MFs stay cash-ready for possible bottom fishing

The stock market is not showing any signs of fatigue yet, but mutual fund managers are not taking any chances. To seize the opportunity in case the market corrects sharply, and also as a safeguard against sudden redemptions, fund houses are maintaining cash levels as high as 20-25% (of their net corpus) in select schemes.

Monthly factsheets of mutual funds reveal that fund houses having focussed infrastructure funds are keeping more cash in their kitty than the rest. ICICI Prudential Infrastructure, AIG Infrastructure, SBI Infrastructure Fund, Birla Sunlife Infrastructure Fund and Reliance Infrastructure are sitting on a cash pile between 6-20% of their net corpus, according to mutual fund tracker Value Research. Brokers say one reason for this trend could be that most stocks in this segment appear over priced at current levels.

Baroda Pioneer Infrastructure Fund, which closed subscription recently, has about Rs 16 crore in cash waiting for deployment. At the fund-house level, Baroda Pioneer MF holds over 17% in cash as of July-end. If one takes a wider view, investors have not lost much as market has only risen around 1.5% over the past one month.

“Gains from investing at lower levels could be much more than the potential upsides from these levels. The market is currently in a trading range and we do not expect it to move in one direction. We’ll wait for good opportunities by sitting on cash,” said Rajan Krishnan, CEO, Baroda Pioneer Mutual Fund.

Mr Krishnan is of the belief that there are several good stocks that can be bought at current levels. Some infrastructure companies have become ‘good buys’ post the fall in prices due to extended gestation period and delays as a result of the monsoon, he added.

If one excludes the infrastructure pack, there are several equity funds as well that are holding high cash levels. Religare Equity (with 29% cash holding), UTI Banking Sector Fund (25%), Axis Equity Fund (21%), ICICI Prudential Advisor Fund (19%), Magnum FMCG Fund (18%) and JM Multistrategy Fund (14%) are amongst funds with significantly higher cash levels. Axis Mutual Fund (with 21% cash holding) and ICICI Prudential Mutual Fund (13%) lead the fund houses’ tally of holding large amounts of cash at July-end.

“In our case, we do not take cash calls; cash in our schemes could be related to our futures positions,” said Nilesh Shah, deputy managing director, ICICI Prudential Mutual Fund. “Market, for sure, is trading at a higher level. We are not very clear of the direction. But then, it surely has not become a bubble to short,” Mr Shah added.

According to institutional investors, domestic portfolio investors like mutual funds and insurance companies are not happy about the stretched valuations of Indian shares. At 17-18 times estimated one-year forward earnings, share prices appear expensive relative to historical valuations.

Several fund managers hold the view that market could slip into a correction mode at the slightest negative newsflow from western markets. If one goes by the recent BoA Merrill Lynch survey, fund managers eyeing Asia-Pacific are underweight on India, thanks to ‘pricey’ valuations.

Reflecting this sentiment, domestic institutional investors have sold shares worth Rs 13,000 crore since June this year. Of this, mutual funds have sold shares in excess of Rs 6,400 crore during the period.

Source: http://economictimes.indiatimes.com/markets/stocks/market-news/MFs-stay-cash-ready-for-possible-bottom-fishing/articleshow/6423537.cms

Banks gear up for tighter liquidity in September

Indian banks are likely to face further tightness in cash conditions next month as the second round of advance taxes are paid by companies, but the situation is expected to ease by the end of September on government spending, investors and analysts said.

Banks are already reeling under a cash crunch, following more than 1 trillion rupees of payments towards telecom spectrum, while higher rates amid rising inflation has led to expectations that the central bank may not act to ease it.

Short-term rates, which are driven by liquidity, are already rising on expectation of tightness coming up and are expected to extend their rise till mid-September, traders said. "Rates are already higher pricing in cash tightness and further incremental upside will happen but not big movements," said Murthy Nagarajan, head-fixed income, Tata Asset Management. The one-year overnight indexed swap rate may rise to 6.35-6.40 percent by end-September from 6.25 percent now, while the three-month treasury bills, which have already risen 53 basis points since July-end, may rise to 6.30-35 percent from 6.27 percent now, he added.

