Liquid funds yield higher returns than savings account, finds study

Liquid funds, which typically invest in Certificates of Deposits (CDs) and Commercial Papers (CPs), have delivered superior returns compared with savings accounts of banks, according to a study by Crisil.

The study shows that over the last five years, liquid funds have given an annualised post-tax return of 5.78% while savings accounts have yielded just 2.5%. Currently, around R2.22 lakh crore of the total assets under management of the mutual fund industry (of R7.85 lakh crore) are parked in liquid funds.

Since the yield curve at present is inverted with short-term rates that are higher than long-term rates, the trend could continue for a while. Liquid schemes might turn out to be a better place to park one’s savings. That’s despite the fact that interest rate on savings bank accounts have been upped to 4% since the start of the month, from 3.5% earlier.

“Historically liquid funds have given higher returns against banks’ savings accounts and in the last few months returns have further improved thanks to short-term rates moving up,” says Mahendra Jajoo, ED and CIO, fixed income at Pramerica Mutual Fund.

In the last one year, liquid fund schemes, on an average, have given a return of over 6.84% with some schemes having managed as much as 7-8.5%.

Liquid schemes are aimed at providing easy liquidity to investors while preserving their capital and giving them modest returns. These schemes invest in safer short-term instruments such as treasury bills, CDs, CPs in the call money market.

Market participants say that as of now over 60-80% of the corpus is invested in bank CDs. Currently three-month bank CDs can yield almost 10% 9.8%, while companies are borrowing through CPs at 10.5% for three months.

According to data provided by the Association of Mutual Funds in India (Amfi) so far in 2011, liquid schemes have seen inflows of over R1.30 lakh crore. Dwijendra Srivastava, head, fixed income at Sundaram MF says, “It’s not just returns, these schemes are more tax-effective than saving accounts.”

Dividends come tax-free in the hands of investors though funds pay dividend distribution tax at the rate of 27.68% (25% plus, 7.5% surcharge and 3% education cess). Short- term capital gains tax is levied at the maximum marginal rate applicable while long-term capital gains tax is payable at the rate of 10% without indexation benefits and 20% with indexation benefits.

While market regulator Sebi has changed the valuation method for liquid schemes, in 2010, it hasn’t impacted inflows into liquid schemes.

“We have had time to reshuffle the portfolios and corporates and banks continue to remain key investors,” says Jajoo. Sebi had asked funds to mark to market money securities with a maturity of up to 91 days rather than securities maturing in 180 days.

Source: http://www.financialexpress.com/news/Liquid-funds-yield-higher-returns-than-savings-account--finds-study/797255/#

ICICI Prudential launches capital protection fund

ICICI Prudential Mutual Fund has unveiled a close-ended capital protection-oriented fund, called ICICI Prudential Capital Protection Oriented Fund - Series I - 24 Months Plan.

The tenure of the scheme is 735 Days. The new fund offer price for the scheme is Rs 10 per unit. The new issue will be open for subscription on June 3 and close on June 17.

The investment objective of the plan under the scheme is to seek to protect capital by investing a portion of the portfolio in good quality debt securities and money market instruments and also to provide capital appreciation by investing the balance in equity and equity related securities. The securities would mature on or before the maturity of the Plan under the scheme.

At present, two options are available under the scheme -- cumulative and dividend options. The dividend payout option is the only facility available under dividend option. The cumulative option shall be default option under the scheme.

The scheme will allocate upto 88% to 100% of assets in debt securities & money market instruments with low to medium risk profile. On the flipside it would allocate upto 12% of assets in equity and equity related securities with medium to high risk profile.

Entry load and exit load charge are not applicable for the scheme. The scheme is proposed to be listed on NSE. The minimum application amount is Rs 5,000 and in multiples of Rs 10 thereafter. The fund seeks to collect a minimum subscription amount of Rs 25 crore under the scheme during the NFO period.

The scheme's performance will be benchmarked against Crisil MIP Blended Index. The debt portion of the scheme will be managed by Chaitanya Pande while the equity portion will be managed by Mrinal Singh.

