Monday, December 11, 2017

December 2017

The consistent performance of all four funds in the December 2016 GEMGAZE is reflected in all the funds holding on to their esteemed position of GEM in the December 2017 GEMGAZE.

Birla Sun Life Treasury Optimizer Fund Gem
Birla Sun Life Treasury Optimizer Fund was launched nearly a decade ago in April 2008. The current AUM of the fund is Rs. 8,324 crore. Its return in the past one year is 5.44%, almost on par with the category average of 5.02%. The number of holdings in the fund’s portfolio is 180 with an average yield to maturity at 7.21%. The expense ratio of the fund is fairly low at 0.49%. The fund is benchmarked against the CRISIL Short-term Bond Index. The fund is managed by Mr. Kaustubh Gupta since September 2009.

Birla Sunlife Dynamic Bond Fund Gem
Birla Sunlife Dynamic Bond Fund, launched in September 2004, manages assets worth Rs. 11,837 crore, making it the largest fund in the income category. This fund is a steady top quartile performer with low volatility. It has delivered returns across interest-rate cycles and is among the top few in its category. The one-year return of the fund is 0.81% as against the category average of 3.55%. The number of holdings in the fund’s portfolio is 55 with an average yield to maturity at 8.15%. The expense ratio is 1.44%. The fund has 65 holdings with the yield to maturity of 7.62%. The fund is benchmarked against the CRISIL Short-term Bond Index. The fund managers are Maneesh Dangi since September 2007 and Pranay Sinha since April 2017.

SBI Magnum Gilt Fund - Long term Plan Gem 
Launched in December 2000, the fund has an AUM of Rs 3,076 crore. The one-year return of the fund is 4.33% as against the category average of 2.57%. The fund has outperformed its benchmark over one-, three- and five-year timeframes. It has delivered a compounded annual return of 9.89% over the last three years. The fund is benchmarked against the I-Sec Li-Bex. The fund has 13 holdings with the yield to maturity of 6.72%. The expense ratio of the fund is 1%. Dinesh Ahuja has been the fund manager since January 2011.

Birla Sunlife Floating Rate Short term Fund Gem

This relatively young fund, launched in October 2005, boasts of a massive AUM of Rs 13,194 crore.  In the past one year, this liquid fund has returned 6.73% as against the category average of 6.46%. The number of holdings in the fund’s portfolio is 89 with an average yield to maturity at 6.71%. The expense ratio is a mere 0.29%. The fund is benchmarked against the CRISIL Liquid Index. Kaustubh Gupta and Mohit Sharma are the fund managers since July 2011 and April 2017 respectively.

Monday, December 04, 2017

December 2017

What are Debt Funds?

When you buy an equity instrument like a stock, you buy ownership into that company to participate in its growth. But when you buy a debt instrument, you give a loan to the issuing entity. The government and private companies issue bills and bonds to get a loan to run their operations. The interest you can earn from these debt securities is pre-decided along with the duration after which the debt security will mature. This is why these securities are called ‘fixed income’ securities, because you know what you are going to get out of them. Debt funds invest in such fixed income securities, and just like equity funds, they try to optimise returns by diversifying across different types of securities. This allows debt funds to earn decent returns, but there is no guarantee of returns. The two main components of returns of debt funds are interest income and capital appreciation/depreciation in the value of the security due to changes in market dynamics. However, debt fund returns can be expected in a predictable range, which makes them safer avenues for conservative investors. Debt securities are also assigned a 'credit rating', which helps assess the ability of the issuer of the securities/bonds to pay back their debt, over a certain period of time. These ratings are issued by independent rating organisations such as CARE, CRISIL, FITCH, Brickwork and ICRA. Ratings are one amongst various criteria used by fund houses to evaluate the credit worthiness of issuers of fixed income securities. There is a wide range of fixed income or Debt Mutual Funds available to suit the needs of different investors, based on their investment horizon and the ability to bear risk.

The different types of securities Debt Funds invest in

Debt funds invest in different securities that have different credit ratings. A security’s credit rating signifies the risk associated with the entity that is issuing the security. A higher credit rating means that the entity is more likely to pay interest on the debt security as well as pay back the principal amount upon maturity. This is why debt funds that invest in higher-rated securities will be less volatile than those that invest in low-rated securities.
Another factor that determines the kind of securities that debt funds invest in is the maturity of that security. Different types of debt funds invest in securities that mature after different time periods. Shorter the maturity period, less volatile the debt security can be expected to be.
Types of Debt Funds