Currently, banks are borrowing around 100 billion rupees from the central bank's repo window in August which may go up to around 500 billion rupees in September following the advance tax payments. "The liquidity shortfall can go to about 400-500 billion rupees by mid-September, which is a large deficit for the market and that's why I feel rates are inching up faster," said Monan Shenoi, head of treasury at Kotak Mahindra Bank in Mumbai. Expectations of a mid-quarter rate increase by the central bank on Sept. 16, is also keeping up the upward pressure on short-term rates, said analysts.

EVERY QUARTER

However, dealers are not overtly concerned as they are aware that central bank intends to keep cash tight and banks can borrow from the repo window to bridge any liquidity mismatch.

"Every quarter whenever advance tax outflows happen you will see the money returning to the banking system with a week to 10 days time and that time you will obviously see banks borrowing from the RBI in the LAF window more often," said Kumar Rachapudi, a fixed income strategist at Barclays Capital, Singapore. "As long as banks have enough securities to borrow from the RBI from the LAF window, that will determine the amount of credit that can be disbursed to both public sector and to the government," he added. Mutual funds are also not too worried about the redemption pressure as these are anticipated outflows.

"Mutual funds are already having long term money... (they) anticipated this and have a lot of maturities coming up in September. So from a mutual fund perspective it can be managed," said K. Ramkumar, head of fixed income at Sundaram BNP Paribas Mutual Fund.

However, the pace of government spending will be the key to ease liquidity crunch given the onset of festive season in October. "The market is now at decent levels and higher rates, the currency in circulation will also return to the system," Nagarajan of Tata Asset Management said.

Source:http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/banking/Banks-gear-up-for-tighter-liquidity-in-September/articleshow/6421420.cms

Follow asset allocation framework, stay invested

Veteran fund manager Tridib Pathak, senior director at IDFC Mutual Fund, says irrespective of market conditions, retail investors must have faith in the long term growth prospects of India and its capital markets. In an exclusive interview with FE’s Saikat Neogi, he underlines that investors should not try to time markets and invest depending upon one’s risk appetite and goals. Excerpts:

Given that there is large-scale redemption from mutual funds, what should retail investors do?

Irrespective of market conditions, we always advise retail investors to have faith in the long-term growth prospects of India and its capital markets. Secondly, investors should not try to time markets, as no one can. Thirdly, one should be invested for the long term in equities, at least three years. One must follow an asset allocation framework, so that one invests depending upon one’s risk appetite and goals. One can also avoid market timing by periodically re-balancing asset allocation according to one’s framework.

How do you think emerging markets like India will perform in the long-term?

India’s relative position as an investment destination has improved a lot over the past two years and it has emerged as one of the few countries with continued high growth and with comparatively better financial health. Led by favourable demographics, rising personal income levels, low indebtedness and domestic centricity, India’s high growth is secular. All of this, is in the context of a developed world, which is struggling to grow and is facing structural, and not cyclical, issues. So, the long-term case for Indian equity markets is quite positive.

What is the outlook for equities in the short-term?

In the short to medium term, we think that there are four factors which determine equity markets outlook – valuation, sentiment, liquidity and earnings. Valuation-wise, we are trading at fair levels. In the short run, we feel there is not much scope for any upside in valuations which are already at about 17 times one-year forward earnings. Sentiment and liquidity depend on how the global macro-risks shape up and how that affects risk appetite. On a medium-term basis, both sentiment and liquidity should be favourable for India. In the short- to medium term, earnings growth and earnings upgrades are very crucial. While we do not think that there will be any significant earnings upgrades in the short term, we think continued strong economic growth and a resultant upgrade in corporate earnings forecast over the year will be the key drivers for Indian markets from here on. On a domestic economic growth basis, we are fine. The actual delivery of growth will be the key and inflows will continue to be diverted towards fundamentally sound companies, which have been able to keep the faith of investors with sustained operational performance. As a result, we will see increasing divergence in performance among sectors and among companies within a sector.

What are the international factors which could damage investor confidence in India?

