Know your fund fact-sheet

Retail investors may not have the wherewithal or time to study and grasp the 40-50-page-long fund offer document / fund information document of a mutual fund. For passive investors the next best alternative is the fund fact-sheet. A fact-sheet is a monthly report prepared and published by a mutual fund for each of its fund offers. 

A fact-sheet is a single-page document that explains all pertinent information on the fund and is easily accessible on mutual funds Web sites. Retail investors are advised to read and understand the fact-sheet before making any investment decision. Anyone with a basic knowledge of the securities market can easily understand a facts-sheet. This article dissects the important terms used in such documents.

Assets Under Management

AUM is the market value of assets a mutual fund manages on behalf of its investors. There are funds such as Baroda Pioneer Balance Fund, with an average AUM of Rs 2.6 crore (August 2011), on one side of the spectrum and others such as ICICI Prudential Dynamic Plan, with an average AUM of 3,814.40 core (July 2011), on the other side.

The bigger the fund size, the more the fund can diversify its portfolio. At the same time, large funds may be difficult to manage.

Changes in AUM can be a good indicator of the fund's performance, and can be gleaned by comparing the current month's fact-sheet with previous month's. If the increase in AUM is higher than the NAV returns over the same period, it means that the fund has received inflows, apart from performing well.

Portfolio

Mutual funds are expected to have a diverse portfolio. The portfolio provides information on where funds are invested, what proportion of funds is invested in various sectors and in specific companies. This will help understand the fund's risk profile and strategy.

Portfolio Turnover

Portfolio turnover is the rate of trading activity in a fund's portfolio of investments. It reflects how actively the fund is managed. Portfolio turnover ranges from 0.10 times to three times of the AUM. The more the turnover, the higher a fund's trading costs (brokerage, transaction tax, capital gains tax). Trading costs reduce net asset value (NAV) returns delivered by the fund. High performing funds have an average portfolio turnover of 0.5- to 1.

Expense Ratio

The expense ratio is the proportion of assets used to pay marketing costs, distribution costs and management fees. The expense ratio varies between 1.75 per cent and 2.5 per cent for equity funds and between 1.5 per cent and 2.25 per cent for debt funds. The higher the fund's AUM, the lower the expense ratio. Over a long term of five or more years, a one per cent difference in expense ratio may eat up to 10 per cent of your returns. An important point to be considered here is that expenses are deducted whether a fund delivers good returns or not.

Load

A load is a commission charged at the time of purchase (entry load / front end load) or sale (exit load / back-end load) of mutual fund units. In India, SEBI abolished entry load from August 1, 2009. The majority of Indian mutual funds charge exit loads ranging from 0.05-1 per cent. If investment is held for more than one year many funds exempt exit load.

Return

Returns are reported — compounded and annualised. Generally, returns are reported monthly, half year, last one year, last three years, last five years, and since inception.

If a fund reports 18.6 per cent since inception (1996) it means Rs 100 invested in 1996 is now worth Rs 1197.6. Past performance, though, may or may not be sustained in future.

Standard Deviation

Standard deviation (SD) is a measure of volatility and quantifies the fluctuations of NAV movements. A high SD denotes high risk. Suppose a fund has a SD of 7.9 per cent and returns of 15.6 per cent it means the return may fluctuate between 7.6 per cent and 23.6 per cent. Another fund with 24.10 per cent SD and 15.63 per cent may see its return fluctuate between -8.5 per cent and 39.7 per cent.

Funds with low SD are preferred. Few funds report yearly annualised SD where as others report annualised based on last 36-month data points. Caution, therefore, needs to be exercised while interpreting SDs.

Risk-Free Rate

The risk-free rate represents the interest that an investor would expect from an absolutely risk-free asset. Such a rate is used in risk-adjusted performance measures like Sharpe and Treynor ratios. For calculating Sharpe ratio different mutual funds use different risk free rates.

Sharpe Ratio

Sharpe ratio is one of the most popular risk-adjusted portfolio performance measures. It takes into consideration the return on portfolio, the risk free rate (opportunity cost), and SD. Sharpe ratio is calculated using the formula (Return on Portfolio – Risk Free Rate) /SD. The numerator in the formula denotes the premium that investors gain for taking the risk.

The Sharpe ratio for Axis Equity Fund, for instance was -0.36 as of July, considering a 364-day T-bill as risk-free rate. For the same period, assuming a 91-day T-bill as the risk-free rate would throw a sharpe ratio of -0.48.

