Mid-caps are the flavour of the season

The post-Lehman meltdown was a once-in-a-century event, but the way the equity markets across the world reinvented themselves in a span of a few months is the stuff of legends.

With changing market dynamics, Indian fund managers too promptly reshuffled portfolios, changed sectoral preferences and adopted suitable strategies to keep their funds afloat. Diversified equity schemes have thus managed to deliver one year average trailing returns of about 90% with a good number of them having conveniently returned over 100% for the period.
Tuning their strategies to the whims and fancies of the market, many fund managers had cautiously begun to deploy their excessive cash holdings back into the equity markets since April this year. The cash holdings — raised to as high as 25-40% by equity funds last year to protect capital from further erosion — finally found their way back into the equity mainstream. Those prompt enough to do so have also reaped in the best of the returns even as others followed suit. The cash holdings of the equity schemes are thus back to the pre-meltdown levels of 5-7% for the quarter ended September 2009.

Growth oriented mid-cap stocks are back in vogue after their 2008 debacle. Mid-cap stocks have become an obvious choice for most funds since many fund managers rightly believe that steam is already out of the large caps. However, having burnt their fingers last time, these fund managers are taking cautious calls before venturing into the midcap space — targeting those with ample and clear growth visibility and liquidity, provided they are available at reasonable valuations.

“Last year everything fell irrespective of quality. This year, everything is on a rise — again irrespective of quality. We are thus treading high cautiously in these markets,” says Anand Shah, head of equity at Canara Robeco.

Even as preferences with respect to choice of stocks and market capitalisation has undergone considerable change since last year, the mutual fund industry appears quite unanimous in its choice of sectors. Energy, infrastructure (including capital goods) and financial services continue to dominate the sectoral preferences of the Indian fund managers. With power and infrastructure being the focal point of the country’s economic development, stocks catering to this segment — especially in the mid-cap space — have become the fund managers’ hot picks.
Says Mahesh Patil, co-head of Equity at Birla Sun Life AMC: “These sectors are here to stay irrespective of the changes in the political circuit.”

While consumer goods and pharmaceuticals — favourites of 2008 — have seen little shrinkage in popularity, Information Technology and Automobiles appear to have generated to renewed interest in fund managers this year.

Source: http://economictimes.indiatimes.com/Market-News/Mid-caps-are-the-flavour-of-the-season/articleshow/5178520.cms

ICICI Pru has a long-term 'buy' call on mkts

The market rally in the last few months — on the back of immense liquidity — may have made some stocks and sectors looking valued, but insurance companies like ICICI Prudential have a long-term buy call on the stock markets, its CIO Puneet Nanda says.
“Insurance companies tend to take much longer calls on the market,” Nanda told CNBC-TV18 in an interview. “On the margin, if I see most of the macro data is positive compared to where we were six months back. So to that extent it does make sense to invest for long-term investors. As things come within our comfort zone in terms of valuation, we will keep on investing,” he said.

Here is a verbatim transcript of Puneet Nanda’s exclusive interview on CNBC-TV18. Also watch the accompanying video.

Q: In the last couple of days insurance companies have started deploying cash just as well you being doing that using this fall as an opportunity?
A: Insurance companies tend to take much longer calls on the market. The sharp rally seen over the last couple of months, in fact last three–four months, has been largely due to two factors. One is tremendous liquidity available globally which has obviously led to greater risk appetite and second is the hope of the economic recovery.
Over the last few days, we have seen that there is some correction because at some stage people would want to take profit and also at some stage people will want to see a real data on whether or not economic recovery is happening.
As far as insurance companies are concerned, we do tend to take longer calls rather than pure liquidity based calls. On the margin, most of the macro data is positive compared to where we were six months back. So to that extent it does make sense to invest for long-term investors, of course, the liquidity-driven rally would have led to some sectors or some stocks perhaps looking a bit richly valued. As things come within our comfort zone in terms of valuation, we will keep on investing.

Q: The first meaningful knock to our market actually came on policy day. How worried are you about the rate tightening now having begun and how would you approach some of the rate sensitive?
A: The fact that the Reserve Bank of India (RBI) would start the exit policy on the monetary side was well-known. So I do not think that has caught anybody by surprise. So if anything, the direction actions, they have still resisted. So they have started some of the things which perhaps are no longer relevant. For example, liquidity support to some non-banking sector. Also, perhaps, they have started doing some things which do not have a very significant immediate impact for example, statutory liquidity ratio (SLR).
So I do not see anything being a surprise in the monetary policy as such. The second factor is that as far as interest rates are concerned, I would say the fact that interest rates have to tick up in the medium-term was expected and is known. So from my perspective, it’s only a question of timing and sequencing of events that one needs to worry about.
I think over the next year or so interest rates will tick up marginally. It may be preceded by RBI trying to tighten the domestic liquidity; they have given enough indications to that effect. However, the most heartening feature for me is that not just RBI, the policymakers in general, are completely focused on the growth paradigm of the country. They have done an admirable job over the last one year or so on this front and as long as they are able to maintain that balance I think things will be okay.

Q: How much investable cash do you yourself have at this point and between the industry, the insurance sector how much investable cash do you think is lying to come into equities?
A: Over the entire FY08–09, the life insurance sector invested somewhere between Rs 50,000–60,000 crore into equity on a net basis. For the first half of this year, the net investment has been relatively muted somewhere around Rs 13,000–14,000 crore. I expect that for the full year, the net investment this year will turnout to be more than last year. So on that basis it is fair to assume that there will be significant investment in equities by Indian insurance companies in the second half of the year.

Q: Even a ballpark figure of what that figure could stand at?
A: Last year the figure was something like Rs 55,000 crore, this year thus far it is somewhere around Rs 13,000–15,000 crore. So looking at the difference between the two one will get the number, and in fact I expect to exceed that number.

Q: So Rs 40,000–50,000 crore in the next five months?
A: I would not rule it out and also let’s remember that retail risk appetite comes off slowly as well as comes back slowly. Last year it took a while for the retail risk appetite to come off, similarly this year retail risk appetite is only gradually returning now. So a combination of the fact that second half anyway tends to be very strong for insurance for a number of reasons and the fact that retail risk appetite is returning albeit gradually, will result in the kind of numbers that we are talking about.

Q: Any reason though why things have moved in the opposite directions for you guys versus the mutual funds? Just this month you have put in under Rs 5,000 crore and they have pulled out more than 6,000 crore?
A: I do not know what’s happening on the mutual fund side. On the insurance side the pace of inflows is picking up. More importantly, as market corrects and people feel, including us a lot of insurance companies feel that valuations are becoming in the striking zone money will flow in because at least in life insurance there is enough liquidity. It is more a question of our view on the markets.

Q: Two big institutional favourites––telecom and capital goods––have disappointed the market. How have you approached both those sectors?
A: On capital goods my view is that next year it will turnout to be much better than what we are seeing now because the cycle there turns out to be much longer than in a lot of other sectors. So currently we are seeing a lot of investment plan. If you will talk to bank you will realise that a lot of approvals are falling in place, the sanctions are falling in place but the actual outflow is not happening. So perhaps a lot of that will fructify in the next year, and broadly, if we feel and I think there is general consensus that in terms of the very economy is going of course we have weathered the storm very well. However, next year we will definitely be better than this year. So putting those things together I am reasonably optimistic on the capital goods sector for the next year.
Telecom is a mixed bag for a number of reasons. There are some fundamental factors and there are some technical factors. The price war has kicked in that was perhaps the biggest reason for the sector to underperform and there are a lot of corporate events. Broadly, domestic consumption has stood the test of time. In this quarter, the results that have come so far, I am talking about telecom specifically but a lot of domestic consumption sectors like autos or even on the banking side things are reasonably in good shape. If anything, I think a lot of concerns on weak monsoon have been mitigated because of these results. So I would say telecom will turnout as a sector perhaps a market performer, within that, of course, we will have to see company by company what’s happening.

Source: http://www.moneycontrol.com/news/market-outlook/icici-pru-haslong-term-39buy39-callmkts_421517.html

Mutual fund investors miss making big gains

Small is the new big.

At least, when it comes to equity mutual fund performance over the last one year.Data from Value Research, as on October 27, show that the top 20 performer schemes gave an average return of 126.42% in the period.

But, interestingly, they held only 2.51% of the assets (or investor money) parked in a total 430 equity mutual fund schemes.

That is, just Rs 4,836 crore out of Rs 192,574 crore, including tax-saving plans and exchange traded funds.

Another way to look at it: The 20 funds that more than doubled returns constitute only 0.77% of the total assets of the mutual fund industry of Rs 627,999 crore (through 1,090 schemes) as on September 30, 2009.

This is startling stats, and tells that mutual fund investors have completely missed out on the best performing schemes.

Someone investing even in the 20th best scheme would have doubled money -- made exactly 114.04% gains -- but in all, only Rs 143.8 crore were put in by investors in the scheme.

