Equity exposure boosts MIPs’ yields

With the markets remaining buoyant, monthly income plans (MIPs) have increased their equity exposure significantly. The best performing schemes in the category have nearly touched the mandatory ceiling and this has enabled them generate higher returns. MIP's typically have 10-30 % exposure to equity.

While a higher equity exposure has helped these schemes log in 6.4% to 8.4% returns since mid-October during which markets have traded within a band and with a largely upward trend, MIPs with lower equity holdings have remained laggards , analysis shows.

The net asset value (NAV) of top ranking MIPs touched their 52-week highs on July 22-23 and as a result many schemes have given dividends ranging from 1.5% to 2%. In all, four MIPs feature in the top 10 debt schemes for the six month period (till July 26). "MIPs have increased allocation to equity as there is much less uncertainty about the market (movement ) in the near term," says Lakshmi Iyer, head, fixed income and products, Kotak Mahindra mutual fund.

Moreover, the performance of the fixed income portfolio of MIPs was not in line with expectations in the past two months prompting fund managers to shore up equity allocations, she says. Some large fund houses have seen a significant increase in sales of hybrid and MIP products in the past year, say industry officials. Though MIPs have managed to ride on the market momentum now, equity allocations in the future would largely hinge on market direction, say industry officials.

Since MIPs, which invest mainly in government securities and corporate bonds, usually make payouts on a monthly basis they would not be able to take aggressive market calls, officials say.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/Equity-exposure-boosts-MIPs-yields/articleshow/6246274.cms

As NAV math changes, raters seek volatility gauge

With volatility in debt funds set to increase on account of a change in their valuation methodology with effect from today, rating agencies and institutions are hard at work trying to figure out the appropriate rating mechanism for these funds.

Debt mutual funds collect money from investors and invest the proceeds in bonds and other securities.

Hitherto, these funds were rated on the basis of their credit quality, or the quality of the securities they held.

However, now they may also have to be rated to account for the daily fluctuation in the market prices of their securities.

As per an order of the Securities and Exchange Board of India (Sebi) issued in February this year, money market and debt securities with residual maturity over 91 days (or with maturity up to 182-days) have to be valued on a mark-to-market basis. The order takes effect today.

This change is likely to increase the volatility of investments in these funds, something the rating agencies are trying to accommodate in their models, although there is no regulatory mandate to this effect yet.

The changed norm also introduces the possibility that some funds could show negative returns.

According to an industry source, a number of mutual funds which outperform have a markedly different maturity and liquidity profile when compared to their peers. While this increases the risk of negative returns when following a mark to market system, it would not be reflected in the credit rating.

In effect, there would be no easy way to distinguish a fund which has been given the highest credit rating but is more volatile than another with the same credit rating but with lesser risk of

seeing negative returns. And without such a rating, the net

asset value of debt funds may be set for a rocky ride, with unwary investors running the risk of getting hurt.

Going by experts, it is this possibility of a ‘safe’ investment —- as debt investments are generally deemed to be —- showing negative return that has investors looking for a means of rating not just the soundness of the papers the fund holds but also the downside risk that it may carry.

“There has been some interest in the market recently with investors as well as funds asking about rating on the basis of volatility in addition to credit quality of paper,” said Deep N Mukherjee, director, Fitch Ratings.

Since Sebi announced its decision in February, eight out of the top ten fund houses have approached the agency for a volatility based rating, said Mukherjee.

Others may consider following suit sooner than later. “There have been some discussions on the introduction of a volatility aspect to ratings, but something concrete is yet to emerge,” said D R Dogra, managing director at Care Ratings.

“Internationally, the volatility rating is used widely. Going forward, one may want to look at the possibility of its introduction in India,” said Karthik Srinivasan, co-head of financial sector ratings at ICRA.

Currently, debt funds account for two-thirds of the Rs 6.3 lakh crore worth of assets under management of mutual funds.

Source: http://www.dnaindia.com/money/report_as-nav-math-changes-raters-seek-volatility-gauge_1417588

Hefty gains for MFs in downturn

Buy when there is blood in the streets, even if the blood is your own. The old adage on investing seems to have helped funds that were launched even in the thick of the stock market downturn in 2008-09. Most diversified equity mutual funds (MFs) that were launched between April 2008 and March 2009, a period during which benchmark indices plunged to new lows, have managed to beat benchmark indices and their category average.

Of the 10-odd diversified equity MFs that were launched during the period, a vast majority have moved ahead of key indices for the 1-year and the year-to-date period. Several funds have given a yearly return of between 22.2% and 39%. Principal Emerging Bluechip that hit the market during the height of the global financial crisis was the best among the lot gaining 44% in one year compared to the category return of 28.1% and the 17.1% return generated by sensex.

"During March 2009, when sensex was at (around) 8000 levels, the equity allocations of top ranked new entrants in the diversified equity category was above 90% as compared to 80% of its peers," said Tarun Bhatia, director, capital markets, CRISIL Research. "So when the markets rebounded from the lows of March 2009, the call of higher equity allocations of these funds paid rich dividends and the rest of the funds had to play catch up."

In fact, first time entrants bagged top ranks in the equity category in the latest CRISIL Mutual Fund Ranking announced for the quarter ended June 2010. The equity category saw 10 new entrants - six funds in the diversified equity segment and two funds each in the large cap and small & mid-cap equity categories. In all, three out of the six new entrants in the diversified equity category bagged the CRISIL Fund Rank 1.

The toppers also scored high on the risk-adjusted returns parameter compared to their category peers, CRISIL said. "Any fund that invests in a downturn gets a good brand value," said Sankaran Naren, CIO, equity, ICICI Prudential MF. "A downturn helps (a fund) in increasing absolute returns. Investors are more interested in getting better absolute returns," he said. Absolute return measure how much an asset has gained over a particular period and investing in a downturn helps in boosting it as units are picked at a low point.

Source: http://timesofindia.indiatimes.com/business/india-business/Hefty-gains-for-MFs-in-downturn/articleshow/6245757.cms