Debt funds provide highest returns in November: CRISIL

CRISIL FundMonitor, CRISIL’s monthly review of the mutual fund industry points out that debt funds provided investors the highest returns in November 2008. Within the debt fund category, the monthly returns of gilt funds were the highest (3.07 per cent), followed by long-term bond funds, short term bond funds and liquid funds in that order. Returns from equity funds were negative, as the downtrend in equity markets continued.

Summarising the trends in the industry, Krishnan Sitaraman, Head, CRISIL FundServices explained : “After two consecutive months of sharp declines, the month end industry AUM finally showed an increase to Rs. 4.05 trillion from Rs.3.95 trillion, due to significant inflows in the second fortnight of the month as liquidity in the economy improved and investors once again turned to mutual funds. Most of the accretions flowed to open-ended income funds and liquid funds.”

In November 2008, open ended income funds and liquid funds were the key beneficiaries with the former seeing net inflows of almost Rs.190 billion while close ended income schemes (largely Fixed Maturity Plans or FMPs) saw net outflows of a similar magnitude. AUMs of liquid funds increased by Rs.175 billion, a growth of nearly 25 per cent over the October-end AUM. The decline in equity AUM of around Rs.70 billion was largely on account of mark-to-market losses. The share of debt funds AUMs in the Indian mutual fund universe thus continued to rise in 2008 from 61 per cent in January 2008 to 71 per cent in November 2008.

Of the 35 mutual fund houses analysed as part of the CRISIL FundMonitor, only two saw a growth in average AUM in November 2008 - Tata Mutual Fund registered a little over 3 per cent growth in its average AUM followed by UTI Mutual Fund which saw a very marginal increase in its average AUM to Rs.384 billion in November from Rs.383 billion in October. Reliance Mutual Fund, ICICI Prudential Mutual Fund and HDFC Mutual Fund saw a decline in the range of 3-6 per cent while smaller fund houses like Taurus Mutual Fund (34 per cent), Edelweiss Mutual Fund (28 per cent) and Mirae Asset Mutual Fund (69 per cent) registered much sharper declines. Reliance Mutual Fund continued to be largest fund house with an average asset base of Rs.678 billion in November 2008, though down by nearly 5 per cent from the previous month.

On an overall basis, the environment of lower interest rates, lower inflation and the beginning of a slight easing in liquidity conditions, facilitated the improved performance of debt funds. Given falling interest rates, funds which had taken a higher duration call out-performed. This is because of the direct relationship between debt fund returns and duration in a declining interest rate scenario, i.e. when interest rates decline, funds which are invested in longer duration securities out-perform as such securities appreciate more in an environment of declining interest rates.

Differential load on MFs may be history

The Securities and Exchange Board of India (Sebi) is set to discontinue the differential
loads on high-value investments to provide a level playing field to mutual fund investors. This move will benefit the retail investors, who often end up subsidising their institutional counterparts.
A Sebi committee found it undesirable to have differential loads between corporates/high networth individuals (HNIs) and retail investors under the aegis of the same scheme. Retail investors subsidise large corporate investors as the latter are exempted from paying an entry load in return for putting huge money into the scheme.
There cannot be zero expenses for managing large investor funds, the Sebi committee concluded. The regulator is also looking at restricting the tenure of debt instruments held by liquid funds. In order to meet sudden redemption pressures, liquid funds may be disallowed from holding securities with a maturity exceeding 90 days.
Fixed maturity plans (FMPs) and liquid schemes were affected the most by a tsunami of redemption requests in October. A large chunk of portfolio was invested in papers with maturity ranging from six months to a year. The liquid schemes initially used their cash reserves to meet the redemption pressures. However, when cash reserves proved insufficient, mutual funds resorted to fire-sale of assets (largely money market instruments).
This, in turn, resulted in huge losses to the remaining investors. Sebi is mulling a ban on the tendency of fixed maturity plans to promise indicative returns/yields. Fund houses currently differentiate themselves by assuring indicative returns. This leads to mis-selling of these products as definite returns based instruments.
The market regulator may impose a sectoral cap of 20-25 % on the portfolio investments of mutual funds to enable risk-diversification. A recent analysis revealed that fund houses restrict investments to the banking, finance, telecom and construction sectors.
In a move that will bring cheer to the retail investors, the regulator may soon approve variable entry load. The application form will have an option for distributor commission to be paid by the investor. The draft standard form will be submitted by Amfi to Sebi shortly.

Source: http://economictimes.indiatimes.com/Personal_Finance/Mutual_Funds/MF_News/Differential_load_on_MFs_may_be_history/articleshow/3849162.cms

Funds pump cash into CDs

Mutual funds On Tuesday stepped up investments in one-year certificates of deposit (CDs) as they received inflows in their fixed maturity plans (FMPs) and on expectations that short-term rates may fall further, dealers said.

Mutual funds had avoided purchasing short-term papers since last week due to outflows on corporate advance tax payments.
On Tuesday, banks placed around Rs 2,300 crore through CDs, while none was placed on Monday.
Mutual funds expect short-term rates to fall as the Reserve Bank of India (RBI) may cut interest rates by January.
The rates on CDs and commercial papers (CPs) have fallen by 100 basis points in the past two weeks after RBI cut the reverse repo rate and repo rate by 100 bps each.
Three-month CPs were quoted at 13-14 per cent On Tuesday, unchanged from Monday, while three-month CDs were quoted at 7.40-7.60 per cent compared with 7.20-7.30 per cent.
On Monday, Adlabs had placed Rs 10 crore of three-month commercial papers at 14 per cent.
CDs maturing in December were dealt at 5.75-6.00 per cent, unchanged from Monday. CDs maturing in March were quoted at 7.75-7.95 per cent.
Corporate bonds riseMutual funds continued purchasing corporate bond papers On Tuesday due to inflows in their income funds, dealers said.
Insurance companies and a few banks were also seen buying papers on expectation that rates would ease further, while primary dealers were selling papers to book profits.
Power Finance Corporation’s 10-year bonds were traded at 9.15-9.20 per cent On Tuesday compared with 9.05-9.15 per cent on Monday.
Mutual funds have been investing heavily in corporate bonds in the secondary market for more than two weeks as they have been receiving inflows in their income fund schemes, dealers said.
Corporate bond yields fell by 5 basis points On Tuesday tracking government securities. The benchmark 8.24 per cent, 2018 government paper ended at 5.9854 per cent compared with 6.1672 per cent on Monday.

Source: http://www.business-standard.com/india/storypage.php?autono=343471