The best returns were given by ICICI Prudential Discovery (Institutional Plan) at 154% followed by the same fund's Regular Plan which returned 150.56%.

No. 2 Taurus Infrastructure Fund knocked up a 147.35% gain.

ICICI Prudential Discovery has an asset base of just Rs 407.16 crore (regular and institutional plan clubbed) and Taurus Infrastructure Fund Rs 28.59 crore.

The third best scheme, JM Multi Strategy Fund, returned 138.83%. It's assets? Just Rs 52.29 crore.

Of the 20 best performing open-ended equity schemes, only two had an asset base of more than Rs 500 crore -- DSP Black Rock World Gold Fund (Rs 1,685.96 crore) and Birla Sunlife Mid-cap (A) (Rs 780.91 crore).

But the World Gold Fund and the AIG World Gold Fund (corpus Rs 280.61 crore) that also features in the top 20 schemes are not really equity funds.

The Income Tax Act, 1961, defines an equity fund as that which invests an average 65% of its assets in Indian equities over the last twelve months.

These schemes are feeder schemes, which invest in international funds that, in turn, invest in gold and other precious metals and mining stocks.

What goes in favour of these schemes is the fact that they are small.

A small scheme needs fewer stocks to do well for the overall performance of the scheme to improve, unlike a large scheme.

As assets under management increase, fund managers are left with fewer options to invest.Also, as a mutual fund scheme becomes successful, the fees it earns becomes more lucrative.

This is well put by Jason Zweig, the respected personal finance writer, in his commentary to Benjamin Graham's all-time investment classic, The Intelligent Investor: "As a fund grows, its fees become more lucrative, making its managers reluctant to rock the boat. The very risk that managers took to generate their initial high returns could now drive the investors away and jeopardise all that fee income. So the biggest funds resemble a herd of identical and overfed sheep, all moving in sluggish lockstep, all saying "Baaaa" at the same time."

The other question to ask is, why have investors missed out on the rally in these small schemes?
If fundmen are to believed it is primarily because distributors selling these schemes to investors have gone missing.

"Initially, performance was being rewarded with inflows. But that is not happening now because of many reasons," says an equity fund manager with an international mutual fund house, hinting at the change in the distributor commission payout method that has come into effect since August 1, 2009.

Since August 1, schemes cannot charge an entry load from an investor to pay commission to a distributor. It is now between the investor and the distributor to decide how much commission is to be paid.

More than half the top-20 schemes had assets under Rs 100 crore. Some had as low as Rs 3.87 crore. The average assets held by the top 20 equity schemes was Rs 241.82 crore.

Waqar Naqvi, chief executive officer at Taurus Asset Management Company, says the Taurus Infrastructure fund had around Rs 7.7 crore in April 2009 and now it is Rs 28.59 crore.

"So, we have got fresh flows. But retail participation is still missing. If Sensex hits the 20,000 mark again retail investors would come in," he said. "In August, September and October 2009, distributors have been in hibernation that has of course been hitting us. But we are drawing plans to take the performance to investors by rolling out advertising campaigns, distributing booklets etc," Naqvi sad.

The industry that is grappling with missing flows and a new norm for commission payouts, should adapt to the changes in a while say officials.

Source: http://www.dnaindia.com/money/report_mutual-fund-investors-miss-making-big-gains_1304361

New SEBI fee structure raises MF distributors hopes on PMS

The new fee structure for mutual fund distributors has fund houses focussing again on businesses that were earlier considered unviable or worthless. Barely a few months ago, fund houses considered their portfolio management services (PMS) business a ‘white elephant’, as competition in the segment prevented them from attaining the scale they desired.

But now, with SEBI scrapping entry load on mutual fund schemes and the resultant lull in equity scheme sales, asset management companies (AMCs) have begun redrawing their business plans around PMS, which cater to wealthy investors. This is mainly because AMCs have the freedom to fix fees and commission that suit the growth of their PMS businesses.

Reliance Mutual, ICICI Prudential Asset Management, Tata Mutual Fund, Birla Sunlife MF and HDFC MF are believed to be attempting to boost their PMS business. The revival in broader markets is aiding fund houses to make a pitch to potential investors, according to PMS providers.

"With markets improving steadily, investors have become more confident about their investments. The whole idea of wealth management is gaining ground among investors," said Amish Munshi, head-PMS, Tata Mutual Fund. The renewed interest in PMS products nowadays is in stark contrast to the period in 2008, when service providers struggled to convince new clients to put in money and existing clients to stay invested due to the market crash.

Early in 2009, DSP BlackRock Investment Managers wound up its domestic PMS business, while Franklin Templeton is reported to have closed down select products. Industry officials said many other mutual funds considered PMS as ‘secondary business’ till the SEBI’s move in August to scrap the entry load of 2.25%.

The move deprived distributors of the commission from mutual funds, resulting in them selling more of insurance products and fixed deposits. Starting August, equity scheme sales have nearly halved in three months’ time. As per AMFI data, sales of equity schemes have come down to Rs 3,363 crore in September, logging a 15% fall from August.

"From a pure marketing point of view, promoting PMS products make more sense to relationship managers, as it gives them higher performance credits than selling mutual funds. PMS has become the core focus of many fund houses. Customised investment products are now being aggressively sold to investors," said Akhilesh Singh, business head, wealth management, Emkay Global Financial Services.

The mode of remunerating fund managers has changed from performance-linked management fee to fixed annual fees in the case of most fund houses. Fund management charges are levied in the range of 2.25 and 3% (of corpus), irrespective of loss or gain in portfolio at the end of term.

A few smaller fund houses are also following the old performance-linked management fee where investors share percentage of profits (generated on the portfolio) with the fund manager, apart from a small flat fee (1-1.5%). Distributors’ remunerations are in the range of 0.75 and 1.50% of fund management charges levied from investors.

While conventional wealth management companies and broking firms have raised their minimum investment limits to about Rs 50 lakh to Rs 1 crore, PMS schemes run by mutual funds firms have much lower entry levels — with many starting at Rs 10 lakh.

According to wealth managers, it takes an investment of at least Rs 20 lakh to have a decent portfolio. At current market levels, such portfolios will have an array of mid-cap stocks, derivative instruments and a few large-cap stocks. "Getting investors into these schemes is still a very hard task for most fund houses. People who have lost money investing into PMS schemes in 2008 are not willing to put money anymore. PMS schemes based on structured notes, however, are witnessing some interest from savvy investors," said the CEO of large fund house.

Source: http://economictimes.indiatimes.com/MFs-hope-to-be-lucky-with-PMS/articleshow/5174659.cms

RBI concerned about circular trade between banks and MFs

Almost 90% of the funds parked by banks in mutual funds (MFs) come back into banks in the form of overnight borrowings through various channels. Though the issue of circular investments between banks and MFs has been discussed in public domain for several months now, the Reserve Bank of India has, for the first time, put it in the public domain data pointing to the extent of such circular trade.

According to the latest data, banks parked Rs 66,687 crore in MFs as of September 25, 2009. These investments are essentially in debt and liquid schemes. MFs, in turn, have lent Rs 29,504 crore under the collateralized lending and borrowing obligation (CBLO) platform and Rs 29,328 crore under market repo, respectively.

The CBLO is a facility which allows non-banks to lend to banks short-term surpluses. MF lending through CBLO and market repo as a percentage of banks’ investment in mutual funds has gone up from about 64% in July to 88% in September.

MFs also subscribe to commercial paper issued by corporates, which is tantamount to lending to corporates by MFs. This lending is ostensibly from funds raised from banks, which are the largest investors in debt MFs. The Reserve Bank has objected to such indirect lending by banks through intermediaries as MFs may lend to corporates that banks themselves have rejected and pose a regulatory concern.

But more serious is its concern over the circular investment between MFs and banks. In an interview to ET on Tuesday, the Reserve Bank governor, D Subbarao said,"... there is concern over the circularity in the movement of liquidity in the system. We have requested banks to take the issue to their board, discuss it at their senior management level and have some governance norms for their investment in debt mutual funds. They must also discuss in their club, the IBA (Indian Banks’ Association) and act as a self regulator."

Though the IBA still has to receive any formal communication from the central bank on this matter, a senior official explained the rationale behind RBI’s concerns on the condition of anonymity.

"As for banks, they earn 3.25% by parking surplus funds with the Reserve Bank. However, they have to pay the corporate income tax of 30% on the income. One ends up losing about 90 bps (basis points 1 bps= 0.01%). Whereas, income from mutual fund is tax-free., even if the returns by deploying the funds in MF is 50 bps low and then borrowing it again through CBLO, the bank still ends up making more income. However, this could pose a systemic risk in case of sudden unwinding of liquidity."