Just like equity mutual funds, debt mutual funds also come in various types. The primary differentiating factor between debt funds is the maturity period of the instruments they invest in. Here are the different types of debt funds.
Dynamic bond funds
As the name suggests, these are ‘dynamic’ funds, which means that they are not fixed to a certain maturity period. Dynamic bond funds have a fluctuating average maturity period because these funds take interest rate calls and invest in instruments of longer as well as shorter maturities.
Income funds
Income funds invest in a variety of fixed income securities such as bonds, debentures and government securities, across different maturity profiles. For example they can invest in 2 to 3 year corporate non-convertible debenture and at the same time invest in a 20 year Government bond. Their investment strategy is a mix of both hold to maturity (accrual income) and duration calls. This enables them to earn good returns in different interest rate scenarios. However, the average maturities of securities in the portfolio of income funds are in the range of 7 to 20 years. This makes them more stable than dynamic bond funds.
Short-term and ultra short-term debt funds
Short term bond funds invest in Commercial Papers (CP), Certificate of Deposits (CD) and short maturity bonds. The average maturities of the securities in the portfolio of short term bond funds are in the range of 2 – 3 years. The fund managers employ a predominantly accrual (hold to maturity) strategy for these funds. Short term debt funds are suitable for investors with low risk tolerance, looking for stable income.
Liquid funds
Liquid funds invest in debt instruments with a maturity of not more than 91 days. This makes them almost risk-free. Liquid funds have seen negative returns very rarely. These funds are good alternatives to savings bank accounts as they provide similar liquidity and higher returns. Unlike savings bank interest, no tax is deducted at source for liquid fund returns. There is no exit load. Withdrawals from liquid funds are processed within 24 hours on business days. Liquid funds are suitable for investors who have substantial amount of cash lying idle in their savings bank account.
Gilt funds
Gilt funds invest only in Government securities with varying maturities. Average maturities of government bonds in the portfolio of long term gilt funds are in the range of 15 to 30 years. Government securities are high-rated securities and do not come with a credit risk, because the government is not going to default on the loan it takes in the form of debt instruments. This makes gilt funds ideal for risk-averse fixed income investors.
Monthly Income Plans
Monthly income plans are debt oriented hybrid mutual funds. These funds invest 75 – 80% of their portfolio in fixed income securities and the 20 – 25% in equities. The equity portion of the portfolio of Monthly Income Plans provides a kicker to the generally stable returns generated by the debt portion of the portfolio. Monthly income plans can generate higher returns from pure debt funds. However, the risk is also slightly higher in monthly income plans compared to most of the other debt fund categories.
Credit opportunities funds
These are relatively newer debt funds. Unlike other debt funds, credit opportunities funds do not invest according to the maturities of debt instruments. These funds try to earn higher returns by taking a call on credit risks. These funds try to hold lower-rated bonds that come with higher interest rates and are, therefore, relatively riskier debt funds. The average maturities of the bonds in the portfolio of credit opportunities funds are in the range of 2 – 3 years. The fund managers hold the bonds to maturity and so there is very little interest rate risk.
Fixed maturity plans
Fixed Maturity Plans (FMPs) are close ended schemes. In other words, investors can subscribe to this scheme only during the offer period. The tenure of the scheme is fixed. FMPs invest in fixed income securities of maturities matching with the tenure of the scheme. This is done to reduce or prevent re-investment risk. Since the bonds in the FMP portfolio are held till maturity, the returns of FMPs are very stable. All FMPs have a fixed horizon for which your money will be locked-in. This horizon can be in months or years. An FMP is like a fixed deposit that can deliver superior, tax-efficient returns but do not guarantee returns. FMPs are suitable for investors with low risk tolerance, looking for stable returns and tax advantage over an investment period of 3 years or more.

Myths about Debt Funds

Debt Mutual Funds are SAFE

It is the misconception among many of us that Debt Mutual Funds are safe and we treat these products like Bank FDs or PPF. But in reality, you check the debt fund categories and notice how the modified duration and average maturity change from Ultra Short Term Debt Fund to Long Term Gilt Fund or Credit Opportunities Funds. Along with interest rate volatility, the risk of credit rate downgrade or default is always there.

We must match our goal with average maturity of the fund

This is one more myth because the experts who recommend it feel debt funds are SAFE. However, these funds also carry the variety of risks. Hence, if your goal is 5 years, then the average maturity must be around 1-2 years of a fund. This is because if the NAV falls due to any risk involved in the fund it may get time to bounce back.

Timing the interest rate movements

It is hard for common man to track the interest rate movements and investing based on the call. Hence, never do such things. Instead, the priority should be to reach your financial goal safely.

Credit Rating is constant

Few believe that if currently the bond instrument is rated as AAA, it will remain same forever. It is not like that. Based on the financial health of the bond, the rating may change. Hence, never be in wrong belief that ratings are constant.

How do interest rates affect Debt Funds?

Interest rates that we often hear about in the news are the repo rate and reverse repo rates that are decided by the Reserve Bank of India (RBI). The RBI will lend money to commercial banks at the repo rate. There are a lot of factors that result in the increase or decrease of interest rates, but the prevailing interest rates also determine the rate at which institutions issue bonds and other debt securities. The prices of fixed income securities are inversely proportional to interest rates. With an increase in interest rates, bond yields go down and vice versa. This is why debt funds tend to earn higher returns when interest rates fall or are expected to fall, as the prices of bonds will go up.

How do Debt Funds generate income?

