit their applications through these channels. From here, the applications go to the registrar and transfer (R&T) agents for processing and sending their account statements.
“This process is paper-oriented and time-consuming. Through a common platform, we are trying to reduce the paperwork as much as possible and connect the brokerages,” added Kurian.
According to Jaideep Bhattacharya, chief marketing officer of UTI Mutual Fund, the step is essentially to empower the investor with choices. “Once you empower the investor, the revenue will automatically increase. For instance, there will be a common application form for different mutual fund schemes, and one need not go to different fund houses for different application forms. Once this proposal is implemented, all the information will be just a click away,” he said. Bhattacharya is also a member of the Amfi’s advisory committee.
“It’s an investor-centric initiative. Instead of receiving several statements, an investor would get only one statement. For technology-savvy investors, statements will be available at a click. We want to go step by step. We are targeting March 2010, by which the new mechanism would be in place,” said Kurian.
Several other chief operating officers Business Standard spoke to also said that the measure was the need of the hour. It would help increase penetration in Tier-II and III cities with relatively lesser costs.
At a time when entry load has been banned by the Securities and Exchange Board of India and the Reserve Bank of India has, in its annual report, expressed concerns over the over-dependence of fund houses on corporate and institutional money resulting in poor rural penetration, industry experts feel that such a common platform will help fund houses address these issues.

Source: http://www.business-standard.com/india/storypage.php?autono=368997

Your investment cost just got lower

In times when spiralling food prices seem to be pinching the wallet on a daily basis, fierce competition among financial institutions and strict regulatory actions are ensuring that your investment costs have started falling. Here are four such examples:

Entry load ban for mutual funds: From August 1, the Securities and Exchange Board of India (Sebi) has banned the entry load of 2.25 per cent on equity funds and 1 per cent (maximum allowed) on debt funds.
This amount was earlier deducted from your investment and given to the distributor of mutual fund schemes by fund houses. That is, if you invested Rs 100 in an equity fund, Rs 97.75 would be invested and the rest Rs 2.25 would be given to the distributor.
From August 1, the distributor has to negotiate the commission with the investor itself and be paid through a separate cheque. Also, these distributors have to declare the commission paid by fund houses for similar schemes.
“Distributors will now have to justify their fee by recommending good schemes to customers. Why else will someone pay?” said Gaurav Mashruwala, a certified financial planner.
Also, the market regulator has asked fund houses to charge the same exit load to both retail and high networth individuals.
Ulip costs capped at 3 per cent: Though, financial planners will say that insurance should be separated from investment, most buyers of unit-linked insurance plans (Ulips) can be accused of looking at hefty returns.
As a result, sellers/ agents of Ulips have often been accused of charging astronomical sums in initial years - much more than that for mutual fund products. However, the Insurance Regulatory and Development Authority (Irda) has recently capped the difference between gross and net yield at 3 per cent for a 10-year policy and 2.25 per cent for a 15-year policy.
“But this is only valid for customers who stay in for the entire term of the policy. If you decide to surrender before the policy matures, the charges will still be marginally higher,” said G V Nageswara Rao, managing director and chief executive officer, IDBI Fortis Life Insurance.
Medical insurers cannot deny renewability: This should come as a relief to senior citizens as they are more prone to illness. Earlier, insurers would either deny renewing a mediclaim policy to a person who had made a claim or would hike the premium substantially.
Irda recently said that from June 1, insurance companies would not deny extending medical insurance and also have to explain the hike to a person. “There was a fear that the existing sickness may lead to more claims and, in turn, more losses,” said S Narayanan, managing director and chief executive officer, Iffco-Tokio General Insurance. Also, the maximum entry age of an individual for medical cover has been raised to 65 from the earlier 50-55.
Reduced loan rates: Call it competition or the lack of credit offtake, but banks have been forced to cut home and auto loan rates aggressively.
State Bank of India (SBI) has been slashing rates in a hurry. It has already cut rates thrice since January. In the recent cut, borrowers of Rs 5-50 lakh will get the loan at 8 per cent for the first year and 8.50 per cent for the next two years. These loans come without any administrative cost and free insurance for personal accident.
Following this, other lenders too have cut rates. HDFC Bank slashed rates by 50 basis points to 9 per cent for Rs 30-50 lakh.
The current United Progressive Alliance (UPA) government has also pitched in and given a subsidy of 1 per cent for loans up to Rs 10 lakh (price of house up to Rs 20 lakh).
For auto loans, Canara Bank is charging 8.50 per cent in the first year, 9.50 per cent for the next 24 months and 10 per cent for the 36-60 month period. Following the aggression shown by public sector banks, ICICI Bank cut its auto loan by 50-75 basis points and the rate ranges between 12 and 14 per cent now, depending upon the car.

