Monday, November 26, 2007

Fund Fulcrum

(November 2007)

The total AUM of the 32 mutual fund houses in India stands at Rs 5,56,700 crore on 31 October 2007, with Reliance Mutual Fund leading the pack with the highest AUM of Rs 79,973 crore followed by ICICI Prudential Mutual Fund whose asset base swelled by 11 per cent to Rs 56,212 crore, according to data from AMFI. The growth rate of 17% in October is the third highest in the current year with the highest rate being recorded in the month of July. The latest increase is, however, on an expanded asset base. The augmenting AUM can be attributed to the surge in the stock market, large corpus raised by new fund offerings, lower redemptions and availability of liquidity in the banking industry, which saw short-term fund flows into liquid schemes. Investors, who withdrew money from equity schemes fearing a sharp correction when the benchmark indices were scaling new highs, typically reinvested these funds into liquid and liquid-plus plans.

Piquant parade

UTI Mutual Fund plans to come out with an IPO in February. All the four sponsors -- State Bank of India, Punjab National Bank, Bank of Baroda and Life Insurance Corporation - holding 25% each in the UTI Mutual Fund have already agreed to divest 49% stake. 20% would go to strategic partners through private placement which would help UTI expand its core businesses. No single investor will get more than 5% through the pre-IPO placement. Besides, the fund house would divest 29% of its stake through offer for sale for which Draft Red Herring Prospectus would be filed with the regulator by December, 2007.

UTI Mutual Fund is in talks with Société Générale Asset Management (SGAM) of France for managing its funds globally.The tie-up is a part of UTI’s plans to increase its global business to $1 billion by the end of 2007. SGAM, a dominant player in the global mutual fund arena with presence in over 20 countries in Europe, United States and Asia, is already managing SBI Mutual Fund’s products after it entered into an agreement nearly a year ago.

UTI Mutual Fund is planning to launch a special customized fund scheme for the public sector units (PSUs). The decision to launch a new product is in line with a recent circular from SEBI that allows 12 Navaratna and 54 mini-Navaratna PSUs to invest upto 30% of their investible surplus in the equity funds of the public sector mutual funds. Prior to this circular, the PSUs were only allowed to invest in liquid and debt schemes of UTI.

In the first of its kind among property consultants, the UK-headquartered Knight Frank Group will launch a $250 million India-focused real estate fund. The offshore fund will raise investments from high net worth individuals and other investors from the UK and will have an investment threshold of $0.5 million and above.

ICICI Prudential AMC has tied up with New India Co-operative Bank and Central Bank of India for distribution of its mutual fund schemes. Reliance Mutual Fund has entered into an agreement with the United Bank of India and State Bank of Saurashtra for distribution of its products. Doha Bank has signed an agreement with Kotak Mahindra Asset Management Company for the distribution of the latter’s mutual fund products in Qatar. Earlier Doha Bank had signed up with UTI Mutual Fund, Reliance Mutual Fund, Birla Sun Life Mutual Fund and Sundaram BNP Paribas Mutual Fund to offer a variety of mutual fund products.

Geojit Financial Services has launched an online trading platform for mutual funds.

Leading mutual fund research firm, Lipper, announced the launch of a rating system to help investors and their advisors to select right schemes to meet their investment goals. Lipper, a subsidiary of Reuters, provides information on mutual funds, retirement funds, hedge funds, fund fees and expenses to the asset management and media by covering 80,000 funds in 66 domiciles. The rating system is based on a numeric scale arranged in ascending order where '1' represents the lowest-scored funds (bottom 20 per cent) and '5' represents the highest-scored funds (top 20 per cent). In India, the Lipper Leader Rating System will judge funds based on three parameters - total return, consistent return and preservation.

Regulatory Rigmarole

SEBI reduced the expenses charged by Index Funds and ETFs. The total expenses shall not exceed one and one half percent (1.5%) of the weekly average net assets out of which investment and advisory fees shall not exceed three fourths of one percent (0.75%) of the weekly average net assets.

SEBI relaxed the duration of short-term investments by mutual funds in bank deposits to 182 days from the earlier limit of 91 days. This will give greater flexibility for mutual funds to choose the deposit option to park their money in and get slightly higher yields without any material impact on duration.

Enabling provisions have been made for a mutual fund to engage in short selling of securities as well as lending and borrowing of securities. However, these amendments will take effect on a later date to be notified by SEBI, which will be after the new framework for short selling of securities and securities lending and borrowing is put into place.

