Bond yields soft; inflation worry weighs

Indian federal bond yields were steady to lower on Monday as the central bank's cash infusing steps on Thursday kept the market mood positive but traders were concerned that its hawkish take on inflation meant policy tightening sooner than later.

India's central bank left interest rates on hold on Thursday and unveiled steps to address persistently tight liquidity, but warned inflation was still well above its comfort level, raising the prospect that it will resume monetary tightening in January.

The central bank cut the statutory liquidity ratio -- the minimum level of deposits banks must hold in government approved securities -- to 24 percent from 25 percent, and unveiled 480 billion rupees ($10.5 billion) worth of bond purchases over the next month.

At 10 a.m. (0430 GMT), The yield of the most traded 8.08 percent, 2022 bond was at 8.01 percent, down from 8.02 percent at close on Thursday. It had fallen to 8 percent in early deals.

The yield of the benchmark 10-year 7.80 percent bond was steady at 7.95 percent. The bond market was shut on Friday for a local holiday. Volumes were a moderate 25.95 billion rupees ($570 million) on the central bank's trading platform.

"The market is starting to get worried about inflation. I feel the yield curve will steepen," said Ritesh Jain, head of fixed income, Canara Robeco Mutual Fund .

"Shorter end yields up to 2017 might not fall much or remain there and 2020 upwards will start correcting," he added.

The benchmark 10-year bond yield, which had risen to a 26-month high of 8.22 percent on Dec. 6 because of liquidity concerns fell as much as 30 basis points on Thursday after the central bank announced its cash support steps.

Some dealers said they waited for the details of bonds the central bank plans to buy as part of its bond purchase programme as well as this week's 110 billion rupees bond sale.

Indian bonds also found support in Friday's rally in U.S. Treasuries.

Local dealers said, however, bond players were cautious as clearing house data showed state-run banks were major sellers of bonds on Thursday with net sales of 40.38 billion rupees.

"There is still more room for yields to fall because the central bank will buy bonds for the next one month, but there are concerns that the market will have to go through a wall of selling by state-run banks before that," said a senior trader with a primary dealer.

The benchmark five-year overnight indexed swap was at 7.37 percent, down 2 basis points from Thursday.

The one-year overnight indexed swap was steady at 6.80 percent.

Source: http://economictimes.indiatimes.com/markets/bonds/Bond-yields-soft-inflation-worry-weighs/articleshow/7131646.cms

IDFC AMC sells 25% stake to Natixis

IDFC Asset Management Company has sold 25 per cent of its stake to Natixis Global Asset Management (NGAM) to enhance its distribution business, said a statement from the fund house.

The financial details of the deal were not disclosed, but sources close to the deal say that the deal is worth around Rs 300 crore.

This partnership would help IDFC AMC enhance its international distribution and gain access to global investors who are keen to invest in Indian equity markets, said the statement.

This would also help IDFC AMC provide international investment platforms to Indian investors.

As on September 30, 2010, NGAM had $719 billion (Rs 32 lakh crore) worth of assets under management.

NGAM has a presence in Asia, including Japan, Taiwan, Singapore and China.

Source: http://www.thehindubusinessline.com/2010/12/19/stories/2010121951520200.htm

‘India now is cheaper than the 2008 high'

Corporate governance issues, compressed business cycles and increased influence of global events on local markets have made decision making in equities a more complex affair for retail investors, feels Mr Sanjay Sinha, CEO, L&T Mutual Fund. In an interview with Business Line, he shares his views on the current valuations of Indian markets as well as on the divergence in earnings performance across sectors.

Excerpts from the interview:

What's your outlook on market and valuations?

Eleven quarters have passed since the previous January 2008 high and over these quarters, corporates have only advanced. So on a like-to-like basis, today at the same absolute level of the index, we are relatively cheaper. India valuation is also frequently compared with other emerging markets.

