Mukesh Ambani may buy MF firm

With JM mutual find valued at 8% of assets under management, Ambani would have to pay around Rs685 crore

Mukesh Ambani, who controls India’s most valuable company Reliance Industries Ltd (RIL), is in talks to buy a majority stake in JM Financial Asset Management Pvt. Ltd, his first attempt to enter Anil Ambani’s territory since the estranged brothers scrapped a “non-compete” agreement between them a week ago.

Negotiations are under way for a deal that values JM Financial Asset Management, the money manager controlled by investment banker Nimesh Kampani, at around 8% of its assets under management, which equals Rs685 crore, said two officials close to the development who didn’t want to be named.

If the acquisition goes through at that valuation, it would be one of the biggest in India’s mutual fund industry.

JM Financial manages assets worth Rs8,569 crore in a total of 27 investment plans.

The non-compete agreement, which was torn up in a move towards possible reconciliation between the brothers, had prevented Mukesh and Anil Ambani from entering each other’s businesses.

Anil Ambani controls Reliance Capital Asset Management Ltd, the country’s largest money manager.

The acquisition of JM Financial will give Mukesh Ambani, 53, a direct licence to enter the mutual fund industry, which has Rs7.7 trillion worth of assets under management.

“As a policy, we do not comment on speculation,” a spokesperson at Reliance Industries said in response to a query from Mint.

Nimesh Kampani’s son Vishal Kampani also termed it “speculation”.

“JM Financial mutual fund forms an important part in the JM Financial group portfolio and we remain focused and committed towards growing this business,” he said over the phone.

Vishal Kampani, who was holding the position of a director in the asset management firm, resigned from his position on 12 March. On 14 March, the fund house informed investors of his resignation.

Bhanu Katoch, chief executive officer of JM Financial Asset Management, also called news of the attempted acquisition speculative in reply to an email from Mint.

JM Financial mutual fund, a part of the Nimesh Kampani-controlled JM Financial group, is one of the country’s first asset managers.

It started operations in December 1994 with the launch of three funds—JM Liquid Fund (now JM Income Fund), JM Equity Fund and JM Balanced Fund.

The non-compete agreement between the Mukesh Ambani company and Reliance Anil Dhirubhai Ambani Group (R-Adag) had restrained the elder brother from venturing into the potentially lucrative financial services space.

Reliance Capital, a part of R-Adag, is engaged in asset management, life and general insurance, consumer finance and other capital market-related businesses.

Reliance Capital Asset Management is the largest mutual fund in the country with assets worth Rs1.11 trillion.

The talks with Mukesh Ambani follow three years after Nimesh Kampani sold his 49% stake in the joint venture investment banking company JM Morgan Stanley Securities Pvt. Ltd to Morgan Stanley for $445 million (Rs2,069.25 crore as of today). “If a partner does not want to be with you, one has to move on,” Nimesh Kampani said then.

JM Financial Asset Management is a loss-making entity in the otherwise profitable JM Financial group. Last year, the money manager made a loss of Rs5 crore.

Under its star fund manager Sandip Sabharwal, JM Financial Asset Management made most of its investments when the stock market was nearing its peak.

Sabharwal, who was known for his aggressive style of investment, has since left the fund.

JM Financial has been on the lookout for a buyer for a couple of months now, said one of the two officials mentioned above.

JM Financial would help its new owner get a decent headstart in the mutual fund business, given that it has a near-full suite of products besides a licence, althoughit hasn’t invested much inexpanding outside the top eight cities, the person said.

People familiar with the situation said JM Financial had earlier talked with the Indiabulls group, which has an asset management licence but has not commenced business for over a year.

But Gagan Banga, chief executive officer of India-bulls, denied they had been in talks.

“We are assessing the regulatory changes and its impact on the industry. We would wait for things to settle down before taking a call on this,” he said.

Valuations typically depend on the portfolio of products held by the asset manager. The higher the equity assets, higher would be the valuation, because companies earn more commission income from the sales and management of equity funds compared with debt funds.

Traditionally, such deals have been struck at 3-4% of the assets under management.

In January, US-based asset management firm T. Rowe Price Global Investment Services Ltd bought a 26% stake in UTI Asset Management Co. Pvt. Ltd for $140 million, around 3.25% of its average assets under management.

Valuation of asset managers plunged after the market decline of 2008.

In July 2009, Nomura Asset Management Co. Ltd bought a 35% stake in LIC Mutual Fund Asset Management Co. Ltd at 2.4% of its total assets.

In September, the financial services unit of engineering firm Larsen and Toubro Ltd announced plans to buy DBS Cholamandalam Asset Management Ltd for Rs45 crore, valuing the firm at about 1.6% of assets under management.

Following the market plunge in 2008, the assets under management of JM Financial had dipped to Rs3,758 crore in March 2009, of which Rs1,480 crore was in equity, before increasing last year when the market recovered.

Source: http://www.livemint.com/2010/05/30233553/Mukesh-Ambani-may-buy-MF-firm.html

LIC Mutual ties up with Nomura for fund management

Life Insurance Corporation of India Mutual Fund (LIC MF) and Nomura Asset Management Company of Japan are entering into a joint venture for adoption of better technology and management of funds.

The approval from the regulatory authorities has been obtained and completion of other formalities isunder process, according to Mr Ravi Chaudary, Chief Marketing Officer, LIC MF.

Addressing the press, after inaugurating the new area office of LIC MF here on Wednesday, he said that the Fund enjoyed a market share of 5.66 per cent and was in the 6 {+t} {+h} position in the country with funds under management to the tune of Rs 42,303.96 crore, spread across 27 products, as at the end of March 2010.

The year on growth has been 83.19 per cent, much higher than the industry growth at 51.6 per cent, he said.

The awareness level about the advantages of the mutual fund is still to spread and LIC MF has taken seriously the education of investors, conducting the programmes in vernacular languages in different parts of the country, to reach out especially the small and medium investors, he further said.

Currently, there are 26 Area offices and 4 more would be coming up shortly. There are plans to open 100 business centres.

A Web site is also to be launched shortly.

Source: http://www.thehindubusinessline.com/2010/05/29/stories/2010052952661300.htm

Equity Index Funds Gain More than Equity Diversified Funds

Equity Fund categories were able to deliver positive returns over the one week period ended 28 May 2010, despite facing losses during the previous week. Equity Diversified fund category gained 1.55%, Tax Savings funds rose 1.64% and Index funds climbed 2.56%. Equity index fund category has delivered better returns than the equity diversified fund category over the one week ended 28 May 2010. Among sector funds, Infotech Funds category was the biggest gainer by 2.74%, followed by FMCG Funds by 2.35%, Auto Fund by 1.79%, Pharma Funds by 1.46%, Banking Funds by 1.30%, Telecom Fund by 0.18% and Media Fund by 0.07%.

Among the sub categories in the debt fund category, Floating Rate Income Funds – Short Term & Long Term and Ultra Short Term Funds gained 0.09% each, Liquid Funds and Short Term Income Funds surged 0.08% and 0.05% over the week end period. While Gilt – Medium & Long Term, Gilt – Short Term and Income Funds lost 0.26%, 0.08% and 0.07%.

The BSE Sensex rose 417.45 points or 2.54% to 16863.06. The S&P CNX Nifty gained 135.40 points or 2.75% to 5066.55.

Major buying was seen in Realty, which gained 4.15%, followed by Oil (3.42%), Power (3.26%), IT (3.06%) and FMCG (2.97%) and Tech (2.30%). However, Consumer Durables dropped 2.15%.

Mid-cap stocks moved up 1.01%, to 6756.01 during the week end period. While the small-cap shares rose 0.94%, to 8494.45 during the week end period. Mid-Cap and Small-Cap index underperformed the Sensex and Nifty.

Equity Diversified Funds

Equity Diversified Fund category gained 1.55% over one week period ended 28 May 2010. This category was able to come out of the losses it incurred during the previous week. Among the schemes in the equity diversified category, Taurus Ethical Fund gained the maximum of 3.47%, followed by JM Equity Fund which climbed 3.17%, HDFC Growth Fund rose 2.84%, ICICI Pru Target Returns Fund & IDFC Enterprise Equity Fund - A jumped 2.75% each among others. Tata Growing Economies Infrastructure – Plan A and Sundaram BNP Paribas Entertainment Opportunities were the worst performers in this category, losing 2.76% and 0.71% respectively.

