Monday, September 29, 2008


(September 2008)

The Indian mutual fund industry is growing at one of the fastest rates in the world, along with those in China and Brazil. Total assets under management have expanded five-and-a-half times since August 2002. The total assets under management of mutual funds represents 12.5 per cent of India's gross domestic product, compared to 60 per cent for the US, indicative of the latent potential.

There were an estimated 123,000 millionaires or High Networth Individuals (HNWIs) in India at the end of 2007, up 22.7% from a year earlier, according to the third annual Asia-Pacific Wealth Report published by Merrill Lynch and Capgemini. HNWIs are individuals with more than US$ 1 million in net assets, excluding their primary residence and consumables. Rapid economic expansion, increased foreign investment and gains on the country's stock markets fueled the jump in India's HNWI population last year. The average net worth of Indian HNWIs rose slightly to US$ 3.6 million, compared with US$ 3.4mn for the Asia Pacific region. The global average was US$ 4 million.

Piquant Parade

Religare AEGON Asset Management Company has received the final regulatory approval from SEBI to launch mutual fund business in India. Religare Enterprises is one of the integrated financial groups of India. Its businesses include three key verticals: the retail, institutional and wealth management. AEGON is one of the world’s largest life insurance and pension groups, and a provider of investment products. The AMC is looking at launching its first product for the Indian retail investor by November-December, 2008.

Amidst highly volatile stock markets, the daily systematic investment plan introduced by Bharti AXA Investment Managers is expected to minimize risk and to generate greater risk adjusted returns while increasing investor participation. The feature, introduced for the first time in India with an equity scheme, allows one to invest on a daily basis a minimum Rs 300 per day. It has a lock-in period of one month, during which an investor has to pay the SIP amount without any default. Beyond this time, an investor can withdraw the money invested with return at any point of time. If one should fail to pay the SIP amount on any particular working day, his investment will not default but his return will be adjusted against the failure of payment for that day. If successful, the fund house plans to bring down the minimum amount to Rs 150 to make it more affordable to retail investors across the country. The fund house will also try to make the daily SIP available with its newer schemes in the days to come.

Principal Mutual Fund has entered into an alliance with United Bank of India, a leading public sector bank, for distribution of its products through the bank’s branch network.

Regulatory Rigmarole

In a move that could revolutionise sale and purchase of mutual fund units by investors across the country, AMFI is working towards setting up an electronic platform. This would not only benefit unitholders, but also distributors and fund houses. The electronic platform will bring paperwork to a bare minimum, improve operational efficiency, provide transaction convenience and reduce cost. The proposed electronic platform will help investors trade even in open ended-mutual fund scheme units, like in the case of shares, switch between schemes of different fund houses, and also enable mutual fund investors to view their entire portfolio on a single portal. The modalities of the platform are being worked upon by an AMFI-appointed committee. The AMFI committee received 15 expressions of interest (EoI) from both international and domestic companies including Canada-based FundSERV, focusing on the data standards and security infrastructure. The new platform is likely to be replicated on the same lines as it is operational in several foreign countries such as in Canada, US and Australia. FundSERV, which is one of the interested parties to offer this service in India, is a leading provider of electronic business services to the Canadian investment fund industry. Indian mutual fund industry has so far about 4.6 crore folios (investors), of which more than 95% is held in the physical format. The electronic platform, which could take two years to implement, will not not only ramp up the present model, but also benefit the next generation of mutual fund applicants, who are expected to grow exponentially.

Sebi chairman CB Bhave, who was instrumental in implementing the demat process for shares, had recently suggested that Mutual Fund investors should also have a common statement for all their mutual fund holdings just like the system for equities through depositories like NSDL and CDSL.

Since February 1, 2008, investors in mutual funds putting in Rs 50,000 and above are required to get a know-your-customer (KYC) compliance certificate. The basic idea behind introducing this was to comply with Prevention of Money Laundering Act guidelines. However, six months later, both investors and asset management companies are struggling with the new norms. The reason: confusion over who qualifies as an attesting authority, besides other requirements.
An investor-friendly measure adopted by AMFI has put distributors in a spot. As prescribed in AMFI's best practices, the rule requiring no-objection certificate (NOC) for shifting to a new financial planner (a mutual fund distributor or agent, in this case) has left a hole in the earnings kitty of large distributors. The new rule is being used as a weapon to poach businesses of other distributors by hiring well-networked relationship managers working with established product distributors.

