Small debt funds face concentration risk: CRISIL

CRISIL`s analysis reveals that the portfolio credit quality of most Indian debt mutual fund schemes is strong. However, a majority of schemes have single-industry concentration, and many small schemes have single-company concentration. Funds with large and illiquid single-company exposures could be affected by redemption pressure: single-company exposures could increase as these funds sell the more liquid assets in their portfolios to meet redemptions. The high credit quality of most debt funds` investments, though, partly offsets the risks arising from concentrated holdings.
The 860 schemes analyzed cover 96% of the assets under management (AUM) of Indian debt mutual funds; gilt schemes are excluded, since they do not have sector or company exposure. Investments that are rated `AAA` and `P1+`, the highest rating categories, constitute 82% of the portfolios analyzed for the study; the `AA` category adds another 6% to this figure.
``Most debt funds have not compromised on credit quality in search of returns, and investors therefore have little reason to fear defaults eroding the value of their investments. Nevertheless, lack of adequate portfolio diversification does remain an issue,`` said Roopa Kudva, managing director and chief executive officer, CRISIL.
A concentrated portfolio increases the risk of investors losing a large chunk of their capital in the event of a single default. CRISIL has defined portfolios where more than 25% of AUM is exposed to a single industry or company as `significantly exposed`. By this definition, almost all debt schemes have significant exposure to at least one sector. Half of the schemes have a significant exposure to the banking sector, and 38% have a significant exposure to the non-bank financial company (NBFC) sector. Contrary to widespread perception, exposure to the real estate sector is relatively low.
``We estimate that only 5% of debt mutual funds` AUM consists of real estate sector debt. More importantly, not more than 3% of debt mutual funds have significant exposure to the real estate sector,`` said Tarun Bhatia, head, financial sector ratings, CRISIL.
More risky than single-industry exposure is single-company exposure, because it implies even lower diversity. Of the 58 debt schemes that have AUMs of Rs 10 billion and above, only two are significantly exposed to single companies. However, of the remaining 802 schemes in the study, 249 have significant exposure to at least one company. This means that, while the larger schemes are well diversified as far as single-company exposure is concerned, 30% of the smaller schemes have significant single-company exposure.
These concentration levels reflect the limited investment opportunities in the Indian debt market. Most funds have worked towards mitigating concentration risk by investing in highly-rated credits as the rating distribution statistics above indicate.
``Over the longer term, the solution to concentration risk lies in having a more vibrant debt market with a much wider issuer base than exists in the country today,`` Kudva added.

Source:http://www.myiris.com/rss_index.php?fileR=2008%2F12%2F09%2F20081209162347121

Investors flock to big, PSU MFs for investment safety

After a tumultuous time during the October liquidity crisis, investors might just be taking a “flight to safety”, banking on public sector mutual funds and the bigger names in the industry.

Corporate investors are shifting preferences in their choice of fund houses instead of chasing returns, distributors and officials said.
Investors are rushing to invest in public sector entity-sponsored fund houses with a view government may come to rescue and bail out in case of any unforeseen circumstances.
While PSU-sponsored fund houses are cashing-in on money, top mutual funds are also benefiting due to their brand name, expertise and fund management skills, industry officials said. “There has been a complete shift in the choice of investors. People have begun associating more with the bigger names. Choice of fund house has become the first criteria for investment followed by better fund managers and lastly, returns,” a senior official at a distribution house said.
October witnessed unprecedented redemption in liquid, short-term debt, and fixed maturity plans amid acute liquidity crisis that pushed interbank call money rate close to 22 per cent.
Doubts over FMP portfolios further added to the pressure leading to the investor sentiment taking a rough bruise. In the course of events, a study by Mumbai-based distribution house, which is famous for corporate reach, notes how only the big players have been consistent with their inflows.
According to this study, fund houses that have garnered sizeable business in November include Birla Sun Life Mutual Fund, ICICI Prudential Mutual Fund, HDFC Mutual Fund, Tata Mutual Fund and Reliance Mutual Fund.
What must be noted that the fund houses listed are among the top ten of the country and that in spite of witnessing a drop in their monthly average assets have remained in the good books of investors.
In November, average assets under management of the 35 fund houses in India fell by 6.91% to Rs 4.02 lakh crore over the previous month. The top 10 mutual funds’ average assets dropped 4.46% to Rs 3.074 lakh crore. Barring UTI Mutual and Tata Mutual, rest all fund houses suffered fall in average assets.
UTI Mutual Fund, LIC Mutual Fund and SBI Mutual that are among the public sector fund houses have seen sizeable inflows, a distributor said. An example of which would be the last quarterly FMP launched by SBI Mutual Fund that garnered Rs 1,700 crore in its new fund offer (November 20-25).
This huge success comes at a time when investors shunned FMPs due to a lack of clarity on likely norms. The crisis faced by the industry led to Securities and Exchange Board of India getting into the act and revising norms for close-ended mutual fund schemes.
“The mindset might be changing. Investors are sticking to Indian mutual funds while new money is definitely going to big names,” said the executive director of an investment advisory firm.
On Thursday, the regulator banned premature exits in close-ended schemes and made listing of such schemes compulsory. Among the other fund houses that held fort were JP Morgan Mutual Fund, DWS Mutual Fund, Kotak Mahindra Mutual Fund and Canara Robeco Mutual Fund, a distributor said. “Smaller fund houses will face problems,” said Juzer Gabajiwala, head, mutual fund distribution, Ventura Securities.