First, it is important to dispel a common misconception with debts funds — that they cannot erode in value, just like fixed deposits. While debt funds are not as risky as equity funds, a part of your initial investment can erode, nonetheless. This is because these funds invest in various fixed income instruments such as government bonds, corporate bonds and other money market and short-term debt instruments. The NAV on the debt fund can thus rise or fall along with the underlying bond prices. And what impacts bond prices? For one, interest rate movements in the economy can impact bond prices. If interest rates move up, bond prices fall and vice versa. This is where the concept of ‘duration’ comes into play. As longer-duration bonds are more sensitive to interest rates, the fund manager of a debt fund will increase duration to cash in on the rally in bonds in a falling rate scenario. Debt funds can also incur losses if they make wrong credit calls. Some debt funds capitalise on interest receipts. Thus they invest in bonds with lower credit ratings, betting on the credit risk to earn higher interest. So, how can these funds suffer losses? If the company that has issued the bond defaults on its interest or principal repayment, then the debt fund’s portfolio, to that extent, is written off. This will impact the NAV of the debt fund. Hence, debt funds can follow a strict ‘duration’ or ‘credit’ call or blend the two to come out with different strategies.
For conservative investors
For those looking for alternatives to bank savings and fixed deposits, liquid funds and ultra short-term debt funds fit the bill. While these funds are riskier than bank FDs, they carry the lowest risk amongst debt funds. Liquid funds are the safest in the category and have, on an average, delivered 7-9% returns annually over the last five years. Compared to liquid funds, ultra short-term debt funds carry slightly higher risk, given that these funds invest in debt securities with residual maturity of up to one year. The returns, though, can be higher. Over the past five years, returns from this category have averaged 7.5-9.5%. For investors looking at debt funds for a period of less than three years, their returns will be taxed at the income tax slab rates. Interest on savings accounts is exempt up to ₹10,000 under Section 80TTA of the Income Tax Act. But even assuming 7% return on liquid funds, post-tax returns work out higher than the 4% that most banks offer. In addition, for large sums of surplus, liquid or ultra-short term funds still offer better returns. While bank FDs for less than a year may offer returns comparable to those from liquid or ultra-short debt funds, should you need the money before maturity, you will be charged a penalty. Liquid funds allow you to exit investments without such penalties.
For moderate risk-takers
For investors with a slightly higher risk appetite and longer time horizon of, say, 2-3 years, debt funds, which generate returns both from accruals and duration calls (only moderately), may be considered. Short-term income funds and Banking and PSU Debt Funds fall under this category. Short-term income funds invest in debt securities that mature up to 3-4 years. Their portfolios usually have a small allocation to long-term gilts and higher allocation to AAA-rated, medium-tenure, corporate bonds. Banking and PSU Debt Funds offer stable returns and minimise risk by investing in good-quality debt instruments, mainly issued by banks and public sector undertakings.
For high-risk takers
Investors willing to bet aggressively on either credit or interest rate movements can consider credit opportunities funds, regular income funds, dynamic income funds and long-term gilt funds. Credit opportunities funds invest a relatively higher portion in lower-rated bonds. Hence they carry higher credit risk, while duration is maintained at 2-4 years, minimising rate risk. Regular income funds carry higher rate risk but lower credit risk. Dynamic bond funds essentially ride on rate movements and alter the duration of the fund portfolio depending on the expectation of rate movements. Gilt funds carry negligible credit risk. But as they carry a relatively higher duration of 7-10 years, they are more prone to rate risk. They can generate returns of 16-18% in favourable markets but can also hurt when rates surge.

The risks of Debt Funds

Debt funds generate returns from two sources. The first, which is simpler to understand, is by accruing coupon pay outs on a periodic basis from their underlying securities. The second, which is more complex, is by way of generating ‘capital gains’ on the same securities. Intuitively, it follows that coupon pay outs are exposed to the risk of the borrower defaulting, or credit risk. Credit risk relates to the ability of an issuer to pay the interest and principal during the life of a particular bond. If the issuer is not able to service the interest or principal, it can lead to loss of capital; this scenario is called credit default.
It rings true that there are no ‘free lunches’ in the investment world, and debt fund investors rubbing their hands in glee at their funds possessing higher yields-to-maturity, must also bear in mind that this potential excess return comes at the cost of increased risk. Investors should be aware that if a debt fund is giving a higher yield vis-à-vis other similar products, it is likely to carry a higher credit risk, and hence, lower safety.
In pursuit of capital gains, the fund manager primarily employs two strategies. The first one involves benefiting from falling interest rates by holding higher maturity bonds, whose prices fluctuate more sharply in inverse correlation with rate changes. Interest rate risk is higher for funds with higher average maturities. Hence, the risk is lowest for liquid funds, and rises as the average maturity of the fund increases. Alternatively, fund managers can elect to take on a deliberate credit risk by buying lower rated bonds, in the well-researched hope that they will undergo a positive ratings transition in the times to come. If the bet pays off, their yields would fall, resulting in capital gains.
The poor understanding that retail investors (defined by AMFI as those who have invested less than Rs 5 lakh in mutual funds) have of debt funds is underscored by the 54% spike in GILT fund ownership this year compared to previous financial year. GILT funds are widely perceived as risk-free as they invest in government-backed securities. But they are extremely sensitive to interest rate changes owing to their high average maturities. According to mutual fund research house Value Research, GILT funds have a category average maturity of 10.97 years as on date, implying that they will likely underperform debt funds with lower maturity portfolios and higher yields, if benchmark yields remain range bound in the near term — a highly likely scenario. In fact, retail investors may balk at the fact that there have been years in which the net asset values (NAV) of these purportedly risk-free GILT funds have fallen more than 15%!
Similarly, investors need to exercise caution while deploying their money in credit opportunity funds that aim to generate alpha by taking on incremental credit risk and investing in lower rated instruments. One needs to carefully weigh his/ her risk appetite for aggressive credit portfolios. A single credit default may have a large impact on returns. Therefore, the credit evaluation and the monitoring process must play a key role in fund selection.
Even liquid funds, commonly perceived as 100% risk free by many individual investors, carry within their portfolios the risk of default. Generally speaking, a liquid fund with a high-quality credit portfolio is very safe in terms of capital safety. In the unfortunate situation of a credit default though, implications could be serious. A recent case in point is the shock faced by investors in Taurus Liquid Fund. They were hit hard by the downgrade of BILT papers that the fund was holding at the time. The impact of the fairly recent Amtek and JSPL downgrades on the debt portfolios of some large asset management companies has also been well chronicled.