Source: http://www.moneyguruindia.com/article.php?cid=1270&id=3

Exchange Traded Funds: Avoid falling into the illiquidity trap

Over the past few months, exchange traded funds have increased in popularity among investors. In special demand are the gold exchange traded funds (ETFs), which have found many takers due to the surging interest for gold as an investment.

These passively managed funds offer many advantages to the investor. They assure convenience, transparency in pricing, means for diversification at a low cost and, supposedly, more liquidity. Unlike in a mutual fund, where units are allotted on the basis of the NAV at the end of the day, ETFs can be traded in real time during market hours.

However, not all ETFs muster a good volume on the exchange. In fact, many schemes suffer from a dearth of trading volume. Why is this? Lakshmi Iyer, head, fixed income and products, Kotak Mutual Fund, believes it will take time to create a vibrant, active market for ETFs as it is a relatively new concept.

"ETF is more of a push product than a pull one. Also, in India, traders and brokers are not sufficiently incentivised to create an active secondary market around it," she says. This poses difficulties for those who have already invested in these illiquid funds. Here's how a low trading volume could impact your ETF investment.

High impact cost: The most direct effect of the absence of liquidity is the undesirably wide difference in the bidding and asking prices, or impact cost, while transacting in ETFs. This is the gap between the price that the buyers are willing to pay for the units of an ETF and the price that the sellers are asking for. The greater the spread, the more you lose every time you transact on the exchange. How does this happen?

In a low-volume market, you could end up buying units at a price higher than that you would have wanted. On the other hand, you may be forced to sell at a price less than that you had hoped for. This is because there are no buyers (or sellers) willing to pay (or accept) the price at which you want to trade. A high impact cost can eat into your overall returns.

Gap between NAV and market price: The lack of liquidity may also lead to price manipulation and, thereby, create a gap between the net asset value (NAV) of the ETF and its market price. In some cases, the ETF may trade at a substantial premium or discount to the value of its underlying portfolio. For a buyer, this could mean that he could be paying much more for the ETF than the real worth of its holdings. For the seller, it could fetch much less than the actual worth of the basket of securities.

Lack of exit option in crisis: The stocks of most small- and mid-cap companies are characterised by low liquidity on the bourses. During a market turmoil, liquidity on these counters dries up as fast as the buyers, so the investors are unable to offload their shares before it is too late. Investors in illiquid ETFs could face the same situation. In such a case, one could eventually end up selling for much less than desired, or worse, get stuck with the fund. Though the offer documents of most ETFs contain provisions to buy back units directly from the investors (when there is no continuous trading for several days), it might become too late to do so.
What you should do

To avoid falling into this liquidity trap, don't follow the latest fads blindly. The rush to invest in gold ETFs currently is the best example of this phenomenon. Rarely do investors check the volume of a fund before buying it.

Second, do not be in a hurry to buy a new fund. Wait for a while to get an idea about its trading volume and take a plunge only after making sure that there is enough trading. The relevant data is available on the websites of both the stock exchanges, BSE and NSE. Also, don't go by the trading volume for a single day as it may not reflect the actual liquidity of the product. Check the volume over a span of at least a month.

Third, understand what drives the liquidity of the ETF and get in only if you are sure that there will be enough in the future. For example, a strong market maker system put in place by the fund house can generate sufficient liquidity. A market maker is someone who can buy/sell funds directly from the mutual fund house. He can also place buy and sell orders simultaneously at the prevailing market price so that there is enough opportunity for both buyers and sellers to get their orders.

The liquidity of the underlying portfolio of the ETF is another factor. For instance, ETFs that invest in large-cap companies or broad market indices are least likely to face liquidity problems. On the other hand, since small- and mid-cap companies are not traded as widely, the schemes that hold them may have a low trading volume.

Lastly, you can opt to place limit orders so that you don't lose out while trading in ETFs. This will ensure that your trade is executed only at the price you specify, otherwise you will have to make do with whatever price the market arrives at. Rajan Mehta, executive director, Benchmark Mutual Fund says, "Investors would do well to place a limit order closer to the real-time NAV for a fund. But keep in mind that a limit order may not always be executed in case of a low-volume ETF."

