India is better placed compared to global economy: Nanavati, Religare MF

Saurabh Nanavati is the CEO, Religare Mutual Fund where he oversees all functions including investments, operations and sales. Saurabh`s last assignment was with HDFC Standard Life Insurance, as chief investment officer overseeing USD 2 bn in equity and debt investments besides other asset classes. Prior to HDFC Standard Life Insurance, he was with Deutsche Asset Management for little under 4 years. His earlier assignments also include stints with multinational institutions like Reuters and HSBC India. Saurabh holds an Electronics Engineering degree and is an MBA in Finance from Jamnalal Bajaj Institute of Management Studies.Here are some excerpts from an exclusive interview with Saurabh Nanavati.

What investment philosophy does Religare Mutual Fund follow to provide value to investors? Is it different for a bull market or a bear market?

The 2 broad tenets of our investment philosophy are ``Active Fund Management`` and ``Being True to Mandate``.

Active Fund Management - Our Core Investment premise is that the Equity Markets are not completely efficient and therefore a well organized and thorough research effort combined with a disciplined portfolio management approach will enable outperformance of the market index over time.

True to Mandate - The fund`s investment mandate is paramount. We do not have a style bias. The Stock selection, industry and asset allocation will flow from the fund objectives.We do not have a different style for a bull market and a bear market.

What are the attributes you look for in stocks before taking a buy or sell call? Also give us an idea about your research team.

We have a proprietary stock categorization model. We categorise stocks into 7 different categories - Star, Leaders, Warriors, Diamonds, Frog Prince, Shot Gun and Commodity.Each category has a detailed description of the kind of fundamental attributes that we expect the company to possess. This approach helps the fund managers to focus on the attributes that drive stock performance and keep a watch for red flags.

As regards the investment team, we have a clear segregation between fund managers, analysts and dealers. We have 3 fund managers, 4 analysts and 1 dealer at present in the AMC team and an additional 2 Fund Managers on the PMS side.The analysts track roughly 280 stocks at present and we are looking at increasing the coverage by another 40 stocks in the next 3 months.

Give us your outlook for the markets in 2009? Will we see the effects of global financial crisis receding?
The first three months of 2008 were good but the situation deteriorated in the next nine months. This year, 2009 may see 12 bad months and the situation might continue even to the first half of 2010.
The global financial crisis is going to take a long time to resolve and the growth paradigm of mercantilism wherein the developing world produces goods and services to meet the insatiable appetite of the US consumer may never take centre stage again.

Capital flows are also likely to remain subdued due to risk aversion. Further, the governments of the western world who are injecting capital into their banks would like them to keep that capital at home. This crisis has heightened the risk of protectionism in the US and other developed markets as they are under public pressure to do whatever it takes to halt the decline.

However for India, the agenda must be the opposite - we must tear down the red tape and barriers that act as a hindrance to foreign capital. But we must also be vigilant to ensure that our economy and businesses are protected against unfair trade.

What are your predictions on the interest rate movement over medium term? Could you share your perspective on the Indian bond markets for 2009 given the continuous monetary easing and increasing government borrowings?

In the second half of 2006, RBI had then indicated its concerns regarding credit growth and started raising interest rates. But the economy did not feel the pinch of rising interest rates because foreign money was flooding into the system. In FY2007 total foreign capital inflows surged to over USD 50 billion and then doubled to USD 108 billion in FY2008. To put this in perspective the capital inflows in FY2008 were an 8 fold jump compared to the inflow in 2002.

The RBI continued to hike rates in the first half of 2008 and the economy was slowing in response to that. But the slowdown has morphed into an abrupt halt with the collapse of the banking system and credit markets in the western world which started in late 2007 and is still ongoing.

RBI has since changed its stance to a pro-growth strategy in Oct 2008 and started cutting interest rates. We feel that the rate cut stance will continue up to Sept 2009 and we can expect another 100 bps reduction in Repo, 150 bps in Reverse Repo and 50 bps in CRR in the coming months.

Bond yields have however factored in some of these cuts, and we feel that the 10 year yield may not rally beyond 5.50% from 6% currently, in an absolutely bullish case beyond 5.25%. This is because of increased government borrowings. We expect government borrowings to exceed their projections for next year as there will be a fall in direct and indirect revenue collections due to the downturn.

What is your approach for investing in government and corporate papers? How much do you rely on external credit rating while investing in the corporate paper?

