Why liquid funds may soon lose their sheen

Debt funds will now have to value debt papers as per the prevailing market prices if they mature after three months, up from the earlier six months

One of the least risky products in the mutual funds (MF) space just got riskier. From 1 July, all debt funds will have to value their debt papers as per the prevailing market prices if they mature after a period of three months, down from the earlier six months. The Securities and Exchange Board of India (Sebi) made this mandatory through a circular issued on 2 February.

Money market instruments will also be valued similarly, said Sebi. This means that your ultra short-term (ST) fund, earlier known as liquid-plus schemes, will become riskier.

The problem

When the markets fell in 2008, investors made a rush for redemptions. MFs had to arrange for cash on a short notice since they did not anticipate so many redemptions. They had to sell assets at throwaway prices and incur losses. Three ultra ST funds gave negative returns, contrary to expectations.

Earlier, debt securities maturing before six months were not required to reflect their prevailing market prices. They used the amortization method. To put it simply, if your debt fund invested in a debt security with a face value of Rs100, carrying a coupon rate of 5% per annum and matured in five months, it would have spread the total interest income of Rs2.10—or Rs0.014 per day—over the debt paper’s tenure. In other words, only those securities that mature after six months would reflect market’s volatility depending on how their market prices move. Also, money market instruments—in which ultra ST funds invest a chunk of their assets—were valued through the amortization method, as per Sebi rules.

In 2008, when the debt markets turned volatile, ultra ST funds did not reflect the reality and their net asset values (NAVs) continued to show a steady rise. A chief investment officer of a leading asset management company said, on condition of anonymity: “Debt funds with shorter duration had large maturity scrips, out of line with their risk profile. Also, much of these debt papers were not valued, giving a false sense of stability to investors.”

Ever since, Sebi has taken corrective steps to ensure that MFs are in line with their objectives and do not convey a message that is not in sync with what they can actually offer.

What has changed?

Sebi now wants debt funds to value their underlying securities more realistically. They will now have to mark-to-market all those debt papers that mature after 91 days. Money market instruments, such as certificates of deposit, commercial papers, collaterized lending and borrowing offerings, were not marked to market even when they matured after six months. Now, these too will be marked to market.

As most ultra ST funds invest up to 90% of their corpus in such instruments, they are set to become more volatile. “Ultra ST funds invest significantly in money market instruments. Now their NAVs will be more volatile and they can also give negative returns on some days,” says Mahendra Jajoo, head (fixed income), Pramerica Asset Managers India Ltd, which is waiting for Sebi’s second-stage license to start its MF operations in India.

They will be more realistically priced as most of their underlying instruments will reflect the prevailing market price.

More realistic

Ultra ST funds are set to lose sheen as they will now be more realistically priced. Fund houses introduced these funds in 2007 when the year’s budget increased the dividend distribution tax (DDT) for corporates from 14.03% to 28.03% in liquid funds. Ultra ST funds were devised to provide liquidity with the tax advantage.

Your fund manager’s skills would be tested to the hilt. “Fund managers will have to sharpen their skills to be able to dynamically manage the duration of funds and debt papers,” said Maneesh Dangi, head (fixed income), Birla Sun Life Asset Management Co. Ltd. “Liquid funds are safer as they can’t invest in debt papers that mature after 90 days,” said Arvind Chari, debt fund manager, Quantum Asset Management Co. Ltd.

Industry sources say that Sebi’s latest move is just the beginning. To ensure that a October 2008-type crisis is not repeated and corporate investors do not use the MF route to save taxes, the coming Budget may plug the loopholes, experts predict. Just like liquid funds, ultra ST funds may also have to pay higher DDT to reduce the tax arbitrage that corporates now enjoy.

Ultimately, such moves will only help the industry focus more on retail than institutional investors. About 66% of the industry’s corpus lies in ultra ST and liquid funds as per the December figures released by the Association of Mutual Funds of India. Reforms such as these would nudge the industry to focus more on retail investors.

Source: http://www.livemint.com/2010/02/08211205/Why-liquid-funds-may-soon-lose.html

Monthly income plans catch investors’ fancy

Monthly income plans (MIP) of mutual funds seem to have captured the fancy of ‘riskaverse' investors. Faced with the prospects of shrinking returns from debt schemes, many investors are turning to their financial advisors for help and the advice they mostly get is the same: ‘‘ Invest in MIPs, which have a small exposure (mostly 15-25 %) to equity. The equity component will act as a ‘kicker' and give you extra returns.''

However, as critics point out, what most advisors don't tell investors is that they would be cut short once bears tighten their grip over the stock market.