Customers will no longer get insurance covers bundled with mutual funds and many savings and investment products offered by banks. They may, however, continue to get insurance with credit cards and home loans. Beginning October 1, mutual fund houses will have to withdraw all products which offer mutual funds with an insurance cover. Only a handful of companies like Kotak Mahindra AMC, Birla Sunlife AMC, and Reliance AMC offer these products. These fund houses have been buying group policies from insurance companies, clubbing them with mutual fund products, and offering them as a product. This had created an outrage in the insurance industry with the industry vehemently opposing such products. Earlier this month, the life insurance council held a round table with the heads of all life insurance companies deciding not to sell group policies to mutual fund houses. However, those who have already invested in these products will continue to get benefits.

The Fund managers are manipulating NAVs of floating-rate schemes; market regulator Sebi and industry body AMFI are working together on standardising valuations of the underlying assets of these funds - the floating rate bonds. The Sebi with the help of AMFI and rating agencies will set up a common valuation method of floating rate bonds in the next two -three months. Till date fund managers used their own methods to value these bonds. The coupon rate or bond value is generally updated every six months. During the tenure of the bond, many fund houses used the circular trading route to rig NAVs to push up returns.

The recent market turmoil around the globe notwithstanding, Indian mutual fund investors are showing signs of maturity. Although concerned about the status of their investments in different funds, not many are rushing to get out of the market by redeeming their Mutual Fund units. The gargantuan growth of the mutual fund industry, thanks to the mushrooming of HNWIs, the spreading wings of mutual funds throughout the length and breadth of the country, by virtue of SIPs gaining a strong foothold and the maturity of the investing populace augur well for the future of the mutual fund industry.

Monday, September 22, 2008

(September 2008)

The domestic mutual fund industry appears to be reeling under the impact of the global financial turmoil that has so far swallowed three iconic US firms and is threatening the stability of many more. The frantic rescue by the Federal Reserve has kept the bombardment of the US and global financial system at bay, at least for the time being…

According to AMFI, while the Indian mutual fund industry has been growing at 50–60% per annum in the last couple of years, the first quarter of fiscal 2008-2009 witnessed a deceleration in the growth of AUM of mutual funds. With equity markets across the globe in doldrums, the equity quotient of mutual fund schemes has plunged sharply. In March 2006, equity assets constituted nearly 40% of the total assets under management by mutual fund houses. That figure has shrunk to 26% last month. This loss of equity, however, has been more than compensated by the debt component, which has gone up substantially from 26% in March 2006 to around 50% in August 2008. The last time debt happened to take up nearly half of the total share of the mutual fund AUM was in December 2003 when its share was nearly 51%. It is not the income or liquid funds but the FMPs that seem to be catching up in light of volatility in the equity market. While there has been a fall of 25 per cent in the total assets managed by mutual funds from December 2007 to July 2008, the industry's total cash, with respect to assets under management, has increased from 5 per cent to 11 per cent (Rs.12000 crores) during the same period.

After witnessing a decline for two months in a row, the mutual fund industry has witnessed nearly three per cent rise in its asset under management in August. The combined AUM of the 35 fund houses in the country increased to Rs 5,44,317 crores at the end of August, as compared to Rs 5,29,629 crores in July. Reliance Mutual retained its position as the largest fund house in terms of assets under management and has grown its assets by 5 per cent to Rs 88,616 crore and its SIP has crossed the one-million mark. HDFC Mutual Fund has replaced ICICI Prudential as the second largest fund house with total assets of Rs 53,859 crore with a 6% growth from July. ICICI Prudential slipped from second to third position as it shed nearly 4% of its assets. Its AUM in August end was Rs 53,093 crore. UTI Mutual Fund has retained its position as the fourth largest fund house with its asset at Rs 46,947, even though it added Rs 827 crore in August. Other notable changes this month was 13% AUM growth of Franklin Templeton which grew by Rs 3276 crore. AUM of Benchmark Mutual was up 29% to Rs 3826 crore. Bharti AXA the new entrant grew its assets to Rs 408 crore adding Rs 180 crore in August. AUM of Taurus Mutual was up 30% as it added Rs 85 crore in August.