Tax Savings Funds

Tax savings Funds category gained 1.64% over one week period as on 28 May 2010. This category moved into the positive territory after witnessing loss of 3.18% during the previous week end period. HDFC Long Term Advantage Fund and JPMorgan India Tax Advantage Fund were the top performers with a return of 2.61% and 2.59% respectively during one week period. Among the other schemes in the category, Axis Tax Saver Fund rose 2.54%, Birla Sun Life Tax Plan climbed 2.50% and ICICI Pru Tax Plan surged 2.20% among others. JM Tax Gain Fund and Edelweiss ELSS Fund ended as the worst performers in this category with a return of 0.24% and 0.70% respectively over one week period.

Index Funds

The Index Fund category gained 2.56%, over one week period ended 28 May 2010. All the schemes in this category gained during the week end period, compared with a loss during the previous week end period. HDFC Index Fund-Nifty Plan was the highest gainer in this category as its NAV appreciated by 2.80%. JM Nifty Plus Fund and ICICI Pru Index Fund-Nifty Plan were the next highest gainers by 2.79% and 2.77%. Among the other schemes in the category, SBI Magnum Index Fund climbed 2.75%, LICMF Index Fund – Nifty Plan & UTI-Nifty Index Fund surged 2.74% each and Franklin India Index Fund-NSE Nifty Plan added 2.72%. IDBI Nifty Index Fund and HDFC Index Fund-Sensex Plus Plan were the worst performers in this category as they witnessed a gain of only 1.72% and 2.02% respectively.

Sector Funds

Pharma Funds category gained 1.46% over one week period ended 28 May 2010. All the schemes in this category gained, while Reliance Pharma Fund ending as the top performer with 1.86%.

Bank Funds category gained 1.30% over one week period ended 28 May 2010. ICICI Pru Banking & Financial Services Fund rose 1.77% and Religare Banking Fund climbed 1.73%.

FMCG Funds category rose 2.35% over one week period ended 28 May 2010. SBI Magnum SFU – FMCG Fund was the top performer in this category. In terms of NAV performance, the fund's NAV gained 3.27% over the one week period.

Infotech Funds category rose 2.74% over one week period ended 28 May 2010. ICICI Pru Technology Fund was the top performer in this category. In terms of NAV performance, the fund's NAV gained 3.63% over the one week period.

Hybrid Funds

Among the sub categories in the hybrid fund category, Asset Allocation Balanced Funds surged 1.25%, Equity Oriented Balanced Fund by 1.20%, Debt Oriented Balanced Fund by 0.43%, Monthly Income Plans by 0.22% and Arbitrage Funds by 0.12% during the one week period ended 28 May 2010.

UTI-Variable Investment Scheme and SBI Magnum NRI Investment Fund-Flexi Asset gained 1.61% and 0.89% respectively under asset allocation balanced fund category.

All the schemes in the equity oriented balanced fund category gained during the week end period. HDFC Children's Gift Fund-Investment Plan was the highest gainer in this category as its NAV appreciated by 1.98%. Sundaram BNP Paribas Balanced Fund was the next highest gainer by 1.97%. Among the other schemes in the category, Escorts Balanced Fund climbed 1.93%, HDFC Balanced Fund surged 1.90% and ING Balanced Fund added 1.65%.

LICMF Children's Fund was the highest gainer in debt oriented balanced fund category as its NAV appreciated by 1.46%. UTI Unit Linked Insurance Plan was the next highest gainer by 0.71%. Among the other schemes in the category, UTI-Retirement Benefit Pension Plan climbed 0.70%, Tata Young Citizens Fund surged 0.65% and Templeton India Pension Plan added 0.57%. SBI Magnum Children Benefit Plan and DWS Money Plus Advantage Fund were the losers in this category by 0.23% and 0.03%.

Exchange Traded Funds (ETFs)

Gold ETF category gained 1.63% during the week end period. SBI Gold Exchange Traded Fund was the only scheme in this category to gain by 1.61%, while the other schemes in this category gained by 1.63%.

The other ETF category gained 1.73% during the week ended 28 May 2010. Shariah BeES, Nifty BeES and Kotak Nifty ETF were the top performers by 2.98% each. The only debt ETF i.e. Liquid BeES witnessed gained of 0.06%. PSU Bank BeES & Kotak PSU Bank ETF lost 0.07% each during the week end period and ended as the worst performers in this category.

Source: http://www.apollosindhoori.cmlinks.com/MutualFund/MFSnapShot.aspx?opt=9&SecId=10&SubSecId=22,24

Sensex to Hit Record on Profits for DSP BlackRock

S. Naganath, who has beaten 99 percent of his mutual fund peers in India, says the fastest profit growth in three years and unprecedented spending on roads and ports will drive the country’s benchmark stock index to a record high in the first half of 2011.

“At every dip, we’re a buyer,” Naganath, chief executive officer at DSP BlackRock Investment Managers Pvt, which manages $7 billion in assets, said in an interview in Mumbai today. “If the market falls, then we’ll seek to deploy our cash.”

India’s benchmark stock gauge on May 25 fell more than 10 percent from its recent peak as investors withdrew funds as the European crisis eroded confidence. Still, the gauge today completed its best week in 12 after Tata Motors Ltd., the owner of Jaguar Land Rover, posted profit that exceeded analysts’ estimates.

Trading will be “choppy” in the next six months amid concern Europe’s debt crisis may worsen, said Naganath, 45. Foreign funds sold $2.3 billion of Indian stocks in May, on course for the worst month since October 2008, following the collapse of Lehman Brothers Holdings Inc.

Return to Highs

“As the earnings upgrades come through as currently estimated, this market has the potential to get to the highs that we last saw in early 2008,” Naganath said. The DSP BlackRock Micro Cap Fund has returned 92 percent, compared with a 51 percent gain in the BSE Small-Cap Index, in the past year.

The benchmark Bombay Stock Exchange Sensitive Index, or Sensex, would have to gain about 25 percent to reach its record set on Jan. 8, 2008. The nation doubled its target for infrastructure spending to $1 trillion in the five years starting 2012 to narrow the gap with China. India’s economy is also accelerating as rising incomes boost demand for cars, mobile phones and air travel.

India’s biggest companies are expected to post an average 25 percent gain in profits in the year ending March 2011, and a further 20 percent in the following year, Naganath said.

Birla Sun Life Asset Management Co., India’s fifth-largest money manager with almost $17 billion in assets, plans to boost stock holdings to as much as 30 percent from 20 percent now, Chief Executive Officer A. Balasubramanian said on May 26.

‘Sweet Spot’

“India is in a sweet spot now,” Balasubramanian said.

“The economy remains insulated from Greece and corporate earnings will maintain a high growth rate. So the correction in stocks is an opportunity for long-term investors.”

India’s small and mid-cap companies will lead a rebound in stocks this year as investors seek out values to tap on the nation’s economic growth, Seth Freeman, chief executive officer at San Francisco-based EM Capital Management LLC said today in a Bloomberg Television interview. Freeman said he’s “overweight” on financial services companies because the banking industry is “a proxy for overall growth in the country.” He also likes technology companies as demand for their services is expected to increase, he said.

The Sensex index of the largest 30 companies is trading at 16.3 times estimated profit, the highest in Asia excluding Japan. It’s also the most expensive among the four BRIC markets, which also include China, Brazil and Russia.

Outpace China

CLSA Asia Pacific Markets’s Christopher Wood, the second- ranked Asia strategist in Institutional Investor magazine’s annual poll, said May 18 he expects India to outpace China’s growth in the next five years with the new developments. Indian equities also have the most attractive outlook in Asia this year, Wood said.

India’s economic growth may accelerate to about 8.5 percent in the year ending March 31, Finance Minister Pranab Mukherjee has forecast. That would be the fastest pace since fiscal 2008.

Source: http://www.businessweek.com/news/2010-05-28/sensex-to-hit-record-on-profits-for-dsp-blackrock-update2-.html

Sundaram Finance not to enter banking or exit MF business

City-based Sundaram Finance group Friday ruled out entering the banking sector and said it will continue with the mutual fund business with or without a partner.

'Converting Sundaram Finance Ltd into a bank provides no advantage. At this level Sundaram Finance can compete with many private banks,' Managing Director T.T. Srinivasaraghavan told reporters here.

'We will be in mutual fund business with or without a partner.'

Asked about market rumours that the group is exiting its non-life insurance joint venture, Royal Sundaram Alliance Company, he said: 'In respect of the insurance, the situation has not arisen for us to take a final call'.

Sundaram Finance has two joint ventures - mutual fund and home finance - with BNP Paribas.

The mutual fund joint venture is under spotlight as BNP Paribas acquired Fortis business outside the Netherlands.