When that is done, we need to keep a couple of things in mind. One, the composition of earnings in India is very different. The Indian indices are broad-based, with a diverse sectoral representation, while some of these markets have a much skewed tilt towards, say, commodities.

Two, we need to look at the valuations in terms of India's outlook on the earnings growth. With a price-to-earnings multiple of 15 times and earnings outlook of 18-20 per cent growth for FY12, it is an open question if India should get the same valuations as some of its Asian peers.

What about sector-specific outlook? There's been a lot of divergence across sectors in terms of earnings performance.

. In the last couple of quarters, there have been significant changes, with interest rates hardening and commodity prices moving up.

These will obviously have a bearing on the earnings outlook. So while we may have the overall earnings remain in line, sectors that are vulnerable to interest rate hikes and commodity prices might see their margins under pressure. That said, we have also seen that the demand outlook for some of these sectors has been much higher than expectations. The first such confirmation will come in the third quarter results. It will reveal if demand growth can lead the economies of scale to absorb the increase in commodity prices and interest rates. But if it doesn't, then we'll have commodity-based sectors see an earnings upgrade while the sectors that are vulnerable to interest rates might suffer earnings downgrade.

What about infrastructure as an investment theme? Mutual funds investing on this theme haven't done as well in this market cycle.

There are couple of prominent reasons for their underperformance. One, following the global financial crisis the capacity expansions were put on hold as the demand outlook wasn't clear. With the resumption of growth in most of the economies, the capacity expansion plans are back on track. This will have an immediate rub-off effect on infrastructure-related projects.

Two, access to capital had become restricted earlier, but with the financial markets now opening up, the flow of capital is becoming freer. Three, in the Eleventh Five Year Plan, there was an ambitious target to spend Rs 20 lakh crore on the sector. However, the mid-term review showed that only Rs 8 lakh crore has so far been spent. While, it may not be practically possible to spend the balance in the remaining two years, one can expect to see some acceleration in the pace of infrastructure projects in the remaining two years.

With mid-caps suffering a crisis of confidence following allegations of insider trading, how should investors select mid- and small-cap stocks?

The key distinction between a good and bad company in the midcap segment is linked to two factors — one, the growth trajectory and two, the quality of corporate governance. It may, however, not always be possible for the lay investor to qualify the corporate governance standards of mid and small-cap companies. While there definitely is an interest to directly invest in equities, given the complexity of decision making and the fact that business cycles are getting compressed in time and that global events increasingly have had a bearing on most companies, it would be better for lay investors to confine investments to a limited number of stocks that can be tracked closely.

Source: http://www.thehindubusinessline.com/iw/2010/12/19/stories/2010121951160500.htm

Mutual funds cheer as money comes back into debt

Mutual fund companies are seeing significant investments in fixed-income schemes, offering them a reason to cheer after months of more redemptions than sales and a continuous decline in the number of investor folios.

Mutual funds buy short-term certificates of deposit, or CDs, from banks for their fixed maturity plans (FMPs) and other fixed-income schemes, and with banks offering at least 9% on these instruments, investors are scrambling to invest in the debt schemes. Interest in monthly income plans (MIPs), too, has increased.

A fortnight ago, banks began offering high rates on CDs to raise money because the banking system is facing a liquidity crunch. Banks can borrow from the Reserve Bank of India (RBI) at 6.25% daily, but they need to offer government bonds as collateral, and all of them do not have enough bonds to offer as collateral. The central bank requires banks to invest at least 24% of their deposits in government bonds, but has relaxed this by a percentage point given liquidity concerns.

The chief marketing officer of one of the country’s top five fund houses admits that investments by funds in CDs have increased. The fund’s own fixed-income funds used to invest Rs. 700-800 crore in CDs every month, and this has gone up to Rs. 2,000 crore in the past two weeks, added the manager, who did not want to be named.

Banks use CDs to raise bulk deposits from the market. The maturity of these instruments ranges from seven days to three years; the bank pays a specified interest rate to the investors. Funds invested in CDs are locked until maturity.