Source: http://articles.economictimes.indiatimes.com/2011-05-30/news/29594823_1_etfs-gold-exchange-exchange-traded-funds

India’s mutual fund sector struggles

Earlier this month, an Indian newspaper quietly published an article that seemed to say a lot about the country’s struggling mutual fund industry and the difficulty for foreign operators entering the sector.

Dutch financial group Aegon, said the report in the English language business daily, The Economic Times, had surrendered its asset management licence after a joint venture with domestic group Religare had failed to get off the ground.

While Aegon has not responded to requests for comment, the affair led to speculation that its fortunes reflected not only the breakup of its partnership but also India’s increasingly tough environment for mutual funds.

Whether this speculation had any foundation or not, what is certain is that regulatory changes 18 months ago that practically eliminated upfront fees for mutual funds have left these once popular financial products struggling to find traction. Gross inflows into mutual funds today have fallen below pre-global crisis levels.

“Given the economic growth in India and the increased need for financial services, one would have expected increased demand for mutual funds as well. In that sense, it is a worrying trend,” says Harshendu Bindal, president of Franklin Templeton Asset Management.

India’s fund management industry should be one of the most promising in Asia given its potential for growth, with the sector accounting for less than 4 per cent of household savings.

Assets under management rose in the quarter ended March 31 compared with December by 3.8 per cent to Rs7,040bn ($156bn), according to the Association of Mutual Funds of India. This was on the back of flows into money market funds as interest rates increased.

But it did not compensate for a 6 per cent drop in the December quarter compared with a year earlier.

Most fund managers put these sluggish flows down to the restrictions on frontloading of fees. These fees used to be paid largely to the industry’s army of distributors, who would then eagerly generate more business for the funds. Now distributors have moved on to insurance-linked products, which are not subject to the same restrictions.

Regulators counter that the purpose of the changes was to separate the advice and distribution functions. Combining these represented a conflict of interest for the distributor.

Ashu Suyash, country head of India for Fidelity International, says the removal of entry load will help the industry in the long term but the short -term impact is to limit its expansion.

“The drop in incentives as a result of the entry load ban has impacted the ability and willingness of independent financial advisers, several regional and national distributors and banks to promote mutual funds versus other financial products like unit-linked plans,” says Ms Suyash.

Others say the mutual fund industry must take some share of the blame. Some asset management companies focused on launching fresh products to keep tapping new investors rather than on long-term performance. Distributors, meanwhile, encouraged churn in their customers` portfolios to generate new entry load fees for themselves. A recent Morgan Stanley report showed that turnover – buying and selling of mutual funds – had fallen sharply since the new rules were introduced.

“About 50 per cent of schemes have underperformed, with varying degree, to their respective benchmarks,” says Virendra Jain, president of Midas Touch Investors Association.

The industry`s fortunes have also not been helped by a lacklustre stock market. The benchmark Sensex index of the Bombay Stock Exchange has lost nearly 13 per cent in the year to date.

The reduced returns are leading fund managers to defect to other areas of the financial sector. About 65 industry executives have left the sector in the past two years, according to Value Research.

“One big reason is that relative to funds, the regulatory environment in insurance and other financial services has historically been less tight,” says Dhirendra Kumar, chief executive of Value Research. “This sort of regulatory arbitrage is unfortunate but is a fact of life in India.”

So far, however, there is little sign that other foreign houses will follow the example of Aegon and exit the market.

“While there have been a select few who have rolled back their plans, we believe that has got to do more with their own strategic objectives rather than the market environment,” says Mr Bindal.

Hope may be around the corner. Indian media have reported that the Securities and Exchange Board of India, the industry regulator, is considering a new incentive structure for agents that might involve a service fee for distributors and a commission paid by the funds. In return, the distributors would have to submit to stricter supervision.

But until this relief comes, the industry will have to focus on providing better long-term value for customers. Only once the sector gets through this period of consolidation will it be able to persuade more Indian investors to switch their hard-earned savings from property or gold to stocks.