As per Indian regulations, no one can have two mutual fund companies and as such BNP Paribas has to decide between Fortis Mutual Fund and Sundaram BNP Paribas Asset Management Company.

'There are three options for us - buy out BNP Paribas' stakes in the mutual fund business; merge Fortis Mutual Fund with us or selling out our stakes in the mutual fund business. The last one does not arise,' Srinivasaraghavan told IANS.

Asked whether Sundaram Finance will be open to buying out BNP Paribas' stakes in both the joint ventures and run the business independently, he said: 'There is no issue with the home finance venture. The partnership with BNP Paribas has been good till now. But we are committed to mutual fund business.'

He said discussions are on and in a month's time a final decision will be taken.

About the rumours that Royal Sundaram Alliance is on the block, he said: 'We have not spoken to anybody about selling our stakes. I can't say that about our partner - RSA, UK. A stage has not been reached where we have to take a call to be present or exit the insurance business.'

Meanwhile, Sundaram Finance, a player in the commercial vehicle and car finance segments, closed fiscal 2009-10 with a revenue of Rs.1,181 crore and net profit of Rs.226 crore.

The company board has recommended a final dividend of 40 percent.

Source: http://sify.com/finance/sundaram-finance-not-to-enter-banking-or-exit-mf-business-news-default-kf2tEehegfc.html

Sebi wants more checks on MF expenses

The Securities and Exchange Board of India (Sebi) is preparing ground for a fresh set of mutual fund (MF) reforms to make the instrument more transparent and attractive for investors.

The MF advisory committee, comprising industry and Sebi representatives, is due to meet on Monday to discuss the proposals.

For a start, the regulator wants fund houses to keep promotional expenses, such as those on foreign trips and gifts to distributors, outside the ambit of the expense ratio. This ratio — it includes fees paid to fund managers, advertising, legal, record-keeping and accounting costs, custodial charges and taxes — is capped at six per cent for a scheme. In most cases, fund houses keep the expense ratio around 2.5 per cent, but include promotional costs in the calculation.

Sources familiar with the development said the regulator suspected that many costs passed off as advertising or promotional expenses were in reality paid to distributors for pushing sales.

The move comes when Sebi has been embroiled in a battle with the insurance regulator, Irda, for control over unit-linked insurance plans, seen as a rival to MF schemes. By reforming the commission structure for these schemes, the market regulator has put pressure on the insurance sector to opt for reforms.

Clearer performance measures

In addition, at the Monday meeting, the regulator would want to put in place a more investor-friendly performance review mechanism. At present, apart from the daily net asset value, fund houses put out monthly fact-sheets which provide mathematical calculations comparing and evaluating the schemes on offer. The regulator feels retail investors find this form of review complicated. Instead, it wants MFs to provide specific quantitative parameters for one to be able to judge the performance of a scheme.

The advisory committee is also to discuss issues like guidelines for MF investments in equity derivatives. This has become a contentious issue. Some members feel fund houses should not be allowed to invest in risky instruments like stock derivatives.

However, if a complete ban was not possible, there should be some specific guidelines, said an industry source.

The committee, whose earlier meeting was in November, was also likely to look at the issue of conflict of interest among trustees, asset management companys (AMCs) and managements of fund houses, sources said. The issue was discussed earlier and it was noted that there was an overlap in membership of these entities.

Sebi had addressed the issue by ordering that AMCs, trustees and managements should have different sets of individuals. The sources said the regulator wanted to ensure that no gaps remained in the regulations.

In the recent past, Sebi has used the MF advisory panel to usher in a lot of changes, such as in the entry and exit load structure, put in place last August.

Source: http://www.business-standard.com/india/storypage.php?autono=396301

Principal to launch pension fund in October

Principal Financial Group (PFG), the largest pension player in the United States, is looking to launch its pension business in India.

“We already have fairly advanced plans and will launch this programme in October,” said Norman Sorensen, president and chief executive officer of Principal International Group, a division of the Principal Financial Group.

Chances are that PFG will set up a separate company to launch pension plans. “We don’t know yet as the structure is yet to be defined. However, we believe the expertise that we have on a global basis in this area is so significant that we can bring to bear an independent company,” Sorensen said.

If PFC does set up a separate company to manage its pension fund business, it will be the first instance of a private pension fund company in India, soliciting as well managing money for building a retirement corpus.

Currently six pension fund managers manage money for the money raised under the New Pension Scheme. These are SBI Pension Funds, UTI Retirement Solutions, IDFC Pension Funds, ICICI Prudential Pension Funds, Kotak Mahindra Pension Fund and Reliance Capital Pension Fund.

These pension funds just manage the money raised under NPS, and have nothing to do with raising or soliciting that money from investors.

The other option is to launch the business through Principal Mutual Fund, a joint venture that Principal has with Punjab National Bank and Vijaya Bank.

On whether this business will be regulated by Securities and Exchange Board of India (Sebi), Sorensen said, “Sure. There is no reason to regulate it otherwise”.

Currently pension plans are offered by insurance companies, which are regulated by the Insurance and Regulatory Development Authority of India (Irda). However, Franklin Templeton Mutual Fund does offer a pension plan regulated by Sebi.

PFG manages $300 billion worldwide (The entire Indian mutual fund industry manages around $169 billion). “In Brazil we are the number two pension player and we manage $18 billion in pensions. In China, we manage only $6 billion. In Mexico and Malaysia we manage $5 billion and $6 billion, respectively,” said Sorensen.

So what exactly is PFG’s plan?

“We have something in the United States called target funds. We intend to introduce those funds in India,” said Sorensen. “Target funds basically target your age. A 25-year-old who has a target date of retirement of 2050, is likely to invest in target retirement fund 2050. And that’s why the name. The fund will probably begin with 80% investment into equity and with age the allocation to equity will come down. It basically increases the conservatism of the investment portfolio as your age grows,” he added.

Also, the investment for these pension plans is so carried out thatit is better than average performance. “It does not intend to at any point be number one in the market. Why? Because then you take more risk,” said Swanson.

And what will happen to the accumulated money on retirement? Well it all depends on the individual who invests in the pension plan. “This is absolutely retirement money but it is up to you what you do with that money afterwards,” said Sorensen.

“The idea behind the retirement plan is to provide income until you pass away. The money can be put into an immediate annuity, so that it provides fixed income or it can be invested in some very conservative fund. And we would not recommend equity of course,” he explained.

How is this product different from pension plans offered by insurance companies?

“There is no restriction on withdrawal unlike some of these pension plans,” said Sorensen. “Some people decide to take out some money before retirement, (which is) not necessarily a wise thing because the money seizes to accumulate,” he added.

Pension plans of insurance companies come with a lock in of 5 years. Over and above this, at maturity, an individual who is holding a pension plan from an insurance company has to necessarily buy immediate annuities using two third of the corpus. The remaining one-third can be withdrawn.

Source: http://www.dnaindia.com/money/report_principal-to-launch-pension-fund-in-october_1388270

Mutual funds play it safe, increase cash holdings

Sensex tanks on worries over euro, Korea.

Amid renewed global uncertainty, cash levels in the mutual fund industry are on the rise. While data will be available only next month, fund managers Business Standard spoke to said cash holdings were expected to go up.

This month, the benchmark CNX Nifty has fallen 8.94 per cent, or 472.65 points, to 4,806.75. The Bombay Stock Exchange Sensex has plunged 1,514 points, or 8.64 per cent. The lessons learnt at the height of the financial crisis in October 2008 are still fresh in the mind, say market experts. Then, fund houses had witnessed massive redemptions amid crashing global markets, prompting the Reserve Bank of India to come to the rescue.

In January 2009, the MF industry was holding 11.46 per cent of its average assets under management (AAUM), estimated at Rs 9,729 crore, in cash. This was the highest in over a year.

In April, according to Edelweiss Capital, total cash balance of asset management companies (AMCs) in equity schemes was 5.2 per cent of the total corpus — Rs 10,100 crore as against Rs 9,100 crore in March. At the end of March, AAUM of the MF industry were estimated at Rs 7,47,525 crore, which rose 2.89 per cent to Rs 7,69,165 crore at the end of April.

Uneasiness at stock movements

But, for some fund houses, cash levels are higher than in January 2009. For instance, a smaller-sized domestic fund house has a cash holding of around 13 per cent, against 10 per cent in the middle of April. “Once stocks moved beyond our comfortable zone, we decided to sell,” said the equity head of a fund house which holds 75 per cent of its assets in equity.