Source: http://www.business-standard.com/india/storypage.php?autono=368874

Mutual funds: When small is beautiful

Does fund size affect the performance of equity mutual funds? A recent working paper at the Yale School of Management involves an empirical study in the Indian context. It’s notable as the principle of ‘economies of scale’ is not an exception to the realm of finance and investment. The study aims to ascertain the degree or extent of relationship between fund size and actual performance when it comes to returns on asset management. The research reveals rather surprising results for Indian mutual funds.
The mutual funds industry in India had assets worth over Rs 7 lakh crore under management as of July 2009 with the bulk of it in debt funds. There are now 36 asset management companies (AMCs) in the MF ‘space’. Meanwhile the regulator, Sebi, has mandated doing away with the levy of ‘entry loads’ for MF investors. It is distributors who have traditionally pocketed the ‘load’ as commission. So, AMCs would need to figure out innovative marketing and perhaps also hand out “out of pocket” commissions for product distributors. The correlation between fund size and returns is seen as relevant because when a corpus is sufficiently large, the fund managers involved would likely have the necessary liquidity and flexibility for timing investment decisions and stock selection. Additionally, size has the added advantage of reducing transaction costs by resorting to bulk ‘buys’. The paper uses data of a three-year period: April, 2006 to April, 2009. Also, while the total number of open-ended equity/growth funds totalled 244, the sample size chosen was 22, with a mix of micro, small, medium and large-size funds. Next, the net asset values of the select equity funds were worked out for the first trading day of each quarter of the 3-year period for computing the return (CAGR), risk and return per unit of risk and risk adjusted return (Sharpe Ratio) of the funds.
The actual fund sizes varied from Rs 9.57 crore to Rs 2,472.36 crore. The funds labelled ‘micro’ had less than Rs 100 crore under management; those characterised ‘small’ had a corpus of less than Rs 500 crore; medium pertains to less than Rs 1,500 crore; and large-size funds were those with up to Rs 2,500 crore under management.
In the paper, the concept of momentum (mass*velocity), a popular concept in physics and mechanics, has been incorporated to engineer a new concept termed ‘fund momentum’ construed as the product of fund size and CAGR.
The results of the study suggest that all the performance parameters such as return, risk, return per risk, return per fund size and Sharpe Ratio were found to be negative. But then, overall the stock market returns for the period under study was negative. From econometrics testing of the hypothesis, it is clear that the correlation coefficient of fund size and performance variables are ‘not significant.’ So there’s no ‘conclusive evidence’ in the paper that fund size affects performance of equity/growth funds, whether they are micro-, small-, medium- and large-sized funds. Further, the variances between fund size and performance variables show that barring risk, the other three parameters–return, return/risk and Sharpe Ratio–move together in the same direction and the values are seen as ‘random’ and no conclusive evidence may be drawn about fund size and performance of equity/growth funds across the size range.
Besides, the small-sized funds seem to have performed better than micro-, medium- and large-sized funds in terms of return per risk and risk adjusted return. The Weighted Average Momentum (WAM) of the small-sized funds was found to be the second best after that for micro-sized funds which, anyway, added up to a mere 2.02% of the total fund size of equity/growth funds. Hence the paper considers the performance of small-sized funds as the best in terms of WAM. As for the medium- and large-sized equity/growth funds, they were quite unable to outperform the overall stock market in terms of returns. So when it comes to mutual funds in India, ‘small’ appears to be beautiful.

Source: http://economictimes.indiatimes.com/Opinion/Jaideep-Mishra-Small-mutual-funds/articleshow/4956932.cms