Source: http://www.business-standard.com/india/news/investors-flock-to-big-psu-mfs-for-investment-safety/00/21/342631/

Primary CP issues take a back seat

Primary issuances in the commercial paper (CP) market were absent as mutual funds preferred to remain on the sidelines due to the uncertainty regarding rates, dealers said.

Rates also fell 50 basis points after the Reserve Bank of India (RBI) on Saturday lopped 100 basis points off its reverse repo and repo rates to 5 per cent and 6.5 per cent respectively.
“Mutual funds are receiving inflows from banks, but are refraining from investing and are preferring to hold on to cash,” said a dealer at a private mutual fund.
Corporate advance tax payments on December 15 have made mutual funds wary about investing as they expect redemptions from banks and companies.
Banks were offering certificates of deposit (CDs), but there were no buyers in the market On Monday, dealers said.
Banks are also not keen on issuing papers as they expect rates to fall further in the coming weeks.
“Mutual funds are not seen investing in papers for a week or so until redemption pressure eases,” said a dealer at a mutual fund.
Non-convertible debentures (NCDs) with put/call option were also not dealt in the market On Monday, dealers said.
Three-month CPs were quoted at 12-13 per cent, unchanged from Friday, while three-month CDs were at 7.50-7.75 per cent versus 8.10-8.30 per cent.
Secondary marketVolumes were subdued in the secondary market too as most mutual funds were seen investing in secondary corporate bonds, dealers said.
“Mutual funds and banks were selling papers in the secondary market to book profits,” said a dealer at an insurance company.
CDs maturing in December were dealt at 6-6.10 per cent compared with 6.50-6.60 per cent on Friday.
CDs maturing in March were dealt at 7.40-7.60 per cent compared with 7.75-8 per cent.
Vijaya Bank’s March maturity CDs were dealt at 7.41 per cent On Monday.

Source: http://www.business-standard.com/india/storypage.php?autono=342619

Markets see another dose of incentives soon

Fund managers see sale of domestic stock by FIIs peaking by the month-end; inflation also to continue falling............

The combination of a Rs32,000 crore economic stimulus package, a 10% cut in retail fuel prices and big cuts in rates by the Reserve Bank of India (RBI) saw Indian stock markets rise modestly even as key Asian markets soared in anticipation of more such announcements in China as well as US President-elect Barack Obama’s plans for a large infrastructure-building national works programme. The Bombay Stock Exchange’s bellwether index Sensex surrendered early gains as investors chose to book profits and closed at 9,162.62, up 197 points, or 2.2%. The broader 50-stock index, Nifty, gained 2.56% or 69.60 points to close at 2784 points.Earlier, among the Asian indices, the Hang Seng was the biggest gainer with 8.66% while the Kospi index gained 7.48%. In Japan, the Nikkei rose 5.20%.

RBI cut both its policy rates by 100 basis points each on Saturday and the government followed it up by announcing a stimulus package worth 0.5% of the country’s gross domestic products.Brokers, analysts and fund managers that Mint spoke to on Monday maintained that the overall impact of policy measures on the stock market is positive, mainly on sentiments, though marginal. They also said they expect more such booster shots from the Indian government as well as more rate cuts by RBI. Rashesh Shah, chairman and chief executive of institutional brokerage Edelweiss Capital Ltd, said while the current package helps, it wouldn’t be the last such measure. Echoing the sentiment, Sanjay Sinha, chief executive of domestic mutual fund DBS Cholamandalam Asset Management Ltd, which manages Rs150 crore worth of equities, said the government’s announcements should translate to the companies getting easier access to credit for the markets to stabilize, and that there could be larger measure from the central bank in January. “This is a confidence booster; however, it may not be sufficient,” said N. Mohan Raj, executive director of investment operations at the Life Insurance Corp of India Ltd, or LIC, and who manages the biggest portfolio in local equities. LIC, which is also India’s largest lender to companies, on Monday announced it would invest Rs11,000 crore in Indian stocks by March, taking its investment in secondary markets for fiscal 2008-09 to Rs40,000 crore.Some fund managers and brokers say they expect the peaking of foreign institutional investors (FIIs) selling domestic stocks by December. Going by the provisional date released by the BSE, FIIs bought Indian stocks worth $70.65 million on Monday, net of selling. FIIs, the main driver of Indian stock market, have taken out $13.7 billion this year after investing $17.36 billion in 2007.In a report on Monday, Sonal Varma, economist at Japanese investment bank Nomura Financial Advisory and Securities (India) Pvt Ltd, wrote the firm expects “the government to continue to announce incremental fiscal policy measures aimed at specific vulnerable sectors and a much larger fiscal stimulus to be announced next year to offset the fall in private investments in financial year 2010”. The good news, she said, is that inflation is likely to continue to fall at an accelerated pace due to falling commodity prices, rising economic slack and a high base effect.Both Sensex and Nifty so far have lost close to 55% each this year.

Source: http://www.livemint.com/2008/12/09003952/Markets-see-another-dose-of-in.html