“It makes sense to increase cash levels, as it will provide a cushion in an event of a drastic fall in the markets. We have increased our cash holding by three-four per cent and it currently stands at nine per cent,” said the equity head of a mid-sized MF.

According to the Securities and Exchange Board of India (Sebi) data, available till May 21, fund houses were net sellers in the equity segment.

Redemption worries

Tarun Bhatia, director (capital markets) at Crisil Research, said, “Due to a significant correction and volatility in the markets, fund houses want to keep cash. AMCs would like to have cash in hand, as volatility and corrections put redemption pressure. So, a mix of global uncertainty and redemption pressure is likely to lead to higher cash levels in May.”

“During May, cash levels may have increased in the industry. In certain segments which have seen more volatility, such as mid-cap funds, there may be higher cash holdings. In our case, mid-cap funds’ cash levels are around 10 per cent from seven-eight per cent earlier,” added the chief investment officer of one of the largest fund houses.

N K Garg, chief executive officer of Sahara MF, said it was always a good strategy to increase cash levels in anticipation of volatility in the markets. “Cash levels will definitely go up in such a situation. In our case, the cash holding is in higher single-digits, higher in comparison to last month. However, we have also used the volatility as an opportunity to get into the market,” he added.

Equity heads maintained the crisis in the European and US markets was not over. “They are simply being postponed with packages. We need to be ready with substantial cash in our pockets,” they said.

Sweta Sinha, senior research analyst at Icra Online, said there was a possibility of rising cash holdings in May. “If the market turns stable, then only will investment come in,” she added.

“Relatively smaller and new fund houses may not have large cash but top players are likely to sit on high cash levels,” said Crisil’s Bhatia.

Source: http://www.business-standard.com/india/news/mutual-funds-play-it-safe-increase-cash-holdings/396057/

MFs oppose Sebi plan to tighten derivative investment norms

Sebi’s proposal to tighten the norms for investment in derivatives has run into opposition from mutual funds with the industry lobby arguing that fund managers need access to some of the products the regulator wants to ban.

The Association of Mutual Funds in India (Amfi), the industry lobby, has sent its detailed response to the mutual funds advisory committee of the Sebi, which will take up the proposal at its next meeting on May 31.

Amfi said funds should be allowed to sell index futures, and write option subject to some safeguards.

When contacted Amfi chairman A P Kurian said: “We are compiling views of all our members and will soon send them to Sebi”.

The investment management department of the stock market watchdog has proposed that mutual funds not be allowed to write options or purchase instruments with embedded written options while recommending limits on the gross exposure on equity, debt and derivative positions.

It said that any derivative instrument used to hedge a risk must have the same underlying security as the investment being hedged. Effectively, the proposal rules out index derivatives, used by fund managers to hedge their portfolio.

Amfi has said since covered options are returns-enhancement strategy with risk reduction, they should be permitted with some limits. For instance, option exposure in a particular stock could be limited to 10% of net asset value.

It also wants market regulator to allow mutual funds to sell index futures against a stock portfolio, as it is the most efficient and cost effective way of managing market risk of the underlying stock portfolio.

It has suggested that a limit could be defined for such a hedge position as a percentage to the total stock portfolio.

The association has also opposed disclosure by way of trade summary and instead suggested that fund houses be mandated to disclose the outstanding derivative positions on a given date in a defined format.

Source:http://economictimes.indiatimes.com/Market-News/articleshow/5974880.cms

Mirae Asset launches Emerging Bluechip Fund

Mirae Asset announced the launch of the Mirae Asset Emerging Bluechip Fund, an open-ended equity fund, today.

The fund is primarily a mid-cap fund that invests in Indian equities and equity-related securities of companies that are not a part of the top 100 stocks by market capitalisation, but have a market cap of at least Rs 100 crore at the time of investment, a release said.

Though the fund does not have any theme bias, it will invest in securities with the objective of generating income and long-term capital appreciation.

Mirae Asset Emerging Bluechip Fund's NFO will run from May 24 to June 22, the release said, adding that the units will be available at Rs 10 each during the period.

Mirae Asset Global Investments (India) CEO Arindam Ghosh said, "With the launch of Mirae Asset Emerging Bluechip Fund, we're expanding our portfolio by offering a mid-cap equity fund. We believe that today's mid-cap stocks have the potential to be tomorrow's large-caps and a right amount of mid-caps in the portfolio can help investors optimise their risk-adjusted returns."

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/Mirae-Asset-launches-emerging-bluechip-fund/articleshow/5969234.cms

Combination of gold and liquid fund will let you have your cake and eat it too

Gold has been in the news lately.

Prices are close to all-time highs in both dollar and rupee terms: international prices are above $1,200 an ounce, and domestic prices are approaching Rs 18,000 per 10 grams.

The high prices have not deterred investors — the holdings of New York-listed SPDR Gold Trust, the world’s largest gold exchange-traded fund, touched a record high of over 1,192 tonnes on May 10.

For perspective, that’s close to double the gold holdings of the Reserve Bank of India (which itself bought 200 tonnes of gold from the IMF in November 2009 at the cost of Rs 30,000 crore). John Paulson, the famous investor who made billions by correctly predicting the US subprime crisis, recently started a hedge fund focused exclusively on gold.

So why is the smart money betting that gold prices could go even higher? The answer lies in the many different aspects of gold as an investment.

- Gold is a scarce commodity and a luxury good. Strong economic growth in India and other important consuming nations has buoyed demand for jewellery. Simultaneously, supply has been stagnating, constrained by falling production from new mines

- Gold is an inflation hedge, a store of value whose purchasing power will not diminish even if governments are forced to debase their currencies by printing money to bail out banks or indebted borrowers. The purchasing power of a kilo of gold has stayed fairly constant over decades despite steady inflation

- When markets are seized by panic and equity markets crash, investors flock to gold as the ultimate safe-haven asset because it carries no risk of credit default.

These advantages have long been known to Indian investors. India consistently ranks as one of the world’s largest importers and consumers of gold, and international prices are strongly influenced by the Indian festival and wedding seasons, when retail demand for gold and gold jewellery rises.

However, despite the many excellent reasons for buying gold, some sceptical investors stay away from it because it does not generate a steady income stream.

In this respect, gold differs from stocks (which bear dividends), bonds or fixed deposits (which generate interest income) and real estate (which can be rented out). All traditional forms of gold investing — via coins or jewellery, ETFs and gold futures — suffer from this drawback.

If a strategy could be specifically designed to overcome this drawback while simultaneously reaping the rewards of investing in gold, we would have the proverbial option to ‘Have your cake and eat it too’.

So the way out is to form a portfolio and invest in a combination of gold exchange-traded funds (ETFs) and the dividend option of a liquid fund which invests in short-term debt.

The debt portion of the portfolio would have to be administered to generate a steady stream of interest income with a low level of risk. And that can be accomplished by investing in the dividend option of a liquid fund.

Such an accrual strategy is particularly attractive in an environment where interest rates are low but expected to rise — precisely the environment prevalent in India today.

The RBI has acted twice this year already to tighten monetary policy, and is expected to adhere to a tightening course going forward. In such an environment, holding longer-term bonds exposes the investor to duration risk, the risk that interest rates will go up causing existing bond holdings to decline in price. By holding short-term instruments, the accrual strategy would explicitly avoid duration risk. Also, by investing only in safe, highly rated instruments, it would minimise the credit risk of its portfolio.

To sum up, a risk-averse investor looking for a steady stream of income with an added bonus of capital appreciation would be well served by this strategy.

The writer is head - fixed income, Canara Robeco Mutual Fund

Source: http://www.dnaindia.com/money/report_combination-of-gold-and-liquid-fund-will-let-you-have-your-cake-and-eat-it-too_1387289

Sahara MF declare 40% dividend

Sahara Mutual Fund has declared 40% dividend under Sahara Midcap Fund. The dividend is taxfree for the investors. The record date for the purpose of dividend is May 28, 2010. All such investors under dividend option of Sahara Midcap Fund, whose name appear in the register of the unitholder’s book as on the record date, would be eligible for it.

Source: http://www.financialexpress.com/news/quick-view/623035/

Secure your retirement- NPS

Pension regulations have been long awaited for the Indian populace. With the setting up of the PFRDA (Pension Fund Regulatory and Development Authority) and the New Pension Scheme, this has now become a reality. The major aim that NPS seeks to achieve is to bring people from the unorganised sector into the pension fold. Pension space in India has been dominated by employer-sponsored plans with contribution from the employee to a certain extent. In addition to the superannuation plans offered by employers, mutual funds and insurance companies also offer voluntary pension schemes. With the NPS, the government is able to offer flexible, growth-oriented scheme that has the potential to generate by far the best returns compared with the products that are available in the market today. The NPS the most effective tool to accumulate wealth for the life post retirement.

