Wednesday, July 1, 2009

Reliance Cap raises 23.5 bln rupees in infra fund

India's No. 1 mutual fund manager Reliance Capital Asset Management has raised 23.5 billion rupees in a new equity fund, a top executive said, the highest collection by a stock fund, since at least March 2008.
Reliance Infrastructure Fund, which closed for initial subscription last month, tapped 436,000 investors from about 1,000 cities, chief executive Sundeep Sikka told Reuters.
The mop-up, more than the collective assets gathered by all the stock funds launched in the last 12 months, also makes the product the third biggest infrastrastructure mutual fund in India.
Infrastructure as an investment theme has gained favour in India following a strong mandate to a Congress-lead government in April-May polls.

Why have mutual funds still not penetrated in rural India? What is there in the minds of the people that they have not accepted this product as yet?

Let’s first try to understand what products have been able to penetrate in rural markets and what are the possible reasons for their success?Investment instruments such as Fixed Deposits, Post Office Schemes, NSC’s, KVP’s, LIC’s, precious metals and property, etc. are some of the products which have been able to penetrate the farthest of the corners of the country.If we trace the history of human civilization we will find that the concept of a bank is very old. It is almost as old as the existence of money and the formation of an organized marketplace. The origin of the word bank comes from the term ‘banko’ which means a bench. The story goes that traders in the olden times used to sit on a bench and carry out money transactions and thus the origin of this word.Over the years, people have understood the concept of borrowing money from the money lenders and repaying the same with interest. Also, they have understood the concept of keeping their savings with the bank and earning an interest on the same. Thus, the concept of interest, which a person gets for giving his money to another person, is something which is clear to even the most rural of regions in the country.Most of the products in the above list are those which operate on the basis of the above formula. If we take the example of FD’s, PO’s, NSC’s, KVP’s, etc. we see that they all work on the same principle. The only difference is that they come with a clause that you need to keep the money with the bank or the respective institution for a fixed duration of time. This is not something that is unacceptable to any person who is promised a sum of money greater than the initial amount to be returned to him, guaranteed, after a period of time.Prior to the formation of the Life Insurance Corporation of India in 1956, there were 154 Indian insurers, sixteen non-indian insurers and 75 provident societies who held the insurance business in India. Post its formation, it held the monopoly for carrying out the insurance and the pension business in India. There are two kinds of products which were sold by LIC – assurances and annuities. Assurance plans would provide a fixed amount to the dependants of the person insured in case of an untimely death. Annuities, would act in the form of a pension which the person would get after retirement to enable him to maintain his standard of living. By the year 1997, LIC had spread to the farthest corners of the country with around 5,50,000 agents.The reasons for this growth and the subsequent impact on the minds of the people in the remotest parts of the country are interesting to note. Monopoly was one of the biggest reasons for LIC to grow. However, prior to formation of LIC, the insurance business in India was limited to the urban regions and little interest was taken to develop the rural business. There wasn’t an organization which was huge enough of interested enough to invest in developing the business from regions where there would be a longer gestation period along with low returns. LIC was the first mover and was reaping the benefits. The other reason for the growth of this business at a time when there was almost a complete absence of advertising or any other form of communication media is the strong network of agents who used to earn a good commission, work using the tools of personal interaction and word of mouth and also provide a good product and security. It is this network of agents, who used to earn their living out of these commissions that LIC was able to reach at a level where very few networks in the world would have been able to reach. Also, it is only because of these agents and the simple products, which were explained well by them, that the understanding and acceptance of insurance has been able to reach almost every possible corner of the country. Even today, just as Colgate is synonymous with toothpaste, LIC is with insurance.Also, LIC agents in the corners of the country, were not just people who would carry out business for the sake of profits. They were people who would get close to the families with whom they would work and would be a part of them in the happy as well as the tough times. They were people who would carry out all the necessary documentation from filling up the forms to getting the claims cheque when the time would come. They would become almost a part of the family as a proper well wisher.With respect to gold, it has been an adornment for the women since the time civilization has existed. They were the first units of transaction after barter system because they were precious and not everyone had access to them. It is for this reason that they were used to make coins which were used for