It’s a suitable time to cherry pick stocks for medium term

Current valuations have just reached a 10-year average price-to-earnings ratio of the market and corporate India has now tightened its belt. Ashutosh Bishnoi, acting chief executive officer, L&T Mutual Fund, tells FE’s Saikat Neogi that it is the right time for investors to do stock-picking for the medium term. He suggests that investors look at companies with strong business models and visibility of sustained earnings. Edited excerpts:

Do you think Indian investors are sitting on cash and waiting for more positive cues before investing in equities?

In times of uncertainty, retail investors tend to ‘fly to safety’. In the Indian context, they have typically moved to high-yielding deposits and gold. Technically, I suppose, you could call them ‘cash’. Historically, the retail investor’s asset allocation towards equities has been dropping. In the last one year also, their participation has been muted. Now, after market correction and reasonable valuations, we expect participation to increase.

Since one-year forward valuations have come back closer to the average levels of valuations, how are you looking at stock selection and what sectoral advice are you giving to your investors?

The valuations across sectors have factored in most of the negatives in terms of high interest rates, growth expectation and global volatility. The current valuations have just reached the 10-year average PE of the market. At the same time, corporate India has, since the 2008 global financial crisis, learnt to tighten its belt and tried to become more efficient. We believe that this is the time to start considering a stock-picking type of portfolio for the medium term. Companies with strong business models and visibility of sustained earnings through times of economic uncertainty are likely to be available inexpensively in volatile markets. We are likely to find these companies in the domestic consumption and infrastructure sectors.

How are foreign institutional investors (FIIs) looking at India and do you expect them to go overweight in debt in the near and medium term?

India offers a great structural long-term investment opportunity. We expect FIIs to increase their allocation to India once normalcy returns in the euro area. In the new year, we can expect some of the smart money coming in into emerging markets, including India, and that’s possibly when you will see some upside. Once FIIs start flowing in and you start expecting better returns, I think that will be a self-fulfilling foretelling and one can expect a better upward move than what most of us are anticipating right now. On the debt side, the FII limits are already full; that could be taken as an indication of their growing appetite for Indian debt.

How do you see the mid- and small-cap segments currently and will they be able to match the returns of some years back?

Currently, this segment offers great value and, over a long-term period, we expect it to deliver superior returns. However, one has to cherry-pick the portfolio here. Mid- and small-cap segments seldom offer across-the-board opportunities.

Do you think L&T MIP—Wealth Builder Fund would offer risk-adjusted returns and serve as an alternative under fixed-income products?

With long-term product performance and highest standards of governance, L&T Mutual Fund is well poised to be an important player in this growing industry.

The fund is an income scheme with a debt exposure of 70-100% and equity exposure can be up to 30%. Fixed income allocation of the scheme could be invested in corporate deposits, commercial paper, government securities, money market and other debt instruments, which aim to generate returns while moderating credit and interest rate risk. The scheme could be suited for those investors who are keen on taking advantage of the interest rate movement and the possible opportunity in the current equity markets.

The L&T MIP—Wealth Builder Fund is an aggressive MIP fund, wherein the fund can take exposure in equity up to 30%.

Through this fund, investors can benefit from both asset classes (debt and equity). We believe both these asset classes offer great opportunity at this time as interest rates have risen and equities are reasonably valued.

Source: http://www.financialexpress.com/news/It-s-a-suitable-time-to-cherry-pick-stocks-for-medium-term/861203/0

It’s a good time to introduce market-oriented products

IDBI Mutual Fund MD and CEO Debasish Mallick says current market conditions is a good opportunity to introduce equity oriented mutual fund schemes. However, in an interview with Chirag Madia, he says indian markets will take some time to recover fully from its high till the time European debt issues are resolved.

IDBI MF is a relatively new player in the industry. How is the company dealing with regulatory changes made in the last three years?

As a new player, there will always be challenges as we don't have large assets under management (AUM) to begin with. Being new also means that we would have to introduce new products. Currently, we have six funds out of which 3 are retail funds.

In the current financial year, we have plans to come out with products from debt as well as equity side. We look at current market condition as a good opportunity to come with market-oriented products and we expect inflows to get stabilised in the days to come.

What is your distribution strategy for the fund house ?

Our largest distributor is IDBI bank (our sponsor). IDBI bank has about 850 branches, out of which over 650-700 branches are marketing our MF products. We want to engage more with IDBI bank, but that has not be possible to the desirable extent till now primarily because we had limited number of of products. We require more products which investors need. IDBI is and will continue to remain largest distributors for us. We are actively looking at engaging institutional distributors.