Why do you need NPS?

The conventional retirement options like the Employee Provident Fund (EPF) and the EPS (Employee Pension Scheme) give fixed returns but do not offer sufficient flexibility to the employees during their working and post-retirement years. In these schemes, the neither the subscriber nor the employee can choose how his or her money is invested. Also, the amount collected through all schemes administered by the Employees' Provident Fund Organisation including the two mentioned above may not be adequate for individuals' future. The major change that the NPS brings in is the shift from a defined benefit to a defined contribution regime for the government employees.

Structure

The unique option that the NPS gives to subscribers is a selection of fund managers with whom they wish to entrust their funds' management. Thus, this flexibility and a competitive environment would push the PFMs (pension fund managers) to work for better returns. The scheme currently has six pension fund managers:

*ICICI Prudential Pension Funds Management Company

*IDFC Pension Fund Management Company

*Kotak Mahindra Pension Fund

*Reliance Capital Pension Fund

*SBI Pension Funds Private

*UTI Retirement Solutions

Subscription types

To apply for the voluntary pension scheme, there are two types of accounts:

Non-Withdraw-able account: The tier 1 account is the basic NPS account that is non-withdrawable till retirement or in the case of death of the subscriber. In this type of account, the total corpus at the retirement age is split, whereby a minimum of 40 per cent of the final corpus has to be compulsorily used to buy an annuity while the subscriber is free to withdraw the remaining 60 per cent as a lump sum or in installments.

Withdraw-able Account: A tier 2 account is available to only those who are existing subscribers of the tier 1 account. The unique selling point of the tier 2 account is that money contributed into this account can be freely withdrawn as and when the subscriber wishes except for a minimum balance that needs to be maintained at the end of each financial year.

Investment options

In NPS, there are two types of fund management options available and the contributions can be invested in various ways. The investment decision should be guided by two factors -risk appetite and ability to actively manage money. This makes NPS flexible for the subscribers whereby they can customise returns.

Auto choice - lifecycle fund. Under this option, contributions made by the subscriber are pooled into a lifecycle fund and then invested as per pre-defined asset allocations that change over the life cycle of the subscriber. Up to 35 years of age of the investor, 50 per cent of the assets will be invested in equity index funds and the rest will be in debt instruments. As the person gets older, investment in equities will taper off by a certain percentage every year and get diverted to debt instruments. By the time the investor turns 55, his assets in equity instruments will be contained to 10 per cent and a major chunk (around 80 per cent) will be invested in government securities.

Active choice. Under this facility, investors have the right to choose the investment pattern as well as the pension fund manager. Investors are also allowed to revise their choices once every year in May.

Asset allocation class options:

Asset Class E. Growth option under the NPS that invests in equity (index funds). The cap for equity investment is 50% of the investment corpus.

Asset Class C. Medium-risk option with investments in fixed-income instruments but not necessarily in government securities.

Asset Class G. Low-risk option whereby investments are made only in government securities.

NPS - The cheaper option

Our calculations show that an investment of Rs 1 lakh per annum over the next 30 years yields the maximum returns if invested in NPS when compared with a unit-linked pension plan or pension plan offered by a mutual fund company. This is considering that all three options give similar returns at the rate of 10 per cent per annum. For the sake of this projection, we have considered funds that would match the asset allocation pattern followed by the aggressive portfolio under NPS.

NPS has the lowest set of charges and therefore delivers the highest returns. The table (Your retirement kitty) shows how the progression of the invested amount happens over 30 years. From the initial period, wealth under the new pension scheme grows faster and owing to the low charges levied, the difference between NPS and other products is almost to the tune of Rs 50 lakh towards the end of the 30-year period. For retail investors looking to invest around Rs 1,000 or so monthly, NPS is clearly a better option because it comes with low charges and flexible fund management options. Due to higher charges levied in ulip-based pension plans during the initial years, the difference in the corpus at the end of the tenure is also substantial. In case of maximum allowable lump sum to a pensioner, the mutual fund pension plan would pay out less in comparison to insurance-based plans as they have the advantage of tax-free lump sum. The mutual fund pension plan is taxed at the rate of 20 per cent (without indexation) and 10 per cent (with indexation).

Taxation

NPS allows subscribers to grow their retirement corpus in the most cost effective way possible. However, NPS is taxed under the EET (Exempt-Exempt-Tax) regime. This means that the investment gets tax exemption and so do the returns on investment. However, all withdrawals are taxed under the applicable tax slabs and so is the annuity interest. Even under the current scenario, i.e. the EET regime, NPS competes on an even field with other instruments. With ULIP based schemes there is the advantage that the withdrawn lump sum is tax-free. Even taking into account this loss of money to tax, NPS returns are higher.

When the Direct Tax Code is introduced it would be interesting to see how it changes the game for the NPS. It could well make or break the market for NPS.

Challenges

The major challenge for the NPS remains its distribution. When the NPS was opened for the unorganised sector, it was expected to be profitable to its fund managers by cornering high volumes of subscribers. However, with not so many distributors and barely 4,000 odd subscribers, in the voluntary (non-government) sector, it has been a major disappointment.

The largest pie of investments in this space is cornered by unit-linked retirement plans offered by insurance companies. Comparing insurance based retirement solutions to NPS shows one major point where the NPS scores. The NPS is a savings and retirement security product and as such, it does not burn a hole in the pockets of the subscribers by the charges it levies. ULIP based pension schemes, on the other hand, are in between, they are inefficient routes for buying insurance and as investment. The investment corpus in ULIP based pension schemes takes a major hit especially in the early years with high charges of around 10 per cent in the first five years. There are and have been ULIP based plans with low charges but distributors have not actively promoted them because of lower commissions.

Conclusion

NPS is a safe and effective post-retirement tool. With its lowest charges, it also is the cheapest way to get an exposure to the market. For thousands and lakhs of employees in the unorganised sector, who have negligible or no postretirement social security benefits, NPS is a boon and greater awareness and marketing will not only increase NPS accounts but also make them available to this immense market, this new and yet ignored tool called the NPS.

Source: http://in.biz.yahoo.com/100524/50/bavngz.html

‘Very few fund managers can consistently beat the index'

We all assume that investors come to us so that we shoot the lights out! But a vast majority ofinvestors want just a bread-and-butter return that is substantially higher than other fixed-income options. Everyone wants to drive a Ferrari, but when it comes to driving on Indian roads, we all plump for a Maruti.

In an interview with Business Line, Mr Krishnamurthy Vijayan, IDBI Mutual's Managing Director and CEO makes a cast-iron case for why Indian investors should choose an index fund over so-called actively managed ones. He argues that beating the index is getting more difficult even for seasoned managers. The high churn in the mutual fund industry and the difficulty of predicting who will win make index funds the simplest solution for investors.

Excerpts from the interview:

Why has IDBI Mutual Fund started out with an index fund instead of an actively managed one? You were talking about the feasibility of having a wholly index-based fund house in India. Can you explain that?

It is my view that today, very very few fund managers are able to consistently add value to the index. A good number of fund houses have shut shop, moved on. Then, as the Indian market has become more and more efficient, the number of active funds outperforming the index is declining. The margin of outperformance too is diminishing.

We wanted to start off with a flagship Nifty fund because Nifty stocks account for around 60 per cent of the traded volumes. It provides sufficient diversification to investors, covering 50 stocks from 22 sectors. And the index itself is actively managed by competent people who apply liquidity and quality parameters to select the best of breed stocks.

Why should the investor settle for index returns, when some equity funds do much better?

Let's look at it this way. There are 64 fund houses that have, at various times, obtained mutual fund licences in India. Of those, about 22 have, in one way or another, exited the business. And of these, I would say only 4-5 funds have consistently delivered good returns. The rest have been mainly flashes in the pan — one good year, a couple of bad ones, and so on.

For the investor, this causes a lot of post-purchase dissonance. He buys a fund and sees the market going up, but his fund's NAV remains below Rs 10, sometimes for years. When the Indian market was in its early stages, a select club of individuals could make outsized returns based on information not generally available to the public.

As markets became more efficient, information came into the public domain, the disclosure rules also became more stringent. That still allowed room for professional managers to do better. But today, when there is a large mass of humanity armed with information, outperformance becomes very difficult.