Funds offering better returns than sensex

The net asset value (NAV) appreciation of nearly 480 funds or nearly one out of every two funds has bettered the sensex returns of 9% in the past year.
Around 100 funds have at least doubled the 30-share index’s gains. The ones like IDFC Small & Midcap Equity (42.92%), Tata Life Sciences & Tech (39.79%), UTI Transportation and Logistics (37.96%), Canara Robeco Equity Tax Saver (36.25%), Birla Sun Life Dividend Yield Plus (35.69%), ICICI Prudential Gilt Investment PF (35.23%) and Reliance NRI Equity (33.99%) returned eye-popping 3x times sensex’s returns. Overall, there are at least 23 funds which more than tripled the benchmark’s gains in the period starting August 31 2008 and ending this August 30.
‘‘Mutual funds have always showed the ability to beat popular benchmarks. While investors remain cautious especially after Sebi regulations on loads, the fact remains that most funds have good track records. We (the industry) have delivered always alpha (a measurement of risk-adjusted performance),’’ said the CEO of a top mutual fund. Interestingly, many funds which sported NAVs of less than Rs 10 have proved to be real gems and may have helped systematic investment plan (SIP) users. Take for instance Religare Contra fund which had an NAV of Rs 9.78 on August 30, 2008.
The market rally has helped the same fund’s NAV to almost touch Rs 13 per unit, gaining 32.52% in 12 months. Others ‘beaten-down’ funds which have outperformed sensex include Taurus Infrastructure (29.09%), Mirae Asset India Opportunities (25.29%), AIG World Gold (20.27%), HSBC Tax Saver Equity (19.86%) and Morgan Stanley ACE fund (18.81%).
‘‘Many themes may not have done well in the past few months. Take for example international funds. While performance is one of the metrics, it’s important for the investor to allocate some portion of their MF assets to them. They might do well when global economies rise,’’ S Naren, CIO of ICICI Prudential AMC said in a recent interview.
Numerous exchange traded funds (ETFs), which track a specific index or commodity, find their place in the market-beater list with those tracking gold like Gold Benchmark ETF (26.69%) or banks such as Kotak PSU Bank ETF (31.8%) doing exceedingly well.
Monthly income plans, best suited for getting specified monthly payment to investors like senior citizens and retired persons, also make it to the sensex-beater list. Funds like Reliance MIP (27.61%), HDFC MIP Long-term (22.08%), Principal MIP Plus (13.87%), Templeton MIP-G (11.74%) and LIC Floater MIP (10.4%) are some examples.

Source: http://timesofindia.indiatimes.com/NEWS/Business/India-Business/Funds-offering-better-returns-than-sensex/articleshow/4956865.cms

Why fund investors didn’t get their timing right

“Buy low and sell high” is a lesson mutual fund investors in India continue to ignore, as trends in money flows into mutual funds over the past two years show. Flush with funds in a rising stock market until early 2008, equity funds saw new inflows dwindle in the bear market, reviving only in the recent rally.
However, the good news is that older fund investors held on patiently as NAVs fell, and reaped gains from the subsequent rally. Another key trend was some investors shifting attention to other asset classes when returns from equities fell. Gold ETFs and income funds saw steady inflows during periods marked either by uncertainty or poor performance by equities.
The tendency to chase returns rather than anticipate them appears to have taken hold of many equity fund investors over the past two years. Net inflows into equity funds (gross sales minus redemptions) peaked, with the stock market in January-2008 at Rs 12,717 crore, though some spillover effect remained with healthy inflows in the following months. However, from April onwards, fund flows dipped as the market’s free fall continued. Behind the curve

An analysis of trends in monthly equity fund flows between early 2007 and now shows that investors have been slow to react to market spikes as well as its falls. Though the equity market was buoyant from August 2007, the gush of inflows caught up only later in November. When the market corrected in January 2008, inflows continued for a few more months.
Net flows that had turned negative following the October 2008 crash, remained so till April 2009 (but for February, which reported net inflows). They resumed in full flow again in May 2009, two months into the recovery rally. These suggest that investments, more often than not, chased good performance from equity funds.
Investments picked up after equity funds put in an average holding period return of 32 per cent between August and November 2007, and 25 per cent in the two-month period between March 2009 and April 2009.
Herd mentality, the need for assurance that the investment value will not drop immediately after committing funds, and the fear of missing out on rallies appear to be the key motivating factors for retail investors in equity funds. Such a short-term approach to equities may also have limited investor participation in the current rally, as the monthly net inflows remained unimpressive throughout last year and the first quarter of the current year.
New fund offerings also garnered larger sums during bullish phases — equity NFOs in April-January 2008 saw inflows of Rs 33,191 crore — but investors appeared to have given them a wide berth during the bear phase.
Fund houses too should shoulder some of the blame for this; as new fund launches have peaked during good times. Triggered also by fewer offerings during the period, equity NFOs garnered only Rs 2,293 crore between April 2008 and March 2009.
The revival in equities since April 2009 has seen more new funds cropping up. With positive response from investors, these have collected over Rs 3,221 crore between April and July. Reluctant to pull out