Before investing in Debt Mutual Funds you should take care of the following points:
§       Duration
§       Credit Risk
§       Average Maturity
§       Tax
For Debt Mutual Funds Taxation you can have Short Term Capital Gain if holding period is less than 3 years and Long Term Capital Gain if holding period is more than 3 years and the tax rate may vary accordingly.

Who should invest in Debt Funds?

Debt mutual funds are ideal investments for conservative investors. They are good alternatives to fixed deposits. While debt funds deliver returns that are in the range of fixed deposit interest rates, they are more tax-efficient than fixed deposits. The interest income earned from fixed deposits are added to your income and taxed as per the slab you fall under. Short-term gains from debt funds are also added to the investor’s taxable income. But they become tax-efficient when the holding period is 3 years or more. The long-term gains are taxed at 20% after indexation.
Debt funds are also liquid when compared to fixed deposits. While fixed deposits come with a lock-in period, debt funds can be redeemed any time. Partial redemptions can also be done from debt funds.
It is for these reasons that debt funds are recommended in place of fixed deposits. However, one point to keep in mind is that unlike fixed deposits, debt funds do not guarantee capital protection or fixed returns.

Pointers for first time Debt Fund investors

If, like many others, you are planning to migrate from the safe haven of fixed deposits to debt mutual funds this year, you might want to start off by investing in relatively lower risk, short-term debt or ultra-short-term debt funds with high-credit rating portfolios at first; even at the cost of potentially lower returns. Over time, you could gradually build a more inclusive portfolio comprising funds with lower credit profiles or higher durations that have the potential to deliver 100-200 basis points higher annualised returns than their shorter-term, highly-rated counterparts. Overall, it is best to follow an asset allocation strategy across various debt fund classes to diversify debt investment portfolios. Whatever you decide, it is imperative that you educate yourself on the nuances of debt fund investing before you jump in with both feet.

Monday, November 27, 2017

November 2017

With rising equity markets, the average assets under management (AAUM) of the mutual fund industry reached close to Rs.22 lakh crore in October 2017. AMFI’s latest data shows that AAUM of the mutual fund industry has reached Rs.21.79 lakh crore in October 2017. The average AUM of the mutual fund industry has increased from Rs.19.92 lakh crore in June 2017 indicating a growth of 9% in a quarter. However, the monthly AUM of the industry stood at Rs.21.41 lakh crore in October 2017. While AAUM is the average assets of the entire month and is calculated by factoring in all working days of the month, month end AUM is the assets of the industry as of the last working day of the month. The growth has come largely because of higher inflows in balanced funds, arbitrage funds and equity funds through SIPs. AMFI data shows that the monthly inflows in mutual funds through SIP reached an all-time high of Rs.5,621 crore. Data shows that the industry mopped up close to Rs.35,000 crore in the last seven months through SIPs. Moreover, the mutual fund industry had added about 8.86 lakh SIP accounts each month on an average during the FY 2017-18, with an average SIP ticket size of about Rs.3,250. Overall, AMFI data shows that the industry has received net inflows of Rs.23,574 crore in equity funds including pure equity funds, balanced, ELSS and equity ETFs in October. The total equity AUM has increased by Rs.66,000 crore to reach a record high at Rs.9.16 lakh crore in October 2017. The industry’s AUM had crossed the milestone of Rs.10 lakh crore for the first time in May 2014 and in a short span of a little over three years, the AUM size has doubled to Rs.20 lakh crore. The total number of folios as on October, 2017 stood at 6.32 crore. 

SEBI’s latest data shows that the Rs. 21.45 lakh crore mutual fund industry has added 11 lakh new retail folios in October 2017. A rough calculation indicates that the industry has added an average of 59,000 folios per day in the month of October 2017. As a result, the total folio count has reached over 6.31 crore in October 2017. For the last three months, the industry had constantly added over 60,000 folios per day on an average. However, last month, the industry witnessed a slight decrease in retail folio count. The decline in the quantum of new folios is largely due to the festive season as investors were more inclined to buy gold and other physical assets. Among mutual fund categories, equity funds have added over 10.26 lakh folios last month including pure equity, balanced and ELSS. Thanks to the market rally, pure equity funds have attracted 7 lakh investors increasing the folio count from 3.67 crore in September 2017 to 3.74 crore in October 2017. At the same time, equity funds saw an inflow of Rs.15,218 crore, shows the latest AMFI data. Also, AUM of equity funds stood at Rs. 6.32 crore in October. ELSS funds witnessed an addition of around 92,000 mutual fund folios and received net inflows of close to Rs. 784 crore in October 2017. Balanced funds continued the positive momentum by adding 1.85 lakh folios. The category received net inflows of Rs. 5,897 crore in October 2017.