Do you think that smaller distributors will again start selling MF products ?

After the ban on entry load in August 2009, there was a need for incentivising the IFAs and this move of charging transaction is in the right direction. But it will take some time to know how these regulations play out. While it will be difficult to go back to the entry load structure, under the given circumstances, this is also the best thing that could have been done by the regulator.

Besides there are quite a few structural changes which are going to take place in the distribution segment, which will lead to more robust distribution network.

When do you look at break-even for the fund house ?

Break-even is likely to take some time, but question remains how long? It will depend on how the products are marketed and managed. It should happen once I do good work on mobilisation as well as deployment by giving superior returns. Then, more investors will come into the fund which can result in earlier break-even. We are here for the longer haul and would like grow at a faster ace.

Interest rates have remained at elevated levels, do you think it has peaked out or do you see more hikes in the months to come ?

Its a policy move to push up the interest rates higher. I have serious doubt whether it can be rolled back in a short period of time. I feel perhaps one or two more quarters where there could be at least some more hikes in the benchmark rates. Primarily this could happen because inflation is still disturbing there. Secondly, there would be additional borrowing by the government, which has already been indicated by them.

However I don't think there will be a hike of 50 basis points at one go; but there could be two hikes of 25 basis points in the months to come.

I think atleast one rate hike is due in the coming policy meet and other hike in December.

Source: http://www.financialexpress.com/news/its-a-good-time-to-introduce-marketoriented-products/861246/0

Market-linked retirement options to look at

NPS works best for conservative investors, risk takers can look at equity-diversified MFs

Aquery that we often receive at Mint Money is how to build a retirement corpus—while some plan early retirement, some plan to follow the course. Regardless of when you decide to hang up your boots, the one need you will have to service is periodic income. In order to maintain your lifestyle after retirement, one thing that you need to do is to start saving as early as possible. Another factor you must consider is to get a return kicker by not just remaining invested in debt instruments, but also looking at some market-linked investments.

In fact, some retirement products are designed in a way to accommodate debt as well as market-linked elements. Here are the options you can look at.

Mutual fund products

Mutual funds (MFs) offer two kinds of retirement products—ones that offer tax deduction and other than don’t. Let’s call schemes that offer tax deduction type I and those which do not type II schemes.

Besides the difference in tax treatment, type I and type II schemes’ investment pattern differs significantly. While type I schemes primarily invest in debt, irrespective of the age of investor, type II schemes mainly invest in equities until the time the investor nears the age of retirement. Typically, after the investor crosses 60 years of age, the fund begins to invest primarily in debt in order to secure your capital. You can make systematic or lump sum withdrawal during this stage.

There are two type I schemes in the market: Templeton India Pension Plan and UTI Retirement Benefit Fund. Both the schemes invest 40% of the corpus into equity and the balance into debt. These funds are relatively safe as a major part of the corpus is invested in debt, but they do not guarantee your capital.

On the other hand, type II schemes are being offered by several MF companies, including Birla Sun Life Asset Management Co. Ltd and ICICI Prudential Asset Management Co. Ltd. The newly launched Tata Retirement Savings Fund by Tata Asset Management Ltd also falls in the same category. Since type II schemes mainly invest in equities, the long-term returns may be higher as compared with type I scheme. “In the long run, equities are likely to yield higher returns compared with any other investment class and since our scheme investments in equities are higher compared with some other MF schemes, insurance plan or even National Pension System (NPS), it suits investors looking for higher appreciation,” says Bhupinder Sethi, fund manager, Tata Retirement Savings Funds.

Assuming the same rate of return, type 1 schemes are better because of the tax deduction factor. Sample this: you invest Rs. 25,000 every year for 20 years and the scheme charges an expense ratio of 2%. At 10% per annum your corpus would be Rs. 12.06 lakh. In a type 1 scheme, if you factor in the tax deduction, you will save Rs. 7,725 every year assuming you are in the highest tax bracket of 30.9%. Over 20 years, this would add up to Rs. 1.55 lakh.

Type 1 schemes tend to lose their edge only if the returns from equity are very high. For instance, equity funds’ yield would be higher if they return 15% as compared with type 1 funds that yield 10%. Hence, the choice between the two depends on your risk profile.

The problem: Both type I and type II schemes discussed above suffer a problem—they have an easy exit option. By paying an exit load, you can redeem your investments and this can dent your retirement savings. Says Sethi, “Ideally, only a partial withdrawal should be allowed but the Indian market would take more time to mature to that level.”