The biggest risk to investor confidence and thus Indian equity markets, is the global macroeconomic conditions. The developed world is facing real structural problems. Sovereign debt levels, total debt levels and fiscal deficits of the developed world are reaching unsustainable levels. Most developed countries are having total debt more than triple the size of their GDP and their fiscal deficits are rising fast. This situation has developed over years of low savings and dependence on cheap debt. Further, the developed world has attempted rampant stimulus over the last two years while trying to revive economic growth. But it is increasingly appearing that their economic growth is becoming dependent on continuation of the economic stimulus. But this will lead to further worsening of fiscal deficits and debt levels. Thus, we have seen widespread fears of a sovereign default, Greece being a case in point, and also of a banking crisis. These fears have ebbed recently. However, what is becoming clear is that the developed world faces prospects of slower growth for a prolonged period of time. Most of Europe has adopted austerity measures to rein in fiscal deficit; but this may lead to slower economic growth.

Which are the sectors that will stand to gain from the slowdown in Europe?

In our portfolios, we run a theme ‘Beneficiaries of Global slowdown’ in which we invest in companies/sectors which may benefit from a slowdown in global growth. There two kinds of such companies/sectors — ones who may benefit from lower input costs due to lower commodity prices like autos, consumer goods, oil marketing companies and secondly, ones who may benefit from increased outsourcing as the developed world searches to cut costs like pharma outsourcing and IT services.

Source: http://www.indianexpress.com/news/follow-asset-allocation-framework-stay-invested/663299/0

Fund Review: Magnum Midcap high on risk

Mid-cap stocks and mid-cap oriented mutual fund schemes are like a double-edged sword. While they can make one super rich in market rallies, they can also throw one flat on the face in the downturn. Investors of Magnum Mid-cap have also faced this harsh reality in the past five years since the time fund was launched in March ‘05. Thus, despite the fund doing fairly well in recent times, the assets managed (AUM) by this fund today stand relatively lower than what it used to manage in 2006-07. The fund is currently managing about Rs 330 crore of investor money.

PERFORMANCE: To summarise the fund’s performance in brief, Magnum Mid-cap has had a fantastic performance in some of the most bullish years of the market in the last five years, like in 2006 and 2007 and then again in 2009; while the meltdown year of 2008 saw the fund’s net asset value (NAV) going virtually down the drain. In fact, by mid-December ‘08, the fund was trading at an NAV, below its face value of Rs 10 per unit, implying that it notionally lost all what it had made in the previous three years since its launch in 2005.

The timing for the launch of this mid-cap oriented fund, at the beginning of one of the wonderful rallies that the Indian equity markets have ever witnessed, could not have been better. It returned a whopping 52% gain in the very first year of its launch, outperforming its benchmark, the CNX Midcap’s 38% returns by extremely good margins. The following years of 2006 and 2007, that witnessed the market’s rally at a stupendous pace, saw Magnum Mid-cap put up an impressive performance with 47% and 71% returns respectively in these two years against CNX Midcap’s 29% and 77% respectively.

In 2008 however, Magnum Midcap was lifted off its ground as its NAV declined by almost 72% as against the decline of about 60% in the CNX Midcap in that single year alone. This was a big shot in the back for investors of this scheme as the fund plunged to its all-time low rankings after this disastrous performance.

However, to the relief of most investors, the fund was quick to recover most of its losses in the following year 2009, as it returned about 104% against the recovery of about 99% made by the CNX Midcap. By the end of 2009, Magnum Mid-cap was trading at an NAV of Rs 21.8, a much desired recovery after its NAV fell to almost Rs 9 per unit in December ‘08.

As far as the performance in the current calendar year is concerned, so far, the fund has delivered about 12% returns since January this year, which appears quite decent in light of the extreme volatility that the broader market indices have faced this year. The fund’s benchmark, the CNX Midcap Index, has however returned about 18% returns so far in the current calendar year.