Speaking on the subject of links between banks, MFs and NBFCs, former RBI governor YV Reddy said in a speech last week: "It is also noteworthy that some mutual funds and NBFCs have close affiliations with large corporates or banks. No doubt, there could be what may be technically termed as fire walls, but a detailed study of their interlinkages, actual operations in concert or clusters with each other and in the equity and corporate bond markets would help reassurance that serious conflicts of interests with systemic consequences are not pervasive."

Source: http://economictimes.indiatimes.com/Circular-trade-seen-among-banks-MFs/articleshow/5174521.cms

Why should you plan for life after death

Across the world, a chief cause of unclaimed money seems to be bad communication. Somebody simply forgot to tell the spouse or kids or siblings about the assets he created.

Rs1,09,544 crore. According to the Reserve Bank of India (RBI), this is the money in unclaimed deposits in all scheduled commercial banks in India in 2007 . Add another Rs3,800 crore of unwanted money with the Employees Provident Fund. And several thousand crore more of unclaimed funds with the Life Insurance Corp. of India (LIC), for which I do not have any data, but expert estimates say it would be in four digits with a crore sitting comfortably behind. Why would somebody sweat away at work, stay away from kids, lose out on taking holidays and doing what they really loved, fight, scheme, machinate to get money under their belts and then die with all of it lying unwanted in some cold vault in the innards of the Indian financial system?

Unclaimed millions and crores is not a uniquely Indian eccentricity; news reports of unclaimed millions in life insurance companies in the US and the UK are plenty. Across the world, a chief cause of unclaimed money seems to be bad communication. Somebody simply forgot to tell the spouse or kids or siblings about the assets he created. It is difficult to visualize your own death and, therefore, difficult to imagine not being around to collect that deposit or bond or mutual fund when it matures or redeems. This is changing, though. A thin sliver of population that passes the twin filters of being urban affluent Indian and working with a financial planner shows a greater acceptance of their own mortality.

Bangalore-based financial planner Lovaii Navlakhi says: “The number of people who have their wills in place is between 3% and 10%. However, the number wanting to create wills is rapidly increasing.” Other planners agree that while there is resistance to making a will, the 40-something urban Indian is fast understanding the wealth-depleting implications of not having a road map in place in case of an untimely death. The other observation is that the parents of affluent Indians are leaving this world intestate or without having a will in place. And it worries the financially mature person no end.

For this 40-something knows that he will have to begin conversations around money and estate planning soon enough to nudge a parent into making a will. It is possibly the worst conversation in the world to begin, but one that will have to be made. To trace the financial life of a person who is not around to tell you where that policy document is, who has the keys to the locker, how many bank accounts there are and the details of the share certificates is a horrendous task. People who have been through the process of piecing together a life gone by say it is like putting together a jigsaw puzzle. Add the Indian legal and procedural system to this to make the emotional trauma of loss hurt even more. Other than the operational issues of having to complete the paperwork, the lack of a will prevents the family from knowing what the person would have wanted to do with the wealth he accumulated. Maybe he’d have wanted to give it all away to a loved religious order or to the charity where he worked. Lack of a will causes the court to apportion assets in the manner the Succession Act delineates.

Facilitating the estate planning of a parent is one of most touchy subjects in a family. Years of stuffing things under the carpet, of growing-up issues, of post-marriage family dramas, of sibling rivalries, make talking to your parents about putting their financial affairs in order a minefield of possible emotional explosions. One reason for the difficulty is the continuation of the parent-child role that somewhere centres around control and makes it tough for the parent to accept that the wheel of time has turned. For the adult child, the unpleasant thought of having to look clinically at the death of a loved one prevents such a conversation from even starting.

A US-based in-home elder care company, Home Instead Senior Care, uses the 40-70 rule that says if you are around 40 years old and your parents are around 70, then you need to begin conversations around estate planning. In our context, it helps to have a trusted uncle or family friend as part of the conversation to break into this difficult, emotional-trap-ridden conversation. Will dad think I’m trying to grab his money? Will mum cry? Will I end up bawling? After the first ice breaker, the idea is to communicate that a will is really a way to continue to control what happens to money, even after you are gone. It is a way to allow your spouse to continue leading the life she is used to.

Nobody said being the middle-aged, financially savvy urban Indian was going to be easy, but even death has its funny stories. This one has just been told on chat by an insurance veteran: Some people would buy a very large single-premium policy (that would work as a fixed deposit and carry an insurance amount) and then destroy the policy document. They fear that some people around them would think their lives worth less than the money they’d get if they died (or were done to death). So they burn the policy document. If they survive till maturity, they’d simply get the insurance company to issue them a duplicate policy. If they died in the interim, they’d simply add a few zeros to the stock of unclaimed money in the country.

Source: http://www.livemint.com/2009/10/27233648/Why-should-you-plan-for-life-a.html?h=B

Lessons from last year's meltdown

At the outset, let me be honest. Today's article is for the most part, a reproduction of what I had written well over a year ago. But now that the market has recovered over 100% from its recent low, perhaps this article is more relevant now than it was then, especially because of the passage of the intervening time. Now, as investors, we can look in the rear view mirror and perhaps learn to navigate the future better.

The immediate fall out of the financial crisis was that the irrational exuberance gave way to delirious panic. There is a difference between panic and panic bordering on delirium. Perhaps, the American investor was justified in being alarmed -- he did not know which bank could run into trouble next and whether his money was safe or not.
But we Indian investors acting in similar fashion was pure insanity. Repeatedly, I have stressed in these columns that the problem was, and perhaps continues to exist, in the Western financial markets.
Here I am reminded of John Luther's quote: "Learn from the mistakes of others -- you can never live long enough to make them all yourself". As the so-called biggest catastrophe since the Great Depression is unraveling all around us, what are the lessons that you and me can learn?
Greed is a vice Though you and me will never be directly buying mortgage-backed securities (MBS) or collateralised debt obligations (CDOs) which have created this mess, yet, we can learn a thing or two from the investors who did.
As already mentioned earlier, greed was the primary reason why such large sums of money went into these investments. So we need to ask ourselves, as investors, do we tend to be greedy?
Well, have you ever bought a stock based on a tip or a strong rumour? Who hasn't? Did you buy equity at 20-21000 index levels in January without really doing your homework? Again, who hasn't?
The truth is that most investors do not have the time, inclination or the knowledge of how to really value a stock. Yet, they make direct equity investments based on something they heard in the train, or on TV or during the coffee break at office. The underlying reason is, sadly, greed.
The smart investor, on the other hand, does his homework, understands the facts and then makes an informed decision. If this is not possible for any reason, then he or she employs a mutual fund with a strong track record to do the hard work. And lastly, they never ever make the cardinal sin or trying to predict the market.
Ignorance is never bliss There is yet another reason for the meltdown. And that is ignorance or lack of knowledge. Apart from the now-notorious broking firms and investment banks, many other investors including hedge funds, municipalities, pension funds etc. have also been affected since they committed their funds despite limited awareness and understanding of the risks involved. Own what you know and know what you own is one of the most basic lessons of investment. And yet, it was flouted.
In the domestic context, the risk is of being talked into churning your investments since the current ones are losing value. Now that mutual funds do not compensate as well as they used to, agents and distributors have started resorting to greener pastures.
The other day, a sales representative of a large broking house called to try and talk me into subscribing to their portfolio management service (PMS). The pitch was that the broking house had devised a portfolio that would not only protect my capital but also earn me handsome profit. Basically, no risk. Only return. I told her that if this were true, then her employer would not be called a broker, he would be called a magician.
So, please be aware that there is no such thing as risk-free return in the equity market. PMS providers, Ulips and structured products (that have lately hit the markets) all basically do the same thing as a mutual fund does -- employ your money in the stock market for a fee. The only thing is that their fee is far higher and the regulation far more lax.
In other words, these products have nothing to offer that a plain vanilla mutual fund cannot, however, some can covertly strip your capital by insidiously camouflaging expenses and charges.
To sum The events of the past clearly show that most people are long-term investors as long as the markets keep going up. However, every dream has a price. Your financial dreams have to be paid for with patience and conviction. Every year that you make this payment takes you that much closer to your goals. So, no matter what you do, stick around. Or to quote from another movie closer to home, "Picture abhi baaki hai".

Source: http://www.dnaindia.com/money/report_lessons-from-last-year-s-meltdown_1303940

4 impacts of the RBI policy

The monetary policy of RBI released on Tuesday, has been received badly by the stock market, with the indices tanking 2.5 per cent. On the personal finance front though, there is not much of a change coming from the monetary policy.

The Key Decision
The key decision in the monetary policy is that of exiting the supportive stance for the expansionary economy. To use the exact words from the monetary policy, "The precise challenge for the Reserve Bank is to support the recovery process without compromising on price stability. This calls for a careful management of trade-offs. Growth drivers warrant a delayed exit, while inflation concerns calls for an early exit. Premature exit will derail the fragile growth, but a delayed exit can potentially engender inflation expectations."
Going with the decision to exit, the RBI has started taking measures to reduce the money supply in the system.
The Measures TakenThough the decision seems to create some risk, RBI has treated the implementation softly. The measures taken to reduce the money flow are: 1 per cent increase in the SLR (Statutory Liquidity Ratio) back to 25 per cent. Reduction in Export credit refinance from 50 per cent back to the earlier 15 per cent of outstanding export credit. Discontinuing the bank funding support to Mutual Funds, Non Banking Finance Companies and Housing Finance Companies.No changes have been made to the Repo and Reverse Repo rates.
The impact on the Aam Aadmi on India is going to be minimal from the above decisions.