FMPs are close-ended debt-oriented fixed income schemes. Fund managers invest the money under such schemes in fixed-return instruments, including CDs, commercial papers, gilts and debentures, which mature at the end of the term of the FMP. FMPs come in maturities ranging from 90 days to three years.

MIPs are hybrid instruments that put 75-95% of the invested amount in debt and money market instruments such as CDs and the rest in equities.

“The risk-reward (equation) is in favour of investors (right now),” said A. Balasubramanian, chief executive officer, Birla Sun Life Asset Management Co. Ltd, which managed assets worth Rs. 67,421.34 crore at the end of September. “We are recommending to investors that it will be worthwhile committing money to short-term oriented funds as rates are attractive. These rates may or may not last.

He added that his firm is continuously rolling out FMPs. “There is a lot of interest in the six months to one year kind of duration. In the last two weeks alone we must have raised around Rs. 3,000 crore (by selling units in such schemes),” he said.

The industry, he added, would have sold units worth around Rs. 20,000 crore under these schemes after CD rates were increased.

The chief marketing officer mentioned in the first instance added that retail participation in one-year FMPs has increased, with his firm receiving, in one case, around 10,000 applications from retail investors for a one-year FMP, as compared to an average of 150 for such schemes before CD rates were raised.

“Many retail investors are now aware that these FMPs can actually fetch more tax-friendly returns than bank deposits,” the executive said.

“There is a renewed interest among retail investors in new fixed-income funds, including FMPs,” said Srinivas Jain, chief marketing officer at SBI Mutual Fund.

“The spread between CD rates and bank deposits is very attractive,” said the fixed-income head of one of the oldest fund houses in India, asking not to be named. “This month we have invested at least Rs. 4,500 crore in CDs so far. Last month, the investment was just half, when CD yields were not so much.”

Banks are offering these rates on CDs because of sluggish growth. While bank credit has recorded a 23% year-on-year growth at Rs. 6.72 trillion, deposits have grown by just 15% at Rs. 6.29 trillion.

India’s mutual fund industry has been struggling since August 2009, when the capital market regulator, Securities and Exchange Board of India (Sebi), abolished entry loads, or the charge paid by the investor and routed to the distributor as commission. The industry’s assets have come down from Rs. 7.5 trillion at the end of August 2009 to Rs. 6.65 trillion at the end of November. Debt schemes haven’t been hurt as much as equity ones, but the former rarely see retail participation.

That has since changed. “Retail participation has gone up in the one year-plus FMP segment,” said Lakshmi Iyer, head, fixed income and products, Kotak Mahindra Asset Management Co. Ltd, which managed assets worth Rs. 28,429.82 crore at the end of September.

“Retail FMPs are one of the best categories of debt products for retail investors. We have added nearly 2.5 lakh retail investors in our MIPs and pure retail debt schemes in the past one year. Higher rates on CDs have certainly acted as a trigger for more retail participation in debt schemes,” said Sundeep Sikka, chief executive officer, Reliance Capital Asset Management Ltd, which is India’s largest fund house with assets worth Rs. 1.07 trillion at the end of September.

A number of new FMPs have been launched by the industry after the new rates on CDs came in. “This is a sharp contrast to two years ago, when FMPs were practically dead,” Balasubramanian said.

FMPs were hit by a number of regulatory changes, including a Sebi ban on giving indicative yields. In terms of returns, too, they were mostly on par with liquid funds.

“Dynamically managed bond funds, gilt funds are other categories are seeing good investor interest,” Balasubramanian added.

Nearly 70% of the industry’s assets are in debt-oriented schemes.

The liquidity crunch in the banking system may remain at least until March, said Devendra Nevgi, founder and principal partner, Delta Global Partners, an independent research firm.