For the investor, the dilemma is who is this person who is good enough to outperform that market? And am I willing to take the incremental risk required to get that outperformance? The average investor's answer would be ‘No'. When you can get a good average return that is superior to other options in the market such as debt instruments, that should be enough. Given that the index in India is consistently delivering a 20-25 per cent return, it thus makes sense to pick up an index fund.

Over the past few years, the proportion of active funds doing better than the index has been at 70-80 per cent. Only in 2009 did that drop to 60 per cent. Will active funds really find it difficult to do better than the index over the next few years?

My view is that not only will the incidence of underperformance continue, but that it will increase! First of all, even 60 per cent is not a great proportion. Two, these numbers are influenced by a survivorship bias, where funds that disappeared or have languished are simply not taken into account.

Three, research shows that, in any given year, the fund that gets the maximum fresh money is the top performing fund for the preceding year. Surprisingly, that fund is never the top performer over the next few years. Funds are typically able to make it to the top when they are tiny, but revert to mean when they become larger!

The category average returns that you see for equity funds are also misleading. Divide funds into quartiles based on returns and you will find that the index is looking much better than a good number of the active funds. Above all, we should look at what the investor wants. We always assume that the investor comes to us so that we shoot the lights out! But the fact is a vast majority of investors want just a bread-and-butter return that is substantially higher than prevailing fixed interest options. Everyone wants to drive a Ferrari, but who really buys one? When it comes to actually driving on Indian roads, we all plump for a Maruti!

I think the core portfolio of an investor only needs to be in bluechip stocks built up over a period of time. That is where an index comes into play. That is why every pension fund making a foray into a new market only takes an index exposure. Thirty or 40 years down the line, fund houses of today may not be around and neither will the fund managers, but the indices will still be around.

With SEBI trying to reduce the cost structure in the mutual fund business, there appears to be a shift to low-cost products. Are index funds also in line with this objective?

When there is very low premium to active management, the only way to deliver good returns to the investor is by reducing the management fee. By reducing the fee from 2.5 per cent (for active funds) to 1.5 per cent (for index funds), the investor gets an effective 40 per cent discount.

If you look at any diversified equity fund, about 70 per cent of the holdings are in index stocks. Where holdings are substantially outside the index, the funds don't weather market declines very well.

If investors need to buy the index, why not Exchange Traded Funds? Why have you used the open-end structure instead? Open-end index funds in India seem to have a very high tracking error.

The tracking error on Indian index funds has arisen largely because they either take cash calls or derivative calls and not because of their structure. You see, fund houses in India are psychologically active managers of money. The moment you take the leeway to be active, you tend to take on these calls.

To be completely passive, you need a lot of discipline. ETFs have a few disadvantages. One, today, the market for ETFs is quite small, as people like to buy from the issuer. The impact cost of buying an ETF (from the market) is high. Two, for a retail investor it is best to invest in the markets through a SIP, you can't do this in an ETF.

Three, upfront loads have been banned on mutual fund products. Yet while buying an ETF you will be paying an upfront brokerage. Internally, we have set a guideline that the tracking error on the IDBI Nifty Index Fund should be less than 1 per cent on the Nifty. We are also consciously adopting the Nifty Total Returns index as our official benchmark to factor in dividends.

Source: http://www.thehindubusinessline.com/iw/2010/05/23/stories/2010052350600700.htm

Rally in G-secs has positive impact on MF income schemes

The rally in the Government securities market over the last one month has had a positive impact on the income schemes of mutual funds. These schemes have given investors attractive annualised returns of 15-20 per cent the one-month period.

Bond market

A host of factors including global economic uncertainty, receding probability of the Reserve Bank of India going in for rapid increase in interest rates when major central banks were persisting with an easy monetary policy, a thaw in global commodity and oil prices, and volatility in stock markets have triggered a rally in the bond market, which in turn has boosted the net asset values of income schemes, say market players.

Following the 40-odd basis points softening in the yield of the benchmark 10-year Government security over the last one month or so, the net asset values of income schemes has gone up, according to Mr K. Ramanathan, Chief Investment Officer, ING Vysya Investment Management.

annualised returns

As a result, investors in income schemes have earned higher annualised returns of 15-20 per cent over a one-month period up to May 21. The annualised returns in the preceding month were in the 6-9 per cent range.

Income schemes of mutual funds typically invest 80-100 per cent of their corpus in debt instruments including the Central Government securities, State Government securities, and debt securities issued by public and private sector companies and up to 20 per cent in money instruments such as treasury bills, certificate of deposits, commercial papers, etc.

long-term G-secs

“The long-term government securities have done well with select securities have moving up by 4-5 per cent since April 16.

The net asset values of some of our duration funds (which invest in long-term G-Secs) have gone up by 4.5-5 per cent in the last month and a half,” said Mr Maneesh Dangi, Head - Fixed Income, Birla Sun Life Mutual Fund

For Birla Sun Life MF, its long term funds, such as income fund and gilt fund, have given a 5 per cent return in the last three months, which works out to an annualised return of 20 per cent.

According to the Association of Mutual Funds of India's data, income schemes of mutual funds saw robust inflows of Rs 1,18,942 crore in April 2010.

The outstanding aggregate corpus in the 345 income schemes as of April-end 2010 was Rs 4,21,063 crore.

These schemes accounted for 39 per cent of the mutual fund industry's total assets under management of Rs 10,87,584 crore.

With the Euro zone crisis casting its long shadow on the stock markets, the Government's coffers swelling on account of good inflows from 3G auction, and reports of possible doubling of the FII investment limit in Government securities coming in, the bond market should be buoyant, said Mr S. Srinivasaraghavan, Vice-President and Head of Treasury, IDBI Gilts Ltd.

This could in turn give a leg up to the returns on the income schemes.

Source: http://www.thehindubusinessline.com/2010/05/24/stories/2010052451920300.htm

Gaining the Gilt Edge

Investors are surprised when gilt funds lose money, finds Ravi Samalad. But the difference between the top and bottom performers of gilt funds is huge

A few weeks ago, one of our readers wrote to us about the performance of a gilt fund he had invested in. He had invested Rs6 lakh in a long-term gilt fund at an average NAV (net asset value) of Rs20.39 in 2008. When he wrote to us, its NAV had fallen to Rs19.13—down 6%. The investor was surprised. How can one lose money in a gilt fund, he complained. If you think that the word ‘gilt’ is synonymous with ‘risk-free’ over all periods of time, it is not.

Gilt funds primarily invest in government securities (G-Secs) issued by the Reserve Bank of India. These funds also invest in corporate bonds, zero-coupon bonds and treasury bills, certificates of deposit, commercial paper and usance bills, as well as derivative instruments like exchange-traded interest rate futures and interest rate swaps. As you know, the NAV of any fund fluctuates on a daily basis just like share prices because the underlying asset—whether bonds or shares—fluctuate on a daily basis. The fact is: anything that is interest-bearing will go up and down with the market. The value of bonds of any kind is primarily influenced by the prevailing interest rates. If interest rates go down, the value of bonds goes up. The daily NAV of a gilt fund is calculated by valuing a variety of government bonds, which a fund has invested in, that are traded in the market. As interest rates change, the value of the securities in which the scheme has invested, fluctuates as well. This, in turn, will be reflected in the changing value of the fund and its NAV.

In the example we started with, the investor had entered the fund at a time when bond prices were high. When interest rates rose and bond prices fell, the NAV of the fund declined. There is nothing mysterious about a gilt fund declining 6% over two years. The same fund has posted decent returns of 7% since inception. In short, buying gilts does not save you from short-term risk of loss due to market fluctuations.

As TP Raman, managing director, Sundaram BNP Paribas Asset Management Company, explains: “The market risk of a debt instrument can be eliminated only in a situation where a security is held till its maturity. Since gilt funds are generally open-ended funds where investors are allowed to enter and exit at various points of time, the funds may be forced to honour the redemption commitment even if it involves booking losses. Further, as all securities are marked-to-market on a daily basis, the NAV of the fund at any point of time recognises the current fair/realisable value of all securities in the portfolio. This recognition leads to losses (principal erosion) or profits for different investors depending on their entry and exit, when analysed at short periods.”

When it comes to gilts, the usual route for an investor is mutual funds. Retail investors do not have access to government securities because these are dealt in large lots which only institutional players can afford to buy. But gilt funds can pool money from retail investors and buy government securities, offering an indirect route to retail investors. However, most investors invest in such funds without consulting a financial advisor and cry foul if the NAV falls.