Impact A
The SLR change really has no real impact on the economy as the scheduled commercial banks are already in maintaining a SLR of 27.6 per cent. So there is no real money that is going out of the system. That means that if A needs to take a loan, the money to lend to B is still there with the banks.
The reduction in support to exports is marginal. This is because using the outstanding export credit is only one of the means for financing exports for the exporters.

Impact B
Discontinuing the support to Mutual funds can have an impact on the Net Asset Values of the funds. The support was given in the first place to prevent selling off of equity and asset holdings of MFs, when there are a lot of individual investors asking the MFs to return back their money. If the MF has to sell their assets to give money back to their investors, the value of the assets (in this case shares), there will be a further fall in the price of the shares. This will erode the value of the assets of the investors further. To prevent this RBI has allowed MFs to borrow from banks to meet the needs for redemption (investors asking their money back). This helped the MFs to give money back to the investors and at the same time hold on to the shares and other assets. This helped both the investors who remained invested and those who wanted their money back.
Since the past 3 months or so, we have seen the retail investors starting to invest again in the equity oriented MFs. So there is no real pressure on the mutual funds now for redemption. However, there could be some short term redemption pressure with the stock market oscillating a lot in the past few weeks.
The removal of lending support from banks to MFs, will affect the retail investor in the short term.

Impact C
Removing banks support to NBFCs and HFCs may not have a major impart on the common citizen. The lending from these companies has decreased by almost 50 per cent in the last one year. The lending for housing in the last one year has come down from Rs 29,872 crores (Rs 298.72 billion) to Rs 14,668 crores (Rs 146.68 billion).
So we can say it is not true that the HFCs were making use of the bank lending to support borrowers. So removing the support will not affect them.

Impact D
The RBI has not changed the Repo and Reverse Repo rates. This means that the bank interest rates and deposit rates also will not be affected directly. Since the deposit rates of banks have come down in the past one year from a peak of 11 per cent per annum to 7.5 per cent per annum, many investors are shying away from the bank deposits.
At the same time many borrowers who delayed their purchases of houses and cars are back at their bank door steps. This is seen in the results declared by automobile companies (both 2 wheelers and 4 wheeler manufacturers have shown extraordinary results).
If new deposits do not come in during this quarter of the year too, banks may be short on the funds to lend. This may increase the interest rates.

Conclusion
Though the stock market has not liked the RBI Monetary Policy, there is virtually no impact on the common citizen's finances. As a principle though, it is of some concern that RBI has decided to exit the supportive stance that it had for increasing the country's money supply. The additional money supply that RBI has pumped in during the global financial crisis has helped the economy to stabilize and recover to some extent.

Source: http://business.rediff.com/report/2009/oct/27/perfin-4-impacts-of-the-rbi-policy.htm

Birla Sun Life Mutual Fund declares dividends in multiple equity funds

Birla Sun Life Mutual Fund has announced dividend in four schemes – three equity and one balanced fund.
It has announced a dividend of 50% (Rs 5.0 per unit on Face Value of Rs 10), under the dividend option of Birla Sun Life Equity Fund, An Open ended Growth Scheme with the objective of long-term growth of capital, through a portfolio with a target allocation of 90% equity and 10% debt and money market securities
It has announced a dividend of 15% (Rs 1.5 per unit on Face Value of Rs 10), under the dividend option of Birla Sun Life Top 100 Fund, An Open ended Growth Scheme which seeks to provide medium to long-term capital appreciation, by investing predominantly in a diversified portfolio of equity and equity related securities of top 100 companies as measured by market capitalization.
A dividend of 5.80% (Rs .58 per unit on Face Value of Rs 10), has been announced under the dividend option of Birla Sun Life Dividend Yield Plus, An Open ended Growth Scheme with the objective to provide capital growth and income by investing primarily in a well diversified portfolio of dividend paying companies that have a relatively high dividend yield.
Birla Sun Life Mutual Fund has also announced a dividend of 70% (Rs 7.0 per unit on Face Value of Rs 10), under the dividend option of Birla Sun Life ‘95 Fund, An Open ended Balanced Scheme with the objective of long-term growth of capital and current income, through a portfolio of equity and fixed income securities. The record date for the above dividends is October 15, 2009. All investors registered in the dividend plan of these schemes as on record date will receive these dividends.
The NAV as on October 8, 2009 under the dividend plan of Birla Sun Equity Fund, Birla Sun Life Top 100 Fund, Birla Sun Life Dividend Yield Plus and Birla Sun Life’95 Fund were 74.19, 15.80, 13.40 & 113.07 respectively,
Birla Sun Life Asset Management Company : Established in 1994, Birla Sun Life Asset Management Company (BSLAMC) is a joint venture between Aditya Birla Group, a well known and trusted name globally amongst Indian conglomerates and Sun Life Financial Inc, leading international financial services organization from Canada.

Source: http://pr.trak.in/2009/birla-sun-life-mutual-fund-declares-dividends-in-multiple-equity-funds-344/

India Central Bank Begins Exit From Monetary Stimulus

India’s central bank took the first step toward withdrawing its record monetary stimulus as inflation pressures build, ordering lenders to keep more cash in government bonds.
“It may be appropriate to sequence the ‘exit’ in a calibrated way,” Governor Duvvuri Subbarao said today after increasing the statutory liquidity ratio to 25 percent from 24 percent and raising the inflation forecast. The central bank kept benchmark policy rates unchanged, while maintaining its economic growth forecast of 6 percent “with an upward bias.”
Stocks fell the most in two months after the statement spurred speculation the Reserve Bank of India will boost borrowing costs by year-end, eroding corporate profits. Today’s shift also signals intensifying global concern about consumer and asset-price increases, with Norway tomorrow forecast to follow Australia in raising rates this month.
“We will start to see G-20 economies exiting now, starting with the emerging ones and then the advanced countries,” said Mridul Saggar, the Mumbai-based chief economist at Kotak Securities Ltd. “In India’s case, growth is coming back on track and inflation is becoming quite a concern.”
The Bombay Stock Exchange’s Sensitive index fell 2.3 percent to 16,351.58 at 2:50 p.m. local time. The rupee extended losses to 0.7 percent, trading at 46.98 against the dollar.
Bonds Rise
Bonds rose because some banks will need to boost their holdings as a result of today’s move, said Murthy Nagarajan, a fund manager at Mirae Asset Global Investment in Mumbai. The yield on the 6.90 percent note due July 2019 fell 9 basis points to 7.32 percent, the biggest drop since Sept. 15, according to the central bank’s trading system.
Subbarao, who has injected 5.85 trillion rupees ($130 billion) of cash since September 2008 to protect the Indian economy from the worst financial crisis since the 1930s, said draining that money has become a “central issue in our policy matrix.” The liquidity injection was the equivalent to almost 9 percent of India’s gross domestic product, Asia’s third-largest.
The central bank said “unconventional” steps taken during the global meltdown in the past year can now be reversed to damp price gains, adding that reversing the “conventional measures is not considered appropriate for now.”
Subbarao maintained the reverse repurchase rate at 3.25 percent, the repurchase rate at 4.75 percent and the cash reserve ratio at 5 percent, in line with the median forecast of 24 economists surveyed by Bloomberg News. He increased the inflation forecast for the year to March 31 to 6.5 percent from 5 percent.
Exporter Credit
The central bank cut the refinance limit to exporters to 15 percent of their eligible outstanding credit from 50 percent, and asked lenders to set aside more funds as provision for loans to property companies.
India becomes the second country, after Australia, among Group of 20 nations to take steps to boost borrowing costs, underscoring a rising threat of accelerating consumer and asset prices. At the same time, today’s decision risks damping a recovery from India’s weakest growth pace in six years.
Subbarao said today’s action wouldn’t affect the “liquidity position” of the banking system, since most commercial banks have government bond holdings amounting to 27.6 percent of their deposits.
Central banks globally have stepped up their vigil against inflation and asset-price increases.
Global Context
The Reserve Bank of Australia increased rates three weeks ago, citing costlier real estate. Norway’s Norges Bank is set to raise borrowing costs tomorrow, according to a Bloomberg survey. Bank of Korea Governor Lee Seong Tae said Oct. 23 that keeping rates at a record low may not be healthy for the economy.
At the U.S. Federal Reserve, officials under Chairman Ben S. Bernanke are reviewing whether recent gains in asset prices and narrowing credit spreads are justified as they try to ensure near- zero borrowing costs don’t create bubbles.
Subbarao said there are “definitive” indications that India’s economy is recovering. Accordingly, attention around the world has shifted from “managing the crisis to managing the recovery.” He said the prospects for Indian industry have become “more promising” and with the revival in the stock market and international financial markets, there will be a pick-up in investments.
Political Factor
The decision to signal tighter monetary conditions comes after Finance Minister Pranab Mukherjee told Bloomberg-UTV television channel on Oct. 8 that promoting economic growth and containing inflation are both important and the central bank shouldn’t “compromise” one for the other.
Subbarao is concerned about consumer-price inflation in India that’s running above 10 percent and may accelerate further after the weakest monsoon rains since 1972 create food shortages. India’s $1.2 trillion economy depends on the June to September rains to water crops.
India uses wholesale price data as its key inflation gauge; consumer price indexes are calculated on the basis of rural and urban workers and don’t capture the aggregate price picture.
Wholesale prices rose for a sixth week on Oct. 10, gaining 1.21 percent. Robert Prior-Wandesforde, an economist at HSBC Group Plc in Singapore, expects the rate to hit 8 percent by March 31. Asset prices are also rising, evidenced by the 75 percent climb in the Bombay Stock Exchange’s Sensitive index since January.
“The central bank faces a very delicate situation to manage growth and inflation,” said Ravi Sud, chief financial officer at Hero Honda Motors Ltd., India’s biggest motorcycle maker. “On balance, inflation is the risk as it will hurt consumption and eventually hurt growth as well.”
It will be a “big challenge” to sustain Hero Honda’s profit margins because of rising commodity prices, Sud said last week. Hero Honda, based in New Delhi, is the Indian affiliate of Japan’s Honda Motor Co.

