Rise in key rates means better returns on FMPs

Investors in debt mutual funds find themselves in a sweet spot each time there is an announcement of a rate rise. Fixed maturity plans (FMPs) especially become more popular because of the tax benefits these offer.

At present, investors in an FMP with an all-bank certificate of deposit (CD) portfolio can expect an annual return of 9.5 per cent. For a portfolio, which includes commercial papers (CPs), the expected returns can be 9.75 per cent.

With the Reserve Bank of India increasing the repo and reverse repo rates by 50 basis points on Tuesday, market experts said returns in an all-bank CD portfolio could rise 15-20 basis points. Similarly, for a portfolio with CPs, the rise could be another 25-30 basis points. For investors, this would translate into returns of almost 10 per cent.

There are tax benefits, as well. That is, there is a double inflation indexation benefit, if the scheme matures slightly over a year. For instance, if one invests in an FMP in May 2011 and it matures in June 2012, there will be indexation benefits for two years — 2010-11 and 2012-13. The net tax rate on capital gains = 10 per cent without indexation and 20 per cent with indexation.

Compared with fixed deposits (FDs), FMPs look quite attractive. It is because although some banks such as Karur Vysya Bank are offering up to 9.5 per cent for one year, the interest income will be added to the total income of the assessee and taxed, according to the slab. Clearly, FMPs score over FDs in terms of returns.

But FMPs are riskier in nature and lack liquidity. Since they invest in CPs, there is a chance of default in bad times. In October 2008, Rs 1.2 lakh crore was withdrawn from these products, amid fears that many fund houses had invested their assets under management (of a single scheme) entirely in a single sector/company or few sectors/companies.

After the panic outflow, the Securities and Exchange Board of India (Sebi) came with strict guidelines where fund houses were banned from giving indicative portfolios and indicative returns. In addition, the listing of FMPs on the stock exchanges was made mandatory.

The latter move has reduced the liquidity of the product. Investors who purchase FMPs and wish to exit in the interim have to sell through the exchanges. Given the secondary market of FMPs is not robust, investors may have to exit at a discount. In comparison, one can pay a small penalty and liquidate the FDs.

In crux, investors need to be careful before buying FMPs. Although the product is tax-efficient, it is riskier and less liquid in nature.

Source: http://www.business-standard.com/india/news/rise-in-key-rates-means-better-returnsfmps/434366/

Sensex may slip into 'bear' phase as cost of funds rises

Indian equities, which recorded the longest losing streak in nine years, run the risk of slipping into a bear market as investors fret about rising funding costs with policymakers determined to rein in prices sacrificing economic growth.

"There is a possibility of another 10% correction in the Indian market near-term, as the impact of the RBI's rate hike sets in," said Saurabh Mukherjea, Head of Equities, Ambit Capital.

India's Sensex is the worst performer in Asia this year with a 10% loss after returning 17% last year. Investors worry that steep valuations, possible slowdown of the economy, could squeeze corporate earnings . A 20% fall in key indices is broadly accepted as a bear market.

The BSE's 30-share Sensex fell 65.33 or 0.35%, to 18469, extending losses for the eight straight day. The NSE's 50-share Nifty dropped 28.10 points or 0.50%, to 5537.15.

The RBI on Tuesday raised the rates for the ninth time in 13 months to fight inflation that is well above the comfort level. Governor Duvvuri Subbarao said, "Inflation is inimical to sustained growth as it harms investment by creating uncertainty. Bringing them down, therefore, even at the cost of some growth in the short-run, should take precedence."

Economic growth forecast for this year is at 8%, down from 8.6% last year. Foreign funds have pulled out close to 2,000 crore in the last few days, including Wednesday's provisional figures.

Analysts are expected to downgrade earnings for companies as they may see slower sales increases and a squeeze in profitability with borrowing, and raw materials eating up cash.

With easy money, the key driver of Indian equities since March 2009, becoming a distant dream even in the West when the US ends the so called QE2 monetary expansion, the pressure on Indian shares could intensify.

"The end of QE2 (quantitative easing2) in June will be closely watched because risk appetite could reduce in an environment of tight liquidity," said Navneet Munot, chief investment officer, SBI Mutual Fund.

But, a sustained economic growth requires some tough measures to cool prices.

"An economic slowdown now is needed to control inflation and investors may need to brace for some pain in the short-term," Anand Shah, chief investment officer, BNP Paribas Mutual Fund.