According to the Association of Mutual Funds in India (AMFI) data, equity funds received an inflow of Rs 2.86 lakh crore from November 2016 to October 2017. Prior to that, such funds had registered inflows of Rs 1.5 lakh crore between October 2016 and December 2015. Along with that optimism of investors, demonetisation actually helped the industry to attract more investments. We have seen Rs 2.86 lakh crore coming into the mutual funds but we have also seen some redemptions. After taking into account redemptions, we have a net inflow of Rs 1.35 lakh crore. While overall assets under management (AUM) rose 32% since November 2016, the equity AUM grew by 46% after the note ban. Overall, the asset base of the mutual fund industry, comprising 42 players, reached an all-time high of Rs 21.41 lakh crore in October 2016, while that of equity AUM was over Rs 6.32 lakh crore. The traction in inflow of equity funds could be attributed to several factors. One, post demonetisation, there has been a clear increase in money coming into regulated market products such as mutual funds. Secondly, a slash in fixed deposit rates has seen retail money coming into equity markets through the mutual fund route. Money from unwinding of deposits may also have entered mutual funds. Third, with SIPs as a way of investing picking up among individual investors, equity funds have seen a steady increase in inflows as retail money, unlike institutional money, tends to be more sticky and steady. Systematic investment plans (SIPs), which have been the preferred route for retail investors to invest in mutual funds as it helps them reduce market timing risk, saw monthly collections growing to Rs 5,621 crore last month from Rs 3,434 crore in October 2016. The asset base of B-15 cities currently account for 17.7% of the overall industry AUM, up from 17% in Oct 2016 prior to demonetisation. B-15 cities have been witnessing a lot of activity around investor awareness and demonetisation was a much needed shot in the arm to help spur investments from smaller centres.

Piquant Parade

After a foray into the life insurance business and setting up of a NBFC subsidiary, Kerala-based Federal Bank is now looking at the mutual fund industry for further expansion of its operational domain. The bank is also in the process of divesting 26% stake in the fully-owned NBFC arm, Fedfina, to a strategic investor to raise capital for the subsidiary. Fedfina, is in the distribution business and also in the underwriting of loans for which it has generated a loan book of Rs 1,250 crore. The loan book of Fedfina is expected to double for which capital is needed. The equity divestment is towards that requirement and the strategic investor would be finalised by the end of the fiscal. Regarding the banking operations, equal stress is being given to corporate, MSME and retail loans. The bank's gross NPA level has been coming down over the last three years and stood at 2.3% at present. Post-demonetisation, digital transactions of the bank increased from 48% to 63%. The bank's business size stood at Rs 1.85 lakh crore comprising both deposits and advance at Rs 1 lakh crore and Rs 85,000 crore, respectively.

Punjab National Bank has said that the company will sell its entire stake in Principal PNB Asset Management Company. In fact, the Principal group has exercised call option to buy the entire stake in the company. Consequent upon the exercise of Call Option by the Principal Group, Board in its meeting held on 02.11.2017 has approved to offload its entire stake in Principal PNB Asset Management Company and Principal Trustee Company Pvt Ltd to the Principal group. Principal Mutual Fund manages AUM of Rs.5826 crore as on September 2017.

Peerless Mutual Fund has been renamed as Essel Mutual Fund with effect from November 1, 2017. Earlier in August 2017, Essel Finance had got the Securities and Exchange Board of India's approval to acquire Peerless Funds Management. Subsequently, the name of the Asset Management Company has been changed from 'Peerless Funds Management Co Limited' to 'Essel Finance AMC Limited’ with effect from October 24, 2017. In addition, the name of the trustee company has been changed from 'Peerless Trust Management' to 'Essel MF Trustee' with effect from October 30, 2017. Consequently, scheme names with prefix 'Peerless' has been changed to 'Essel'.

Canara Robeco Mutual Fund has allowed its mutual fund investors to use MF Utilities India's MF Utility portal for transactions in addition to the existing platforms. MF Utility is a 'transaction aggregator portal' and a shared service initiative of various asset management companies in India, wherein it enables the investors to transact in multiple schemes across fund houses. To use the portal, Canara Robeco Mutual Fund has signed an agreement with MF Utility India. Unit holders availing MF Utility can either transact electronically or physically in the authorised points of service approved by MF Utility India.

While Reliance Nippon Life AMC became the first fund house to go public in two decades, other fund houses such as ICICI, HDFC and UTI have been reportedly launching their IPOs soon. Listing of an asset management company has many advantages for both investors and companies.  Listing of an AMC provides retail investors access to a new sector. It makes the AMC business transparent for investors and attracts global investors. Listing of an AMC increases the accountability of the asset management company. Another possible reason could be retention of talent. Globally many companies use ESOP route to retain key employees. Going forward, the focus of the industry will move towards more profitable growth. Mergers and acquisition will take place based on profitability of the fund house instead of AUM. Investors will look at track record of profits. Public companies will have to focus on profitability to live up to the investor expectations.