Source: http://www.bloomberg.com/apps/news?pid=20601087&sid=a.Cc4PTq_Tgg

Reliance MF Declares Dividend for Growth Fund

Reliance Mutual Fund has declared dividend on the face value of Rs. 10 per unit under dividend option in retail and institutional plan of Reliance Growth Fund. The record date for the dividend is 30 October 2009.

The fund house has decided to distribute 50% (Rs. 5 per unit) as dividend for retail and institutional plan on the record date. The NAV of the scheme under retail plan was Rs. 56.1611 per unit and Rs. 392.5758 per unit for institutional plan as on 22 October 2009.

Reliance Growth Fund is an open-ended equity scheme, which has the investment objective to achieve long term growth of capital by investing in equity and equity related securities through a research based investment approach.

Source: http://profit.ndtv.com/2009/10/26100118/Reliance-MF-Declares-Dividend.html

Longer trading hours likely to add to Mutual woes

The prospect of extended stock market hours soon is giving mutual funds some nervous moments. The anxiety is over the additional pressure that the extra trading hours will put on the mutual funds and custodians to meet the daily deadline to submit the net asset values (NAV) of equity schemes. As per existing norms, the NAVs have to be uploaded on the Association of Mutual Funds of India (AMFI) website before 9 pm everyday. While custodians, who manage the back-office operations of mutual funds, just about manage to meet the deadline at the moment, mutual fund and custodian officials said the extension of trading hours will make it difficult for them to meet the deadline. “Even when the markets closed at 3.30 pm, we just about managed to submit the NAVs before deadline. Now, at 5 pm, we do not know how will we meet it, especially with the quality checks that need to be followed,” said a top official with a leading private mutual fund.

Last week, capital market regulator Sebi, in a circular, permitted stock exchanges to begin the day as early as 9 am and keep the market open for trading till 5 pm. Mutual fund officials said the deadline to submit NAVs will need to be extended by at least an hour-and-a-half, if the stock market’s close is stretched to 5 pm. A top Sebi official told ET that the matter will be considered once the new timings are implemented by exchanges, though he added that the industry is yet to approach the market regulator to extend this deadline. One of the hindrances to uploading the NAVs on time is the delay by stock exchanges in releasing the final data on futures and options, which are a part of the portfolio of several equity schemes today. Currently, the final derivatives data arrives at around 6 pm. Mutual funds are worried that setting up new systems, including more manpower, will result in escalation of costs, especially when business has been hit following the new fee structure for distributors in August. Custodians said insurance companies also may be burdened with higher costs, as they need to adhere to similar deadlines to submit NAVs for the unit-linked Investment Plan (Ulips), which constitute a sizeable chunk of their assets.

Source: http://economictimes.indiatimes.com/Longer-trading-hours-may-add-to-MF-woes/articleshow/5166513.cms

Mahindra Finance awaits nod for AMC to float MF business

Mahindra Finance, part of the $6.3 bn Mahindra Group, plans to enter into mutual fund business through an asset management company, a top company official said here.

"We have lodged an application to launch an asset management company (AMC) to float a mutual fund and it is under process of review with the regulatory authority," Mahindra Finance's Managing Director, Ramesh G Iyer, told PTI on the sidelines of a press meet here today.

Once licence is issued, we would be able to float mutual fund business in the next 4-6 months period, Iyer said.

The company hopes to provide mutual fund products to vast untapped rural market customers, he said.

Mahindra Finance, one of India's leading non-banking finance company registered on a consolidated basis a growth of 10 per cent in its total income at Rs 368 crore for the second quarter ended September, 2009 as compared to Rs 334 crore during the same period last year.

During the 2nd quarter, the profit after tax (PAT) doubled to Rs 72 crore from Rs 36 crore in the corresponding quarter of the previous year. During the first half of financial year 2010, the total income on consolidated basis increased by 10 per cent at Rs 704 crore as against Rs 638 crore in the same period of the previous year.

Source: http://economictimes.indiatimes.com/Personal-Finance/Mutual-Funds/MF-News/Mahindra-Finance-awaits-nod-for-AMC-to-float-MF-business/articleshow/5165399.cms

Large cap fund yet to prove prowess in market downturn

A large cap fund is considered an ideal investment option for risk-averse investors. While these funds do not promise overwhelming returns like their midcap or multicap peers in rallies, they are known to offer better protection in downturns. However, this does not make a thumb-rule for the entire range of large-cap funds including Principal Large Cap Fund.

PERFORMANCE:

Launched in October 2005 in the middle of the bull run, Principal Large Cap managed to do well delivering decent returns in the first two years. For a new fund, it was a rather comfortable journey – beating the market and its benchmark BSE 100 by healthy margins both in 2006 as well as in 2007. Its returns of about 48% in 2006 and 73% in 2007 compared well against BSE 100’s 41% and 60%, respectively, given its large-cap investment mandate. Year 2007, which was an year of midcap stocks, saw the Sensex and Nifty deliver just about 47% and 55%, respectively.

The feat of the first two years of the launch could not, however, be repeated in 2008 and the fund slumped by about 59% against BSE 100’s fall of 55%. The sensex and the Nifty had lost about 52% each in that year. While this came as a surprise given the fund’s large cap mandate, the downfall could be given the benefit of doubt in light of the fund’s high beta of 1.05. Beta compares the risk imbedded in the fund’s portfolio vis-à-vis that of the market as a whole. Thus, a beta greater than 1 indicates the fund is expected to generate returns higher than that of the market and vice-versa.

However, what has indeed been fascinating about this fund is the kind of turnaround that the fund has made in calendar year 2009. Since January, the fund has delivered a whooping 102% returns against BSE 100’s 82%, smartly compensating the downfall it witnessed last year.

PORTFOLIO:

Adhering to its investment mandate, Principal Large Cap has built up its portfolio with some of the best large-cap stocks available in the market. But the same is not without a tint of midcap stocks. The fund has shown a tendency to invest on an average, about 10-12 % of its portfolio in midcap stocks with the average number of stock holdings restricted to about 40 giving the fund a reasonable diversification.

An analysis of the fund’s portfolio shows that the fund has indeed been prompt enough to pick some of the multi-baggers that are reaping yields in the current market. Its picks like Shree Cement in Sep ’08, at one third of the current market price, and Lupin in Aug ’08 – both of these it continue to hold – have seen a good runup . Again Bajaj Auto, which it had picked way back in Oct ’07 has also rewarded it handsomely. The fund has, however, now replaced this stock with Hero Honda. It was also quick to offload Mundra Port within a month of its IPO and before the markets snapped the bull run in early 2008.

However, some of the moves did not work for the fund — such as its investments in ICICI Bank and ABB at their peaks in Jan ’08, the levels they are still to breach. What may have also hit the fund was its early exit from stocks like Axis bank in Dec ’08. Had the fund continued to hold this multibagger stock today, it may have added on extensively to its returns.

VIEW: This four-year old fund has reasonably proved its ability to beat the market in an upturn. However, it is yet to prove the same in the reverse scenario. While its performance in the current calendar year has been highly impressive, it is now rather imperative to watch whether it can continue to maintain this trend in the coming months as well. But given its track record, it can be conveniently deciphered that Principal Large Cap is one of the better performing schemes from the Principal basket.