PORTFOLIO: A mid-cap oriented fund, with just about 30 stocks in the portfolio, raises the risk quotient of the fund. Currently, the top ten holdings of the fund alone account for nearly 50% of the fund’s equity portfolio, making it suitable for investors with a relatively higher risk appetite. As far as the sectoral allocation is concerned, the fund has a fairly high exposure in the FMCG space with GSK Consumer Healthcare alone accounting for about 6.5% of its FMCG composition. With mid-cap FMCG and healthcare sectors doing reasonable well for quite some time now, the fund has already made a neat 20% gain on this stock alone since the time it invested in this stock in February ‘10.

As far as healthcare is concerned, while the fund currently has about 8% exposure in this sector, the same has been increased only recently, May ‘10 onwards, and thus, this sector is yet to reap in gains for this fund. Its stocks under this sector include Cadila Healthcare, Dishman Pharma and Ipca Labs.

Given its mid-cap orientation, the fund has more of an opportunistic approach towards investment rather than a long-term holding strategy. It is thus quite proactive in churning its portfolio with most of its current holdings less than a year old. The only exception to this investment strategy is its investment in GMDC, which it has been holding since February ‘07 and Elecon Engineering, invested in in May ‘06. Of these, the fund has made a neat kill in GMDC with nearly 175% absolute gains in the last three and a half years of its investment in this stock.

OUR VIEW: A mid-cap fund with relatively high exposure to select stocks takes Magnum Mid-cap a bit high on the risk scale. Moreover, notwithstanding the fund’s decent performance in market rallies, it has failed to cushion its fall in the downturn. While those who had invested into this fund right at its NFO stage in 2005, have made around 146% gains from this scheme till date, these gains appear belittled when compared with CNX Midcap’s absolute gains of 199% during this period. Magnum Mid-cap is thus yet to prove its mettle before it can be rated at par with some of the better performing mid-cap schemes of the MF industry.

Source: http://economictimes.indiatimes.com/features/investors-guide/Fund-Review-Magnum-Midcap-high-on-risk/articleshow/6395373.cms

Reliance MF launches Reliance Small Cap Fund

Reliance Mutual Fund has launched a new fund named as Reliance Small Cap Fund, an open ended equity scheme. The New Fund Offer (NFO) price for the scheme is Rs 10 per unit. The new issue is open for subscription from 26 August 2010 and closes on 09 September 2010.

The primary investment objective of the scheme is to generate long term capital appreciation by investing predominantly in equity and equity related instruments of small cap companies and the secondary objective is to generate consistent returns by investing in debt and money market securities.

The scheme offers two options viz. growth (which includes bonus option too) and dividend option with both payout and reinvestment facility.

The minimum application amount is Rs 5000 and in multiples of Rs 1000 thereafter.

Entry load for the scheme will be nil. While, Exit load will be charged at 2% if redeemed or switched out on or before completion of 12 months from the date of allotment of units, 1% if redeemed or switched out after 12 months but on or before completion of 24 months from the date of allotment of units and Nil if redeemed or switched out after the completion of 24 months from the date of allotment of units.

The fund will be managed by Mr Sunil Singhania.

The scheme will allocate 100-65% of assets in Equities and equity related securities of small cap companies including derivatives with medium to high risk profile. 0-35% of the assets in Equities and equity related securities of any other companies including derivatives with medium to high risk profile and 0-35% in debt and money market securities with low to medium risk profile.

The scheme will be benchmarked against BSE Small Cap Index.

Source: http://www.indiainfoline.com/Markets/News/Reliance-MF-launches-Reliance-Small-Cap-Fund/3260149508

SEBI, MFs want tax benefit for equity-linked schemes in DTC

Market regulator Sebi and mutual fund houses have asked the finance ministry to continue with the tax benefits on equity linked schemes in the Direct Taxes Code, which will replace the existing Income Tax Act.

The revised DTC draft, based on which the government is finalising the bill, has proposed to do away with the tax benefits available to people investing in the equity-linked savings schemes (ELSS).

Under the IT Act, investments up to Rs one lakh in the ELSS and dividends accrued on them are exempted from tax. Besides, there is no long term capital gain tax on withdrawal of the funds after the three-year lock-in period.