When To Buy Gilts

“The right time to invest in a gilt fund is when interest rates in the economy are near their peak levels, inflation expectations are likely to go down, growth slowdown is seen in the months ahead and overcapacities get built up in the economy. An ideal time-frame should be two to four years, depending on the clues from broader indicators in the economy,” adds Mr Raman. The past one year has been a time of rising inflation and rising interest rates, leading to falling value of gilts and, therefore, the NAV of gilt funds.

The principal amount that you have invested may erode due to interest rate fluctuations and mark-to-market formula of securities valuation. Although there is no fixed timing for investing in gilt funds, financial advisors believe that one should ideally invest when interest rates are around 8%. Long-term securities react more in response to interest-rate changes than short-term securities.

Gilt funds are of two kinds—short term and long term. “There is no ideal time horizon for gilt funds; it is advisable to invest when interest rates are high but it is very difficult for a common investor to predict interest rates. The best way for an investor is to go for a short-term gilt fund, where the effect of interest rate changes will be nil, so the NAV will not give you nasty shocks,” says Bhavesh Gajiwala, a Surat-based independent financial advisor (IFA).

Of the 29 gilt funds available, 14 have recorded hugely varying compounded annual returns over five years. ICICI Prudential, JM G-Sec Regular Plan and Templeton India GSF have reported the highest returns of 9%. HSBC Gilt Fund and Taurus Gilt Fund have reported the worst performance of 2% and 1%, respectively, for the same period.

So, here again, you will have to time your buying and selling to avoid losing money in a supposedly loss-free product like gilt funds.

No Sheen on Gilt Funds?

Distributors don’t promote gilt funds aggressively due to the meagre commissions offered (usually 0.15% to 0.40%) compared to equity funds and unit-linked insurance plans (ULIPs) which give 30% of the premium plus trail commission of around 5%. Debt funds don’t offer such upfront brokerage. Gilt funds have remained low-profile because fund houses never promote them as aggressively as equity funds. According to data available with the Association of Mutual Funds in India, total assets under management (AUM) of gilt funds were just Rs3,171 crore, constituting 1% of all categories of mutual fund schemes, compared to equity funds which constituted 22% at Rs168,672 crore as of February 2010.

The performance of the scheme depends on a variety of factors affecting capital markets, such as interest rates, currency rates, foreign investment, government policy, etc.

“Volatility in gilt funds is far lower than that in equity. This, perhaps, makes it less glamorous and attractive. Retail participation in government securities has been a non-starter in India—both directly and through the mutual funds route. There are incentives aplenty for equity funds—right from tax-free dividends, low short-term gains and zero long-term gains. Similar incentives to gilt funds will go a long way in achieving the twin purpose of retail participation in government securities through mutual funds and bridging the demand-supply mismatch in government borrowings which the government is keen to address,” says Mr Raman of Sundaram BNP Paribas.

Source: http://www.moneylife.in/article/5294.html

Indian macros strong, would use dips to buy: Tata MF

Q: The manner in which we have seen the turmoil, the volatility that has happened due to more global reasons—how are you, at a macro level, reading these developments?

A: My sense is that we have to look at it from three different angles. Clearly, markets ultimately act to the fundamental performance of companies. Earnings growth of Indian companies is likely to show an uptrend in the coming years as India’s GDP growth. Most analysts expect that, whether at higher rates or low rates, this earnings growth will continue. The question is high rate or low rates?

There is some dependence that India has on global economy one is certain sectors like IT, pharma etc, are dependent on exports and some of the high profile companies in the markets. Secondly, Indian economy is dependent on overseas capital for growth. The last 1% or 2% of growth beyond 6% really comes from capital that comes in from overseas. Last but not the least, there is a sentiment which gets impacted if there is overseas news flows.

These are three angles my sense is that overseas news flow will remain mix for some time and our markets hence will remain in a consolidation band. We have been in that consolidation band of between 15,000 and 17,000 or 16,000 to 17,500 for some time now. I suspect that much of this year we will have to bear with a market, which is in a narrow band. We will have what is known as a time correction rather than a price correction in response to what is happening in the macro economy and macro global factors.

Q: In that sense, how would you tactically approach the markets? Would you wait by global dust to settle down or would you look at this as an attractive opportunity to enter into the markets?

A: My personal sense is that if one believes that the Indian growth story is intact—our growth cycle is actually up trending and we are moving towards that phase where capacity creation focus on infrastructure investing etc is going to be the talk of the day—I would use dips as opportunities to buy because I suspect that whenever sentiment is bad that is the best time to buy stocks.

As we started the discussion talking about beta, I would also say that some of the high beta names, if a sentiment on a bad day will show a higher correction and for good companies in that space I feel there would be buying opportunities.

Q: How are you seeing retail investors reacting at this point of time? I know that there have been more larger structural issues with the industry over the last 5-6 months which has lead to inflows going down but are you seeing a sense of fresh retail money coming in at all at this point of time or are investors sitting by?

A: It has been very interesting this time around that most investors actually tend to book profits if the indices go to higher levels and are entering the markets when markets fall. So we have this situation when on very bad days when market are falling investors coming in and some of these investors they book profits at higher levels. Compared to the volumes that we saw in 2007—markets volumes of investor coming into fund has not been as high—but trends really indicate, thanks to quality financial advice and thanks to a greater awareness among investors, many of them actually come in when markets fall.

Q: The fact that a mutual fund today is by far the cheapest financial product that you can buy when it comes to commission structures—is that something which is sinking in to investors mind at all or is that really not something, which is drawing people? Logically, you would have investors factoring the costing as well. It is not the Indian consumer is not mindful of the cost but is that sinking in? It is almost at about 7-8 months since we went out of that no entry load regime.

A: It is in the process of happening and it is happening now. Certainly, what has happened in the recent past has been very good for the investors. The product has become very cheap and investors can virtually buy mutual funds without any load or any charge and also ongoing transparency charges. The fact that mutual funds now have a 15 year, at least the private sector mutual fund has a 15 year track record of performance in India, which is available to study and securitize.

All these factors are helping investors to take firm decisions and come to mutual funds. As you know many financial services products in India are more pushed products than pulled products so mutual funds are often sold and not bought. Hence, the incentives that the distributors have to sell, mutual funds also play a role. But not withstanding that certainly investors are seeing benefits of investing in funds. Many of them have benefited from investing in funds and the word of mouth is spreading and the tribe of mutual fund investors is gradually increasing.

Q: Without getting into specific stocks a lot of investors who are calling in these days find that they are making a loss on their high beta plays that they have invested into perhaps 6-7 months back. What would you advice one to do because the global headwind seem to be getting a little more intense as compared to these particular spaces? Would you advice investor to sit and hold on to their investments and perhaps wait for these things to die down or do you think exiting at these points would be the best thing to do?

A: Assuming that investors have holding power when there is some noise and confusion fundamentals tenets play out. The fundamentals tenets of any market and the Indian market will remain that, if companies do well, over a period of time prices eventually will have to catch up and perform. Given the fact that India continuous to be a rapidly growing economy in the global context, I suspect that some of these noise and confusion that we have seen, can only cause temporary disruption to prices of strong and performing companies.

Hence, I would clearly say that if I believe in your stock pick and if you have done your homework right—hold on and once the noise clears, markets will resume their march.

Q: I was just going through some of the numbers which Crisil has put out in terms of the monthly the exposure of fund houses as a collective entity and it appears that banking was one sector on which most fund houses were fairly exposed to and have benefited from it. If you were to look at a few sectors which your fund managers at one point of time are looking at and I understand that your fund managers look at a more six month 1-2 year kind of a time frame, which are the sectors which still look good even on all this turmoil?

A: As you right said, various fund managers would have various points of view. But on a very holistic and macro basis, we have been positive on three themes. We have been positive on the India outsourcing story and the global theme because we feel that in a situation where many global companies are going through tough time, actually outsourcing will benefit and there IT companies and pharmaceutical companies with an orientation in that area will do well. We will be overweight these sectors.

We have been positive on the domestic consumption theme and particularly drive from that theme. Again, pharma companies, to some extent some FMCG companies but also automobile companies, particularly two-wheelers and driven demand, hence, commercial vehicles—we have been positive in that area. Also, banking has been a focus area for us.

We also feel that as the markets move to a situation where capacities get stretched, government financial have strengthened—we have seen what the 3G auction has done and so on and so forth—investment-oriented sectors will start to look up. Typically happens to the middle of a growth cycle that capacity creation, infrastructure building etc, investment confidence and business confidence together return. We will see some of that going forward. Infrastructure-oriented construction engineering companies—these areas we have taken a positive stance at the moment.

