Tuesday, August 25, 2009

Mutual funds largely eschew derivatives play

Since its inception in 2000, the derivatives market has emerged as a major market segment.
This type of trading allows market players to hedge their exposures or take bets depending upon their view on market situations. With Sebi allowing mutual funds to participate in derivatives, fund managers do take positions through futures and options in order to hedge their positions. It also allows investment managers to take arbitrage advantage of mis-pricing arising out of two different markets i.e. cash market and derivatives market, thus, locking the profit in case the price differs in both the markets.
While the advantages of trading in the derivative segment are many, mutual funds have not gone overboard in investing in this segment. The total exposure of mutual funds in derivatives market at the end July 2009 was close to Rs 1,360 crore. When compared to the volumes clocked in the derivative markets, mutual funds participation is marginal.
Investing in the derivative segment is fraught with its own set of risks, as a result of while, Sebi permitted mutual funds to dapple in the derivatives market. It has done this with some wise restrictions in place. The maximum net position by mutual funds in derivatives has been capped to the extent of 50% of the portfolio.

Trend
The primary reason why fund managers invest in futures and options segment is with the aim to hedge risks. Derivatives are used as an instrument to minimise the risk exposures and limit the degree of fluctuations in prices, which is rampant during a bear market. On the other hand, in a bull phase, the managers are less averse to risk and hence do not hedge as extensively. Hence, theoretically, the exposure in derivatives would ideally be higher in the bear phase while it can drop down during a bull phase.
For the worst of the bear phase -- marked between January 2008 and March 2009 -- the exposure to derivatives witnessed a large increase. In case of ICICI Prudential Mutual Fund, the exposure into the derivatives segment climbed from 1.77% as a proportion of equity assets under management in January 2008 to 5.86% in March 2009. On the other hand, even in the current improved market conditions, DSP Black Rock Mutual Fund allocated 12.52% of its equity assets to derivatives during July 2009.
On an average, the highest allocation in the derivative segment across asset management companies was in the month of November 2008, with four fund houses allocating anywhere between 11.50% and 14% of their equity assets to derivatives.
The theoretical assumption of higher exposure to derivatives in bad times and a significant drop in derivative positions in better times is vindicated by the holdings of mutual funds between March 2009 and July 2009. Since markets began looking more upbeat after the Lok Sabha elections, the assets allocated to derivatives have also drastically reduced, as have the number of schemes hedging through derivatives.
Moreover, before January 2008, there were hardly any positions in the derivatives segment, with barely 10 diversified equity schemes dappling in derivatives. On the other hand, there have also been some AMCs such as HDFC Mutual Fund, Reliance Mutual Fund, SBI Mutual Fund, UTI Mutual Fund and few others which have not ventured into this segment over the past two years.

Performance
In order to assess whether the strategy of investing in derivatives works or not, we segregated the schemes which invested in derivatives and those which did not. Between January 2008 and March 2009, out of 187 diversified equity schemes, as many as 75 invested in futures and options. Moreover, the returns delivered by these 75 funds are not very different from the remaining diversified equity funds. The range of returns is also comparable. The funds which invested in derivatives on an average lost 59.89% while the other diversified equity funds lost 55.75% on an average.
A look at the near-term performance since March 2009 also shows that the returns of these schemes have not been dented drastically over the recent uptake in equity markets. One of the strategies of investing in derivatives is that of gaining from the mis-pricing between the cash and the derivatives market.
Using this strategy, AMCs have floated arbitrage schemes. Unlike the run-of-the-mill equity funds, this class skirts the 'high risk' tag that is synonymous with equity investment. But then again, the returns are also much lower and are more similar to what a debt-oriented mutual fund would produce. The returns for equity arbitrage schemes over the past year have been in the range of 5-10%.
While the use of derivatives by mutual funds as a hedging mechanism is a popular one, in the Indian context, their participation has been unimpressive. It is unlikely the diversified equity class of funds will exploit this option if the uptake in equity markets persists. However, with the success of the arbitrage category of funds, the share of mutual funds investing in this market segment is likely to change in the long run.