Our fixed income philosophy is based on 3 parameters - Safety, Liquidity and Consistency.Again we have a defined investment philosophy and process, with clear segregation between credit analysts, fund managers and dealers. We currently have 2 credit analysts, 3 fund managers and 2 dealers.Credit analysts rely on external credit as a starting point post which they do their own internal analysis.Both in equity and debt, if the respective equity analysts and credit analysts do not approve of a security, the portfolio manager cannot buy it in his portfolio.Due to an increased risk aversion globally, government paper and corporate paper spreads have increased to around 300 bps from 150-200 bps earlier. We feel that the spreads may not compress to earlier levels for the next 18-24 months. However, a higher spread means a higher yield and therefore if the credit analyst has done his job well, it will enable the fund manager to buy the Corporate paper and earn a higher yield for the investor.

According to you what lessons should we take from the India`s biggest fraud at Satyam?Recent report by CRISIL substantiates weak governance practices in 50% of the 29 IPO graded by them since May 2007. How do you rate India Inc on corporate governance parameters?

At a philosophical level, India was always taking the higher moral ground as compared to the developed markets, that 50% of the Sensex companies were promoter owned, faster decision making and great corporate governance. This has been shattered after the Satyam episode. So when analysts say Satyam was an accident, I disagree. Investors have lost faith in our corporate governance standard currently and the whole market will suffer because of this episode.We clearly have issues on corporate governance parameters and I personally feel, that there will be some startling disclosures in the next 12 months by India Inc. Auditors too will tighten their requirements and not sign off easily on grey areas, forcing more disclosures.

Recent quarters showed significant drop in corporate earnings on back of higher input and fund cost. Going forward, what is your take on FY10 earnings? Will it continue to fall?

For the last 6 months, we have been communicating a 5-10% EPS de-growth from FY08 to FY10, to the market. This is for the Nifty stocks. The broader markets may have a higher earnings fall. Six months back, analysts consensus were talking of 15% growth and currently they have brought down these estimates to flat growth. We are yet sticking to our stance of a 5-10% earnings fall in this period.Difficult to predict when this will turn but our sense is we are at least 18 months away from a trend reversal.

With the impact of global economic meltdown started reflecting into domestic economy, how do you see the economic outlook moving ahead?

India is yet much better placed as compared to the global economy. But it may be difficult to meet the growth projections of 5.5-6% growth for FY10. Even assuming a normal and good monsoon, our expectations would be around 4-4.5%. There will be a definite slowdown in the services sectors and manufacturing sectors due to reduced demand. Job losses will peak between April to Sept 2009 and this will curb demand growth at the ground level.Looking at the positive side, there are three factors which should aid India decouple itself from this global recession after 12-18 months.a) Sub-prime - Due to RBI`s conservative policies, India is actually not having a major sub-prime kind of an issue - of home loan defaults and banking collapses at the ground level. This is a big positive. India yet has a financial system intact as compared to the rest of the world.b) Rural Consumption - This theme is definitely intact and will be largely responsible for India`s 4-4.5% GDP growth rate. The pay commission increase of last year will reflect in increased or stable rural spending.c) Political Reforms - The third factor will definitely be the elections and the new government stance. Difficult to talk of the outcome but the industry will need to be fleet-footed in terms of anticipating and understanding the new government`s stance on issues, as well as their powers to push reforms in a coalition situation.

What are challenges faced by the MF industry in the current scenario? How do you plan to overcome these challenges? What is your outlook for the MF industry in 2009?

MF investors are facing a confidence crisis at this point of time, post the Sept-Oct 2008 liquidity crisis. We will also see consolidation in the mutual fund industry in the coming two years. This business is for the long-term serious players only and carries fiduciary responsibility. I am sure promoters have now realized this and are re-visiting their business plans.From our perspective, it is time to get back to basics. Simple products, customer education, increasing visibility, strong platform to deliver consistency and shareholder commitment. Small innovations sometimes deliver fantastic results. All these are our focus areas.I am sure the industry will emerge stronger at the end of 2009. Let me assure you that the transparency levels are yet the highest by far in this industry and customers will appreciate it, once the risk appetite comes back.

Religare AMC is relatively new in the MF industry, what are your plans for scaling up the business?

Of the three existing business models in India AMC Industry - Retail, Institutional and Quasi-Institutional, Religare AMC has adopted the Retail Business Model. With the acquisition of Lotus Mutual Fund, Religare AMC now has a presence in 38 cities through 41 own branches. We intend to set-up a further 62 branches in 62 cities in the next 18 months to increase our network to a 100 cities. With a presence in 100 cities through own branches, Religare will be in the top 7-8 AMCs from a distribution reach perspective. It is important to understand the difference of having your own branch and having a presence through the registrar offices which are in over 150 locations.

Apart from managing fund house, what other things you like to do?