In general, the higher the Sharpe ratio the better the fund returns. The point to be noted here is, to calculate Sharpe ratio funds use different time periods. Axis Equity fund use annualised data where as BNP Paribas uses the last three-year data. Hence comparison is nto easy unless one takes similar data points to calculate onself.

Benchmark

Mutual funds use benchmark index to compare the fund performance. Depending on fund portfolio and investment objective, mutual funds choose an appropriate benchmark index. BNP Paribas Equity use S&P CNX Nifty, ICICI Prudential discovery fund use CNX MIDCAP Index, Axis Tax Saver fund use BSE 200, and Franklin India Prima Plus use S&P CNX 500. Benchmark index is also used to calculate the Beta of the fund.

Treynor's Ratio

Treynor's ratio is another popular risk-adjusted performance measure. Treynor's ratio is calculated using the formula: Return on Portfolio – Risk Free Rate / Beta. The calculation and uses are similar to Sharpe ratio except that Treynor ratio uses market risk (beta) where as Sharpe's ratio uses individual portfolio risk (SD).

BETA

Beta measures the co-movement between fund and its benchmark. A beta value of 1 represents that the fund will move in tandem with benchmark index. A beta of less than 1 means fund is less volatile than the benchmark. A beta of greater than 1 indicates that the fund is more volatile than the benchmark. Axis equity fund has beta of 0.89 (July, 2011).

ICICI Prudential Services Industries fund has a beta of 1.07 (Sep, 2011). Higher beta value reduces risk-adjusted returns. For example, if we consider Franklin India Flexi Cap Fund three-year annualised return of 17.2 per cent, risk free rate of 7.9 per cent and beta of 0.86 as of July, the risk adjusted portfolio return (Treynor's ratio) is 10.8 per cent. If we assume beta value as 1.07 then the risk adjusted portfolio return will be 8.70 per cent.

R-Squared

R-Squared represents the fund movements that can be explained by movements in benchmark index. R-Squared value ranges between 0 and 100. A high R-Squared (above 85) indicates the fund's performance patterns are similar to benchmark index.

Source: http://www.thehindubusinessline.com/features/investment-world/mutual-funds/article2580346.ece

Look beyond past returns to choose the best fund

The last 4-5 years have been very interesting for the Indian equity markets. They tested the patience of investors and merit of fund managers. The extremes of highs and lows made investors sit up and closely watch the stocks picked by their funds and fund managers. Some schemes beat the benchmark indices in the rising market of 2006-07. They also managed to limit the losses in the 2008 crash. But many failed.

“Last four years have seen all cycles of the markets - massive uptick, downtick, panic, mania, bull run, bear phase etc. Stocks defensive in 2008 are aggressive now. The performance of funds vary depending on stock selection,” says Sankar Naren, chief investment officer, ICICI Prudential AMC.

Though long-term annualised return is normally used to gauge a fund’s performance, a look at the 'up capture' and 'down capture' ratios would help zero in on the best one.

Up/downside capture ratio shows you whether a given fund has outperformed—gained more or lost less—compared with a benchmark during periods of market strength and weakness, and if so, by how much. Broadly there are four different combinations of up/downside capture ratios.

High upside – High downside

These are the funds which outperform the benchmark index during a rising market. During a correction or bear phase, same funds carry the risk of falling more than the index. For example, the SBI Magnum Midcap Growth scheme gave excellent annual returns of 47 per cent and 71 per cent, respectively during 2006 and 2007, when the equity markets were breaking all previous record highs. In 2009 when markets recovered after 2008 crash, it gave a whopping annual return of 104 per cent.

However, during the 2008 crash, the same fund eroded in value by 72 per cent. From January this year to September, it fell 16.73 per cent. The five year annualised return of the fund is a mere 2 per cent. This is explained by its up capture and down capture ratios. According to Morningstar, a global mutual fund research company, the 5 year up capture ratio of the fund is 104.21 while the down capture ratio is 119.7. This means that while the fund manager ensured out-performance during a bull run, it could not limit the downside while the markets were correcting. Data indicates that the fund value fell 19.79 per cent more than the benchmark. This is true across categories – be it large cap, mid cap or small cap funds. Several funds like Taurus Starshare, L&T Opportunities, JM Basic, LIC Nomura MF Equity, and Sundaram India Leadership funds show similar traits.

Low upside – High downside

It indicates that while the fund failed to match the return of the index in a rising market, it fared equally bad by giving higher negative returns than the index in a falling market. For example, Principal Growth Fund, a large cap oriented scheme. Its 5 year up capture ratio is 81.55 while the down capture is 99.