Currently, 50 per cent of the shares in an IPO is reserved for Qualified Institutional Buyers (QIBs). Of this portion, 5 per cent is reserved for mutual funds. Others competing for their share in this category include FIIs, banks and insurance companies. Allotments in IPOs happen on a pro-rata basis. This means that if there are about 100 FIIs and just about 15-20 mutual funds applying for the IPO, FIIs get a higher allotment compared to mutual funds.The quota for mutual funds in public offers of equity shares is proposed to be hiked in order to promote retail investments in share markets.

Proposals for introduction of Real Estate Investment Trusts (REITs) in India, guidelines for real estate mutual funds, and regulations for trading in securitised debt instruments are on the agenda of the capital markets regulator SEBI for the near-term.

These forward-looking strategic arrangements and the impending changes in the mutual fund regulatory environment bode well for the mutual fund industry.

Monday, November 19, 2007

NFO Nest

The NFO bandwagon is slowing down, thanks to the see-sawing sensex and the painful PAN. Though the number of NFOs are on the rise, the magnitude of money mobilised is on the decline.

The following funds find their place in the NFO nest in November, 2007.

SBI Capital Protection Oriented Fund Opens: 15Oct , 2007 Closes: 23 Nov, 2007

A five year close-ended capital protection oriented fund, the scheme aims at protecting the capital invested in debt and money market instruments as well as equity while at the same time also seeking to provide investors with opportunities for long-term growth in capital. The schemes’ portfolio structure has been rated AAA by CRISIL. The rating given by CRISIL will be reviewed on a quarterly basis.The scheme aims at investing 73% to 100% in debt securities and money market instruments, 0% to 20% in securitized debt and 0% to 27% in equity and equity related instruments including derivatives.This fund will be benchmarked to CRISIL MIP Blended Index.

Lotus India Agile Fund Opens: 25Oct , 2007 Closes: 23 Nov, 2007

Lotus India AMC, a joint venture between Fullerton Fund Management Group and Sabre Capital Worldwide, has launched India’s first Quant based Mutual Fund Scheme Lotus India AGILE Fund (Alpha Generated from Industry Leaders Fund). Quant funds operate on the basis of computer generated mathematical models designed by the Fund Management Team. The primary objective of this fund is to generate capital appreciation by investing in a passive portfolio of stocks selected from the industry leaders. The portfolio of the scheme will consist of stocks which satisfy the following conditions.
• The market capitalisation of the stock chosen should not be less than the market capitalisation of the last stock of S&P CNX Nifty.
• The floating stock of the company should not be less than the least floating stock of S&P CNX Nifty.
• The stock should have a price history of at least 1 year before the date of investment.
• The industry represented by the stock should be present in the composition of S&P CNX Nifty.

Of all the stocks that meet the above criteria, only the top 11 will be selected for investment. Thereafter, 9 per cent of the total corpus will be invested in each of these stocks and the remaining 1 per cent will be invested in debt and money market instruments.This fund will redefine the product suite available in the market and will provide investors a model based alternative to the existing value and growth based investing philosophies.

JPMorgan Smaller Cos Fund Opens:Nov 9 , 2007 Closes:Nov 30, 2007

The second equity fund from the JP Morgan stable, JPMorgan India Smaller Companies Fund is an open-ended equity growth scheme that aims to generate long-term capital appreciation from a portfolio that devotes 65 to 100% to smaller companies. The scheme can also invest in derivatives traded on the futures and options segment of Indian stock exchanges not exceeding 50 per cent of the net assets of the scheme, offshore securities, ADRs and GDRs and up to 35 per cent in debt and money market instruments. The benchmark index for the scheme is CNX-Midcap.

Sundaram BNP Paribas Energy Sector Fund Opens:Nov 12, 2007Closes:Dec 11, 2007

A three-year close-ended equity fund with an automatic conversion into an open-ended scheme on expiry of three years, the fund seeks long-term capital appreciation by investing in equity and equity-related instruments of companies in the domestic energy sector. The fund managers will seek to invest more than 65 per cent of net assets in equity shares of the targeted theme, up to 35 per cent of its net assets in instruments outside the theme, and up to 15 per cent in treasury bills, Collateralised Borrowing and Lending Obligation (CBLO) and reverse repo.