Source: http://economictimes.indiatimes.com/Features/Investors-Guide/Large-cap-fund-yet-to-prove-prowess-in-market-downturn/articleshow/5162018.cms

Pick a fund, not a portfolio

It goes without saying that choosing a mutual fund is the most critical aspect of fund investing. How well your investments perform is directly dependant on how you pick them. It is safe to say that picking the right fund is almost as good as ensuring good returns on your investments. But, despite the fact that choosing funds is such an important factor, most people often seem to falter at this very step.

There are a lot of different approaches used to choose a mutual fund. When it comes to equity funds, the approach that is most ineffective is the one based on the fund’s portfolio. Under this approach, an investor – and quite often even an analyst or expert – looks at the fund’s recent portfolio statement and decides for or against the fund on the basis of the stocks it holds. I can’t stress enough on why this method is a futile way of choosing a fund to invest in.

Firstly, this approach is wrong because it takes away the basic advantage of investing in a fund. You invest in a fund because you don’t have either the time or the knowledge, or sometimes both, required to dabble in stocks. So you let the fund manager do it for you. But when you start decoding a fund’s portfolio, you are doing nothing but dabbling in stocks and worse, also assuming that you are a better judge of stocks than the fund manager. In general, stock investors who feel the need to venture into funds as well use this approach. Apart from them, this method is used by broking firms who have started selling funds. In such firms, the stock analyst analyses the funds as well. And hence, he looks at the fund’s portfolio. If he doesn’t like the stocks in it, he renders the fund unfit for investment.

This approach has been appearing in the media a lot too. Recently, a financial publication published a misdirected article that picked individual stocks in isolation from funds, followed the fund managers’ actions on those stocks through a couple of years and then declared those actions to be illogical. What amazed, and amused, me was that they didn’t realise that the funds that they had picked out were funds that had mostly outperformed their benchmarks and peers over the last few years.

This is just another example which shows why a fund shouldn’t be analysed on the basis of its portfolio. A fund buys or sells a stock for myriad reasons, many times for reasons that have nothing to do with the stock’s performance. At times, another stock from the industry could be more attractive. At times, there could be an internal limit on an industry, or to the company. And likewise.

Hence, a fund shouldn’t be analysed on the basis of its portfolio. For most funds, a look at its past returns-based performance is more than enough. A comparison of a fund’s returns, vis-à-vis its benchmark’s or peers’ returns, will give you a fair idea of whether the fund is worth investing in or not. The fund’s portfolio should be looked at after it has answered other basic questions. The portfolio should only be seen to know if the fund is concentrated, is it churned a lot, does it have exposure to emerging sectors, etc. The portfolio should be used to decide between two otherwise similar funds, not as a primary deciding factor....

Source: http://www.financialexpress.com/news/pick-a-fund-not-a-portfolio/533114/0

MF portfolio: Diversify and factor in risk appetite

The equity markets are at their volatile best and it is difficult to predict the direction of the markets amidst the ongoing results season. Robust industrial production numbers backed by strong global cues led to a major upsurge in the markets last week.

While the markets have been on a roll since March this year and are continuing to scale up, investing at the current levels has become risky for investors who did not enter earlier.

For an average investor, who does not have the time or the inclination to track the movements of the markets, investing in stocks directly could be risky. A direct equity portfolio requires constant attention, or else the opportunity to exit from losing investments in time or book profits on those performing well, may be missed.

For such investors, investing in equity markets through the mutual fund route may be a better strategy.

While the burden of managing the stocks is passed on to a fund manager in a mutual fund, the selection of the right funds for the portfolio remains the problem of the investor. Choosing the right funds based on your risk appetite, time horizon for investment and returns expectation is extremely important.

The method of investing in mutual funds also assumes importance depending on the nature of the markets. Investments in mutual funds can be made in lump sum or through the systematic investment route.

In the current market conditions, making lump sum investments may not be a good idea considering the fact that the markets have run up very fast and investors may encounter a correction. Hence, in these times, making investments using the systematic investment plan (SIP) or systematic transfer plan (STP) is advisable.

Here are some pointers for investors in mutual funds to build a robust portfolio:

Portfolio allocation:

As a thumb rule, 100 minus your age is the amount which should be invested in equity. However, risk appetite and resources are important factors to be considered also. Generally, it is seen that risk-taking ability goes down as you become older since capital preservation takes precedence over capital appreciation.

Portfolio size:

While building a mutual fund portfolio, it is important to remember that even five funds can give the desired level of diversification. So, there is no need to hold a large number of funds. In any case, an individual should not hold more than 10 funds, or else it becomes extremely difficult to monitor.

Designing the portfolio:

The base of a mutual fund portfolio should be built with diversified mutual funds. Allocation to the base should be around 50 percent in not more than 3-4 funds. Diversified funds can invest across sectors and hence can move swiftly across different stocks when the tide turns. For those with a medium risk appetite, balanced funds which invest in equity and debt can form the base of the portfolio.
Once the base is built, a high risk investor can add a good large-cap and mid-cap fund to the portfolio. Sector funds and theme funds are highest in risk and best avoided unless you can monitor these funds regularly to identify opportunities for profit-booking. Investors with a low risk appetite can invest in debt funds. In the current interest rate scenario, keep away from income funds and long-term debt funds since interest rates are expected to harden.

Selection of funds:

Risk-adjusted returns, comparison with benchmark, consistency of performance, fund manager's performance, costs and reputation of the fund house are some of the factors to be considered in selection of a fund. The selected fund should be in existence for at least five years to ensure that it has seen different market cycles. Avoid new fund offers since they have no history of performance.

In the current market conditions, investors would do well to stagger their investments or use the systematic investment facility to invest for the long term. You must review your portfolio performance at least twice a year to ensure that the investments are growing as desired and weed out non-performers after monitoring them for at least a year.

Source: http://economictimes.indiatimes.com/articleshow/5158705.cms?flstry=1

September MF outflows likely to reverse

The heavy redemption in debt schemes of mutual funds (MFs) in September should get reversed soon and MFs are expected to get back the entire outflow in the current month. Historical evidence suggests that debt funds face redemption pressure at the end of every quarter. This pressure is considerably higher at the end of the first as well as the second half of the financial year.

For example, MFs witnessed a net outflow of Rs 98,980 crore in March 2009 in debt schemes. In the following month, April, inflows were Rs 154,507 crore. A similar trend was seen at the end of all quarters, except in September 2008, when the redemption pressure on debt funds continued in October.
According to Sundeep Sikka, chief executive officer, Reliance MF, corporate houses withdrew a lot of money last month to meet advance tax liabilities, something they do at the end of every half year. A part of the money withdrawn is invested in other debt schemes and so money doesn’t flow out completely.
Banks invested Rs 180,000 crore in MFs between April and September. They withdrew a part of this last month to show profits in their books, which caused a lot of redemption pressure. However, a considerable part of this was reinvested in the first week of October, said Surajit Misra, national head (mutual funds), Bajaj Capital.
September 2008 was exceptionally bad for the MF industry as the entire financial sector faced redemption pressure after four US banks filed for bankruptcy. Indian banks faced cash withdrawals from account holders while the corporate sector faced a liquidity crunch. As a result, banks and the corporate sector withdrew money to remain liquid.
With MFs floating time-bound fixed maturity plans (FMPs) to attract investments from the corporate sector and banks, the maturity of such schemes also increases outflows. For example, data compiled by MutualFundsIndia.com show that in September 2009, FMPs worth Rs 11,648 crore went under compulsory redemption.
Companies also periodically withdraw large amounts to show cash in their balance sheets and for future investments. It was a normal trend and there was no need for investors to panic as there was ample liquidity with the industry, said Lakshmi Iyer head (fixed income and Products), Kotak Mutual Fund.

Source: http://www.business-standard.com/india/news/september-mf-outflows-likely-to-reverse/373927/

Cash level of equity funds lowest since Jan ’08 peak

After a swift rise in share prices since early March, cash available with equity mutual funds has fallen below 7 per cent of assets under management, a level last seen during the market peak in January 2008.
Even till April end, equity fund managers were cautious and held 14.35 per cent of their assets in cash. The scenario changed after the Congress-led alliance won a comfortable majority in general elections boosting investors’ confidence in political stability in the country.
Between April 30 and September 30, cash available with 297 open-ended equity schemes declined from Rs 14,637.18 crore to Rs 9,675.15 crore, data available from Delhi-based mutual fund tracking firm Value Research showed. During this period, cash as a percentage of total equity assets declined from 14.35 per cent to 6.25 per cent.
“Markets are buoyant, so obviously we have to invest,” said Satish Ramna­than, head of equities at Sundaram BNP Paribas Asset Management.
The benchmark Sensex of the Bombay Stock Exchange (BSE) has gained 108.61 per cent in this year so far since closing at a three-year low of 8,160.40 on March 9.
The market rally has forced many fund managers to cut their high cash levels and chase the returns, said head of equities of a mutual fund house, who wished not to be identified. “The conviction in the market is because of momentum and not valuations,” he said.
The low level of cash among Indian equity mutual funds also gives some indication of present domestic sentiment, believes Jyotivardhan Jaipuria, head of research at foreign brokerage Bank of America (BoA) Merrill Lynch.
“These low levels of cash were last seen at the peak of the markets in January 2008. While insurance companies are bigger buyers than mutual funds, it does indicate that buying from domestics will be lower going forward,” he said in a strategy note to clients.
Most market experts are also of the view that valuations are now running ah­ead of fundamentals and the rally is largely driven by liquidity. “Valuations are rich,” said Ramnathan of Sundaram BNP Paribas, who has a “neutral” stance on the market. At Wednesday’s close of 17,023.18, the 30-stock Sensex quoted at 19.89 times its expected earnings per share of Rs 856.04 for the financial year ending March 31, 2010, according to Bloomberg. This is higher than the benchmark’s long-term average price-to-earnings (P/E) multiple of about 15 times.