This is more risky than the previous category since the scheme fails to outperform the index in a rising market, it falls equally or more than the index in a falling market. This shows in its annual returns of 2007 and 2008. In the bull run of 2007, it yielded 53.28 per cent while in the next year, the scheme fell 63.69 per cent. January to September this year, the fund value plunged 23.25 per cent while its 5 year annualised return is negative 0.67 per cent. Some of the other schemes that fall in this category are BNP Paribas Midcap, ICICI Pru Midcap, SBI Magnum Multicap, and L&T Contra.

High upside – Low downside

This is the smartest set. These are schemes which on one hand beat the benchmark index in a rising market, and on the other, protect the downside in a falling market. Most top funds that have performed consistently and have a good 5 year annualised return fall in this category.

For example, IDFC Premier Equity Plan A, a small and midcap oriented fund. It has a 5 year up capture ratio of 104.5 and the down capture ratio of 74.46. The fund returned 110 per cent in 2007 while it fell 53 per cent in 2008. The 5 year annualised return of the fund stands at a staggering 23 per cent. January to September this year, it has dropped 8 per cent.

It gave better returns than the benchmark during the rising market and protected the downside when the markets crashed. Some other funds in this category are HDFC Top 200, HDFC Equity, Canara Robeco Equity and UTI Dividend Yield.

“The hallmark of a good fund manager is not how s/he performs when the markets are going up but how s/he performs when the chips are down. The fund should not fall more than the benchmark index. Else what is the point of investing in a mutual fund,” says Sanjay Sachdev, president and CEO, Tata AMC.

Low upside – Low downside

This category may not beat the benchmark when the markets are rising but would not fall much in a falling market. They can be a good choice for risk averse investors who would like to invest in a fund that would protect the downside in a falling market.

UTI MNC fund is an example. The 5 year up capture ratio of thefund stands at 67.67 per cent while the down capture is 52 per cent. This means that while the fund did not match up the benchmark index returns, it captured the losses of falling market up to only 52 per cent. In 2007, the fund gave a return of 32.45 per cent while it fell 42.78 per cent in 2008. The 5 year annualised return remains at 13 per cent. January to September return this year stands at 1.34 per cent which is not bad considering most of the equity funds gave negative returns.

The other funds in this category are Birla Sun Life MNC, UTI Equity, and ICICI Pru Dynamic.

It may be a smart strategy to have a look at the up and down capture ratios of the funds before finally taking a call on the choice of fund. Websites such as www.morningstar.co.in, have such details about each equity fund. “Investors must stay away from such funds that fall too much in a falling market. Funds with high up capture and low down capture ratios are ideal for investors,” suggests Dhruva Chatterji, senior research analyst with Morningstar, India.

You must not look at only the recent past performance as that may be misleading. Do check how the fund performed both in the rising market as well as the falling market.

Source: http://www.indianexpress.com/news/look-beyond-past-returns-to-choose-the-best-fund/867895/0

Rally to be capped at 5-10% from current level: Religare MF

The week gone by saw Indian equities surging past resistance levels to end on a high note. However, chief investment officer at Religare Mutual Fund, Vetri Subramaniam expects this rally to be capped at 5-10% higher from current levels. Global factors off late have been conducive for a rally, but domestic macro continues to be a significant concern, he explains in an interview to CNBC-TV18.

Subramanium goes on to say that he expects the market to remain volatile within a trading range. Therefore, avoid sectoral calls and focus on stock picking, he said, adding that companies with a high return on equity (RoE) will trade at a premium.

He further adds that poor domestic environment could lead to a cut in earnings estimates for FY13.

Below is an edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee.

Q: Do you think what we are witnessing right now is a technical rally or have fundamentals changed around to justify higher prices?

A: It’s always hard to separate the factors because a little bit of everything goes in for the market at this point of time. A little bit of optimism coming in from the way global markets and risk assets have performed and some good economic data or I would say not very bad economic data out of the US, so global factors have been conducive for a rally.

The earnings picture locally has been reasonable too, nothing very dramatic. There have been a few surprises on the negative side, but equally we have seen few companies do quite well. So the earnings season has played out reasonably okay so far. So all of that put together, the market had a big of headroom in terms of valuations to put in a bit of rally and that’s what we have seen.

Q: Does the combination amount to an extension of the rally or would you say this is about it?

A: I think purely from a valuation standpoint at one point we had gone down to almost about 18-20% below our historical trading multiples so there still may be about 7-8% below historical trading multiple averages of about 17 times odd. So there may be a bit more room to the upside. But where I would start to worry is the fact that as far as the domestic economy is concerned things are looking quite poor at this point of time and the risk is that we actually see further slackening of GDP growth in FY13.