carrying out the transactions.With the passage of time, owing to the preciousness of these metals monetarily and also because they are an intrinsic part of the adornment of women on auspicious occasions and otherwise, precious metals have been an investment which are usually on top of the mind with people anywhere in the world. It is also for this reason, that money lenders started lending money in exchange for gold and other precious metals.Property as a material of possession is almost a part of the human genes. The concept of possession of a place and how it would provide a sense of security and a feeling of power has been seen from the time human evolution has started. From animals who would fight for their own areas, to rulers who would conquer, to nations who would democratize, to owning a little house or a field or an office, the ownership of property is as old as we can possibly look back.If we go back a couple of decades into the history of this nation, we see that farmers would mortgage their lands to the money lenders for buying seeds, manure, etc and also for running their families. What would usually follow is a burden of a lifelong un-repayable interest and mercy at the hands of these rich landlords. Thus, the feeling of having a land of their own, is something which has been one of the greatest ambitions for the success of the Indian household.From the above, we see how people not only in rural India but across the country, have been able to understand and accept the importance of investment of their savings into any of the above products. All of these products have an immensely long history which has enabled their understanding and acceptance in the minds of the people.Now, let’s look at the growth of mutual funds in the Indian context.Mutual Funds were introduced in India in the mid to late eighties. They started to grow as acceptable products of investments by the late nineties. However, their penetration was extremely low. LIC had far more number of agents than the total number of applications which it had received by this time for LIC Mutual Funds. Also, the financial losses that people suffered owing to the turmoil in the markets made them extremely wary of investing in mutual funds. At the same time, this sector had just started to open up, become professional and start investing in the stock markets. There were far greater number of debt schemes at this time, which used to provide better returns than fixed deposits due to the falling rate of interests and the profits these schemes could earn on mark to market transactions.As this sector began opening up, we have seen a far greater number of financial goof-ups in the stock markets, entry of foreign companies to whom people are not familiar, maturing of the market regulators and a greater transparency over the years and also a large number of players leading to confusion in the minds of the investors. These new players who have entered the market, are still limited to the urban and semi urban regions and also their marketing efforts are limited to these regions. At the same time, there have been too many uncertainties which this sector has witnessed owing to the conditions of the stock exchanges on the equity side and negative to negligible returns owing to almost stagnated interest rates on the long term debt side. At the same time, they are competing with products which have a distinct understanding and acceptance in the minds of the people in urban and the rural India.Today, there are a total of 35 asset management companies with a total AUM of around 639130 crores. The largest being Reliance Capital Asset Management Company, followed by ICICI Prudential AMC, UTI Mutual Fund AMC and SBI Funds Management Pvt. Ltd. However, with so many fund houses and schemes in the market, there is still an extremely low penetration of MF’s among the paid workforce at around 2% of the savings. Also, there is a huge percentage of people who do not understand the product at all in terms of the risk and the reward which are associated with it.Some of the reasons for the success of the top funds are as follows:1) Huge distribution networks which spread almost all across the country. Eg. SBI, UTI, ICICI, HDFC, etc.2) Favorable image of the mother brand on the fund house. Eg. Reliance, ICICI, SBI, UTI, etc.3) Huge investments received from the banking channels by cross selling of these mutual funds. Eg. Reliance, SBI, ICICI, HDFC, etc.4) Huge investments received from the mother company and its subsidiaries. Eg. Reliance.5) Corporate short term funds parking money being invested in mutual funds. The major portion of the AUM of all of these fund houses comes from this source and not so much from retail investors.6) Extensive and established agent networks. Eg. LIC, UTI, etc.7) Huge marketing and advertising spends which have been made by these AMC’s.With assets under management of over 60,000 crores as on May, 2009, it cannot be denied that there is a huge amount of money that is being managed by the mutual fund houses. However, the issue lies with the fact that most of this money is from the urban areas, from corporate investors who park their funds for the short term and from a small number of investors with big ticket size investment. The money is divided between hundreds of schemes of these fund houses. Also, the corpus which is actually invested into the stock markets for a long period of time is too little. Mutual Fund corpus is not big enough at present to be able to substantially impact the market. On the other hand, it gets affected by the market turbulence very fast. To be continued…

