Smaller-cap stocks help mutual funds in Feb

Diversified equity funds posted better returns than the BSE Sensex in February, helped by small and medium-sized stocks that rose on increased foreign and domestic buying.

Diversified funds, the largest category of stock funds in India by number and assets, returned an average 4.8% in the month, according to fund tracker Lipper, a Thomson Reuters company.

These funds outperformed the benchmark index, which rose 3.25% on robust inflows from foreign institutional investors (FIIs) and hopes of easing monetary policy.

Favourable global liquidity conditions encouraged foreign investors to buy more than $7 billion of Indian equities so far in 2012, pushing up the index by more than 14%.

"With the backing of FIIs, retail participation increased in mid- and small-caps, which pushed them higher," said R. K. Gupta, managing editor at Taurus Mutual Fund. "However, the outlook for these shares is likely to be cautious going ahead."

Mid- and small-cap shares accounted for more than a third of the assets of diversified funds at the end of January, and holdings of such stocks rose to the highest level since January 2011, Morningstar India data showed.

During the month, the BSE mid-cap index rose 8.8% while the small-cap index gained 6.14%.

Exposure to the financial services sector— the top sector bet for money managers, with an allocation of over 20%— also helped equity diversified mutual funds as the Bombay Stock Exchange banking index rose 5.12%.

Shares of top-lender State Bank of India gained 9%, while HDFC Bank rose 5% on hopes the central bank will further reduce the cash reserve ratio for banks to help ease tight liquidity conditions.

Two diversified funds from HSBC, the HSBC Midcap Equity Fund and the HSBC Progressive Themes Fund, were India's top performing mutual funds in February, returning more than 11%.

Among sectoral funds, those focusing on technology returned more than 7% while those investing in financial services registered a rise of nearly 6%.

IT stocks were among the best performers in February, pushing up the BSE IT index by 6.6%.

"Indian IT companies offer a significant value proposition to their international clients and offshoring of services will increase over a period of time," said Nilesh Shetty at Quantum Asset Management Co. "This will augur well for the sector."

Fixed income funds that invest in government securities rose 0.75% in the month, as the yield on the benchmark bond fell 7 basis points.

Gold exchange traded funds (ETFs) rose a little more than 1% on an average in the month.

Source: http://business-standard.com/india/news/smaller-cap-stocks-help-mutual-funds-in-feb/159389/on

CD rates cross 11% in a first since 2008 repo drawing at new high

Recent Sebi norms barring mutual funds from investing in CDs add to liquidity concerns

The lack of interest from investors and the year-end rush by banks have driven the rates on certificates of deposits (CDs) maturing in three months above 11 per cent, a level last seen in 2008.

According to market participants, lenders, including IDBI Bank, UCO Bank and Central Bank of India, have raised funds for three months through CDs at rates ranging between 11.1 per cent and 11.15 per cent. The rates stood at around 100 basis points lower in the corresponding period of the last financial year.

CDs are short-term debt instruments issued by banks to raise funds for up to one year, and mutual funds are major investors in these instruments. However, traders said norms introduced recently by markets regulator Securities and Exchange Board of India (Sebi) were preventing mutual funds from participating. This is evident from the fact that the volumes are low, despite banks willing to pay high rates.

“Banks are finding it difficult to lock deals even for Rs 200 crore. The volume in the market is small,” said T S Srinivasan, general manager (treasury), Indian Overseas Bank. He added if situation did not improve, the rates would rise further.

A month earlier, Sebi had decided to reduce the threshold for mark-to-market requirement on debt and money market securities of mutual funds from 91 days to 60 days. Hence, securities with maturity periods of more than 60 days would have to be valued at market prices.

Nirav Dalal, managing director (debt capital markets), YES Bank, said, “The demand for CDs is muted, as mark-to-market ramifications due to the recent Sebi guidelines are keeping mutual funds from investing in the money market. This is over and above the inherent systemic liquidity deficit of about Rs 1.5-1.6 lakh crore.”

Banks that have surplus liquidity and invest in CDs issued by other banks are not doing so, as this is the last month of the current financial year. Rather than deploying funds in the money market, these are seeking higher credit growth.

Today, banks borrowed a record Rs 1.91 lakh crore from the Reserve Bank of India (RBI) under the Liquidity Adjustment Facility. The liquidity deficit has been beyond the central bank’s comfort zone of Rs 60,000 crore, despite a cut of 50 basis points in the cash reserve ratio in January.

Tomorrow, RBI is slated to buy government bonds and infuse up to Rs 12,000 crore into the banking system. However, traders said this would not help boost liquidity, in spite of the fact that there is no government debt sale auction scheduled for tomorrow. So far this financial year, the central bank has infused close to Rs 1 lakh crore through open market operations.

“Liquidity is expected to improve if government spending increases,” said N S Venkatesh, head (treasury), IDBI Bank. He added typically, the government tends to spend unused allocated amounts towards the end of the financial year.

Banks are bracing up for withdrawal pressure from companies, as the advance tax payment deadline of March 15 approaches.

Markets expect the central bank to address systemic liquidity concerns by announcing another cut in the cash reserve ratio before the mid-quarter review of monetary policy, scheduled on March 15.

Source: http://www.business-standard.com/india/news/cd-rates-cross-11-infirst-since-2008-repo-drawing-at-new-high/466443/