Spending time with my children (aged 5 and 2), reading economic articles and cricket. Proving skeptics wrong, in every walk of life, is also what I enjoy the most. I am going back to the movie ``Matrix``, where Keanu Reeves was told that ``this has been never done before`` to which he replied ``that`s why it will succeed``.

Source: http://www.myiris.com/newsCentre/storyShownew_opt.php?fileR=20090413142504196&secID=fromnewsroom&secTitle=From%20the%20News%20Room&dir=2009/04/13

FIIs upbeat in FY-10; invest Rs 1,000 cr in April so far

Foreign institutional Investors, who had turned away from the Indian equity market last year, seem to be returning back as since the beginning of the new financial year 2009-10 they have already put in over Rs 1,000 crore into the domestic stocks.
FIIs seem to have embarked on fresh buying mode and made net investments of Rs 1,056.1 crore since April 1, the latest data available with the market regulator Securities and Exchange Board of India (SEBI) website shows.
Significantly, in last fiscal, FIIs had pulled out close to Rs 50,000 crore at the domestic stock market, almost equaling the inflow in the previous financial year.
According to SEBI data, FIIs' net outflows have been Rs 47,706.2 crore till March 30 in the financial year 2008-09 as against huge inflows of Rs 53,000 crore in FY'08.
Further, the Bombay Stock Exchange's benchmark index Sensex has witnessed a rally in the past two weeks although the trading sessions have been just five due to holidays in between.

Since the beginning of the new financial year, Sensex has gained over 900 points or over 9 per cent. On Thursday, the last trading day of the week, Sensex closed at 10,803.86 points.
Besides, FIIs have also made net investments in the debt segment to the tune of Rs 620 crore in the first five days of the FY10.
Interestingly, it seems that domestic mutual fund houses are still concerned about the movement of the equity market as they have been net investors of just Rs 38.3 crore in this fiscal, the latest data available with SEBI shows.
However, fund houses have put in significantly more amount in the debt segment in the first few days of the fiscal year.They have made investments of nearly Rs 9,000 crore in the debt segment in April so far, the latest data shows.
Since the beginning of 2009, domestic institutional investors (which include mutual fund houses, insurance firms and others) have made a net investment of Rs 10,558.98 crore in shares, the latest provisional data with the BSE shows.
In the financial year 2008-09, the country's mutual fund industry witnessed a nearly Rs 37,000 crore decline in its assets, with top fund house Reliance MF accounting for a little less than one-third of the losses.

Source: http://economictimes.indiatimes.com/News/Economy/Indicators/FIIs-upbeat-in-FY10-invest-Rs-1k-cr-in-April-so-far/articleshow/4391988.cms

Defensive funds outperform auto, banking and tech

Investors who invested in defensive sector funds would have a mental solace. In the last one year, these funds, which include FMCG and pharma, have performed better than other sector including auto, banking and technology.
In the last one year, FMCG and pharma funds have fallen by 23% and 23.26% respectively. Auto, banking and technology have fallen to the extent of 25%, 35%, and 42% respectively. This performance makes sense when one looks at the fall in S&P Nifty, which shed 29% in the last one year.
The strategy that worked:
a) Pharma funds
Funds which were over-weight on healthcare sector benefited largely and it helped these funds to mitigate maximum damage, while those which were not overweight suffered bigger losses. There are in all five solely dedicated pharma funds. Of these, Reliance Pharma, UTI Pharma and Healthcare, and Franklin Pharma were the better performers. These funds unanimously adhered to the strategy of going overweight on healthcare to an extent of 90% and above while those which didn’t observe this strategy suffered greater damages. These funds are Magnum Pharma and JM Healthcare.
In the last one year, Reliance Pharma, UTI Pharma and Healthcare, and Franklin Pharma fell to the extent of 14.94%, 15.29% and 15.33% respectively, while Magnum Pharma and JM Healthcare fell to the extent of 38.24% and 32.49% respectively.
b) FMCG funds
Franklin Templeton, ICICI Prudential and SBI Mutual have almost a decade long history. SBI Magnum FMCG Fund has recorded minimum loss of 13.26% in this category over last one year. Franklin FMCG Fund followed with a loss of 16.85% for the same period of time, whereas ICICI Prudential FMCG fund lost 32.61%--the maximum in this category.
SBI Magnum Fund ran a concentrated portfolio of both the Indian and Multinational counters. The fund manager has invested 27.35% of the scheme corpus in Nestle as its top holding. “Focused investments in the category leaders with growth orientation at reasonable price have saved the fund in the bad times,” said a fund analyst with a domestic brokerage. The fund has put 70% of the money in top 5 stocks. Point to note here is the fund is the smallest in this category with only Rs 5.42 crore.
Its nearest competitor on the returns front, Franklin FMCG Fund, has chosen to be a well diversified equity fund in the FMCG sector with a portfolio of 18 stocks. The well diversified investment style has helped the fund in the difficult times. Nestle is the top holding with 15% allocation followed by HUL. However the investors in ICICI Prudential were not as fortunate.
The fund manages a concentrated portfolio with a focus on Indian companies than the multinationals. This is the only scheme in this segment that has employed derivatives. A short position of Hindustan Unilever is initiated in February. The fund has ITC as its top investments with 40% weight. Marico is the second biggest holding in the portfolio. Barring Gillette the fund has no long positions in any of the multinationals. Though the fund has delivered the worst performance in the category, it still enjoys the title of largest fund with Rs 42 crore under management as on February 2009.