Source: http://www.mydigitalfc.com/mutual-funds/cash-level-equity-funds-lowest-jan-’08-peak-641

Markets to consolidate around current levels: JM Financial

JM Financial Mutual Fund, a part of JM Financial Group while commenting on recent happenings in the Indian economy and equity market scenario said that GDP quarterly numbers improved in Q1 FY10 over the previous quarter mainly on account of a good growth of industry.
This growth was mainly the resultant of a huge rise in manufacturing YoY growth. But both services and agri GDP growth fell in Q1 FY2010 compared from Q4 FY2009, the AMC expects the GDP growth to accelerate over the next 2 years.
July 2009 IIP (index of industrial production) showed exceptional growth of 6.8% YoY due to high growth in mining, intermediate, manufacturing and consumer non-durables goods.
Manufacturing (highest weighted in Sectoral IIP) growth continued to remain optimistic. It grew at 6.8% YoY in July 2009 vs 7.8% in June 2009 and 6.9% in July 2008. Continuation of this trend ahead will signal a revival in demand.
Advance tax collections for the second quarter of the current financial year (2009-10) have shown robust growth of 35 to 40% across industries, reinforcing the hopes of a sooner-than-expected recovery. The second quarter is significant, since companies for banks pay almost 45% of the total annual tax payable. The first quarter accounts for 15%. The target for direct tax collections for 2009-10 has been fixed at Rs 3,700 billion, roughly 10% higher than Rs 3,382.12 billion last year.
However, among all the good news, monsoon continued to be the spoilsport and the season has ended with a 23% deficit. How much impact would it have on the agri production and its consequent impact on the GDP is yet to be seen.
Globally too, like India, optimism ruled and hopes of a early recovery in the global GDP strengthened.
Commenting about the stock markets, the fund house said that markets awash with liquidity remained stable during the entire month and displayed strong sectoral rotations as the Nifty ended above 5,000 for the first time in 2009. FII flows were at USD 3.8 billion which took the annual FII inflow to over USD 12 billion.
Sectors like pharma, tech and financials outperformed rest of the market. Midcaps also played strong till the last week when they displayed fatigue. Sensex which began the month at 15,555 ended Sep. 2009 at 17,127 crossing the physcologically important 17,000 mark for the first time in 2009. Overall markets in India remained tremendously resilient than the rest of the Asian peers.
Large fund raising through the QIP route has absorbed most of the FII flow this month thus preventing volatility. Among the corporates Reliance, Axis Bank and Jaiprakash Associates are some of the corporates who raised money.
Giving its outlook about the market the fund house said that Sensex is now over 17,000 and at current levels trades at over 16x FY11 which now puts it in a historically traded average band. India has been a beneficiary of strong flows like the rest of the Asian peers and there is a strong likelyhood of the continuation of the flows in the near future. On the other hand, there are several large offerings lined up through the IPO, QIP routes etc as a consequence of corporates trying to use the optimism in the environment to raise equity capital.
Although JM Financial is reasonably optimistic about the prospects of the Indian economy in the medium to long term; it remains slightly cautious in the short term. It believes markets are likely to consolidate around the current levels and keenly await the Q2 FY10 results to show further direction to markets in the near term.
Any correction, if at all, would be healthy for the markets and should not be source of any anguish to long term investors thus the fund house advices disciplined and systematic manner of investment to capture the Indian growth story.

Source: http://www.myiris.com/newsCentre/storyShow.php?fileR=20091020171340707&dir=2009/10/20&secID=livenews

'Pharma, infra & banking look very attractive'

A steep correction looks unlikely, given that there has been no reckless build-up of positions this time, says Sunil Singhania , executive vice-president (equities), Reliance Mutual Fund. At the same time, investors should be extremely choosy about the new issues they are investing in since many overpriced offerings have been hitting the market, says Mr Singhania. In an interview with ET , he says pharma, banking and infrastructure are the sectors to watch out for. Excerpts:

You are known for your aggressive cash calls, sometimes as high as 35% of the portfolio value in a few schemes. Isn’t that a risky bet in a rising market?
Past 2-3 months have been very challenging in terms of identifying the right stocks. And it looks as like it will remain that way for some time. We have to deploy money knowing fully that near-term valuations are stretched, and that risk on the downside is higher. We have cut down our cash positions significantly, though they differ across schemes. In diversified schemes, we are sitting on cash of between 4-14%. In banking and pharma funds, it is 3-4%, in the power fund it is 16-17%, while in the infrastructure fund, it is 2-3%. But the cash component should not be viewed in isolation. We deploy a fair bit of it in (stock/index)options, which helps us ride the volatile phase of the market, and even beat the market.

Which are the sectors that you are bullish on?
We are very bullish on infrastructure. There is huge latent demand for infrastructure. Also, the government is realising that good infrastructure is becoming an election issue. From a foreign investor’s perspective, this is a sector where one can investment a sizeable sum and get decent double-digit returns. We are also positive on banking. Notwithstanding short-term concerns over rising g-sec yields (and therefore falling bond prices), banking services are underpenetrated, and valuations of bank stocks are cheap compared with allied financial services players. Within the sector, we like PSU banks. We are positive on the pharma sector, and see huge opportunities locally as well as globally. Total pharma sales in India are about Rs 30,000 crore, while sales of Pfizer’s drug Lipitor alone are around Rs 50,000 crore.

What is your outlook on the market from a 3-6 month perspective?
We are cautiously positive on the market. Valuations are not cheap any longer, and big gains look unlikely near term. At the same time, we do not expect any drastic correction either. Investors have been very cautious this time around. Most mutual funds have used the recent rally to book profits. There has been no reckless build-up of positions by traders, as was the case in the previous bull run. Also, traditionally, the October-December period has been good for the Indian stock market.

What should the investor be cautious of? Any factor(s) that could trigger a deeper-than-expected correction?
There are some worrying signs, especially on the capital raising front (qualified institutional placements/ initial public offerings). Lot of poor quality paper is finding its way into the market. Also, many IPOs are being mispriced at the upper end.
The global economy is still not out of the woods. There is a lot of liquidity sloshing around at the moment, which makes everything appear good. But what happens once central banks across the world start pulling out the stimulus money? That is the key question. Some people may argue that a weak recovery in the global economy is good for India, since it will also keep oil prices low. Yet, one must remember that the Indian market had its best phase when oil was climbing from $27 to $150 a barrel.

Source: http://economictimes.indiatimes.com/opinion/interviews/Pharma-infra-banking-look-very-attractive/articleshow/5140189.cms

SIP investment: Better than one-go

Systematic investment plan (SIP) investors have reason to cheer. The ongoing rally in equity market has pushed up the one-year return on such investments sizeably, compared to lump-sum investments.
The comeback has even pushed up annualised returns on SIPs over a three-year period. Those SIP investors who opted for mid-cap-oriented funds have reaped a richer harvest then their large-cap peers.
Business Line picked up the top five large- and mid-cap schemes that have a long-term track record and analysed performance over one- and three-year periods. Among the large-cap schemes either through lump-sum or SIPs, the HDFC Top 200 Fund tops the return charts over one- and three-year periods.
Those who stayed invested in SIPs over the past year notched up absolute returns of 140 per cent while those who preferred lump-sum investment could have earned 90 per cent, substantially lower than those who bought SIPs.
The other top performers for the one-year period are Birla Sun Life Frontline Equity, which clocked an absolute return of 130 per cent, and Magnum Contra with 123 per cent. Both the schemes returned 40-50 percentage points more on SIPs compared to lump-sum investments.
In the mid-cap space the return generated by Birla Sun Life MidCap and Sundaram BNP Paribas Select MidCap were at 173 per cent, while those who made lump-sum investments a year ago, would have got returns of 108 per cent and 101 per cent respectively.
The SIP return of Franklin India Prima Fund and Magnum Midcap were identical at 147 per cent. Returns on lump-sums too were identical over a one-year period, at 86 per cent.