Q: What are your thoughts on telecom and real estate?

A: We have been traditionally cautious on real estate as a fund house. But on telecom, our view is that there is a great long-term future for this sector. However, in the immediate context, lot of the investment that is now going to go into the rollout of 3G services, the fact that there is a pricing competition. which has caused, bottom-line will erode—all these issues are real issues and they will remain issues for sometime. Our sense is that it might be just worthwhile waiting for the sector to bottom out before one takes a call on the sector.

Source: http://www.moneycontrol.com/news/mf-interview/indian-macros-strong-would-use-dips-to-buy-tata-mf_459441-1.html

Dividend yield funds shine in volatile mkts

Uncertainty in the equity markets in recent times has pulled down NAV of most equity schemes. However, in the last one month, dividend yield equity funds have managed to give positive returns as compared to plain vanilla equity diversified schemes.

Dividend yield schemes gave a one-month return of 1-2%, while it was a negative 3.1% on an average for equity diversified funds. Benchmark equity indices — BSE Sensex and NSE Nifty — fell even more by over 5%. Dividend yield schemes predominantly invest in portfolio of companies with high dividend yield, as measured by annual dividend paid divided by its latest share price.

Consistently high dividend paying companies provide a steady stream of cash flows for its investors. In that sense, owning an equity share is akin to holding a bond with dividends flowing akin to coupon payments. Any appreciation in stock price is an added advantage for shareholders.

Ankit Sancheti, fund manager of the Birla Sun Life Dividend Yield Plus (BSLDYP) said, "In the bull run of 2007-08 it underperformed, while during the volatile markets they have done better." In the last one month, BSLDYP gave a return of 2.1%, while it was 1.8% for ING Dividend Yield and 1.2% for Escorts High Yield Equity.

Andhra Bank, Glaxo consumer health care and ONGC are top holdings of Birla, while Tata and Fortis are bullish on financial and FMCG stocks. Dividend yield funds usually have a mandate to invest in companies which have a dividend yield at least equal to that of Nifty or Sensex. Sensex dividend yield is currently 1.17%. Buying into dividend yielding companies is a conservative form of building stock portfolio- and as such these funds are usually known to outperform other equity funds in a bear market.

In India, though the entire corpus of dividend yield funds is less than 1% of the total equity corpus of Rs 2 lakh crore. “The dividend yields schemes in the long run can't beat the returns of the equity schemes though it does relatively well in volatile markets" said a leading equity fund manager. In the last one and three years, handful of dividend yield funds have given higher returns than that of plain vanilla equity schemes.

Source: http://www.financialexpress.com/news/Dividend-yield-funds-shine-in-volatile-mkts/621524/

Tata Mutual Fund launches Tata Gilt Mid Term Fund

Tata Mutual Fund has launched, a new open ended debt scheme, Tata Gilt Mid Term Fund. The new fund offer would remain open from 20th May, 2010 to 17th June, 2010. The scheme will seek to provide reasonable returns and high liquidity to the unit holders by investing predominantly in Government Securities having residual maturity up to 15 years. The scheme will offer growth and dividend option to its investors.

Source: www.karvymfs.com

M R Mayya joins L&T MF as independent director

M R Mayya, a well-known finance professional and former executive director of Bombay Stock Exchange (BSE), has been appointed as an independent director on the board of L&T Mutual Fund Trustee Limited with effect from May 17, 2010.

Mayya, an MA in Economics from Madras University was also founder chairman of BOB Capital Markets. After completing his MA, Mayya entered into the Indian Economic Service in July 1958, and served about 18 years in the Forward Markets Commission regulating commodity markets.

He joined the stock exchange division of the Ministry of Finance regulating stock markets in February 1973. He became the head of stock exchange division in August 1978. He joined Bombay Stock Exchange as an executive director in August 1983 and after working for about 10 years, he retired in August 1993.

With his vast knowledge and experience, Mayya was appointed as the Member of the Rating Committee of CARE for over 14 years till January 2008. He has also been Director of various Companies.

Commenting on Mayya joining the trustee company, N Sivaraman Sr VP L&T Finance, the sponsor of L&T Mutual Fund Trustee Limited said, “We are proud to have Mr. Mayya, a legend in the financial Services in India on the Board of L&T Mutual Fund Trustee Limited. His guidance will be valuable to us in building a robust mutual fund business”.

L&T Mutual Fund manages 11 equity schemes and 11 debt schemes.

Source: http://www.business-standard.com/india/news/m-r-mayya-joins-lt-mf-as-independent-director/95172/on

IDFC mutual fund seeking foreign ally

At present, seven of the top 10 fund managers in the country are in the form of joint ventures

The asset management arm of Infrastructure Development Finance Co. Ltd(IDFC) is looking for a strategic foreign partner that will give it access to an overseas distribution network, enable it to build an international presence and tap investors abroad.

Discussions are under way with several potential overseas partners for IDFC Asset Management Co. Pvt. Ltd, IDFC executive director Vikram Limaye said in a phone interview.

“I don’t know in what shape and form the partnership will evolve, and there could be an arrangement of the partner taking a minority stake in the company,” he said.

IDFC Asset Management wants a foreign partner that will help it tap a share of the capital that flows into the Indian market, boosting its fee income and improving its margins.

“Domestic mutual funds do not have the international distribution, brand or relationships to intermediate international capital flows into the Indian markets from an investment management perspective,” Limaye said.

In January, Baltimore, US-based asset management firm T. Rowe Price Global Investment Services Ltd agreed to buy a 26% stake in UTI Asset Management Co. Pvt. Ltd for $140 million (around Rs655 crore today). At the price, UTI Asset Management was valued at around Rs2,500 crore.

At present, seven of the top 10 fund managers in India are joint ventures (JVs), with the local partners holding a controlling stake in each of them. Franklin Templeton Asset Management (India) Pvt. Ltd is the only 100% foreign-owned asset manager among the top 10.

Kotak Mahindra Asset Management Co. Ltd is the only one among the larger asset managers without a foreign partner.

Foreign joint venture partners help get significant overseas funds to manage for local ventures, said N. Prasad, an independent consultant and a former chief investment officer at Sundaram BNP Paribas Asset Management Pvt. Ltd.

“Though the fee is lower, it goes direct to the bottom line as there are no marketing costs for the JV. In contrast, though you get a higher fee on the local money, you end up spending a bulk of it in brand building and marketing activities,” he said.

IDFC Asset Management started operations by acquiring Standard Chartered Plc’s asset management business for Rs830 crore in March 2008. Standard Chartered had assets of Rs14,141 crore under management.

Joint ventures are mutually beneficial for foreign and local asset managers, said Sudeep K. Moitra, chief distribution officer of Anagram Stockbroking Ltd.

“While foreign players get a share of the growing Indian market, the local players get access to international management practices, fund management processes and control mechanisms,” Moitra added.

In the past two years, IDFC Asset Management has almost doubled its asset base. At the end of April, it managed in excess of Rs26,000 crore, making it the 10th largest asset manager in the country.

India has 38 asset management companies that handle a total Rs7.7trillion.

On Thursday, Pramerica Asset Managers Pvt. Ltd, a unit of US-based Prudential, said it received regulatory approval to start operations, becoming the 39th.

Reliance Capital Asset Management Ltd, HDFC Asset Management Co. Ltd and ICICI Prudential Asset Management Co. Ltd are the top three fund houses in India.

Mutual fund valuations peaked when Eton Park Capital Management paid 12.9% of assets for a 5% stake in Reliance Capital Asset Management in December 2007.

After the market decline of 2008, valuations have plunged.

In July, Nomura Asset Management Co. Ltd picked up a 35% stake in LIC Mutual Fund Asset Management Co. Ltd for 2.4% of total assets.

In September, the financial services unit of engineering firm Larsen and Toubro Ltd announced plans to buy DBS Cholamandalam Asset Management Ltd for Rs45 crore, valuing the firm at about 1.6% of its assets under management.

Profit margins of asset management companies have come under pressure. A ruling by the capital markets regulator, Securities and Exchange Board of India, had restrained fund houses from charging upfront commissions for mutual fund investments starting August.

A study by consultancy firm McKinsey and Co. said that asset management companies would see profit erosion in fiscal 2010 and 2011.

“The industry is likely to witness consolidation as smaller AMCs (asset management company) may not be able to accommodate the acute profit and loss stress,” the study added.

Source: http://www.livemint.com/2010/05/20233817/IDFC-mutual-fund-seeking-forei.html?h=A1