Saturday, January 30, 2010

‘Secondary market for mutual funds needs to be developed’

Heavy inflows from the equity funds and structural changes have impacted the mutual fund industry in the interim. This has, therefore, prompted players to think differently and innovate. Ashu Suyash, MD & country head, Fidelity International, spoke with Akash Joshi of The Financial Express about the impact on the industry and how they are coping up with the situation. Excerpts.

We have seen several changes in the industry, the commission structures being changed and now the low inflows into the equity funds. How do you see this shaping up?
The mutual fund industry has been wholesale distribution and now we see that there is a huge disinterest in the distribution community. In other markets, other than India, there are distribution norms that are being re-worked and the regulators are saying that they would give two or three years for the industry to realign. Here, we went ahead and implemented these norms.

So now given this, we are looking at seeing to it that communication and service do not suffer and we have invested heavily on our service infrastructure and building communication. When distribution is disinterested then the end-customers are not going to receive as much service. Clearly as a result of this move, in the interim, the end-customers are still coming to grips with this move. And this is one big reason for not seeing as inflows coming into the industry as they should have.

If one looks at it 2009, it was one of the best years for the stock market. And in this year we saw, on a net basis, only Rs 1,000 crore coming in which is very small considering the size on potential of the market.

And at the same time we have had several discussions over tax codes and say that we have dealt with this. However, the uncertainty element is out there. One does not know what the paradigm would down the line. And the third thing is that when change happens and it is common across investment products then it's fine. Here, every thing about mutual funds has got implemented but other instruments, whether it is unit linked plans or structured products, it's the old order that continues. When I look at it from a customer perspective, then they only get to see change in mutual funds. Why can't we have common standards and I am thinking that when the underlying, the market linked instruments, are the same, then the same customers have different experiences. So given this, we have stepped up our investment education programmes.

How is your new product development coming up?
We have not done new schemes for almost two years and we believe when things realign, it will be better for the long-term. So we have looked at bringing in products that are differentiated in the market place. And its not a case of these products will over take the existing ones.

What is the theme that you are looking at?
If one looks at the market and not just India but globally, last year was a come back for equities and we still believe that there is still lot left here. Our view on fixed income is rather cautious and there would be a time when action would be taken on the interest rates, it's difficult to tell when. And then there is a recovery that sets in, it's difficult to say, especially, countries other than China and India. Then again there is the inflation factor that has caught up and the government will have to walk a tight rope between managing the inflation and growth. And obviously, in this, the commodities will do well. When recovery picks up, the commodity prices will rise. So, we are looking at gaining from the rise at the materials and the commodities sector. Therefore, we looked at a pilot project for the global real assets segment and the London office seeded it.

If you wanted to look at taking an exposure to the commodity segment, as a retail investor you have very limited means to take an exposure. Say you want to get an exposure to gold, it has a problem with liquidity and the ETFs don't track the commodity prices that well. And then you look at investing in securities, say a mining company, India has only one. Moreover, say what happens when gold starts underperforming. Most of the investors cannot take these calls. So we have built our thought over this.

How would you look at real assets, especially the real estate sector and other commodities?
Property would be a segment and the route to that would be through the securities and not real properties. And we will be looking at global assets so we would look at what gets the investors the best buck - say it's a DLF or its some company in China. The best plays in real assets are not in India and China. Say you want to have a play in oil, then ONGC would be the choice. But its results are decided, to a great extent, by government policies. But if you were to buy an Exxon Mobil, then you have a better chance to riding the oil price play. And if you tracked oil prices and Exxon Mobil, our researchers saw that the price of Exxon did not rise as much when the oil price rose, but actually later. We saw that it had $40 billion in cash and therefore it was safer than some of the banks at the end of the crisis. If you locked at yourself to India, you might not get diversification nor would you get a play on the global movements. Now, even look at agricultural plays. Where do we, in India, have an exposure to this play? Those are the stocks that are listed outside of India. We also believe that there is a huge opportunity in platinum as the gold prices have overshot. And again, where do we have an exposure to companies that would gain from this. Then there are developments in the steel sector and the cement sector and there is far more action happening in China, so why have an exposure to India only.

There has been a move to list all close-ended funds. What is your take on this one?
The move to allow brokers to trade in mutual funds is definitely a welcome move. Moreover, you need to offer an exit for investors as closed ended funds should remain closed ended. Then the secondary market is the best route and this is being followed globally as well. However, in India we don't have a vibrant secondary market even for bonds, so having one for mutual funds would also be a challenge. Yes, market makers would work, but we have a long way to go on developing the secondary markets. The secondary markets for equities, however has come a long way and is of global standards.