Piquant Parade

Over the next few months, the number of mutual fund companies operating in India is set to go up sharply. Right now, there are 35 fund companies that are operating in this country. In another few months, there are as many as 20 new ones that are likely to start, bringing the total up to 55. Goldman Sachs Asset Management has received an approval from SEBI to start mutual fund business in India. Motilal Oswal recently got an in-principle approval for its AMC. Some players like Axis Bank, Future Finance Ltd, Peerless General Finance & Investment Ltd. Etc. have applied for mutual fund license. Others in the fray include Axis Bank, Peerless, Jaypee, DLF, Union Bank, India Bulls, Religare, Schroder Investment Management of Singapore, PGLH of Delaware, Shinsei Bank of Japan and India’s Ambit, which has tied up with Nikko for a joint venture in the mutual fund business. Incidentally, DLF is planning to enter this business in a joint venture with Primerica, which is owned by Citibank.

The asset management business of DSP Merrill Lynch (Merrill Lynch is one of the iconic US firms that was sold to Bank of America) will be combined with BlackRock and named as DSP BlackRock Mutual Fund. BlackRock is a UK based group, which is a premier provider of global investment management, risk management and advisory services to institutional and retail clients around the world. The 40 per cent stake in the fund management business of DSP Mutual Fund will be transferred to BlackRock, while its 60 per cent stake will be held by the DSP Group. The stake transfer to BlackRock is awaiting regulatory nod.

UTI Mutual Fund is planning to rope in strategic investors without diluting the majority stake of its promoters, SBI, Bank of Baroda, Punjab National Bank and LIC. Specified Undertaking of UTI (SUUTI) is being wound up by 31 March, 2009. Till now, 15 lakh investors have redeemed Rs 21,000 crore. 2008 has seen the redemption of Rs 6800 crore in favour of 11 lakh investors. SUUTI was formed well over four years ago after the erstwhile UTI Mutual Fund was bifurcated into two in 2003-04, following a major crisis. All the schemes run by UTI based on the net asset value (NAV) were transferred to the UTI AMC while the assured return schemes and other assets and liabilities were transferred to a new undertaking, SUUTI, the objective being that once all the liabilities to the untiholders were extinguished, the undertaking could be wound up.

Punjab National Bank (PNB) is exiting its mutual fund business. PNB is asking for Rs 1.80bn for its 30% stake in the venture, valuing the AMC at Rs 6bn. However, Principal has valued it at around Rs 5bn.

SBI Mutual Fund has formalised its tie-up with Karur Vysya Bank , a leading private sector bank in Tamilnadu. The customers of Karur Vysya Bank would now be offered mutual fund investment products of SBI Mutual Fund. The tie up with Karur Vyasa Bank is a part of the effort to expand reach to the semi urban and rural investors. Karur Vysya Bank has tied up with Birla Sunlife Mutual Fund, Sundaram BNP Paribas, Reliance Mutual Fund and SBI Mutual Fund for distribution of their products.

Andhra Bank will be cross selling mutual fund products of the Reliance Asset Management Company and Kotak Mahindra Asset Management Company.

Taurus Mutual Fund has entered into a product distribution tie up with Bajaj Allianz Financial Distributors for distributing all products of Taurus Fund through its 5500 strong agency force.

Peerless General Finance and Investment has forayed into mutual fund distribution business, under Peerless Smart Money. The company has identified and empanelled three asset management companies - Tata, Sundaram and ICICI.
Reliance Mutual Fund has been accorded Superbrand status in the 2nd edition of Business Superbrands for the year 2008 on the criteria of market dominance, longevity, goodwill and customer loyalty.