However, what’s interesting is that while new money committed to funds dropped in 2008, the year did not see any significant pick-up in redemption activity. Investors preferred to remain invested in equity funds, despite a fall in, or poor performance of, the market.
While pullouts from equity funds did pick up a little after the January 2008 correction, they dwindled considerably in the months thereafter and remained low throughout 2008. Though the average NAV of diversified equity funds plunged by 55 per cent in 2008, average monthly redemption numbers stood at just Rs 3,375 crore.
Even in October, when the equity market nose-dived to new lows, investors refrained from pulling out a large chunk of their investments. Investors took out only Rs 2,652 crore in October, compared to Rs 7,536 crore in January 2008, the market peak. Another interesting sidelight is that some investors did cash out close to, though not exactly at, the market peak. Equity fund redemptions, which began to inch higher as early as May 2007, peaked in October 2007, well ahead of the market peak in January.
That the average monthly redemption stood at about Rs 6,905 crore between April-December 2007, even when equity funds notched up average holding period returns of 73 per cent, suggests that a section of investors does constantly monitor fund portfolios and book profits.
The trend appears to be gathering strength in the recent rally too. Following the broader market rally, the average monthly redemption between May and July 2009 went up to Rs 4,082 crore.

Looking beyond equities

Spurred by the need to make up for the lack of returns in equities, a section of mutual fund investors appear to have ventured beyond equity funds too. A host of other dynamics, such as higher inflation and interest rates in 2008, may also have triggered the flow of funds into other assets.
Income funds, which primarily invest in debt securities with varying maturity periods, reported net outflows in November and December 2007 (coinciding with a rising equity market). However, following the crash in equities, fund flows into income funds turned positive and remained buoyant till the Lehman Brothers collapse in September.
While it can be argued that income funds usually see participation only from the well-informed investors (such as banks and other financial institutions), retail participation in other assets is also evident from fund flows into other categories.
For instance, net inflows into gold ETFs have been rising steadily since the January 2008 crash and 2008 saw gold ETF assets expand by about 54 per cent. Investors also appear to have taken temporary shelter in low-risk gilt and liquid funds in October 2008 following the collapse of equities worldwide. Flight to safer avenues following a liquidity crunch, both domestic and global, may explain the changed stance, especially since the asset classes saw poor inflows in the earlier months.
ELSS funds too saw a change in fund patterns. Being tax-saving instruments, these funds generally tend to report peak flows toward the end of a fiscal year.
In keeping with this, while ELSS funds did report higher net flows in the four-month period between December 2007 and March 2008 (peaked in March with Rs 2,071 crore net inflows), the risk-appetite of investors appears to have fallen sharply since.
The downward spiral in equities in 2008 led to a lower quantum of net flows between January-March 2009 (Rs 547 crore in March 2009). That these funds, notwithstanding the lock-in, saw a pick-up in redemption activity in October 2008 and more recently in June 2009 also points to the reluctance of investors to lock in funds for the long term.
Overseas investing too appears to have lost its charm, what with these funds recording net outflows since October 2008. What’s more, the funds reported a significant jump in net outflows (Rs 127 crore) in May 2009, which also coincided with a broader equity rally.

Source: http://www.thehindubusinessline.com/iw/2009/08/30/stories/2009083050650700.htm

MF houses lure investors with smart fund names

India’s largest equity mutual fund is something called Reliance Diversified Power Sector Fund, and I think that’s a problem. The problem is not with this fund as such, but in the fact the Indian investor has chosen to bestow this rank upon a fund that is narrowly focussed on a single sector. This is a problem because the core investment of every mutual investor (without exception) must always be a general diversified fund that is not constrained to invest in any theme or sector.
More than the Rs 5,300 crore managed by Reliance Diversified Power Sector fund, this problem is highlighted by the aggregates of the entire fund industry. In all, India’s equity funds manage Rs 1.68 lakh crore and an absurdly high Rs 58,000 crore (31%) is in sectoral or thematic funds. This is way too high. How high? Well, I would venture to say that it’s too high by a margin of about 100% or so. The truth of the matter is that it’s difficult to visualise an investor who should be investing through a mutual fund and yet who should be taking sector calls himself.
The very idea of mutual fund is, one is of hand off investing . You pay a fund company because you don’t have the time or the expertise to judge where to invest. An important facet of this decision-making is to decide which sector to invest in. When you decide that say, 25% of your investments should stay in a power or an infrastructure or a technology fund, then you are making decisions that you shouldn’t . The way to make mutual funds work for you is to put your money only in diversified funds and then let their fund managers do their job of choosing which sector makes sense and when.
Of course, I’m being a little disingenuous here. No investor sits down and actually decides how much to invest in this or that sector. No, that decision gets taken for them by the manner in which funds are marketed and how investors react to the message.
Even the name of the fund plays an important role. According to its name, Reliance Diversified Power Sector Fund is both a diversified as well as a power sector fund. That’s a complete contradiction in itself. If you are a sector fund then you can’t be diversified. And in any case, how the average investor is to figure out what the name actually signifies.
Consumer goods style naming is not uncommon in mutual funds. We have a DSP Blackrock T.I.G.E.R. fund (which supposedly stands for The Infrastructure Growth and Economic Reforms), Sundaram BNP Paribas S.M.I.L.E. (Small and Medium Indian Leading Equities), ING C.U.B. (Competitive Upcoming Businesses), Morgan Stanley A.C.E (Across Capitalisations Equity), Canara Robeco F.O.R.C.E. (Financial Opportunities, Retail, Consumption & Entertainment), and ICICI Prudential Ninja (Nifty and Nifty Junior Advantage).
These are only some of the more fanciful names that have been thought up to sell funds. Clearly, fund companies have a very different idea of what works than what a thoughtful investor should be doing. But I guess that is a comment both on how investments are bought and how they are sold.