New pension-cum-savings scheme by year end: PFRDA

A new kind of pension-cum-savings scheme is on the anvil which would provide a safety net as well as liquidity to the holder.
The scheme, called tier II account, may be introduced by the end of this calendar year, a top official of Pension Fund Regulatory and Development Authority (PFRDA) said.
"We are working on a pension saving account under New Pension System (NPS) and is likely to be operationalised by the end of this year," the official said.
The essential feature of this saving account would be liquidity. Customers needing money in emergency situations would be able to withdraw their deposited sum.
In this pension saving account, customers can withdraw almost the entire amount, though a small part might be retained with the fund manager, as directed by the interim pension regulator, the official said.
The pension amount withdrawn would be subjected to tax as it is under exempt-exempt mode like the Tier I account.
Under exempt-exempt, the amount is exempted from tax when deposited and also when it accrues interest, but tax is levied at the time of withdrawing the amount.
"Investment patterns and other guidelines would be the same as applied to Tier I account, which was operationalised from May 1," the official added.
However, the customers who wants to open the Tier II account should essentially have a Tier I account.
"Those who wants to open the Tier II account must also have Tier 1 account. Both the account should run separately," the official added.
Under the present structure of NPS, a customer can only withdraw 20 per cent of the money as a lump sum before he or she attains 60 years of age. On attaining 60 years, the customers can withdraw 60 per cent as lump sum.
Besides the pension-cum-saving scheme, PFRDA is working on a separate fund management guideline for corporates, a move that will allow them to enter into agreements with fund managers for managing the pension fund of their employees.
NPS was implemented for government employees who joined service on or after 1 January 2004. On May 1, it was extended to all citizens.
There are six fund managers for all citizens' scheme-IDFC Mutual Fund, Kotak Mahindra, SBI, UTI Asset Management, ICICI Prudential Life Insurance and Reliance MF-to manage the corpus of customers.
Besides, there are 21 Points of Presence (PoPs) of NPS, which include, State Bank of India, ICICI Bank, IDBI Bank, Oriental Bank of Commerce, Axis Bank and Union Bank of India.
PoPs are contact and collection points for customers wanting to be part of NPS.

RMF declares dividend in three of its flagship schemes

Reliance Pharma Fund beats market expectations Reliance Banking Fund maintains
consistent track record with dividend returns totaling 160% since inception.
RMF declares dividend in three of its flagship schemes
Reliance Pharma Fund beats market expectations
Reliance Banking Fund maintains consistent track record with dividend returns totaling 160% since inception.
MUMBAI, August 24, 2009: India’s largest Mutual fund house, Reliance Mutual Fund, part of the Anil Dhirubhai Ambani Group, announced dividend for three of its flagship equity schemes. The three schemes namely Reliance Banking Fund, Reliance Pharma Fund and the Reliance Tax Saver (ELSS) Fund have shown consistent performance over a sustained period as shown below:
Total dividend since inception:
Reliance Banking Fund --160%
Reliance Pharma Fund--40%
Reliance Tax Saver (ELSS) Fund--20%
“Our aim has always been to maintain positivity of results and ensure that we focus on long term wealth creation for our investors through prudent investment, monitoring of trends and higher safety. ” said Reliance Mutual Fund CEO Sundeep Sikka.
The dividend declared and the record dates are 28th Aug 09:
Reliance Banking Fund --160%
Reliance Pharma Fund--40%
Reliance Tax Saver (ELSS) Fund--20%
Benchmarked against the BSE Healthcare Index, the Reliance Pharma Fund has consistently delivered superior returns over the last five years, beating both its benchmark and peer Pharma funds by a considerable margin. (Source: www.valueresearchonline.com)
In the banking sector Reliance Banking Fund has a holding in the top performing banks in the country. “As the banks we are invested in are able to reduce lending rates, their business portfolio has grown multi fold. We expect a higher percentage of growth in the next quarter as the finance bill announced seems positive for this sector” said Mr. Sikka.
The Reliance Tax Saver (ELSS) Fund has been a steady performer that has in the last six months given returns of over 60% to investors. The investment portfolio of the fund comprises of blue chip companies that are consistent performers with strong fundamentals and excellent management capabilities with long-term growth outlook. With over 56 schemes in its portfolio, spread across 71 lakh investors, and an Assets Under Management (AUM) exceeding over One Lakh Crore, RMF has emerged as the largest and fastest growing mutual fund in the country. It has a presence in over 300 cities across the length and breadth of India and a large Fund Management team that comprises the best professionals in the Industry.