Q: You were saying that growth might slow down in FY13, so where do you think that market gets capped given the outlook on domestic macro?

A: I would say another 5-10% from here. I think the adverse domestic macro will come back to haunt us and I would split with the camp which seems to attribute all the problems that the Indian market has had this year with global events. I think our biggest challenge is our domestic issues; the global issues are only clouding the domestic picture. The investment cycle has pretty much stalled at this point of time and I worry that unless we see a significant pick up in investments, it is pretty much a given that growth will come in below 7% in FY13.

So I think it really is the domestic factors which are front and center as far as we are concerned. The global issues obviously create a lot of volatility, but it is the domestic factors that I would worry about.

Q: In the immediate term do you feel that this rally has the power to surprise on the upside because of how cramped the market has been through all of this year. Can we go much further than people expect?

A: You cannot rule it out because at the margin there has been a lot of money sloshing around, not just in India but all over the world, which is risk on-risk off. We are seeing money gushing through all sort of financial markets and asset classes and in that environment it’s interesting that markets like India are now the low beta market around the world. It’s the newest market and markets of Europe which are the high beta markets and that’s visible in the way those markets have behaved during the course of this year.

So we are in some senses strangely a low beta play in the global environment right now, but we will catch a little bit of the tailwind if it continues to remain supportive in Europe and US. But eventually, our fate will be determined more by local factors. We keep talking about the global slowdown but at the same time we focus a lot more on the domestic growth story and it is that domestic growth story which is starting to creek at this point.

Q: So what is your best case prognosis for the next few quarters? Do you think the market will grind in a bit of a range with occasional bouts of volatility or do you see a more constructive uptrend starting next year?

A: It all depends on when the uptrend will come but I think in this kind of an environment the scope for a further de-rating of the markets is certainly there. There will be pressure on equity prices coming from the fact that earnings estimate for 2013 definitely need to be cut. I am seeing consensus numbers in the region of 20% earnings growth for FY13 and I don’t think those are going to come through when you got GDP growth slowing down to below 7%. I think there is a lot of earnings cuts which will come through.

Secondly, as far as PE multiples are concerned, the risk to derating is going to come both through the fact that our growth is slowing and secondly from the fact that you have got 10 year bond yield now pushing close to 9%. So both these things put together clearly make for the case that equities will continue to de-rate. So you will see 10-12% earnings growth but some of that will get offset by the fact that PE multiples will de-rate.

Q: In that case, do you think the downside is protected around those 4,700 Nifty kind of levels where we seem to be bouncing off every time in terms of valuations as we get forward in time or do you think those levels could be at risk as well next year?

A: I think if you look at the risk that could cause us to go down even below that in retrospect might then create a good buying opportunity. But if you have the ten year bond yield going north of 9%, which would be largely a function of fiscal profligacy in Delhi and not so much of a function of RBI rate action, then there is a risk of this market eventually breaking down below what has been fairly critical shelf of support that we have seen through this year.

I think that would be driven both by the slowdown in GDP growth that I am talking about as well as by spike up in the ten year bond yield. If those two factors come about then there is risk that the market will trade lower and will trade through that support.

Q: Going into next year is there a case for the tact to be turned around in terms of what the approach should be for defensives and high beta?

A: It has been a very interesting environment from our perspective. There have been some sectors which have been less affected by the macro headwinds and some which have been more adversely affected. But when we drill it down, what we are finding is that there is a lot more value addition that is coming to the portfolio by way of alpha creation from stock selection rather than just focusing purely on the sector selection. Really the call that we have to take as portfolio managers at this point of time and the way at least we are approaching it is to be driven a lot more by the credentials of the companies rather than just getting blindly attached to certain sectors or avoiding certain sectors.

In sectors that tailwinds are favorable or at least the scene has been in some cases perhaps defensive, valuations already captured or factor in a lot of the attractiveness of those companies. Where as in other areas where the macro headwinds are adverse, there are companies where there could be continued to be short term issues but the valuations are favorable if you are willing to stay the course with them over a period of time and wait for the environment to turn more conducive.

I would really say this is an environment where you need to focus a lot more on the stock picking bit. Yes, sector selection is important but the stock picking is going to be far more important, both in terms of limiting your downsides and preparing yourself for some kind of cyclical upside which might play out sometime in 2012. So if you want to position yourself in both of these, I think stock selection is going to be far more important that the sector selection.