ICICI Prudential AMC has launched ‘I-Pru Mobile’, an innovative mobile-based service that provides 24X7 access to investors invested in ICICI Prudential AMC schemes and empowers investors in their decision making process with easy to use investment calculators. Investors can now check portfolio values, view historical transaction details, get instant access to advisors and ICICI Prudential AMC branches. Even distributors can download and use the calculators during their sales calls for demonstration and explanation.
Fidelity Anywhere is a VeriSign secured (SSL certificates), mobile-friendly web site launched by Fidelity`s domestic asset management company in India. The Fidelity Anywhere service is free and available across all telecom operators in India. Investors who are registered for Fidelity`s online service can use the same login credentials and PIN / password to access their accounts on mobile phones with internet browsers and GPRS connectivity. The enhanced functionality allows investors to login and monitor their Fidelity account investments in all linked folios, including latest valuations of each scheme, monitor the last 5 transactions folio wise, whether completed / pending / rejected transactions, view their holding status and investor names, e.g. single or joint holding. They can request an account statement via email. The statement will be sent to the investor`s email ID that is registered with Fidelity. Another new feature allows visitors to Fidelity Anywhere to view stock market movements, of both the BSE and NSE, with a 15-minute delay. This feature is available without investors having to login. It provides the latest NAVs for Fidelity`s funds in India and allows its customers there to request application forms and investor guides which are then delivered via email.

(to be continued…)

Monday, September 15, 2008

NFO Nest
(September 2008)

NFOs go the IPO way…

With the gyrations in the stock market, a mere 17 equity fund schemes were launched in the period between March and August, 2008. Many schemes failed to mobilise decent money needed to make worthwhile investments. This sordid scenario apart, majority of the offerings this month are aggressive!

The following funds find their place in the NFO Nest in September, 2008.
IDFC Strategic Sector (50-50) EquityFund
Opens: 28 Aug, 2008 Closes: 18 Sept, 2008

Half of the IDFC Strategic Sector (50-50) Equity Fund will be a diversified equity fund and half will be an opportunistic sector fund. The fund aims to be ahead of the curve in identifying a sector with depth which is core part of the Indian economy with an investment time frame of 1-2 years. The structure of the fund will allow it to take concentrated positions in companies in a sector. The fund may also invest in debt and money market instruments. The fund with half of its equity allocation managed as a diversified equity fund will provide stability while the rest of the portfolio can be more volatile or an out of favour market segment. This will be a relatively aggressive equity fund comparable to the opportunity funds. The fund is benchmarked against the Nifty and will be managed by Mr. Kenneth Andrade.

Escorts Power and Energy Fund
Opens: 25 Aug, 2008 Closes: 23 Sept, 2008

Escorts Power and Energy Fund is an open-ended sector fund. The fund aims to provide income distribution and medium to long-term capital gains by investing predominantly in equity/equity (65-100%) related instruments of the companies in the power/energy sector and/or debt/money market instruments (0-35%). Investment in securitised debt will not exceed 40% of the debt component of the scheme. The fund is benchmarked against BSE Power Index and will be managed by Mr. Rajesh Sharma.

ICICI Prudential S.M.A.R.T Fund
Opens: 18 August 2008 Closes: 1 Oct, 2008
ICICI Prudential S.M.A.R.T (Structured Methodology Aiming at Returns over Tenure) Fund - Series C and Series F are closed ended plans that seek to provide investors with equity market linked returns while aiming to protect against the downside. The fund will invest up to 95 per cent in equity-linked debentures with returns linked to the movement of the Nifty. In order to achieve equity-linked returns, the fund would invest in debentures issued by a third party/parties which provide an indicative coupon rate. The coupon would also be linked to an index – Nifty in this case, to participate in the returns arising from stocks. Such returns, linked to the index, would come with a cap. The coupon is also designed in such a manner that even in case of a decline in the index, the capital plus an indicative yield would still be generated. It will also invest 0-100 per cent in investment grade debt securities. It is important to note that this fund is not a capital protection scheme and does not offer any guaranteed/assured interest or repayment of principal as the investments are subject to credit risk. However, the fund plans to invest in quality debt securities to minimise this risk. Mr. Chaitanya Pande will be the fund manager of the scheme.