UTI-Infrastructure Advantage Fund Opens:12 Nov,2007Closes:19 Dec, 2007

A three year close-ended equity scheme, this scheme aims to provide income distribution for medium to long term capital by investing 65 -100 per cent in equity and equity related instruments of companies engaged either directly or indirectly in the infrastructure sector and up to 35 per cent in debt and money market instruments including securitised debt.The benchmark index for the scheme is BSE-100.

ICICI Prudential Real-estate Securities Fund Opens:Nov 15,2007 Closes:Dec 14,2007

A three-year close-ended debt fund, the fund will invest in real estate and related sectors such as cement, construction, metals, hotels, retail, banks and finance companies etc. to gain from the real-estate boom in India. This is a hybrid fund that will predominantly invest 51 per cent in high-yielding debt securities, while investing up to 49 per cent in equity.

Sundaram BNP Paribas Global Advantage Fund, Sahara Retail and Entertainment Fund, Taurus Parsoli Ethical Fund, Quantum Gold Fund, SBI Emerging International Opportunities Fund, ING Optimix Emerging Markets Fund, ING Global Real Estate Fund, ICICI Prudential Retirement Fund Series, LIC Infrastructure Fund, Franklin Asia Equity Fund, SBI Gold ETF and SBI Tax Advantage Fund are expected to be launched in the coming months.

Monday, November 12, 2007

Gem Gaze

Towering Tax Tycoons!

Tax savers have finally risen from their slumber! The hitherto microscopic corpus of the ELSS schemes, which are exclusive preserves of individual investors, have started burgeoning in the recent past and these towering tax tycoons have been the target of the tax conscious investing public in view of the scintillating performance turned out by them. Funds that have an impeccable five-year record (the sole exception being one-year old Fidelity Tax Saver) and have also managed to beat the broad market (S&P 500 index) would be the right choice for your portfolio.

Magnum Taxgain’s performance has propelled it into the number one slot in the ELSS category since 2004. This fund had a miserable past but has steered clear of it. Magnum Taxgain has also changed several fund managers since November 2005, but this has not affected its excellent performance. It is the largest ELSS fund with an asset size of Rs.1664 crore. In the recent past, the fund has kept its mid- and small-cap allocation in check and is now at 57.59 per cent. The fund fared quite well in the current market crash and not much of the portfolio has been revamped over the past few months.

An excellent performer, this fund has performed well during good times and displayed resilience during the bad times too. The fund has a limited corpus of 31 to 35 stocks. At one time, exposure to large-caps was huge and it dropped dramatically in 2004. Since then it has risen and it hovers in the 55 per cent range. It has 33 and 13 percent respectively in the mid-cap and small-cap segments. It is most heavily invested in the auto sector with 18.29% in auto stocks. Dancing to the tunes of the sectoral performances, it has re-entered the financial services sector which it exited sometime back while exposure to the automobile sector has declined.

Birla Equity Plan has come a long way since inception to emerge as a category beating fund. It has displayed an uncanny ability to sense an opportunity at the right time. Barring 2004, the fund has had a good run since 2002. The ability to identify trends, make swift moves and go against the herd has paid off. Good stock picks have in fact become the USP of the fund. For instance picks such as Automobile Corporation of Goa have delivered significant returns for the fund at a time when the auto sector has been in the grip of bears. In fact, the fund has maintained its position in the automobile sector at a high of 13 per cent through the bear phase while the average category exposure to the sector has hovered around 7 per cent. In spite of such a churn, the volatility in returns is below average. The fund manager prefers to hold a small portfolio of around 35 stocks in which he invests with conviction. Moreover each of these holdings accounts for over 1 per cent of the portfolio. This in turn means that each stock has a significant impact on the fund's returns. The mid- and small-cap allocation is high at 64.64 per cent. Another refreshing difference in the portfolio is the lower than average allocation to the technology sector. Those of you who have a tech heavy portfolio and are looking for a tax-planning fund to balance such a discrepancy can definitely look at Birla Equity Plan.

Fidelity Tax Advantage

The fund, positioned as one with a ‘go anywhere’ approach, has no market cap bias, no sector bias and no trend bias. At the same time the fund also aims to be well-diversified for greater risk control.The results delivered thus far look encouraging. The fund has managed to keep up with its peers in every quarter since its inception in January 2006. If the true test for a fund lies in its performance in a falling market, then Fidelity Tax Advantage has passed with flying colours. This achievement has been owing to the fund’s preference for large cap companies coupled with its diversified portfolio inspite of it being a new entrant. Perhaps the only departure from the category norm is the fund’s 10.88 per cent exposure to the healthcare segment. If Fidelity Tax Advantage manages to keep up its impressive fund management, it will emerge as one of the star performers in the ELSS space.