Source: http://www.moneycontrol.com/news/mf-interview/rally-to-be-capped-at-5-10current-level-religare-mf_607673.html

NRIs returning to India: Avail the benefits given under tax laws

It is praise worthy weakness of a man to love the places where he played in his childhood, where he was educated, where he dwelt and call back to the mind his childhood pleasure. The recent fears of recession in the west compounded by the growth story in India, as well as the lure of returning to one's own motherland may change the minds of many Indians who have settled abroad to return to India permanently.

This may mean that they could be looking at resettling in India by selling their property abroad which they would have acquired whilst being there. This decision may not be just an emotional one but would have to factor other perspectives like taxation, exchange control regulations etc, which may significantly impact the decision of shifting back to India and its timing.

Subin, a person of Indian origin, was employed in the US for the past several years. He wants to return to India permanently. He owns several assets in the US such as a residential property, a car, and investment in shares in US based companies. He has also invested in mutual funds there. He is pondering on whether to sell his property in US before he returns to India permanently, but wants to get his car to India and if permitted, retain his investments in the US.

While discussing his idea of coming back to India permanently with a friend, he found out that there were certain advantages that he could derive in case he qualifies as a Non-Resident (NR) in India under the Indian tax laws. He also found out that the simplest way to qualify as a NR in India is to spend less than 60 days in India in any particular tax year, which runs from April 01 to March 31 of the subsequent calendar year. Accordingly, Subin has planned his return in such a way that he qualifies as a NR in India in the year in which he returns to India.

His decision to return to India would have both direct and indirect tax implications, such as income tax, wealth tax and customs duty. He would also need to take note of implications from an exchange control regulations perspective.

The implications under each of the above mentioned laws need to be understood distinctly. As per the Indian income-tax laws, NRs are taxable in India only on income which accrues in India or is received in India. In the case of an NR, once an income is earned and received outside India and it is brought to India at a later date, it would not be taxable in India.

This would mean that Subin could sell his residential property in US, while he is an NR or a Not Ordinarily Resident (NOR) in India, and he would not be taxable in India on the gain that he makes from the sale. Similarly, he would not be taxable in India on the income earned and received by him in the US from his investments till he qualifies as a NR or NOR in India. Once Subin loses the status of a NR or NOR and qualifies as an Ordinary Resident in India, he would be taxable in India on his global income.

This would typically happen in the third or fourth year from the time Subin shifts to India (depending on how extensively he has stayed in India prior to shifting to India permanently). However, in case Subin is paying taxes on any income in the US which is taxable in India as well, he may be able to avail relief under the Double Taxation Avoidance Agreement which India has entered into with the US, for avoiding double taxation of the same income in both the countries.

The provisions for determining residency under the wealth tax laws are the same as that of the Income Tax laws. In the case of NRs and NORs, the current wealth tax provisions provide that any assets located outside India would be excluded from the ambit of wealth tax in India. Hence, Subin will not be required to pay wealth tax in India on the assets that are located outside India, as long as he qualifies as a NR or NOR in India.

If he intends to reside in India permanently, he would not be required to pay wealth tax on money and the other assets brought by him into India from the US, within one year immediately preceding the date of his return or later. This exemption is limited to seven successive years which immediately follow the year in which Subin returns to India.

Also, as per Baggage Rules, 1998, since, Subin had used his car in the US for personal purposes for more than a year and he is transferring residence to India now, he could bring his car with him but would be required to pay customs duty on the same. However, considering the quantum of custom duty liability likely to arise due to the import, it may be a better idea to buy a new car in India subsequent to shift of his residence. In addition to the car, he would be able to get certain specified used personal effects upto a specified threshold without payment of customs duty.

With regards to exchange control implications, Subin would be able to open a Resident Foreign Currency Bank (RFC) account. He could then transfer, through appropriate banking channels, the amount that he has in his US Bank account into such RFC account without any limit.

He can continue to hold his other investments in the US, since he had acquired these when he was a resident outside India. The dividend from the US companies and mutual funds and interest income from his US bank account which he receives from his investment that he continues to hold in the US can also be credited to the RFC account.

Also, he needs to watch out for the upcoming Direct Tax Code (DTC) which has certain significant proposed changes relating to wealth tax.

For Subin or any other NRI, the decision to return to India may not be just an emotional one, but also needs to be made taking into account the current regulatory environment and proposed changes being made to them. With a proper understanding, efficient planning and utilisation of the benefits provided under the tax laws in India, home-coming would not only feel good on the heart but also relatively easier on the pocket.

Source: http://articles.economictimes.indiatimes.com/2011-10-25/news/30320235_1_income-tax-tax-and-customs-duty-nr/3