Regulatory Rigmarole

The Association of Mutual Funds in India has sent an addendum to mutual funds for making Aadhaar mandatory for mutual fund investments with effect from January 1, 2018. On October 23, AMFI in an e-mail communication directed that mutual funds will not be allowed to open any new folios without obtaining customers' Aadhaar numbers. However, fund houses can allow investors to invest in mutual funds without furnishing Aadhaar details at their discretion; they will have to update such details before December 31, 2017. AMFI has also directed fund houses to ensure linking of Aadhaar details with existing folios before December 31, 2017. AMFI has asked fund houses to freeze non-Aadhaar compliant accounts with effect from January 2018. This means, non-Aadhaar compliant investors cannot execute fresh mutual fund transactions. This comes in the wake of the recent amendment in the Prevention of Money Laundering Act (PMLA) Rules, 2017. Earlier, the Finance Ministry had directed fund houses to link the Aadhaar number with the mutual fund folios before December 31, 2017. Investors can link their Aadhaar number with mutual fund folios through R&T agents such as CAMS and Karvy.

AMFI is likely to approach SEBI requesting modification of certain regulations of the scheme consolidation guidelines. Among other things, AMFI wants the market regulator to modify norms related to market capitalization, Macaulay duration and inclusion of gold as an asset class in the multi asset funds. Last month, SEBI had come out with uniform definitions for fund categories to reduce confusion among investors and expedite scheme consolidation. SEBI had defined large cap stocks as the 1st to 100th companies in terms of full market capitalization. While mid cap stocks, comprise 101st to 250th companies, small cap stocks consist of beyond 250th companies in terms of full market capitalization. On debt funds, AMFI will request the market regulator to consider modified duration instead of Macaulay duration. “Duration signifies risk. Longer the duration higher the risk. Since modified duration measures the price sensitivity of a bond due to change in the yield to maturity, it is a better measurement of interest rate risks. On the other hand, Macaulay duration calculates weighted average of maturity before the cash flows on bond starts and hence it may understate such risks. Currently, most fund houses consider modified duration to measure interest rate risks. Another key aspect of the circular is inclusion of gold in multi asset funds. SEBI has asked fund houses to have exposure to at least three asset classes in multi asset allocation funds. Apart from equity and debt, there are commodities like gold where a fund manager can invest in. Since, our fund managers do not have conviction on the performance of gold, they are not willing to take exposure to such an asset class.

Mutual funds are growing at a rate of 15% annually in the country. Indian mutual fund industry is in a growth phase with investors willing to test equity mutual funds. The Systematic Investment Plan (SIP) is gaining immense popularity among investors as an efficient tool for regular and disciplined investments. With SIP, one need not worry about market volatility or timing of market

Monday, November 20, 2017


November 2017

Asset mobilisation through the new fund offer (NFO) route has hit a nine-year high in 2017. The mutual fund industry launched a total of 47 NFOs during the first 10 months of the year, to mop up a cumulative Rs 13,500 crore. The average NFO size, too, has increased to a nine-year high of Rs 288 crore. The amount raised this year is still a fraction of what it used to be during the bull run of 2005-08. The annual mop-up during those four years was an average Rs 28,000 crore. Currently, investors prefer existing funds with a reasonable performance track record over new scheme launches and the trend is expected to continue. It is quite evident, as equity schemes got inflows of Rs 1.16 lakh crore so far in 2017, of which equity NFOs contributed a mere 12 per cent. Fund houses that do not have existing schemes in any of the product categories will only launch NFOs. 

NFOs of various hues adorn the November 2017 NFONEST.

HDFC Housing Opportunities Fund – Series 1
Opens: November 16, 2017
Closes: November 30, 2017

HDFC Mutual Fund has launched HDFC Housing Opportunities Fund - Series 1. The close-ended thematic equity fund will allocate at least 80 percent of its assets in equity and equity related instruments of entities engaged in and/or expected to benefit from the growth in housing and its allied business activities. The fund house will also invest up to 20 percent in equity shares of companies other than in housing and its allied business activities or in debt and money market instruments. The scheme also has the provision to invest up to 10 percent in units issued by Real Estate Investment Trusts or REITs & Infrastructure Investment Trusts InvITs. Though the underlying theme is housing, the fund is not a sectoral fund as it does not play on just one sector. The fund will invest in multiple sectors such as banks, NBFCs, engineering companies, steel companies and other consumer discretionary companies. In addition, the close end structure ensures that investors will remain invested at least for three years. The fund is benchmarked against India Housing and Allied Businesses Index. The Fund Managers are Mr. Srinivas Rao Ravuri and Mr. Rakesh Vyas.