Sources said Sebi and the mutual fund industry have written to the finance ministry to continue with the current exemption, as the industry is witnessing redemption pressure post the entry-load ban, a type of agent commission that was charged from investors.

During July, the industry saw Rs 139 crore withdrawal from the ELSS portfolio, and till July the redemption was to the tune Rs 349 crore.

The sources said retail investors benefit from investment in ELSS and Sebi wants that ELSS schemes continue to enjoy tax deduction.

After banning the entry-load, since August 2009, this is the first time that the market regulator has sought some benefit from the finance ministry.

Currently, ELSS comes under a method of taxation called EEE -- wherein it is exempted at the points of investment, in the entire tenure of the investment and as well at the time of withdrawal.

The draft DTC does not include ELSS as one of the instruments which will be subject to EEE mode of taxation.

Currently there are over 40 ELSS schemes in the market. During the last fiscal (2009-10), the MF industry sold ELSS units of over Rs 3,000 crore.

Source: http://economictimes.indiatimes.com/personal-finance/tax-savers/tax-news/SEBI-MFs-want-tax-benefit-for-equity-linked-schemes-in-DTC/articleshow/6381259.cms

Pick the one that suits your needs

Selecting the right mutual fund scheme among a plethora of schemes available in the market is the most daunting task for mutual fund investors’ at all times. Selecting the right scheme based on your appetite is like finding a needle in a hay-stack. Every individual is different from the other when it comes to investment goal, risk tolerance, investment horizon, return expectations and entry-exit load, among other things. There is no ‘one size fits all’ strategy, thus investors’ portfolio should be in sync with their very own personal parameters.

Investment Goal
Know your investment goals. Do you want to preserve capital or to grow it? Is it to earn a certain income or to provide a certain cash flow at the end of a period? The answers to such questions will determine your investment goals in life. Your goals should be in line with your responsibilities in life. For example, a person looking to accumulate funds for retirement or a child's education may want to invest in a mutual fund whose objective focuses on long-term stock price appreciations instead of dividend payments. On the other hand, someone who's recently retired may wish to invest in a fund that provides additional income with little risk of loss to principal, such as a conservative stock fund that distributes dividends monthly or quarterly. Still another investor may want to use mutual funds to improve the return on his or her risk-free savings account at a bank. The investment should do at least as well as the overall stock market; therefore, a mutual fund that tracks the overall performance of a benchmark market index might be the most appropriate choice.

Asset Allocation

The groundwork of any portfolio construction is asset allocation. Studies show that over 90 per cent of returns generated by an investor depend on how the savings are allocated across different asset classes. Asset allocation also determines the broad risk level of a portfolio, which should be in accordance with the risk profile of the investor. Risk appetite of an investor depends on various factors like age, income level, etc. While making asset allocation decisions, investors should also keep the concept of diversification in mind. Diversification across asset classes and geographies is a wise idea.

Analyse the performance

A key attribute to mutual fund investing is analyzing the performance of a scheme. However, while evaluating a mutual fund scheme, attention should be given to the consistency of the performance. Investors should select schemes which have performed well over good and even bad markets. Only a long term perspective will help us understand how the fund has fared in unfavorable market scenarios.

Risk-adjusted returns

Returns should always be benchmarked against the risk undertaken by the scheme. A certain scheme could have superlative performance but would have undertaken huge risk to deliver those returns. A good mutual fund not only maximizes returns but also minimizes the risk.

Fund management team

Like an efficient sailor who can take his ship through turbulent weather and come out safe, a large part of a fund’s performance is dependent on the investment management team of the fund house. The ideal sailor whom you can trust with your money is the one who has weathered many a boom-bust market cycles and still have delivered consistent returns. Since the global investing window is now open for every investor, a globally experienced team would then add value to your global investments.

Load and fund expenses

Investors should also get a clear picture of all the funds expenses, including the applicable exit load and annual fund expenses as they also impact fund returns. Since Aug’09, investments in mutual funds no longer attract any entry fee. This now allows investors to decide how much to pay their advisor for his advice.