Source: http://economictimes.indiatimes.com/articleshow/4952904.cms

Standout performers

BIRLA SUN LIFE MID-CAP PLAN A

It started as a middle-of-the-road performer and began to take on the competition from 2006. Savvy sector selection is the primary reason for its above-average returns.

Betting heavily on engineering and services proved fruitful in 2006. In 2007, it capitalised on the rally in metals, financial and engineering. And, in 2008, it fled to FMCG and healthcare. The fund manager is now focusing on construction, capital goods, power and cement.
The portfolio is churned quite frequently, with nearly 40 per cent of the stocks making an appearance for less than six months. Nevertheless, this fund can't be called aggressive. In fact, it avoids concentrated bets. Since 2005, no sector has breached the 20 per cent mark (though this is quite a high limit) and no single stock has crossed an allocation of six per cent.
What's interesting is the fund manager's flexibility. At the end of 2008, he was heavily into debt, which he totally offloaded in early 2009, to significantly move into cash.
During market rallies, this fund does make its mark. Yet, during downturns, it will not dramatically stray from the category average. But its appeal lies in the fact that over the long run, it rewards its investors. In the three-year and five-year periods as of July 31, 2009, the fund returned 19 per cent (category average, 9 per cent) and 30 per cent (category average, 24 per cent), respectively.

IDFC PREMIER EQUITY PLAN A

There's no arguing with the numbers. In its history, this fund has underperformed the category average in just two quarters out of 14.
In 2007, it trounced the competition with a return of 110 per cent (category average, 64 per cent). In the bear phase, running from January 2008 to March 2009, it shed 54 per cent (category average, minus 64 per cent). Its three-year trailing returns of 30.45 per cent (July 31, 2009) places it streets ahead of the competition.
Hats off to fund manager Kenneth Andrade, who boldly rides his bets. Little wonder that allocation to services touched 44.74 per cent (May 2007) or FMCG accounted for 21.66 per cent (March 2009). Neither does he shirk from taking contrarian stands; his bias towards services ever since inception and his restraint from going heavy on energy, despite the sector gaining impressively, are cases in point.
With a focus on small companies, Andrade has an interest in keeping the fund's size small. He maintains a tight portfolio spread across 26 stocks (one-year average), whose allocations don't cross seven per cent, barring Shree Renuka Sugars.
Since Andrade took over the fund in February 2007, he has maintained a high debt allocation, which peaked at 25.53 per cent (June 2008), while cash peaked at 12.24 per cent (May 2008). Due to these high allocations, he missed out on the latest rally to some extent ,with a return of 91 per cent as against the category average of 104 per cent (March 9-July 31, 2009).
However, the fund's history still makes it a compelling pick.

SUNDARAM BNP PARIBAS S M I L E Regular

Though a category beater in 2006 and 2008, it didn't deliver headline grabbing returns. Its performance of 81 per cent (category average, 64 per cent) in 2007 brought it in the limelight.
Fund manager S Krishna Kumar timely increased the allocation to metals from 6.5 per cent in June 2007 to 13 per cent in July and maintained it around those levels till the end of that year. The sector gained 89 per cent during the July-December period. The allocation to energy and engineering towards the end of the year also helped.
Recently, the fund manager doubled exposure to metals from six per cent (May) to 12 per cent (June) and the fund delivered remarkably in the bull run from March 9 to July 31, 2009, with a return of 117 per cent (category average, 104 per cent). Being heavy on energy also helped.
Right now, he is bullish on energy, industrials, IT, auto and sugar.
What's interesting is that he delivered impressively during the latest rally, though cash exposure averaged at around 14 per cent between February and April.
With this offering, you may be sure of ample diversification amongst sectors, as well as stocks. Overall, it's a good performer, with a three-year trailing return of 19 per cent (category average, 9 per cent) as on July 31.

Source: http://www.business-standard.com/india/storypage.php?autono=368511