Bharti AXA Equity Fund
Opens: 4 Sept 2008 Closes: 1 Oct, 2008

Bharti AXA Mutual Fund is all set to launch its first equity diversified fund, Bharti AXA Equity Fund. The objective of the scheme is to invest in equity and equity derivatives across all market capitalizations. Thus the scheme aims to be a diversified multi-cap fund. 65–100 per cent of assets will be allocated in equity and equity related securities while debt & money market securities/instruments will constitute 0–35 per cent. Investments in derivative instruments shall not exceed 50 per cent of net assets of the portfolio. No investments will be made in securitized debt. The fund house, in an attempt to differentiate its products among other mutual fund products, has introduced a new facility of ECO Plan with all its schemes. Under this plan, investors investing up to Rs. 2 lakh and who opt to receive all communications in electronic form would get an additional benefit of lower annual recurring charges. Bharti AXA Equity Fund offers investors the option of a daily SIP. Interestingly, investors can also opt for a daily systematic transfer plan by investing a lump sum in Bharti AXA Liquid Fund and transferring a specified amount to Bharti AXA Equity Fund on a daily basis. Minimum instalment for daily SIP/STP is Rs.300 and in multiples of Rs.100 thereafter. The minimum investment instalment amount for the monthly SIP/STP is Rs.1,000. Mr Prateek Agrawal will be the fund manager of the scheme.

Birla Sun Life Commodity Equities Fund
Opens: 15 Sept, 2008 Closes: 14 Oct, 2008

Birla Sun Life Commodity Equities Fund is an open-ended fund that provides long-term capital growth by investing in securities of domestic and overseas commodity companies i.e. companies engaged in or focusing on the specified commodity business and/or overseas mutual fund scheme(s) that have similar investment objectives. The fund will invest a minimum of 80% of its assets in equities and equity-linked instruments, which includes 65-100 per cent investments in overseas securities. Birla Sun Life Commodity Equities Fund offers three plans: Global Precious Metals Plan, Global Agri Plan and Global Multi Commodity Plan. Investors can enjoy the benefits of diversification by investing in Global Precious Metals Plan (benchmarked against Dow Jones Precious Metals Index), Global Agri Plan (benchmarked against S&P Global Agribusiness Index), and Global Multi Commodity Plan (benchmarked against MSCI World Index). Ankit Sancheti and Vineet Maloo will manage the scheme.

The DWS Global Agri-Business Off-Shore Fund, JP Morgan Latin America Fund, JP Morgan Emerging Europe Fund, JP Morgan Middle East and Africa Fund, JP Morgan Greater China fund, JP Morgan Asean Equity Fund, JP Morgan India Tax Advantage Fund, Goldman Sachs India Equity Fund, Bharati AXA Short Term Income Fund, Bharati AXA Monthly Income Plan, HDFC Select Equity Fund, JM Moving Sector Fund, Franklin MENA Fund (Middle East and Northern Africa), Shariah Benchmark Exchange Traded Fund, HDFC Real Estate Fund, ABN Amro Sector Select Fund and SBI Capital Protection oriented Fund Series III are expected to be launched in the coming months.

Monday, September 08, 2008

GEM GAZE - September 2008

Gem gaze

The glittering gems in the diversified equity space have undergone a radical change in the past one year. HDFC Equity, Magnum Contra and ICICI Prudential Dynamic have stood the test (highly volatile market) and have retained the status of a gem. The new entrants that have achieved the pre eminent status of ‘gem’ are DSPML Equity and Birla Frontline Equity. DSPML Opportunities and Franklin Flexicap have been shown the exit door.