Source: http://economictimes.indiatimes.com/markets/analysis/sensex-may-slip-into-bear-phase-as-cost-of-funds-rises/articleshow/8163997.cms

Sundaram Mutual Fund launches Equity Plus scheme

Sundaram Mutual Fund today announced the launch of Sundaram Equity Plus, an open-end scheme. The scheme will open for subscription on May 4 and close on May 16. Sundaram Equity Plus aims to invest between 65-85 per cent in equity to give all the tax advantages of a designated equity fund and a maximum of 35 per cent in gold ETF. The scheme will primarily focus on opportunities in Indian equities with the addition of gold-ETF to provide diversification and exposure to the relative attractiveness of gold in certain phases, Sundaram Mutual Fund's Director-Sales & Marketing, Sunil Subramaniam told reporters here. The investors will get benefit from equity and gold ETF- two asset classes in terms of capital appreciation and avail tax benefits, Subramaniam said. The performance of the scheme will be benchmarked to the S&P CNX Nifty index for the equity and equity related instruments and to the price of gold for the investments in gold-ETF, Sundaram Equity Plus Fund Manager, Srividhya Rajesh said. The objective of this scheme would be to seek capital appreciation by investing in equity and equity-related instruments listed in India to the extent of at least 65 per cent and in gold-ETF up to 35 per cent, Rajesh said. Sundaram Mutual Fund, a major player in the fund management has an average assets under management (AUM) of about Rs 14,556 crore as on April 2011.

Source: http://ibnlive.in.com/generalnewsfeed/news/sundaram-mutual-fund-launches-equity-plus-scheme/671841.html

DSP BlackRock brings its foreign funds to India

Apart from gold funds, foreign funds—especially those that invest in Brazil—seem to have become the flavour of the season

DSP BlackRock Mutual Fund has filed an offer document with the Securities and Exchange Board of India (SEBI) to launch three global funds—DSP BlackRock Latin American Fund, DSP BlackRock World Agriculture Fund and DSP BlackRock New Energy Fund. All three are open-ended fund of funds (FoF) schemes investing in international BlackRock funds.

Global funds offer diversification benefits, by investing in stocks (bio-tech, technology, energy, agriculture and mining etc.) which an Indian investor may not be able to buy by just investing in domestic schemes. However, funds that put your money in other countries don’t necessarily offer another round of diversification. In fact, markets in countries around the world have been moving in sync. In April 2009-March 2010 the Sensex was up 77% while the MSCI Emerging Markets Index was up 74%. Non-correlated market movement is not easy to find. This is because an enormous pool of global capital is sloshing around the world looking for a slightly higher return. As with other kinds of products, foreign funds are not about returns alone. There are risks too. You are exposed to all kinds of risks unique to different countries, plagued with their own set of issues.

In 2007, as many as eight funds were launched that planned to invest overseas. These eight funds, on an average, have given returns as low as 0.1%. These include ICICI Prudential Indo Asia Equity Fund-Ret with 2.6% return; Birla Sun Life International Equity Fund-Plan A (-0.7% return); Birla Sun Life International Equity Fund-Plan B (-1.6% return); Kotak Global Emerging Market Fund (0.4% return), Fidelity International Opportunities Fund (8.7% return); Tata Indo-Global Infrastructure Fund (-7.5% return) and BNP Paribas China-India fund with -3.4% return.

DSP BlackRock Latin American Fund plans to invest in units of BlackRock Global Funds Latin American Fund (BGF-LAF). It has given a return of 14.61% over the last 5 years and 15.27% since inception (3 January 1995). This fund is in turn benchmarked to an index known as DAX Global Agribusiness which has given a return of 13.37% in the last 5 years and 13.31% since inception while the Sensex and Nifty have returned 11% (CAGR, Compounded Annual Growth Rate) over the past 5 years. And the Sensex and Nifty have returned 10% (CAGR) since January 1995.

DSP BlackRock World Agriculture Fund plans to invest in units of BlackRock Global Funds World Agriculture Fund (BGF WAF). It has given a return of 20.29% since inception. This fund is benchmarked to an index known as DAX Global Agribusiness, which has given a return of 21.14% since inception.

DSP BlackRock New Energy Fund plans to invest in units of BlackRock Global Funds New Energy Fund (BGF-NEF). It has given a return of -4.32% in last 5 years and -5.76% since inception. This fund is benchmarked to an index known as MSCI World Net Index which has given a return of -0.03% over the last 5 years and 3.75% since inception. As you can see, the performance of BlackRock New Energy Fund is not very exciting, to say the least.

Another issue is that it is hard to find the details of where exactly your money is being invested. Even Moneylife could not find sufficient data to analyse these international funds. We could only get the details of BlackRock Latin America fund. The top five holdings of BlackRock Latin America Inv A are Vale S.A. ADR, Petroleo Brasileiro SA Petrobras ADR, Itau Unibanco Holding SA ADR, Bank Bradesco ADR (all from Brazil) and America Movil S.A.B. de C.V. ADR L of Mexico.

Source: http://www.moneylife.in/article/dsp-blackrock-brings-its-foreign-funds-to-india/16136.html