Selecting a good tax saving fund at the beginning of the financial year and using the systematic investment route to spread out your exposures in these funds over several months is the best course of action to follow. Tax saving funds being equity-oriented funds, and fairly aggressive at that, SIP investments may be the best way to ride out the volatility that is an inherent part of their returns.

Monday, November 05, 2007


Equity Linked Savings Scheme

Versatility is the name of the game (scheme)!

100 per cent tax deduction, high returns, no lock-in period and full safety – looks like a Utopian dream. But the equity-linked savings scheme (ELSS) comes closer to achieving this Utopian dream. It offers 100 per cent tax deduction up to Rs 1,00,000 per year, it delivers returns higher than traditional investment avenues, it has a moderate lock-in period of three years and though equity and risk go hand in hand with each other, history has shown that most ELSS schemes have been safe and investors have rarely lost their money.

What is this versatile ELSS all about? ELSS was introduced to promote investments in equity markets by giving tax concessions to the investors. As the name lucidly suggests, it is a savings scheme that is linked to equity. It invests in stocks of various companies in different sectors. It is mostly open-ended in the sense that you can buy and sell units from the mutual fund anytime you desire (there are a few exceptions like TATA Tax Advantage – 1, which is close-ended).

So, is it just another diversified equity fund? In many ways, yes… but the difference lies in the tax benefit. These funds give a tax benefit of upto Rs. 1 lakh under Section 80C of the Income Tax Act. But, to get this benefit, your investment is locked-in with the fund for at least three years and the fund has to invest at least 80% of its corpus in equity.

Titans of tax saving

In case of a debt-oriented mutual fund scheme, short-term capital gains are taxed at the normal slab rates applicable to the individual. But long-term capital gains are taxed at the lower of 10% (without the benefit of indexation) or 20% (with the benefit of indexation). (Indexation is a factor used to adjust the impact of inflation to the cost of acquisition of mutual fund units).Equity-oriented scheme provides an added advantage, both in case of short as well as long-term capital gains. While the short-term gains are taxed at the moderate rate of 10%, irrespective of the income tax slab to which the individual belongs, long-term gains are exempt from tax. ELSS has an additional feather tugged to its cap! While the exit is tax free — since it carries a lock-in period of three years, rendering it as a long-term investment instrument — the initial investment is also eligible for deduction under the Rs 1-lakh threshold of Section 80C. ELSS schemes give twice the benefit as compared with diversified equity schemes. They give you tax sops on investments and are also exempt from long term capital gains tax.

Monarch in the money game

You are in the money game. At the end of the day, you want to know what you are getting in return for your investment. Over the years, the average return from tax-saving funds on the whole has far outweighed any fixed-income return. The average annual return over the past five years has varied from 16% to 108%. Compare this to the National Savings Certificate (NSC), which gives you an interest rate of 8%, and the Public Provident Fund (PPF) which gives you 8.5%. Besides having the potential to deliver the most lucrative returns, the lock-in period of three years is considerably less when compared with other tax-saving avenues like PPF (15 years) and NSC (6 years). Since tax-planning funds have a three-year lock-in period, it gives greater room to fund managers in making flexible investment decisions and taking massive sectoral bets. Consequently, majority of these funds are relatively more volatile than their equity diversified peers. But this should not be a cause for concern as over the long-term the returns get smoothened. Moreover, they are not required to hold huge cash, as they are usually not susceptible to a huge redemption. They provide decent scope for capital appreciation with added advantage of tax-free dividends. Though they do not provide an assured return, when reviewed over a long term horizon, they tend to give superior returns.

ELSS gives you the option of saving tax while participating in the growth of the capital market. ELSS are evergreen funds and are ideal for:

• Small investors as it is a simple way of investing in the stock market.
• Investors who may not have a lump sum to invest in order to save tax. Open-ended ELSS allows them to invest at various points depending on the availability of funds, as well as take advantage of cost averaging.

Constant tracking is passe. Daily statistics will tell you nothing. Consider investing in ELSS through a systematic investment plan so that you can fully exploit the potential of such funds. Tax planning should never be left till the end of the financial year - it should be an ongoing process. If you commit your money at one go, you will be at the mercy of the market. But by distributing it over the months, you minimise your risk. Develop an early tax planning strategy within the broad framework of your financial plan and take advantage of this versatile scheme.