Source: http://economictimes.indiatimes.com/Defensive-funds-outperform-auto-banking-and-tech/articleshow/4394472.cms

Everything you need to know about FDs

Fixed deposit (FD) is an investment option that allows you to invest a sum of money for a fixed time period and at a fixed rate of interest. During the course of the FD, even if the prevailing interest rates go up or down, you will be entitled to the rate of interest that was committed to you.

FDs pay a higher rate of interest than your savings bank account. The current rates, as of early April, for a one-year FD are approximately 8-8.5%. Your savings bank account offers you only 3.5% interest.

Other conditions being equal, you are better off putting your money in an FD account rather than a savings account. The interest can be paid to you quarterly, half-yearly or annually. If you are a senior citizen, the interest rate on your FD may go up by 0.5%.

Two types:

1. Bank and NBFC FDs: Offered by banks or non-banking finance companies; the Reserve Bank of India (RBI) regulates these institutions.

2. Corporate FDs: These are offered by companies that are looking to raise money from the open market. Corporate FDs typically pay a higher rate of interest, but also carry a relatively higher risk than bank FDs.

Advantages

• FDs offer a safe return: FDs are usually secure and are very low-risk investments. Bank FDs are guaranteed up to Rs1 lakh by the Deposit Insurance and Credit Guarantee Corporation.

• You can raise a loan against your FD: You can borrow up to 85% of your deposit amount (in some cases, only after a few months of your FD’s existence). This is valid only for bank FDs.

• Low maintenance: Unlike other investments such as stocks, mutual funds or even real estate, you don’t need to monitor your FDs on a daily or monthly basis, or undertake any kind of maintenance work.

• Choice of time period: You can make a deposit for any period of time, from 15 days to 10 years.

Disadvantages

• Relatively low returns: Because FDs are very low-risk instruments, they offer low returns compared with alternative investment options such as stocks and mutual funds.

• Lock-ups: Your money will be locked up in an FD for the duration of the deposit. As a result, unlike a savings bank deposit, you will lose the flexibility of accessing your funds whenever needed. You can break your FD if needed, but you would have to pay a penalty, which could include both a reduced interest rate as well as charges that are typically around 1%of the investment amount.

• Unfavourable tax treatment: Unlike other investment options, interest income earned from FDs will be added to your income and taxed.Taxes and FDs

• Tax-saving investments: Under section 80C, you can get a tax deduction of up to Rs1 lakh a year if you invest in a five-year FD.

• FDs and tax deduction at source (TDS): If the aggregate interest income that you are likely to earn from all your bank FDs held in a single branch is at least Rs10,000 in a financial year (Rs5,000 in the case of corporate FDs) then TDS will be deducted at 10%.

• If you do not fall in a taxable slab, then furnish Form 15G or 15H to your bank to prevent TDS on the interest income that is paid to you.

7 things to watch out for

1. Always appoint a nominee on your FD for quick withdrawals, and to avoid hassles if you are not around.

2. FDs from companies might pay more but come at a much higher risk than bank FDs. These FDs are not deposit-guaranteed.

3. In times of rising inflation, avoid FDs because your money will lose its purchasing power.

4. When making a deposit, check the penalty clause for early withdrawal.

5. If you need to withdraw funds for an emergency, instead of breaking the FD, you might want to consider taking an overdraft of up to 85% on your FD rather than pay the withdrawal penalty.

6. You might want to split your investment and make multiple deposits in small sizes and spread them across different maturities as opposed to making a single large deposit. This way, even if you do have to make a premature withdrawal, you will not pay a penalty on the entire amount but just on the limited amount you withdraw.

7. For FDs longer than a year, if your interest is paid at maturity, the taxes on interest income from your FDs are due on interest earned, even if the interest hasn’t been received by you.

Source: http://www.livemint.com/2009/04/12222430/Everything-you-need-to-know-ab.html?h=B