HDFC Equity Fund Gem

The perpetual champion fund, HDFC Equity has been the first choice of investors and rightly so. The reason behind the fund's exemplary performance year after year is not far to seek. Its ability to identify opportunities at the right time is the key factor contributing to its success. Though the fund maintains a large-cap bias, it does not hesitate to invest substantially in stocks of smaller companies, as and when there are opportunities to exploit. The fund remains fully invested at all times. Historically, the portfolio has been a focused 25-30 stocks. The number of stocks has now increased to over 45. In addition, the concentration in the top five holdings has been moderated from 35-40 per cent about a year ago, to just around 25 per cent now. This is probably not reflective of the fund’s stance but rather an adjustment to the size. Investors have flocked to this fund in droves making it the largest diversified equity offering of Rs 5,000 crore. And this very factor may be detrimental to the strategy of the fund. The fund's ability to identify opportunities and take meaningful exposure in them will be neutralised by its increasing size. The fund has displayed ample strength till date, but it remains to be seen how it fares from here on.

Magnum Contra Gem

When the going is great, the fund performs exceptionally and even when the going is not so smooth, Magnum Contra still manages to save face. Magnum Contra has consistently managed to stay ahead of the curve. The Fund has outperformed its benchmark index i.e. BSE 100 over the 3-year and 5-year time frames. Rs 100 invested in the fund at inception (July 1999) would have grown to approximately Rs 985 at present. The same amount invested in the benchmark index would have appreciated to Rs 346. The fund outperformed the category in every quarter since 2003. It has the third highest risk adjusted return in its category, i.e. for every unit of risk undertaken, the fund gives you more bang for your buck. When the market slips, it tends to fall much less than the category average as well. Magnum Contra has lost close to 9.5 per cent of its NAV per unit over the last year. The decline, nevertheless, is less than the diversified fund category average of -11 per cent. Magnum Contra has beaten its benchmark 63 per cent of the times on a monthly return basis over the last 36 months, suggesting its consistency in performance. For the performance chasers looking at the top returning funds, Magnum Contra’s performance over a shorter time frame of 1-2 years may appear to be mediocre. However, the consistency with which it has beaten its benchmark BSE-100 over the last three years makes it a good investment case for a core portfolio. The fund would fit well into a portfolio of an investor with average risk appetite. However, it may no longer fit the bill of a true contrarian investor as, over the last few years, a good number of its stock and sector calls have moved with the market crowd. At present, the fund appears to follow an aggressive growth strategy with an occasional contrarian sector stand.

ICICI Prudential Dynamic Plan Gem

The Fund has been one of the star performers of Indian mutual fund industry and has delivered a commendable 52 per cent return since inception as compared to 38 per cent return given by the benchmark index, S&P CNX Nifty. The fund recently received top rating of “Platinum” among the equity diversified funds. This is based on risk- adjusted return analysis that was done by ET Quarterly survey. In fact ICICI Prudential Dynamic Plan is one of the only two equity schemes that managed to beat BSE 500 returns on all the past 12 quarters. ICICI Prudential Dynamic Plan is a blend of aggression and defense in the current equity market scenario. As the name suggests, the ICICI Prudential Dynamic Plan is flexible in nature. Its focus is to generate capital appreciation by managing a diversified equity portfolio which is dynamic across market caps (large and mid cap) and across investment styles (Growth & Value). Depending on the market conditions, valuations and the fund houses’ view going forward, the fund manager also has the flexibility to invest in cash and debt by changing the equity allocation to meet the long term objectives of the fund. Given the mandate to protect the downside for investors, the fund uses derivative techniques like hedging to deliver range bound returns. The portfolio is currently spread over 38 scrips encompassing 18 different sectors to reduce any industry specific risk. Thus the fund seeks to provide the agile combination of stock selection, market timing, diversification and cash management aimed at harnessing market opportunities. Due to its consistent performance, investors’ confidence in the fund has been multiplying. The fund size has seen a sharp rise on the back of the scheme’s enviable track record and the corpus currently is over Rs 2218 crores.