The NAV returns for the last six months for the 3 schemes in the growth plan as of last month end are as follows:
Reliance Banking Fund : 66.85%
Reliance Pharma Fund : 60.40%
Reliance Tax Saver (ELSS) Fund : 60.52%

About Reliance Mutual Fund
RMF has grown to be the leader in the Mutual Fund Industry in a short span of less than 5 years, beating much more established players in the field. With Assets Under Management (AUM), of 1,08,334 crore, RMF is a clear leader with a 30% lead over its nearest competition. With More than 90% of the applicants having less than Rs. 50,000 of investments and over 1 million SIP investors proves that Reliance Mutual Fund is truly a very retail focused fund house. Reliance Mutual Fund schemes are managed by Reliance Capital Asset Management Limited., a subsidiary of Reliance Capital Limited, which holds 93.37% of the paid-up capital of RCAM, the balance paid up capital being held by minority shareholders. Reliance Capital Ltd. is one of India’s leading and fastest growing private sector financial services companies, and ranks among the top 3 private sector financial services and banking companies, in terms of net worth. Reliance Capital Ltd. has interests in asset management, life and general insurance, private equity and proprietary investments, stock broking and other financial services.

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Aggrasive Portfolio

  • Principal Emerging Bluechip fund (Stock picker Fund) 11%
  • Reliance Growth Fund (Stock Picker Fund) 11%
  • IDFC Premier Equity Fund (Stock picker Fund) (STP) 11%
  • HDFC Equity Fund (Mid cap Fund) 11%
  • Birla Sun Life Front Line Equity Fund (Large Cap Fund) 10%
  • HDFC TOP 200 Fund (Large Cap Fund) 8%
  • Sundram BNP Paribas Select Midcap Fund (Midcap Fund) 8%
  • Fidelity Special Situation Fund (Stock picker Fund) 8%
  • Principal MIP Fund (15% Equity oriented) 10%
  • IDFC Savings Advantage Fund (Liquid Fund) 6%
  • Kotak Flexi Fund (Liquid Fund) 6%

Moderate Portfolio

  • HDFC TOP 200 Fund (Large Cap Fund) 11%
  • Principal Large Cap Fund (Largecap Equity Fund) 10%
  • Reliance Vision Fund (Large Cap Fund) 10%
  • IDFC Imperial Equity Fund (Large Cap Fund) 10%
  • Reliance Regular Saving Fund (Stock Picker Fund) 10%
  • Birla Sun Life Front Line Equity Fund (Large Cap Fund) 9%
  • HDFC Prudence Fund (Balance Fund) 9%
  • ICICI Prudential Dynamic Plan (Dynamic Fund) 9%
  • Principal MIP Fund (15% Equity oriented) 10%
  • IDFC Savings Advantage Fund (Liquid Fund) 6%
  • Kotak Flexi Fund (Liquid Fund) 6%

Conservative Portfolio

  • ICICI Prudential Index Fund (Index Fund) 16%
  • HDFC Prudence Fund (Balance Fund) 16%
  • Reliance Regular Savings Fund - Balanced Option (Balance Fund) 16%
  • Principal Monthly Income Plan (MIP Fund) 16%
  • HDFC TOP 200 Fund (Large Cap Fund) 8%
  • Principal Large Cap Fund (Largecap Equity Fund) 8%
  • JM Arbitrage Advantage Fund (Arbitrage Fund) 16%
  • IDFC Savings Advantage Fund (Liquid Fund) 14%

Best SIP Fund For 10 Years

  • IDFC Premier Equity Fund (Stock Picker Fund)
  • Principal Emerging Bluechip Fund (Stock Picker Fund)
  • Sundram BNP Paribas Select Midcap Fund (Midcap Fund)
  • JM Emerging Leader Fund (Multicap Fund)
  • Reliance Regular Saving Scheme (Equity Stock Picker)
  • Biral Mid cap Fund (Mid cap Fund)
  • Fidility Special Situation Fund (Stock Picker)
  • DSP Gold Fund (Equity oriented Gold Sector Fund)