Source: http://www.financialexpress.com/news/secondary-market-for-mutual-funds-needs-to-be-developed/572707/0

Investments in Mutual Funds after CRR hike

RBI has stepped in to rein in spiraling headline inflation and in this direction it has raised the Cash Reserve Ratio (CRR) by 75bps. This will happen in two stages. CRR is the amount of funds that banks have to keep with RBI.

This step by RBI did not come as a surprise to the market as it was already expecting a hike in CRR. Chaitanya Pandey, Fund Manager, ICICI Prudential AMC said, “the rate hike was very much expected by the debt market, participants had already discounted for it in their investment decision.”

But, the important question is what today’s announcement means for debt/income fund investors.

Impact on the Markets

While today’s policy announcement was more or less expected, fund managers are now awaiting cues from the forthcoming union budget. “On debt market side the CRR increase is not going to have much of an impact. Any major reaction can be seen once any fiscal steps are taken. Next month’s budget will give a clear direction for the debt market as Government will announce its borrowing programme for next financial year” said Chaitanya Pandey. Market participants believe that if government borrowing equals or exceeds the FY 09-10 borrowing amount of Rs 4.51 trillion, we may see a major reaction in the market.

Investment in Debt oriented Mutual Funds

It is clear that today’s hike in CRR will not impact bond market much, so debt funds too will not be affected much. Presented below is the investment strategy an investor can follow while investing in different kinds of debt/income based funds:

Liquid Funds: As per Chaitanya an investor with less than 6 months investment horizon may look at investing in liquid funds which may generate steady returns going forward and the returns could also possibly improve.

Income and Gilt Funds: On long term funds, he said that an investor needs to stay put for more than 1 year. But when asked whether it is the right time to enter in he said “long term yields are more dependent on the government borrowing programme to be announced in the budget, so only post budget it will be appropriate to take a call whether to enter in or not”.

With spiraling inflation, possibilities of rate hike in next credit policy and possibilities of fiscal measures by Government and uncertainties over borrowing programme of Government for next financial year may keep the long term rates volatile in short term.

Short Term Debt Funds: On short term funds – funds that invest with an average maturity of one to two years - he said that “in March we may see a gradual increase in short term interest rates, so better to stay away from these funds.” Any increase in interest rates causes a fall in the market prices of debt paper and consequently the NAV of a fund.

Fixed Maturity Plans: With so much uncertainty, an investor may feel safe if he invests in fixed maturity plans and holds it till maturity. FMPs may act as the best bet to tide over short term uncertainties. Typically, FMPs hold their investments till the end of the scheme tenure, thereby cutting interest rate risk in the intervening period.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/analysis/Investments-in-Mutual-Funds-after-CRR-hike/articleshow/5514017.cms

Momentum – The trend is not always your friend

Have you ever thought why most stock tips you receive are about buying a stock that has done well recently, a recent winner? Are your brokers and friends great stock pickers who pick stocks that do well, or is it just momentum – picking stocks AFTER they have done well – at work? With no offense to anybody’s skills, it’s probably the latter.

Momentum is India’s favourite market strategy. Most stock picks and market recommendations, whether they come from a broker’s desk or a cocktail party, when looked at in any detail, point to momentum. What does that mean? Quite simply, it means betting on things that have done well recently – whether it is an individual stock, a particular sector or the market as a whole. A classic recent example – everyone wants to buy steel stocks because they have done well, everyone wants to sell telecom stocks because they have done badly. Buy winners, sell losers, it’s as simple as that.

Indians are not the only ones who understand or love momentum, and there is no magic behind it. Momentum is a time-tested globally known investment strategy with its roots in behavioural finance. When good news comes out, people under react because they are not sure, and the stock price doesn’t rise enough. The stock has room to go, and as more good news comes out, people overreact, driving the stock price up further. Similarly, on the downside, as bad news comes out, people over react to bad news, and in despair run for an exit, leading to a further correction. The tendency to overreact to bad news and under react to good news is timeless and inherent in human nature, and as long as it works, momentum trading will continue to work.

In fact, momentum has historically been even more powerful in India, than other global markets, and is one of the best performing strategies over the last 15 years. The most basic indicators have made for very favourable trading strategies. What makes it even more popular is that momentum is one of the easiest things to do – it takes very little to get the past prices of stocks and figure out which ones are doing well. You don’t need to know anything about the stock or the business to trade momentum – you could be following the price of bananas for all it matters.

Moreover, for a broker or an individual, momentum is a professional and socially safe strategy. You’re always following the trend, always selling what is doing well, and that’s a pretty easy sale to make. You always sound right, and who doesn’t like that? Compare this to value investing – after all the work involved in understanding a company’s inherent value and financials, you are the one rooting for an undervalued firm whose stock price has been beaten down. Even tougher, you’re running down a company that has done well because it is overvalued, even though everyone else loves it. It’s a pretty unpopular place to be in and a tough sale to make to a client.