DSPML Equity In

A strong pedigree and track record across market cycles, ability to weather short-term market reversals and the flexibility to invest in both large and mid-cap stocks may be key attributes to look for in a diversified equity fund, under current circumstances. The DSP ML Equity Fund is a diversified fund that fits the bill well, on all these parameters. One, launched in April 1997, DSP ML Equity has over a ten-year track record of beating its benchmarks through various market cycles. The fund is among a handful in the diversified category to manage a top quartile performance, over one-, three-, five- as well as 10-year time frame. The fund has also stayed well ahead of the category average over each of these periods. Two, the fund’s return generation has also been fairly consistent over the past five years. It has figured within the top quartile in return rankings in each of the five years. Further, it has managed to contain the erosion in its NAV to levels less than the broad markets in several of the recent corrective episodes. Whether it was the short corrective episodes in October and August 2007 or the more severe one in May 2006, the NAV of the DSP ML Equity Fund has declined less than the Sensex on each occasion. Three, in terms of portfolio strategy, the fund invests in a mix of mid and large-cap stocks and has a well-diversified portfolio of about 78 stocks. This may make it a good option for an investor who does not wish to actively manage his Mutual Fund portfolio between those oriented towards large-caps and those funds with a mid-cap bias. Over the past year, about 40-45 per cent of the assets of DSP ML Equity Fund have been consistently invested in mid-cap stocks (market capitalisation of Rs 7,500 crore or less). The fund has generated a return of 75 per cent over a one-year period, beating its benchmark, the Nifty, by 20 percentage points. DSPML Equity has also outpaced the category average by a huge margin. Over the October 2007-April 2008 period, the NAV has fallen 7.1 per cent while the assets managed rose 6.4 per cent, despite a dividend payout of Rs 7 per unit in January. This may indicate that the fund received substantial inflows in this period. It is difficult not to like this fund. With no market-capitalisation or sector bias, this diversified equity offering goes about generating returns in a very consistent fashion. Its versatility and consistency make it a suitable core holding for conservative as well as aggressive investors. Little wonder that its asset size has grown to cross Rs 1,000 crore.

Birla Frontline Equity Fund In

A fund for all seasons, Birla Sun Life Frontline Equity has consistently outperformed its benchmark, BSE 200, year after year since its launch in August 2002. In the past five years, the fund has turned in 33 per cent annually, which is almost equal to its category’s returns. And in the past three years, the fund has significantly outperformed its category, delivering 26 per cent returns as against the category’s 19 per cent. But probably the best part about Birla Sun Life Frontline Equity is that it has managed to beat its category even during the bad times. Since the fund’s launch, its category has given negative returns in seven quarters but the fund has been in the red in only six of these seven quarters. Even in the recent turmoil, in the first quarter of 2008, the fund gave negative returns of 24 per cent, four per cent less than the category’s fall of 28 per cent. And in the second quarter too the fund managed to restrict its fall to the average fall of the category. The fund has managed to stay afloat thanks to a large-cap tilt. In the latest portfolio, one-fourth of the assets have been invested in mid-cap stocks with market capitalisation of less than Rs 7,500 crore. The fund has a concentrated sector allocation while it has diversified it over a large number of stocks. Birla Sun Life Frontline Equity Fund has been among the handful of equity funds that delivered better returns than the BSE Sensex over the past one year, amidst rather challenging market conditions.

A common line that runs through all the funds discussed above – strong parentage, track record across market cycles, flexibility and diversification – have brought out the ‘GEM’ in them.

Monday, September 01, 2008



During the past one year, commencing from September, 2007, I have been enabling you to savour one “fund flavour” in the first week of every month. From September, 2008, I shall give you an update of the flavour dealt with in the previous year. Gem Gaze, NFO Nest and Fund Fulcrum will appear in the second, third and fourth weeks respectively.

Diversified Equity Funds – an Update

The Best Bet!

As the name suggests, Diversified Equity funds invest in a wide basket of stocks, picked from several industries. Diversified funds are particularly suitable when the market rally is across the board, i.e., when many sectors and stocks are expected to do well. They provide capital appreciation over a long period (5-10 years). They invest in stocks from a diverse array of industries. They prevent adverse impact due to a downturn in one or two sectors and are hence less volatile.

While soaring stock markets during the past four years led the party at Diversified Equity Funds, the allure has dimmed considerably ever since the bears gripped the market in January 2008. Investors who laughed all the way to the bank till last year, have started fretting. Although there is optimism about the future direction of the market, caution should be exercised in terms of your portfolio exposure. If you are unsure as to which equity fund category to look at, Diversified Equity Fund is the best option…given that the India growth story is intact.