Source: http://www.livemint.com/2010/12/19235435/Mutual-funds-cheer-as-money-co.html?h=A1

MFs continue to face redemptions

The average assets under management (AAUM) of domestic mutual funds declined in November for a successive month. Continuous redemption pressure is not letting fund houses garner assets, despite a robust inflow of fresh money.

Data from the Securities and Exchange Board of India (Sebi) show the industry’s AAUM dipped 3.7 per cent in November to Rs 6,73,186.3 crore, compared with Rs 6,98,852.7 crore in the previous month. This is in contrast to what was seen in the same period last year, when the industry continued to increase AAUM, which stood above Rs 8 lakh crore in November last year.

“It is true the industry is getting fresh money, but that does not mean redemptions have stopped. There is no change in investors’ mindset and they are still redeeming their funds,” said the chief investment officer (CIO) of a mid-sized fund house.

“In holiday season, investors, in particular foreign investors, tend to redeem their money. It appears it has got slightly preponed this year,” said the head of fixed income at another fund house. He said schemes in the liquid and money market segment were witnessing the highest redemption pressure.

In the current quarter so far, the industry’s assets have declined by close to six per cent, or a little over Rs 40,000 crore. In October, the decline was two per cent. “The poor performance during the initial months of the quarter is likely to put pressure on the industry,” said the CIO of a mid-sized fund house. He added that December, being the last month of the quarter, was likely to bring a further decline in assets due to the quarter-end phenomenon, when banks and companies pull out funds.

According to equity fund managers, corrections in equity markets over recent weeks have brought fresh investors to the fund market. “However, redemptions are going on unabated, as investors are booking profits,” said the chief executive officer of one of the top five fund houses.

Source: http://www.business-standard.com/india/news/mfs-continue-to-face-redemptions/418727/

Investors to get weekly update of MF trade

From January, mutual fund investors will get a weekly consolidated statement of their transactions instead of the monthly statement they get currently. The fund industry is finalising an investor database that will help registrars despatch consolidated account statements to investors every week.

The move is an offshoot of a Sebi suggestion, calling for a central statement processing hub, common for all mutual funds. Once the database is ready, fund registrars, like CAMS , Karvy and Franklin Templeton, will despatch consolidated statement of accounts to investors every week.

“Investors will get one consolidated statement having transaction details across funds, including scheme or fundwise NAV and even the overall portfolio value. This service is ideal for investors who have more than one investment folios,” said a senior official in a registrar.

According to the official, CAMS, Karvy and Franklin Templeton RTA are already despatching consolidated monthly statements to investors, having their money in schemes managed by 25 asset management companies. The registrar group is expecting non-participating mutual funds to join in when the weekly despatch of consolidated statements commence.

“By weekly despatch, we mean that if any investor has done any transaction in their fund portfolio, he’ll get a statement of his actions and the impact thereof, in a week’s time,” the official said.

“Post-July , after Sebi’s directive to send consolidated statements, we’ve been sending deal details only once in a month. Weekly statements will help active fund investors keep a tighter tab on their fund portfolios,” the official added.

According to mutual fund officials, consolidated statements will help people who have invested in multiple fund schemes. In the absence of consolidated statements, the investor will receive individual statements from every fund he has invested. Consolidated statements will cut down the number of statements to just one. The consolidated statement will have scheme-wise transaction details and also net portfolio value. This move will reduce the paperwork and to some extent, even the cost for AMCs.

The cost of sending consolidated statements will be borne by fund houses; it will be calculated on the basis of transactions effected by the investor. Fund houses expect the charge to be around . 5-6 per active client for every month. SIP investors will get consolidated accounts once in every three months. The statement will be mailed to investors in a paper-andenvelope format, sources said.

“This is a good move, but it will hit our marketing campaigns badly,” said the marketing head of bank-promoted fund house. “The statement of accounts, which fund houses mail to investors once a year, is a carrier of our print ad campaigns. Consolidated statements , which include details of other fund houses, will not have any advertisement or promotional material,” the fund marketer said.
Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/Investors-to-get-weekly-update-of-MF-trade/articleshow/7120863.cms

Focus on growing existing schemes, Sebi tells MFs

Market regulator, Securities and Exchange Board of India (Sebi), on Thursday, said it is in favour of fewer NFOs (new fund offers) by mutual funds and called for a greater focus on growing existing schemes.