Unfortunately, for all its ease and apparent money making abilities, momentum can revert pretty quickly, and when it does, it gets ugly. No trend sustains itself forever, definitely not in the short to medium term, and when a trend reverts, it is painful being a momentum trader. Think of 2007. For the three year bull run, markets were doing well, and every trader was bullish – momentum did well and every investor felt they had discovered a gold mine…until 2008 struck. The upward trend reverted, the market crashed and momentum crashed with it, and quickly. Momentum traders saw gains made over three years quickly erode as markets took a turn.

My favourite story about the dangers of playing momentum is Religare AGILE, a mutual fund that claimed to be a quant fund, but is actually just playing momentum. AGILE launched when the tide just turned and momentum was having its worse run. In a year when the markets were down 60%, AGILE bled much more. A period of downward momentum followed and AGILE did fine, but come May 2009, the downward trend reverted. The markets rallied nearly 90%, momentum strategies suffered, and AGILE returned less than 50%. AGILE’s poor performance, incidentally, has nothing to do with being a quant fund – many quants have done well over this period – it is simply playing momentum.

Cut to the last quarter of 2009 – another great period for momentum as the markets have had an upward trend, and to no surprise, AGILE has done superbly, as have other funds that have played the same trick. What will happen to them when the trend reverts, however, is the question?

Should you not play momentum or invest in a momentum fund? In general, yes, investing in a concentrated strategy is a bad idea – investments should be diversified across investment styles. If you do have to play momentum, do it in a conservative way with moderate risk. Most of all don’t be fooled by a manager’s great returns over a period – he may just be playing momentum. Check out his returns when the trend reverts.

Be careful when playing momentum – following the trend may appear to be your friend, but can quickly turn into a foe you had never bargained for.

Source: http://www.moneycontrol.com/news/mf-experts/momentum-%96-the-trend-is-not-always-your-friend_438780.html

LIC Index Fund - Sensex Advantage Plan declares dividend

LIC Mutual Fund has declared a dividend of 17.5% (Rs 1.75 per unit on a face value of Rs 10), under the dividend plan of LIC MF Index Fund - Sensex Advantage Plan. The record date for the dividend is January 29, 2010.

All investors registered under the dividend option of LIC MF Index Fund - Sensex Advantage Plan as on record date January 29, 2010 will receive this dividend. The NAV under the dividend plan of the scheme as on January 18, 2009 is Rs 10.373. (Check out - Recent MF Dividends)

LIC MF Index Fund - Sensex Advantage Plan is an open ended index linked equity scheme. The objective of the scheme seeks to provide capital growth by investing in index stocks and growth stocks.

Source: http://www.moneycontrol.com/news/mf-news/lic-index-fund-sensex-advantage-plan-declaresdividend_438779.html

Religare's Gold ETF NFO

The launch of Religare Mutual Fund’s Gold exchange Traded Fund (ETF) has expanded the segment’s universe. Till now, there were six gold ETFs - the oldest being Gold Benchmark ETF, which was launched way back in February 2007.

The Religare Gold ETF fund will invest up to 100 per cent in physical gold in the domestic markets while it would also invest up to 10 per cent in debt or money market instruments.

The performance of the scheme would be benchmarked against the price of gold.

For investors, Saurabh Nanavati, Chief Executive Officer, Religare Mutual Fund, lays out the reasoning behind the launch of the ETF: “Investors keep asking whether this is the right time to invest in gold. From my perspective, gold is a necessary allocation for everybody’s portfolio to the tune of 5-10 per cent. Gold is a hedge against inflation and a falling US dollar. Emerging markets like India are facing inflationary issues due to ample liquidity created by global central banks. As regards the US dollar, over a longer period with India and China GDP growth being in excess of 6 per cent plus and US growth not expected to cross 2 per cent in the near future, the dollar is bound to depreciate fairly sharply over the next five years against emerging market currencies. Gold will therefore, act as an insurance to retail investor portfolios”.

The fund would be managed by commerce graduate and an MBA in finance, Gautam Kaul. He has more than eight years of experience in fixed income markets. Prior to joining Religare AMC, he was working in Sahara India AMC (2005- 2006) and Mata Securities (India).

The New Fund Offer (NFO) opens on January 28, 2010 while it closes on February 23, 2010.

The minimum application amount during NFO period for retail investors is Rs 5,000, while for large investors, it is Rs 15 lakh per application.

There is no exit load.

Other Gold ETFs in the market:

1. Gold Benchmark ETF

2. Kotak Gold ETF

3. Quantum Gold

4. Reliance Gold ETF

5. SBI Gold ETS

6. UTI Gold ETF.

Source: http://new.valueresearchonline.com/story/h2_storyView.asp?str=101209

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