Typically, mutual funds costs comprise recurring annual expenses and transaction fees each time one buys or sells MF units. The expense ratio of a fund encompasses the myriad costs levied by the asset management company on a yearly basis. This is charged irrespective of fund performance. The basket of costs includes: management & advisory fee, selling and promotion fee, custodial fee, registrar fee, audit fee, etc… The expense ratio varies across different funds. However, SEBI has capped the charges at 2.5 per cent for equity funds and 2.25 per cent for debt funds. This cost gradually goes down as the corpus of the fund rises above a certain level. Equity funds charge2.5 per cent on the first Rs 100 crore of the average weekly net assets collected. This is then reduced to 2.25 per cent for the next Rs 300 crore, 2 per cent on the subsequent Rs 300 crore corpus; it finally comes down to 1.75 per cent for the balance assets. There are some expenses which are not accounted for in a fund’s return and are referred to as ‘loads’. These are deducted at source while buying or selling the units in the fund. SEBI has now abolished the front-end load. So funds can now only charge an ‘exit’ load.

Types of Funds

Mutual funds invest in different asset classes including equity, debt and alternate (gold, real estate, etc…). Investors seeking high return, who do not mind taking risk, should look at equity as an investment vehicle. Short-term investors, who may want to keep money liquid, need some sort of regular income or keep their capital protected, should look at mutual funds that invest in debt products. Investors seeking to diversify their portfolios and guard against inflation buy some gold or real estate through a fund. And then, there are those who want a fund to take care of multiple needs, should look at hybrid products.

Conclusion

In the current market uncertain times, more than ever, asset allocation will deliver better risk reward outcome than trying to time the market. Second, dynamic asset allocation may be preferred over static asset allocation. And lastly, discipline in investing will be more valuable than emotional or ad-hoc investment decisions. Above all, staying away from investing could turn out to be more harmful than investing; hence, invest, if you have a longer term view.

Source: http://www.indianexpress.com/news/pick-the-one-that-suits-your-needs/657759/0

Bharti Airtel, top pick for mutual funds

AMCs reduce stake in Reliance Ind, IDFC.

Bharti Airtel saw the highest number of shares (1.3 crore) being bought by the fund houses, while Reliance Industries witnessed the maximum number of shares (1.7 crore) being sold, said a report from Sharekhan.com.

The month of July saw the total assets under management (AUM) in equity schemes of mutual funds drop marginally by 0.3 per cent to Rs 2.03 lakh share crore, according to a report by Networth Stock Broking.

The mutual fund industry was a net seller of Indian equities for Rs 1,497 crore in July, the Sharekhan report added.

According to Sharekhan, other stocks that fell prey to profit-booking by mutual funds were Infrastructure Development Finance Co Ltd (1.2 crore shares), ITC Ltd (1.09 crore), Dabur India Ltd (1.02 crore) and Crompton Greaves Ltd (0.71 crore).

These companies, along with Reliance, make up the top five companies in terms of the volume of shares sold by fund houses.

In terms of volumes bought by fund houses, Bharti was followed by Petronet LNG Ltd (1.03 crore), Hindustan Media Ventures Ltd (1.01 crore), SpiceJet Ltd (0.86 crore) and Indiabulls Financial Services (0.78 crore).

Shares held

In terms of number of shares held by the schemes, NTPC occupied the top slot.

Around 14 crore shares of NTPC were held in MF portfolios with a total market value of Rs 2,929.12 crore.

However, Bharti Airtel — with the second highest number of shares in circulation in the portfolios (around 13 crore) — had the higher market value at Rs 4,239.68 crore.

In terms of featuring in the largest number of schemes, Reliance Industries was the top stock, with its presence in 269 schemes.

Around six crore shares of the stock were held at a market value of Rs 6,189.09 crore, according to the Sharekhan report.

State Bank of India shares had the highest market value at Rs 6,769.69 crore. However, only 2.7 crore shares of SBI were held in portfolios, according to the report.

ICICI Bank and Infosys stocks each had 259 schemes investing in them, and their market value was Rs 5,882.67 crore and Rs 5,986.48 crore, respectively.

Source: http://www.thehindubusinessline.com/2010/08/20/stories/2010082053281000.htm