“We want all focus to come on existing schemes and grow them instead of launching new fund offers (by the mutual funds industry),” Executive Director K N Vaidyanathan, told Press Trust of India here. The abolition of the entry load has led to a fewer number of new fund offers and it would help the industry by way of consolidation of products. Sebi abolished entry loads from August 2009 saving huge money of retail investors that was going to the intermediaries.

Vaidyanathan said Sebi was restraining mutual funds from launching new fund offerings at random. Mutual funds were misusing the new fund offer option to pay higher commissions. Following the tightening of norms, net inflow in NFOs has come down to Rs 5,000-crore this year against Rs 25,000-30,000-crore in earlier years, he added.

Investor education

“We are not keen on mutual funds launching new NFOs. We are asking 20 more questions, before somebody launches a NFO like how is it different from the existing schemes,” Sebi executive director pointed out. There is no impact of abolition of entry load on inflows into the existing schemes which are attracting funds of Rs 5,000-5,500-crore every month, he said. Over the last 12-months, all asset management companies have invested in investor education and in technology and there have been nearly 300 investor awareness campaigns done already, he said.

Source: http://www.deccanherald.com/content/121493/focus-growing-existing-schemes-sebi.html

AMFI guidelines on... Third-party cheques

Mutual fund purchases thus far could be made with cheques from one's own bank, third party cheques, DDs or Banker's Pay Order. AMFI recently issued new guidelines for mutual fund investments made through third-party cheques. With effect from November 15, mutual fund investments made through third-party cheques will not be processed. We discuss the new rule and answer investor queries.

What is a third-party cheque?

A cheque issued by and signed by any other person other than the first holder of the investment is a third-party cheque. When a payment is made from a bank account that is not held by the beneficiary investor, that is, the first Holder or the sole Holder, it is referred to as a “Third Party Payment”.

I wish to invest in my minor child's name. He doesn't have a Bank account. Can I issue my cheque for such an investment? Are there any exceptions to this rule?

There are exceptions to the rule, as mentioned below:

Parents: Payment may be made by parents/grandparents/related persons on behalf of a minor for a value not exceeding Rs 50,000 (each regular purchase or per SIP instalment)

Employers: Payment may be made by employers on behalf of employees under Systematic Investment Plans through payroll deductions.

Custodians: Payments made by custodians on behalf of FIIs or clients.

Such applications should be accompanied by PAN and KYC Acknowledgement of the person or entity making the payment on behalf of the investor and a declaration mentioning the relationship with the first holder.

These declarations are expected to be part of the application forms issued by mutual funds. Investors may contact the mutual funds for necessary guidance.

Can I provide a cheque leaf through another bank account which belongs to me, but different from the one mentioned in the Bank Mandate column of the application?

Yes. Investors may provide a cheque from a bank account different from the one mentioned in the bank mandate column which belongs to them. However, the investor's name should be printed on the cheque leaf. If the cheque leaf does not have the name printed, investors should submit a copy of the bank statement, attested by the bank manager as evidence of holding the account.

What if the Bank Account from which payment is made is jointly held?

In this case, the Beneficiary Investor, that is the first / sole holder must be one of the joint account. holders

Can I make the payment through a demand draft / pay order / banker's cheque?

Such applications will be accepted if the instrument is accompanied with a certificate from the issuing banker stating the account holder's name and the account number which has been debited for issue of the instrument. The account holder's name mentioned in the certificate should be that of the first holder. If the said certificate from the issuing banker is not attached, the application will not be processed.

Source: http://www.thehindubusinessline.com/iw/2010/12/19/stories/2010121951660800.htm