DSP BlackRock A.C.E Fund – Series 1
Opens: November 17, 2017
Closes: December 1, 2017

DSP BlackRock Mutual Fund has launched DSP BlackRock ACE Fund (Analyst’s Conviction Equalized) Series 1. The 37-month close-ended multi-cap fund will allocate at least 80 percent of its asset in equity and equity-related instruments including derivatives, while up to 20 percent will be deployed in debt and money market instruments. The scheme portfolio will consist of 45-55 high conviction stocks across sectors and market capitalisations. The scheme will avoid sector and stock allocation bias. It will do so by having sectoral allocation in line with NIFTY 500 and equal weights for all stocks within a sector. Stock weights will be rebalanced quarterly and stock inclusions/exclusions will be done real-time. The Benchmark index of the fund is Nifty 500 Index. The Fund Manager is M. Suryanarayanan.

UTI Focused Fund – Series V
Opens: November 20, 2017
Closes: December 4, 2017

UTI Mutual Fund has launched UTI Focused Equity Fund Series V (1102 days), a closed ended equity scheme which primarily aims to generate long term capital appreciation by investing predominantly in equity and equity related securities of listed companies. The scheme will without any capitalization bias endeavor to invest in either growth stocks or value stocks or both. The scheme will normally hold up to 30 stocks in the portfolio. The Benchmark index of the fund is S&P BSE 100 Index. The Fund Manager is Mr. Vetri Subramaniam.

BOI AXA Midcap Tax Fund – Series 1
Opens: November 10, 2017
Closes: February 9, 2018

BOI AXA Mutual Fund has launched the BOI AXA Mid Cap Tax Fund Series 1, a close ended ELSS scheme with a tenure of 3650 days. The investment objective of the scheme is to generate capital appreciation over a period of ten years by investing predominantly in equity and equity-related securities of midcap companies along with income tax benefit. The fund is benchmarked against Nifty Free Float Midcap 100. The Fund Manager is Mr. Alok Singh.

ICICI Prudential Multiple Yield Fund – Series 14, Sundaram Capital Protection Oriented Fund – Series 19 & 20, ICICI Prudential Growth Fund – Series 9 to 11, ICICI Prudential Capital Protection Oriented Fund – Series XIII, SBI Long Term Advantage Fund – Series V & VI and ICICI Prudential Long Term Wealth Enhancement Fund are expected to be launched in the coming months.

Monday, November 13, 2017

November 2017

The consistent performance of all five funds in the November 2016 GEMGAZE is reflected in all the funds holding on to their esteemed position of GEM in the November 2017 GEMGAZE.

Birla Sun Life Tax Plan Gem
Launched in 1999, the Rs. 633 crore Birla Sun Life Tax Plan is one of the oldest ELSS funds in the industry. Currently, large caps account for 39% of the portfolio. Portfolio allocations show the fund to be more small and mid-cap oriented than its peers, with a 61.37% allocation to small and mid-cap stocks. With 53 stocks and the top 5 holdings accounting for 32.8%, the fund looks well-diversified. The fund invests 47.92% in the top three sectors, i.e. automobile, finance and services. The fund's investment strategy focuses on a diversified and high-quality portfolio, with parameters such as capital ratios and balance-sheet strength used to judge quality. It uses a combination of top-down and bottom-up approaches to take sector/stock positions. The fund avoids highly leveraged plays and offers superior growth opportunities.  After a bad patch from 2008 to 2010, Birla Sun Life Tax Plan has made a big comeback in the last five years, with a particularly good run since 2014. In spite of getting hit in the bear market situations a few years ago, it maintained a consistent growth. Since inception, this mutual fund has managed to give a very impressive return of 20.72% along with displaying a very consistent performance. In the past one year, the fund has earned a return of 27.89% as against the category average of 24.96%.  The expense ratio is 2.57% and turnover ratio is 62%.

Franklin India Taxshield Fund Gem
Launched in April 1999, the Rs. 3,367 crore Franklin India Taxshield Fund is one of the oldest ELSS funds in the industry with a proven track record in bull and bear phases. This ELSS fund’s strategy has been to buy quality large caps or emerging large caps at a reasonable price, even in a category crowded with multi-cap funds. Currently, large caps account for 81% of the portfolio. A large-cap oriented fund with a bottom-up investment strategy, this fund always stays fully-invested. The most distinctive feature of the fund's performance history is its ability to do better than its peers when markets crash. It fell only 15.19% as compared to the category average of 23.82% in 2011. But in the next year it slightly lagged behind its peers in terms of performance. The fund's long term returns are attractive, with a trailing five year return of 21.48% and it is ahead of its benchmark. Globally, Franklin Templeton is known for its stock selection. The Franklin India Taxshield Fund adopts the value investment philosophy. The fund waits for attractive price before investing in a share. The fund focuses on big companies which have potential to grow the business. The fund is backed by a strong research team. Anand Radhakrishan’s disciplined investment approach and a strategy that jelled well with his skill-sets has yielded desired results for this fund under his watch from April 2007 to April 2016. However, the fund went through some fundamental changes last year such as change in the manager and investment strategy. It is now helmed by Lakshmikanth Reddy, who joined the fund on May 2016 and has been managing this fund since then. Although R. Janakiraman is the named comanager here, Reddy is the primary manager. The change in the fund’s strategy is significant, too. While earlier it had a more definite mandate of investing around 70% in large-cap stocks and 30% in small/mid-cap stocks, it is now managed with a flexicap approach, which enables the manager to invest without paying heed to the benchmark index, market cap, or any specific style of investing. The change in the strategy is largely to align it with Reddy's skill-sets and to capture wider range of investment opportunities in the fund. Although the investment team has a reasonably good track record in running flexicap strategies, which is positive, it should be noted that it will also change the fund’s risk/reward profile going ahead. Further, the changes here have made the fund’s past track record less relevant. With 60 stocks and the top 5 holdings accounting for 26.52%, the fund looks well diversified. The fund invests 54.96% in the top three sectors, i.e. finance, automobile, and technology. Since inception the fund has given returns of around 25%. In the past one year, the fund has earned a return of 18.19% as against the category average of 24.96%. The expense ratio is 2.37% and turnover ratio is 26%. 