Insurance products

Pension products from insurance companies have a better cost structure, but owing to a mandatory guarantee on the capital, pension policies invest heavily in debt products.

Let’s sample a policy from the Life Insurance Corp. of India (LIC). LIC’s Pension Plus is a regular premium policy that offers two options—one invests up to 100% in debt, while the other limits debt exposure to 65-85%. It has a premium allocation charge of 6.75% in the first year, 4.5% from the second to fifth years and 2.5% thereafter. The fund management charge is 0.7% for the debt fund and 0.8% for the mixed fund.

Assuming a return of 10% over 20 years on an investment of Rs. 25,000 every year, the policy will return Rs. 13.16 lakh. Throw in the additional Rs. 1.55 lakh—the premiums of pension policies qualify for a tax deduction under section 80C—and the total corpus at the end of 20 years stands at Rs. 14.71 lakh.

The problem: Though pension policies have a friendlier cost structure, they may not turn out to be an effective investment vehicle over the long term. According to the guidelines of the Insurance Regulatory and Development Authority, insurance companies need to provide a minimum guaranteed return of 3-6% on the total premiums paid. To fulfil the requirement, insurance companies invest predominantly in debt and hence the returns are conservative. “Under the present structure, retirement products offered by insurance companies would not be able to provide high return. The cost structure of insurance products too is higher as compared with other products such as the NPS. Hence, even conservative investors should not invest in these products and would be better off investing in products like NPS,” says Satkam Divya, business head, Rupeetalk.com, a Net Ambit Venture.

National Pension System

Like MF and insurance products, NPS also invests in a mix of equity and debt. The scheme allows for three investment options: equity (E) in which a maximum of 50% can be invested, fixed income instruments other than government securities (c) and government securities (G).

What compensates for lower equity investment by NPS (up to 50%) is its low cost structure. Among all retirement product, NPS charges the least. The costs in NPS are a mix of fixed and variable costs. While the fixed costs fail to make any visible dent on the return, especially if the investment corpus is large, even variable costs are minimal. The fund management charge is as low as 0.0009%. Hence, your investment of Rs. 25,000 per year for 20 years at an annual return of 10% per annum would give you Rs. 15.45 lakh.

Also, since NPS provides tax deduction, indirect savings can yield another Rs. 1.55 lakh. And it is not the cost alone that pleases you; the structure of NPS is such that it allows for no leakages. The scheme has a strict lock-in till 60 years of age. If you wish to withdraw before you turn 60, the system discourages you by annuitizing at least 80% of your corpus: it buys an annuity product that gives periodic income.

What should you do?

If you are a conservative or balanced investor, NPS is best suited for you. Type 1 MF schemes and debt-oriented pension plans are best avoided. For risk takers or equity investors, we recommend equity diversified mutual funds for wealth accumulation.

Source: http://www.livemint.com/2011/10/17213335/Marketlinked-retirement-optio.html?h=B

Tata Mutual may seek tie-ups to tap QFI

Tata Mutual Fund may go in for strategic tie-ups that will offer opportunity to qualified foreign investors (QFIs) to tap the Indian market.

In order to promote the portfolio investment route, the Government last month allowed QFIs -- individual, group or association -- to invest up to USD 13 billion in equity and debt schemes of mutual funds in the infrastructure sector.

Besides, with an aim to further liberalise the capital market, the Government is contemplating to allow foreign individuals to buy equities directly in stock markets.

"We are looking at strategic partnership and at ways to have access to newer markets," Tata Asset Management president and chief executive officer Sanjay Sachdev said.

"It will happen ... it is a matter of time. We are working on that," Sachdev said on the sidelines of launch of 'Tata Retirement Savings Fund' -- an open-ended scheme.

Sebi had recently said that efforts were being made to sort out a few concerns including KYC issues to make QFI entry into Indian mutual funds a reality.

Asset under management of the Tata Mutual house was Rs 23,000 crore as on September, and offshore AUM Rs 2,800 crore.

Speaking about the mutual fund industry, Sachdev said it was expected to grow 20 per cent in next five years and welcomed combined Know Your Customer (KYC) norms planned by the capital market regulator Sebi.

On the new Retirement Saving Fund, Sachdev said the number of senior citizens had gone up from 71 million in 2007 to 100 million in 2011 and there was need for a fund to meet retirement goals.

The NFO of the fund was open and would remain so till October 21.

Source: http://www.moneycontrol.com/news/mf-news/tata-mutual-may-seek-tie-ups-to-tap-qfi_600721.html