Source: http://www.ft.com/intl/cms/s/0/1384d826-888b-11e0-afe1-00144feabdc0.html#axzz1NoCBnZEm

Indian markets may be guided by monsoon movements

Equity markets

Recovery in the global markets helped Indian investors recover part of their losses, as the Sensex ended at 18,266.10 points on Friday, a mere 60 points, or 0.33%, down from the week before.

Results of many corporates were not up to the mark and the markets punished those scrips. Stocks of SBI , Infosys and BHEL were battered after the companies announced results that were disappointing.

The stocks of many companies are down 8% to 10% in response to below-expected numbers. FIIs, too, have been net sellers in May. "The coming quarter is going to be tougher for corporates, since the cost of capital has moved up. This will result in lower margins," says Sadanand Shetty, fund manager, Taurus Mutual Fund.

Globally, too, there are a lot of concerns with the Eurozone problems surfacing again. As May comes to an end, the markets are likely to take cues from auto sales numbers. This could give an indication of consumer demand. The markets will also closely watch monsoon forecasts. A good monsoon could help push up consumer demand, which is crucial for the economy.

Debt markets

With inflation continuing to be higher than estimated, all eyes are now on the central bank, which is likely to meet on June 16 to decide on the next course of action. Most experts feel the central bank will be forced to hike interest rates by at least 25-50 basis points in a gradual manner over a period of time. Fixed income investors may, therefore, be better off investing in liquid and liquid plus funds. Those with a one-year view could consider investing in FMPs, which are more tax efficient than fixed deposits.

Gold

Speculation that China will increase its purchase of European bonds to ease the region's debt crisis led to lower demand for the yellow metal. In India, too, there are few buyers at high prices. However, in the short-term, uncertainty in Eurozone and Fed's action post QE2, which is likely to end in June could make investors come back to the yellow metal. This could move up gold prices marginally in the short term.

Source: http://economictimes.indiatimes.com/markets/analysis/indian-markets-may-be-guided-by-monsoon-movements/articleshow/8643015.cms

Amundi SA to Acquire 37% Stake in SBI Funds

SBI Funds Management Private Limited (SBI FMPL), the asset management company of the SBI Mutual Fund, is a joint venture between State Bank of India (SBI) and Societe Generale Asset Management S.A. (SGAM), a subsidiary of Societe Generale S.A (SG).

On 9 July 2009, SG and Credit Agricole SA, entered into an agreement to undertake a global merger of their fundamental asset management business. Pursuant to the Global Merger, which has completed on 31 December 2009, SBI FMPL will shortly become a joint venture between SBI and Amundi S.A. (Amundi), a leading European asset management company. Amundi will, through a wholly owned subsidiary know as Amundi India Holding (AIH), acquire from SGAM, SGAM's entire shareholding in SBI FMPL aggregating to 1,850,000 equity shares constituting 37% of the paid-up equity capital of SBI FMPL and consequently, replace (through AIH) SGAM as a shareholder of SBI FMPL (Transaction).

Amundi is the new joint venture partner of SBI in SBI FMPL. The proposed transfer of shares of SBI FMPL by SGAM to AIH, a wholly subsidiary of Amundi, will result in a change in controlling interest of SBI FMPL.

The Securities and Exchange Board of India gave its nod to this on 24 March 2011.

Source: http://www.adityabirlamoney.com/news/480385/10/22,24/Mutual-Funds-Reports/Amundi-SA-to-Acquire-37-Stake-in-SBI-Funds

UTI Dividend Yield Fund declares tax-free dividend of 5%

UTI Mutual Fund today declared tax-free dividend of 5 per cent for its scheme UTI Dividend Yield Fund.

The record date for the dividend is May 30, the company said in a statement.

All unit holders registered under the dividend options of the scheme as on May 30 would be eligible for dividends. Also investors who join the dividend option of the scheme on or before the record date will be eligible for the dividend, it added.

As on May 24, the NAV per unit of UTI Dividend Yield Fund was Rs 14.34 under the dividend options. UTI-Dividend Yield Fund is an open-ended equity oriented scheme. The investment objective of the scheme is to provide medium to long-term capital gains and dividend distribution.

Source: http://articles.economictimes.indiatimes.com/2011-05-25/news/29581715_1_tax-free-dividend-dividend-options-record-date