The Euphoria…

The top-100 list, carved out from a set of 24,887 funds tracked by global fund intelligence firm Lipper includes five India-dedicated offshore funds. Over the 10-year period ended December 2007, Indian funds are clear winners with seven of the world's top 10 funds from India. Indian funds had a revelling year, with the broader markets faring well and the mid- and small-cap segments outperforming their bluechip peers by a significant margin in 2007. India’s main stock index, the Sensex, rose 47 per cent in 2007, as foreign funds, attracted by strong economic growth and corporate performance, poured more than $17 billion in local shares, the highest in a single year. Globally, equity funds showed an average return of 2.52 per cent, but the 306 Indian funds among them delivered an average 55.64 per cent gain.

…and the Downturn

Actively managed diversified stock funds in India, which posted their best annual returns in four years in 2007, lost all their gains of 2007 in the first half of 2008, according to Lipper data. These funds' net values plunged 38.8 percent on an average as weak global markets and concern on domestic economy under pressure of inflation triggered a fall in the stock market. Contraction in the benchmark index by a third in the first half of 2008 forced fund managers to seek safety in cash, which rose to more than a five-year high of 11.84 percent on an average in June 2008, data from fund tracker ICRA Online revealed. 80 % of India's actively managed diversified equity funds underperformed the benchmark BSE index in July 2008 on higher cash holdings and relatively lower returns from their mid and small-cap bets. Net asset values of diversified equity funds (only 38 of 201 diversified funds beat India's benchmark index), the biggest group of stock funds by assets and number, rose an average 4.29 percent as compared to 6.64 percent rise in the benchmark index, according to data from global fund tracker, Lipper.

Diversity is the Spice of the Portfolio

Funds are now embracing diversification with alacrity. Predicting the peaks and troughs in any business cycle to perfection is a tough call. So, while sector funds are in the high-risk and high-return zone, over a long term, diversified equity funds tend to outperform sector funds with a big margin. But no matter what your view on market efficiency is, you can still argue that widespread diversification is the best policy. The human ego being what it is, it is all too easy to convince yourself that you are a Warren Buffett, able to spot great investments. Humility counsels you that no, you are not that good, and would be better off hedging your bets through diversification.

This diversified approach creates many advantages. First, it reduces the risk from concentrated holdings in select stocks or sectors. Performance is not dependent on the returns of a small set of stocks or a particular sector. If some sectors/stocks are not doing well in the portfolio, the other ones may be expected to outperform and deliver better returns and, therefore, compensate you.

Second, diversified funds can invest across market capitalisation — small, mid and large — and take advantage of any rally in these stocks. Of course, there are exclusive large, small and mid-cap funds as well. However, a fund that has the flexibility to invest in stocks of varied market capitalisation may be in a better position to capitalise on prevailing trends in the market and could deliver superior returns over the long term.

Third, even as they stick to the principle of diversification, diversified funds can step up exposures to themes that are in market fancy at any given time and gain from the momentum in those sectors. Therefore, investing in diversified funds does not mean that you will miss out on prevailing ideas.

Fourth, a diversified fund reduces the importance of timing the market. This is because there is a long window of opportunity for different sectors to outperform and deliver superior returns. A diversified fund can also quickly switch its preference between sectors and themes and continue to outperform the market over a long period.

Because of these features, diversified funds are suitable for long-term investors.

The Evergreen Fund

The case for Diversified Equity funds in the context of current volatility is strong in view of the following factors:

* Given strong fundamentals, diversified funds are likely to do well over the long-term.
* A broader portfolio reduces risk.
* Diversified funds offer better selection and variety of stocks.

Given the market condition we are in, mutual funds are looking at a long-term time horizon. Considering a time span of 5 to 10 years, you should only think of diversified equity funds; you should not get tactical and not become a fund collector. You should choose a few solid funds, review these investments every 12 months and continue doing it. You can accumulate substantial wealth through systematic investment in Diversified Equity Funds.