ICICI Prudential Long-term Equity Fund Gem

At Rs. 4753 crore, ICICI Prudential Long-term Equity Fund is one of the largest ELSS funds in the industry. Currently, large caps account for 55% of the portfolio. With 49 stocks and the top 5 holdings accounting for 22.13%, the fund looks well diversified. The fund invests 52.21% in the top three sectors, i.e. finance, energy and healthcare. The fund is valuation-focused and the portfolio is constructed around stocks across sectors and market-capitalisation ranges, based on cheaper valuation and reasonable growth expectations. Expensive stocks which cannot be explained by valuation tools are avoided. A fund which has outpaced its benchmark over not one but three different market cycles, it has beaten its benchmark in 13 of the last 15 years. This is a rare ELSS fund that has managed to stay one step ahead of the benchmark on a trailing one-, three-, five- and ten-year basis, while also beating the category over these periods. The fund's investment strategy typically delivers outsized returns in the beginning stages of a bull market when sector rotation is in vogue. It trails when markets are overheated. It also works well in containing losses when bears are in control. The value style of stock-picking has suffered setbacks in the last five years but seems to be back on the saddle in the last one year or so. In the past one year, the fund has earned a return of 14.48% as against the category average of 24.96%. The expense ratio is 2.32% and turnover ratio is 181%. 

Invesco India Tax Plan Gem

With a corpus size of Rs. 481 crore, Invesco India Tax Plan is one of the smallest schemes in its category, but it packs in quite a punch. The fund invests across market capitalisation and sectors and spreads its assets over 35 stocks without being overly diversified and the top 5 holdings constitute 37.14%. 57.03% of the assets are invested in the top three sectors, finance, automobile, and energy. Even though the fund currently has a large cap bias with 82% allocation, it has not been hesitant about being heavily invested in smaller companies. In the past too, the mid-cap and small-cap allocation have been high. Its relatively small size makes an effective mid-cap strategy viable. The one-year return is 23.7% as against the category average of 24.96%. The year-to-year returns of this fund show it to be equally good at navigating both bull and bear markets, which is a hallmark of this fund. It managed to contain downside to levels much lower than its benchmark during 2008 and 2011 and has outpaced it by big margins both in 2010 and 2014. The last one year has seen the fund outpace its benchmark, but it slightly lagged behind its category. This could be due to its higher large-cap tilt in a category that is largely multi-cap-focused. This fund is a good choice for investors who are looking for a conservative approach to tax planning. Despite its relatively short history, the fund has consistently delivered returns for the investors. A fund that has managed to beat its benchmark through markets ups and downs in seven out of the eight years since launch, the fund prefers quality businesses with healthy growth prospects. But it is careful about not going overboard on valuations. It does not take tactical cash or sector calls. Stock picking has been the key for success of this fund. The expense ratio is 2.47% and the portfolio turnover ratio is 43%.

DSPBR Tax Saver Fund Gem

Launched in 2007, DSPBR Tax Saver Fund has a fund corpus of around Rs 3216 crore. It has a growth-oriented multi cap portfolio with 73% of the corpus in large cap stocks. There are 68 stocks in the portfolio. The top 5 holdings constitute 21.24%.56.16% of the assets are invested in the top three sectors, finance, energy and construction. This fund has outperformed its benchmark in eight out of nine years since launch and its peers in seven of those years. The fund is not wedded to any particular style and follows a diversified approach to select stocks. Though multi-cap by mandate, the fund has been quite large-cap stock oriented in the last five years. The fund also takes tactical calls to capitalise on market trends and opportunities. The fund's margin of outperformance relative to the category and benchmark has widened in the last one year to over 6 percentage points. On a three- and five-year basis, its annualised returns are over 7 percentage points and 3 percentage points ahead of the benchmark and category, respectively. It is creditable that this has been managed with a distinct large-cap tilt relative to the category. The track record suggests that the fund has proved better at navigating bull runs and volatile phases in the market than bear phases. In 2008 and 2011, the fund lost slightly more than the category. It has delivered sizeable outperformance in 2012 and 2016. However, as the fund has seen a change in manager in 2015 and also adopted a higher allocation to large-cap stocks, past performance may not be a great guide to the future. DSP BR Tax Saver fund has offered 20.55% returns for the last one year as against the category average of 24.96%. The expense ratio is 2.51% and the portfolio turnover ratio is 84%.