Timing makes difference
The returns generated by Franklin India Prima Fund, Magnum Midcap and HSBC Mid cap over a three-year period still look low despite their stellar one-year performance. The three-year annualised return of the all the three schemes is 6-14 per cent on SIPs and 0.5-4.0 per cent for lump-sum investment.
The returns from SIPs buttresses the point that timing of entry and continuing with investments in a falling market made a big difference to returns.

Source: http://www.thehindubusinessline.com/iw/2009/10/19/stories/2009101950300600.htm

Leader's Speak

Mr. Pankaj Tibrewal, Fund Manager, Principal Mutual

Mr. Pankaj Tibrewal, Fund Manager joined Principal Mutual Fund in 2003 as a Credit Analyst and is currently holding the position of Fund Manager. Prior to joining Principal Mutual Fund, he had a short stint with Global Trade Finance. He is a graduate in Commerce from St. Xavier's College, Calcutta and holds a Masters degree in Finance from Manchester University, U.K. Pankaj Tibrewal’s schemes, mostly the Principal Child Benefit Fund, Principal Monthly Income Plan & Monthly Income Plan – MIP Plus and most recently Principal Emerging Bluechip Fund have done well (145% + returns in less than 1 year and launched during Nov 08’ last year).
Principal Mutual Fund is sponsored by Principal Financial Services Inc. USA through its wholly owned subsidiary, Principal Financial Group (Mauritius) Limited, with Punjab National Bank and Vijaya Bank as its co-settlors. As on September 30, 2009 the average assets under management was around Rs 8882 crores with over 10.2 lac investors (on the basis of live folios). Principal Mutual Fund serves its clients through 40 locations and 80 investor service centres.
Speaking with Yash Ved of India Infoline, Pankaj Tibrewal says "Compared to the rest of the world, valuations in India are moving into the expensive zone."

What is your view on the Indian stock market? Where do you see SENSEX by March?

The last six months’ rally has caught most people by surprise. Over the last six months, the Indian economy has showed resilience in overall growth. We are of the view that over the next few months the earning upgrades for Sensex companies need to be sharp in order to support the markets which in our view has limited scope. Over the last four years, it was not only Indian growth in isolation which happened, but it was lot to do with global GDP growth led by consumption in US and European Union. Also we had a strong commodity cycle which was led by some of the developing economies. All the three things - global growth, easy credit cycle and commodity cycle which were growth drivers over the last few years– are not in favour of us today. Global growth is weak, credit cycle has worsened and consumers are very cautious. There is no denial to the fact that the largest consumer of the world which is USA, has gone into hibernation for sometime to come which will keep the US and global economic growth subdued. The argument that the emergence or growth of India and China would offset the contraction of consumer demand of the West may not be true. Also, in commodities, there is huge overhang of excess capacity. Overall fundamentals globally are not in support of growth.

India is still seen growing at 6-6.5% which is reasonable as compared to the rest of the world. The large part of the rally which we have seen not only in India but globally is due to liquidity tap which has been opened up because of loose monetary policy in the world by the central banks. Sooner or later, once the central banks start indicating that the growth is returning back and that they will withdraw stimulus, markets will suffer a set back. Barring new stocks or sectors, I see limited scope for earnings upgrade by the street going forward for the Sensex companies . Hence leaving liquidity variable aside which is difficult one to call on, on absolute fundamentals the market should correct in the intermediate period until the global and domestic growth surprises us on the upside.

Are you comfortable with current valuations?

Compared to the rest of the world, valuations in India are moving into the expensive zone. From an earnings perspective, the consensus expects Sensex earnings growth of around 5% and 19% in FY2010 and FY2011, respectively. BSE Sensex now quote at 18xFY10 and 15xFY11 consensus earnings The forward earnings estimate over the last six months has undergone sharp upward revisions and have lagged the sharp rally in the markets. However going forward we believe that there is a limited scope of earnings surprise in the FY11 earnings estimate until domestic and global demand picks up very strongly and volumes surprises us on the upside as we believe that room for operating leverage is limited and pricing environment could remain weak. Some of the sectors where we believe, scope for positive earnings surprise/upgrades are present are Banking, Energy (regulatory development in terms of subsidy sharing etc) or Metal (globally linked prices).

What is your outlook on the global and Indian economy?

This year because of the bad monsoon, the rainfall deficiency till now is over 20%. This will affect the rural demand. However, IIP is starting to show strength from the last few months. For the second half, though IIP will continue to be strong, rural demand would be negative which could affect sectors like automobiles, FMCG, consumer durables or cement companies.
Next year monsoon will be a big variable. Capex by a lot of companies will start picking up. A lot of big companies will carry on with their capex plans and this will lead to growth. In FY10, we are looking at 6-6.5% GDP growth in India. We are looking at 7% GDP growth for FY10-11.
The global economy will still be in trouble. In the US, the debt leverage is high. If the US consumption does not pick up, 4-5% global growth is history for some time. 4-5% global GDP growth may not materialise over the next couple of years.

How do you see inflation and interest rates going forward?

I would look at food inflation and non-food inflation. Because of bad monsoon, there is going to be price pressure on food inflation. The non-food inflation may not be that high. Commodity prices are still subdued. The RBI clearly looks at segregation. Inflation could touch 4-4.5% by December-January because of low base effect.
We saw some uptick happening in the benchmark 10 year yield. The bond yield could go to 7.5-7.75% by the year end. The tax revenues as budgeted by the government could have an upside if Corporate India surprises on the earnings and hence fiscal deficit could be better than estimates and lower the budgeted borrowing programme for FY10.
We believe that the RBI would not be in a hurry to reverse the rate cycle until it is sure of growth recovery in the economy. On the contrast we believe that if credit growth picks up you could incrementally see liquidity getting lower in the system which may affect short end of the yield curve.

What is your AUM?

Our Average Assets Under Management is around Rs 8882 crores as on September 30, 2009.

Which of the sectors you are positive and negative?

We are positive on Power, Infrastructure and Retail. We are negative on IT, Automobiles and Metal stocks.

How do you see movement in small-cap and mid-cap shares?

Overall I don’t see much upside in the large cap stocks from the current level over the next 6months. However the valuations of mid-small cap stocks still look reasonable considering the growth they can potentially deliver next year. Also we believe that over the last 12months stock picking as a theme has not worked well however going forward if market remains range bound for some time stock pickers will be rewarded again.

A guide to debt fund

In the past six months, stock markets have risen by over 100 per cent. Even interest rates, which were at double digits last October, have slipped considerably.

However, with both consumer and wholesale price indices on the rise, there are indications that interest rates will not fall further. In its credit policy review later this month, the Reserve Bank of India (RBI) is expected to give signals to the return of a higher interest rate regime.

For investors in debt mutual funds, these are interesting times. They need to realise that their returns will be adversely impacted if rates go up. No wonder, experts are quite clear in their view - avoid medium and long-term funds. Also, gilt funds are a strict no-no. This is because they are the first to be impacted in case of a rate rise.

While there are various options for investors, they need to select the category that suits their risk-taking ability and time horizon.

Said Ramanathan K, head (fixed income), ING Investments, “Investors could look at short-term debt funds now because there is uncertainty about interest rates.”

The ultra short-term investor can park their funds in liquid funds for a few days or weeks. Liquid funds are offering 3-3.5 per cent returns. Then there are short-term funds (three to six months) offering returns of 5-6 per cent.

If one is ready to stay invested for a couple of years, one could look at dynamic funds. These funds are actively-managed debt funds. Fund managers buy and sell securities when yields are going up or coming down.

“For 2 to 3 years, income or dynamic debt funds are a good pick because they are expected to outperform inflation going forward,” said Arjun Parthasarathy, head (fixed income), IDFC Mutual Fund.

Some experts also said that fixed maturity plans (FMPs) and monthly income plans (MIPs) could be good options. Hitungshu Debnath, executive director, wealth management, Angel Broking, said, “FMPs and MIPs will help retail investors as they will lock into high interest rates and will give stable returns.”

Fund houses have already started launching FMPs aggressively. ICICI Prudential, Tata Mutual Fund and Fortis launched new fund offers recently. Market sources said that they were offering returns of 7-8 per cent.

Also, there are taxation benefits for FMPs. That is, an investor will get double indexation benefit on a scheme that is for more than a year. For instance, if you had invested in an FMP on February 2009 and it matures in April 2010, you will get the inflation indexation benefit for financial years 2008-09 and 2010-11.

MIPs are good for investors, who do not mind a little equity in their schemes. Typically, MIPs have 10-15 per cent of their money invested in equities. This improves their returns when the equity market is booming. At present, MIPs are offering returns of 10-15 per cent.

ING’s Ramanathan advised that investors should look for at least a two-three year horizon while investing in these products.

Source: http://www.business-standard.com/india/news/a-guide-to-debt-fund/372570/