Infrastructure Sector - Best Sector To Invest For Next Atleast 10 Years

I was reading through a news article on one site about Mutual funds buying stocks of Infrastructure companies in India. Here are my thoughts on the same and the original news article as well.
Infrastructure as a whole is big story in India looking at the growth trajectory country has been experiencing in past few years. To sustain this growth and even achieve higher numbers, what India now needs is the best of infrastructure that we can have. And the government formed by Congress in Delhi knows it well. It is obvious that country is going to witness increasing number of infrastructure projects being announced for execution in next few years to build world class infrastructure in India for sustained growth and to attract more and more foreign investments. Have you seen those metro rails being built? Or the expressways being built? Or the flyover network Or New national highways Or New Airport terminals? If Yes, You have seen the growth in infrastructure sector. Question is, if you should become the part of this growth and ride the infrastructure story to mint money from your investments in next few years!
Infrastructure shares are hot commodities to buy for mutual funds in India after the recent elections, and their attraction is only set to grow as the new government lays out plans to improve the country's overburdened roads and bridges in next month's budget.
Fund managers are hoping the new government will bolster spending on infrastructure, remove policy bottlenecks by easing land acquisition rules and environmental clearances, amend labour laws and simplify procedures for project approvals.
Fund managers are also betting on a pick-up in earnings for such firms later this year, helped by lower interest rates and commodity prices and a revival in economic growth.
"Basically the opportunity is very big," said Sankaran Naren, equity chief investment officer at ICICI Prudential. All that is required is for everything to be lubricated properly. I am interested in clarity," Naren, who manages about $780 million in India's biggest infrastructure mutual fund, added.
Engineering firms Bharat Heavy Electricals, Larsen & Toubro, Crompton Greaves and Reliance Infrastructure, were among the 20 most popular stocks for domestic fund managers in May.
The shopping list also included construction firms Jaiprakash Associates and Punj Lloyd, as funds sought exposure to sectors such as power and construction.
India's biggest fund firm, Reliance Capital, is raising money for a new infrastructure offering, while rival Tata Mutual Fund sought approval this month to launch its fourth such fund.
SBI Funds Management, French insurer AXA, Sundaram BNP Paribas, Franklin Templeton and Deutsche Bank have also sought approval for infrastructure funds in June.
Fund managers are excited by the prospects for reforms after India gave the Congress-led coalition the most decisive election mandate in two decades, freeing it from the support of the Left and communist parties, which had stalled planned reforms.
India estimates it needs $500 billion over the five years to 2012 to upgrade its overwhelmed airports, potholed roads and inadequate utilities but has lagged in making critical reforms needed to do so, holding back potential gains for investors.
The sector suffered a blow last year as the economy slowed from 9 per cent in 2007/08 to less than 7 per cent and a global credit crunch starved infrastructure firms of funds.
But the gloom seems to be diminishing.
India is expected to expand at 8 per cent in 2010, the fastest among major economies in the world, and 8.5 per cent the year after, matching China's growth rate, according to a World Bank report released on Monday.
An improvement in growth prospects is likely to boost fund flows, especially to the high-beta infrastructure sector.
The sector could also get a lift later this week when the S&P CNX Nifty index shifts to a free-float market cap methodology, giving higher weight to some infrastructure stocks.
However, India faces plenty of execution risk.
"While there is always a fear of disappointment when expectations are very high, in our view, the government could focus on low hanging fruit and still deliver a lot," JPMorgan's domestic fund unit said in its latest fact sheet.
HUGE POTENTIAL
Few would doubt the opportunity in domestic infrastructure.
India's peak power capacity is nearly 14 per cent short of demand, while its transmission and distribution losses are a staggering 40 per cent, according to Planning Commission data.
Only 2 per cent, or 65,590 kilometres, of roads are national highways but carry 40 per cent of traffic, while less than half of agricultural land is irrigated, it said.
Ports are running at 95 per cent of capacity with demand rising at 10 per cent annually, Tata Asset Management data showed.
But to grow at 9 per cent India needs to invest 9 per cent of its GDP to boost infrastructure from less than 6 per cent now.
For a graphic on planned investment by sector, click here
"Achievements in the past five years will pale in comparison with what we will see in the next five years because of the scale at which these activities are going to be happening," said Sanjay Sinha, chief executive of DBS Cholamandalam Asset Management.
Infrastructure funds are the most popular in India by sector, with 18 of them managing nearly Rs 16000 crore ($3.3 billion) at the end of May, according to fund tracker ICRA Online.
"This is a 10 to 20-year catch-up story, years of servicing and supplying, and then another cycle of upgrading and replacing," said Seth R. Freeman, chief investment officer of US money manager EM Capital Management.