‘‘ Many experts recommend MIPs because these are the right product at this juncture. Fixed income products are anyway not delivering great returns and they are expected to fall further,'' says Hiren Dhakan, associate fund manager, Bonanza Portfolio . ‘‘ MIPs will be useful because of their portfolio mix of equity and debt. If you can earn extra returns from equity, it would offset low returns from debt,'' he adds.

And financial experts have good reason to believe that debt returns may fall further. The likely large government borrowing in the next financial year may drive yields up, pushing down debt returns . Many investors are already rethinking their debt investment as these schemes give only 5.0-5 .5% return, say investment advisors.

However, critics point out that the whole premise on which the MIPs are sold could prove wrong. ‘‘ The products are sold on the assumption that equity would give extra returns, but that need not be the case always,'' says an investment consultant, who doesn't want to be named. ‘‘ Safety, higher returns , tax-efficiency , active management of debt equity allocation and liquidity of investment, liquidity ... MIPs are supposed to be the one solution to all these needs. Clearly, there is some mis-selling going on,'' he adds.

Dhakan says the MIP recommendation is based on two reasons : one, there is a consensus that the prospects of debt investment remains rather bleak for the time being. Two, there are no negative factors as far as equity investment is concerned.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/Monthly-income-plans-catch-investors-fancy-/articleshow/5546979.cms

ICICI Prudential FMCG Fund declares dividend

ICICI Prudential Mutual Fund has declared a dividend of 12% (Rs 1.2 per unit on a face value of Rs 10), under the dividend plan of ICICI Prudential FMCG Fund. The record date for the dividend is February 11, 2010.

All investors registered under the dividend option of ICICI Prudential FMCG Fund as on record date February 11, 2010 will receive this dividend. The NAV under the dividend plan of the scheme as on February 5, 2010 is Rs 29.70.

ICICI Prudential FMCG Fund is an open ended FMCG Sector Scheme. The investment objective of the scheme is to generate long term capital appreciation through investments primarily in equities of a selected group of companies in the FMCG sector.

Source: http://www.moneycontrol.com/news/mf-news/icici-prudential-fmcg-fund-declares-dividend-_440563.html

Sundaram Leadership Fund announces 20% dividend

Sundaram BNP Paribas Mutual Fund has declared a dividend of 20% (Rs 2 per unit on face value of Rs 10) in Sundaram BNP Paribas India Leadership Fund. The record date for the dividend is February 11, 2010.

All investors registered under the dividend option of Sundaram BNP Paribas India Leadership Fund as on record date February 11, 2010 will receive this dividend. The NAV under the dividend plan of the scheme as on February 5, 2010 is Rs 12.69.

Sundaram BNP Paribas India Leadership Fund is an open ended equity scheme. The objective of the scheme is to achieve capital appreciation by investing in select stocks of companies, which meet criteria of ‘Leaders’ in their respective sectors/subsectors.

Source: http://www.moneycontrol.com/news/mf-news/sundaram-leadership-fund-announces-20-dividend_440572.html

Four firms set to enter MF space in six months

Four new companies are set to enter the asset management business in the next six months, namely; IDBI Bank, Peerless Investment & Finance, Prudential Financial and Union Bank of India.

“We will be launching our asset management business in a month’s time so very soon we will make the formal announcement,” said P Sitaram, chief financial officer at IDBI Bank. A source at Peerless Investment & Finance also said that the company is planning to start its mutual fund venture in a month.

The company has already files mutual funds scheme information documents with the Sebi for which approval is awaited. Pramerica, the brand name used in India by US-based Prudential Financial, is also gearing up.

“We are awaiting the market regulator’s approval for our asset management venture. We hope to launch in a couple of months,” said Vijai Mantri, chief executive officer of Pramerica Financial Services.

Union Bank of India, meanwhile, has formed a joint venture with Belgium-based KBC Group for its asset management firm. The bank holds a 51% stake in the venture.

“We will be starting our mutual funds business in May and we are already half-way through. We are waiting for an approval from Sebi for the mutual funds products to be launched by us,” said M V Nair, chairman and managing director of Union Bank of India.

The mutual fund industry manages assets worth Rs 7,61,625.54 crore as on January and there are 40 players in this industry, as per data available on the Association of Mutual Funds of India website.

“Despite so many players, there is low penetration and household savings flowing into mutual funds is a mere 7%. So there is a lot of scope for new players,” said A P Kurian, chairman of Amfi.

Source: http://www.dnaindia.com/money/report_four-firms-set-to-enter-mf-space-in-six-months_1345202