Wednesday, July 8, 2009

Deficit hurts, but FIIs say they understand

The Budget may have been short of the big-bang policy moves that the market was hoping for. Still, it may be too early to question the government’s commitment to reforms, feel some of the FIIs that ET spoke to. The main concern among these players at the moment is the projected fiscal deficit of 6.8%, which is more than what the market had feared.
“I see no adverse impact on FII flows. In our view, the India story is on track for the next few years,” says Sam Mahtani, director, emerging markets of the London-based F&C Investments.
“One has to keep in mind that the government has five years to implement the reform programme. We need to have a long-term view, keeping in mind the government’s new fiscal responsibilities. We are currently overweight on India, and we like the infrastructure space,” added Mr Mahtani, who manages more than $2.5 billion in emerging markets. Most market watchers feel there could be a slowdown in FII inflows, if not an outright reversal. So far in 2009, FIIs have net invested $5.2 billion into Indian equities and have been the main drivers of the recent rally.
Ashu Suyash, MD and Country Head, Fidelity Mutual Fund, highlights the fact that not all policy announcements are made in the Budget. According to her, over the last year, the government has been responsive and made policy announcements as warranted by the prevailing environment. “One area where greater clarity would have been welcome is on specific steps that would be taken to bridge the deficit, which is at a worrying level. On balance, though, the government’s focus on continuing to stimulate economic growth is encouraging,” Ms Suyash said.
Yet, there are also fund managers who feel the government has missed out on an opportunity to instil confidence among investors. On Monday, FIIs net sold shares worth Rs 351 crore, and according to provisional data on BSE, they sold shares worth Rs 921 crore on Tuesday.
Samir Arora of Singapore-based Helios Capital is of the view that the big picture roadmap was missing from the Budget. “This could have provided confidence to investors about how we would go from A to B in a credible manner,” he added. And there are others who feel the market had set itself up for a disappointment.
“Given that we had a large stimulus programme going on last year — which has been sustained — the fact that there was no dramatic increase in direct/indirect taxes is in itself a relief,” says Pratik Gupta, MD-equities, Deutsche Equities, who believes that expectations going into the Budget were unrealistically high, partly raised by a rather bold Economic Survey.
“Nonetheless, the increase in fiscal deficit is a long-term worry. We would have liked bolder announcements on disinvestment. The post-Budget sell-off has taken away the near-term market momentum. However, the long-term growth potential remains intact and the Budget is not the only policy tool for the government,” said Mr Gupta. Echoing a similar view, Jyotivardhan Jaipuria, MD and head-research, BoA Merrill Lynch, says, many of the reforms might happen outside the Budget. “The market technically needs a breather. It has been slightly on the higher side,” added Mr Jaipuria.

Equity mutual funds: Should you switch or hold on?

Equity mutual funds had a tough time last year, in fact till the first quarter of this year. The crash in the stock markets resulted in a crash in their net asset values (NAV) and redemption pressures ruled pretty much across the board for equity mutual funds.
Investor interest is slowly coming back into equity mutual funds after the rally seen in the stock markets since March this year. Further, after the formation of the new UPA government , some fund houses are coming up with new fund offers as well. The new UPA government will present its first full budget tomorrow and that will set the tone of the government's policies and steps in the short to medium terms.
On the regulation front, the Securities and Exchange Board of India (SEBI) announced the removal of entry load on investments in mutual funds recently. The SEBI, in its directives, announced that the distributors of mutual funds will have to charge commission separately from the investors rather than deducting it from the investment's principal . Market experts believe that the move looks a bit harsh for agents and distributors in the short term but it will be good move in the long term, and will be beneficial for all the participants, especially the investors.
The upfront disclosures of distributor fee/commission on all the recommended funds would make it transparent for the investors and help in creating a level playing field for smaller as well as bigger mutual fund houses. Some are apprehensive about the possibility of levying and collecting charges to sell mutual funds. However, experts believe investors would definitely recognize the value of services provided in terms of advice and would be willing to pay a fee for the service. For example, investors already pay for stock tips/advice, equity market brokerage etc.
The performance of mutual funds varied quite a bit during the last few quarters . Many mutual funds under-performed the index. The reason remained huge stock market volatility, higher beta of the funds and redemption pressures. Analysts believe that postbudget , the picture of government policies and economic revival will be quite clear and it will be the time to re-evaluate your mutual fund portfolio. It is a good strategy to exit from underperforming equity funds and move the investment to those funds with better performance prospects in the light of the developments.

New fund offers
There were many new fund offers (NFOs) during the last few weeks. It is important for the investor to go through and understand the theme of the fund. It is important to evaluate the returns prospects with respect to the investment horizon of the investor. For example, a fund based on the infrastructure theme may give good returns over a long term but may under-perform in the short term. Therefore, it may not be a good idea for a short-term investor to invest in this kind of offer.
Existing open-ended funds
Investors should evaluate the open-ended mutual funds with respect to their past performance and the sectors in focus under the new UPA government regime. The exit and entry decisions from a fund should be based on a careful analysis of both these factors . Investors should gradually move their portfolios from under-performing mutual funds to funds with better prospects.
The first quarter results of 2009-10 have started coming in and this is another event to wait for and watch, before executing a switch strategy completely.

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  • HDFC Equity Fund (Mid cap Fund) 11%
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  • IDFC Imperial Equity Fund (Large Cap Fund) 10%
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  • HDFC Prudence Fund (Balance Fund) 9%
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Best SIP Fund For 10 Years

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