BlackRock's India unit plans long/short stock fund

BlackRock's Indian mutual fund unit filed initial papers with the Securities and Exchange Board of India on Monday to launch a long/short stock fund.
DSP BlackRock Enhanced Equity Fund will invest at least 65 percent of its assets in long positions and up to 30 percent in shorts, according to the offer document filed with the regulator.
Long positions refer to buying and holding a security to sell at a higher price, while a short position means selling a security that one does not own, in hope of repurchasing it at a lower price and making a profit from the price differential.
The fund can also invest up to 35 percent of its assets in debt and money market instruments.
India's market regulator allowed short selling of shares by all institutional investors from April 21 last year but the strategy has not taken off yet.

Quantum offers maiden fund of funds

Quantum Mutual Fund launched its first fund of funds on Friday in a bid to lure clients finding it tough to chose from hundrends of equity funds.
The fund will invest in 5-10 diversified equity funds with a track record of at least three years, the firm said in a statement. It will, however, not invest in Quantum funds.
"Choosing the correct equity fund is difficult due to the plethora of schemes available. Quantum Equity Fund of Funds will make it simple for investors," Ajit Dayal, president of Quantum Asset Management, said.
Number of equity funds in India has doubled to more than 300 in the last five years, according to data from the Association of Mutual Funds in India (AMFI), creating a problem of plenty for mutual fund investors.
This has lured firms such as ING Asset Management to offer fund of funds, though the category is yet to attract any significant investments.
Fund of funds managed just over 7 billion rupees in India's 6-trillion-rupees-plus mutual funds industry in May, AMFI data showed.

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Aggrasive Portfolio

  • Principal Emerging Bluechip fund (Stock picker Fund) 11%
  • Reliance Growth Fund (Stock Picker Fund) 11%
  • IDFC Premier Equity Fund (Stock picker Fund) (STP) 11%
  • HDFC Equity Fund (Mid cap Fund) 11%
  • Birla Sun Life Front Line Equity Fund (Large Cap Fund) 10%
  • HDFC TOP 200 Fund (Large Cap Fund) 8%
  • Sundram BNP Paribas Select Midcap Fund (Midcap Fund) 8%
  • Fidelity Special Situation Fund (Stock picker Fund) 8%
  • Principal MIP Fund (15% Equity oriented) 10%
  • IDFC Savings Advantage Fund (Liquid Fund) 6%
  • Kotak Flexi Fund (Liquid Fund) 6%

Moderate Portfolio

  • HDFC TOP 200 Fund (Large Cap Fund) 11%
  • Principal Large Cap Fund (Largecap Equity Fund) 10%
  • Reliance Vision Fund (Large Cap Fund) 10%
  • IDFC Imperial Equity Fund (Large Cap Fund) 10%
  • Reliance Regular Saving Fund (Stock Picker Fund) 10%
  • Birla Sun Life Front Line Equity Fund (Large Cap Fund) 9%
  • HDFC Prudence Fund (Balance Fund) 9%
  • ICICI Prudential Dynamic Plan (Dynamic Fund) 9%
  • Principal MIP Fund (15% Equity oriented) 10%
  • IDFC Savings Advantage Fund (Liquid Fund) 6%
  • Kotak Flexi Fund (Liquid Fund) 6%

Conservative Portfolio

  • ICICI Prudential Index Fund (Index Fund) 16%
  • HDFC Prudence Fund (Balance Fund) 16%
  • Reliance Regular Savings Fund - Balanced Option (Balance Fund) 16%
  • Principal Monthly Income Plan (MIP Fund) 16%
  • HDFC TOP 200 Fund (Large Cap Fund) 8%
  • Principal Large Cap Fund (Largecap Equity Fund) 8%
  • JM Arbitrage Advantage Fund (Arbitrage Fund) 16%
  • IDFC Savings Advantage Fund (Liquid Fund) 14%

Best SIP Fund For 10 Years

  • IDFC Premier Equity Fund (Stock Picker Fund)
  • Principal Emerging Bluechip Fund (Stock Picker Fund)
  • Sundram BNP Paribas Select Midcap Fund (Midcap Fund)
  • JM Emerging Leader Fund (Multicap Fund)
  • Reliance Regular Saving Scheme (Equity Stock Picker)
  • Biral Mid cap Fund (Mid cap Fund)
  • Fidility Special Situation Fund (Stock Picker)
  • DSP Gold Fund (Equity oriented Gold Sector Fund)